As filed with the Securities and Exchange Commission on August 31, 2000
Registration No. 333-91845
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CHARLES RIVER LABORATORIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
Delaware 6770 76-0509980
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
251 Ballardvale Street
Wilmington, Massachusetts 01887
(978) 658-6000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------------------
Thomas F. Ackerman,
Chief Financial Officer
Charles River Laboratories, Inc.
251 Ballardvale Street
Wilmington, Massachusetts 01887
(978) 658-6000, Ext. 1225
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(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Richard D. Truesdell, Jr.
Davis Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
(212) 450-4000
Approximate date of commencement of proposed sale to the public: from time
to time after the effective date.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the SEC, acting pursuant to said Section 8(a), may
determine.
================================================================================
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PROSPECTUS
, 2000
Charles River Laboratories, Inc.
$97,500,000
13 1/2% Series B Senior Subordinated Notes Due 2009
-----------------------
The Company:
o We are a leading provider of critical research tools and integrated
support services that enable innovative and efficient drug discovery and
development.
o The common stock of our parent company, Charles River Laboratories
International, Inc., is listed on the New York Stock Exchange under the
symbol "CRL".
The Original Offering:
o We issued the notes in March 2000 in an exchange offer registered under
the Securities Act of 1933. The notes were issued in exchange for
substantially identical notes issued in a private placement in September
1999.
o We used the net proceeds from the private placement in part to fund our
recapitalization, our acquisition of SBI Holdings, Inc. and related fees
and expenses. We did not receive any proceeds in the exchange offer.
The Senior Subordinated Notes:
o Maturity: October 1, 2009.
o Interest Payments: semi-annually in cash in
arrears on October 1 and April 1.
o Redemption: we can redeem the notes on or after October 1, 2004. Holders
of the notes may also require us to redeem all or part of such holder's
notes upon a change of control.
o Ranking: the notes are general unsecured obligations, junior in right of
payment to our senior indebtedness, including borrowings under our credit
facility, and effectively junior to the liabilities of our subsidiaries.
o As of June 24, 2000, on a pro forma basis, we had outstanding
approximately $101.4 million of senior indebtedness and our subsidiaries
had approximately $14.7 million of liabilities, including trade payables
but excluding intercompany obligations.
This investment involves risk. See Risk Factors beginning on page 10.
Neither the SEC nor any state securities commission has determined whether
this prospectus is truthful or complete. Nor have they made, nor will make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
This prospectus will be used by Donaldson, Lufkin & Jenrette Securities
Corporation in connection with offers and sales in market-making transactions
at negotiated prices related to prevailing market prices. This prospectus may
also be used by DLJ Investment Partners, L.P., DLJ Investment Funding, Inc.,
and DLJ ESC II L.P. to comply with their prospectus delivery requirements of
the Securities Act in connection with any resale transaction. The notes are not
listed on any securities exchange, and we do not intend to list them.
Donaldson, Lufkin & Jenrette Securities Corporation has advised us that it is
currently making a market in the notes; however, it is not obligated to do so
and may stop at any time. Donaldson, Lufkin & Jenrette Securities Corporation
may act as principal or agent in any such transaction. We will not receive the
proceeds of any sales of the notes but will bear the expenses of registration.
Donaldson, Lufkin & Jenrette
2
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TABLE OF CONTENTS
Page
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Prospectus Summary.............................................................4
Risk Factors..................................................................10
Forward-Looking Statements....................................................18
Use of Proceeds...............................................................19
Capitalization................................................................20
Selected Consolidated Financial Data..........................................21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...............................................................23
Business......................................................................35
Management....................................................................45
Security Ownership of Certain Beneficial
Owners and Management....................................................51
Relationships and Transactions with Related
Parties..................................................................53
Description of Credit Facility................................................55
Description of Notes..........................................................57
Plan of Distribution..........................................................98
Legal Matters.................................................................99
Experts.......................................................................99
Where You Can Find More Information...........................................99
Index to Unaudited Pro Forma Condensed
Consolidated Financial Data.............................................P-1
Index to Consolidated Financial Statements...................................F-1
-----------------------
-----------------------
Charles River is a registered trademark of Charles River Laboratories,
Inc. This prospectus also includes trademarks and tradenames of other parties.
3
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PROSPECTUS SUMMARY
This summary highlights important information regarding our business and
the notes. Because this is only a summary, it does not contain all the
information that may be important to you. You should read the entire prospectus
carefully, including "Risk Factors" and our financial statements and related
notes, before deciding to invest in the notes.
CHARLES RIVER LABORATORIES, INC.
Overview
We are a leading provider of critical research tools and integrated
support services that enable innovative and efficient drug discovery and
development. We are the global leader in providing the animal research models
required in research and development for new drugs, devices and therapies and
have been in this business for more than 50 years. Since 1992, we have built
upon our research model technologies to develop a broad and growing portfolio
of biomedical products and services. Our wide array of services enables our
customers to reduce costs, increase speed and enhance their productivity and
effectiveness in drug discovery and development. Our customer base, spanning
over 50 countries, includes all of the major pharmaceutical and biotechnology
companies, as well as many leading hospitals and academic institutions. We
currently operate 53 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 1999, our pro forma net
sales were $272.6 million, and our pro forma operating income was $49.5
million. For the six months ended June 24, 2000, our pro forma net sales were
$150.8 million, and our pro forma operating income was $35.4 million.
Research Models. We are the global leader in the production and sale of
research models, principally genetically and virally defined purpose-bred rats
and mice. These products represented 65% of our 1999 pro forma net sales and
63% of our pro forma net sales for the six months ended June 24, 2000. We offer
over 130 research models, one of the largest selections of small animal models
of any provider worldwide. Our higher growth models include genetically defined
models and models with compromised immune systems, which are increasingly in
demand as early-stage research tools. The FDA and foreign regulatory bodies
typically require the safety and efficacy of new drug candidates and many
medical devices to be tested on research models like ours prior to testing in
humans. As a result, our research models are an essential part of the drug
discovery and development process.
Biomedical Products and Services. We have focused significant resources on
developing a diverse portfolio of biomedical products and services directed at
high-growth areas of drug discovery and development. Our biomedical products
and services business represented 35% of our 1999 pro forma net sales and 37%
of our pro forma net sales for the six months ended June 24, 2000, and has
experienced strong growth as demonstrated by the 26% 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.
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.
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Our rapidly growing development services offerings enable our
customers to outsource their high-end, non-core drug development
activities.
In Vitro Detection Systems. We have diversified our product offerings
to include non-animal, or in vitro, methods for testing the safety of
drugs and devices. We are strategically committed to being the leader
in providing our customers with in vitro alternatives as these
methods become scientifically validated and commercially feasible.
Vaccine Support Products. We produce pathogen-free fertilized chicken
eggs, a critical element of poultry vaccine production. We believe
there is significant potential for growth in this area in support of
novel human vaccines, such as a nasal spray flu vaccine currently in
development.
Competitive Strengths
Our leading research models business has provided us with steadily growing
revenues and strong cash flow, while our biomedical products and services
business provides significant opportunities for profitable growth. Our products
and services are critical to both traditional pharmaceutical research and the
rapidly growing fields of genomic, recombinant protein and humanized antibody
research. We believe we are well positioned to compete effectively in all of
these sectors as a result of a diverse set of competitive strengths, which
include:
o Critical products and services;
o Long-standing reputation for scientific excellence;
o Extensive global infrastructure and customer relationships;
o Biosecurity technology expertise;
o Platform acquisition and internal development capabilities; and
o Experienced and incentivized management team.
Our Strategy
Our business strategy is to build upon our core research models 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:
o Broaden the scope of our discovery and development services;
o Acquire new technologies in research models;
o Expand our preclinical outsourcing services;
o Expand our non-animal technologies; and
o Pursue strategic acquisitions and alliances.
5
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THE RECAPITALIZATION
On September 29, 1999, CRL Acquisition LLC, a limited liability company
owned by affiliates of DLJ Merchant Banking Partners, II, L.P., our management
and other investors, together with our former parent company, Bausch & Lomb
Incorporated, completed a recapitalization transaction.
THE INITIAL PUBLIC OFFERING
We are a wholly-owned subsidiary of Charles River Laboratories
International, Inc., which consummated an initial public offering of 14,000,000
shares of its common stock on June 28, 2000 at a price of $16.00 a share.
Charles River Laboratories International issued an additional 2,100,000 shares
of its common stock on July 6, 2000 upon the exercise of an over-allotment
option by the underwriters. The common stock is listed on the New York Stock
Exchange under the symbol "CRL."
-----------------------
We are organized as a Delaware corporation. Our headquarters are located
at 251 Ballardvale Street, Wilmington, Massachusetts 01887. Our telephone
number is (978) 658-6000. Our website address is www.criver.com. The
information on our website is not incorporated as a part of this prospectus.
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SUMMARY DESCRIPTION OF THE NOTES
Maturity Date..................... October 1, 2009.
Interest Rate and Payment Dates... Interest on the notes accrues at the rate
of 13.5% per year, and is payable
semi-annually in cash in arrears on
October 1 and April 1 of each year.
Optional Redemption............... On or after October 1, 2004 we may redeem
some or all of the notes at any time at
the redemption prices described in the
section "Description of Notes" under the
heading "Optional Redemption."
Mandatory Repurchase Offer........ If we sell particular assets or
experience specific kinds of changes in
control of our company, we must offer to
repurchase the notes at the prices listed
in the section "Description of Notes"
under the heading "Repurchase at the
Option of Holders." See "Risk
Factors--Risks Relating to Our Debt--We
may not be able to purchase the notes
upon a change of control as required
under the indenture because of
restrictions in our credit facility."
Ranking........................... The notes are senior subordinated debt.
The notes rank:
o junior to all of our existing and
future senior debt, including any
borrowings under our credit facility;
o equally with any of our future senior
subordinated debt;
o senior to any of our future
subordinated debt; and
o effectively junior to all of the
liabilities of our subsidiaries.
At June 24, 2000, on a pro forma basis,
we had outstanding $101.4 million of
senior debt and our subsidiaries had $14.7
million of liabilities, including trade
payables but excluding intercompany
obligations.
Restrictive Covenants............. The indenture governing the notes
contains covenants that limit, among
other things, our ability, and the
ability of some of our subsidiaries, to:
o borrow money;
o create liens;
o pay dividends on stock or repurchase
stock;
o make some investments;
o engage in transactions with
affiliates; and
o sell some assets or merge with or
into other companies.
For more details, see the section
"Description of Notes" under the heading
"Certain Covenants."
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The table below presents our summary historical and unaudited pro forma as
adjusted consolidated financial and other data. We derived the summary
consolidated financial data for the fiscal years ended December 27, 1997,
December 26, 1998 and December 25, 1999 from our audited consolidated financial
statements and the related notes included elsewhere in this prospectus. We
derived the summary consolidated financial data for the six months ended June
26, 1999 and June 24, 2000 from our unaudited condensed consolidated financial
statements and the notes thereto included elsewhere in this prospectus. In the
opinion of management, our unaudited condensed consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial condition and
results of operations for this period. The summary unaudited pro forma as
adjusted consolidated financial data of Charles River Laboratories, Inc. is
based upon the consolidated financial statements as of and for the year ended
December 25, 1999, and as of and for the six months ended June 24, 2000,
adjusted as appropriate, to give effect to the recapitalization, the
acquisition of SBI Holdings Inc. which we call "Sierra," the acquisition of an
additional 16% of the equity of Charles River Japan Inc., the sale of a product
line within our research model business segment, and the sale of 16,100,000
shares of our parent's common stock in its initial public offering at the price
of $16.00 per share, the net proceeds of which have been used to repay
outstanding debt. The summary unaudited pro forma as adjusted consolidated
financial data may not be indicative of what our results would have been if the
transactions presented on a pro forma basis were completed as of December 27,
1998 and December 26, 1999 for annual and quarterly income statement data,
respectively, and as of June 24, 2000 for balance sheet data. In addition, they
are not projections of our consolidated future results of operations or
financial position. You should read the information contained in this table in
conjunction with "Use of Proceeds," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Condensed Consolidated Financial Data" and
our consolidated financial statements and the related notes contained elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
As Adjusted As Adjusted
Fiscal Year Ended(1) Fiscal Year Six Months Ended Six Months
---------------------------------------- Ended (1) -------------------- Ended(2)
December 27, December 26, December 25, December 25, June 26, June 24, June 24,
1997 1998 1999 1999 1999 2000 2000
------------ ------------ ------------ ------------ ----------- -------- ------------
(dollars in thousands except for share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales............................. $170,713 $193,301 $219,276 $272,557 $108,166 $143,399 $150,801
Cost of products sold and services
provided............................. 111,460 122,547 134,592 166,865 64,322 83,912 88,032
Selling, general and administrative
expenses............................. 30,451 34,142 39,765 52,328 19,911 24,240 25,453
Amortization of goodwill and
intangibles.......................... 834 1,287 1,956 3,848 764 1,802 1,876
Restructuring charges................. 5,892 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income $ 22,076 $ 35,325 $ 42,963 $ 49,516 $ 23,169 $ 33,445 $ 35,440
-------- -------- -------- -------- -------- -------- --------
Interest expense ..................... $ (501) $ (421) $ (9,943) $(22,550) $ (171) $(19,162) $(11,816)
======== ======== ======== ======== ======== ======== ========
Net income............................ $ 15,340 $ 23,378 $ 19,317 $ 11,616 $ 14,308 $ 12,722 $ 17,282
======== ======== ======== ======== ======== ======== ========
Other Data:
EBITDA, as defined(2)................. $ 31,779 $ 46,220 $ 55,281 $ 66,590 $ 28,985 $ 41,457 $ 43,954
EBITDA margin......................... 18.6% 23.9% 25.2% 24.4% 26.8% 28.9% 29.1%
Depreciation and amortization......... $ 9,703 $ 10,895 $ 12,318 $ 17,074 $ 5,816 $ 8,012 $ 8,514
Cash flows from operating
activities(3)........................ 24,324 37,380 37,568 -- 8,697 7,042 --
Cash flows (used in) investing
activities(3)........................ (12,946) (23,030) (34,168) -- (4,888) (5,118) --
Cash flows (used in) provided by
financing activities(3).............. (12,939) (8,018) (11,504) -- (6,306) 2,184 --
Ratio of earnings to fixed charges(4). 16.5x 25.8x 4.0x 2.0x 32.5x 1.7x 2.8x
</TABLE>
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As of June 24, 2000
-------------------------
Pro Forma
Historical As Adjusted
---------- -----------
(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents,............ $ 18,993 $ 18,993
Working capital....................... 38,713 43,714
Total assets.......................... 398,247 397,553
Total debt............................ 318,376 203,565
Total shareholders' equity............ (17,025) 97,092
(1) Our fiscal year consists of twelve months ending on the last Saturday on
or prior to December 31.
(2) EBITDA, as defined, represents operating income plus depreciation and
amortization. EBITDA, as defined, is presented because it is a widely
accepted financial indicator used by some investors and analysts to
analyze and compare companies on the basis of operating performance.
EBITDA, as defined, is not intended to represent cash flows for the
period, nor is it presented as an alternative to operating income or as an
indicator of operating performance. It should not be considered in
isolation or as a substitute for measures of performance prepared in
accordance with GAAP in the United States and is not indicative of
operating income or cash flow from operations as determined under GAAP.
Our method of computation may or may not be comparable to other similarly
titled measures of other companies.
(3) Cash flow information is not presented with respect to the unaudited pro
forma data because a statement of cash flows is not required by Article 11
of SEC Regulation S-X.
(4) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes, minority interests and
earnings from equity investments less minority interests plus earnings
from equity investments plus fixed charges. "Fixed charges" consist of
interest expense on all indebtedness, amortization of deferred financing
costs and one-third of rental expense from operating leases that we
believe is a reasonable approximation of the interest component of rental
expense.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones we face.
Additional risks not presently known to us or that we currently consider
immaterial may also impair our business operations. Any of these risks could
have a material and negative effect on our business, financial condition or
results of operations. The value of the notes could decline due to any of these
risks, and you may lose all or part of your investment.
Risks Related to Our Business and Industry
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. 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 made over $6.0
million in capital expenditures designed to strengthen our biosecurity and
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
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not be available to us or we may not be successful in commercializing these
methods. Even if we are successful, sales or profits from these methods may not
offset reduced sales or profits from research models.
Alternative research methods could decrease the need for research models,
and we may not be able to develop new products effectively or in a timely
manner to replace any lost sales. In addition, one of the anticipated outcomes
of genomics research is to permit the elimination of more compounds prior to
preclinical testing. While this outcome may not occur for several years, if at
all, it may reduce the demand for some of our products and services.
The outsourcing trend in the preclinical and nonclinical stages of drug
discovery and development, meaning contracting out to others functions that
were previously performed internally, may decrease, which could slow our
growth.
Some areas of our biomedical products and services business have grown
significantly as a result of the increase over the past several years in
pharmaceutical and biotechnology companies outsourcing their preclinical and
nonclinical research support activities. While industry analysts expect the
outsourcing trend to continue for the next several years, a substantial
decrease in preclinical and nonclinical outsourcing activity could result in a
diminished growth rate in the sales of one or more of our expected higher
growth areas.
We must comply with FDA regulation of our endotoxin detection systems
operations.
The United States Food and Drug Administration, or FDA, regulates our
endotoxin detection systems operations as a medical device manufacturer. Last
year, the FDA issued a "warning letter" to us and other LAL manufacturers,
citing quality control and other problems in the manufacturing facilities. The
FDA has allowed our facility, located in Charleston, South Carolina, to
continue to manufacture and sell the LAL product line, subject to our agreement
to make prescribed changes to our production and quality control systems. We
believe that we have taken all steps necessary to meet the FDA's requirements,
but if the FDA disagrees, it could take further enforcement action, including
potentially requiring us to recall our products or temporarily revoking our
manufacturing license. Any further enforcement action could impose additional
costs and affect our ability to provide our endotoxin detection systems.
Our business may be affected by changes in the Animal Welfare Act and related
regulations which may require us to alter our operations.
The United States Department of Agriculture, or USDA, is presently
considering changing the regulations issued under the Animal Welfare Act to
include rats, mice and birds, including chickens. 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. If the USDA decides to include rats, mice and birds,
including chickens, in its regulations, 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 the addition of
rats, mice and chickens to the Animal Welfare Act to 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.
If we are not successful in selecting and integrating the businesses and
technologies we acquire, our business may suffer.
We plan to continue to grow our business through acquisitions of
businesses and technologies and through 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:
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o difficulties and expenses incurred in assimilating operations,
services, products or technologies;
o difficulties in developing and operating new businesses including
diversion of management's attention from other business concerns;
o the potential loss of key employees of an acquired business and
difficulties in attracting new employees to grow businesses;
o difficulties in assimilating differences in foreign business
practices and overcoming language barriers;
o difficulties in obtaining intellectual property protections and
skills that we and our employees currently do not have; and
o 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.
Factors such as exchange rate fluctuations and increased international and
U.S. regulatory requirements may increase our costs of doing business in
foreign countries.
A significant part of our net sales is derived from operations outside the
United States. Our operations and financial results could be significantly
affected by factors such as changes in foreign currency rates, uncertainties
related to regional economic circumstances and the costs of complying with a
wide variety of international and U.S. regulatory requirements.
Because the sales and expenses of our foreign operations are generally
denominated in local currencies, we are subject to exchange rate fluctuations
between local currencies and the U.S. dollar in the reported results of our
foreign operations. These fluctuations may decrease our earnings. We currently
do not hedge against the risk of exchange rate fluctuations.
We face significant competition in our business, and if we are unable to
respond to competition in our business, our revenues may decrease.
We face significant competition from different competitors in each of our
business areas. Some of our competitors in biotech safety testing and medical
device testing are larger than we are and may have greater capital, technical
or other resources than we do. We generally compete on the basis of quality,
reputation, and availability of service. Expansion by our competitors into
other areas in which we operate, new entrants into our markets or changes in
our competitors' strategy could adversely affect our competitive position. Any
erosion of our competitive position may decrease our revenues or limit our
growth.
Negative attention from special interest groups may impair our business.
Our core research model activities with rats, mice and other rodents have
not historically been the subject of animal rights media attention. However,
the large animal component of our business has been the subject of adverse
attention and on-site protests. We recently 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.
12
<PAGE>
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, the shareholders of our parent
company, 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 parent's
initial public offering, CRL Acquisition LLC reorganized, terminated its
existence as a corporation for tax purposes and distributed a substantial
portion of our parent's stock to its members. It is possible that the Internal
Revenue Service may contend that this reorganization and liquidating
distribution should be integrated with the original recapitalization. We
believe that the reorganization and liquidating distribution should not have
any impact upon the election for federal income tax purposes. However, the
Internal Revenue Service may reach a different conclusion. If the Internal
Revenue Service were successful, the expected future tax benefits would not be
available, and we would be required to write off the related deferred tax asset
reflected in our balance sheet by recording a non-recurring tax expense in our
results of operations in an amount equal to such deferred tax asset. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Our supply of animal feed may be interrupted by the bankruptcy of our domestic
commercial supplier Purina Mills, Inc.
Purina Mills, Inc., our commercial supplier of animal feed for our United
States research model business, has filed for reorganization under the U.S.
Bankruptcy Code. We do not expect this to interrupt our supply of animal feed.
If we need to secure an alternative or secondary source, our costs of animal
feed may increase.
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 24 years and recently became our Chairman. We have no employment
agreement with Mr. Foster, nor with any other executive officer. If Mr. Foster
or other members of management do not continue in their present positions, our
business may suffer.
Because of the specialized scientific nature of our business, we are
highly dependent upon qualified scientific, technical and managerial personnel.
There is intense competition for qualified personnel in the pharmaceutical and
biotechnological fields. Therefore, we may not be able to attract and retain
the qualified personnel necessary for the development of our business. The loss
of the services of existing personnel, as well as the failure to recruit
additional key scientific, technical and managerial personnel in a timely
manner could harm our business.
DLJ Merchant Banking Partners, II, L.P. and its affiliates have substantial
control over our parent company and may have different interests than those of
other holders of our securities, including the notes.
As of July 15, 2000, DLJ Merchant Banking Partners II, L.P. and affiliated
funds, which we refer to as the DLJMB Funds, beneficially owned 45.3% of our
parent's 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 parent's and, by extension, our business, policies
and affairs, including the power to:
o elect a majority of directors;
13
<PAGE>
o appoint new management;
o prevent or cause a change of control; and
o substantially control any action requiring the approval of
stockholders, including the adoption of amendments to our certificate
of incorporation and approval of mergers or sales of substantially
all of our assets.
The directors of our parent elected by the DLJMB Funds have the ability to
control decisions affecting the business and management of our parent and our
company including as to 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 parent's or our
securities, including the notes.
Our historical financial information may not be representative of our results
as a separate company.
The historical financial information in this prospectus 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 prospectus 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.
Risks Relating to Our Debt
We have a significant amount of debt, which could limit our growth and our
ability to respond to changing conditions.
On a pro forma basis as of June 24, 2000, after giving effect to our
parent's initial public offering, the net proceeds of which were used to repay
outstanding debt, we had:
o total consolidated indebtedness of approximately $210.0 million; and
o approximately $30.0 million we could borrow under our credit
facility. In addition, subject to the restrictions in our credit
facility and the indenture, we may incur significant additional debt.
Our additional debt may be secured from time to time.
The level of our debt could have important consequences, including:
o if a substantial portion of our cash flow from operations must be
dedicated to servicing our debt, then this limits our cash flow
available for general corporate purposes and acquisitions;
o limiting our ability to obtain additional debt financing in the
future for working capital, capital expenditures or acquisitions; and
14
<PAGE>
o limiting our flexibility in reacting to competitive and other changes
in our industry and economic conditions generally.
Though we currently have enough cash flow to service our debt, we may not in
the future and you may not receive interest or principal payments on the notes
Our ability to pay or to refinance our debt will depend on our future
operating performance. General economic, financial, competitive, legislative,
regulatory, business and other factors beyond our control affect our operating
performance.
We anticipate that our operating cash flow, together with money we can
borrow under our credit facility, will sufficiently meet our anticipated future
operating expenses, fund capital expenditures and pay our debt as it becomes
due. If we still are not able to pay our debt, we could attempt to restructure
or refinance our debt or seek additional equity capital. We may not be able to
accomplish these actions on favorable financial terms, or at all. This
inability may reduce our flexibility, potential for growth and ability to pay
you interest and principal on the notes.
We may in the future incur significant additional debt in order to fund
our working capital or capital expenditure needs, or to acquire other
businesses. If our cash flow were to decline, or our debt levels or interest
rates were to increase, the risks that we face in terms of our ability to
service debt could intensify. If we are unable to service our debt, you may not
receive interest or principal payments on the notes in a timely manner, or at
all.
Restrictive covenants in our indenture and credit facility may adversely
affect us by limiting the types of transactions we can enter into, potentially
leading to a default and our debt becoming immediately due and payable.
The indenture governing the notes contains various covenants that limit
our ability to engage in particular transactions.
In addition, our credit facility contains other and more restrictive
covenants and prohibits us from prepaying our subordinated debt, including the
notes. Our credit facility also requires us to maintain specified financial
ratios and satisfy some other financial condition tests. The other tests
include requiring us to maintain a minimum EBITDA, minimum coverage of interest
expense, minimum coverage of fixed charges and a maximum leverage ratio. We
currently comply with such ratios and tests; however, events beyond our control
may affect our ability to meet these financial ratios and tests in the future.
A breach of any of these covenants could cause us to default under our credit
facility and/or the notes. If we default under our credit facility, which
includes a cross default to debt of our parent, the lenders could elect to
declare all amounts outstanding under our credit facility to be immediately due
and payable. They could also terminate all commitments to extend further credit
to us. We pledged substantially all of our assets, other than assets of our
foreign subsidiaries, as security under our credit facility. If the lenders
under our credit facility make our borrowing immediately due and payable, we
may not have sufficient assets to repay our credit facility and our other debt.
If we are not able to repay amounts due under our credit facility, the lenders
could proceed against the collateral that secures that debt.
The notes are subordinated to other debt and holders of our senior debt must
be paid before you receive any payment under the notes.
The notes rank junior to all of our existing and future senior debt,
including all debt under our credit facility.
As a result of the notes being subordinated, if:
o we become insolvent or enter into a bankruptcy or similar proceeding;
o we fail to make a payment when due on senior debt; or
o any senior debt becomes immediately due and payable;
15
<PAGE>
then the holders of our senior debt must be paid in full before you are paid.
In addition, we cannot make any payments to you if we have failed to make
payments to holders of designated senior debt. Under some circumstances, we
cannot make any payments to you for a period of up to 179 days if we have
defaulted, other than failures to make payments, under our senior debt
covenants.
At June 24, 2000, on a pro forma basis, the notes ranked junior in right
of payment to $101.4 million of senior debt.
We may incur additional debt ranking equal to the notes and holders of that
debt would also receive equally with you, any proceeds from any dissolution of
our company.
If we incur any additional debt that ranks equally with the notes, the
holders of that debt will be entitled to share equally with you in any proceeds
distributed in connection with any insolvency, liquidation, reorganization,
dissolution or other winding-up of our company. This would have the effect of
reducing the amount of proceeds you receive.
The notes will be structurally junior to our subsidiaries' debt and the claims
of those holders are senior to your claims against those subsidiaries.
Holders of debt and other liabilities of our subsidiaries will effectively
be senior to your claims under the notes against those subsidiaries. As of June
24, 2000, on a pro forma basis, our subsidiaries had $14.7 million of
outstanding liabilities, including trade payables but excluding intercompany
obligations.
We may not be able to purchase the notes upon a change of control as required
under the indenture because of restrictions in our credit facility.
Upon the occurrence of "change of control" events specified in the
"Description of Notes," you may require us to purchase your notes at 101% of
their principal amount, plus accrued interest. The terms of our credit facility
limit our ability to purchase your notes in such circumstances. Any of our
future debt agreements may contain similar restrictions and provisions.
Accordingly, we may not be able to satisfy our obligations to purchase your
notes unless we are able to refinance or obtain waivers under the credit
facility and other debt with similar restrictions. Also, we may not have the
financial resources to purchase your notes, particularly if such change of
control event triggers a similar repurchase requirement for other debt, or
results in other debt becoming immediately due and payable. Our credit facility
currently provides that change of control events will constitute a default and
could result in our debt becoming immediately due and payable under the credit
facility.
No public trading market for the notes exists.
There is no existing public trading market for the notes, and we cannot
assure you about the future development of a market for the notes or your
ability to sell the notes or the price at which you may be able to sell your
notes. If such market were to develop, the notes could trade at prices that may
be higher or lower than the initial offering price of the notes depending on
many factors, including prevailing interest rates, our operating results and
the market for similar securities. Although it is not obligated to do so,
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") has made a market
in the notes. Any such market-making activity may be discontinued at any time,
for any reason, without notice at the sole discretion of DLJSC. We do not
intend to list the notes on any securities exchange or to seek admission
thereof to trading in the National Association of Securities Dealers Automated
Quotation System. No assurance can be given as to the liquidity of or the
trading market for the notes.
DLJSC may be deemed to be our "affiliate" (as defined in the Securities
Act) and, as such, may be required to deliver a prospectus in connection with
its market-making activities in the notes. Under the registration rights
agreement that we signed with DLJSC in connection with the initial sale of the
notes, we have agreed to use our best efforts to file and maintain a
registration statement that would allow DLJSC to engage in market-making
transactions
16
<PAGE>
in the notes for a period ending no sooner than the date on which DLJSC is no
longer deemed to be such an "affiliate." We have agreed to bear substantially
all the costs and expenses related to registration.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue" or similar words. You should
read statements that contain these words carefully because they discuss our
future expectations, contain projections of our future results of operations or
of our financial condition or state other "forward-looking" information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or control and that may cause our actual results to differ
materially from those discussed as a result of various factors, including
contaminations at our facilities, changes in the pharmaceutical or
biotechnology industries, competition and changes in government regulations or
general economic or market conditions. These factors should be considered
carefully and readers should not place undue reliance on our forward-looking
statements. Before you invest in the notes, you should be aware that the
occurrence of the events described in the "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" sections and elsewhere in this prospectus could harm our business,
operating results and financial condition. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements and risk factors contained
throughout this prospectus. We are under no duty to update any of the
forward-looking statements after the date of this prospectus or to conform
these statements to actual results.
Industry and Market Data
In this prospectus, we rely on and refer to information and statistics
regarding the research model and biomedical products and services industries,
and our market share in the sectors in which we compete. We obtained this
information and statistics from various third party sources, discussions with
our customers and/or our own internal estimates. We believe that these sources
and estimates are reliable, but we have not independently verified them.
18
<PAGE>
USE OF PROCEEDS
This prospectus is delivered in connection with the sale of the notes by
DLJSC in market-making transactions. This prospectus may also be used by DLJ
Investment Partners, L.P., DLJ Investment Funding, Inc., and DLJ ESC II L.P. to
comply with their prospectus delivery requirements of the Securities Act in
connection with any resale transaction. We will not receive any of the proceeds
from such transactions but will bear the expenses of registration.
19
<PAGE>
CAPITALIZATION
The following table presents our consolidated capitalization as of June
24, 2000 (i) on a historical basis and (ii) as adjusted to give pro forma
effect to the transactions described in the notes to the unaudited pro forma as
adjusted condensed consolidated balance sheet and our parent's initial public
offering. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Unaudited Pro Forma Condensed Consolidated Financial Data" and our
consolidated financial statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
As of June 24, 2000
----------------------------
Pro Forma
Historical As Adjusted
----------- -----------
(dollars in thousands)
<S> <C> <C>
Debt:
Credit facility:
Revolving credit facility(1)........................ $ 5,000 $ --
Term loans(2)....................................... 159,400 101,401
Senior subordinated notes(3)......................... 148,032 96,220
Capital lease obligations and other long-term debt... 5,944 5,944
-------- --------
Total debt........................................... 318,376 203,565
======== ========
Shareholders' equity:
Common stock......................................... $ 1 $ 1
Additional paid-in capital........................... 114,933 237,521
Accumulated deficit.................................. (119,436) (127,907)
Loan to officers..................................... (920) (920)
Accumulated other comprehensive loss................. (11,603) (11,603)
-------- --------
Total shareholders' equity........................... (17,025) 97,092
-------- --------
Total capitalization................................. 301,351 300,657
======== ========
</TABLE>
(1) At June 24, 2000, we had $30.0 million available under our revolving
credit facility, subject to customary borrowing conditions.
(2) Includes senior secured term loan A of $40.0 million and senior secured
term loan B of $119.4 million.
(3) Represents proceeds of $150.0 million related to the units which were
allocated between the senior subordinated notes ($147.9 million) and
warrants ($2.1 million), plus amortization of the discount on the senior
subordinated notes.
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<PAGE>
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 30, 1995, December 28,
1996, December 27, 1997, December 26, 1998 and December 25, 1999 and as of and
for the six months ended June 26, 1999 and June 24, 2000. We derived the
selected consolidated income statement data for the three fiscal years ended
December 25, 1999 and the consolidated balance sheet data as of December 26,
1998 and December 25, 1999 from our audited consolidated financial statements
and the notes to those statements contained elsewhere in this prospectus. We
derived the selected consolidated financial data as of and for the fiscal year
ended December 28, 1996 from our audited consolidated financial statements and
the notes to those statements, which are not contained in this prospectus. We
derived the selected consolidated financial data as of and for the fiscal year
ended December 30, 1995 from our unaudited consolidated financial statements
and the notes to those statements which are also not contained in this
prospectus. We derived the selected consolidated data as of and for the six
months ended June 26, 1999 and June 24, 2000 from our unaudited condensed
consolidated financial statements and the notes thereto which are contained
elsewhere in this prospectus. In the opinion of management, our unaudited
consolidated financial statements and our unaudited condensed consolidated
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
condition and results of operations for these periods. You should read the
information contained in this table in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the related notes contained elsewhere
in this prospectus.
<TABLE>
<CAPTION>
Fiscal Year(1) Six Months Ended
---------------------------------------------------------------- --------------------
June 26, June 24,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total net sales........................ $141,041 $155,604 $170,713 $193,301 $219,276 $108,166 $143,399
Cost of products sold and services
provided............................ 86,404 97,777 111,460 122,547 134,592 64,322 83,912
Selling, general and administrative
expenses............................ 27,976 28,327 30,451 34,142 39,765 19,911 24,240
Amortization of goodwill and
intangibles......................... 558 610 834 1,287 1,956 764 1,802
Restructuring charges.................. -- 4,748 5,892 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Operating income....................... 26,103 24,142 22,076 35,325 42,963 23,169 33,445
Interest income........................ 634 654 865 986 536 359 291
Other income........................... -- -- -- -- 89 -- 390
Interest expense....................... (768) (491) (501) (421) (9,943) (171) (19,162)
Gain/(loss) from foreign currency,
net................................. (68) 84 (221) (58) (136) (153) (160)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes,
minority interests and earnings
from equity investments............. 25,901 24,389 22,219 35,832 33,509 23,204 14,804
Provision for income taxes............. 10,759 10,889 8,499 14,123 16,214 10,011 2,151
Income before minority interests
and earnings from equity
investments......................... 15,142 13,500 13,720 21,709 17,295 13,193 12,653
Minority interests..................... (13) (5) (10) (10) (22) (2) (679)
Earnings from equity investments....... 1,885 1,750 1,630 1,679 2,044 1,117 748
-------- -------- -------- -------- -------- -------- --------
Net income............................. 17,014 15,245 15,340 23,378 19,317 14,308 12,722
======== ======== ======== ======== ======== ======== ========
Other Data:
Depreciation and amortization.......... 9,717 9,528 9,703 10,895 12,318 5,816 8,012
Capital expenditures................... 10,239 11,572 11,872 11,909 12,951 4,637 6,107
Ratio of earnings to fixed charges(2).. 18.9x 18.8x 16.5x 25.8x 4.0x 32.5x 1.7x
21
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Fiscal Year(1) Six Months Ended
---------------------------------------------------------------- --------------------
June 26, June 24,
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
Balance Sheet Data (at end of
period):
Cash and cash equivalents.............. 15,336 19,657 17,915 24,811 15,010 21,569 18,993
Working capital........................ 39,100 48,985 46,153 42,574 27,574 49,196 38,714
Total assets........................... 184,271 196,981 196,211 234,254 362,403 227,037 398,247
Total debt............................. 4,626 1,645 1,363 1,582 311,063 1,278 318,376
Total shareholders' equity (deficit)... 142,212 153,818 149,364 168,259 (22,616) 169,153 (17,025)
</TABLE>
(1) Our fiscal year consists of twelve months ending on the last Saturday on
or prior to December 31.
(2) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes, minority interests and
earnings from equity investments less minority interests plus earnings
from equity investments plus fixed charges. "Fixed charges" consist of
interest expense on all indebtedness, amortization of deferred financing
costs and one-third of rental expense from operating leases that we
believe is a reasonable approximation of the interest component of rental
expense.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and our unaudited pro forma condensed
consolidated financial data, including the related notes, contained elsewhere
in this prospectus.
Overview
We are a leading provider of critical research tools and integrated
support services that enable innovative and efficient drug discovery and
development. We are the global leader in providing the animal research models
required in research and development for new drugs, devices and therapies and
have been in this business for more than 50 years.
We operate in two segments for financial reporting purposes: research
models and biomedical products and services. In addition, since services
represent over 10% of our net sales, our consolidated financial statements also
provide a breakdown of net sales between net sales related to products, which
include both research models and biomedical products, and net sales related to
services, which reflect biomedical services, and a breakdown of costs between
costs of products sold and costs of services provided. The following tables
show the net sales and the percentage contribution of our segments, research
models and biomedical products and services, for the past three years. It also
shows 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.
<TABLE>
<CAPTION>
For the Six
Fiscal Year Ended Months Ended
------------------------------------------------ -----------------------
December 27, December 26, December 25, June 26, June 24,
1997 1998 1999 1999 2000
------------ ------------ ------------ -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Net sales:
Research models.............................. $125.2 $134.6 $142.3 $73.8 $87.2
Biomedical products and services............. 45.5 58.7 77.0 34.4 56.2
Costs of products sold and services provided:
Research models.............................. $ 82.5 $ 85.8 $ 86.3 $43.5 $50.0
Biomedical products and services............. 29.0 36.7 48.3 20.9 35.8
Selling, general and administrative expenses:
Research models.............................. $ 19.6 $ 18.1 $ 22.2 $10.0 $12.0
Biomedical products and services............. 6.9 9.7 12.5 6.1 9.4
Operating income:
Research models.............................. $ 19.6 $ 30.5 $ 33.7 $20.3 $25.2
Biomedical products and services............. 6.5 11.1 14.4 7.4 11.0
</TABLE>
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<TABLE>
<CAPTION>
For the Six
Fiscal Year Ended Months Ended
December 27, December 26, December 25, June 26, June 24,
1997 1998 1999 1999 2000
------------ ------------ ------------ -------- --------
(as a percent of net sales)
<S> <C> <C> <C> <C> <C>
Net sales:
Research models.............................. 73.3% 69.6% 64.9% 68.2% 60.8%
Biomedical products and services............. 26.7 30.4 35.1 31.8 39.2
Costs of products sold and services provided:
Research models.............................. 65.9% 63.7% 60.6% 58.9% 57.3%
Biomedical products and services............. 63.7 62.5 62.7 60.8 63.7
Selling, general and administrative expenses:
Research models.............................. 15.7% 13.4% 15.6% 13.6% 13.8%
Biomedical products and services............. 15.2 16.5 16.2 17.7 16.7
Operating income:
Research models.............................. 15.7% 22.7% 23.7% 27.5% 28.9%
Biomedical products and services............. 14.3 18.9 18.7 21.5 19.6
</TABLE>
Net Sales. We recognize net sales when a product is shipped or as services
are completed. 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 30%
from 1997 to 1999. 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 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. Our net
sales in 1997 were adversely affected by our inability to fulfill customer
orders, and our expenses were increased during that period by the costs
associated with cleaning up the contaminations. Since January 1, 1997, we have
made over $6.0 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 contamination,
including, for example, increasing the frequency of replacing masks and gowns,
and most importantly, increasing awareness and training
24
<PAGE>
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 to date.
Acquisitions. Since January 1, 1997, we have successfully acquired and
integrated four companies, which contributed $18.2 million in sales in 1999 and
$22.8 million in sales for the six months ended June 24, 2000, representing
8.3% and 15.9% of total sales, respectively. The acquisition of three of the
companies occurred prior to December 26, 1998. 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 have agreed to pay (a) up to $2.0 million in contingent purchase price if
specified financial objectives are reached by December 31, 2000, (b) up to
$10.0 million in performance-based bonus payments if specified financial
objectives are reached over the next five years, with no payment in any
individual year to exceed $2.7 million and (c) $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 $2.0 million in contingent purchase price for Sierra will, if paid,
increase goodwill and will not affect our results of operations except through
the subsequent related amortization expense and any interest expense related to
any borrowings necessary to finance the payment. 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. During fiscal 1999, we expensed $1.4 million of the $3.0 million in
retention and non-competition payments, with the $1.6 million remaining being
expensed ratably through June 2001 as it is earned. The contingent purchase
price and performance-based bonus payments are not reflected in the pro forma
condensed consolidated financial data included elsewhere herein because they
are not considered reasonably estimable; the retention and non-competition
payments are not included in the pro forma condensed consolidated financial
data as they are considered non-recurring.
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 $3.6 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
$15.1 million in sales for the six months ended June 24, 2000. We also receive
dividends based on our pro-rata share of net income. Charles River Japan paid
dividends of $0.8 million, $0.7 million and $0.8 million in 1997, 1998 and
1999, respectively. No dividends were paid in the six months ended June 24,
2000. Our other unconsolidated joint venture is Charles River Mexico, an
extension of our vaccine support products area, which is not significant to our
business.
Restructuring Program. During 1997, we implemented a restructuring
program. Our plan, which was approved by B&L, was designed to reduce excess
capacity, increase efficiencies, eliminate non-essential operating and staff
personnel, and close several small product-lines. In 1997, we established a
restructuring reserve in the amount of $5.9 million, based on our plan to close
particular facilities and eliminate personnel in our vaccine support products
area, eliminate personnel in Europe, reduce corporate staff, and relocate one
of our large animal facilities. We have completed the actions underlying this
plan. These actions reduced cost of products sold and services provided and
selling, general and administrative expenses and also improved profitability in
the areas affected. At the time we prepared our restructuring program, we
estimated we would save approximately $3.1 million on an annual basis. In 1997
we saved approximately $0.6 million from these actions, and in 1998 we saved
approximately $2.6 million.
25
<PAGE>
Allocation of Costs from Bausch & Lomb. Historically, B&L charged us for
some direct expenses, including insurance, information technology and other
miscellaneous expenses, based upon actual charges incurred on our behalf.
However, these charges and estimates are not necessarily indicative of the
costs and expenses which would have resulted had we incurred these costs as a
stand-alone entity. The actual amounts of expenses we incur in future periods
may vary significantly from these allocations and estimates. We expect to incur
other incremental expenses as a stand-alone company. See "Unaudited Pro Forma
Condensed Consolidated Financial Data."
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, our
stockholders made an 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 fourth quarter of 1999. 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, some of the proceeds of our parent's initial
public offering have been used to repay a portion of our outstanding debt;
therefore, we expect to be more profitable in the future due to reduced
interest costs. We have therefore reassessed the need for a valuation allowance
associated with the deferred tax asset balance discussed above and have reduced
the valuation allowance by $4.8 million. This reduction in valuation allowance
has been recorded as a tax benefit in the second quarter of 2000. The net
deferred tax asset pertaining to the election under Section 38(h)(10) of the
Internal Revenue Code as of June 24, 2000 of $100.2 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 contend that the reorganization and liquidating distribution that CRL
Acquisition LLC undertook in connection with our parent's initial public
offering should be integrated with our original recapitalization. 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 (8) to
the consolidated financial statements and note (4) to the condensed
consolidated interim financial statements. We believe that the reorganization
and liquidating distribution should not have any impact upon the election for
federal income tax purposes. However, the Internal Revenue Service may reach a
different conclusion. See "Risk Factors-Tax benefits we expect to be available
in the future may be subject to challenge."
Initial Public Offering. Some of the proceeds of our parent's initial
public offering, which was consummated in the third quarter of 2000, have been
used to repay approximately $114.8 million of our outstanding indebtedness. In
connection with this repayment we have paid premiums and written off deferred
financing costs. We expect to record an extraordinary loss of approximately
$8.5 million, net of tax benefits of $4.6 million, in the third quarter of
2000.
Results of Operations
The following table summarizes historical results of operations as a
percentage of net sales for the periods shown:
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
-------------------------------------------- --------------------
December 27, December 26, December 25, June 26, June 24,
1997 1998 1999 1999 2000
------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of products sold and services
provided........................... 65.3 63.4 61.4 59.5 58.5
Selling, general and administrative
expenses........................... 17.8 17.7 18.1 18.4 16.9
Amortization of goodwill and other
intangibles........................ 0.5 0.7 0.9 0.7 1.2
Restructuring charges............... 3.5 -- -- -- --
Interest income..................... 0.5 0.5 0.2 0.3 0.2
Interest expense.................... 0.3 0.2 4.5 0.2 13.3
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Fiscal Year Ended Six Months Ended
-------------------------------------------- --------------------
December 27, December 26, December 25, June 26, June 24,
1997 1998 1999 1999 2000
------------ ------------ ------------ -------- --------
Provision for income taxes.......... 5.0 7.3 7.4 9.3 1.5
Earnings from equity investment..... 0.9 0.8 0.9 1.0 0.5
Minority interests.................. -- -- -- -- 0.5
----- ----- ----- ----- -----
Net income.......................... 9.0% 12.1% 8.8% 13.2% 8.9%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 24, 2000 Compared to Six Months Ended June 26, 1999
Net Sales. Net sales for the first six months of 2000 were $143.4 million,
an increase of $35.2 million, or 32.5%, from $108.2 million
for the first six months of 1999.
Research Models. Net sales of research models in the first six months of
2000 were $87.2 million, an increase of $13.4 million, or 18.2%, from $73.8
million for the first six months of 1999. The consolidation of Charles River
Japan in the first six months of 2000 increased sales by $14.8 million. Small
animal research model sales increased in North America by $3.0 million or 9.5%
due to continued improved pricing, a shift to higher priced specialty units and
an increase in unit volume. Small animal research model sales decreased in
Europe by $3.1 million principally from the negative impact of $3.4 million due
to foreign currency translations. We also experienced a decrease in the large
animal breeding, import and conditioning area of $1.3 million principally due
to the closure of a facility in the U.K. and the sale of our large animal
colony in the first quarter of 2000.
Biomedical Products and Services. Net sales of biomedical products and
services for the first six months in 2000 were $56.2 million, an increase of
$21.8 million, or 63.4%, from $34.4 million for the first six months of 1999.
At the beginning of the fourth quarter in 1999 we acquired SBI Holding Inc.
("Sierra") which had sales of $15.4 million for the first six months of 2000.
The remaining increase was due to significant sales increases of transgenic and
research support services of $2.0 million, endotoxin detection systems of $0.9
million, biosafety testing of $1.5 million and sales from our contract site
management contracts of $2.1 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 for the first six months of 2000 was $83.9 million, an
increase of $19.6 million, or 30.5%, from $64.3 million for the first six
months of 1999.
Research Models. Cost of products sold and services provided for research
models for the first six months of 2000 was $50.0 million, an increase of $6.5
million, or 14.9%, compared to $43.5 million for the first six months of 1999.
Cost of products sold and services provided for the first six months of 2000
was 57.3% of net sales compared to 58.9% of net sales for the first six months
of 1999. Cost of products sold and services provided increased at a lower rate
than net sales due to the more favorable product mix and better pricing, as
well as improved capacity utilization.
Biomedical Products and Services. Cost of products sold and services
provided for biomedical products and services for the first six months of 2000
was $35.8 million, an increase of $14.9 million, or 71.3%, compared to $20.9
million for the first six months of 1999. Cost of products sold and services
provided as a percentage of net sales increased from 60.8% for the first six
months of 1999 compared to 63.7% for the first six months of 2000 due mainly to
the acquisition of Sierra which has slightly lower margins.
Selling, General, and Administrative Expenses. Selling, general and
administrative expenses for the first six months of 2000 were $24.2 million, an
increase of $4.3 million, or 21.6%, from $19.9 million for the first six months
of 1999. Selling, general and administrative expenses for the first six months
of 2000 were 16.9% of net sales compared to 18.4% of net sales for the first
six months of 1999.
Research Models. Selling, general and administrative expenses for research
models for the first six months of 2000 were $12.0 million, an increase of $2.0
million, or 20.0%, compared to $10.0 million for the first six months of
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<PAGE>
1999. The $2.0 million increase is mainly due to the consolidation of Charles
River Japan. Selling, general and administrative expenses for the first six
months of 2000 were 13.8% of net sales, compared to 13.6% for the first six
months of 1999.
Biomedical Products and Services. Selling, general and administrative
expenses for biomedical products and services for the first six months of 2000
were $9.4 million, an increase of $3.3 million, or 54.1%, compared to $6.1
million for the first six months of 1999. The acquisition of Sierra in the
fourth quarter of 1999 accounts for $2.9 million of the increase. Selling,
general and administrative expenses for the first six months of 2000 decreased
to 16.7% of net sales, compared to 17.7% of net sales for the first six months
of 1999, due to greater economies of scale.
Unallocated Corporate Overhead. Unallocated corporate overhead, which
consists of various corporate expenses, was $2.8 million for the first six
months of 2000, a decrease of $1.7 million compared to $4.5 million for the
first six months of 1999. Pension income of $1.4 million due to favorable
investment returns primarily accounts for this decrease.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles for the first six months in 2000 was $1.8 million, an
increase of $1.0 million from $0.8 million for the first six months in 1999.
The increase was due to the effect of additional amortization of intangibles
resulting from our Sierra acquisition.
Operating Income. Operating income for the first six months of 2000 was
$33.4 million, an increase of $10.2 million, or 44.0%, from $23.2 million for
the first six months of 1999. Operating income for the first six months of 2000
was 23.3% of net sales, compared to 21.4% of net sales for the first six months
of 1999. 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 for the
first six months of 2000 was $25.2 million, an increase of $4.9 million, or
24.1%, from $20.3 million for the first six months of 1999. Operating income
from sales of research models for the first six months of 2000 was 28.9% of net
sales, compared to 27.5% for the first six months of 1999. The increase was
attributable to the factors described above.
Biomedical Products and Services. Operating income from sales of
biomedical products and services for the first six months of 2000 was $11.0
million, an increase of $3.6 million, or 48.6%, from $7.4 million for the first
six months of 1999. Operating income from sales of biomedical products and
services for the first six months of 2000 decreased to 19.6% of net sales,
compared to 21.5% of net sales for the first six months of 1999. This was
primarily due to the acquisition of Sierra, and the impact of the additional
amortization of intangibles.
Income Taxes. The effective tax rate for the first six months of 2000
excluding the reversal of the deferred tax valuation allowance of $4.8 million
was 46.9% as compared to 44.9% for the first six months in 1999. The $4.8
million reversal of the valuation allowance was recorded as a tax benefit in
the second quarter of 2000 due to a reassessment of the need for a deferred tax
valuation allowance following Charles River Laboratories International, Inc.'s
initial public offering of 16,100,000 shares of its common stock subsequent to
the second quarter of 2000.
Interest Expense. Interest expense for the first six months of 2000 was
$19.2 million. The $19.0 million increase from the first six months of 1999 was
primarily due to the additional debt incurred as a result of the
recapitalization which occurred on September 29, 1999. The interest rate of the
senior subordinated notes as a result of meeting a financial ratio will remain
at 13.5%.
Net Income. Net income for the first six months of 2000 was $12.7 million,
a decrease of $1.6 million from $14.3 million for the first six months of 1999.
The decrease was attributable to the increased interest expense partially
offset by operating income from operations and the reversal of the deferred tax
valuation allowance.
28
<PAGE>
Fiscal 1999 Compared to Fiscal 1998
Net Sales. Net sales in 1999 were $219.3 million, an increase of $26.0
million, or 13.5%, from $193.3 million in 1998.
Research Models. Net sales of research models in 1999 were $142.3 million,
an increase of $7.7 million, or 5.7%, from $134.6 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 $77.0 million, an increase of $18.3 million, or 31.2%,
from $58.7 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 $134.6 million, an increase of $12.1 million, or
9.9%, from $122.5 million in 1998.
Research Models. Cost of products sold and services provided for research
models in 1999 was $86.3 million, an increase of $0.5 million, or 0.6%,
compared to $85.8 million in 1998. Cost of products sold and services provided
in 1999 was 60.6% of net sales compared to 63.7% of net sales in 1998. Cost of
products sold and services provided increased at a lower rate than net sales
due to the more favorable product mix and better pricing, as well as improved
capacity utilization.
Biomedical Products and Services. Cost of products sold and services
provided for biomedical products and services in 1999 was $48.3 million, an
increase of $11.6 million, or 31.6%, compared to $36.7 million in 1998. Cost of
products sold and services provided as a percentage of net sales was
essentially unchanged at 62.7% in 1999 compared to 62.5% 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 18.1% of net sales compared to 17.7% 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 15.6% of net sales, compared to 13.4% 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 16.2% of net sales,
compared to 16.5% 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.
29
<PAGE>
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 19.6% of net sales, compared to 18.3% 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 23.7% of net
sales, compared to 22.7% 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 18.7% of net sales,
compared to 18.9% of net sales in 1998. This was primarily due to the
acquisition of Sierra, and the impact of additional amortization of
intangibles.
Other Income. We recorded a $1.4 million gain on the sale of two small
facilities, one located in Florida, and the other located in the Netherlands,
and a charge of $1.3 million for stock compensation expense.
Interest Expense. Interest expense for 1999 was $9.9 million
compared to $0.4 million for 1998. The $9.5 million increase was primarily
due to the additional debt incurred in the recapitalization.
Income Taxes. The effective tax rate of 48.4% in 1999 as compared to 39.5%
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 $19.3 million, a decrease of $4.1
million, or 17.5%, from $23.4 million in 1998. The decrease was attributable to
the increased interest expense.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales in 1998 were $193.3 million, an increase of $22.6
million, or 13.2%, from $170.7 million in 1997.
Research Models. Net sales of research models in 1998 were $134.6 million,
an increase of $9.4 million, or 7.5%, from $125.2 million in 1997. Sales
increased due to the increase in small animal research model sales in North
America of $4.2 million, resulting from improved pricing and a more favorable
product mix. In addition, in 1998 we were not affected by the significant
contaminations which negatively affected sales in 1997. Overall, unit volumes
remained relatively flat, with modest increases in North America offset by
modest declines in Europe. Our net sales in the large animal import and
conditioning area increased by $3.2 million as a result of expansion in our
boarding and service operations.
Biomedical Products and Services. Net sales of biomedical products and
services in 1998 were $58.7 million, an increase of $13.2 million, or 29.0%,
from $45.5 million in 1997. During 1998 we made three acquisitions that
30
<PAGE>
contributed $6.1 million of our sales growth. The remaining increase was due to
increased sales across all of our product lines, and in particular our
transgenic and research support services of $2.2 million and endotoxin
detection systems of $1.9 million.
Cost of Products Sold and Services Provided. Cost of products sold and
services provided in 1998 was $122.5 million, an increase of $11.0 million, or
9.9%, from $111.5 million in 1997.
Research Models. Cost of products sold and services provided for research
models for 1998 was $85.8 million, an increase of $3.3 million, or 4.0%,
compared to $82.5 million in 1997. Cost of products sold and services provided
for 1998 was 63.7% of net sales compared to 65.9% for 1997. Cost of products
sold and services provided increased for 1998 compared to 1997, but at a slower
rate than net sales due principally to better product mix and pricing as well
as greater economies of scale and improved production efficiencies.
Biomedical Products and Services. Cost of products sold and services
provided for biomedical products and services for 1998 was $36.7 million, an
increase of $7.7 million, or 26.6%, compared to $29.0 million in 1997. Cost of
products sold and services provided was 62.5% of net sales in 1998 compared to
63.7% in 1997. Cost of products sold and services provided increased for 1998
compared to 1997, but at a slower rate than net sales due principally to cost
savings.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1998 were $34.1 million, an increase of $3.6
million, or 11.8%, from $30.5 million in 1997. Selling, general and
administrative expenses in 1998 were 17.7% of net sales compared to 17.8% of
net sales in 1997. These expenses increased mainly in line with sales. Selling,
general and administrative expenses also included research and development
expense of $1.4 million in 1998, which was the same amount as in 1997.
Research Models. Selling, general and administrative expenses for research
models for 1998 were $18.1 million, a decrease of $1.5 million, or 7.7%,
compared to $19.6 million, for 1997. Selling, general and administrative
expenses for 1998 decreased to 13.4% of net sales, compared to 15.7% for 1997
due primarily to the significant increase in sales.
Biomedical Products and Services. Selling, general and administrative
expenses for biomedical products and services for 1998 were $9.7 million, an
increase of $2.8 million, or 40.6%, compared to $6.9 million for 1997. Selling,
general and administrative expenses for 1998 were 16.5% of net sales, compared
to 15.2% of net sales for 1997. The increase was principally attributable to
the acquisition of two small companies in April 1998.
Unallocated Corporate Overhead. Unallocated corporate overhead was $6.3
million for 1998, an increase of $2.3 million, or 57.5%, compared to $4.0
million in 1997. The increase was due to an increase in our supplemental
retirement program costs, along with an increase in management bonuses for
1998.
Amortization of Goodwill and Other Intangibles. Amortization
of goodwill and other intangibles in 1998 was $1.3 million, an increase of
$0.5 million, or 62.5%, from $0.8 million in 1998. The increase was due to
amortization of intangibles in connection with two acquisitions in April 1998.
Restructuring Charges. There were no restructuring charges in 1998
compared to $5.9 million in 1997. The 1997 restructuring charges consisted of
the following: plant closings and personnel reductions in our vaccine support
products operations, severance, relocation and refoliation costs in the Florida
Keys and staff reductions and severance costs in Europe and the United States.
During 1998, we charged $1.6 million against the restructuring reserves
previously recorded.
Operating Income. Operating income in 1998 was $35.3 million, an increase
of $13.2 million, or 59.7%, from $22.1 million in 1997. Operating income in
1998 was 18.3% of net sales compared to 12.9% of net sales in 1997.
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Research Models. Operating income from research models in 1998 was $30.5
million, an increase of $10.9 million, or 55.6%, from $19.6 million in 1997.
Operating income from sales of research models in 1998 increased to 22.7% of
net sales, compared to 15.7% of net sales in 1997 for the reasons described
above.
Biomedical Products and Services. Operating income from biomedical
products and services in 1998 was $11.1 million, an increase of $4.6 million,
or 70.8%, from $6.5 million in 1997. Operating income increased to 18.9% of net
sales, compared to 14.3% of net sales in 1997 for the reasons described above.
Interest Expense. Interest expense for 1998 was $0.4 million compared to
$0.5 million in 1997.
Income Taxes. The effective tax rate in 1998 was 39.5% compared to 38.2%
in 1997.
Net Income. Net income in 1998 was $23.4 million, an increase of $8.1
million, or 52.9%, from $15.3 million in 1997. The increase was attributable to
the factors referred to above.
Liquidity and Capital Resources
Prior to the recapitalization our principal source of liquidity was cash
flow from operations. Following the consummation of the recapitalization, our
principal sources of liquidity are cash flow from operations and borrowings
under our credit facility.
In September 1999, our parent, Charles River Laboratories International,
Inc., consummated a leveraged recapitalization transaction. In connection with
the recapitalization transaction we issued $150.0 million units consisting of
senior subordinated notes due in 2009 with warrants to purchase common stock of
Charles River Laboratories International, Inc. and borrowed $162.0 million
under our senior secured credit facility. 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. 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 13-1/2% senior subordinated notes were exchanged for
registered notes having the same financial terms and covenants as the notes
issued in September 1999. Interest on the notes is payable semi-annually in
cash. The notes contain customary covenants and events of default, including
covenants that limit our ability to incur debt, pay dividends and make
particular investments.
In the third quarter of 2000, our parent, Charles River Laboratories
International, Inc., consummated an initial public offering of 16,100,000
shares of its common stock at a price of $16.00 per share. Some of the net
proceeds from the initial public offering of $236.0 million were used to redeem
a portion of our outstanding senior subordinated notes and a portion of our bank
debt.
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.
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Six Months Ended June 24, 2000 Compared to Six Months Ended June 26, 1996
Cash and cash equivalents totaled $19.0 million at June 24, 2000 compared
with $15.0 million at December 25, 1999. Our principal sources of liquidity are
cash flow from operations and borrowings under our credit facility.
Net cash provided by operating activities during the six months ending
June 24, 2000 was $7.0 million compared to $8.7 million for the six months
ending June 26, 1999. Net income for the six month period ending June 24, 2000
was $12.7 million compared to $14.3 for the first six months of 1999. Cash flow
provided by operating activities was reduced by the decrease in the deferred
tax valuation allowance of $4.8 million.
Net cash used in investing activities during the six months ending June
24, 2000 was $5.1 million compared to $4.9 million for the six months ending
June 26, 1999. On February 28, 2000, the company acquired an additional 16% of
the equity (340,840 common shares) of its 50% equity joint venture company,
Charles River Japan, from Ajinomoto Co., Inc. The purchase price for the equity
was 1.4 billion yen or $12.8 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. We acquired $3.2 million in
cash as a result of the acquisition. In January we sold an operation in Florida
for $7.0 million. Capital expenditures for the first six months ending June 24,
2000 were $6.1 million compared to $4.6 million for the six months ending June
26, 1999.
Net cash provided from financing activities during the six months ending
June 24, 2000 was $2.2 million compared to cash used of $6.3 for the first six
months in 1999. We increased our borrowings under the revolving loan by an
additional $3.0 million during the first six months of 2000. During the first
six months of 1999 we had net outflow activity with Bausch & Lomb, our 100%
shareholder prior to the recapitalization, of $6.1 million.
Fiscal 1999 Compared to Fiscal 1998
Cash flow from operating activities in 1999 was $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 dividended $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.
Fiscal 1998 Compared to Fiscal 1997
Cash flow from operating activities in 1998 was $37.4 million compared to
$24.3 million in 1997, due to an increase in net income and a decrease in
working capital.
Net cash used in investing activities in 1998 was $23.0 million compared
to $12.9 million in 1997. The increase in 1998 was primarily due to the
acquisitions previously discussed. Capital expenditures were $11.9 million in
1998, the same as 1997. Cash paid for acquisitions was $11.1 million in 1998,
compared to $1.2 million 1997.
Net cash used in financing activities was $8.0 million in 1998 compared to
$12.9 million in 1997. The decrease is due to the remittance of less cash to
B&L.
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Quantitative and Qualitative Disclosure about Market Risk
We are subject to market risks arising from changes in interest rates and
foreign currency exchange rates. Our primary interest rate exposure results
from changes in LIBOR or the base rate which are used to determine the
applicable interest rates under our term loans and revolving credit facility.
We have entered into an interest rate protection agreement designed to protect
us against fluctuations in interest rates with respect to at least 50% of the
aggregate principal amount of the term loans and the senior subordinated notes.
Interest rate swaps have the effect of converting variable rate obligations to
fixed or other interest rate obligations. Our potential loss over one year that
would result from a hypothetical, instantaneous and unfavorable change of 10
basis points in the interest rate on all of our variable rate obligations would
be approximately $1.7 million. Fluctuations in interest rates will not affect
the interest payable on the senior subordinated notes, senior discount
debentures or subordinated discount note, which is fixed.
We do not use financial instruments for trading or other speculative
purposes.
We also have exposure to some foreign currency exchange-rate fluctuations
for the cash flows received from our foreign affiliates. This risk is mitigated
by the fact that their operations are conducted in their respective local
currencies, and it is not our intention to repatriate earnings prospectively.
Currently, we do not engage in any foreign currency hedging activities as we do
not believe that our foreign currency exchange-rate risk is material.
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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 53 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 1999, our pro forma net
sales were $272.6 million, and our pro forma operating income was $49.5
million. For the six months ended June 24, 2000, our pro forma net sales were
$150.8 million, and our pro forma operating income was $35.4 million.
Research Models. We are the global leader in the production and sale of
research models, principally genetically and virally defined purpose-bred rats
and mice. These products represented 65% of our 1999 pro forma net sales and
63% of our pro forma net sales for the six months ended June 24, 2000. 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 35% of our 1999 pro forma net sales and 37%
of our pro forma net sales for the six months ended June 24, 2000, and has
experienced strong growth as demonstrated by our 26% 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.
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Our rapidly growing development services offerings enable our customers to
outsource their high-end, non-core drug development activities.
In Vitro Detection Systems. We have diversified our product offerings
to include non-animal, or in vitro, methods for testing the safety of
drugs and devices. We are strategically committed to being the leader in
providing our customers with in vitro alternatives as these methods
become scientifically validated and commercially feasible. Our current
products include endotoxin detection systems that ensure that injectable
drugs and devices are free from harmful contaminants as well as
bioactivity software.
Vaccine Support Products. We provide vaccine manufacturers with
pathogen-free fertilized chicken eggs, a critical ingredient for poultry
vaccine production. We believe there is significant potential for growth
in this area in support of novel human vaccines, such as a nasal spray
flu vaccine currently in development.
Competitive Strengths
Our leading research models business has provided us with
steadily growing revenues and strong cash flow, while our biomedical products
and services business provides significant opportunities for profitable
growth. Our products and services are critical to both traditional
pharmaceutical research and the rapidly growing fields of genomic, recombinant
protein and humanized antibody research. We believe we are well positioned to
compete effectively in all of these sectors as a result of a diverse set of
competitive strengths, which include:
Critical Products and Services. We provide critical, proven and enabling
products and services that our customers rely upon to advance their early-stage
research efforts and accelerate product development. We offer a wide array of
complementary research tools and discovery and development services that
differentiate us from our competition and have created a sustained competitive
advantage in our markets.
Long-Standing Reputation for Scientific Excellence. We have earned our
long-standing reputation for scientific excellence by consistently delivering
high-quality research models supported by exceptional technical service and
support for over 50 years. As a result, the Charles River brand name is
synonymous with premium quality products and services and scientific excellence
in the life sciences. We have nearly 100 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 53 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 small
businesses and new technologies. With this experience, we have developed
internal expertise in sourcing acquisitions and further developing new
technologies. Historically, our strong operating cash flow has allowed us to
fund these growth initiatives without external financing. Our disciplined
approach to making these acquisitions without extensive capital outlays has
resulted in very attractive rates of return on these investments. 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 16 years of experience with our company, and has evidenced a
strong commitment and capability to deliver reliable
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performance and steady growth. Our Chairman and Chief Executive Officer, James
C. Foster, has been with us for 24 years. Our management team owns or has
options to acquire securities representing over 5.1% of our equity on a fully
diluted basis as of July 15, 2000.
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 plan 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 intend 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 12 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. Historically, our
strong cash flow has allowed us to fund these transactions primarily with
internal resources. We intend to continue this strategy in the future, aided by
our parent's new ability to issue publicly traded common stock.
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 65% of
our 1999 pro forma net sales and 63% of our pro forma net sales for the six
months ended June 24, 2000. 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:
o outbred animals, which have genetic characteristics of a random
population;
o inbred animals, which have essentially identical genes;
o hybrid animals, which are the offspring of two different inbred
parents;
o spontaneous mutant animals, which contain a naturally occurring
genetic mutation (such as immune deficiency); and
o 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.
Biomedical Products and Services
Our biomedical products and services business consists of our newer,
higher-growth operations, which we organize as follows:
<TABLE>
<CAPTION>
Discovery Services Development Services In Vitro Detection Systems Vaccine Support Products
------------------ -------------------- -------------------------- ------------------------
<S> <C> <C> <C>
o Transgenic Services o Drug Safety Assessment o Endotoxin Detection o Animal Health
Systems
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Discovery Services Development Services In Vitro Detection Systems Vaccine Support Products
------------------ -------------------- -------------------------- ------------------------
o Research Support o Biotech Safety Testing o BioActivity Software o Human Health
Services
o Infectious Disease and o Medical Device Testing
Genetic Testing
o Contract Site
Management
</TABLE>
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 100 laboratories around the
world from pharmaceutical and biotechnology companies to hospitals and
universities. We maintain nearly 300 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 models will
drive our future growth as the reference laboratory of choice for genetic
testing of special models.
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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 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
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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 ten largest pharmaceutical companies based on 1999 revenues, as
well as biotechnology, animal health, medical device and diagnostic companies
and hospitals, academic institutions and government agencies. We have many
long-term, stable relationships with our customers as evidenced by the fact
that all of our top 20 customers in 1990 remain our customers today.
During 1999, 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 26% of our 1999 pro forma net sales, and approximately 29% of our pro
forma net sales for the six months ended June 24, 2000, with no individual
customer accounting for more than 3% of net sales in either period.
Sales, Marketing and Customer Support
We sell our products and services principally through our direct sales
force. As of June 24, 2000, we had approximately 51 employees engaged in field
sales, of which 30 were in the United States, 12 were in Europe and 9 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.
41
<PAGE>
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 400,000 hits each month. Our website is not incorporated by
reference in this prospectus.
We maintain both a customer service and technical assistance departments,
which services 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 1997, $1.4 million in 1998 and
$0.5 million in 1999 and $0.3 million for the six months ended June 24, 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 June 24, 2000, we had approximately 2,400 employees, including
nearly 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.
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
42
<PAGE>
other resources than we do; however, many are smaller and more regionalized. We
have a small relative share in the biotech safety testing market, where the
market leader is a well-established company, and in medical device testing,
where there are many larger competitors.
We generally compete on the basis of quality, reputation, and
availability, which is supported by our international presence with
strategically located facilities.
Environmental Matters; Legal Proceedings
Our operations and properties are subject to extensive foreign and
federal, state and local environmental protection and health and safety laws
and regulations. These laws and regulations govern, among other things, the
generation, storage, handling, use and transportation of hazardous materials
and the handling and disposal of hazardous and biohazardous waste generated at
our facilities. Under such laws and regulations, we are required to obtain
permits from governmental authorities for some of our operations. If we violate
or fail to comply with these laws, regulations or permits, we could be fined or
otherwise sanctioned by regulators. Under some environmental laws and
regulations, we could also be held responsible for all of the costs relating to
any contamination at our past or present facilities and at third party waste
disposal sites. As a result of disputes with federal, state and local
authorities and private environmental groups regarding damage to mangrove
plants on two islands in the Florida Keys, we agreed to refoliate the islands
at our cost. Although we have not been able to completely replant, principally
due to the presence of a free-range animal population and storms, we believe
that the cost of refoliation will not have a material adverse effect on our
business.
Although we believe that our costs of complying with current and future
environmental laws, and our liabilities arising from past or future releases
of, or exposure to, hazardous substances will not materially adversely affect
our business, results of operations or financial condition, we cannot assure
you that they will not do so.
We are not a party to any other material legal proceedings, other than
ordinary routine litigation incidental to our business that is not otherwise
material to our business or financial condition.
Regulatory Matters
The Animal Welfare Act governs the treatment of particular species
intended for use in research. The AWA imposes a wide variety of specific
regulations on producers and users of these species, most notably cage size,
shipping conditions and environmental enrichment methods. We comply with
licensing and registration requirement standards set by the USDA for handling
regulated species, including breeding, maintenance and transportation. However,
rats, mice and chickens are not currently regulated under the AWA. As a result,
most of our United States small animal research model activities and our
vaccine support services operations are not subject to regulation under the
AWA. The USDA, which enforces the AWA, is presently considering changing the
regulations issued under the AWA, in light of judicial action, to include rats,
mice and chickens within its coverage. Our animal production facilities in the
United States are accredited by a highly regarded member association known as
AAALAC, which maintains standards that often exceed those of the USDA.
Our biomedical products and services business is also generally regulated
by the USDA, and in the case of our endotoxin detection systems, the FDA. Our
manufacture of test kits and reagents for endotoxin testing is subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act. We are required to register with the FDA as a device manufacturer
and are subject to inspection on a routine basis for compliance with the FDA's
Quality System Regulations and Good Manufacturing Practices. These regulations
require that we manufacture our products and maintain our documents in a
prescribed manner with respect to manufacturing, testing and control
activities. Last year, we received a "warning letter" from the FDA for quality
control deficiencies with regard to our Charleston, South Carolina facility. We
believe we have taken all of the necessary steps to meet the FDA's
requirements.
43
<PAGE>
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 2000 to 2005.
Sites-Owned
<TABLE>
<CAPTION>
Country No. of Sites Total Square Feet Principal Functions
-------------------------- -------------- ------------------- -------------------------------
<S> <C> <C> <C>
Belgium................... 1 16,140 Office, Production
Canada.................... 1 64,929 Office, Production, Laboratory
China..................... 1 10,000 Office, Production, Laboratory
France.................... 4 373,214 Office, Production, Laboratory
Germany................... 3 122,314 Office, Production, Laboratory
Italy..................... 1 36,677 Office, Production, Laboratory
Japan..................... 2 88,511 Office, Production, Laboratory
Netherlands............... 1 6,502 Sales Office
United Kingdom............ 2 67,331 Office, Production, Laboratory
United States............. 17 732,980 Office, Production, Laboratory
-- ---------
Total..................... 33 1,518,598
== =========
</TABLE>
Sites-Leased
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Country No. of Sites Total Square Feet Principal Functions
-------------------------- -------------- ------------------- -------------------------------
Australia................. 1 9,787 Office, Production
Czech Republic............ 1 23,704 Office, Production, Laboratory
Hungary................... 1 4,681 Office, Production, Laboratory
Japan..................... 2 23,552 Office, Production, Laboratory
Spain..................... 1 3,228 Sales Office
Sweden.................... 1 8,070 Sales Office
United States............. 14 270,695 Office, Production, Laboratory
-- ---------
Total..................... 21 343,717
== =========
</TABLE>
44
<PAGE>
MANAGEMENT
The following table sets forth the name, age and position of each of our
executive officers, key members of management, and directors, each of whom
serves in a comparable capacity for our parent company.
<TABLE>
Name Age Position
---- --- --------
<S> <C> <C>
James C. Foster................. 49 Chairman, Chief Executive Officer and President
Thomas F. Ackerman.............. 45 Senior Vice President and Chief Financial Officer
David P. Johst.................. 38 Senior Vice President, Human Resources and Administration
Real H. Renaud.................. 53 Senior Vice President and General Manager, European and North
American Animal Operations
Dennis R. Shaughnessy........... 42 Senior Vice President, Corporate Development, General Counsel and
Secretary
Julia D. Palm................... 52 Vice President and General Manager, Biomedical Products and Services
Robert Cawthorn................. 64 Director
Stephen D. Chubb................ 56 Director
Thompson Dean................... 42 Director
Stephen C. McCluski............. 48 Director
Reid S. Perper.................. 40 Director
Douglas E. Rogers............... 45 Director
Samuel O. Thier................. 63 Director
William Waltrip................. 62 Director
Henry Wendt III................. 66 Director
</TABLE>
James C. Foster joined us in 1976 as General Counsel. Over the past 24
years, Mr. Foster has held various staff and managerial positions, with Mr.
Foster being named our President in 1991, our Chief Executive Officer in 1992
and our Chairman in 2000. Mr. Foster also serves on the Board of Directors of
BioTransplant, Inc. Mr. Foster received a B.A. from Lake Forest College, a M.S.
from the Sloan School of Management at the Massachusetts Institute of
Technology, and a J.D. from Boston University School of Law.
Thomas F. Ackerman joined us in 1988 with over eleven years of combined
public accounting and international finance experience. He was named
Controller, North America in 1992 and became our Vice President and Chief
Financial Officer in 1996. In 1999, he was named a Senior Vice President. He is
currently responsible for overseeing our Accounting and Finance Department, as
well as our Information Technology Group. Prior to joining us, Mr. Ackerman was
an accountant at Arthur Anderson & Co. Mr. Ackerman received a B.S. in
Accounting from the University of Massachusetts and is a certified public
accountant.
David P. Johst joined us in 1991 as Corporate Counsel and was named Vice
President, Human Resources in 1995. He became Vice President, Human Resources
Administration in 1996, and a Senior Vice President in 1999. He is responsible
for overseeing our Human Resources Department, as well as several other
corporate staff departments. He also serves as our counsel on labor relations
matters. Prior to joining us, Mr. Johst was a corporate associate at Boston's
Hale and Dorr. Mr. Johst is a graduate of Dartmouth College, holds an M.B.A.
from Northeastern University and received his J.D. from Harvard University Law
School.
Real H. Renaud joined us in 1964 and has 35 years of small animal
production and related management experience. In 1986, Mr. Renaud became our
Vice President of Production, with responsibility for overseeing our North
American small animal operations, and was named Vice President, Worldwide
Production in 1990. Mr. Renaud became Vice President and General Manager,
European and North American Animal Operations in 1996, following a two-year
European assignment during which he provided direct oversight to our European
operations. In 1999 he became a Senior Vice President. Mr. Renaud attended
Columbia University's executive education program, and has also studied at the
Lyon Veterinary School and the Montreal Business School.
Dennis R. Shaughnessy joined us in 1988 as Corporate Counsel and was named
Vice President, Business Affairs in 1991. He became Vice President, Corporate
Development and General Counsel in 1994 and is responsible
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<PAGE>
for overseeing our business development initiatives on a worldwide basis, as
well as handling our overall legal affairs. He became a Senior Vice President
in 1999. Mr. Shaughnessy also serves as our Corporate Secretary. Prior to
joining us, Mr. Shaughnessy was a corporate associate at Boston's Testa,
Hurwitz & Thibeault and previously served in government policy positions. Mr.
Shaughnessy has a B.A. from The Pennsylvania State University, an M.S. from The
University of Michigan, an M.B.A. from Northeastern University, and a J.D. from
The University of Maryland School of Law.
Julia D. Palm joined us in 1995 with nearly 20 years of management and
marketing experience in the medical device and biotechnology industries. Prior
to joining us, she held various marketing positions with Becton Dickinson,
National Medical Care and W.R. Grace, and served as President of W.R. Grace's
Amicon Division immediately prior to joining us. Ms. Palm has responsibility
for overseeing a portfolio of most of our biomedical products and services
companies on a worldwide basis. Ms. Palm holds a B.A. in Biology from Denison
University, and an M.B.A. from Farleigh Dickinson University.
Robert Cawthorn is an independent consultant to Global Health Care
Partners, a group at DLJ Merchant Banking, Inc., having been a Managing
Director from 1997 to 1999. Mr. Cawthorn was Chief Executive Officer and
Chairman of Rhone-Poulenc Rorer Inc. until May 1996. Further, he previously
served as an executive officer of Pfizer International and was the first
President of Biogen Inc. Mr. Cawthorn serves as Chairman of Actelion
Pharmaceuticals Ltd., NextPharma Technologies S.A. and Pure Energy Corporation
and also serves as a director of HO Technologies.
Stephen D. Chubb has been Chairman, Director and Chief Executive Officer
of Matritech, Inc. since its inception in 1987. Previously, Mr. Chubb served as
President and Chief Executive Officer of T Cell Sciences, Inc. and as President
and Chief Executive Officer of Cytogen Company. Mr. Chubb serves as a director
of i-Stat Corporation and CompuCyte Corp.
Thompson Dean has been a Managing Partner of DLJ Merchant
Banking, Inc. since November 1996. Previously, Mr. Dean was a Managing
Director of DLJ Merchant Banking, Inc. and its predecessor since January 1992.
Mr. Dean serves as a director of Von Hoffmann Press, Inc., Manufacturer's
Services Limited, Phase Metrics, Inc., AKI Holding Corp., Amatek Ltd., DeCrane
Aircraft Holdings Inc., Insilco Holding Corporation, Formica Corporation and
Mueller Group, Inc.
Stephen C. McCluski has been Senior Vice President and Chief Financial
Officer of Bausch & Lomb Incorporated since 1995. Previously, Mr. McCluski
served as Vice President and Controller of Bausch & Lomb Incorporated and
President of Outlook Eyewear Company.
Reid S. Perper has been a Managing Director of DLJ Merchant Banking, Inc.
since January 2000. Mr. Perper was a Principal of DLJ Merchant Banking, Inc.
from 1996 to January 2000 and a Vice President from 1993 to 1996. Mr. Perper
was formerly a director of IVAC Holdings, Inc. and Fiberite Holdings, Inc.
Douglas E. Rogers has been a Managing Director of Global Health Care
Partners since 1996. Previously, Mr. Rogers was a Vice President at Kidder
Peabody & Co., Senior Vice President at Lehman Brothers, and head of U.S.
Investment Banking at Baring Brothers. Mr. Rogers serves as a director of
Computerized Medical Systems, Inc. and Wilson Greatbatch Ltd.
Samuel O. Thier has been Chief Executive Officer of Partners HealthCare
System, Inc. since July 1996 and President of Partners HealthCare System since
1994. Previously, he served as President of The Massachusetts General Hospital
from 1994 through 1997. He has served as President of the Institute of Medicine
of the National Academy of Sciences and Chairman of the American Board of
Internal Medicine, and he is a Fellow of the American Academy of Arts and
Sciences. He is a director of Merck & Co., Inc.
William Waltrip has served since 1993 as chairman of the board of
Technology Solutions Company, a systems integration company, and from 1993
until 1995 he was chief executive officer of that company. From 1996 to 1998,
he also served as chairman of Bausch & Lomb Incorporated, and during 1996 was
the company's chief executive
46
<PAGE>
officer. From 1991 to 1993, he was chairman and chief executive officer of
Biggers Brothers, Inc., a food service distribution company and was a
consultant to private industry from 1988 to 1991. From 1985 to 1988, he served
as president and chief operating officer of IU International Corporation, a
transportation, environmental and distribution company. Earlier, he had been
president, chief executive officer and a director of Purolator Courier
Corporation. He is a director of Teachers Insurance and Annuity Association and
Thomas & Betts Corporation.
Henry Wendt III has been the Chairman of Global Health Care Partners since
1996. Previously, Mr. Wendt was Chairman of SmithKline Beecham Corporation and
President and Chief Executive Officer of SmithKline Beckman Corp. prior to its
merger with Beecham and served as founder and First Chairman of Pharmaceutical
Partners for Better Health Care. Mr. Wendt serves as a director of Allergan,
Inc., Atlantic Richfield Company, Computerized Medical Systems, The Egypt
Investment Company, West Marine Products and Wilson Greatbatch Ltd.
Each of our directors serves until the next annual meeting of stockholders
and until a successor is duly elected and qualified or until his earlier death,
resignation or removal. All members of our board of directors, other than Mr.
Thier, were elected at the time of the recapitalization pursuant to the
investors' agreement that was entered into in connection with that transaction.
See "Relationships and Transactions with Related PartiesInvestors' Agreement."
Mr. Thier was elected as a director in April 2000. There are no family
relationships between any of our directors or executive officers. Our executive
officers are elected by, and serve at the discretion of, the board of
directors.
Committees of the Board of Directors
Our parent's board of directors has an audit committee and a compensation
committee. The parent board or our board may also establish other committees to
assist in the discharge of its responsibilities.
The audit committee makes recommendations to the parent board of directors
regarding the independent accountants to be nominated for election by the
stockholders and reviews the independence of such accountants, approves the
scope of the annual audit activities of the independent accountants, approves
the audit fee payable to the independent accountants and reviews such audit
results with the independent accountants. The audit committee is currently
comprised of Messrs. Chubb, Thier and Waltrip. PricewaterhouseCoopers LLP
presently serves as our independent accountants.
The duties of the compensation committee are to provide a general review
of our compensation and benefit plans to ensure that they meet corporate
objectives. In addition, the compensation committee reviews the chief executive
officer's recommendations on compensation of all of our officers and adopting
and changing major compensation policies and practices, and reports its
recommendations to the entire board of directors for approval and
authorization. The compensation committee also administers our parent's stock
plans. The compensation committee is currently comprised of Messrs. Cawthorn,
Dean, Waltrip and Wendt.
47
<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation for
the years ended December 25, 1999 and December 26, 1998 for our chief executive
officer and our four other most highly compensated executive officers at the
end of our last fiscal year. We collectively refer to these executive officers
throughout this section as our named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
------------------------
Annual Compensation Other Annual Restricted Securities All Other
---------------------------- Compensation Stock Underlying Compensation
Name and Principal Position Year Sallary Bonus (1) Award(s) Options (2)
---- -------- -------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James C. Foster................. 1999 $324,727 $790,001 $355,357 -- 558,824 $135,200
Chairman, Chief Executive 1998 308,700 230,705(3) 33,717 4,500 19,000 171,268
Officer, President and Director
Real H. Renaud.................. 1999 224,475 236,391 100,647 -- 163,793 42,252
Senior Vice President and 1998 212,000 99,814 21,559 -- 4,200 43,275
General Manager, European and
North American Animal
Operations
Dennis R. Shaughnessy........... 1999 176,239 290,542 323,616(4) -- 134,642 61,057
Senior Vice President, 1998 167,800 79,898 21,968 -- 4,200 60,088
Corporate Development,
General Counsel and Secretary
David P. Johst.................. 1999 154,209 238,767 84,569 -- 125,254 60,003
Senior Vice President, Human 1998 146,800 69,911 11,689 -- 4,200 58,182
Resources and Administration
Thomas F. Ackerman.............. 1999 141,621 245,954 92,574 -- 125,254 38,200
Senior Vice President and Chief 1998 135,000 64,378 10,670 -- 3,600 38,200
Financial Officer
</TABLE>
(1) Amounts in this column for 1999 include contractual payments made by B&L
to the named executive officers in lieu of accelerating their unvested B&L
options upon the closing of the recapitalization.
(2) Includes employer contribution under our Executive Supplemental Life
Insurance Retirement Plan (Mr. Foster (1999: $132,000, 1998: $168,068);
Mr. Renaud (1999: $39,052, 1998: $40,075); Mr. Shaughnessy (1999: $57,857,
1998: $57,956); Mr. Johst (1999: $56,803, 1998: $54,982); Mr. Ackerman
(1999: $35,000, 1998: $35,000)) and Employee Savings Plan (Mr. Foster
(1999: $3,200, 1998: $3,200); Mr. Renaud (1999: $3,200, 1998: $3,200); Mr.
Shaughnessy (1999: $3,200, 1998: $2,132), Mr. Johst (1999: $3,200, 1998:
$3,200); Mr. Ackerman (1999: $3,200, 1998: $3,200)).
(3) Includes $12,000 paid under B&L's Long Term Incentive Plan during 1998.
(4) Also includes a lump-sum payment of $253,000 made in return for
relinquishment of right to participate in our Executive Supplemental Life
Insurance Retirement Plan.
48
<PAGE>
Stock Options
The following table presents material information regarding options to
acquire shares of our parent's common stock granted to our named executive
officers in 1999. No options to acquire shares of B&L's common stock were
granted to our executive officers in fiscal 1999.
Option Grants in Fiscal 1999
<TABLE>
<CAPTION>
Individual Grants(1)
-------------------------------------------------------------
Percent of Potential Realizable Value at
Number of Total Assumed Annual Rates of Stock
Securities Options Exercise Price Appreciation for
Underlying Granted to of Base Option Term (2)
Options Employees in Price Expiration -------------------------------
Granted(#) Fiscal Year(%) ($/Sh) Date 5%($) 10%($)
---------- ------------- -------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
James C. Foster....... 558,824 32.4% 5.33 9/29/2009 $1,871,892 $4,744,400
Real H. Renaud........ 163,793 9.5 5.33 9/29/2009 548,658 1,421,200
Dennis R. Shaughnessy. 134,642 7.8 5.33 9/29/2009 451,010 1,168,260
David P. Johst........ 125,254 7.3 5.33 9/29/2009 419,562 1,086,800
Thomas F. Ackerman.... 125,254 7.3 5.33 9/20/2009 419,562 1,086,800
</TABLE>
(1) The options granted vest either over time, on the occurrence of specified
events or the achievement of specified performance goals.
(2) The value actually realized by an optionee may not be at or near the
amount estimated using this model. These amounts rely on assumed future
stock price movements which management believes cannot be predicted with a
reliable degree of accuracy. We based these amounts on the assumption that
the option holders hold the options granted for their full term.
The following table provides material information related to the number
and value of options to acquire common stock of B&L exercised during 1999 by
the named executive officers and the value of options to acquire common stock
of B&L and our parent's common stock at the end of fiscal 1999. On December 23,
1999, the closing sale price of B&L common stock on NYSE was $66.25.
Aggregated Option Exercises in Fiscal 1999 and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-the-
Options at Fiscal Year- Money Options at Year
End(#) End($)(2)
Shares Acquired Value ---------------------------- ----------------------------
Name Company on Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ------- --------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
James C. Foster....... CRL -- -- -- 558,824 -- --
B&L 100,054 $2,154,389 -- -- -- --
Real H. Renaud........ CRL -- -- -- 163,793 -- --
B&L 23,509 424,032 -- -- -- --
Dennis R. Shaughnessy. CRL -- -- -- 134,642 -- --
B&L 5,951 122,617 -- -- -- --
David P. Johst........ CRL -- -- -- 125,254 -- --
B&L 11,921 328,913 -- -- -- --
Thomas F. Ackerman.... CRL -- -- -- 125,254 -- --
B&L 8,164 172,226 -- -- -- --
</TABLE>
49
<PAGE>
(1) Value realized represents the difference between the exercise price of the
option shares and the market price of the option shares on the date the
option was exercised. We determined the value realized without
consideration for any issues or brokerage expenses which may have been
owed.
(2) There was no public trading market for our parent's common stock as of
December 25, 1999.
Employee Agreements and Compensation Arrangements
We do not currently have employment agreements with any of our named
executive officers.
Director Compensation
Directors who are not our employees or who are not otherwise affiliated
with us or our parent's principal stockholders will receive $10,000 per year
and $1,000 per board meeting, plus travel expenses.
Severance Plans
In January 1999, we adopted the 1999 Charles River Laboratories Officer
Separation Plan. This plan provides for severance payments to vice presidents
and more senior officers who are terminated for reasons other than cause,
voluntary resignation, disability, early or normal retirement or death and who
have not been offered comparable positions within our company. A participant
under the plan is entitled to a severance payment equal to one year of the
officer's base pay plus the accrued vacation pay payable to the officer as of
the separation date. Each of the named executive officers other than Mr. Renaud
is a participant under the plan. In January 1992, Mr. Renaud entered into an
agreement with us providing for a severance payment equal to one year of his
base pay if he is terminated for any reason other than for cause, and up to one
additional year of base pay until he finds non-competing employment. The plan
and the 1992 agreement with Mr. Renaud each prohibit the participant from
competing with us for one year after termination of the participant's
employment.
On July 25, 1999, we entered into an agreement with each of the named
executive officers providing for a severance payment to any covered officer
terminated by us prior to September 29, 2000 for any reason other than cause.
Under these agreements, Mr. Foster is entitled to a severance payment equal to
two and one-half times his base salary and each of Messrs. Ackerman, Johst and
Shaughnessy is entitled to a severance payment equal to two times his base
salary.
Stock Plans
Our parent's 1999 management incentive plan provides for the grant of
stock options to our employees, directors, officers and consultants. There are
1,784,384 shares of common stock of our parent reserved for awards under the
plan. As of July 15, 2000, options to purchase 1,726,328 shares were
outstanding under the plan.
Our parent's 2000 incentive plan provides for the grant of incentive and
nonstatutory stock options, stock appreciation rights, restricted or
unrestricted common stock, promises to deliver stock or other securities in the
future, awards of cash or stock earned by attaining performance criteria, cash
bonuses and cash bonuses or loans to help defray the costs of the foregoing
awards. There are 1,189,000 shares of our parent's common stock reserved under
the plan. As of July 15, 2000, options to purchase 447,400 shares were
outstanding under the plan.
Our parent's 2000 directors stock plan provides for the grant of both
automatic and discretionary nonstatutory stock options to our parent's
non-employee directors. Pursuant to the plan, each independent director will be
automatically granted an option to purchase 20,000 shares of our parent's
common stock on the date he or she is first elected or named a director. On the
day of each annual meeting of stockholders, each independent director who
served during the prior year will be awarded an option to purchase 4,000 shares
of our parent's common stock (pro-rated if the director did not serve for the
entire preceding year). There are 100,000 shares of common stock reserved under
this plan. As of July 15, 2000, options to purchase 60,000 shares were
outstanding under the plan.
58
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Our parent, Charles River Laboratories International, Inc., holds all of
our common stock. The following table shows information regarding the
beneficial ownership of our parent's common stock as of July 15, 2000 for:
o each person or group of affiliated persons known by us to own
beneficially more than 5% of the outstanding shares of common stock;
o each director and named executive officer; and
o all directors and executive officers as a group.
We have determined beneficial ownership in the table in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, we have deemed shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days of July 15, 2000, to be outstanding, but we have not deemed
these shares to be outstanding for computing the percentage ownership of any
other person. To our knowledge, except as set forth in the footnotes below,
each stockholder identified in the table possesses sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
that stockholder. Beneficial ownership percentage is based on 35,920,369 shares
of our parent's common stock outstanding after completion of its initial public
offering.
The address for each listed director and officer is c/o Charles River
Laboratories International, Inc., 251 Ballardvale Street, Wilmington, MA 01887.
<TABLE>
<CAPTION>
Number of Shares Percentage of Shares
Name of Beneficial Owner Beneficially Owned Outstanding
------------------------ ------------------ --------------------
<S> <C> <C>
DLJ Merchant Banking Partners II, L.P. and
related investors(1)........................ 16,277,391(2) 45.3%
Bausch & Lomb Incorporated(3)................ 2,477,547 6.9
James C. Foster.............................. 395,262 1.1
Real H. Renaud............................... 94,859 *
Dennis R. Shaughnessy........................ 86,975 *
David P. Johst............................... 97,685 *
Thomas F. Ackerman........................... 80,481 *
Robert Cawthorn(4)........................... -- --
Stephen D. Chubb............................. 16,895 *
Thompson Dean(4)............................. -- --
Stephen C. McCluski(3)....................... 2,477,547 6.9
Reid S. Perper(4)............................ -- --
Douglas E. Rogers(4)......................... -- --
Samuel O. Thier.............................. 13,000 *
William Waltrip.............................. 16,895 *
Henry Wendt III(4)........................... -- --
Officers and directors as a group............ 3,279,599 9.13
</TABLE>
---------------
*Less than 1%
(1) Consists of shares held directly or indirectly by the DLJMB Funds and the
following related investors: DLJ Merchant Banking Partners II-A, L.P.; DLJ
Investment Partners, L.P.; DLJ Offshore Partners II, C.V.; DLJ Capital
Corp.; DLJ Diversified Partners, L.P.; DLJ Diversified Partners-A, L.P.;
DLJ Millennium Partners, L.P.; DLJ Millennium Partners-A, L.P.; DLJMB
Funding II, Inc.; DLJ First ESC L.P.; DLJ EAB Partners, L.P.; DLJ ESC II,
L.P., DLJ Investment Funding, Inc., Sprout Capital VIII, L.P. and Sprout
Venture Capital, L.P. See "Relationships and Transactions with Related
Parties." The address of each of these investors is 277 Park
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Avenue, New York, New York 10172, except the address of Offshore Partners
is John B. Gorsiraweg 14, Willemstad, Curacao, Netherlands Antilles.
(2) Includes 1,685,050 shares underlying currently exercisable warrants.
(3) Represents shares beneficially owned by B&L through a wholly owned
subsidiary. Mr. McCluski is Senior Vice President and Chief Financial
Officer of Bausch & Lomb Incorporated.
(4) Messrs. Cawthorn, Dean, Perper, Rogers and Wendt are officers of DLJ
Merchant Banking, Inc., an affiliate of the DLJMB Funds. Shares shown for
Messrs. Cawthorn, Dean, Perper, Rogers and Wendt exclude shares shown as
held by the DLJMB Funds, as to which they disclaim beneficial ownership.
The address of each of these investors is 277 Park Avenue, New York, New
York 10172.
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RELATIONSHIPS AND TRANSACTIONS WITH RELATED PARTIES
Financial Advisory Fees and Agreements
Donaldson, Lufkin & Jenrette Securities Corporation, or DLJ Securities
Corporation, an affiliate of the DLJMB Funds, received customary fees and
expense reimbursement for its services as financial advisor for the
recapitalization and as the initial purchaser of the units. DLJ Capital
Funding, an affiliate of the DLJMB Funds, received customary fees and
reimbursement of expenses in connection with the arrangement and syndication of
our credit facility and as a lender under the facility. The aggregate amount of
all fees paid to the DLJ entities in connection with the recapitalization and
the related financing was approximately $13.2 million plus out-of-pocket
expenses. We paid a fee to the lenders under our existing credit facility,
including DLJ Capital Funding, in connection with consents and to DLJ Capital
Funding for an irrevocable commitment to provide us with a new credit facility.
The aggregate fees payable to DLJ Capital Funding in connection with such
consent and commitment are approximately $1.1 million. DLJ Securities
Corporation was a managing underwriter in our parent's public offering and
received fees of approximately $4.4 million, and DLJdirect, Inc. was an
underwriter and received fees of approximately $0.1 million. We also paid a
premium of approximately $24.5 million to DLJMB and other investors for early
repayment of our senior discount debentures due 2010.
Under the investors' agreement described below, for a period of five years
from the date of the investors' agreement, our parent has agreed to engage DLJ
Securities Corporation or its affiliates as its exclusive financial and
investment banking advisor. We expect that DLJ Securities Corporation or such
affiliate will receive customary fees for such services rendered and will be
entitled to reimbursement for all reasonable disbursements and out-of-pocket
expenses incurred in connection with any such engagement. We expect that any
such arrangement will include provisions for the indemnification of DLJ
Securities Corporation against some liabilities, including liabilities under
the federal securities laws.
CRL Acquisition LLC
Effective June 21, 2000, our parent's stockholders, including CRL
Acquisition LLC, exchanged each of their shares of our parent's common stock
for newly issued shares of our parent's common stock. Each old share was
exchanged for 1.927 new shares. Immediately prior to the initial public
offering, CRL Acquisition LLC distributed a substantial portion of these shares
to its limited liability company unit holders.
Investors' Agreement
Our parent company, CRL Acquisition LLC, CRL Holdings, Inc. (a subsidiary
of B&L), management and some other investors are parties to an investors'
agreement entered into in connection with the recapitalization and amended on
June 20, 2000. The investors' agreement provides, among other things, that any
person acquiring shares of our parent's common stock who is required by the
investors' agreement or by any other agreement or plan of our parent to become
a party to the investors' agreement will execute an agreement to be bound by
the investors' agreement.
The terms of the investors' agreement restrict transfers of the shares of
our parent's common stock by our parent, management and some other investors
and some future shareholders. The agreement provides for, among other things:
o the ability of some shareholders to participate in particular sales
of our parent's common stock;
o the ability of DLJMB Funds or CRL Acquisition LLC to require the
other shareholders of our parent to sell shares of our parent's
common stock held by them in particular circumstances if the DLJMB
Funds or CRL Acquisition LLC choose to sell shares owned by them;
o some registration rights with respect to shares of our parent's
common stock, including rights to indemnification against some
liabilities, including liabilities under the Securities Act; and
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o pre-emptive rights of all the parties, other than CRL Acquisition LLC
and its permitted transferees, to acquire its pre-emptive portion of
our parent's common stock in particular instances when our parent
proposes to issue common stock.
The investors' agreement also provides that our parent's board of
directors will consist of at least nine but no more than twelve members, seven
of whom (including the chairman) will be appointed by DLJ Merchant Banking
Partners II, L.P. for so long as the aggregate number of shares of our parent's
common stock held by the DLJMB Funds is at least 10% of the initial aggregate
number of shares purchased by the DLJMB Funds in the recapitalization. The
investors' agreement also provides that B&L CRL, Inc. has the right to appoint
one director and that the chief executive officer appointed by the board will
serve as a director.
Transactions with Officers and Directors
In connection with the recapitalization, some of our officers purchased
units of CRL Acquisition LLC, some of whom also borrowed funds up to a maximum
aggregate amount of $1.3 million from DLJ Inc. secured by their units. James C.
Foster borrowed $300,000 and each of Real H. Renaud, Thomas F. Ackerman and
Dennis R. Shaughnessy borrowed $200,000. Two weeks after the consummation of
the recapitalization, the loans matured and were repaid. Following the
repayment, the officers borrowed the following amounts from our parent: Mr.
Foster ($300,000), Mr. Renaud ($150,000), Mr. Shaughnessy ($175,000) and Mr.
Ackerman ($175,000). The loans mature in ten years and interest accrues at
6.75%, the applicable federal rate. Each loan is fully recourse to the officer.
Any after-tax proceeds from the sale of these shares and options by each
officer will be used to repay his loan until it is repaid in full. Each note
accelerates upon the termination of the borrower's employment with us for any
reason.
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DESCRIPTION OF CREDIT FACILITY
A syndicate of financial institutions led by DLJ Capital Funding, as sole
book runner, lead arranger and syndication agent, provided our credit facility.
The credit facility includes a $40.0 million term loan A facility, a $120.0
million term loan B facility and a $30.0 million revolving credit facility,
which provides for loans and under which up to $15.0 million in letters of
credit may be issued. The term loan A facility matures six years after the
closing date of the facility, the term loan B facility matures eight years
after the closing date of the facility and the revolving facility matures six
years after the closing date of the facility. The revolving credit facility is
subject to a potential, but uncommitted, increase of up to $25 million at our
request at any time prior to such revolving credit facility maturity date. Such
increase will be available only if one or more financial institutions agrees,
at the time of our request, to provide it.
Loans under the term loan A facility and the revolving facility bear
interest, at our option, at the alternate base rate or the reserve adjusted
LIBOR rate plus, in each case, applicable margins of 3.00% for LIBOR loans and
1.75% for base rate loans. Loans under the term loan B facility bear interest,
at our option, at the alternative base rate or the reserve adjusted LIBOR rate
plus, in each case, applicable margins of 3.75% for LIBOR loans and 2.50% for
base rate loans. We pay commitment fees in an amount equal to 0.50% per annum
on the daily average unused portion of the revolving credit facility. Beginning
approximately six months after the closing date of the credit facility, the
applicable margins applicable to loans under the term loan A facility and the
revolving facility and commitment fees will be determined based on the ratio
(the "Leveraged Ratio") of consolidated total debt to consolidated EBITDA (as
defined in the credit facility) of us and our restricted subsidiaries (as
defined in the credit facility).
We will pay a letter of credit fee on the outstanding undrawn amounts of
letters of credit issued under the credit facility at a rate per year equal to
the margin applicable to LIBOR loans under the revolving facility (in the case
of standby letters of credit) or 1.25% (in the case of commercial letters of
credit), which shall be shared by all lenders participating in the relevant
letters of credit. In addition, we will pay an additional fee to the issuer of
each letter of credit in an amount agreed between us and the issuer.
The term loan A is subject to the following amortization schedule:
Term Loan
Year Amortization(%)
---- ---------------
1.......................... 0%
2.......................... 5
3.......................... 10
4.......................... 20
5.......................... 25
6.......................... 40
The term loan B is subject to the following amortization schedule:
Term Loan
Year Amortization(%)
---- --------------
7.......................... 1%
8.......................... 93
The credit facility is subject to mandatory prepayment:
o with the net cash proceeds of the sale or other disposition of any
property or assets of, or receipt of casualty proceeds by, us or any
of our restricted subsidiaries, subject to some exceptions, including
an exception for reinvestment in our and our restricted subsidiaries'
business;
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<PAGE>
o with 50% of the net cash proceeds received from the issuance of
equity securities of our parent, us or any of our restricted
subsidiaries (subject to some exceptions) so long as the Leverage
Ratio following such payment would exceed 3.5:1;
o with the net cash proceeds received from issuances of debt securities
by our parent, us or any of our restricted subsidiaries (subject to
some exceptions); and
o with 50% of excess cash flow (as defined in the credit facility) for
each fiscal year so long as the Leverage Ratio following such payment
would exceed 3.5:1.
All mandatory prepayment amounts will be applied first to the prepayment
of the term loans.
All of our future domestic restricted subsidiaries are guarantors of the
credit facility. Our obligations under the credit facility are secured by:
o all of our stock;
o ll of our existing and after-acquired personal property and all the
existing and after-acquired personal property of our future domestic
restricted subsidiaries, including a pledge of all of the equity
interests of our future restricted subsidiaries held by us or any of
our restricted subsidiaries and no more than 65% of the equity
interests of any foreign restricted subsidiary, and all intercompany
debt in our favor;
o first-priority perfected liens on all of our material existing and
after-acquired real property fee and leasehold interests, subject to
customary permitted liens (as defined in the credit facility); and
o negative pledge on all of our and our subsidiaries' assets.
The credit facility contains customary covenants and
restrictions on our ability to engage in some activities, including, but not
limited to:
p limitations on other indebtedness, liens, investments and guarantees;
o restrictions on dividends and redemptions and payments on
subordinated debt; and
o restrictions on mergers and acquisitions, sales of assets and leases.
The credit facility also contains financial covenants requiring us to
maintain a minimum EBITDA, minimum coverage of interest expense, minimum
coverage of fixed charges and a maximum leverage ratio. The credit facility
contains customary events of default and cross-default to indebtedness of our
parent.
Borrowings and reimbursement obligations under the credit facility are
subject to significant conditions, including compliance with some financial
ratios and the absence of any material adverse change. See "Risk Factors--Risks
Relating to Our Debt--Restrictive covenants in our indenture and credit
facility may adversely affect us by limiting the types of transactions we can
enter into, potentially leading to a default and our debt becoming immediately
due and payable."
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<PAGE>
DESCRIPTION OF NOTES
General
We issued the notes under an indenture between Charles River and State
Street Bank and Trust Company, as trustee. The terms of the notes include those
stated in the indenture and those made part of the indenture by reference to
the Trust Indenture Act of 1939, as amended. The notes are subject to all those
terms, and holders of notes are referred to the indenture and the Trust
Indenture Act for a statement thereof. Copies of the proposed form of indenture
and registration rights agreement are available as set forth below under "Where
You Can Find More Information."
The following description is a summary of the material provisions of the
indenture. It is not complete and is qualified in its entirety by reference to
the indenture, including the definitions therein of terms used below. We urge
you to read the indenture because it, and not this description, defines your
rights as a holder of the notes.
The definitions of terms used in the following summary are set forth below
under "--Certain Definitions." For purposes of this summary, the term "Charles
River" refers only to Charles River Laboratories, Inc. and not to any of its
Subsidiaries.
The notes:
o are general unsecured obligations of Charles River;
o rank junior in right of payment to all existing and future Senior
Indebtedness of Charles River, including borrowings under our New
Credit Facility;
o rank equally in right of payment with any future senior subordinated
Indebtedness of Charles River;
o rank senior in right of payment to all future subordinated
Indebtedness of Charles River; and
o are effectively junior to all liabilities of Charles River's
subsidiaries.
On a pro forma basis, as of June 24, 2000, we had outstanding
approximately $101.4 million of Senior Indebtedness and our subsidiaries had
$14.7 million of outstanding liabilities, including trade payables but
excluding intercompany obligations. The indenture permits Charles River and its
Subsidiaries to incur additional Indebtedness, including Senior Indebtedness,
in the future. See "Risk Factors--The notes are subordinated to our other debt
and holders of our senior debt must be paid before you receive any payments
under the notes" and "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
As of June 24, 2000, all of our Subsidiaries are Restricted Subsidiaries.
However, so long as we satisfy the conditions described in the definition of
"Unrestricted Subsidiary," we will be permitted to designate current or future
Subsidiaries as "Unrestricted" Subsidiaries that are not subject to the
restrictive covenants included in the indenture.
Principal, Maturity and Interest
o The notes are initially limited in aggregate principal amount to
$150.0 million and mature on October 1, 2009.
o The notes have been issued in denominations of $1,000 and integral
multiples thereof.
o Interest on the notes accrues at the rate of 13.5%.
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<PAGE>
o We pay interest in arrears every October 1 and April 1, to holders of
record on the immediately preceding September 15 and March 15.
o Interest on the notes accrues from the most recent date to which
interest has been paid or, if no interest has been paid, from the
date of original issuance.
o Interest is computed on the basis of a 360-day year comprised of
twelve 30-day months.
We pay principal of, premium, if any, and interest on the notes:
o at the office or agency we maintain for that purpose within the City
and State of New York;
o or, at our option, by check mailed to the holders of the notes at
their respective addresses set forth in the register of holders of
notes;
o however, all payments with respect to notes represented by one or
more permanent Global Notes will be paid by wire transfer of
immediately available funds to the account of the Depository Trust
Company or any successor thereto.
Until we designate another office or agency, our office or agency in New
York will be the office of the trustee maintained for that purpose.
Subject to the covenants described below, we may issue additional notes
under the indenture having the same terms in all respects as the notes, or
similar in all respects except for the payment of interest on the notes (1)
scheduled and paid prior to the date of issuance of those additional notes or
(2) payable on the first Interest Payment Date following that date of issuance.
The notes and any additional notes would be treated as a single class for all
purposes under the indenture.
Subordination
The payment of Subordinated Note Obligations will be subordinated in right
of payment, as set forth in the indenture, to the prior payment in full in cash
or cash equivalents of all Senior Indebtedness, whether outstanding on the date
of the indenture or thereafter incurred.
Upon any distribution to creditors of Charles River in a liquidation or
dissolution of Charles River or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to Charles River or its property,
an assignment for the benefit of creditors or any marshaling of Charles River's
assets and liabilities,
(1) the holders of Senior Indebtedness will be entitled to receive
payment in full in cash or cash equivalents of all Obligations due in
respect of such Senior Indebtedness, including interest after the
commencement of any such proceeding at the rate specified in the
applicable Senior Indebtedness, before the holders of notes will be
entitled to receive any payment with respect to the Subordinated Note
Obligations; and
(2) until all Obligations with respect to Senior Indebtedness are
paid in full in cash or cash equivalents, any distribution to which the
holders of notes would be entitled shall be made to the holders of Senior
Indebtedness.
However, holders of notes may receive and retain Permitted Junior
Securities and payments made from the trust described under "--Legal Defeasance
and Covenant Defeasance."
Charles River also may not make any payment upon or in respect of the
Subordinated Note Obligations, except in Permitted Junior Securities or from
the trust described under "--Legal Defeasance and Covenant Defeasance," until
all obligations with respect to Senior Indebtedness have been paid in full in
cash or cash equivalents if:
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(1) a default in the payment of the principal (including
reimbursement obligations in respect of letters of credit) of,
premium, if any, or interest on or commitment, letter of credit or
administrative fees relating to, Designated Senior Indebtedness
occurs and is continuing beyond any applicable period of grace; or
(2) any other default occurs and is continuing with respect to
Designated Senior Indebtedness that permits holders of the Designated
Senior Indebtedness as to which that default relates to accelerate
its maturity and the trustee receives a notice of that default (a
"Payment Blockage Notice") from Charles River or the holders of any
Designated Senior Indebtedness.
Payments on the notes may and shall be resumed:
(1) in the case of a payment default, upon the date on which that
default is cured or waived; and
(2) in case of a nonpayment default, the earlier of the date on which
that nonpayment default is cured or waived or 179 days after the date
on which the applicable Payment Blockage Notice is received, unless
the maturity of any Designated Senior Indebtedness has been
accelerated.
No new period of payment blockage may be commenced unless and until 360
days have elapsed since the effectiveness of the immediately prior Payment
Blockage Notice. No nonpayment default that existed or was continuing on the
date of delivery of any Payment Blockage Notice to the trustee shall be, or be
made, the basis for a subsequent Payment Blockage Notice unless that default
shall have been waived or cured for a period of not less than 90 days.
"Designated Senior Indebtedness" means:
(1) any Indebtedness outstanding under the New Credit Facility; and
(2) any other Senior Indebtedness permitted under the indenture the
principal amount of which is $25.0 million or more and that has been
designated by Charles River in writing to the trustee as "Designated
Senior Indebtedness."
"Permitted Junior Securities" means Equity Interests in Charles River or
debt securities of Charles River that are subordinated to all Senior
Indebtedness and any debt securities issued in exchange for Senior Indebtedness
to substantially the same extent as, or to a greater extent than, the notes are
subordinated to Senior Indebtedness.
"Senior Indebtedness" means, with respect to any Person:
(1) all Obligations of that Person outstanding under the New Credit
Facility and all Hedging Obligations payable to a lender or an
Affiliate thereof or to a Person that was a lender or an Affiliate
thereof at the time the contract was entered into under the New
Credit Facility or any of its Affiliates, including, without
limitation, interest accruing subsequent to the filing of, or which
would have accrued but for the filing of, a petition for bankruptcy,
whether or not that interest is an allowable claim in that bankruptcy
proceeding;
(2) any other Indebtedness, unless the instrument under which that
Indebtedness is incurred expressly provides that it is subordinated
in right of payment to any other Senior Indebtedness of that Person;
and
(3) all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior
Indebtedness will not include:
(a) any liability for federal, state, local or other taxes;
(b) any Indebtedness of that Person, other than under the New Credit
Facility, to any of its Subsidiaries or other Affiliates;
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(c) any trade payables; or
(d) any Indebtedness that is incurred in violation of the indenture.
"Subordinated Note Obligations" means all Obligations with respect to the
notes, including, without limitation, principal, premium, if any, interest and
liquidated damages, if any, payable under the terms of the notes (including
upon the acceleration or redemption thereof), together with and including any
amounts received or receivable upon the exercise of rights of rescission or
other rights of action, including claims for damages, or otherwise.
We will promptly notify holders of Senior Indebtedness if payment of the
notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, holders of notes may recover less ratably than
creditors of Charles River who are holders of Senior Indebtedness.
Optional Redemption
The notes will not be redeemable at Charles River's option prior to
October 1, 2004. Thereafter, the notes will be subject to redemption at any
time at the option of Charles River, in whole or in part, upon not less than 30
nor more than 60 days' notice, in cash at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest, if any, thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on October 1 of the years indicated below:
Year Percentage
----- ----------
2004............................ 106.750%
2005............................ 104.500%
2006............................ 102.250%
2007 and thereafter............. 100.000%
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select the notes for redemption as follows:
(1) in compliance with the requirements of the principal national
securities exchange, if any, on which the notes are listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or by
another method the trustee considers fair and appropriate;
provided that no notes of $1,000 or less shall be redeemed in part.
Notices of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address. Notices of redemption may not be
conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original note. Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on
notes or portions of them called for redemption.
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Mandatory Redemption
Charles River is not required to make mandatory redemption of, or sinking
fund payments with respect to, the notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, each holder of notes will have
the right to require Charles River to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of that holder's notes as specified in
the offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon to the date of repurchase (the "Change of Control
Payment"). Within 60 days following any Change of Control, Charles River will,
or will cause the trustee to, mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase notes on the date specified in that notice, which date shall be
no earlier than 30 days and no later than 60 days from the date that notice is
mailed (the "Change of Control Payment Date"), under the procedures required by
the indenture and described in that notice. Charles River will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent those laws and regulations are
applicable in connection with the repurchase of the notes as a result of a
Change of Control. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the indenture relating to a Change
of Control Offer, Charles River will comply with the applicable securities laws
and regulations and shall not be deemed to have breached its obligations
described in the indenture by virtue thereof.
On the Change of Control Payment Date, Charles River will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly
tendered under the Change of Control Offer;
(2) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all notes or portions thereof so
tendered; and
(3) deliver or cause to be delivered to the trustee the notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of notes or portions thereof being purchased by
Charles River.
The Paying Agent will promptly mail to each holder of notes so tendered
the Change of Control Payment for that holder's notes, and the trustee will
promptly authenticate and mail or cause to be transferred by book-entry to each
holder a new note equal in principal amount to any unpurchased portion of the
notes surrendered, if any; provided that each new note will be in a principal
amount of $1,000 or an integral multiple thereof.
The indenture provides that, prior to complying with the provisions of
this covenant, but in any event within 90 days following a Change of Control,
Charles River will either repay all outstanding Senior Indebtedness or obtain
the requisite consents, if any, under all agreements governing outstanding
Senior Indebtedness to permit the repurchase of notes required by this
covenant. The indenture requires Charles River to publicly announce the results
of the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the notes to require that Charles
River repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
The New Credit Facility prohibits Charles River from purchasing any notes
and also provides that some change of control events, which may include events
not otherwise constituting a Change of Control under the indenture, with
respect to Charles River would constitute a default thereunder. Any future
credit agreements or other agreements
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relating to Senior Indebtedness to which Charles River becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when Charles River is prohibited from purchasing notes,
Charles River could seek the consent of its lenders to the purchase of notes or
could attempt to refinance the borrowings that contain that prohibition. If
Charles River does not obtain such a consent or repay those borrowings, Charles
River will remain prohibited from purchasing notes. In that case, Charles
River's failure to purchase tendered notes would constitute an Event of Default
under the indenture, which would, in turn, constitute a default under the New
Credit Facility. In those circumstances, the subordination provisions in the
indenture would likely restrict payments to the holders of notes.
Charles River will not be required to make a Change of Control Offer upon
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by Charles
River and purchases all notes validly tendered and not withdrawn under that
Change of Control Offer.
"Change of Control" means the occurrence of any of the following:
(1) the sale, lease, transfer, conveyance or other disposition, other
than by way of merger or consolidation, in one or a series of related
transactions, of all or substantially all of the assets of Charles
River and its Subsidiaries, taken as a whole, to any "person" or
"group" (as those terms are used in Section 13(d) of the Exchange
Act), other than the Principals and their Related Parties;
(2) the adoption of a plan for the liquidation or dissolution of
Charles River;
(3) the consummation of any transaction, including, without
limitation, any merger or consolidation, the result of which is that
any "person" or "group" (as those terms are used in Section 13(d) of
the Exchange Act), other than the Principals and their Related
Parties, becomes the "beneficial owner" (as that term is defined in
Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly through one or more intermediaries, of 50% or more of the
voting power of the outstanding voting stock of Charles River; or
(4) the first day on which a majority of the members of the board of
directors of Charles River are not Continuing Members.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of Charles River and its Subsidiaries taken as a whole.
Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of notes to require
Charles River to repurchase notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of Charles River
and its Subsidiaries taken as a whole to another person or group may be
uncertain.
"Continuing Members" means, as of any date of determination, any member of
the board of directors of Charles River who:
(1) was a member of Charles River's board of directors immediately
after consummation of the Recapitalization and the Recapitalization
Financing; or
(2) was nominated for election or elected to Charles River's board of
directors with the approval of, or whose election to the board of
directors was ratified by, at least a majority of the Continuing
Members who were members of Charles River's board of directors at the
time of that nomination or election.
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Certain Covenants
Asset Sales
The indenture provides that Charles River will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless:
(1) Charles River or the Restricted Subsidiary, as the case may be,
receives consideration at the time of that Asset Sale at least equal
to the fair market value (evidenced by a resolution of the board of
directors set forth in an Officers' Certificate delivered to the
trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of; and
(2) at least 75% of the consideration therefor received by Charles
River or the Restricted Subsidiary is in the form of:
(a) cash or Cash Equivalents; or
(b) property or assets that are used or useful in a Permitted
Business, or the Capital Stock of any Person engaged in a
Permitted Business if, as a result of the acquisition by Charles
River or any Restricted Subsidiary thereof, that Person becomes
a Restricted Subsidiary.
For the purposes of this provision, each of the following shall be deemed
to be cash:
(i) any liabilities, as shown on Charles River's or the
Restricted Subsidiary's most recent balance sheet, of
Charles River or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their
terms subordinated to the notes or any guarantee thereof)
that are assumed by the transferee of any such assets under
a customary novation agreement that releases Charles River
or the Restricted Subsidiary from further liability;
(ii) any securities, notes or other obligations received by
Charles River or the Restricted Subsidiary from the
transferee that are converted within 180 days of their
receipt by Charles River or the Restricted Subsidiary by
Charles River or the Restricted Subsidiary into cash or
Cash Equivalents, but only to the extent of the cash or
Cash Equivalents received; and
(iii) any Designated Noncash Consideration received by
Charles River or any of its Restricted Subsidiaries in that
Asset Sale having an aggregate fair market value, taken
together with all other Designated Noncash Consideration
received under this clause (iii) that is at that time
outstanding, not to exceed 15% of Total Assets at the time
of the receipt of that Designated Noncash Consideration,
with the fair market value of each item of Designated
Noncash Consideration being measured at the time received
and without giving effect to subsequent changes in value.
The 75% limitation referred to in clause (2) above will not apply to any
Asset Sale in which the cash or Cash Equivalents portion of the consideration
received therefrom, determined in accordance with subclauses (i), (ii) and
(iii) above, is equal to or greater than what the after-tax proceeds would have
been had that Asset Sale complied with the aforementioned 75% limitation.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Charles River or the Restricted Subsidiary, as the case may be, shall apply the
Net Proceeds, at its option (or to the extent Charles River is required to
apply the Net Proceeds under the terms of the New Credit Facility), to:
(1) repay or purchase Senior Indebtedness or Pari Passu Indebtedness
of Charles River or any Indebtedness of any Restricted Subsidiary, as
the case may be,
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provided that if Charles River shall so repay or purchase Pari Passu
Indebtedness of Charles River;
(a) it will equally and ratably reduce Indebtedness under the
notes if the notes are then redeemable; or
(b) if the notes may not then be redeemed, Charles River shall
make an offer, in accordance with the procedures set forth below
for an Asset Sale Offer, to all holders of notes to purchase at
a purchase price equal to 100% of the principal amount of the
notes, plus accrued and unpaid interest and thereon to the date
of purchase, the notes that would otherwise be redeemed; or
(2)(a) an investment in property, the making of a capital expenditure
or the acquisition of assets that are used or useful in a Permitted
Business; or
(b) the acquisition of Capital Stock of any Person primarily
engaged in a Permitted Business if:
(x) as a result of the acquisition by Charles River or any
Restricted Subsidiary thereof, that Person becomes a
Restricted Subsidiary; or
(y) the Investment in that Capital Stock is permitted by
clause (6) of the definition of Permitted Investments.
Pending the final application of any Net Proceeds, Charles River may
temporarily reduce Indebtedness or otherwise invest those Net Proceeds in any
manner that is not prohibited by the indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of the second preceding paragraph will be deemed
to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, Charles River will be required to make an offer to all
holders of notes (an "Asset Sale Offer") to purchase the maximum principal
amount of notes that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof, plus
accrued and unpaid interest thereon to the date of purchase, in accordance with
the procedures set forth in the indenture.
To the extent that any Excess Proceeds remain after consummation of an
Asset Sale Offer, Charles River may use those Excess Proceeds for any purpose
not otherwise prohibited by the indenture. If the aggregate principal amount of
notes surrendered by holders thereof in connection with an Asset Sale Offer
exceeds the amount of Excess Proceeds, the trustee shall select the notes to be
purchased as set forth under "--Selection and Notice." Upon completion of an
offer to purchase, the amount of Excess Proceeds shall be reset at zero.
Charles River will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with the
repurchase of the notes under an Asset Sale Offer. To the extent that the
provisions of any securities laws or regulations conflict with the provisions
of the indenture relating to an Asset Sale Offer, Charles River will comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations described in the indenture by virtue thereof.
Restricted Payments
The indenture provides that Charles River will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or
distribution on account of Charles River's or any of its Restricted
Subsidiaries' Equity Interests other than
o dividends or distributions payable in Equity Interests other than
Disqualified Stock of Charles River or
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o dividends or distributions payable to Charles River or any Wholly
Owned Restricted Subsidiary of Charles River;
(2) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of Charles River or Parent other than any of those
Equity Interests owned by Charles River or any Restricted Subsidiary
of Charles River;
(3) make any principal payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value, any
Indebtedness of Charles River that is subordinated in right of
payment to the notes, except in accordance with the mandatory
redemption or repayment provisions set forth in the original
documentation governing that Indebtedness (but not under any
mandatory offer to repurchase upon the occurrence of any event); or
(4) make any Restricted Investment
(all payments and other actions set forth in clauses (1) through (4) above
being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to that Restricted Payment:
(1) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(2) Charles River would, immediately after giving pro forma effect
thereto as if that Restricted Payment had been made at the beginning
of the applicable four-quarter period, have been permitted to incur
at least $1.00 of additional Indebtedness under the Fixed Charge
Coverage Ratio test set forth in the first paragraph of the covenant
described under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(3) that Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by Charles River and its
Restricted Subsidiaries after the date of the indenture (excluding
Restricted Payments permitted by clauses (1) (to the extent that the
declaration of any dividend referred to therein reduces amounts
available for Restricted Payments under this clause (3)), (2) through
(9), (11) through (15) and (17) of the next succeeding paragraph), is
less than the sum, without duplication, of:
(a) 50% of the Consolidated Net Income of Charles River for the
period (taken as one accounting period) commencing June 27, 1999 to
the end of Charles River's most recently ended fiscal quarter for
which internal financial statements are available at the time of that
Restricted Payment (or, if Consolidated Net Income for that period is
a deficit, less 100% of the deficit); plus
(b) 100% of the Qualified Proceeds received by Charles River on or
after the date of the indenture from contributions to Charles River's
capital or from the issue or sale on or after the date of the
indenture of Equity Interests of Charles River or of Disqualified
Stock or convertible debt securities of Charles River to the extent
that they have been converted into those Equity Interests, other than
o Equity Interests, Disqualified Stock or convertible debt
securities sold to a Subsidiary of Charles River and
o Disqualified Stock or convertible debt securities that have been
converted into Disqualified Stock; plus
(c) the amount equal to the net reduction in Investments in Persons
after the date of the indenture who are not Restricted Subsidiaries
(other than Permitted Investments) resulting from:
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(i) Qualified Proceeds received as a dividend, repayment of a
loan or advance or other transfer of assets (valued at the fair
market value thereof) to Charles River or any Restricted
Subsidiary from those Persons;
(ii) Qualified Proceeds received upon the sale or liquidation of
those Investments; and
(iii) the redesignation of Unrestricted Subsidiaries (excluding
any increase in the amount available for Restricted Payments
under clause (10) or (14) below arising from the redesignation
of that Unrestricted Subsidiary) whose assets are used or useful
in, or which is engaged in, one or more Permitted Business as
Restricted Subsidiaries (valued, proportionate to Charles
River's equity interest in that Subsidiary, at the fair market
value of the net assets of that Subsidiary at the time of that
redesignation).
The foregoing provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration, the payment
would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of
Charles River in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of Charles
River) of other Equity Interests of Charles River (other than any
Disqualified Stock), provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from
clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase, retirement or other
acquisition of subordinated Indebtedness of Charles River with the
net cash proceeds from an incurrence of, or in exchange for,
Permitted Refinancing Indebtedness;
(4) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Charles River or Parent or CRL
Acquisition LLC held by any member of Parent's, Charles River's (or
any of its Restricted Subsidiaries') management under any management
equity subscription agreement or stock option agreement and any
dividend to Parent to fund any such repurchase, redemption
acquisition or retirement; provided that:
(a) the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed:
(i) $5.0 million in any calendar year, with unused amounts
in any calendar year being carried over to succeeding
calendar years subject to a maximum (without giving effect
to the following clause (ii)) of $10.0 million in any
calendar year; plus
(ii) the aggregate net cash proceeds received by Charles
River during that calendar year from any reissuance of
Equity Interests by Charles River, Parent or CRL
Acquisition LLC to members of management of Charles River
and its Restricted Subsidiaries; provided that the amount
of any such net cash proceeds that are used to permit an
acquisition or retirement for value under this clause (4)
shall be excluded from clause (3)(b) of the preceding
paragraph; and
(b) no Default or Event of Default shall have occurred and be
continuing immediately after that transaction;
(5) payments and transactions in connection with
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o the Transactions, including any purchase price adjustment or any
other payments made under or as contemplated in the Transaction
Agreements or the financial advisory agreements with DLJ
Securities Corporation described under "Relationships and
Transactions with Related Parties,"
o the Transaction Financing,
o the Offering,
o the New Credit Facility (including commitment, syndication and
arrangement fees payable thereunder) and
o the application of the proceeds thereof, and the payment of fees
and expenses with respect thereto;
(6) the payment of dividends or the making of loans or advances by
Charles River to Parent not to exceed $2.5 million in any fiscal year
for costs and expenses incurred by Parent in its capacity as a
holding company for services rendered by Parent on behalf of Charles
River;
(7) payments or distributions to Parent under any Tax Sharing
Agreement;
(8) the payment of dividends by a Restricted Subsidiary on any class
of common stock of that Restricted Subsidiary if:
(a) that dividend is paid pro rata to all holders of that class
of common stock; and
(b) at least 50.1% of that class of common stock is held by
Charles River or one or more of its Restricted
Subsidiaries;
(9) the repurchase of any class of common stock of a Restricted
Subsidiary if:
(a) that repurchase is made pro rata with respect to that class
of common stock; and
(b) at least 50.1% of that class of common stock is held by
Charles River or one or more of its Restricted
Subsidiaries;
(10) any other Restricted Investment made in a Permitted Business
which, together with all other Restricted Investments made under this
clause (10) since the date of the indenture, does not exceed $5.0
million (in each case, after giving effect to all subsequent
reductions in the amount of any Restricted Investment made under this
clause (10), either as a result of (i) the repayment or disposition
thereof for cash or (ii) the redesignation of an Unrestricted
Subsidiary as a Restricted Subsidiary (valued, proportionate to
Charles River's equity interest in that Subsidiary at the time of
that redesignation, at the fair market value of the net assets of
that Subsidiary at the time of that redesignation), in the case of
clause (i) and (ii), not to exceed the amount of the Restricted
Investment previously made under this clause (10); provided that no
Default or Event of Default shall have occurred and be continuing
immediately after making that Restricted Investment;
(11) the declaration and payment of dividends to holders of any class
or series of Disqualified Stock of Charles River or any Restricted
Subsidiary issued on or after the date of the indenture in accordance
with the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock;" provided that no
Default or Event of Default shall have occurred and be continuing
immediately after making that Restricted Payment;
(12) repurchases of Equity Interests deemed to occur upon exercise of
stock options if those Equity Interests represent a portion of the
exercise price of those options;
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(13) any other Restricted Payment which, together with all other
Restricted Payments made under this clause (13) since the date of the
indenture, does not exceed $5.0 million, in each case, after giving
effect to all subsequent reductions in the amount of any Restricted
Investment made under this clause (13) either as a result of (i) the
repayment or disposition thereof for cash or (ii) the redesignation
of an Unrestricted Subsidiary as a Restricted Subsidiary (valued,
proportionate to Charles River's equity interest in that Subsidiary
at the time of that redesignation, at the fair market value of the
net assets of that Subsidiary at the time of that redesignation), in
the case of clause (i) and (ii), not to exceed the amount of the
Restricted Investment previously made under this clause (13);
provided that no Default or Event of Default shall have occurred and
be continuing immediately after making that Restricted Payment;
(14) the pledge by Charles River of the Capital Stock of an
Unrestricted Subsidiary of Charles River to secure Non-Recourse Debt
of that Unrestricted Subsidiary;
(15) the purchase, redemption or other acquisition or retirement for
value of any Equity Interests of any Restricted Subsidiary issued
after the date of the indenture, provided that the aggregate price
paid for any such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed the sum of:
(a) the amount of cash and Cash Equivalents received by that
Restricted Subsidiary from the issue or sale thereof; and
(b) any accrued dividends thereon the payment of which would be
permitted under clause (11) above;
(16) any Investment in an Unrestricted Subsidiary that is funded by
Qualified Proceeds received by Charles River on or after the date of
the indenture from contributions to Charles River's capital or from
the issue and sale on or after the date of the indenture of Equity
Interests of Charles River or of Disqualified Stock or convertible
debt securities to the extent they have been converted into that
Equity Interests (other than Equity Interests, Disqualified Stock or
convertible debt securities sold to a Subsidiary of Charles River and
other than Disqualified Stock or convertible debt securities that
have been converted into Disqualified Stock) in an amount (measured
at the time that Investment is made and without giving effect to
subsequent changes in value) that does not exceed the amount of those
Qualified Proceeds (excluding any such Qualified Proceeds to the
extent utilized to permit a prior "Restricted Payment" under clause
(3)(b) of the preceding paragraph); and
(17) distributions or payments of Receivables Fees.
The board of directors of Charles River may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if that designation would not cause
a Default. For purposes of making that designation, all outstanding Investments
by Charles River and its Restricted Subsidiaries (except to the extent repaid
in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of that designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Restricted Investments in
an amount equal to the greater of
(1) the net book value of that Investments at the time of that
designation and
(2) the fair market value of that Investments at the time of that
designation.
That designation will only be permitted if that Restricted Investment
would be permitted at that time and if that Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary.
The amount of:
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(1) all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Charles River or
that Restricted Subsidiary, as the case may be, under the Restricted
Payment; and
(2) Qualified Proceeds (other than cash) shall be the fair market
value on the date of receipt thereof by Charles River of those
Qualified Proceeds.
The fair market value of any non-cash Restricted Payment shall be
determined by the board of directors of Charles River whose resolution with
respect thereto shall be delivered to the trustee.
Not later than the date of making any Restricted Payment, Charles River
shall deliver to the trustee an Officers' Certificate stating that the
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed.
Incurrence of Indebtedness and Issuance of Preferred Stock
The indenture provides that:
(1) Charles River will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur")
any Indebtedness (including Acquired Indebtedness);
(2) Charles River will not, and will not permit any of its Restricted
Subsidiaries to, issue any shares of Disqualified Stock; and
(3) Charles River will not permit any of its Restricted Subsidiaries
to issue any shares of preferred stock;
provided that Charles River or any Restricted Subsidiary may incur
Indebtedness, including Acquired Indebtedness, or issue shares of Disqualified
Stock if the Fixed Charge Coverage Ratio for Charles River's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which that additional Indebtedness
is incurred or that Disqualified Stock is issued would have been at least 2.0
to 1 if such four-quarter period ended prior to September 30, 2002 and 2.25 to
1 thereafter, determined on a consolidated pro forma basis, including a pro
forma application of the net proceeds therefrom, as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of that four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the following items of Indebtedness (collectively,
"Permitted Indebtedness"):
(1) the incurrence by Charles River and its Restricted Subsidiaries
of Indebtedness under the New Credit Facility and the Foreign Credit
Facilities; provided that the aggregate principal amount of all
Indebtedness (with letters of credit being deemed to have a principal
amount equal to the maximum potential liability of Charles River and
those Restricted Subsidiaries thereunder) then classified as having
been incurred in reliance upon this clause (1) that remains
outstanding under the New Credit Facility and the Foreign Credit
Facilities after giving effect to that incurrence does not exceed an
amount equal to $215.0 million;
(2) the incurrence by Charles River and its Restricted Subsidiaries
of Existing Indebtedness;
(3) the incurrence by Charles River of Indebtedness represented by
the notes and the indenture and any guarantees thereof by its
Restricted Subsidiaries as specified in "Note Guarantees";
(4) the incurrence by Charles River or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Expenditure
Indebtedness, Capital Lease Obligations or other obligations, in each
case, the proceeds of which are used solely for the purpose of
financing all or any part of the purchase price or cost
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of construction or improvement of property, plant or equipment
(including acquisitions of Capital Stock of a Person that becomes a
Restricted Subsidiary to the extent of the fair market value of the
property, plant or equipment so acquired) used in the business of
Charles River or that Restricted Subsidiary, in an aggregate
principal amount (or accreted value, as applicable) not to exceed
$20.0 million outstanding after giving effect to that incurrence;
(5) Indebtedness arising from agreements of Charles River or any
Restricted Subsidiary providing for indemnification, adjustment of
purchase price or similar obligations, in each case, incurred or
assumed in connection with the disposition of any business, assets or
a Subsidiary, other than guarantees of Indebtedness incurred by any
Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing that acquisition;
provided that:
(a) that Indebtedness is not reflected on the balance sheet of
Charles River or any Restricted Subsidiary (contingent
obligations referred to in a footnote or footnotes to financial
statements and not otherwise reflected on the balance sheet will
not be deemed to be reflected on that balance sheet for purposes
of this clause (a)); and
(b) the maximum assumable liability in respect of that
Indebtedness shall at no time exceed the gross proceeds
including non-cash proceeds (the fair market value of those
non-cash proceeds being measured at the time received and
without giving effect to any subsequent changes in value)
actually received by Charles River and/or that Restricted
Subsidiary in connection with that disposition;
(6) the incurrence by Charles River or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange for,
or the net proceeds of which are used to refund, refinance or replace
Indebtedness (other than intercompany Indebtedness) that was
permitted by the indenture to be incurred;
(7) the incurrence by Charles River or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among Charles
River and/or any of its Restricted Subsidiaries; provided that:
(a) if Charles River is the obligor on that Indebtedness, that
Indebtedness is expressly subordinated to the prior payment in
full in cash of all Obligations with respect to the notes; and
(b) (i) any subsequent issuance or transfer of Equity Interests
that results in any such Indebtedness being held by a Person
other than Charles River or a Restricted Subsidiary thereof and
(ii) any sale or other transfer of any such Indebtedness to a
Person that is not either Charles River or a Restricted
Subsidiary thereof shall be deemed, in each case, to constitute
an incurrence of that Indebtedness by Charles River or that
Restricted Subsidiary, as the case may be, that was not
permitted by this clause (7);
(8) the incurrence by Charles River or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose
of fixing or hedging;
(a) interest rate risk with respect to any floating rate
Indebtedness that is permitted by the terms of this indenture to
be outstanding; and
(b) exchange rate risk with respect to agreements or
Indebtedness of that Person payable denominated in a currency
other than United States dollars;
provided that those agreements do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or because of fees, indemnities and
compensation payable thereunder;
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(9) the guarantee by Charles River or any of its Restricted
Subsidiaries of Indebtedness of Charles River or a Restricted
Subsidiary of Charles River that was permitted to be incurred by
another provision of this covenant;
(10) obligations in respect of performance and surety bonds and
completion guarantees (including related letters of credit) provided
by Charles River or any Restricted Subsidiary in the ordinary course
of business; and
(11) the incurrence by Charles River or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate principal
amount (or accreted value, as applicable) outstanding after giving
effect to that incurrence, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred under this clause (11), not to exceed $30.0
million.
For purposes of determining compliance with this covenant:
o in the event that an item of Indebtedness meets the criteria of more
than one of the categories of Permitted Indebtedness described in
clauses (1) through (11) above or is entitled to be incurred under
the first paragraph of this covenant, Charles River shall, in its
sole discretion, classify that item of Indebtedness in any manner
that complies with this covenant and that item of Indebtedness will
be treated as having been incurred under only one of those clauses or
under the first paragraph hereof;
o Charles River may, at any time, change the classification of an item
of Indebtedness (or any portion thereof) to any other clause or to
the first paragraph hereof; provided that Charles River would be
permitted to incur that item of Indebtedness (or that portion
thereof) under that other clause or the first paragraph hereof, as
the case may be, at the time of reclassification; and
o accrual of interest, accretion or amortization of original issue
discount will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
All Indebtedness under the New Credit Facility and the Foreign Credit
Facilities outstanding on the date on which notes are first issued and
authenticated under the indenture shall be deemed to have been incurred on that
date in reliance on the first paragraph of the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock." As a result, Charles River will be permitted to incur
significant additional secured indebtedness under clause (1) of the definition
of "Permitted Indebtedness." See "Risk Factors."
Liens
The indenture provides that Charles River will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien, other than a Permitted Lien, that secures
obligations under any Pari Passu Indebtedness or subordinated Indebtedness of
Charles River on any asset or property now owned or hereafter acquired by
Charles River or any of its Restricted Subsidiaries, or any income or profits
therefrom or assign or convey any right to receive income therefrom, unless the
notes are equally and ratably secured with the obligations so secured until
such time as those obligations are no longer secured by a Lien; provided that,
in any case involving a Lien securing subordinated Indebtedness of Charles
River, that Lien is subordinated to the Lien securing the notes to the same
extent that subordinated Indebtedness is subordinated to the notes.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The indenture provides that Charles River will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to:
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(1) (a) pay dividends or make any other distributions to Charles
River or any of its Restricted Subsidiaries (i) on its Capital Stock
or (ii) with respect to any other interest or participation in, or
measured by, its profits; or
(b) pay any Indebtedness owed to Charles River or any of its
Restricted Subsidiaries;
(2) make loans or advances to Charles River or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Charles River or any
of its Restricted Subsidiaries.
However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or because of:
(1) Existing Indebtedness as in effect on the date of the indenture;
(2) the New Credit Facility as in effect as of the date of the
indenture, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings
thereof;
(3) the indenture and the notes;
(4) applicable law and any applicable rule, regulation or order;
(5) any agreement or instrument of a Person acquired by Charles River
or any of its Restricted Subsidiaries as in effect at the time of
that acquisition (except to the extent created in contemplation of
that acquisition), which encumbrance or restriction is not applicable
to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired,
provided that, in the case of Indebtedness, that Indebtedness was
permitted by the terms of the indenture to be incurred;
(6) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(7) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described
in clause (5) above on the property so acquired;
(8) contracts for the sale of assets, including, without limitation,
customary restrictions with respect to a Subsidiary under an
agreement that has been entered into for the sale or disposition of
all or substantially all of the Capital Stock or assets of that
Subsidiary;
(9) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing that Permitted
Refinancing Indebtedness are, in the good faith judgment of Charles
River's board of directors, not materially less favorable, taken as a
whole, to the holders of the notes than those contained in the
agreements governing the Indebtedness being refinanced;
(10) secured Indebtedness otherwise permitted to be incurred as
specified in the covenants described under "--Incurrence of
Indebtedness and Issuance of Preferred Stock" and "--Liens" that
limit the right of the debtor to dispose of the assets securing that
Indebtedness;
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(12) other Indebtedness or Disqualified Stock of Restricted
Subsidiaries permitted to be incurred subsequent to the Issuance Date
as specified in the provisions of the covenant described under
"--Incurrence of Indebtedness and Issuance of Preferred Stock;"
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(13) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business;
and
(14) restrictions created in connection with any Receivables Facility
that, in the good faith determination of the board of directors of
Charles River, are necessary or advisable to effect that Receivables
Facility.
Merger, Consolidation, or Sale of Assets
The indenture provides that Charles River may not consolidate or merge
with or into (whether or not Charles River is the surviving corporation), or
sell, assign, transfer, convey or otherwise dispose of all or substantially all
of its properties or assets in one or more related transactions to, another
Person unless:
(1) Charles River is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than
Charles River) or to which that sale, assignment, transfer,
conveyance or other disposition shall have been made is a corporation
organized or existing under the laws of the United States, any state
thereof or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or
merger (if other than Charles River) or the Person to which that
sale, assignment, transfer, conveyance or other disposition shall
have been made assumes all the obligations of Charles River under the
registration rights agreement, the notes and the indenture under a
supplemental indenture in a form reasonably satisfactory to the
trustee;
(3) immediately after that transaction no Default or Event of Default
exists; and
(4) Charles River or the Person formed by or surviving any such
consolidation or merger (if other than Charles River), or to which
that sale, assignment, transfer, conveyance or other disposition
shall have been made
(a) will, at the time of such transaction and after giving pro
forma effect thereto as if that transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness under the Fixed
Charge Coverage Ratio test set forth in the first paragraph of
the covenant described under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock" or
(b) would, together with its Restricted Subsidiaries, have a
higher Fixed Charge Coverage Ratio immediately after that
transaction (after giving pro forma effect thereto as if that
transaction had occurred at the beginning of the applicable
four-quarter period) than the Fixed Charge Coverage Ratio of
Charles River and its Restricted Subsidiaries immediately prior
to that transaction.
The foregoing clause (4) will not prohibit:
(a) a merger between Charles River and a Wholly Owned Subsidiary
of Parent created for the purpose of holding the Capital Stock
of Charles River;
(b) a merger between Charles River and a Wholly Owned Restricted
Subsidiary; or
(c) a merger between Charles River and an Affiliate incorporated
solely for the purpose of reincorporating Charles River in
another State of the United State
so long as, in each case, the amount of Indebtedness of Charles River and its
Restricted Subsidiaries is not increased thereby.
The indenture provides that Charles River will not lease all or
substantially all of its assets to any Person.
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Transactions with Affiliates
The indenture provides that Charles River will not, and will not permit
any of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate of Charles River (each of the
foregoing, an "Affiliate Transaction"), unless:
(1) that Affiliate Transaction is on terms that are no less favorable
to Charles River or that Restricted Subsidiary than those that would
have been obtained in a comparable transaction by Charles River or
that Restricted Subsidiary with an unrelated Person; and
(2) Charles River delivers to the trustee, with respect to any
Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $7.5 million, either:
(a) a resolution of the board of directors set forth in an
Officers' Certificate certifying that the relevant Affiliate
Transaction complies with clause (1) above and that the
Affiliate Transaction has been approved by a majority of the
disinterested members of the board of directors; or
(b) an opinion as to the fairness to the holders of that
Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national
standing.
Notwithstanding the foregoing, the following items shall not be deemed to
be Affiliate Transactions:
(1) customary directors' fees, indemnification or similar
arrangements or any employment agreement or other compensation plan
or arrangement entered into by Charles River or any of its Restricted
Subsidiaries in the ordinary course of business (including ordinary
course loans to employees not to exceed (a) $5.0 million outstanding
in the aggregate at any time and (b) $2.0 million to any one
employee) and consistent with the past practice of Charles River or
that Restricted Subsidiary;
(2) transactions between or among Charles River and/or its Restricted
Subsidiaries;
(3) payments of customary fees by Charles River or any of its
Restricted Subsidiaries to the DLJ Merchant Banking funds and their
Affiliates made for any financial advisory, financing, underwriting
or placement services or in respect of other investment banking
activities, including, without limitation, in connection with
acquisitions or divestitures which are approved by a majority of the
board of directors in good faith;
(4) any agreement as in effect on the date of the indenture or any
amendment thereto (so long as that amendment is not disadvantageous
to the holders of the notes in any material respect) or any
transaction contemplated thereby;
(5) payments and transactions in connection with the Transaction,
including any purchase price adjustment or any other payments made
under the Transaction Agreements or the financial advisory agreements
with DLJ Securities Corporation described under "Relationships and
Transactions with Related Parties," and the Transaction Financing,
the New Credit Facility (including commitment, syndication and
arrangement fees payable thereunder) and the Offering (including
underwriting discounts and commissions in connection therewith) and
the application of the proceeds thereof, and the payment of the fees
and expenses with respect thereto;
(6) Restricted Payments that are permitted by the provisions of the
indenture described under the caption "--Restricted Payments" and any
Permitted Investments; and
(7) sales of accounts receivable, or participations therein, in
connection with any Receivables Facility.
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Sale and Leaseback Transactions
The indenture provides that Charles River will not, and will not permit
any of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that Charles River or any Restricted Subsidiary may enter
into a sale and leaseback transaction if:
(1) Charles River or that Restricted Subsidiary, as the case may be,
could have:
(a) incurred Indebtedness in an amount equal to the Attributable
Indebtedness relating to that sale and leaseback transaction
under the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock;"
and
(b) incurred a Lien to secure that Indebtedness under the
covenant described under the caption "--Liens;"
(2) the gross cash proceeds of that sale and leaseback transaction
are at least equal to the fair market value (as determined in good
faith by the board of directors and set forth in an Officers'
Certificate delivered to the trustee) of the property that is the
subject of that sale and leaseback transaction; and
(3) the transfer of assets in that sale and leaseback transaction is
permitted by, and Charles River applies the proceeds of that
transaction in compliance with, the covenant described under the
caption "Repurchase at the Option of Holders--Asset Sales."
No Senior Subordinated Indebtedness
The indenture provides that
o Charles River will not Incur any Indebtedness that is subordinated or
junior in right of payment to any Senior Indebtedness and senior in
right of payment to the notes, and
o no Guarantor will Incur any Indebtedness that is subordinate or
junior in right of payment to any Senior Indebtedness and senior in
right of payment to that Guarantor's guarantee (the "Guarantee").
Note Guarantees
The Indenture provides that, if any Wholly-Owned Restricted Subsidiary of
Charles River that is a Domestic Subsidiary guarantees any Indebtedness under
the New Credit Facility, then such Restricted Subsidiary shall become a
Guarantor and execute a supplemental indenture and deliver an opinion of
counsel, in accordance with the terms of the Indenture.
Reports
The indenture provides that, whether or not required by the rules and
regulations of the SEC, so long as any notes are outstanding, Charles River
will furnish to the holders of notes:
(1) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and
10-K if Charles River were required to file those Forms, including a
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information
only, a report thereon by Charles River's certified independent
accountants; and
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(2) all current reports that would be required to be filed with the
SEC on Form 8-K if Charles River were required to file those reports,
in each case, within the time periods specified in the SEC's rules
and regulations.
In addition, following the consummation of the exchange offer contemplated
by the registration rights agreement, whether or not required by the rules and
regulations of the SEC, Charles River has agreed to and have filed a copy of
all information and reports referred to in clauses (1) and (2) above with the
SEC for public availability within the time periods specified in the SEC's
rules and regulations (unless the SEC will not accept such a filing) and make
that information available to securities analysts and prospective investors
upon request.
In addition, Charles River has agreed that, for so long as any notes
remain outstanding, it will furnish to the holders and to securities analysts
and prospective investors, upon their request, the information required to be
delivered under Rule 144A(d)(4) of the Securities Act.
Events of Default and Remedies
The indenture provides that each of the following constitutes an Event of
Default:
(1) default for 30 days in the payment when due of interest on the
notes (whether or not prohibited by the subordination provisions of
the indenture);
(2) default in payment when due of the principal of or premium, if
any, on the notes (whether or not prohibited by the subordination
provisions of the indenture);
(3) failure by Charles River or any of its Restricted Subsidiaries
for 30 days after receipt of notice from the trustee or holders of at
least 25% in principal amount of the notes then outstanding to comply
with the provisions described under the captions "Repurchase at the
Option of Holders--Change of Control," "--Asset Sales," "Certain
Covenants--Restricted Payments," "--Incurrence of Indebtedness and
Issuance of Preferred Stock" or "Merger, Consolidation or Sale of
Assets;"
(4) failure by Charles River for 60 days after notice from the
trustee or the holders of at least 25% in principal amount of the
notes then outstanding to comply with any of its other agreements in
the indenture or the notes;
(5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by Charles River or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by
Charles River or any of its Restricted Subsidiaries), whether that
Indebtedness or guarantee now exists, or is created after the date of
the indenture, which default:
(a) is caused by a failure to pay Indebtedness at its stated
final maturity (after giving effect to any applicable grace
period provided in that Indebtedness) (a "Payment Default"); or
(b) results in the acceleration of that Indebtedness prior to
its stated final maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been
a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more;
(6) failure by Charles River or any of its Restricted Subsidiaries to
pay final judgments aggregating in excess of $10.0 million (net of
any amounts with respect to which a reputable and creditworthy
insurance company has acknowledged liability in writing), which
judgments are not paid, discharged or stayed for a period of 60 days;
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(7) except as permitted by the indenture, any Guarantee shall be held
in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor,
or any Person acting of behalf of any Guarantor, shall deny or
disaffirm its obligations under its Guarantee; and
(8) some events of bankruptcy or insolvency with respect to Charles
River or any of its Restricted Subsidiaries that is a Significant
Subsidiary.
If any Event of Default (other than an Event of Default specified in
clause (8) above with respect to events of bankruptcy or insolvency with
respect to Charles River or any Restricted Subsidiary that is a Significant
Subsidiary) occurs and is continuing, the holders of at least 25% in principal
amount of the then outstanding notes may direct the trustee to declare all the
notes to be due and payable immediately. However, so long as any Indebtedness
permitted to be incurred under the New Credit Facility shall be outstanding,
that acceleration shall not be effective until the earlier of:
(1) an acceleration of any such Indebtedness under the New Credit
Facility; or
(2) five business days after receipt by Charles River and the
administrative agent under the New Credit Facility of written notice
of that acceleration.
Except as stated in the prior sentence, upon any such declaration, the notes
shall become due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default
specified in clause (8) above with respect to events of bankruptcy or
insolvency with respect to Charles River or any Restricted Subsidiary that is a
Significant Subsidiary, all outstanding notes will become due and payable
without further action or notice. Holders of the notes may not enforce the
indenture or the notes except as provided in the indenture.
The holders of a majority in aggregate principal amount of the then
outstanding notes by written notice to the trustee may on behalf of all of the
holders rescind an acceleration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of Default
(except nonpayment of principal, interest or premium that has become due solely
because of the acceleration) have been cured or waived, provided that, in the
event of a declaration of acceleration of the notes because an Event of Default
has occurred and is continuing as a result of the acceleration of any
Indebtedness described in clause (5) above, the declaration of acceleration of
the notes shall be automatically annulled if the holders of any Indebtedness
described in that clause (5) have rescinded the declaration of acceleration in
respect of that Indebtedness within 30 days of the date of that declaration and
if:
(1) the annulment of the acceleration of the notes would not conflict
with any judgment or decree of a court of competent jurisdiction; and
(2) all existing Events of Default, except non-payment of principal
or interest on the notes that became due solely because of the
acceleration of the notes, have been cured or waived.
Subject to some limitations, holders of a majority in principal amount of
the then outstanding notes may direct the trustee in its exercise of any trust
or power. The trustee may withhold from holders of the notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the notes.
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Charles River is required to deliver to the trustee annually a statement
regarding compliance with the indenture, and Charles River is required upon
becoming aware of any Default or Event of Default to deliver to the trustee a
statement specifying that Default or Event of Default.
No Personal Liability of Member, Directors, Officers, Employees and Stockholders
No member, director, officer, employee, incorporator or stockholder of
Charles River, as such, shall have any liability for any obligations of Charles
River under the notes or the indenture or for any claim based on, in respect
of, or because of, those obligations or their creation. Each holder of notes by
accepting a note waives and releases all that liability. The waiver and release
are part of the consideration for issuance of the notes. That waiver may not be
effective to waive liabilities under the federal securities laws, and it is the
view of the SEC that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
Charles River may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and the indenture
("Legal Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, premium, if any, and interest on those
notes when those payments are due from the trust referred to below;
(2) Charles River's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed,
lost or stolen notes and the maintenance of an office or agency for
payment and money for security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee,
and Charles River's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Charles River may, at its option and at any time, elect to
have its obligations released with respect to some covenants that are described
in the indenture ("Covenant Defeasance") and thereafter any omission to comply
with those obligations shall not constitute a Default or Event of Default with
respect to the notes. In the event Covenant Defeasance occurs, some events (not
including non-payment with respect to the notes, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default and
Remedies" will no longer constitute an Event of Default with respect to the
notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(1) Charles River must irrevocably deposit with the trustee, in
trust, for the benefit of the holders of the notes, cash in United
States dollars, non-callable Government Securities, or a combination
thereof, in those amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay
the principal of, premium, if any, and interest on the outstanding
notes on the stated maturity or on the applicable redemption date, as
the case may be, and Charles River must specify whether the notes are
being defeased to maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, Charles River shall have
delivered to the trustee an opinion of counsel in the United States
reasonably acceptable to the trustee confirming that:
(a) Charles River has received from, or there has been published
by, the Internal Revenue Service a ruling; or
(b) since the date of the indenture, there has been a change in
the applicable federal income tax law,
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in either case to the effect that, and based thereon that opinion of counsel
shall confirm that, subject to customary assumptions and exclusions, the
holders of the outstanding notes will not recognize income, gain or loss for
federal income tax purposes as a result of that Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if that Legal Defeasance had not
occurred;
(3) in the case of Covenant Defeasance, Charles River shall have
delivered to the trustee an opinion of counsel in the United States
reasonably acceptable to the trustee confirming that, subject to
customary assumptions and exclusions, the holders of the outstanding
notes will not recognize income, gain or loss for federal income tax
purposes as a result of that Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if that Covenant
Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of that deposit (other than a Default or Event
of Default resulting from the borrowing of funds to be applied to
that deposit) or, insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on
the 123rd day after the date of deposit;
(5) that Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under, any material
agreement or instrument (other than the indenture) to which Charles
River or any of its Subsidiaries is a party or by which Charles River
or any of its Subsidiaries is bound;
(6) Charles River must have delivered to the trustee an opinion of
counsel to the effect that, subject to customary assumptions and
exclusions, after the 123rd day following the deposit, the trust
funds will not be subject to the effect of Section 547 of the United
States Bankruptcy Code or any analogous New York State law provision
or any other applicable federal or New York bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(7) Charles River must deliver to the trustee an Officers'
Certificate stating that the deposit was not made by Charles River
with the intent of preferring the holders of notes over the other
creditors of Charles River with the intent of defeating, hindering,
delaying or defrauding creditors of Charles River or others; and
(8) Charles River must deliver to the trustee an Officers'
Certificate and an opinion of counsel (which opinion may be subject
to customary assumptions and exclusions), each stating that all
conditions precedent provided for relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the indenture.
The Registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and Charles River may
require a holder to pay any taxes and fees required by law or permitted by the
indenture. Charles River is not required to transfer or exchange any note
selected for redemption. Also, Charles River is not required to transfer or
exchange any note for a period of 15 days before a selection of notes to be
redeemed. The registered holder of a note will be treated as the owner of it
for all purposes.
Amendment, Supplement and Waiver
Except as provided below, the indenture and the notes may be amended or
supplemented with the consent of the holders of at least a majority in
principal amount of the notes then outstanding, and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the holders of a majority in principal amount of the then
outstanding notes. Consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes shall be included for those purposes.
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Without the consent of each holder affected, an amendment or waiver may
not, with respect to any notes held by a non-consenting holder:
(1) reduce the principal amount of notes whose holders must consent
to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note
or alter the provisions with respect to the redemption of the notes
(other than the provisions described under the caption "-Repurchase
at the Option of Holders");
(3) reduce the rate of or extend the time for payment of interest on
any note;
(4) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the notes (except a rescission
of acceleration of the notes by the holders of at least a majority in
aggregate principal amount of the notes and a waiver of the payment
default that resulted from that acceleration);
(5) make any note payable in money other than that stated in the
notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults;
(7) waive a redemption payment with respect to any note (other than
the provisions described under the caption "--Repurchase at the
Option of Holders");
(8) release any Guarantor from its obligations under its Guarantee or
the indenture, except in accordance with the terms of the indenture;
or
(9) make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing,
(1) any amendment to or waiver of the covenant described under the
caption "--Repurchase at the Option of Holders--Change of Control;"
and
(2) any amendment to Article 10 of the indenture (which relates to
subordination)
will require the consent of the holders of at least two-thirds in aggregate
principal amount of the notes then outstanding if that amendment would
materially adversely affect the rights of holders of notes.
Notwithstanding the foregoing, without the consent of any holder of notes,
Charles River, any Guarantor and the trustee may amend or supplement the
indenture, any Guarantee or the notes:
(1) to cure any ambiguity, defect or inconsistency,
(2) to provide for uncertificated notes in addition to or in place of
certificated notes,
(3) to provide for the assumption of Charles River's obligations to
holders of notes in the case of a merger or consolidation or sale of
all or substantially all of the assets of Charles River or to provide
for the assumption of any Guarantor's obligations under its Guarantee
in the case of a merger or consolidation of the Guarantor,
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not materially
adversely affect the legal rights under the indenture of any such
holder,
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(5) to comply with requirements of the SEC in order to effect or
maintain the qualification of the indenture under the Trust Indenture
Act or
(6) to provide for guarantees of the notes.
Concerning the Trustee
The indenture contains some limitations on the rights of the trustee,
should it become a creditor of Charles River, to obtain payment of claims in
particular cases, or to realize on particular property received in respect of
any such claim as security or otherwise. The trustee will be permitted to
engage in other transactions; however, if it acquires any conflicting interest
it must eliminate that conflict within 90 days, apply to the SEC for permission
to continue or resign.
The holders of a majority in principal amount of the then outstanding
notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the trustee, subject to
some exceptions. The indenture provides that in case an Event of Default shall
occur (which shall not be cured), the trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any holder of notes, unless that holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability
or expense.
Book-Entry, Delivery and Form
The certificates representing the notes were issued in fully registered
form, without coupons. Except as described below, the notes were deposited
with, or on behalf of, The Depository Trust Company, New York, New York
("DTC"), and registered in the name of Cede & Co. as DTC's nominee, in the form
of a global note (the "global registered note").
The Global Registered Note. Charles River expects that under procedures
established by DTC (a) upon deposit of the global registered note, DTC or its
custodian credited on its internal system interests in the global registered
note to the accounts of persons who have accounts with DTC ("Participants") and
(b) ownership of the global registered note is shown on, and the transfer of
ownership thereof will be effected only through, records maintained by DTC or
its nominee, with respect to interests of Participants, and the records of
Participants with respect to interests of persons other than Participants.
Ownership of beneficial interests in the global registered note is limited to
Participants or persons who hold interests through Participants.
So long as DTC or its nominee is the registered owner or holder of the
notes, DTC or such nominee will be considered the sole owner or holder of the
notes represented by the global registered note for all purposes under the
indenture. No beneficial owner of an interest in the global registered note
will be able to transfer such interest except in accordance with DTC's
procedures, in addition to those provided for under the indenture with respect
to the notes.
Payments of the principal of, or premium and interest on, the global
registered note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of Charles River, the trustee or any paying
agent under the indenture will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the global registered note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interest.
We expect that DTC or its nominee, upon receipt of any payment of the
principal of, or premium and interest on, the global registered note, will
credit Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such global
registered note as shown on the records of DTC or its nominee. We also expect
that payments by Participants to owners of beneficial interests in the global
registered note held through such Participants will be governed by standing
instructions and customary practice as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such Participants.
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Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a certificated note for any reason, including to
sell notes to persons in states which require physical delivery of the notes or
to pledge such securities, such holder must transfer its interest in the global
registered note in accordance with the normal procedures of DTC and with the
procedures set forth in the indenture.
DTC has advised us that DTC will take any action permitted to be taken by
a holder of notes, including the presentation of notes for exchange as
described below, only at the direction of one or more Participants to whose
account at DTC interests in the global registered note are credited and only in
respect of such portion of the aggregate principal amount of notes as to which
such Participant or Participants has or have given such direction. However, if
there is an Event of Default under the indenture, DTC will exchange the global
registered note for certificated notes, which it will distribute to its
Participants.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered under the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
Participants and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and other organizations.
Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interest in the global registered notes among Participants, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither Charles River nor the trustee will have any
responsibility for the performance by DTC or its Participants or Indirect
Participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Notes. Interests in the global registered note will be
exchangeable or transferable, as the case may be, for certificated notes if
(1) DTC (a) notifies us that it is unwilling or unable to continue as
depositary for the global registered note and we fail to appoint a
successor depositary or (b) has ceased to be a clearing agency
registered under the Exchange Act;
(2) We, at our option, notify the trustee in writing that we elect to
cause the issuance of the notes in certificated form; or
(3) there shall have occurred and be continuing to occur a Default or
an Event of Default with respect to the notes.
In addition, beneficial interests in the global registered note may be
exchanged for certificated notes upon request but only upon at least 20 days'
prior written notice given to the trustee by or on behalf of DTC in accordance
with customary procedures. In all cases, certificated notes delivered in
exchange for the global registered note or beneficial interest therein will be
registered in the names, and issued in any approved denominations, requested by
or on behalf of the depositary, in accordance with its customary procedures.
Same Day Settlement And Payment
The indenture requires that payments in respect of the notes represented
by the global registered note, including principal, premium, if any, and
interest be made by wire transfer of immediately available next day funds to
the accounts specified by the holder. With respect to certificated notes,
Charles River will make all payments of principal, premium, if any, and
interest by wire transfer of immediately available funds to the accounts
specified by
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the holders thereof or, if no such account is specified, by mailing a check to
each such holder's registered address. Charles River expects that secondary
trading in certificated notes will also be settled in immediately available
funds.
Certain Definitions
Set forth below are some defined terms used in the indenture. Reference is
made to the indenture for a full disclosure of all those terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Accounts Receivable Subsidiary" means an Unrestricted Subsidiary of
Charles River to which Charles River or any of its Restricted Subsidiaries
sells any of its accounts receivable under a Receivables Facility.
"Acquired Indebtedness" means, with respect to any specified Person,
(1) Indebtedness of any other Person existing at the time that other
Person is merged with or into or became a Subsidiary of that
specified Person, including, without limitation, Indebtedness
incurred in connection with, or in contemplation of, that other
Person merging with or into or becoming a Subsidiary of that
specified Person; and
(2) Indebtedness secured by a Lien encumbering an asset acquired by
that specified Person at the time that asset is acquired by that
specified Person.
"Affiliate" of any specified Person means any other Person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, that specified Person. For purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of that Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Sale" means:
(1) the sale, lease, conveyance, disposition or other transfer (a
"disposition") of any properties, assets or rights (including,
without limitation, by way of a sale and leaseback); provided that
the sale, lease, conveyance or other disposition of all or
substantially all of the assets of Charles River and its Subsidiaries
taken as a whole will be governed by the provisions of the indenture
described under the caption "--Change of Control" and/or the
provisions described under the caption "--Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sale covenant;
and
(2) the issuance, sale or transfer by Charles River or any of its
Restricted Subsidiaries of Equity Interests of any of Charles River's
Restricted Subsidiaries,
in the case of either clause (1) or (2), whether in a single transaction or a
series of related transactions,
(a) that have a fair market value in excess of $5.0 million; or
(b) for net proceeds in excess of $5.0 million.
Notwithstanding the foregoing, the following items shall not be deemed to be
Asset Sales:
(1) dispositions in the ordinary course of business;
(2) a disposition of assets by Charles River to a Restricted
Subsidiary or by a Restricted Subsidiary to Charles River or to
another Restricted Subsidiary;
(3) a disposition of Equity Interests by a Restricted Subsidiary to
Charles River or to another Restricted Subsidiary;
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(4) the sale and leaseback of any assets within 90 days of the
acquisition thereof;
(5) foreclosures on assets;
(6) any exchange of like property under Section 1031 of the Internal
Revenue Code of 1986, as amended, for use in a Permitted Business;
(7) any sale of Equity Interests in, or Indebtedness or other
securities of, an Unrestricted Subsidiary;
(8) a Permitted Investment or a Restricted Payment that is permitted
by the covenant described under the caption "--Restricted Payments";
and
(9) sales of accounts receivable, or participations therein, in
connection with any Receivables Facility.
"Attributable Indebtedness" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in that transaction, determined in accordance with GAAP)
of the obligation of the lessee for net rental payments during the remaining
term of the lease included in that sale and leaseback transaction, including
any period for which that lease has been extended or may, at the option of the
lessor, be extended.
"Capital Expenditure Indebtedness" means Indebtedness incurred by any
Person to finance the purchase or construction or any property or assets
acquired or constructed by that Person which have a useful life or more than
one year so long as:
(1) the purchase or construction price for that property or assets is
included in "addition to property, plant or equipment" in accordance
with GAAP;
(2) the acquisition or construction of that property or assets is not
part of any acquisition of a Person or line of business; and
(3) that Indebtedness is incurred within 90 days of the acquisition
or completion of construction of that property or assets.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at that time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents
(however designated) of corporate stock;
(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or
distributions of assets of, the issuing Person.
"Cash Equivalents" means;
(1) Government Securities;
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(2) any certificate of deposit maturing not more than 365 days after
the date of acquisition issued by, or demand deposit or time deposit
of, an Eligible Institution or any lender under the New Credit
Facility;
(3) commercial paper maturing not more than 365 days after the date
of acquisition of an issuer (other than an Affiliate of Charles
River) with a rating, at the time as of which any investment therein
is made, of "A-3" (or higher) according to S&P or "P-2" (or higher)
according to Moody's or carrying an equivalent rating by a nationally
recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments;
(4) any bankers acceptances of money market deposit accounts issued
by an Eligible Institution;
(5) any fund investing exclusively in investments of the types
described in clauses (1) through (4) above; and
(6) in the case of any Subsidiary organized or having its principal
place of business outside the United States, investments denominated
in the currency of the jurisdiction in which that Subsidiary is
organized or has its principal place of business which are similar to
the items specified in clauses (1) through (5) above, including
without limitation any deposit with a bank that is a lender to any
Restricted Subsidiary.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of that Person and its Restricted Subsidiaries for
that period plus, to the extent deducted in computing Consolidated Net Income,
(1) provision for taxes based on income or profits of that Person and
its Restricted Subsidiaries for that period;
(2) Fixed Charges of that Person for that period;
(3) depreciation, amortization (including amortization of goodwill
and other intangibles) and all other non-cash charges, but excluding
any other non-cash charge to the extent that it represents an accrual
of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period, of that
Person and its Restricted Subsidiaries for that period;
(4) net periodic post-retirement benefits;
(5) other income or expense net as set forth on the face of that
Person's statement of operations;
(6) expenses and charges of Charles River related to the
Transactions, including any purchase price adjustment or any other
payments made under or as contemplated in the Transaction Agreements
or the financial advisory agreements with DLJ Securities Corporation
described under "Relationships and Transactions with Related
Parties," and Transaction Financing, the New Credit Facility and the
application of the proceeds thereof; and
(7) any non-capitalized transaction costs incurred in connection with
actual, proposed or abandoned financings, acquisitions or
divestitures, including, but not limited to, financing and
refinancing fees and costs incurred in connection with the
Transactions and Transaction Financing,
in each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes based on the income
or profits of, the Fixed Charges of, and the depreciation and amortization and
other non-cash charges of, a Restricted Subsidiary of a Person shall be added
to Consolidated Net Income to compute Consolidated Cash Flow only to the extent
and in the same proportion that Net Income of that Restricted Subsidiary was
included in calculating the Consolidated Net Income of that Person.
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"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication,
(1) the interest expense of that Person and its Restricted
Subsidiaries for that period, on a consolidated basis, determined in
accordance with GAAP, including amortization of original issue
discount, non-cash interest payments, the interest component of all
payments associated with Capital Lease Obligations, imputed interest
with respect to Attributable Indebtedness, commissions, discounts and
other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net payments, if any, under
Hedging Obligations; provided that in no event shall any amortization
of deferred financing costs be included in Consolidated Interest
Expense; and
(2) the consolidated capitalized interest of that Person and its
Restricted Subsidiaries for that period, whether paid or accrued;
provided, however, that Receivables Fees shall be deemed not to
constitute Consolidated Interest Expense.
"Consolidated Net Debt" means, with respect to any Person as of any date
of determination, the aggregate principal amount of Indebtedness for borrowed
money of such Person and its Restricted Subsidiaries as of such date, less the
aggregate amount of cash and Cash Equivalents of such Person and its Restricted
Subsidiaries, in each case determined on a consolidated basis in accordance
with GAAP.
Notwithstanding the foregoing, the Consolidated Interest Expense with
respect to any Restricted Subsidiary that is not a Wholly Owned Restricted
Subsidiary shall be included only to the extent and in the same proportion that
the net income of that Restricted Subsidiary was included in calculating
Consolidated Net Income.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of that Person and its Restricted
Subsidiaries for that period, on a consolidated basis, determined in accordance
with GAAP; provided that
(1) the Net Income (or loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of
dividends or distributions paid in cash to the referent Person or a
Restricted Subsidiary thereof;
(2) the Net Income (or loss) of any Restricted Subsidiary other than
a Subsidiary organized or having its principal place of business
outside the United States shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income (or loss) is not at the date
of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to
that Restricted Subsidiary;
(3) the Net Income (or loss) of any Person acquired in a pooling of
interests transaction for any period prior to the date of that
acquisition shall be excluded; and
(4) the cumulative effect of a change in accounting principles shall
be excluded.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Designated Noncash Consideration" means the fair market value of non-cash
consideration received by Charles River or one of its Restricted Subsidiaries
in connection with an Asset Sale that is so designated as Designated Noncash
Consideration in an Officers' Certificate, setting forth the basis of that
valuation, executed by the principal executive officer and the principal
financial officer of Charles River, less the amount of cash or Cash Equivalents
received in connection with a sale of that Designated Noncash Consideration.
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"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable), or upon the happening of any event (other than any event solely
within the control of the issuer thereof), matures or is mandatorily
redeemable, under a sinking fund obligation or otherwise, is exchangeable for
Indebtedness (except to the extent exchangeable at the option of that Person
subject to the terms of any debt instrument to which that Person is a party) or
redeemable at the option of the holder thereof, in whole or in part, on or
prior to the date on which the notes mature; provided that any Capital Stock
that would constitute Disqualified Stock solely because the holders thereof
have the right to require Charles River to repurchase that Capital Stock upon
the occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of that Capital Stock provide that Charles
River may not repurchase or redeem any such Capital Stock under those
provisions unless that repurchase or redemption complies with the covenant
described under the caption "--Certain Covenants--Restricted Payments," and
provided further that, if that Capital Stock is issued to any plan for the
benefit of employees of Charles River or its Subsidiaries or by any such plan
to those employees, that Capital Stock shall not constitute Disqualified Stock
solely because it may be required to be repurchased by Charles River in order
to satisfy applicable statutory or regulatory obligations.
"DLJ Merchant Banking Funds" means DLJ Merchant Banking Partners II, L.P.
and its Affiliates.
"Domestic Subsidiary" means a Subsidiary that is organized under the laws
of the United States or any State, district or territory thereof.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus not less than $100.0 million or its equivalent in
foreign currency, whose short-term debt is rated "A-3" or higher according to
Standard & Poor's Ratings Group ("S&P") or "P-2" or higher according to Moody's
Investor Services, Inc. ("Moody's") or carrying an equivalent rating by a
nationally recognized rating agency if both of the two named rating agencies
cease publishing ratings of investments.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of Charles River and its
Restricted Subsidiaries (other than Indebtedness under the New Credit Facility)
in existence on the date of the indenture, until those amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of,
(1) the Consolidated Interest Expense of that Person for that period;
and
(2) all dividend payments on any series of preferred stock of that
Person (other than dividends payable solely in Equity Interests that
are not Disqualified Stock),
in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of that Person for that period
(exclusive of amounts attributable to discontinued operations, as determined in
accordance with GAAP, or operations and businesses disposed of prior to the
Calculation Date (as defined)) to the Fixed Charges of that Person for that
period (exclusive of amounts attributable to discontinued operations, as
determined in accordance with GAAP, or operations and businesses disposed of
prior to the Calculation Date).
In the event that the referent Person or any of its Subsidiaries incurs,
assumes, guarantees or redeems any Indebtedness (other than revolving credit
borrowings) or issues or redeems preferred stock subsequent to the commencement
of the period for which the Fixed Charge Coverage Ratio is being calculated but
prior to the date on which the event for which the calculation of the Fixed
Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to that incurrence,
assumption,
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guarantee or redemption of Indebtedness, or that issuance or redemption of
preferred stock and the use of the proceeds therefrom, as if the same had
occurred at the beginning of the applicable four-quarter reference period.
In addition, for purposes of making the computation referred to above, the
Recapitalization and acquisitions that have been made by Charles River or any
of its Subsidiaries, including all mergers or consolidations and any related
financing transactions, during the four-quarter reference period or subsequent
to that reference period and on or prior to the Calculation Date shall be
deemed to have occurred on the first day of the four-quarter reference period
and Consolidated Cash Flow for that reference period shall be calculated to
include the Consolidated Cash Flow of the acquired entities on a pro forma
basis after giving effect to cost savings reasonably expected to be realized in
connection with that acquisition, as determined in good faith by an officer of
Charles River (regardless of whether those cost savings could then be reflected
in pro forma financial statements under GAAP, Regulation S-X promulgated by the
SEC or any other regulation or policy of the SEC) and without giving effect to
clause (3) of the proviso set forth in the definition of Consolidated Net
Income.
"Foreign Credit Facilities" means any Indebtedness of a Restricted
Subsidiary organized or having its principal place of business outside the
United States. Indebtedness under the Foreign Credit Facilities outstanding on
the date on which the notes are first issued and authenticated under the
indenture shall be deemed to have been incurred on that date in reliance on the
first paragraph of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of the indenture.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit or
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means any Subsidiary that executes a Note Guarantee in
accordance with the provisions of the indenture.
"Hedging Obligations" means, with respect to any Person, the obligations
of that Person under (a) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (b) other agreements or
arrangements designed to protect that Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of that
Person in respect of borrowed money or evidenced by bonds, notes, debentures or
similar instruments or letters of credit (or reimbursement agreements in
respect thereof) or banker's acceptances or representing Capital Lease
Obligations or the balance deferred and unpaid of the purchase price of any
property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense, trade payable or customer contract advances, if
and to the extent any of the foregoing Indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of that Person prepared in accordance with GAAP, as well as all
Indebtedness of others secured by a Lien on any asset of that Person (whether
or not that Indebtedness is assumed by that Person) and, to the extent not
otherwise included, the guarantee by that Person of any Indebtedness of any
other Person, provided that Indebtedness shall not include the pledge by
Charles River of the Capital Stock of an Unrestricted Subsidiary of Charles
River to secure Non-Recourse Debt of that Unrestricted Subsidiary.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness that
does not require current payments of interest; and
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(2) the principal amount thereof (together with any interest thereon
that is more than 30 days past due), in the case of any other
Indebtedness provided that the principal amount of any Indebtedness
that is denominated in any currency other than United States dollars
shall be the amount thereof, as determined under the foregoing
provision, converted into United States dollars at the Spot Rate in
effect on the date that Indebtedness was incurred or, if that
indebtedness was incurred prior to the date of the indenture, the
Spot Rate in effect on the date of the indenture.
"Investments" means, with respect to any Person, all investments by that
Person in other Persons, including Affiliates, in the forms of direct or
indirect loans (including guarantees by the referent Person of, and Liens on
any assets of the referent Person securing, Indebtedness or other obligations
of other Persons), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP, provided that an investment by Charles River for
consideration consisting of common equity securities of Charles River shall not
be deemed to be an Investment other than for purposes of clause (3) of the
definition of "Qualified Proceeds."
If Charles River or any Restricted Subsidiary of Charles River sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of Charles River such that, after giving effect to any such sale or
disposition, that Person is no longer a Subsidiary of Charles River, Charles
River shall be deemed to have made an Investment on the date of any such sale
or disposition equal to the fair market value of the Equity Interests of that
Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described under the caption
"--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of that asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Management Loans" means one or more loans by Charles River or Parent to
officers and/or directors of Charles River and any of its Restricted
Subsidiaries to finance the purchase by such officers and directors of common
stock of Parent or Charles River or membership interests in CRL Acquisition
LLC; provided that the aggregate principal amount of all such Management Loans
outstanding at any time shall not exceed $1.5 million.
"Net Income" means, with respect to any Person, the net income (loss) of
that Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however:
(1) any gain (or loss), together with any related provision for taxes
on that gain (or loss), realized in connection with:
(a) any Asset Sale, including, without limitation, dispositions
under sale and leaseback transactions; or
(b) the extinguishment of any Indebtedness of that Person or any
of its Restricted Subsidiaries; and
(2) any extraordinary or nonrecurring gain (or loss), together with
any related provision for taxes on that extraordinary or nonrecurring
gain (or loss).
"Net Proceeds" means the aggregate cash proceeds received by Charles River
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of, without
duplication,
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(1) the direct costs relating to that Asset Sale, including, without
limitation, legal, accounting and investment banking fees, and sales
commissions, recording fees, title transfer fees and appraiser fees
and cost of preparation of assets for sale, and any relocation
expenses incurred as a result thereof;
(2) taxes paid or payable as a result thereof (after taking into
account any available tax credits or deductions and any tax sharing
arrangements);
(3) amounts required to be applied to the repayment of Indebtedness
(other than revolving credit Indebtedness incurred under the New
Credit Facility) secured by a Lien on the asset or assets that were
the subject of that Asset Sale; and
(4) any reserve established in accordance with GAAP or any amount
placed in escrow, in either case for adjustment in respect of the
sale price of such asset or assets until such time as that reserve is
reversed or that escrow arrangement is terminated, in which case Net
Proceeds shall include only the amount of the reserve so reversed or
the amount returned to Charles River or its Restricted Subsidiaries
from that escrow arrangement, as the case may be.
"New Credit Facility" means that Credit Agreement, dated as of September
29, 1999 among Charles River, some subsidiaries of Charles River from time to
time party thereto as guarantors, various financial institutions party thereto,
and DLJ Capital Funding, Inc., as syndication agent and administrative agent,
including any related notes, guarantees, letters of credit collateral
documents, rate protection or hedging arrangement, instruments and agreements
executed in connection therewith, and, in each case, as amended, modified,
renewed, refunded, replaced or refinanced from time to time, including any
agreement:
(1) extending or shortening the maturity of any Indebtedness incurred
thereunder or contemplated thereby;
(2) adding or deleting borrowers or guarantors thereunder;
(3) increasing the amount of Indebtedness incurred thereunder or
available to be borrowed thereunder, provided that on the date that
Indebtedness is incurred it would not be prohibited by clause (1) of
the second paragraph of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; or
(4) otherwise altering the terms and conditions thereof.
Indebtedness under the New Credit Facility outstanding on the date on
which notes are first issued and authenticated under the indenture shall be
deemed to have been incurred on that date in reliance on the first paragraph of
the covenant described under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
"Non-Recourse Debt" means Indebtedness,
(1) no default with respect to, which (including any rights that the
holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or
both) any holder of any other Indebtedness of Charles River or any of
its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and
(2) as to which the lenders have been notified in writing that they
will not have any recourse to the stock (other than the stock of an
Unrestricted Subsidiary pledged by Charles River to secure debt of
that Unrestricted Subsidiary) or assets of Charles River or any of
its Restricted Subsidiaries;
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provided that in no event shall Indebtedness of any Unrestricted Subsidiary
fail to be Non-Recourse Debt solely as a result of any default provisions
contained in a guarantee thereof by Charles River or any of its Restricted
Subsidiaries if Charles River or that Restricted Subsidiary was otherwise
permitted to incur that guarantee under the indenture.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering" means the offering of the units by Charles River.
"Parent" means Charles River Laboratories International, Inc. (f/k/a
Charles River Laboratories Holdings, Inc.), the corporate parent of Charles
River, or its successors.
"Pari Passu Indebtedness" means Indebtedness of Charles River that ranks
pari passu in right of payment to the notes.
"Permitted Business" means any person engaged, directly or indirectly, in
the animal research or biomedical products and services business or any
business reasonably related, incidental or ancillary thereto.
"Permitted Investments" means:
(1) any Investment in Charles River or in a Restricted Subsidiary of
Charles River;
(2) any Investment in cash or Cash Equivalents;
(3) any Investment by Charles River or any Restricted Subsidiary of
Charles River in a Person, if as a result of that Investment,
(a) that Person becomes a Restricted Subsidiary of Charles
River; or
(b) that Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, Charles River or a Wholly Owned
Restricted Subsidiary of Charles River;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made under and in
compliance with the covenant described under the caption
"--Repurchase at the Option of Holders--Asset Sales";
(5) any Investment acquired solely in exchange for Equity Interests
(other than Disqualified Stock) of Charles River;
(6) any Investment in a Person engaged in a Permitted Business (other
than an Investment in an Unrestricted Subsidiary) having an aggregate
fair market value, taken together with all other Investments made
under this clause (6) that are at that time outstanding, not to
exceed 15% of Total Assets at the time of that Investment (with the
fair market value of each Investment being measured at the time made
and without giving effect to subsequent changes in value);
(7) Investments relating to any special purpose Wholly Owned
Subsidiary of Charles River organized in connection with a
Receivables Facility that, in the good faith determination of the
board of directors of Charles River, are necessary or advisable to
effect that Receivables Facility;
(8) the Management Loans or Investments in Parent to fund Management
Loans; and
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(9) Hedging Obligations permitted to be incurred under "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock."
"Permitted Liens" means:
(1) Liens on property of a Person existing at the time that Person is
merged into or consolidated with Charles River or any Restricted
Subsidiary, provided that those Liens were not incurred in
contemplation of that merger or consolidation and do not secure any
property or assets of Charles River or any Restricted Subsidiary
other than the property or assets subject to the Liens prior to that
merger or consolidation;
(2) Liens existing on the date of the indenture;
(3) Liens securing Indebtedness consisting of Capitalized Lease
Obligations, purchase money Indebtedness, mortgage financings,
industrial revenue bonds or other monetary obligations, in each case
incurred solely for the purpose of financing all or any part of the
purchase price or cost of construction or installation of assets used
in the business of Charles River or its Restricted Subsidiaries, or
repairs, additions or improvements to those assets, provided that:
(a) those Liens secure Indebtedness in an amount not in excess
of the original purchase price or the original cost of any such
assets or repair, additional or improvement thereto (plus an
amount equal to the reasonable fees and expenses in connection
with the incurrence of that Indebtedness);
(b) those Liens do not extend to any other assets of Charles
River or its Restricted Subsidiaries (and, in the case of
repair, addition or improvements to any such assets, that Lien
extends only to the assets (and improvements thereto or thereon)
repaired, added to or improved);
(c) the Incurrence of that Indebtedness is permitted by
"--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(d) those Liens attach within 365 days of that purchase,
construction, installation, repair, addition or improvement;
(4) Liens to secure any refinancings, renewals, extensions,
modification or replacements (collectively, "refinancing") (or
successive refinancings), in whole or in part, of any Indebtedness
secured by Liens referred to in the clauses above so long as that
Lien does not extend to any other property (other than improvements
thereto);
(5) Liens securing letters of credit entered into in the ordinary
course of business and consistent with past business practice;
(6) Liens on and pledges of the capital stock of any Unrestricted
Subsidiary securing Non-Recourse Debt of that Unrestricted
Subsidiary;
(7) Liens securing (a) Indebtedness (including all Obligations) under
the New Credit Facility or any Foreign Credit Facility (b) Hedging
Obligations payable to a lender under the New Credit Facility or an
Affiliate thereof or to a Person that was a lender of Affiliate
thereof at the time the contract was entered into to the extent such
Hedging Obligations are secured by Liens on assets also securing
Indebtedness (including all Obligations) under the New Credit
Facility; and
(8) other Liens securing Indebtedness that is permitted by the terms
of the indenture to be outstanding having an aggregate principal
amount at any one time outstanding not to exceed $50.0 million.
"Permitted Refinancing Indebtedness" means any Indebtedness of Charles
River or any of its Restricted Subsidiaries issued within 60 days after
repayment of, in exchange for, or the net proceeds of which are used to
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extend, refinance, renew, replace, defease or refund other Indebtedness of
Charles River or any of its Restricted Subsidiaries; provided that:
(1) the principal amount (or accreted value, if applicable) of that
Permitted Refinancing Indebtedness does not exceed the principal
amount of (or accreted value, if applicable), plus premium, if any,
and accrued interest on the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith);
(2) that Permitted Refinancing Indebtedness has a final maturity date
no earlier than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted
Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and
(3) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to
the notes, that Permitted Refinancing Indebtedness is subordinated in
right of payment to, the notes on terms at least as favorable, taken
as a whole, to the holders of notes as those contained in the
documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded.
"Principals" means the DLJ Merchant Banking Funds.
"Qualified Proceeds" means any of the following or any combination of the
following:
(1) cash;
(2) Cash Equivalents;
(3) assets (other than Investments) that are used or useful in a
Permitted Business; and
(4) the Capital Stock of any Person engaged in a Permitted Business
if, in connection with the receipt by Charles River or any Restricted
Subsidiary of Charles River of that Capital Stock,
(a) that Person becomes a Restricted Subsidiary of Charles River
or any Restricted Subsidiary of Charles River; or
(b) that Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its assets
to, or is liquidated into, Charles River or any Restricted
Subsidiary of Charles River.
"Ratio of Consolidated Net Debt to Consolidated Cash Flow" means, with
respect to any Person as of any date of determination, the ratio of (x) the
Consolidated Net Debt of such Person as of such date of determination
(exclusive of amounts attributable to discontinued operations, as determined in
accordance with GAAP, or operations and businesses disposed of prior to the
date of determination) to the (y) the Consolidated Cash Flow of such Person for
the four full fiscal quarters ending on or immediately preceding such date of
determination (exclusive of amounts attributable to discontinued operations, as
determined in accordance with GAAP, or operations and businesses disposed of
prior to the date of determination).
In the event that the referent Person or any of its Subsidiaries incurs,
assumes, guarantees or redeems any Indebtedness (other than revolving credit
borrowings) or issues or redeems preferred stock subsequent to the commencement
of the period for which the Ratio of Consolidated Net Debt to Consolidated Cash
Flow is being calculated but prior to the date of determination, then the Ratio
of Consolidated Net Debt to Consolidated Cash Flow shall be calculated giving
pro forma effect to that incurrence, assumption, guarantee or redemption of
Indebtedness, or that issuance or redemption of preferred stock and the use of
the proceeds therefrom, as if the same had occurred at the beginning of the
applicable four-quarter reference period.
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In addition, for purposes of making the computation referred to above, the
Recapitalization and acquisitions that have been made by Charles River or any
of its Subsidiaries, including all mergers or consolidations and any related
financing transactions, during the four-quarter reference period shall be
deemed to have occurred on the first day of the four-quarter reference period
and Consolidated Cash Flow for that reference period shall be calculated to
include the Consolidated Cash Flow of the acquired entities on a pro forma
basis after giving effect to cost savings reasonably expected to be realized in
connection with that acquisition, as determined in good faith by an officer of
Charles River (regardless of whether those cost savings could then be reflected
in pro forma financial statements under GAAP, Regulation S-X promulgated by the
SEC or any other regulation or policy of the SEC) and without giving effect to
clause (3) of the proviso set forth in the definition of Consolidated Net
Income.
"Recapitalization" means the recapitalization of Charles River by the
Principals and their Related Parties under the terms of the Recapitalization
Agreement.
"Recapitalization Agreement" means that Recapitalization Agreement dated
as of July 25, 1999 among Charles River, B&L, Parent, Charles River
Laboratories, Inc., Charles River SPAFAS, Inc., Bausch & Lomb International,
Inc., Wilmington Partners, L.P., Bausch & Lomb Canada, Inc., CRL Acquisition
LLC and DLJ Merchant Banking Partners II, L.P.
"Receivables Facility" means one or more receivables financing facilities,
as amended from time to time, under which Charles River or any of its
Restricted Subsidiaries sells its accounts receivable to an Accounts Receivable
Subsidiary.
"Receivables Fees" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold
in connection with, and other fees paid to a Person that is not a Restricted
Subsidiary in connection with, any Receivables Facility.
"Related Party" means, with respect to any Principal,
(1) any controlling stockholder or partner of that Principal on the
date of the indenture; or
(2) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons beneficially
holding (directly or through one or more Subsidiaries) a 51% or more
controlling interest of which consist of the Principals and/or such
other Persons referred to in the immediately preceding clauses (1) or
(2).
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Sierra Acquisition" means the acquisition of SBI Holdings, Inc. by
Charles River under the terms of the Sierra Acquisition Agreement.
"Sierra Acquisition Agreement" means Stock Purchase Agreement among
Charles River Laboratories, Inc. and SBI Holdings, Inc. and its stockholders
dated September 3, 1999.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
under the Securities Act, as that Regulation is in effect on the date hereof.
"Spot Rate" means, for any currency, the spot rate at which that currency
is offered for sale against United States dollars as determined by reference to
the New York foreign exchange selling rates, as published in The Wall Street
Journal on that date of determination for the immediately preceding business
day or, if that rate is not available, as determined in any publicly available
source of similar market data.
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"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which that payment of
interest or principal was scheduled to be paid in the original documentation
governing that Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any that interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person,
(1) any corporation, association or other business entity of which
more than 50% of the total voting power of shares of Capital Stock
entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at
the time owned or controlled, directly or indirectly, by that Person
or one or more of the other Subsidiaries of that Person (or a
combination thereof); and
(2) any partnership or limited liability company,
(a) the sole general partner or the managing general partner or
managing member of which is that Person or a Subsidiary of that
Person; or
(b) the only general partners or managing members of which are
that Person or of one or more Subsidiaries of that Person (or
any combination thereof).
"Tax Sharing Agreement" means any tax sharing agreement or arrangement
between Charles River and Parent, as the same may be amended from time to time;
provided that in no event shall the amount permitted to be paid under all such
agreements and/or arrangements exceed the amount Charles River would be
required to pay for income taxes were it to file a consolidated tax return for
itself and its consolidated Restricted Subsidiaries as if it were a corporation
that was a parent of a consolidated group.
"Total Assets" means the total consolidated assets of Charles River and
its Restricted Subsidiaries, as shown on the most recent balance sheet
(excluding the footnotes thereto) of Charles River.
"Transactions" means the Recapitalization and the Sierra Acquisition.
"Transaction Agreements" means the Recapitalization Agreement and the
Sierra Acquisition Agreement.
"Transaction Financing" means;
(1) the issuance and sale by Parent of senior discount debentures
with warrants and senior subordinated discount note for
consideration;
(2) the issuance and sale by Charles River of the notes; and
(3) the execution and delivery by Charles River and some of its
subsidiaries of the New Credit Facility and the borrowing of loans,
if any, and issuance of letters of credit thereunder to fund the
Transactions and any related transactions, including without
limitation, the payment of fees and expenses and the refinancing of
outstanding indebtedness of Charles River and its subsidiaries;
the proceeds of each of which were used to fund the purchase price for the
Recapitalization and related fees and expenses.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
board of directors as an Unrestricted Subsidiary under a board resolution, but
only to the extent that Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
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(2) is not party to any agreement, contract, arrangement or
understanding with Charles River or any Restricted Subsidiary of
Charles River unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to Charles River
or that Restricted Subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of Charles River;
(3) is a Person with respect to which neither Charles River nor any
of its Restricted Subsidiaries has any direct or indirect obligation,
(a) to subscribe for additional Equity Interests (other than
Investments described in clause (7) of the definition of
Permitted Investments); or
(b) to maintain or preserve that Person's financial condition or
to cause that Person to achieve any specified levels, of
operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Charles River or any of its
Restricted Subsidiaries.
Any such designation by the board of directors shall be evidenced to the
trustee by filing with the trustee a certified copy of the board resolution
giving effect to that designation and an Officers' Certificate certifying that
designation complied with the foregoing conditions and was permitted by the
covenant described under the caption entitled "--Certain Covenants--Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as a Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the indenture and any
Indebtedness of that Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of Charles River as of that date (and, if that Indebtedness is not
permitted to be incurred as of that date under the covenant described under the
caption entitled "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," Charles River shall be in default of that covenant).
The board of directors of Charles River may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that the
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of Charles River of any outstanding Indebtedness of that
Unrestricted Subsidiary and that designation shall only be permitted if:
(1) that Indebtedness is permitted under the covenant described under
the caption entitled "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock"; and
(2) no Default or Event of Default would be in existence following
that designation.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying,
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof; by
(b) the number of years (calculated to the nearest one-twelfth)
that will elapse between that date and the making of that
payment; by
(2) the then outstanding principal amount of that Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of that Person all the outstanding Capital Stock or other ownership
interests of which (other than directors' qualifying shares) shall at the time
be owned by that Person or by one or more Wholly Owned Restricted Subsidiaries
of that Person or by that Person and one or more Wholly Owned Restricted
Subsidiaries of that Person.
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"Wholly Owned Subsidiary" of any Person means a Subsidiary of that Person
all of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by that
Person or by one or more Wholly Owned Subsidiaries of that Person.
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PLAN OF DISTRIBUTION
This prospectus is to be used by DLJSC in connection with offers and sales
of the notes in market-making transactions effected from time to time. DLJSC
may act as a principal or agent in such transactions, including as agent for
the counterparty when acting as principal or as agent for both counterparties,
and may receive compensation in the form of discounts and commissions,
including from both counterparties when it acts as agent for both. Such sales
will be made at prevailing market prices at the time of sale, at prices related
thereto or at negotiated prices. This prospectus may also be used by DLJ
Investment Partners, L.P., DLJ Investment Funding, Inc., and DLJ ESC II L.P. to
comply with their prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
DLJ Merchant Banking, an affiliate of DLJSC, and some of its affiliates
beneficially own approximately 16,277,391 shares of our parent's common stock.
See "Relationships and Transactions with Related Parties."
DLJSC has informed us that it does not intend to confirm sales of the
notes to any accounts over which it exercises discretionary authority without
the prior specific written approval of such transactions by the customer.
DLJSC has made a market in the notes. However, DLJSC is not obligated to
do so, and such market-making may be interrupted or discontinued at any time
without notice. In addition, such market-making activity is subject to the
limits imposed by the Securities Act and the Exchange Act. See "Risk
Factors--No public trading market for the notes exists."
We and DLJSC have entered into the registration rights agreement with
respect to the use by DLJSC of this prospectus. Under such agreement, we agreed
to bear all registration expenses incurred under such agreement and agreed to
indemnify DLJSC against some liabilities, including liabilities under the
Securities Act.
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LEGAL MATTERS
The validity of the notes offered hereby will be passed upon for Charles
River Laboratories, Inc. and Charles River Laboratories International, Inc. by
Davis Polk & Wardwell, New York, New York.
EXPERTS
The consolidated financial statements of Charles River Laboratories
International, Inc. as of December 25, 1999 and December 26, 1998 and for each
of the three years in the period ended December 25, 1999 included in this
prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on authority of said
firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the notes. This prospectus does not contain all
the information included in the registration statement and the related exhibits
and schedules. You will find additional information about us and the notes in
the registration statement. The registration statement and the related exhibits
and schedules may be inspected and copied at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the public reference facilities of the SEC's
Regional Offices: New York Regional Office, Seven World Trade Center, Suite
1300, New York, New York 10048; and Chicago Regional Office, Citicorp Center,
500 West Madison Street, Chicago, Illinois 60661. Copies of this material may
also be obtained from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. You can obtain
information on the operation of the public reference facilities by calling
1-800-SEC-0330. The SEC also maintains a site on the World Wide Web
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, including us, that file
electronically with the SEC. Statements made in this prospectus about legal
documents may not necessarily be complete and you should read the documents
which are filed as exhibits or schedules to the registration statement or
otherwise filed with the SEC.
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INDEX TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction to Unaudited Pro Forma Condensed Consolidated Financial Data...................... P-2
Charles River Laboratories, Inc. and Subsidiaries
Unaudited Pro Forma as Adjusted Condensed Consolidated Balance Sheet as of June 24, 2000....... P-4
Notes to Unaudited Pro Forma as Adjusted Condensed Consolidated Balance Sheet as of
June 24, 2000................................................................................ P-5
Unaudited Pro Forma Condensed Consolidated Statement of Income for the Year Ended
December 25, 1999............................................................................ P-7
Unaudited Pro Forma as Adjusted Condensed Consolidated Statement of Income for the Year
Ended December 25, 1999...................................................................... P-8
Notes to Unaudited Pro Forma and Pro Forma as Adjusted Condensed Consolidated Statement
of Income for the Year Ended December 25, 1999............................................... P-9
Unaudited Pro Forma as Adjusted Condensed Consolidated Statement of Income for the Six
Months Ended June 24, 2000................................................................... P-11
Notes to Unaudited Pro Forma as Adjusted Condensed Consolidated Statement of Income for
the Six Months Ended June 24, 2000........................................................... P-12
</TABLE>
P-1
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INTRODUCTION TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
On September 29, 1999, Charles River Laboratories International, Inc.
("CRLI"), our parent, consummated the recapitalization. Prior to the
consummation of the recapitalization, Charles River Laboratories, Inc. (the
"Company") became a wholly owned subsidiary of CRLI. CRLI has no operations
other than those related to the Company. The aggregate consideration for the
recapitalization consisted of $400.0 million in cash and a subordinated
discount note for $43.0 million issued to the subsidiaries of B&L. Subsidiaries
of B&L retained equity with a fair market value of $13.2 million. The $400.0
million cash consideration was raised through the following:
o $92.4 million cash equity investment by the DLJMB Funds, management
and certain other investors;
o $37.6 million senior discount debentures with warrants to purchase
common stock of CRLI issued to the DLJMB Funds and other investors;
o $162.0 million senior secured credit facilities; and
o a portion of the net proceeds of the $150 million unit offering
consisting of senior subordinated notes ($147.9 million) and warrants
to purchase common stock of CRLI ($2.1 million).
Upon the consummation of the recapitalization, the DLJMB Funds, management
and certain other investors owned 87.5% of CRLI's outstanding capital stock and
B&L owned 12.5%. The recapitalization has been accounted for as a leveraged
recapitalization, which had no impact on the historical basis of our, or our
subsidiaries', assets and liabilities.
Simultaneously with the recapitalization, we acquired SBI Holdings, Inc.
("Sierra") pursuant to a stock purchase agreement for an initial purchase price
of $23.3 million, of which approximately $6.0 million was used to repay
Sierra's existing debt, which we funded with available cash and a portion of
the net proceeds from the indebtedness described above. In addition, we have
agreed to pay (a) up to $2.0 million in contingent consideration if certain
financial objectives are reached by December 31, 2000, (b) up to $10.0 million
in performance-based bonus payments if certain financial objectives are reached
over the next five years, and (c) $3.0 million in retention and non-competition
payments contingent upon the continuing employment of certain key scientific
and managerial personnel through June 30, 2001. The recapitalization and the
Sierra acquisition were consummated concurrently.
As of February 28, 2000, the Company acquired an additional 16% of the
equity (340,840 common shares) of its 50% equity joint venture company, Charles
River Japan, Inc. ("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 secured
by a pledge of the 16% interest. The note bears interest at the long-term prime
rate in Japan. Effective with the acquisition of this additional interest, the
Company has control of and is consolidating the operations of Charles River
Japan, from the effective date of the incremental acquisition.
During January 2000, the Company sold a product line in its research model
business segment. The selling price of $7.0 million approximated the net book
value at the time of the sale. Fiscal 1999 sales associated with this product
line approximated $2.8 million. In addition, at the time of the sale, the
Company had approximately $0.9 million of deferred revenue which related to
cash payments received in advance of shipping the research models.
The following unaudited pro forma as adjusted condensed consolidated
financial data of the Company is based upon historical consolidated financial
statements of the Company as adjusted to give effect to the impact of the
transactions described above and the use of some of the net proceeds of the
sale of 16,100,000 shares in CRLI's initial public offering (the "Offering") at
the price of $16.00 per share to repay certain outstanding indebtedness of the
Company, including a portion of the senior subordinated notes. The unaudited
pro forma condensed consolidated balance sheet as of June 24, 2000 gives effect
to the Offering, assuming that this had occurred on June 24, 2000. The
unaudited pro forma condensed consolidated statement of income for the year
ended December 25, 1999, gives
P-2
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effect to the recapitalization, the acquisition of Sierra, the acquisition of
the additional 16% of the equity of Charles River Japan, the sale of the
product line and the Offering, as if these transactions had occurred at the
beginning of the period presented. The unaudited pro forma condensed
consolidated statement of income for the six months ended June 24, 2000 gives
effect to the acquisition of Charles River Japan and the Offering, as if these
transactions had occurred at the beginning of the period presented.
The pro forma adjustments are based on estimates, available information
and assumptions and may be revised as additional information becomes available.
The unaudited pro forma condensed consolidated financial data do not purport to
represent what the Company's combined results of operations or financial
position would actually have been if the above transactions and the offering
had occurred on the dates indicated and are not necessarily representative of
the Company's combined results of operations for any future period. The
unaudited pro forma condensed consolidated balance sheet and condensed
consolidated statements of income should be read in conjunction with our
consolidated financial statements and the notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial information appearing elsewhere in this prospectus.
P-3
<PAGE>
CHARLES RIVER LABORATORIES, INC.
UNAUDITED PRO FORMA AS ADJUSTED CONDENSED CONSOLIDATED BALANCE SHEET
As of June 24, 2000
(in thousands)
<TABLE>
<CAPTION>
Company Offering Pro Forma
Historical Adjustments (a) As Adjusted
---------- ----------- -----------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.............................. $ 18,993 -- (b) $ 18,993
Trade receivables, net................................. 50,930 -- 50,930
Inventories, net....................................... 32,192 -- 32,192
Deferred tax asset..................................... 632 -- 632
Due from affiliates.................................... 99 -- 99
Other current assets................................... 5,492 -- 5,492
---------- ----------- -----------
Total current assets................................ 108,338 -- 108,338
Property, plant and equipment, net........................ 117,741 -- 117,741
Goodwill and other intangibles, net....................... 41,658 -- 41,658
Investments in affiliates................................. 2,166 -- 2,166
Deferred tax assets....................................... 101,130 4,561 (c) 105,691
Deferred financing costs.................................. 13,747 (5,255)(d) 8,492
Other assets.............................................. 13,467 -- 13,467
---------- ----------- -----------
Total assets........................................ $ 398,247 $ (694) $ 397,553
========== =========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt...................... $ 6,442 (5,000)(e) $ 1,442
Current portion of capital lease obligations........... 211 -- 211
Accounts payable....................................... 8,693 -- 8,693
Accrued compensation................................... 13,540 -- 13,540
Deferred income........................................ 5,808 -- 5,808
Accrued interest....................................... 8,363 -- 8,363
Accrued liabilities.................................... 20,443 -- 20,443
Accrued income taxes................................... 6,124 -- 6,124
---------- ----------- -----------
Total current liabilities.............................. 69,624 (5,000) 64,624
Long-term debt............................................ 311,102 (109,811)(f) 201,291
Deferred tax liability.................................... 6,964 -- 6,964
Capital lease obligations................................. 621 -- 621
Accrued ESLIRP............................................ 8,638 -- 8,638
Other long-term liabilities............................... 3,852 -- 3,852
---------- ----------- -----------
Total liabilities...................................... 400,801 (114,811) 285,990
---------- ----------- -----------
Commitments and contingencies
Minority interests........................................ 14,471 -- 14,471
Shareholders' equity
Common stock........................................... 1 -- 1
Capital in excess of par value......................... 114,933 122,588 (g) 237,521
Accumulated deficit.................................... (119,436) (8,471)(h) (127,907)
Loans to officers...................................... (920) -- (920)
Accumulated other comprehensive loss................... (11,603) (11,603)
---------- ----------- -----------
Total shareholders' equity............................. (17,025) 114,117 97,092
---------- ----------- -----------
Total liabilities and shareholders' equity............. $ 398,247 $ (694) $ 397,553
========== =========== ===========
</TABLE>
P-4
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO UNAUDITED PRO FORMA AS ADJUSTED
CONDENSED CONSOLIDATED BALANCE SHEET
As of June 24, 2000
(a) The as adjusted condensed consolidated balance sheet as of June 24,
2000 gives effect to the impact on the Company of the sale of
16,100,000 shares in CRLI's Offering at the initial public offering
price of $16 per share. Some of the net proceeds after transaction
costs of $236,068 were used to repay indebtedness of the Company of
$114,811.
(b) The sources and uses of cash from the Offering as they impact the
Company are as follows:
Sources of funds:
Capital contribution from CRLI........................ $ 122,588
Uses of funds:
Redemption of senior subordinated notes............... (52,500)
Premium on redemption of principal amount of notes.... (7,088)
Repayment of term loan A.............................. (14,500)
Repayment of term loan B.............................. (43,500)
Repayment of amount outstanding on revolving credit
facility........................................... (5,000)
-----------
Net adjustments to cash.......................... $ --
(c) The adjustment represents the income tax benefit related to:
(i) the estimated premium related to the senior subordinated notes
to be redeemed ($7,088).
(ii) the write-off of the discount associated with the portion of the
senior subordinated notes redeemed ($689).
(iii)the $5,255 write off of deferred financing costs related to the
senior subordinated notes to be redeemed, the repayment of the
amount outstanding on the revolving credit facility, the
repayment of the senior discount debentures, and the portions of
the term loan A and term loan B to be repaid from the proceeds
of the offering.
The income tax benefit of $4,561 was computed at a 35.0% effective
income tax rate.
(d) Reflects the write off of deferred financing costs of $5,255 related
to the senior subordinated notes to be redeemed, the repayment of the
senior discount debentures and the amount outstanding on the
revolving credit facility, and the portions of the term loan A and
term loan B to be repaid from the proceeds of the offering.
(e) Reflects the repayment of the $5,000 outstanding on the revolving
credit facility at June 24, 2000.
(f) The adjustment represents the Company's indebtedness, recorded as
long term debt in the June 24, 2000 condensed consolidated financial
statements, to be repaid from the proceeds of CRLI's Offering:
(i) senior subordinated notes ($51,811)
(ii) term loan A ($14,500)
(iii)term loan B ($43,500)
(g) Represents the capital contribution made by CRLI to repay
indebtedness of the Company.
P-5
<PAGE>
(h) The adjustment represents the extraordinary loss computed as of March
25, 2000 resulting from:
(i) the premium related to the senior subordinated notes to be
redeemed ($7,088);
(ii) the $5,255 write off of deferred financing costs related to the
senior subordinated notes to be redeemed, the amount outstanding
on the revolving credit facility, and the portion of the term
loan A and term loan B to be repaid from the proceeds of the
offering;
(iii)the write off of the discount related to the redeemed senior
subordinated notes ($689).
These items are recorded net of the associated tax benefit of $4,561.
P-6
<PAGE>
CHARLES RIVER LABORATORIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 25, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Charles
Pro Forma River Japan,
Company Recapitalization for the Sierra Historical
Historical Adjustments Recapitalization Historical (c) (d)
---------- ---------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales related to products.. $180,269 -- $180,269 -- $41,063
Net sales related to services.. 39,007 39,007 16,034 --
---------- ---------------- ---------------- -------------- ------------
Total net sales................ 219,276 -- 219,276 16,034 41,063
Cost of products sold.......... 108,928 -- 108,928 -- 25,268
Cost of services provided...... 25,664 -- 25,664 9,589 --
Selling, general and
administrative expenses....... 39,765 -- 39,765 5,364 8,412
Amortization of goodwill and
other intangibles............. 1,956 -- 1,956 192 --
Restructuring charges.......... -- -- -- -- --
---------- ---------------- ---------------- -------------- ------------
Operating income............... 42,963 -- 42,963 889 7,383
Interest income................ 536 -- 536 -- --
Other income (expense)......... 89 -- 89 (865)
Interest expense............... (9,943) (27,854) (a) (37,797) (321) (95)
(Loss)/gain from foreign
currency, net................. (136) -- (136) -- --
---------- ---------------- ---------------- -------------- ------------
Income before income taxes and
minority interests............ 33,509 (27,854) 5,655 568 6,423
Provision for income taxes..... 16,214 (11,142) (b) 5,072 233 2,537
---------- ---------------- ---------------- -------------- ------------
Income before minority
interests..................... 17,295 (16,712) 583 335 3,886
Minority interests............. (22) -- (22) -- --
Earnings from unconsolidated
subsidiaries.................. 2,044 -- 2,044 -- --
---------- ---------------- ---------------- -------------- ------------
Net income..................... $19,317 $(16,712) $2,605 $335 $3,886
========== ================ ================ ============== ============
Sale of
Acquisition Product Pro
Adjustments Line (k) Forma
----------- -------- ---------
Net sales related to products.. $(986) (e) $(2,830) $217,516
Net sales related to services.. -- -- 55,041
----------- -------- ---------
Total net sales................ (986) (2,830) 272,557
Cost of products sold.......... -- (2,584) 131,612
Cost of services provided...... -- 35,253
Selling, general and
administrative expenses....... (986) (e) (227) 52,328
Amortization of goodwill and
other intangibles............. 1,700 (f) -- 3,848
Restructuring charges.......... -- -- --
----------- -------- ---------
Operating income............... (1,700) (19) 49,516
Interest income................ -- -- 536
Other income (expense)......... -- -- (776)
Interest expense............... 241 (g) -- (37,972)
(Loss)/gain from foreign
currency, net................. -- -- (136)
----------- -------- ---------
Income before income taxes and
minority interests............ (1,459) (19) 11,168
Provision for income taxes..... (279) (h) 7,563
----------- -------- ---------
Income before minority
interests..................... (1,180) (19) 3,605
Minority interests............. (1,321) (i) -- (1,343)
Earnings from unconsolidated
subsidiaries.................. (1,943) (j) -- 101
----------- -------- ---------
Net income..................... $(4,444) $(19) $2,363
=========== ======== =========
</TABLE>
P-7
<PAGE>
CHARLES RIVER LABORATORIES, INC.
UNAUDITED PRO FORMA AS ADJUSTED
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 25, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Adjustments(l) As Adjusted
--------- -------------- -----------
<S> <C> <C> <C> <C>
Net sales related to products.......................... $217,516 -- $217,516
Net sales related to services.......................... 55,041 -- 55,041
--------- -------------- ----------
Total net sales........................................ 272,557 -- 272,557
Cost of products sold.................................. 131,612 -- 131,612
Cost of services provided.............................. 35,253 -- 35,253
Selling, general and administrative expenses........... 52,328 -- 52,328
Amortization of goodwill and other intangibles......... 3,848 -- 3,848
Restructuring charges.................................. -- -- --
--------- -------------- ----------
Operating income....................................... 49,516 -- 49,516
Interest income........................................ 536 -- 536
Other income (expense)................................. (776) -- (776)
Interest expense....................................... (37,972) 15,422 (m) (22,550)
(Loss)/gain from foreign currency, net................. (136) -- (136)
--------- -------------- ----------
Income before income taxes and minority interests...... 11,168 15,422 26,590
Provision for income taxes............................. 7,563 6,169 (n) 13,732
--------- -------------- ----------
Income before minority interests....................... 3,605 9,253 12,858
Minority interests..................................... (1,343) -- (1,343)
Earnings from unconsolidated subsidiaries.............. 101 -- 101
--------- -------------- ----------
Net income before extraordinary loss................... 2,363 9,253 11,616
========= ============== ==========
</TABLE>
P-8
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 25, 1999
(a) Reflects the adjustment to unaudited pro forma consolidated interest
expense for the nine months ended September 25, 1999 as a result of
the recapitalization transaction.
The increase in interest expense can be reconciled as follows:
Senior subordinated notes with warrants (1)............. $15,416
Term loan A (2)......................................... 2,562
Term loan B (3)......................................... 8,363
Revolver (4)............................................ 229
-------
Amortization of deferred financing costs (5)............ 1,284
$27,854
=======
(1) Interest expense was calculated using an effective rate of 13.6%
(2) Interest expense was calculated using an effective rate of 8.5%
(3) Interest expense was calculated using an effective rate of 9.25%
(4) Represents interest expense calculated at 8.5% plus fees on the
unused portion of 0.50%
(5) Represents nine months of amortization expense
(b) Represents the income tax adjustment required to result in a pro
forma income tax provision based on: (i) the Company's historical tax
provision and (ii) the direct effects of the pro forma adjustments
pertaining to the recapitalization.
(c) Represents the historical unaudited financial results of Sierra for
the nine months ended September 25, 1999.
(d) Represents the historical unaudited financial results of Charles
River Japan for the twelve months ended December 25, 1999.
(e) Represents the elimination of inter-company balances.
(f) Reflects the incremental amortization expense of the identifiable
intangibles and goodwill acquired in connection with the Sierra
acquisition based upon useful lives ranging from five to fifteen
years, and the incremental amortization of goodwill acquired in
connection with the additional equity investment in Charles River
Japan based upon an estimated useful life of fifteen years.
(g) To eliminate Sierra's historical interest expense related to debt
that, according to the terms of the Sierra stock purchase agreement,
was repaid, and to reflect additional interest expense on the
acquisition of an additional 16% of Charles River Japan.
(h) Represents the income tax adjustment required to result in a pro
forma tax provision based on: (i) Sierra's historical tax provision,
(ii) Charles River Japan's historical tax provision and (iii) the
direct effects of the pro forma adjustments pertaining to the
acquisition of Sierra and an additional 16% equity interest in
Charles River Japan.
(i) Reflects minority interests of 34% for Charles River Japan.
P-9
<PAGE>
(j) Represents the elimination of Charles River Japan's earnings from the
earnings from unconsolidated subsidiaries line due to the fact that
earnings are being consolidated into the Company's results on a pro
forma basis.
(k) Represents the historical results of a product line sold subsequent
to year end. The realization of $900 of deferred income has not been
reflected in the pro forma consolidated income statement as it is a
non-recurring item.
(l) The as adjusted condensed consolidated statement of income for the
year ended December 25, 1999 gives effect to the recapitalization,
the Sierra acquisition, the Charles River Japan acquisition, the
product line sale, and is further adjusted for the repayment of some
of the Company's indebtedness as a result of CRLI's Offering.
(m) Reflects the reduction to interest expense that will be achieved as a
result of the redemption of a portion of the senior subordinated
notes and repayment of debt, along with the associated reductions to
the amortization of the deferred financing costs and the discounts on
the redeemed senior subordinated notes.
(n) Reflects the tax effect of the interest and amortization savings
described above. This adjustment does not include the $4,762 release
of valuation allowance associated with the deferred tax asset as this
is a non- recurring item. As a result of CRLI's Offering, and the use
of some of the proceeds to repay a portion of the Company's
indebtedness, the Company expects to be significantly more profitable
in the future, due to reduced interest costs. The need for a
valuation allowance associated with the Company's deferred tax asset
has been reassessed and the $4,762 reduction in the valuation
allowance was recorded as a tax benefit in the second quarter of
2000. Refer to Note 4 to the unaudited condensed consolidated interim
financial statements included elsewhere in this prospectus.
(o) The extraordinary loss which arises as a result of the offering has
not been reflected in the as adjusted condensed consolidated
statement of income as it is a non-recurring item. The extraordinary
loss of $8,961 computed as if the offering had occurred on December
27, 1998 results from:
(i) the estimated premiums related to the senior subordinated notes
to be redeemed ($7,088);
(ii) the $5,954 write off of deferred financing costs related to the
senior subordinated notes and senior discount debentures to be
redeemed, the repayment of the outstanding amount on the
revolving credit facility, and the portions of the term loan A
and term loan B to be repaid from the proceeds of the offering;
and
(iii)the write off of the discounts related to the redeemed senior
subordinated notes ($745).
The associated tax benefits are estimated to be $4,826.
P-10
<PAGE>
CHARLES RIVER LABORATORIES, INC.
UNAUDITED PRO FORMA AS ADJUSTED CONDENSED
CONSOLIDATED STATEMENT OF INCOME
For the Six Months Ended June 24, 2000
(in thousands)
<TABLE>
<CAPTION>
Charles River
Japan, Inc.
Company Two Acquisition Pro Forma
Historical months(a) Adjustments Pro Forma Adjustments(h) As Adjusted
---------- ------------- ----------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales related to
products................... $106,970 $7,598 $(196) (b) $114,372 -- $114,372
Net sales related to
services................... 36,429 -- -- 36,429 -- 36,429
---------- ------------- ----------- --------- -------------- -----------
Total net sales............. 143,399 7,598 (196) 150,801 -- 150,801
Cost of products sold....... 59,511 4,120 -- 63,631 -- 63,631
Cost of services provided... 24,401 -- -- 24,401 -- 24,401
Selling, general and
administrative
expenses................... 24,240 1,409 (196) (b) 25,453 -- 25,453
Amortization of goodwill
and other intangibles...... 1,802 -- 74 (c) 1,876 -- 1,876
Restructuring charges....... -- -- -- -- -- --
---------- ------------- ----------- --------- -------------- -----------
Operating income............ 33,445 2,069 (74) 35,440 -- 35,440
Interest income............. 291 -- -- 291 -- 291
Other income (expense)...... 390 -- -- 390 -- 390
Interest expense............ (19,162) (12) (29) (d) (19,203) 7,387 (i) (11,816)
(Loss)/gain from foreign
currency, net.............. (160) -- -- (160) -- (160)
---------- ------------- ----------- --------- -------------- -----------
Income before income taxes
and minority interests..... 14,804 2,057 (103) 16,758 7,387 24,145
Provision for income taxes.. 2,151 879 (43) (e) 2,987 2,955 (j) 5,942
---------- ------------- ----------- --------- -------------- -----------
Income before minority
interests.................. 12,653 1,178 (60) 13,771 4,432 18,203
Minority interests.......... (679) -- (401) (f) (1,080) -- (1,080)
Earnings from
unconsolidated
subsidiaries............... 748 -- (589) (g) 159 -- 159
---------- ------------- ----------- --------- -------------- -----------
Net income.................. $12,722 $1,178 $(1,050) 12,850 4,432 17,282
========== ============= =========== ========= ============== ===========
</TABLE>
P-11
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO UNAUDITED PRO FORMA AS ADJUSTED
CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Six Months Ended June 24, 2000
(a) Represents the historical unaudited financial results of Charles
River Japan for the two months ended February 28, 2000.
(b) Represents the elimination of inter-company balances.
(c) Reflects the incremental amortization of goodwill acquired in
connection with the additional equity investment in Charles River
Japan based upon an estimated useful life of fifteen years.
(d) To reflect additional interest expense on the acquisition of an
additional 16% of Charles River Japan.
(e) Represents the income tax adjustment required to result in a pro
forma income tax provision based on Charles River Japan's historical
tax provision and the direct effects of the pro forma adjustments
pertaining to the acquisition of an additional 16% of Charles River
Japan.
(f) Reflects minority interests of 34% for Charles River Japan.
(g) Reflects the elimination of Charles River Japan's earnings for the
two months ended February 28, 2000 from the earnings from
unconsolidated subsidiaries line due to the fact that these earnings
are being consolidated into the Company's results on a pro forma
basis.
(h) The as adjusted condensed consolidated statement of income for the
six months ended June 24, 2000 gives effect to the Charles River
Japan acquisition as if this occurred on the first day of the period,
and is further adjusted for CRLI's Offering with the net proceeds
after transaction costs of $236,068 being used to repay some of the
Company's indebtedness.
(i) Reflects the reduction to interest expense that will be achieved as a
result of the redemption of a portion of the senior subordinated
notes and repayment of debt, along with the reductions to the
amortization of the deferred financing costs and the discounts on the
redeemed senior subordinated notes.
(j) Reflects the tax effect of the interest and amortization reductions
described above. A $4,762 release of the valuation allowance
associated with the deferred tax asset was recorded in the second
quarter of 2000. Refer to Note 4 to the unaudited condensed
consolidated interim financial statements contained elsewhere in this
prospectus.
(k) The extraordinary loss which arises as a result of the offering has
not been reflected in the as adjusted condensed consolidated
statement of income as it is a non-recurring item. The extraordinary
loss of $8,731 computed as if the offering occurred on December 26,
1999 results from:
(i) the estimated premiums related to the senior subordinated notes
to be redeemed ($7,088);
(ii) the $5,618 write off of deferred financing costs related to the
senior subordinated notes and senior discount debentures to be
redeemed, the repayment of the outstanding amount on the
revolving credit facility, and the portions of the term loan A
and term loan B to be repaid from the proceeds of the offering;
and
(iii)the write off of the discounts related to the redeemed senior
subordinated notes ($726).
The associated tax benefits are estimated to be $4,701.
P-12
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Charles River Laboratories, Inc.
Report of Independent Accountants..........................................F-2
Consolidated Statements of Income for the years
ended December 27, 1997, December 26, 1998 and December 25, 1999........F-3
Consolidated Balance Sheets as of December 26, 1998 and
December 25, 1999.......................................................F-4
Consolidated Statement of Cash Flows for the years ended
December 27, 1997, December 26, 1998 and December 25, 1999..............F-5
Consolidated Statement of Changes in Shareholder's Equity for the
years ended December 28, 1996, December 27, 1997,
December 26, 1998 and December 25, 1999.................................F-6
Notes to Consolidated Financial Statements.................................F-7
Condensed Consolidated Statements of Income (Unaudited) for the
six months ended June 24, 2000 and June 26, 1999........................F-25
Condensed Consolidated Balance Sheets (Unaudited) as of
December 25, 2000 and June 26, 1999 ...................................F-26
Condensed Consolidated Statements of Cash Flows (Unaudited)
as of June 24, 2000 and June 26, 1999 .................................F-27
Notes to Unaudited Condensed Consolidated Interim Financial Statements....F-28
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Charles River Laboratories, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Charles River Laboratories, Inc. and its subsidiaries (the "Company") at
December 25, 1999 and December 26, 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
25, 1999, in conformity with accounting principles generally accepted in the
United States. In addition, in our opinion, the financial statement schedules
appearing under Item 16(b) present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 20, 2000
F-2
<PAGE>
CHARLES RIVER LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
<TABLE>
Fiscal Year Ended
--------------------------------------------------
December 27, December 26, December 25,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net sales related to products................................... $ 156,800 $ 169,377 $ 180,269
Net sales related to services................................... 13,913 23,924 39,007
---------- ---------- ----------
Total net sales................................................. 170,713 193,301 219,276
Costs and expenses
Cost of products sold......................................... 102,980 107,146 108,928
Cost of services provided..................................... 8,480 15,401 25,664
Selling, general and administrative........................... 30,451 34,142 39,765
Amortization of goodwill and intangibles...................... 834 1,287 1,956
Restructuring charges......................................... 5,892 -- --
---------- ---------- ----------
Operating income................................................ 22,076 35,325 42,963
Other income (expense)
Interest income............................................... 865 986 536
Other income and expense...................................... -- -- 89
Interest expense.............................................. (501) (421) (9,943)
Loss from foreign currency, net............................... (221) (58) (136)
---------- ---------- ----------
Income before income taxes, minority interests and earnings
from equity investments........................................ 22,219 35,832 33,509
Provision for income taxes...................................... 8,499 14,123 16,214
---------- ---------- ----------
Income before minority interests and earnings from equity
investments.................................................... 13,720 21,709 17,295
Minority interests.............................................. (10) (10) (22)
Earnings from equity investment................................. 1,630 1,679 2,044
---------- ---------- ----------
Net income...................................................... $ 15,340 $ 23,378 $ 19,317
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
CHARLES RIVER LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
December 26, December 25,
1998 1999
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents.......................................................... $ 24,811 $ 15,010
Trade receivables, less allowances of $898 and $978, respectively.................. 32,466 36,293
Inventories........................................................................ 30,731 30,534
Deferred tax asset................................................................. 5,432 632
Due from affiliates................................................................ 982 1,233
Other current assets............................................................... 2,792 6,371
---------- ----------
Total current assets............................................................ 97,214 90,073
Property, plant and equipment, net................................................... 82,690 85,413
Goodwill and other intangibles, less accumulated
amortization of $5,591 and $7,220, respectively.................................... 17,705 36,958
Investments in affiliates............................................................ 18,470 21,722
Deferred tax asset................................................................... 5,787 100,907
Deferred financing costs............................................................. -- 14,015
Other assets......................................................................... 12,388 13,315
---------- ----------
Total assets.................................................................... $ 234,254 $ 362,403
========== ==========
Liabilities and Shareholder's Equity
Current liabilities
Current portion of long-term debt.................................................. $ 202 $ 3,290
Current portion of capital lease obligations....................................... 188 253
Accounts payable................................................................... 11,615 9,291
Accrued compensation............................................................... 9,972 10,792
Deferred income.................................................................... 3,419 7,643
Accrued liabilities................................................................ 14,862 18,479
Accrued interest................................................................... 53 8,935
Accrued income taxes............................................................... 14,329 2,738
---------- ----------
Total current liabilities....................................................... 54,640 61,421
Long-term debt....................................................................... 248 306,725
Deferred tax liability............................................................... 836 4,990
Capital lease obligations............................................................ 944 795
Accrued ESLIRP....................................................................... 7,747 8,315
Other long-term liabilities.......................................................... 1,274 2,469
---------- ----------
Total liabilities............................................................... 65,689 384,715
---------- ----------
Commitments and contingencies (Note 11)
Minority interests................................................................... 306 304
Shareholder's equity
Common stock, par value $1 per share, 1,000 shares issued.......................... 1 1
Capital in excess of par value..................................................... 17,836 119,470
Retained earnings.................................................................. 156,108 (132,158)
Loans to officers.................................................................. -- (920)
Accumulated other comprehensive income............................................. (5,686) (9,009)
---------- ----------
Total shareholder's equity...................................................... 168,259 (22,616)
---------- ----------
Total liabilities and shareholder's equity...................................... $ 234,254 $ 362,403
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
CHARLES RIVER LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
Fiscal Year Ended
--------------------------------------------
December 27, December 26, December 25,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows Related to Operating Activities
Net income....................................................................... $ 15,340 $ 23,378 $ 19,317
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................ 9,703 10,895 12,318
Amortization of debt issuance costs and discounts............................ - - 479
Provision for doubtful accounts.............................................. 166 181 148
Earnings from equity investments............................................. (1,630) (1,679) (2,044)
Minority interests........................................................... 10 10 22
Deferred income taxes........................................................ (1,363) (3,133) 9,278
Stock compensation expense................................................... 84 333 124
Gain on sale of property, plant, and equipment............................... - - (1,441)
Property, plant and equipment write downs.................................... 822 - 1,803
Other non-cash items......................................................... - - 486
Change in assets and liabilities
Trade receivables............................................................ (2,232) (1,712) (3,333)
Inventories.................................................................. (1,917) (1,250) 133
Due from affiliates.......................................................... (462) 538 (251)
Other current assets......................................................... 165 (241) (2,911)
Other assets................................................................. 1,251 (4,309) (1,943)
Accounts payable............................................................. 594 2,853 (2,374)
Accrued compensation......................................................... 674 2,090 868
Accrued ESLIRP............................................................... 499 821 570
Deferred income.............................................................. 105 1,278 4,223
Accrued interest............................................................. - - 8,930
Accrued liabilities.......................................................... 3,163 2,351 3,111
Accrued income taxes......................................................... (500) 5,605 (11,264)
Other long-term liabilities.................................................. (148) (629) 1,319
--------- --------- ---------
Net cash provided by operating activities.................................. 24,324 37,380 37,568
--------- --------- ---------
Cash Flows Relating to Investing Activities
Proceeds from sale of property, plant, and equipment......................... - - 1,860
Dividends received from equity investments................................... 773 681 815
Capital expenditures......................................................... (11,872) (11,909) (12,951)
Contingent payments for prior year acquisitions.............................. (640) (681) (841)
Acquisition of businesses net of cash acquired............................... (1,207) (11,121) (23,051)
--------- --------- ---------
Net cash used in investing activities...................................... (12,946) (23,030) (34,168)
--------- --------- ---------
Cash Flows Relating to Financing Activities
Dividends to Holding Company................................................. - - (270,000)
Loans to officers............................................................ - - (920)
Payments of deferred financing costs......................................... - - (14,442)
Proceeds from long-term debt................................................. 281 199 309,872
Payments on long-term debt................................................... (119) (1,247) (252)
Payments on capital lease obligations........................................ (346) (48) (307)
Net activity with Bausch & Lomb.............................................. (12,755) (6,922) (29,415)
Transaction costs............................................................ - - (8,168)
Capital contribution......................................................... - - 2,128
--------- --------- ---------
Net cash used in financing activities...................................... (12,939) (8,018) (11,504)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents..................... (181) 564 (1,697)
Net change in cash and cash equivalents.......................................... (1,742) 6,896 (9,801)
--------- --------- ---------
Cash and cash equivalents, beginning of year..................................... 19,657 17,915 24,811
--------- --------- ---------
Cash and Cash Equivalents, End of Year........................................... $ 17,915 $ 24,811 $ 15,010
========= ========= =========
Supplemental Cash Flow Information
Cash paid for taxes.......................................................... $ 4,254 $ 4,681 $ 4,656
Cash paid for interest....................................................... 287 177 538
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
CHARLES RIVER LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
Accumulated
Other
Retained Comprehensive Common Capital in Loans to
Total Earnings Income Stock Excess of Par Officers
---------- ---------- ------------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 28, 1996....... $ 154,133 $ 137,067 $ (771) $ 1 $ 17,836 $ -
Components of comprehensive
income:
Net income.................... 15,340 15,340 - - - -
Foreign currency translation.. (6,844) - (6,844) - - -
Minimum pension liability
adjustment.................. (510) - (510) - - -
----------
Total comprehensive income.. 7,986 - - - - -
Net activity with Bausch & Lomb. (12,755) (12,755) - - - -
---------- ---------- --------- ---- --------- -------
Balance at December 27, 1997....... $ 149,364 $ 139,652 $ (8,125) $ 1 $ 17,836 $ -
Components of comprehensive
income:
Net income.................... 23,378 23,378 - - - -
Foreign currency translation.. 2,839 - 2,839 - - -
Minimum pension liability
adjustment.................. (400) - (400) - - -
----------
Total comprehensive income.. 25,817 - - - - -
Net activity with Bausch & Lomb. (6,922) (6,922) - - - -
---------- ---------- --------- ---- --------- -------
Balance at December 26, 1998....... $ 168,259 $ 156,108 $ (5,686) $ 1 $ 17,836 $ -
Components of comprehensive
income:
Net income.................... 19,317 19,317 - - - -
Foreign currency translation.. (3,437) - (3,437) - - -
Minimum pension liability
adjustment.................. 114 - 114 - - -
----------
Total comprehensive income.. 15,994 - - - - -
Net activity with Bausch & Lomb. (29,415) (29,415) - - - -
Loans to officers............... (920) - - - - (920)
Transaction costs............... (8,168) (8,168) - - - -
Deferred tax asset.............. 99,506 - - - 99,506 -
Capital contribution............ 2,128 - - - 2,128 -
Dividends....................... (270,000) (270,000) - - - -
---------- ---------- --------- ---- --------- -------
Balance at December 25, 1999....... $ (22,616) $ (132,158) $ (9,009) $ 1 $ 119,470 $ (920)
========== ========== ========= ==== ========= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Description of Business and Summary of Significant Accounting
Policies
Description of Business
Charles River Laboratories, Inc. (the "Company") is a commercial
producer and supplier of animal research models for use in the discovery,
development and testing of pharmaceuticals. In addition, the Company is a
supplier of biomedical products and services in several specialized niche
markets. The Company's fiscal year is the twelve-month period ending the last
Saturday in December.
Basis of Presentation
For the periods presented in these consolidated financial statements
that are prior to September 29, 1999, the Company was 100% owned by Bausch &
Lomb Incorporated ("B&L"). The assets, liabilities, operations and cash flows
relating to the Company were held by B&L and certain of its affiliated entities.
As more fully described in Note 2, effective September 29, 1999, pursuant to a
recapitalization agreement all assets, liabilities and operations of the Company
were contributed to an existing dormant subsidiary which was subsequently
renamed Charles River Laboratories, Inc. Under the terms of the
recapitalization, the Company became a wholly-owned subsidiary of Charles River
Laboratories Holdings, Inc. ("Holdings"). These consolidated financial
statements include all such assets, liabilities, operations and cash flows as of
and for each of the periods presented.
Subsequent to December 25, 1999, Charles River Laboratories Holdings,
Inc. changed its name to Charles River Laboratories International, Inc.
Principles of Consolidation
The financial statements include all majority-owned U.S. and non-U.S.
subsidiaries. Intercompany accounts, transactions and profits are eliminated.
Affiliated companies over which the Company does not have the ability to
exercise control are accounted for using the equity method (Note 9).
Use of Estimates
The financial statements have been prepared in conformity with
generally accepted accounting principles and, as such, include amounts based on
informed estimates and judgments of management with consideration given to
materiality. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include time deposits and highly liquid investments
with remaining maturities at the purchase date of three months or less.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined principally on the average cost method. Costs for primates are
accumulated in inventory until the primates are sold or declared breeders.
Property, Plant and Equipment
Property, plant and equipment, including improvements that
significantly add to productive capacity or extend useful life, are recorded at
cost, while maintenance and repairs are expensed as incurred. Depreciation is
calculated for financial reporting purposes using the straight-line method based
on the estimated useful lives of the assets as follows: building, 20 to 40
years; machinery and equipment, 2 to 20 years; and leasehold improvements,
shorter of estimated useful life or the lease periods.
F-7
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Intangible Assets
Intangible assets are amortized on a straight-line basis over periods
ranging from 5 to 20 years. Intangible assets consist primarily of goodwill,
patents and non-compete agreements.
Other Assets
Other assets consist primarily of the cash surrender value of life
insurance policies and the net value of primate breeders. Primate breeders are
amortized over 20 years on a straight line basis. Total amortization expense for
primate breeders was $348, $323 and $300 for 1997, 1998 and 1999, respectively,
and is included in costs of products sold.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets and intangibles whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the asset and
its eventual disposal are less than its carrying amount. In such instances, the
carrying value of long-lived assets is reduced to the estimated fair value, as
determined using an appraisal or discounted cash flow, as appropriate.
Stock-Based Compensation Plans
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), the Company accounts for
its stock-based compensation plans using the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25).
Revenue Recognition
Revenues are recognized when products are shipped or as services are
performed. Deferred income represents cash received from customers in advance of
product shipment or performance of services.
Fair Value of Financial Instruments
The carrying amount of the Company's significant financial instruments,
which include accounts receivable and debt, approximates their fair values at
December 26, 1998 and December 25, 1999.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109).
The asset and liability approach underlying FAS 109 requires the recognition of
deferred tax liabilities and assets for the expected future tax consequences of
temporary differences between the carrying amounts and tax basis of the
Company's assets and liabilities.
Foreign Currency Translation
In accordance with the Statement of Financial Accounting Standards No.
52, "Foreign Currency Translation," the financial statements of all non-U.S.
subsidiaries are translated into U.S. dollars as follows: assets and liabilities
at year-end exchange rates; income, expenses and cash flows at average exchange
rates; and shareholder's equity at
F-8
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
historical exchange rates. The resulting translation adjustment is recorded as a
component of accumulated other comprehensive income on the accompanying balance
sheet.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables from
customers within the pharmaceutical and biomedical industries. As these
industries have experienced significant growth and its customers are
predominantly well-established and viable, the Company believes its exposure to
credit risk to be minimal.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," (FAS 130) at the beginning of 1998. As it
relates to the Company, comprehensive income is defined as net income plus the
sum of currency translation adjustments and the change in minimum pension
liability (collectively, other comprehensive income), and is presented in the
Consolidated Statement of Changes in Shareholder's Equity.
Segment Reporting
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (FAS 131), which requires financial and descriptive information
about an enterprise's reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available and regularly evaluated by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. The Company
operates in two business segments, research models and biomedical products and
services.
Reclassifications
Certain amounts in prior year financial statements and related notes
have been reclassified to conform with current year presentation.
2. Recapitalization and Related Financing
On September 29, 1999 CRL Acquisition LLC, an affiliate of DLJ Merchant
Banking Partners II, L.P., and affiliated funds (the "DLJMB Funds") consummated
a transaction in which it acquired 87.5% of the common stock of Charles River
Laboratories, Inc. from Bausch & Lomb for approximately $443 million. This
transaction was effected through Charles River Laboratories Holdings, Inc.
("Holdings"), a holding company with no operations or assets other than its
ownership of 100% of the Company's outstanding stock. This transaction was
accounted for as a leveraged recapitalization, which had no impact on the
historical basis of the Company's assets and liabilities. The transaction did,
however, impact the capital structure of the Company, as further described
below. In addition, concurrent with the transaction, and more fully described in
Note 3, the Company purchased all of the outstanding shares of common stock of
SBI Holdings, Inc. ("Sierra"), a pre-clinical biomedical services company, for
$23.3 million.
The recapitalization transaction and related fees and expenses were
funded as follows:
o issuance of 150,000 units, each consisting of a $1,000 principal
amount of a 13.5% senior subordinated note (the Series A Note
Offering or the "Notes") and one warrant to purchase 3.942 shares
of common stock of Holdings;
F-9
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
o borrowings by the Company of $162.0 million under a new senior
secured credit facility;
o an equity investment of $92.4 million in Holdings;
o senior discount debentures with warrants issued by Holdings for
$37.6 million; and
o subordinated discount note issued by Holdings to Bausch & Lomb
for $43.0 million.
The Company incurred approximately $14,442 in debt issuance costs
related to these transactions. These costs have been capitalized as long-term
assets and are being amortized over the terms of the loans. Amortization expense
of $426 was recorded in the accompanying consolidated financial statements for
the year ended December 25, 1999. In addition, the Company also incurred
transaction costs of $8,168, which were recorded as an adjustment to retained
earnings.
Senior Subordinated Notes
As discussed above, the Company issued 150,000 units, each comprised of
a $1,000 note and a warrant to purchase 3.942 shares of common stock of Holdings
for total proceeds of $150,000. The Company estimated the fair value of the
warrants to be $2,128 and allocated the $150,000 offering proceeds between
senior subordinated notes (the "Notes") ($147,872) and the warrants ($2,128).
The discount on the Notes is being amortized over the life of the Notes and
amounted to $53 in 1999. The portion of the proceeds allocated to the warrants
is reflected as a capital contribution in the accompanying consolidated
financial statements.
The Notes will mature on October 1, 2009. The Notes are not redeemable
prior to October 1, 2004 other than in connection with a public offering of the
common stock of Holdings. Thereafter, the Notes will be subject to redemption at
any time at the option of the issuers at redemption prices set forth in the
Notes. Interest on the Notes will accrue at the rate of 13.5% per annum and will
be payable semi-annually in arrears on October 1 and April 1 of each year. The
payment of principal and interest on the Notes will be subordinated in right to
the prior payment of all Senior Debt.
Upon the occurrence of a change in control, the Company will be
obligated to make an offer to each holder of the Notes to repurchase all or any
part of such holders' Notes at an offer price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest. Restrictions under
the Notes include certain sales of assets, certain payments of dividends and
incurrence of debt, and limitations on certain mergers and transactions with
affiliates. The Company is also required to maintain certain financial ratios
and covenants with respect to the notes.
Senior Secured Credit Facility
The senior secured Credit Facility ("the Facility") includes a $40,000
term loan A facility, a $120,000 term loan B facility and a $30,000 revolving
credit facility. The term loan A facility will mature on October 1, 2005, the
term loan B facility will mature on October 1, 2007, and the revolving credit
facility will mature on October 1, 2005. Interest on the term loan A and the
revolving credit facility will accrue at either a base rate plus 1.75% or LIBOR
plus 3.0%, at the Company's option (9.08% at December 25, 1999). Interest on the
term loan B accrues at either a base rate plus 2.50 % or LIBOR plus 3.75% (9.83%
at December 25, 1999). Interest will be paid quarterly in arrears commencing on
December 30, 1999. At December 25, 1999, the Company had $2,000 of outstanding
borrowings on its revolving credit facility. A commitment fee in an amount equal
to 0.50% per annum on the daily average unused portion of the revolving credit
facility will be paid quarterly in arrears. The Credit Facility requires the
Company to remain in compliance with certain financial ratios as well as other
restrictive covenants. Compliance with these ratios and covenants is not
required until the quarter ended March 25, 2000.
F-10
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company has certain insignificant foreign borrowings outstanding at
December 25, 1999, amounting to $90.
Minimum Future Principal Repayments
Minimum future principal payments of long-term debt at December 25,
1999 are as follows:
Fiscal Year
2000................................... $ 3,290
2001................................... 3,200
2002................................... 5,200
2003................................... 9,200
2004................................... 11,200
Thereafter............................. $277,925
--------
Total.................................. $310,015
========
Holdings Financing
The senior discount debentures issued by Holdings accrete from their
original issue price of $37,600 to $82,300 by October 1, 2004. Thereafter,
interest is payable in cash. The senior discount debentures mature on April 1,
2010. The senior discount debentures contain covenants and events of default
substantially similar to those contained in the Notes. The subordinated discount
note issued by Holdings of $43,000 accretes at a rate of 12% prior to October 1,
2004 and thereafter at 15% to an aggregate principal amount of $175,300 at
maturity on October 1, 2010. The subordinated discount notes are subject to
mandatory redemption upon a change in control at the option of the holder
thereof and are subject to redemption at Holdings' option at any time.
As previously discussed, Holdings is a holding company with no
operations or assets other than its ownership of 100% of the Company's
outstanding common stock. The Company neither guarantees nor pledges its assets
as collateral for the senior discount debentures or the subordinated discount
note, which Holdings issued. Holdings has no source of liquidity to meet its
cash requirements. As such, repayment of the obligations as outlined above will
be dependent upon either dividends from the Company, which are restricted by
terms contained in the indenture governing the Notes and the new senior secured
credit facility, or through a refinancing or equity transaction at the Holdings
level.
3. Business Acquisitions
The Company acquired several businesses during the three-year period
ended December 25, 1999. All acquisitions have been accounted for under the
purchase method of accounting. The results of operations of the acquired
business are included in the consolidated financial statements from the date of
acquisition.
Significant acquisitions include the following:
On September 29, 1999, the Company acquired 100% of the outstanding
stock of SBI Holdings, Inc. ("Sierra"), a pre-clinical biomedical services
company, for approximately $23,300 of which $6,000 was used to repay existing
debt. The estimated fair value of assets acquired and liabilities assumed
relating to the Sierra acquisition are summarized below:
F-11
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Allocation of Purchase Price:
Net current assets (including cash of $292)..... $ 1,807
Property, plant and equipment................... 5,198
Other non-current assets........................ 254
Intangible assets:
Customer list................................ 11,491
Work force................................... 2,941
Other identifiable intangibles............... 1,251
Goodwill..................................... 852 16,535
------ ---------
23,794
Less long-term liabilities assumed.............. 451
$ 23,343
=========
Goodwill and other intangibles related to the Sierra acquisition are
being amortized on a straight-line basis over their established lives, which
range from 5 to 15 years. As the transaction was effected through the
acquisition of the stock of Sierra, the historical tax basis of Sierra continues
with the Company and a deferred tax liability and offsetting goodwill of $4,374
has been recorded.
In conjunction with the Sierra acquisition, the Company has agreed to
pay additional consideration of up to $2,000 if Sierra achieves specified
financial targets by December 31, 2000. This additional consideration, if any,
will be recorded as additional goodwill at the time the contingency is resolved.
Secondly, also as a part of the acquisition, the Company has agreed to pay up to
$10,000 in performance-based bonus payments if specified financial objectives
are reached over the next five years. At the time these contingencies become
probable, the bonuses, if any, will be recorded as compensation expense.
Thirdly, the Company has entered into employment agreements with certain key
scientific and management personnel of Sierra that contain retention and
non-competition payments totaling $3,000 to be paid upon their continuing
employment with the Company at December 31, 1999 and June 30, 2001. The Company
has recorded compensation expense of $1,435 in the accompanying consolidated
financial statements relating to the first payment which was made on December
31, 1999. The remaining $1,565 will be expensed ratably through June 30, 2001 as
such amounts are earned.
On March 30, 1998, the Company acquired 100% of the outstanding stock
of Tektagen, Inc. ("Tektagen") for $8,000 and assumed debt equal to
approximately $850. Tektagen provides quality control testing and consulting
services to the biotechnology and pharmaceutical industries. The purchase price
exceeded the fair value of the net assets acquired by approximately $6,600,
which is being amortized on a straight line basis over 15 years. In addition,
during 1998 the Company acquired an additional biomedical service business and
one research model business; the impact of each is considered immaterial to the
Company's financial statements taken as a whole.
The following selected unaudited pro forma consolidated results of
operations are presented as if each of the acquisitions had occurred as of the
beginning of the period immediately preceding the period of acquisition after
giving effect to certain adjustments for the amortization of goodwill and
related income tax effects. The pro forma data is for informational purposes
only and does not necessarily reflect the results of operations had the
companies operated as one during the period. No effect has been given for
synergies, if any, that may have been realized through the acquisitions.
F-12
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Fiscal Year Ended
------------------------------------------------
December 27, December 26, December 25,
1997 1998 1999
------------ ------------ ------------
Net sales........... $ 179,513 $ 216,853 $ 235,310
Operating income.... 21,830 36,233 42,589
Net income.......... 15,018 23,451 18,389
In addition, during 1997, 1998 and 1999, the Company made contingent
payments of $640 and $681, and $841 respectively, to the former owners of
acquired businesses in connection with an additional purchase price commitment.
4. Supplemental Balance Sheet Information
The composition of inventories is as follows:
December 26, December 25,
1998 1999
------------ ------------
Raw materials and supplies............ $ 4,932 $ 4,196
Work in process....................... 1,088 1,608
Finished products..................... 24,711 24,730
--------- ---------
Inventories........................ $ 30,731 $ 30,534
========= =========
The composition of property, plant and equipment is as follows:
December 26, December 25,
1998 1999
------------ ------------
Land.................................. $ 7,783 $ 7,022
Buildings............................. 90,919 90,730
Machinery and equipment............... 74,876 82,131
Leasehold improvements................ 3,063 4,668
Furniture and fixtures................ 1,532 1,826
Vehicles.............................. 3,006 2,689
Construction in progress.............. 6,176 4,679
--------- ---------
187,355 193,745
Less accumulated depreciation......... (104,665) (108,332)
--------- ---------
Net property, plant and equipment... $ 82,690 $ 85,413
========= =========
Depreciation and amortization expense for the years ended 1997, 1998,
and 1999 was $8,320, $9,168, and $10,062, respectively.
5. Leases
Capital Leases
The Company has one capital lease for a building and numerous capital
leases for equipment. These leases are capitalized using interest rates
considered appropriate at the inception of each lease. Assets under capital
lease are not significant.
F-13
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Capital lease obligations amounted to $1,132 and $1,048 at December 26,
1998 and December 25, 1999, respectively, with maturities through 2004 at
interest rates ranging from 9.5% to 15.0%. Future minimum lease payments under
capital lease obligations at December 25, 1999 are as follows:
2000.................................................... $ 384
2001.................................................... 312
2002.................................................... 293
2003.................................................... 475
---------
Total minimum lease payments............................ 1,464
Less amount representing interest....................... (416)
---------
Present value of net minimum lease payments............. $ 1,048
=========
Operating Leases
The Company has various operating leases for machinery and equipment,
automobiles, office equipment, land and office space. Rent expense for all
operating leases was $4,453 in 1999, $3,273 in 1998, and $3,111 in 1997. Future
minimum payments by year and in the aggregate, under noncancellable operating
leases with initial or remaining terms of one year or more consist of the
following at December 25, 1999:
2000................................... $ 4,263
2001................................... 3,071
2002................................... 2,039
2003................................... 910
2004................................... 696
Thereafter............................. 1,928
---------
$ 12,907
=========
6. Income Taxes
In the years ended December 27, 1997, December 26, 1998, and for the
nine-month period ended September 29, 1999, the Company was not a separate
taxable entity for federal and state income tax purposes and its income for
these periods was included in the consolidated B&L income tax returns. The
Company accounted for income taxes for these periods under the separate return
method in accordance with FAS 109. Under the terms of the recapitalization
agreement, B&L has assumed all income tax consequences associated with the
periods through September 29, 1999. Accordingly, all current and deferred income
tax attributed reflected in the Company's consolidated financial statements on
the effective date of the recapitalization will ultimately be settled by B&L. In
line with this the domestic income tax attributes have been included in the net
activity with B&L and have been charged off against retained earnings.
In addition, in connection with the recapitalization transaction, the
Company has elected under Internal Revenue Code Section 338(h)(10) to treat the
transaction as a purchase resulting in a step-up in the tax basis of the
underlying assets. The election resulted in the recording of a net deferred tax
asset, before valuation allowance, of approximately $106,700, representing the
estimated future tax benefits associated with the increased tax basis of its
assets. In connection with the establishment of the net deferred tax asset, the
Company has recorded a valuation allowance of $6,380, primarily related to its
realizability with respect to state income taxes. The Company expects to realize
the net benefit of the deferred tax asset over a 15 year period. For financial
reporting purposes the benefit was treated as a contribution to capital. The
Company is in the process of finalizing the tax purchase price allocation.
F-14
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Any increase or decrease in the net deferred tax assets resulting from the final
allocation of tax purchase price will be an adjustment to additional
paid-in-capital.
An analysis of the components of income before income taxes and
minority interests and the related provision for income taxes is presented
below:
<TABLE>
Fiscal Year Ended
--------------------------------------------------
December 27, December 26, December 25,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Income before equity in earnings of foreign subsidiaries, income
taxes and minority interests
U.S................................................................ $ 13,497 $ 22,364 $ 17,454
Non-U.S............................................................ 8,722 13,468 16,055
--------- --------- ---------
$ 22,219 $ 35,832 $ 33,509
--------- --------- ---------
Income tax provision
Current:
Federal.......................................................... $ 6,202 $ 7,730 $ 9,522
Foreign.......................................................... 2,528 6,171 6,035
State and local.................................................. 1,397 1,833 1,895
--------- --------- ---------
Total current.................................................. 10,127 15,734 17,452
--------- --------- ---------
Deferred:
Federal.......................................................... $ (1,867) $ (597) $ (1,347)
Foreign.......................................................... 498 (887) 53
State and local ................................................. (259) (127) 56
--------- --------- ---------
Total deferred.................................................. (1,628) (1,611) (1,238)
$ 8,499 $ 14,123 $ 16,214
--------- --------- ---------
</TABLE>
Deferred taxes, detailed below, recognize the impact of temporary
differences between the amounts of assets and liabilities recorded for financial
statement purposes and such amounts measured in accordance with tax laws.
<TABLE>
December 26, 1998 December 25, 1999
--------------------------- ------------------------------
Assets Liabilities Assets Liabilities
--------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Current:
Inventories....................................... $ 827 -- $ -- --
Restructuring accruals............................ 1,006 -- -- --
Employee benefits and compensation................ 3,077 -- -- --
Other accruals.................................... 522 -- 632 --
-------- ------- ---------- ---------
5,432 -- 632 --
Non-current:
Goodwill and other intangibles.................... -- -- 104,617 4,272
Net operating loss and credit carryforwards....... 2,960 -- 2,220 --
Depreciation and amortization..................... 3,672 836 162 --
Other............................................. 921 -- 844 718
-------- ------- ---------- ---------
7,553 836 107,843 4,990
Valuation allowance............................. (1,766) -- (6,936) --
-------- ------- ---------- ---------
5,787 836 100,907 4,990
Total deferred taxes after valuation allowance..... $ 11,219 $ 836 $ 101,539 $ 4,990
-------- ------- ---------- ---------
</TABLE>
F-15
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
As of December 25, 1999, the Company has net operating loss
carryforwards for federal and state income tax purposes of approximately $4,200
expiring between 2004 and 2019. Additionally, the Company has foreign tax credit
carryforwards of $600 expiring in 2004. The Company has increased its valuation
allowance from the $6,380 discussed above to $6,936, primarily related to the
realizability of state operating loss carryforwards, and the foreign tax credits
generated in the fourth quarter. The Company has recorded the balance of the net
deferred tax asset on the belief that it is more likely than not that it will be
realized. This belief is based upon a review of all available evidence,
including historical operating results, projections of taxable income, and tax
planning strategies. Reconciliations of the statutory U.S. federal income tax
rate to effective tax rates are as follows:
<TABLE>
Fiscal Year Ended
-------------------------------------------------------
December 27, December 26, December 25,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Tax at statutory U.S. tax rate....................... 35.0% 35.0% 35.0%
Foreign tax rate differences......................... (0.1) 1.6 6.8
Non-deductible goodwill amortization................. 0.4 0.6 0.5
State income taxes, net of federal tax benefit....... 3.3 3.1 3.3
Change in valuation allowance........................ -- -- 1.6
Other................................................ (0.4) (0.8) 1.2
---- ---- ---
38.2% 39.5% 48.4%
==== ==== ====
</TABLE>
During the year ended December 25, 1999, substantially all of the
accumulated earnings of the Company's foreign subsidiaries through September 29,
1999 were repatriated to the United States to B&L in connection with the
recapitalization transaction. Accordingly, a provision for U.S. federal and
state income taxes, net of foreign tax credits, has been provided on such
earnings in the year ended December 25, 1999. In addition, for periods
subsequent to September 29, 1999, the Company elected to treat certain foreign
subsidiaries in Germany and the United Kingdom as disregarded entities for U.S.
federal and state income tax purpose and, accordingly, is providing for U.S.
federal and state incomes taxes on such earnings. The Company's other foreign
subsidiaries have accumulated earnings subsequent to September 29, 1999. These
earnings are considered to be indefinitely reinvested and, accordingly, no
provision for U.S. income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. taxes and withholdings taxes payable to the various foreign
countries.
7. Employee Benefits
The Company sponsors one defined contribution plan and two defined
benefit plans. The Company's defined contribution plan ("Charles River
Laboratories Employee Savings Plan") qualifies under section 401(k) of the
Internal Revenue Code. It covers substantially all U.S. employees and contains a
provision whereby the Company matches 50% of employee contributions up to four
percent. The costs associated with the defined contribution plan totaled $416,
$498 and $588 in 1997, 1998, and 1999, respectively.
One of the Company-sponsored defined benefit plans (Charles River
Laboratories, Inc. Pension Plan) is a qualified, non-contributory plan that also
covers substantially all U.S. employees. Benefits are based on participants'
final average monthly compensation and years of service. Participants' rights
vest upon completion of five years of service.
Under another defined benefit plan, the Company provides some
executives with supplemental retirement benefits. This plan (Executive
Supplemental Life Insurance Retirement Plan or ESLIRP) is generally unfunded and
non-qualified under the provisions of the Employee Retirement Income Securities
Act of 1974. The Company has,
F-16
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
however, taken out several key person life insurance policies with the intention
of using its cash surrender value to fund the ESLIRP Plan. At December 25, 1999,
the cash surrender value of these policies was $8,052.
The following table provides reconciliations of the changes in benefit
obligations, fair value of plan assets and funded status of the two defined
benefit plans.
<TABLE>
Defined Benefit Plans
-------------------------
1998 1999
-------- -------
<S> <C> <C>
Reconciliation of benefit obligation
Benefit/obligation at beginning of year............................ $ 20,531 $ 25,112
Service cost....................................................... 795 958
Interest cost...................................................... 1,588 1,738
Benefit payments................................................... (742) (738)
Actuarial loss (gain).............................................. 2,940 (73)
--------- ---------
Benefit/obligation at end of year.................................. $ 25,112 $ 26,997
========= =========
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year..................... $ 19,237 $ 26,493
Actual return on plan assets....................................... 7,773 24,781
Employer contributions............................................. 225 259
Benefit payments................................................... (742) (738)
--------- ---------
Fair value of plan assets at end of year........................... $ 26,493 $ 50,795
========= =========
Funded status
Funded status...................................................... $ 1,381 $ 23,797
Unrecognized transition obligation................................. 563 423
Unrecognized prior-service cost.................................... (27) (24)
Unrecognized gain.................................................. (7,178) (29,108)
--------- ---------
Accrued benefit (cost)............................................. $ (5,261) $ (4,912)
========= =========
Amounts recognized in the consolidated balance sheet
Accrued benefit cost............................................... $ (7,849) $ (7,237)
Intangible asset................................................... 286 215
Accumulated other comprehensive income............................. 2,302 2,110
--------- ---------
Net amount recognized.............................................. $ (5,261) $ (4,912)
========= =========
</TABLE>
Key weighted-average assumptions used in the measurement of the
Company's benefit obligations are shown in the following table:
<TABLE>
Fiscal Year Ended
--------------------------------------------------------
December 27, December 26, December 25,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Discount rate........................... 7.5% 7% 7%
Expected return on plan assets.......... 10% 10% 10%
Rate of compensation increase........... 4.75% 4.75% 4.75%
</TABLE>
The following table provides the components of net periodic benefit
cost for the two defined benefit plans for 1997, 1998 and 1999:
F-17
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Defined Benefit Plans
--------------------------------
1997 1998 1999
-------- ------- -------
Components of net periodic benefit cost:
Service cost............................ $ 804 $ 795 $ 958
Interest cost........................... 1,413 1,588 1,738
Expected return on plain assets......... (1,717) (1,901) (2,623)
Amortization of transition obligation... 141 141 141
Amortization of prior-service cost...... (3) (3) (4)
Amortization of net gain................ (172) (85) (301)
------ ------ ------
Net periodic benefit cost............... $ 466 $ 535 $ (91)
====== ====== ======
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $8,205, $7,745 and $0, as of December
26, 1998, and $8,761, $8,315, and $0 at December 25, 1999.
The Company had an adjusted minimum pension liability of $2,302
($1,381, net of tax) and $2,110 ($1,266 net of tax) as of December 26, 1998 and
December 25, 1999, which represented the excess of the minimum accumulated net
benefit obligation over previously recorded pension liabilities.
8. Stock Compensation Plans
As part of the recapitalization of the Company effective September 29,
1999, the equity investors in the recapitalization transaction agreed and
committed to establish a stock option plan for the Company, for the purpose of
providing significant equity incentives to management. The 1999 Management
Incentive Plan (the "Plan") is administered by the Holdings Compensation
Committee of the Board of Directors. Awards of 895,872 non-qualified stock
options, none of which are currently exercisable, were ratified and granted by
the Holdings Compensation Committee on December 9, 1999 effective as of
September 29, 1999. Options to purchase shares of Holdings granted pursuant to
the Plan are subject to a vesting schedule based on three distinct measures. A
total of 926,000 shares have been reserved for the exercise of option grants
under the Plan, representing approximately 9% of the fully diluted equity of
Holdings. Certain options vest solely with the passage of time (incrementally
over five years so long as the optionee continues to be employed by the
Company). The remainder of the options vest over time but contain clauses
providing for the acceleration of vesting upon the achievement of certain
performance targets or the occurrence of certain liquidity events. All options
granted expire on September 29, 1999. The exercise price of all of the options
initially granted under the Plan is $10.27, the per share value of the
underlying common stock, at the time of grant.
Until September 29, 1999, employees of the Company participated in a
stock option plan sponsored by B&L. As a result of the recapitalization
transaction described in Note 2, employees participating in the B&L Stock Option
Plan exercised all vested options and were compensated for all unvested options.
The Company recorded compensation expense of $1,300 in the fourth quarter of
1999 based upon the amount that B&L compensated these employees. The Company
received a capital contribution by B&L for this amount during the fourth quarter
of 1999, which has been recorded as part of the net activity with B&L. As
management's participation in the B&L plan was discontinued earlier in the year
and the Company has estimated its' own plan based on current facts and
circumstances, the historical FAS 123 disclosures relating to the B&L plan, are
not considered relevant.
The Company accounts for stock-based compensation plans under the
provisions of APB 25. Under APB 25, because the exercise price of the new
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
F-18
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Pro forma information regarding net income is required by FAS 123,
which also requires that the information be determined as if the Company has
accounted for its employee stock options under the fair value method of that
Statement.
For purposes of this disclosure, the fair value of the fixed option
grant on December 9, 1999 was estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants
outstanding:
Risk-free interest rate............................... 6.28%
Volatility factor..................................... 45.00%
Weighted average expected life (years)................ 6
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly difference from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Had compensation expense for the Company's portion of fixed options
been determined consistent with FAS 123, the Company's net income for the year
ended December 25, 1999 would have been reduced to the pro forma amounts
indicated below:
As Reported Pro Forma
----------- ---------
Net Income.............. $ 19,317 $ 19,223
9. Joint Ventures
The Company holds investments in several joint ventures. These joint
ventures are separate legal entities whose purpose is consistent with the
overall operations of the Company and represent geographical expansions of
existing Company markets. The financial results of two of the joint ventures are
consolidated into the Company's results as the Company has the ability to
exercise control over these entities. The interests of the outside joint venture
partners in these two joint ventures has been recorded as minority interests
totaling $306 at December 26, 1998 and $304 at December 25, 1999.
The Company also has investments in two other joint ventures that are
accounted for on the equity method. Charles River Japan is a joint venture with
Ajinomoto Co., Inc. and is an extension of the Company's research model business
in Japan. Dividends received from Charles River Japan amounted to $773 in 1997,
$681 in 1998, and $815 in 1999. Charles River Mexico, a joint venture which is
an extension of the Company's avian (or bird) business in Mexico, is not
significant to the Company's operations.
F-19
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
Summarized financial statement information for the unconsolidated joint
ventures is as follows:
<TABLE>
Fiscal Year Ended
------------------------------------------------
December 27, December 26, December 25,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Condensed Combined Statements of Income
Net sales....................................... $ 44,744 $ 39,798 $ 44,826
Operating income................................ 7,484 6,756 7,658
Net income...................................... 3,337 3,445 4,221
</TABLE>
December 26, December 27,
1998 1999
------------ ------------
Condensed Combined Balance Sheets
Current assets...................... $ 19,388 $ 20,486
Non-current assets.................. 36,376 39,720
--------- ---------
$ 55,764 $ 60,206
========= =========
Current liabilities................. $ 13,501 $ 11,330
Non-current liabilities............. 6,617 6,163
Shareholders' equity................ 35,646 42,713
--------- ---------
$ 55,764 $ 60,206
========= =========
10. Restructuring Charges and Asset Impairments
In April 1997, the Bausch & Lomb Board of Directors approved plans to
restructure portions of the Company. As a result, pre-tax restructuring charges
of $5,892 were recorded in 1997. The major components of the plans are
summarized in the table below:
1997
--------
Employee separations......................... $ 3,200
Asset writedowns............................. 2,157
Other........................................ 535
--------
$ 5,892
========
The overall purpose of the restructuring charges was to reduce
costs and improve profitability by closing excess capacity and eliminating
associated personnel, reducing excess corporate, administrative and
professional personnel, and exiting several small unprofitable product-lines.
The restructuring actions affected both the research model and biomedical
products and services segments. In total over 70 individuals were terminated
in connection with these actions.
These restructuring efforts have reduced the Company's fixed cost
structure and realigned the business to meet its strategic objectives through
the closure, relocation and combining of breeding, distribution, sales and
administrative operations, and workforce reductions. Some severance costs were
being paid over periods greater than one year. Asset writedowns relate primarily
to the closing of facilities and losses resulting from equipment dispositions.
Other charges included miscellaneous costs and other commitments.
F-20
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The following table sets forth the activity in the restructuring
reserves through December 25, 1999:
Restructuring
Programs
1997
Restructuring provision..................... $ 5,892
Cash payments............................... (1,725)
Asset write-downs........................... (1,435)
---------
Balance, December 27, 1997................. $ 2,732
Cash payments............................... (897)
Asset write-downs........................... (722)
----
Balance, December 26, 1998................. $ 1,113
Cash payments............................... (1,113)
---------
Balance, December 25, 1999................. $ --
=========
At December 25, 1999 the restructuring reserve was fully utilized.
11. Commitments and Contingencies
Insurance
The Company maintains insurance for workers' compensation, auto
liability, employee medical and general liability. The per claim loss limits are
$250, with annual aggregate loss limits of $1,500. Related accruals were $2,556
and $2,813 on December 26, 1998 and December 25, 1999, respectively. Separately,
the Company has provided a letter of credit in favor of the insurance carriers
in the amount of $350.
Supply Agreement
The Company is currently engaged in distributing certain products under
a supply agreement. In the event certain minimum sales of $500 in 2000 and
$1,000 in 2001 are not achieved the Company will be required to pay the
difference in cash or the agreement can be terminated, at the option of the
Company. In the event of such termination, the Company will no longer be
required to make any payments.
Litigation
Various lawsuits, claims and proceedings of a nature considered normal
to its business are pending against Holdings. In the opinion of management, the
outcome of such proceedings and litigation currently pending will not materially
affect the Company's consolidated financial statements. The most potentially
significant claim is described below.
The Company is currently under a court order issued in June 1997 to
remove its primate operations from two islands located in the Florida Keys. The
mandate asserts that the Company's operations have contributed to the
defoliation of some protected plant life. The Company continues to hold
discussions with the state of Florida authorities regarding the extent of
refoliation required on the islands. The Company believes the reserves recorded
in the accompanying consolidated financial statements are sufficient to provide
for the estimated exposure in connection with the refoliation. The Company has
provided a letter of credit in regards to the completion of the refoliation on
the island for $350.
F-21
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
12. Related Party Transactions
As more fully described in Note 2, the Company completed a
recapitalization in September 1999 and became a stand-alone entity. Until the
recapitalization, the Company historically had operated autonomously from B&L.
Some costs and expenses including insurance, information technology and other
miscellaneous expenses were charged by B&L to the Company on a direct basis,
however. Management believes these charges were based upon assumptions that were
reasonable under the circumstances. These charges and estimates are not
necessarily indicative of the costs and expenses which would have resulted had
the Company incurred these costs as a separate entity. Charges of approximately
$470, $250, and $88 for these items are included in costs of products sold and
services rendered and selling, general and administrative expense in the
accompanying consolidated financial statements for the years ended 1997, 1998
and for the nine months ended 1999, respectively. The Company does not expect
its stand-alone costs to be significantly different from the historical costs
allocated by B&L due to the autonomy with which the Company operated.
As more fully described in Note 2, the accompanying consolidated
financial statements include a line item "net activity with Bausch and Lomb"
which comprises the above referenced intercompany allocations, net distributions
made by the Company to B&L, and settlements with B&L as a result of the
recapitalization.
On September 25, 1999 the Company loaned to certain officers $920 to
purchase stock in Holdings. These loans bear interest at the original rate of
the term B credit facility (9.25%). The underlying stock is pledged as
collateral for the loans. The year-end balance of $920 is classified as a
reduction from Shareholders Equity.
13. Other Income
During the third quarter of 1999, the Company recorded a gain of $1,441
on the sale of property, plant and equipment located in Florida and the
Netherlands.
14. Geographic and Business Segment Information
The Company is organized into geographic regions for management
reporting with operating income being the primary measure of regional
profitability. Some general and administrative expenses, including some
centralized services provided by regional offices, are allocated based on
business segment sales. The accounting policies used to generate geographic
results are the same as the Company's overall accounting policies.
The following table presents sales and other financial information by
geography for the years 1997, 1998 and 1999. Included in the other non-U.S.
category below are the Company's operations located in Canada, China, Germany,
Italy, Netherlands, United Kingdom, Australia, Belgium, Czech Republic, Hungary,
Spain and Sweden. Sales to unaffiliated customers represent net sales
originating in entities physically located in the identified geographic area.
Long-lived assets include property, plant and equipment, goodwill and
intangibles, other investments and other assets.
<TABLE>
U.S. France Other Non-U.S. Consolidated
--------- --------- -------------- -------------
<S> <C> <C> <C> <C>
1997
Sales to unaffiliated customers......... $ 100,314 $ 25,680 $ 44,719 $ 170,713
Long-lived assets....................... 62,236 10,146 22,108 94,490
1998
Sales to unaffiliated customers......... $ 115,639 $ 26,177 $ 51,485 $ 193,301
Long-lived assets....................... 76,289 12,751 23,743 112,783
1999
Sales to unaffiliated customers......... $ 137,417 $ 29,205 $ 52,654 $ 219,276
Long-lived assets....................... 103,261 12,234 20,191 135,686
</TABLE>
F-22
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
The Company's product line segments are research models and biomedical
products and services. The following table presents sales and other financial
information by product line segment for the fiscal years 1997, 1998 and 1999.
Sales to unaffiliated customers represent net sales originating in entities
primarily engaged in either provision of research models or biomedical products
and services. Long-lived assets include property, plant and equipment, goodwill
and intangibles; other investments; and other assets.
1997 1998 1999
---------- ---------- -----------
Research models
Net sales........................ $ 125,214 $ 134,590 $ 142,312
Operating income................. 19,583 30,517 33,663
Total assets..................... 157,915 180,983 268,381
Depreciation and amortization.... 5,297 5,534 8,008
Capital expenditures............. 6,178 8,127 6,983
Biomedical products and services
Net sales........................ $ 45,499 $ 58,711 $ 76,964
Operating income................. 6,496 11,117 14,428
Total assets..................... 38,296 53,271 94,022
Depreciation and amortization.... 4,406 5,361 4,310
Capital expenditures............. 5,694 3,782 5,968
A reconciliation of segment operating income to consolidated operating
income is as follows:
Fiscal Year Ended
--------------------------------------------
December 27, December 26, December 25,
1997 1998 1999
------------ ------------ ------------
Total segment operating income. $ 26,079 $ 41,634 $ 48,091
Unallocated corporate overhead. (4,003) (6,309) (5,128)
--------- --------- ---------
Consolidated operating income.. $ 22,076 $ 35,325 $ 42,963
========= ========= =========
A summary of identifiable long-lived assets of each business segment at
year end is as follows:
December 26, December 25
1998 1999
------------ ------------
Research Models...................... $ 73,190 $ 69,257
Biomedical Products and Services..... 39,593 66,429
---------- ----------
$ 112,783 $ 135,686
========== ==========
15. Subsequent Events (unaudited)
As of February 28, 2000, the Company acquired an additional 16% of the
equity (340,840 common shares) of its 50% equity joint venture company, Charles
River Japan, from Ajinomoto Co., Inc. The purchase price for the equity was 1.4
Billion Yen, or $12,844. One Billion Yen, or $9,174, was paid at closing, and
the balance of 400 Million Yen, or $3,670, was deferred pursuant to a three-year
balloon promissory note secured by a pledge of the 16% shares. The note bears
interest at the long-term prime rate in Japan. Effective with the acquisition of
this additional interest, the Company will have control of and will consolidate
the operations of Charles River Japan, from the effective date of the
incremental acquisition.
F-23
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
On March 10, 1999 Charles River Laboratories announced the closure of
its Shamrock primate import and conditioning business in Small Dole, England.
The Company expects to have its plans finalized by the end of the first quarter
and expects the closure to be completed during the second or third quarter of
2000. The actions contemplated in this plan relate primarily to severance,
property and equipment dispositions and other miscellaneous activities directly
related to the operations being shut down. Management has met with 16 employees
subject to its severance plans and has communicated its intended closure actions
to customers. The Company does not expect that the animal sales previously made
by Shamrock will be significantly impacted.
During January 2000, the Company sold a product line within its
research model business segment. The selling price of $7,000 approximated the
net book value of the underlying assets at the time of the sale. In addition,
the Company had approximately $900 of deferred revenue which related to cash
payments received in advance of shipping the research models. Under the term of
the sales agreement, the Company is no longer obligated to ship research models
and, accordingly, has recorded this amount as income in the first quarter of
2000. Fiscal 1999 sales associated with this product line approximated $2,800.
The Company's 100% shareholder, Charles River Laboratories
International, Inc., formerly Charles River Laboratories Holdings, Inc.
("Holdings"), consummated an initial public offering ("the Offering") of
16,100,000 shares of its common stock at a price of $16 subsequent to June 24,
2000. Holdings plans to use some of the net proceeds from the Offering of
$236,068 to redeem a portion of the Company's outstanding senior subordinated
notes and a portion of the Company's bank debt. The Offering was declared
effective and trading opened on the New York Stock Exchange on June 23, 2000,
however the closing did not occur until the third quarter of 2000.
The following pro forma presentation of selected unaudited balance
sheet information for the company gives effect to the Offering as if it had
occurred on June 24, 2000.
Pro Forma as of
June 24, 2000
---------------
Total assets........................................ $ 397,553
Total liabilities................................... 285,990
Shareholders' Equity................................ 97,092
The Company will record an extraordinary loss, net of tax, of
approximately $8.5 million in the third quarter of 2000. This extraordinary
loss will be attributable to premiums relating to the early repayment of a
portion of the senior subordinated notes, and the write-off of deferred
financing costs and discounts associated with the debt repayment.
F-24
<PAGE>
CHARLES RIVER LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 24, 2000 AND JUNE 26, 1999
(dollars in thousands)
<TABLE>
Six Months Ended
------------------------------------
June 26, June 24,
1999 2000
---------- ----------
<S> <C> <C> <C>
Net sales related to products................................................. $ 93,153 $ 106,970
Net sales related to services................................................. 15,013 36,429
---------- ----------
Total net sales............................................................... $ 108,166 $ 143,399
Costs and Expenses
Cost of products sold....................................................... 55,113 59,511
Cost of services provided................................................... 9,209 24,401
Selling, general and administrative......................................... 19,911 24,240
Amortization of goodwill and intangibles.................................... 764 1,802
---------- ----------
Operating income.............................................................. 23,169 33,445
Other income (expense)
Interest income............................................................. 359 291
Interest expense............................................................ (171) (19,162)
Loss from foreign currency, net............................................. (153) (160)
Other income (expenses)..................................................... -- 390
---------- ----------
Income before income taxes, minority interests and earnings from equity
investments................................................................. 23,204 14,804
Provision for income taxes.................................................... 10,011 2,151
---------- ----------
Income before minority interests and earnings from equity investments......... 13,193 12,653
Minority interests............................................................ (2) (679)
Earnings from equity investments.............................................. 1,117 748
---------- ----------
Net Income................................................................... $ 14,308 $ 12,722
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-25
<PAGE>
CHARLES RIVER LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands)
<TABLE>
December 25, June 24,
1999 2000
------------ ---------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents ............................................................ $ 15,010 $ 18,993
Trade receivables, less allowances of $978 and $976, respectively.................... 36,293 50,930
Inventories.......................................................................... 30,534 32,192
Deferred income taxes................................................................ 632 632
Due from affiliates.................................................................. 1,233 99
Other current assets................................................................. 5,293 5,492
--------- ---------
Total current assets............................................................... 88,995 108,338
Property, plant and equipment, net.................................................... 85,413 117,741
Goodwill and other intangibles, less accumulated amortization of $7,220 and
$8,971, respectively................................................................. 36,958 41,658
Investments in affiliates............................................................. 21,722 2,166
Deferred tax asset.................................................................... 100,907 101,130
Deferred financing costs.............................................................. 14,015 13,747
Other assets.......................................................................... 14,393 13,467
--------- ---------
Total assets......................................................................... $ 362,403 $ 398,247
========= =========
Liabilities and Shareholder's Equity
Current liabilities
Current portion of long-term debt.................................................... $ 3,290 $ 6,442
Current portion of capital lease obligation.......................................... 253 211
Accounts payable..................................................................... 9,291 8,693
Accrued compensation................................................................. 10,792 13,540
Deferred income...................................................................... 7,643 5,808
Accrued interest..................................................................... 8,935 8,363
Accrued liabilities.................................................................. 18,479 20,443
Accrued income taxes................................................................. 2,738 6,124
--------- ---------
Total current liabilities.......................................................... $ 61,421 $ 69,624
Long-term debt........................................................................ 306,725 311,102
Deferred tax liability................................................................ 4,990 6,964
Capital lease obligations............................................................. 795 621
Accrued ESLIRP........................................................................ 8,315 8,638
Other long-term liabilities........................................................... 2,469 3,852
--------- ---------
Total liabilities.................................................................. 384,715 400,801
--------- ---------
Commitments and contingencies (Note 3)................................................
Minority interests.................................................................... 304 14,471
Shareholder's equity
Common stock......................................................................... 1 1
Capital in excess of par value....................................................... 119,470 114,933
Retained earnings.................................................................... (132,158) (119,436)
Loans to officers.................................................................... (920) (920)
Accumulated other comprehensive income............................................... (9,009) (11,603)
--------- ---------
Total shareholder's equity......................................................... (22,616) (17,025)
--------- ---------
Total liabilities and shareholder's equity......................................... $ 362,403 $ 398,247
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-26
<PAGE>
CHARLES RIVER LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
June 26, June 24,
1999 2000
-------- --------
<S> <C> <C>
Cash Flows Relating to Operating Activities
Net income....................................................................... $ 14,308 $ 12,722
Adjustments to reconcile net income to net cash provided by operating
activities:......................................................................
Depreciation and amortization................................................... 5,816 8,012
Amortization of debt issuance costs and discounts............................... - 962
Provision for doubtful accounts................................................. (13) 35
Earnings from equity investments................................................ (1,117) (748)
Minority interests.............................................................. 2 679
Deferred income taxes........................................................... 309 (5,147)
Stock compensation expense...................................................... 91 -
Property, plant, and equipment write-downs and disposals........................ - 528
Other non-cash items............................................................ - 11
Changes in assets and liabilities
Trade receivables............................................................... (4,707) (4,832)
Inventories..................................................................... 589 (61)
Due from affiliates............................................................. (779) 156
Deferred financing costs........................................................ - (588)
Other current assets............................................................ (694) (122)
Other assets.................................................................... (481) (1,740)
Accounts payable................................................................ (1,210) (3,532)
Accrued compensation............................................................ 368 3,050
Deferred income................................................................. 2,607 (1,835)
Accrued interest................................................................ - (601)
Accrued liabilities............................................................. (2,499) (2,339)
Accrued income taxes............................................................ (4,569) 2,099
Accrued ESLIRP.................................................................. 801 323
Other long-term liabilities..................................................... (125) 10
--------- ---------
Net cash provided by operating activities $ 8,697 $ 7,042
--------- ---------
Cash Flows Relating to Investing Activities
Capital expenditures............................................................ (4,637) (6,107)
Contingent payments for prior year acquisitions................................. (251) -
Acquisition of business, net of cash acquired of $3,163......................... - (6,011)
Proceeds from sale of animal colony............................................. - 7,000
--------- ---------
Net cash used in investing activities......................................... $ (4,888) $ (5,118)
Cash Flows Relating to Financing Activities
Proceeds from long-term debt.................................................... - 3,000
Payments on long-term debt...................................................... (35) (600)
Payments on capital lease obligations........................................... (124) (216)
Net activity with Bausch & Lomb................................................. (6,147) -
--------- ---------
Net cash provided by/used in financing activities............................. $ (6,306) $ 2,184
Effect of exchange rate changes on cash and cash equivalents..................... (745) (125)
--------- ---------
Net change in cash and cash equivalents.......................................... (3,242) 3,983
========= =========
Cash and cash equivalents, beginning of period................................... 24,811 15,010
--------- ---------
Cash and Cash Equivalents, End of Period......................................... $ 21,569 $ 18,993
========= =========
Supplemental Cash Flow Information
Cash paid for interest.......................................................... $ 172 $ 18,773
Cash paid for taxes............................................................. 2,978 4,539
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-27
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation
The condensed consolidated interim financial statements are unaudited,
and certain information and footnote disclosure related thereto normally
included in financial statements prepared in accordance with generally accepted
accounting principles in the United States, have been omitted in accordance with
Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements were prepared following
the same policies and procedures used in the preparation of the audited
financial statements and reflect all adjustments (consisting of normal recurring
adjustments) considered necessary to present fairly the financial position of
Charles River Laboratories, Inc. ("the Company"). The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year. These condensed consolidated financial statements should be read in
conjunction with the Company's annual report appearing elsewhere in this
Registration Statement.
2. Initial Public Offering
The Company's 100% shareholder, Charles River Laboratories
International, Inc. consummated an initial public offering ("the Offering") of
16,100,000 shares of its common stock at a price of $16 subsequent to June 24,
2000. Charles River Laboratories International, Inc. plans to use some of the
net proceeds from the Offering of $236,068 to redeem a portion of the Company's
outstanding senior subordinated notes and a portion of the Company's bank debt.
The Offering was declared effective and trading opened on the New York Stock
Exchange on June 23, 2000, however the closing did not occur until the third
quarter of 2000. For this reason, use of these proceeds with respect to the
Company has not been recorded in the accompanying unaudited condensed
consolidated financial statements. See Note 4 for a discussion of the impact of
the Offering on the provision for income taxes.
The following pro forma presentation of selected unaudited balance
sheet information for the company gives effect to the Offering as if it had
occurred on June 24, 2000.
Pro Forma as of
June 24, 2000
---------------
Total assets............................ $ 397,553
Total liabilities....................... 285,990
Shareholders' Equity.................... 97,092
The Company will record an extraordinary loss, net of tax, of
approximately $8.5 million in the third quarter of 2000. This extraordinary loss
will be attributable to premiums relating to the early repayment of a portion of
the senior subordinated notes, and the write-off of deferred financing costs and
discounts associated with the debt repayment.
3. Supplemental Balance Sheet Information
The composition of inventories is as follows:
December 25, June 24,
1999 2000
------------ ------------
Raw materials and supplies........ $ 4,196 $ 3,793
Work in process................... 1,608 1,374
Finished products................. 24,730 27,025
--------- ---------
Inventories....................... $ 30,534 $ 32,192
========= =========
F-28
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(dollars in thousands)
The composition of property, plant and equipment is as follows:
December 25, June 24,
1999 2000
------------ ------------
Land.................................. $ 7,022 $ 9,411
Buildings............................. 90,730 143,809
Machinery and equipment............... 82,131 93,340
Leasehold improvements................ 4,668 5,145
Furniture and fixtures................ 1,826 1,931
Vehicles.............................. 2,689 2,585
Construction in progress.............. 4,679 4,569
--------- ---------
193,745 260,790
Less accumulated depreciation (108,332) (143,049)
--------- ---------
Net property, plant and equipment..... $ 85,413 $ 117,741
========= =========
4. Income Taxes
Effect of the Offering
As further described in Note 2, Charles River Laboratories
International, Inc. the Company's 100% shareholder, closed its initial public
offering in the third quarter of 2000. Some of the net proceeds from the
Offering of $236,068 will be used to repay a portion of the Company's
indebtedness. Although the uses of the proceeds are not reflected in the
accompanying condensed consolidated financial statements, the Company has given
effect to the impact of the Offering on its estimated annual effective tax rate
and reduced such rate to 46.7%. The 46.7% effective tax rate has been reflected
in the accompanying condensed consolidated statements of income for the three
and six month periods ended June 24, 2000.
In addition, the Company has reassessed the need for a valuation
allowance associated with the deferred tax asset balance discussed below. As a
result of the Offering, the Company expects to be significantly more profitable
in the future, due to reduced interest costs. The valuation allowance associated
with the deferred tax asset described below has been reduced by $4,762, to $750.
The reduction of the valuation allowance has been recorded as a tax benefit in
the second quarter of 2000. The net deferred tax asset of $101,752 as of June
24, 2000 has been recorded at its estimated realizable value as determined by
management after considering all available evidence, including historical
operating results, projections of taxable income and tax planning strategies.
Finalization of Tax Purchase Price Allocation
In connection with the leveraged recapitalization transaction which
occurred effective September 29, 1999, CRL Acquisition LLC and Bausch & Lomb
Incorporated, Charles River Laboratories International, Inc's shareholders, made
a joint election under Internal Revenue Code 338(h)(10) to treat the transaction
as an asset purchase resulting in a step-up in the tax basis of the underlying
net assets. The election resulted in the recording of a deferred tax asset, net
of valuation allowance, of $99,506 and a corresponding increase to capital in
excess of par value. The Company was, however, still in the process of
finalizing the tax purchase price allocation at December 25, 1999. During the
second quarter of 2000, the tax purchase price allocation related to the
election described above was finalized. An adjustment of $4,537 has been
recorded to reduce the net deferred tax asset balance and capital in excess of
par value in accordance with the final tax purchase price allocation.
F-29
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(dollars in thousands)
5. Commitments and Contingencies
Insurance
The Company maintains insurance for workers' compensation, auto
liability, employee medical and general liability. The per claim loss limits are
$250, with annual aggregate loss limits of $1,500. Related accruals were $2,813
and $2,861 on December 25, 1999 and June 24, 2000, respectively. Separately, the
Company has provided a letter of credit in favor of the insurance carriers in
the amount of $350.
Supply Agreement
The Company is currently engaged in distributing certain products under
a supply agreement. In the event certain minimum sales of $500 in 2000 and
$1,000 in 2001 are not achieved, the Company at its option can pay the
difference in cash or terminate the agreement. In the event of such termination
the Company will not be required to make any payments.
Litigation
Various lawsuits, claims and proceedings of a nature considered normal
to its business are pending against the Company. In the opinion of management,
the outcome of such proceedings and litigation currently pending will not
materially affect the Company's condensed consolidated financial statements.
The Company is currently under a court order issued in June 1997 to
remove its large animal operations from two islands located in the Florida Keys
and to refoliate the islands. The Company removed its large animal operations
from the island in the First Quarter of 2000. The Company continues to hold
discussions with the state of Florida and federal authorities regarding the
extent of refoliation required on the islands and believes the reserves recorded
in the accompanying condensed consolidated financial statements are sufficient
to provide for the estimated exposure in connection with the refoliation. The
Company has provided a letter of credit in regards to the completion of the
refoliation on the island for $350.
6. Acquisitions and Disposals
On February 28, 2000, the Company acquired an additional 16% of
the equity (340,840 common shares) of its 50% equity joint venture company,
Charles River Japan, from Ajinomoto Co., Inc. The purchase price for the equity
was 1.4 billion yen, or $12,844. One billion yen, or $9,174, was paid at
closing, and the balance of 400 million yen, or $3,670, was deferred pursuant
to a three-year balloon promissory note secured by a pledge of the 16% shares.
The note bears interest at the long-term prime rate in Japan, 2.15% at June
24, 2000. Effective with the acquisition of this additional interest, the
Company has control of, and is consolidating the operations, of Charles River
Japan. The estimated fair value of the incremental net assets acquired is
$6,207. Goodwill of $6,637 has been recorded in the accompanying condensed
consolidated interim financial statements and is being amortized over its
estimated useful life of 15 years.
On March 10, 2000, the Company announced the closure of its Shamrock
primate import and conditioning business in Small Dole, England. This closure
was completed during the second quarter of 2000. The Company does not expect
that the animal sales previously made by Shamrock will be significantly
affected. A restructuring change of $751 related to the closure was recorded in
selling, general and administrative expenses in the first quarter of 2000. This
reserve was fully utilized in the second quarter of 2000.
During January 2000, the Company sold a product line within its
research model business segment. The selling price of $7,000 approximated the
net book value of the underlying assets at the time of the sales. In addition
the
F-30
<PAGE>
CHARLES RIVER LABORATORIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(dollars in thousands)
Company had approximately $900 of deferred revenue which related to cash
payments received in advance of shipping the research models. Under the term of
the sales agreement, the Company is no longer obligated to ship research models
and, accordingly, has recorded this amount as income in the first quarter of
2000. Fiscal 1999 sales associated with this product line approximated $2,800.
7. Business Segment Information
The following table presents sales and other financial information by
product line segment for the six month period ended June 26, 1999 and June 24,
2000. Sales to unaffiliated customers represent net sales originating in
entities primarily engaged in either animal services or biomedical products and
services.
Six Month Period Ended
--------------------------
June 26, June 24,
1999 2000
--------- ---------
Research Models
Net sales........................... $73,782 $87,176
Operating income.................... 20,306 25,150
Depreciation and amortization....... 3,991 4,596
Capital expenditures................ 2,512 3,281
Biomedical Products and Services
Net sales........................... 34,384 56,223
Operating income.................... 7,417 11,056
Depreciation and amortization....... 1,825 3,416
Capital expenditures................ 2,125 2,826
Total assets attributable to the research models segment as of December
25, 1999 and June 24, 2000 were $268,381 and $305,489 respectively. Total assets
attributable to the biomedical products and services segment as of December 25,
1999 and June 24, 2000 were $94,022 and $92,758 respectively.
A reconciliation of segment operating income to consolidated operating
income is as follows:
Six Month Period Ended
--------------------------
June 26, June 24,
1999 2000
-------- --------
Total segment operating income...... $27,723 $36,206
Unallocated corporate overhead...... (4,554) (2,761)
------- -------
Consolidated operating income....... 23,169 33,445
======= =======
8. Comprehensive Income
The components of comprehensive income for the six-month periods ended
June 26, 1999 and June 26, 2000 are set forth below:
Six Month Period Ended
--------------------------
June 26, June 24,
1999 2000
-------- --------
Net income......................... $14,308 $12,722
Foreign currency translation....... (4,768) (2,594)
------- -------
Comprehensive income............... 9,540 10,128
======= =======
F-31
<PAGE>
================================================================================
13 1/2 Series B Senior Subordinated Notes Due 2009
Charles River Laboratories, Inc.
PROSPECTUS
Donaldson, Lufkin & Jenrette
, 2000
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of Charles
River have not changed since the date hereof.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses incurred or
expected to be incurred by the Registrant in connection with the sale of the
securities being registered.
Legal fees and expenses................. $ 25,000
Accounting fees and expenses............ 17,500
Miscellaneous........................... 7,500
--------
Total................................... $ 50,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court
to award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act").
As permitted by the Delaware General Corporation Law, the Registrant's
certificate of incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law,
(iii) under section 174 of the Delaware General Corporation Law (regarding
unlawful dividends and stock purchases) or (iv) for any transaction from which
the director derived an improper personal benefit.
As a result of this provision, the ability of the Registrant, or a
stockholder thereof, to successfully prosecute an action against a director for
breach of his duty of care is limited. However, the provision does not affect
the availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The SEC has taken the position
that the provision will have no effect on claims arising under the federal
securities laws.
In addition, the Registrant's certificate of incorporation provides for
mandatory indemnification rights, subject to limited exceptions, to any director
or executive officer of the Registrant who (because of the fact that he or she
is a director or officer) is involved in a legal proceeding of any nature. Such
indemnification rights include reimbursement for expenses incurred by such
director or officer in advance of the final disposition of such proceeding in
accordance with the applicable corporate law.
The indemnification provisions in the Registrant's certificate of
incorporation, by-laws and the indemnification agreements entered into between
the Registrant and each of its directors and executive officers may be
sufficiently broad to permit indemnification of the Registrant's directors and
executive officers for liabilities arising under the Securities Act.
Charles River provides insurance from commercial carriers against some
liabilities incurred by the directors and officers of its parent.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
Document Exhibit Number
-------- --------------
Certificate of Incorporation.................. 3.1
II-1
<PAGE>
Document Exhibit Number
-------- --------------
By-laws....................................... 3.2
Form of Indemnification Agreement............. 10.15
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On September 29, 1999, Charles River Laboratories, Inc. sold 150,000
units consisting of 13 1/2% notes due 2009 and warrants to purchase 1,140,000
shares of common stock of Charles River Laboratories International, Inc. for an
aggregate principal amount of $150,000,000 to Donaldson, Lufkin & Jenrette
Securities Corporation in a private placement in reliance on Section 4(2) under
the Securities Act, at an offering price of $1,000 per unit. The notes were
immediately resold by the initial purchaser in transactions not involving a
public offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following exhibits are filed as part of this
registration statement:
Number Description
------ -----------
2.1*** Recapitalization Agreement, dated as of July 25, 1999, among
Charles River Laboratories, Inc., Charles River Laboratories
International, Inc. (formerly known as Endosafe, Inc.), Bausch &
Lomb Incorporated, and other parties listed therein.
2.2*** Amendment No. 1 to Recapitalization Agreement, dated as of
September 29, 1999 by Bausch & Lomb Incorporated and CRL
Acquisition LLC.
2.3** Agreement and Plan of Reorganization, dated as of June 6, 2000,
among Charles River Laboratories International, Inc., CRL
Acquisition LLC and B&L CRL, Inc.
3.1*** Certificate of Incorporation of Charles River Laboratories, Inc.
3.2*** By-laws of Charles River Laboratories, Inc.
4.1*** Investors' Agreement, dated as of September 29, 1999, among
Charles River Laboratories International, Inc. and the
shareholders named therein.
4.2*** Indenture dated as of September 29, 1999 among Charles River
Laboratories, Inc. and State Street Bank and Trust Company, as
trustee.
4.3*** Form of note (included in Exhibit 4.2).
5.1*** Opinion of Davis Polk & Wardwell with respect to the notes.
10.1*** Credit Agreement, dated as of September 29, 1999, among Charles
River Laboratories, Inc., the various financial institutions that
are or may become parties as lenders thereto, DLJ Capital
Funding, Inc., as lead arranger, sole book runner and syndication
agent for the lenders, Union Bank of California, N.A., as
administrative agent for the lenders, and National City Bank, as
documentation agent for the lenders.
10.2*** Purchase Agreement between Charles River Laboratories, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation as Initial
Purchaser.
10.3+ Joint Venture Agreement between Ajinomoto Co., Inc. and Charles
River Breeding Laboratories, Inc. dated June 24, 1981, and
ancillary agreements, amendments and addendums.
10.4*** Supply Agreement between Merck & Co., Inc. and Charles River
Laboratories, Inc. dated September 30, 1994.
10.5*** Amended and Restated Stock Purchase Agreement among Charles River
Laboratories, Inc. and SBI Holdings, Inc. and its stockholders
dated September 4, 1999.
10.6+ Ground Lease between HIC Associates (Lessor) and Charles River
Laboratories, Inc. (Lessee) dated June 5, 1992; Real Estate Lease
between Charles River Laboratories, Inc. (Landlord) and Charles
River Partners L.P. (Tenant) dated December 22, 1993; and
Assignment and Assumption Agreement between Charles River
Partners, L.P. (Assignor) and Wilmington Partners L.P.
(Assignees) dated December 22, 1993.
10.7*** Amended and Restated Distribution Agreement between Charles River
BRF, Inc., Charles River Laboratories, Inc., Bioculture Mauritius
Ltd. and Marry Ann and Owen Griffiths, dated December 23, 1997.
10.8*** Supply Agreement between Sierra Biomedical, Inc. and Scientific
Resources International, Ltd., dated March 18, 1997.
10.9**** Severance Agreement between Charles River Laboratories, Inc. and
Real H. Renaud dated January 20, 1992.
10.10**** 1999 Charles River Laboratories Officer Separation Plan.
10.11**** Form of Agreement and Release among Bausch & Lomb, Incorporated,
Charles River Laboratories, Inc. and the named executive officers
dated as of July 25, 1999.
10.12# 1999 Management Incentive Plan.
10.13** 2000 Incentive Plan.
10.14** 2000 Directors Stock Plan.
10.15** Form of Indemnification Agreement.
12.1* Computation of Ratio of Earnings to Fixed Charges
21.1*** Subsidiaries of Charles River Laboratories, Inc.
23.1*** Consent of Davis Polk & Wardwell (contained in their opinion
filed as Exhibit 5.1).
23.2* Consent of PricewaterhouseCoopers LLP.
24.1*** Power of Attorney pursuant to which amendments to this
registration statement may be filed.
--------------------
* Filed herewith.
** Previously filed as an exhibit to Amendment No. 2 to Charles River
Laboratories International, Inc.'s Registration Statement on Form S-1 (File
No. 333-35524) filed June 23, 2000.
*** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 333-91845) filed December 1, 1999.
**** Previously filed as an exhibit to Amendment No. 1 to Charles River
Laboratories International, Inc.'s Registration Statement on Form S-1 (File
No. 333-35524) filed June 6, 2000.
+ Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-91845) filed January 11,
2000.
# Previously filed as an exhibit to Charles River Laboratories International
Inc.'s Quarterly Report on Form 10-Q (File No. 333-92383) filed May 9,
2000.
II-4
<PAGE>
(b) Financial Statement Schedules. The following financial statement
schedules are included as part of this registration statement.
Valuation and Qualifying Accounts
Charles River Laboratories, Inc.
Income Tax Valuation Allowance
<TABLE>
<CAPTION>
Charged
Balance to costs Charged Balance
at beginning and to other at end of
of period expenses accounts Description Deductions Description period
--------- -------- -------- ----------- ---------- ----------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended December 25, 1999.
Income Tax Valuation Allowance....... $1,766 $5,170 Provisions $-- $6,936
For the year ended December 26, 1998.
Income Tax Valuation Allowance....... $1,766 $ -- Provisions $-- $1,766
For the year ended December 27, 1997.
Income Tax Valuation Allowance....... $ -- $1,766 Provisions $-- $1,766
</TABLE>
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Charged
Balance to costs Charged Balance
at beginning and to other at end of
of period expenses accounts Description Deductions Description period
--------- -------- -------- ----------- ---------- ----------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
For the year ended December 25, 1999.
Recoveries/
Income Tax Doubtful Accounts......... $ 898 $ 324 Provisions $(244) Write-offs $ 978
For the year ended December 26, 1998.
Recoveries/
Income Tax Doubtful Accounts......... $ 688 $ 265 Provisions $(55) Write-offs $ 898
For the year ended December 27, 1997.
Recoveries/
Income Tax Doubtful Accounts......... $ 568 $ 192 Provisions $(72) Write-offs $ 688
</TABLE>
Other financial statement schedules have been omitted because they are
inapplicable or are not required under applicable provisions of Regulation S-X
or because the information that would otherwise be included in such schedules is
contained in the Registrant's financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(x) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(y) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(z) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
II-5
<PAGE>
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wilmington, State of
Massachusetts, on the 31st day of August, 2000.
Charles River Laboratories, Inc.
By: /s/Thomas F. Ackerman
-------------------------------
Thomas F. Ackerman
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement on Form S-1 has
been signed by the following persons in the capacities indicated on August 31,
2000.
Signature Title
--------- -----
*
--------------------- President, Chief Executive Officer
James C. Foster (Principal Executive Officer) and
Chairman
/s/Thomas F. Ackerman Chief Financial Officer (Principal
--------------------- Financial Officer) and Senior Vice
Thomas F. Ackerman President, Finance and Administration
(Principal Accounting Officer)
*
--------------------- Director
Robert Cawthorn
* Director
---------------------
Stephen D. Chubb
* Director
---------------------
Thompson Dean
* Director
---------------------
Reid S. Perper
* Director
---------------------
Douglas E. Rogers
* The undersigned, by signing his name hereto, does sign and execute
this Post-Effective Amendment No. 1 pursuant to the Power of Attorney executed
by the above-named directors and officers of the Registrant and previously filed
with the Securities and Exchange Commission on behalf of such directors and
officers.
By: /s/Thomas F. Ackerman
---------------------------
Thomas F. Ackerman
Attorney-in Fact
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<PAGE>
Exhibit Index
Number Description
------ -----------
2.1*** Recapitalization Agreement, dated as of July 25, 1999, among
Charles River Laboratories, Inc., Charles River Laboratories
International, Inc. (formerly known as Endosafe, Inc.), Bausch &
Lomb Incorporated, and other parties listed therein.
2.2*** Amendment No. 1 to Recapitalization Agreement, dated as of
September 29, 1999 by Bausch & Lomb Incorporated and CRL
Acquisition LLC.
2.3** Agreement and Plan of Reorganization, dated as of June 6, 2000,
among Charles River Laboratories International, Inc., CRL
Acquisition LLC and B&L CRL, Inc.
3.1*** Certificate of Incorporation of Charles River Laboratories, Inc.
3.2*** By-laws of Charles River Laboratories, Inc.
4.1*** Investors' Agreement, dated as of September 29, 1999, among
Charles River Laboratories International, Inc. and the
shareholders named therein.
4.2*** Indenture dated as of September 29, 1999 among Charles River
Laboratories, Inc. and State Street Bank and Trust Company, as
trustee.
4.3*** Form of note (included in Exhibit 4.2).
5.1*** Opinion of Davis Polk & Wardwell with respect to the notes.
10.1*** Credit Agreement, dated as of September 29, 1999, among Charles
River Laboratories, Inc., the various financial institutions that
are or may become parties as lenders thereto, DLJ Capital
Funding, Inc., as lead arranger, sole book runner and syndication
agent for the lenders, Union Bank of California, N.A., as
administrative agent for the lenders, and National City Bank, as
documentation agent for the lenders.
10.2*** Purchase Agreement between Charles River Laboratories, Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation as Initial
Purchaser.
10.3+ Joint Venture Agreement between Ajinomoto Co., Inc. and Charles
River Breeding Laboratories, Inc. dated June 24, 1981, and
ancillary agreements, amendments and addendums.
10.4*** Supply Agreement between Merck & Co., Inc. and Charles River
Laboratories, Inc. dated September 30, 1994.
10.5*** Amended and Restated Stock Purchase Agreement among Charles River
Laboratories, Inc. and SBI Holdings, Inc. and its stockholders
dated September 4, 1999.
10.6+ Ground Lease between HIC Associates (Lessor) and Charles River
Laboratories, Inc. (Lessee) dated June 5, 1992; Real Estate Lease
between Charles River Laboratories, Inc. (Landlord) and Charles
River Partners L.P. (Tenant) dated December 22, 1993; and
Assignment and Assumption Agreement between Charles River
Partners, L.P. (Assignor) and Wilmington Partners L.P.
(Assignees) dated December 22, 1993.
10.7*** Amended and Restated Distribution Agreement between Charles River
BRF, Inc., Charles River Laboratories, Inc., Bioculture Mauritius
Ltd. and Marry Ann and Owen Griffiths, dated December 23, 1997.
10.8*** Supply Agreement between Sierra Biomedical, Inc. and Scientific
Resources International, Ltd., dated March 18, 1997.
10.9**** Severance Agreement between Charles River Laboratories, Inc. and
Real H. Renaud dated January 20, 1992.
10.10**** 1999 Charles River Laboratories Officer Separation Plan.
10.11**** Form of Agreement and Release among Bausch & Lomb, Incorporated,
Charles River Laboratories, Inc. and the named executive officers
dated as of July 25, 1999.
10.12# 1999 Management Incentive Plan.
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<PAGE>
10.13** 2000 Incentive Plan.
10.14** 2000 Directors Stock Plan.
10.15** Form of Indemnification Agreement.
12.1* Computation of Ratio of Earnings to Fixed Charges
21.1*** Subsidiaries of Charles River Laboratories, Inc.
23.1*** Consent of Davis Polk & Wardwell (contained in their opinion
filed as Exhibit 5.1).
23.2* Consent of PricewaterhouseCoopers LLP.
24.1*** Power of Attorney pursuant to which amendments to this
registration statement may be filed.
--------------------
* Filed herewith.
** Previously filed as an exhibit to Amendment No. 2 to Charles River
Laboratories International, Inc.'s Registration Statement on Form S-1 (File
No. 333-35524) filed June 23, 2000.
*** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (File No. 333-91845) filed December 1, 1999.
**** Previously filed as an exhibit to Amendment No. 1 to Charles River
Laboratories International, Inc.'s Registration Statement on Form S-1 (File
No. 333-35524) filed June 6, 2000.
+ Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-91845) filed January 11,
2000.
# Previously filed as an exhibit to Charles River Laboratories International
Inc.'s Quarterly Report on Form 10-Q (File No. 333-92383) filed May 9,
2000.
II-9