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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
COMMISSION FILE NUMBER 0-19271
IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 01-0393723
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
ONE IDEXX DRIVE, WESTBROOK, MAINE 04092
(Address of principal executive offices) (Zip Code)
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(207) 856-0300
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.10 par value per share
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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Based on the closing sale price on February 28, 1998, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$588,090,769. For these purposes, the registrant considers all of its Directors
and executive officers and The Jackson Laboratory to be its only affiliates.
The number of shares outstanding of the registrant's Common Stock was
38,430,462 on March 25, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
LOCATION IN FORM 10-K 10-K INCORPORATED DOCUMENT
Part III Specifically identified portions of the
Company's definitive proxy statement to be
filed in connection with the Company's Annual
Meeting to be held on May 15, 1998 are
incorporated herein by reference.
Parts I and II Specifically identified portions of the
Company's Annual Report to Stockholders for
the year ended December 31, 1997 are
incorporated herein by reference.
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Forward-looking statements, within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, are made throughout this Annual Report on Form
10-K. For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans," "expects,"
"seeks," "estimates," and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause the results of the Company to differ materially from those indicated by
such forward-looking statements, including those detailed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Future Operating Results" in the Company's 1997 Annual Report to
Stockholders incorporated herein by reference.
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ITEM 1. BUSINESS
IDEXX Laboratories, Inc., incorporated in Delaware in 1983 (the "Company"
or "IDEXX", which includes wholly-owned subsidiaries unless the context
otherwise requires), develops, manufactures and distributes products and
provides services for animal health, food, hygiene and environmental markets.
Within these markets, the Company's products and services include biology-based
detection systems, chemistry-based detection systems, laboratory testing and
specialized consulting services, veterinary practice management software systems
and pharmacy services. The substantial majority of the Company's revenue is
currently derived from the sale of animal health diagnostic products and
services and veterinary practice management systems, where the Company believes
it holds leading market positions. The Company's veterinary products are used by
veterinarians to detect and monitor diseases, physiologic disorders, immune
status, hormone and enzyme levels, blood chemistry, electrolyte levels, blood
cell counts and other substances or conditions in animals. The Company's
software products are designed to provide practice management solutions for
veterinary clinics. The veterinary laboratory testing and consultation services
provided by the Company are used by veterinarians to assist them in the
detection and diagnosis of disease status and other conditions in animals. The
Company's food, hygiene and environmental testing products and services and
consultative services are used to detect various contaminants in food, food
processing environments and water and to assist in maintaining safe food and
food processing environments.
The Company currently offers more than 400 products to customers in more
than 50 countries. The Company has developed leading positions in many of its
markets by identifying user needs and offering high-quality, cost-effective
product and service solutions backed by extensive customer support. The
Company's veterinary and food and environmental test products incorporate a
range of delivery systems and detection technologies which are tailored to
particular applications and customer needs. These products range from
single-use, handheld immunoassays that yield a simple positive or negative
result and instrument-based systems that perform quantitative testing on a range
of sample volumes to approximately 300 dehydrated culture media products.
Through its 1997 acquisitions of Advanced Veterinary Systems and Professionals'
Software, Inc., the Company has become the leading U.S. supplier of veterinary
practice management software systems. In addition, the Company provides rapid,
affordable, high-quality laboratory services to veterinarians throughout the
U.S., England, Japan and Australia.
In developing its businesses, the Company has employed a number of
strategies, including the licensing of human diagnostic technology and the
adaptation of that technology for veterinary applications, internal research and
development, strategic acquisitions, and an emphasis on single use products and
instrument-based products that offer a significant opportunity for repeatable
sales of associated consumables. The Company's strategy is to maintain and build
upon its market-leading positions in veterinary professional office diagnostic,
veterinary practice management software and water testing products through
continued product support, development and enhancement, and to exploit
opportunities created by the continuing integration of the Company's diverse
veterinary products and services and by the development of an integrated and
comprehensive offering of products and consulting services to food processors.
The Company also will continue to evaluate acquisition, licensing and other
opportunities in complementary areas within the veterinary and food and
environmental markets, including veterinary pharmaceuticals.
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IDEXX(R), Better Choice(TM), Bind(R), Cardiopet(R), CITE(R), Colilert(R),
Colisure(TM), Cornerstone(TM), Defined Substrate Technology(R),
DiaSystems(TM), DST(R), Enterolert(TM), Environetics(R), FlockChek(R),
HerdChek(R), IDEXX Food Safety Net(TM), IDEXX VetLab(TM), LacTek(TM),
Lightning(R), PetChek(R), Probe(R), Quanti-Tray(R), Screen Machine(TM), SNAP(R),
SimPlate(TM), VetLyte(R) and VetTest(R) are trademarks of the Company.
Autoread(TM), QBC(R) and VetAutoread(TM) are trademarks of Becton Dickinson and
Company ("Becton"). Windows(R) is a trademark of Microsoft Corporation.
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PRODUCTS AND SERVICES
The Company operates in two primary business areas: products and services
for the veterinary market and products and services for food, hygiene and
environmental markets. Within the veterinary market, the Company operates
primarily through five business units: (i) Professional Office Diagnostics,
which includes test kits and instrument-based detection systems for in-clinic
companion animal diagnostics, (ii) IDEXX Veterinary Services, which operates the
Company's U.S. network of veterinary laboratory testing and consulting services,
(iii) the IDEXX Informatics Division, formed as a result of the acquisition of
two veterinary practice management software businesses in 1997, (iv) IDEXX
Pharmacy Services, a mail order pharmacy serving veterinarians throughout the
U.S. and (v) Production Animal Services, which comprises test kits and
instrument-based systems for diagnostics in the production animal (poultry,
livestock and swine) market. The Company's food, hygiene and environmental
testing products and services are provided by the Company's Food and
Environmental Division.
- - PROFESSIONAL OFFICE DIAGNOSTICS
IMMUNOASSAYS
The Company, through its Professional Office Diagnostic ("POD") Division,
provides a broad range of point-of-care diagnostic products for use by
veterinarians in testing for a variety of animal diseases and health conditions.
The Company markets a line of single-use, hand-held test kits, under the SNAP,
CITE Probe and CITE trademarks, to veterinary clinics and animal hospitals for
the detection of diseases and other conditions in dogs, cats, horses and cattle.
These trademarks designate different testing delivery systems, each of which is
designed to address different customer needs and to allow quick (in most cases,
less than ten minutes), accurate and convenient testing without the need for
laboratory equipment. These products enable veterinarians to provide improved
service to animal owners by delivering test results almost immediately, allowing
the veterinarians to initiate therapy during the office visit, if required.
The Company's test kits incorporate immunoassay technology based on
antibody-antigen reactions. Antibodies are proteins produced as a result of an
immune response, a biological mechanism that enables certain animals to
recognize and respond to substances foreign to the body, called antigens.
Antibodies are provided by the immune system specifically to bind to these
antigens and also signal other immune system cells to assist in eliminating the
antigen. Antigens include viruses, bacteria, parasites, and hormones. In
immunoassay-based tests, a sample containing an unknown quantity of the analyte
is mixed with one or more reagents. Certain of these reagents contain either
antibodies or antigens that bind in a highly specific manner to the analyte.
Certain reagents are labeled with an indicator chemical, which identifies the
presence or absence of the analyte. In some cases results can be read visually;
in others, instruments are used to determine the results.
The Company's POD immunoassays use enzyme labels to indicate the presence
or absence of a specific analyte. In these enzyme immunoassays ("EIA"), the test
results are measured through a color change, which varies in proportion to the
amount of the analyte present in the sample. Use of EIA labels allows for visual
interpretation of test results.
The Company offers SNAP, CITE Probe and CITE immunoassays to detect feline
leukemia ("FeLV") and feline immunodeficiency virus ("FIV") (which resembles the
human AIDS virus) in cats and heartworm disease in dogs and cats. The Company
also has developed and markets a combination test, the SNAP Combo FeLV/FIV,
which enables veterinarians to test simultaneously for the FeLV and FIV viruses.
Other small animal assays include tests for Lyme disease in dogs, thyroid
hormone levels in dogs and cats, and parvovirus, which causes a gastrointestinal
disease in dogs. The Company's equine products test for immunity levels in
newborn foals, as well as for equine infectious anemia, a regulated disease in
the U.S. for which horses must be tested before they are allowed to cross state
lines.
The Company also markets a line of EIA microwell-based test kits, under the
PetChek name, for testing in larger clinics and independent laboratories serving
the veterinary market. PetChek tests offer accuracy, ease of use and cost
advantages to high-volume customers. The Company currently sells PetChek tests
for feline leukemia virus, feline immunodeficiency virus and heartworm disease.
The Company also markets several immunoassay test kits under the DiaSystems
trade name. These include microwell-based tests for feline infectious
peritonitis and equine infectious anemia, and an agar gel immunodiffusion test
for equine infectious anemia.
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INSTRUMENTS
The Company markets four instrument systems for use in veterinary clinics.
These instruments are distributed under the trade names of VetTest, QBC(R)
VetAutoread(TM), VetLyte and VetTest SNAP Reader.
VETTEST. The VetTest blood chemistry analyzer is used to measure levels of
certain enzymes and other substances in blood in order to assist the
veterinarian in diagnosing physiologic conditions. Twenty-one separate blood
chemistry tests can be performed on the VetTest analyzer. The system is capable
of running up to 12 tests at a time on a single sample. The Company also offers
prepackaged general health profiles which include 12 frequently used chemistries
and pre-anesthetic panels for young animals consisting of six chemistries each.
Commonly run tests include glucose, alkaline phosphate, albumin, creatinine,
urea and total protein. VetTest analysers are manufactured for the Company by
Sanyo Electric Co., Ltd. under an agreement that expires December 31, 1998, but
renews automatically for one-year periods unless either party notifies the other
of its decision not to renew. The dry chemistry slides used in the VetTest
analyzer (the "VetTest Slides") are supplied by Johnson and Johnson Clinical
Diagnostics, Inc. ("J&J") under a Supply Agreement with J&J, as assignee of
Eastman Kodak Company (as amended, the "J&J Agreement"). The Company is required
to purchase all of its requirements for slides from J&J to the extent available.
In addition, the Company has committed to minimum annual purchase volumes of
certain chemistry VetTest Slides during the term of the J&J Agreement. The J&J
Agreement does not prohibit J&J from selling comparable slides or licensing its
slide technology for use in veterinary applications and J&J currently sells
comparable slides for use in its own analyzer, which is primarily designed for
human applications but is also used in the veterinary market. Although the
Company does not believe sales by J&J in the veterinary market currently have a
material adverse effect on the business of the Company, there can be no
assurance that such sales will not have such a material adverse effect in the
future. The J&J Agreement expires on December 31, 2006 and contains provisions
for the negotiation of a renewal term of five years.
QBC(R) VETAUTOREAD(TM). The QBC(R) VetAutoread(TM) is a hematology system
used to evaluate certain components of blood. This hematology instrument is
based on Quantitative Buffy Coat technology, which uses centrifugal force to
separate a blood sample into its key components. The blood sample is spun at
high speed in a proprietary test device, and the different components of the
blood separate by density. The QBC(R) VetAutoread(TM) instrument scans the blood
tube, quantifies the different components and calculates parameters. These
values are then compared to normal ranges contained in the software of the
instrument, which assists the veterinarian in determining if there are disease
states indicated that require further investigation. Key components evaluated
are red blood cells (anemia/internal bleeding), white blood cells (infection,
immunosuppression, allergy), and platelets (clotting capability). The QBC(R)
VetAutoread(TM) instrument is based on the Becton QBC(R) Autoread(TM) system
sold to physicians in private practices for human applications. The QBC(R)
VetAutoread(TM) system is manufactured for IDEXX by Becton, and is covered by a
development and distribution agreement which requires Becton to supply
instruments to IDEXX through 2001 and reagents through 2003. IDEXX has committed
to minimum annual purchases of instruments and reagents under the agreement.
VETTEST SNAP READER. The VetTest SNAP Reader allows the veterinarian to
obtain quantitative measurement of hormones including T4 and cortisol. These
measurements assist the veterinarian in diagnosing and monitoring the treatment
of certain endocrine diseases, such as hyper- and hypo-thyroidism, Cushing's
syndrome and Addison's disease. In addition, the analyzer allows the
veterinarian to monitor the effect of treatment on these diseases. The VetTest
SNAP Reader is a module which can be integrated into the VetTest chemistry
analyzer. Samples and reagents are introduced to the instrument using the
Company's SNAP device. The quantitative measurement is performed automatically
with results available for interpretation in less than 15 minutes after sample
introduction. The results are either displayed on the VetTest SNAP Reader or
downloaded to the VetTest analyzer.
VETLYTE. The VetLyte system is used for measuring three electrolytes --
sodium, potassium and chloride -- to aid in evaluating water and electrolyte
balances and assessing plasma condition. Samples are introduced to the
instrument through a probe. The assay operation, including the addition of
reagents from an enclosed solution pack, is performed automatically. Test
results are available in less than one minute after sample introduction and are
either displayed on the VetLyte instrument or downloaded to the VetTest
instrument.
The Company also provides computer software which facilitates the
integration of results obtained on these four systems. This linkage of the four
instrument systems as part of the IDEXX VetLab (the combination of the VetTest,
QBC(R) VetAutoread(TM), VetLyte and VetTest SNAP Reader) allows the veterinarian
to produce a report containing the same types of information in a more timely
manner than would typically be provided by commercial laboratories performing
the same tests. A veterinarian using the Company's Better Choice practice
management software system can also automatically transfer results obtained from
the IDEXX VetLab to the applicable patient records.
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Approximately 57%, 73% and 75% of the Company's total revenues were derived
from sales of POD products in 1997, 1996 and 1995, respectively, with
approximately 39%, 46% and 46% of total revenues, respectively, attributable to
the sale of POD kits and consumables and approximately 18%, 27% and 29% of total
revenues, respectively, attributable to the sale of POD instruments.
- - IDEXX VETERINARY SERVICES
IDEXX Veterinary Services was formed in 1996 when IDEXX acquired VetLab,
Inc., located in Fort Worth, Texas, Veterinary Services, Inc., located in
Denver, Colorado and the Consolidated Veterinary Diagnostics, Inc. business,
located in Sacramento, California and combined them with the Company's
specialized consulting service provider known as Cardiopet, Incorporated. Since
that time, IDEXX Veterinary Services has opened a number of other facilities in
the U.S. to broaden its veterinary laboratory services coverage. IDEXX
Veterinary Services currently offers commercial veterinary laboratory and
consulting services to approximately 4,500 veterinary clinics in the U.S.
through facilities located in Arizona, California, Colorado, Illinois, New
Jersey, Oregon and Texas. Through subsidiaries located in the United Kingdom,
Japan and Australia, the Company offers commercial veterinary laboratory
services to approximately 4,000 veterinary clinics located in those countries.
Veterinarians use the Company's services by submitting samples by courier or
overnight delivery to the appropriate Company facility based on location, type
of sample and workload at the facility. The commercial reference laboratories
offer a large selection of tests and diagnostic panels to detect a number of
disease states and other conditions in production and companion animals.
Services include chemistry, hematology, pathology and serum allergy testing.
Additionally, IDEXX Veterinary Services provides specialized veterinary
consultation and advisory services through Cardiopet. Cardiopet was originally
established in 1979 by veterinarians to facilitate the provision of
electrocardiographic ("ECG") consulting services by board-certified
veterinarians. Since its founding, Cardiopet has expanded into areas such as
radiology, internal medicine, dermatology and ultrasound consulting. Cardiopet's
ECG and radiology services permit veterinarians to obtain readings and
interpretations of test results transmitted by telephone from the veterinarians'
offices. Such consulting services can be provided during the course of a visit,
thereby giving veterinarians immediate access to experts in cardiology and
radiology, as well as internal medicine and dermatology consulting, by
telephone. Cardiopet employs or retains as consultants approximately 33
board-certified or board-eligible specialists, who handle over 70,000 cases per
year for over 9,000 veterinary clinics and hospitals in the U.S., Canada and
approximately 12 other countries.
Approximately 15% of the Company's 1997 revenues were derived from
veterinary laboratory and consulting services.
- - IDEXX INFORMATICS DIVISION
The IDEXX Informatics Division was formed in 1997 with the acquisition of
Advanced Veterinary Systems, located in Eau Claire, Wisconsin, and
Professionals' Software, Inc., located in Effingham, Illinois. The Company
believes that it is the leading provider of veterinary practice management
software in the U.S. with an installed based of more than 8,000 clinics. Through
this division, the Company provides comprehensive veterinary practice management
software solutions for veterinary emergency, food animal, equine and small
animal practices. These products include the Company's Windows-based Cornerstone
and Better Choice practice management software products. The Company can provide
fully integrated solutions which include software, hardware, network design,
installation and education. The Company's software systems are designed to
manage all aspects of client contact, and business and accounting functions for
the veterinarian.
- - IDEXX PHARMACY SERVICES
The Company introduced its mail-order veterinary pharmacy services in 1997.
While the Company will fill any valid pharmaceutical prescription from a
licensed veterinarian, the pharmacy specializes in custom-compounding of
pharmaceutical products for which no approved animal formulation exists.
Generally, compounding is the preparation, mixing, assembling or packaging of a
drug when there is no approved human or animal drug available of the composition
required by a veterinarian to treat a particular patient. The Company believes
that many veterinarians provide compounding services for their clients in
clinic. The Company believes that its compounding services, performed by
licensed pharmacists, will be more desirable to many veterinarians than
in-clinic compounding.
The pharmacy industry is heavily regulated. The Center for Veterinary
Medicine ("CVM") of U.S. Food and Drug Administration ("US FDA") regulates the
compounding of drugs for use in the veterinary industry. The Company's pharmacy
is also regulated by other federal government agencies and in each state in
which it conducts its business. See "Government Regulation." The pharmacy is
conducting business in every state except California, North Carolina,
Missouri and the District of Columbia, where it currently has license
applications pending.
- - PRODUCTION ANIMAL SERVICES
The Company provides a range of diagnostic products, including single-test
kits and instrument-based systems, to production industry and government
customers for disease surveillance and eradication and health management
programs. Products sold for these applications utilize a range of technologies
including enzyme immunoassay, particle concentration fluorescence immunoassay
("PCFIA") and DNA probe technologies.
The Company's HerdChek product line consists of several immunoassay kits
and related instruments which detect diseases in swine and cattle, including an
often fatal, highly contagious disease in swine caused by pseudorabies virus
("PRV") and a disease in cattle caused by infectious bovine rhinotracheitis
("IBR"). The disease caused by PRV is a target of eradication by state and
federal governments and in many countries worldwide. The HerdChek products
include tests that can distinguish antibody levels caused by certain genetically
engineered vaccines from antibody levels produced by the field strains of PRV
and IBR. The product line also includes a test for porcine reproductive
respiratory syndrome, a swine disease that has been shown to have a severe
health impact on infected herds, and for a cattle disease known as bovine
leukemia virus.
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The Company has three test kits based on DNA probe technology, marketed
under the name IDEXX DNA Probe, for the diagnosis of Johne's disease
(Mycobacterium paratuberculosis) in cattle, and Mycoplasma gallisepticum ("MG")
and Mycoplasma synoviae ("MS") infections in poultry. Johne's disease causes
significant economic loss for cattle producers and is thus a target for disease
control efforts by producers, veterinarians and certain government agencies.
Respiratory infections caused by MG or MS cause significant economic loss for
poultry breeders. DNA probes offer a direct means of detecting the presence of
certain organisms through the recognition of specific DNA sequences. The
technology is particularly effective in differentiating closely related
organisms that cannot adequately be distinguished by current immunoassay
technology. The Company's DNA probe products utilize the patented polymerase
chain reaction ("PCR") technology licensed from Roche Molecular Systems, Inc.,
which amplifies target DNA sequences several million-fold and facilitates
detection of minute amounts of DNA in a sample. The Company believes that its
DNA Probe tests provide more rapid and accurate results than culture
methodologies.
The Company's FlockChek product line comprises a range of enzyme
immunoassay test kits and related instrumentation and software used in poultry
health management programs. Extensive testing in breeder flocks, which produce
progeny flocks for egg and meat production, permits better management of vaccine
and therapeutic programs designed to enhance production efficiency. Kits in the
FlockChek product line are used to test for immunity to leading avian pathogens,
including Newcastle disease virus, infectious bursal disease virus, infectious
bronchitis virus, reovirus, mycoplasma and Salmonella enteriditis.
The Company also sells instrument-based detection systems used by
government and industry laboratories to test large numbers of samples
simultaneously. Applications include disease surveillance and health monitoring
in poultry and livestock, which can facilitate government and industry disease
eradication programs and enhance poultry and livestock production efficiency.
- - FOOD AND ENVIRONMENTAL PRODUCTS AND SERVICES
Detection products help assure the safety and wholesomeness of water and
food such as drinking water, dairy products, poultry and meat. Detection targets
include microbial contaminants such as total coliforms, E. coli and enterococci,
pathogenic bacteria such as Salmonella, and other contaminants such as food
residues and antibiotic residues.
The Company currently offers several enzyme immunoassay test kits which are
used by food companies, government laboratories and dairy producers to test for
contaminants such as antibiotic residues in milk. Dairy farmers and food
producers use these tests for incoming quality assurance of raw milk, and
government and food quality managers use them for ongoing surveillance of food
safety. IDEXX dairy and food quality tests are designed for convenience in field
and laboratory testing applications and are calibrated to detect analytes at
specified levels. While many of these tests are read visually, the Company's
reader instrument also enables users to obtain confirmation and a printed record
of test results for antibiotic residues in milk.
The Company's Colilert tests are Defined Substrate Technology ("DST") media
which simultaneously detect total coliforms and E. coli in water. These
organisms are broadly used as indicators of microbial contamination. The
Company's DST products utilize indicator-nutrients which produce a change in
color or fluorescence when metabolized by target microbes in the sample.
Colilert tests serve as a rapid method for determining the presence or absence
of both total coliforms and E. coli, with results available in 24 hours, or 18
hours in the case of the Colilert-18 media. Colilert tests are used by
government laboratories, water utilities and private certified
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laboratories to test drinking water in compliance with U.S. Environmental
Protection Agency ("US EPA") standards. The test is also used in evaluating
water used in production processes (for example, in food or cosmetic
applications) and in evaluating bottled water, recreational water and water from
private wells.
The Company's Enterolert product is also based on DST and detects
enterococci in recreational waters with results available in 24 hours. The
Quanti-Tray device, when used in conjunction with the Company's Colilert,
Colilert-18 or Enterolert products, enables users to test for microbiological
contamination, and to obtain quantitative results without the time-consuming
steps associated with traditional methods.
The Company's Colilert, Colilert-18, and Quanti-Tray products have been
approved by the US EPA. In addition, the Colilert test has also been approved in
Japan and Brazil and is under evaluation by regulatory agencies in Europe and
certain other countries in South America.
In connection with the settlement of patent infringement litigation (see
the section in this Report labeled "Legal Proceedings"), the Company recently
acquired from Millipore Corporation all rights to manufacture and distribute the
Colisure test for detection of total coliforms and E. coli in water. Colisure is
also a DST medium, and the Company believes that this product may complement the
Company's Colilert and Colilert-18 products and intends to continue distributing
the Colisure product.
The Company's hygiene products, marketed under the Lightning trade name,
are designed for rapid and convenient testing of cleaning effectiveness in food
processing plants, retail outlets and restaurants. The Lightning system consists
of a unit-dose testing device, which is used to swab processing and other
surfaces to measure levels of adenosine triphosphate ("ATP"), which is a
commonly used indicator of the presence of food residue, and a portable
luminometer used to read test results. Detection of ATP is accomplished by
bioluminescence, the production of light by the reaction between the swab
reagents and ATP. Results may be obtained within one minute after a surface is
swabbed. The luminometer also may be easily linked to a printer or computer to
enable users to maintain records of test results.
The Company's SimPlate product line consists of proprietary media and a
patented incubation vessel which detect and quantify various microorganisms in
food, including total bacterial count, total coliforms, E. coli, and yeast and
mold. The SimPlate device is used with the Company's Defined Substrate
Technology or Multiple Enzyme Technology media, with results available in 24 -
48 hours. Multiple Enzyme Technology media correlates enzyme activity to the
presence of microorganisms in food using multiple enzyme substrates which
fluoresce when hydrolyzed by bacterial enzymes. Reading and quantification of
total viable bacteria is achieved by incubating the media with the food sample
in the SimPlate device for 24 hours and then counting the fluorescent wells. The
total count of fluorescent wells is then compared against a most probable number
table to determine the number of bacteria present in the sample. The SimPlate
product line is used by food quality managers for ongoing surveillance of food
safety.
The Company's BIND test uses genetically engineered bacteriophage to screen
for the presence of a broad range of Salmonella organisms in finished food
products, ingredients and animal feeds. The bacteriophage causes Salmonella to
produce a unique protein which is easily detectable. BIND gives results in
approximately 22 hours, more rapidly and without the time-consuming steps
associated with traditional methods.
The Company, through its Acumedia subsidiary, also produces a line of more
than 300 dehydrated culture media products. These products are used primarily
for bacterial detection in the food industry.
In 1997, the Company introduced the IDEXX Food Safety Net, which is
intended to offer a comprehensive and integrated network of products and
consulting services to food producers to help improve the effectiveness of
their food safety and quality programs. The network is intended to combine
offerings of the Company's food testing products with reference laboratory
testing services and consulting services, including food safety education and
training, food safety auditing, crisis management and response, and regulatory
awareness.
Approximately 17%, 13% and 14% of the Company's revenues were derived from
sales of food and environmental test products in 1997, 1996 and 1995,
respectively.
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MARKETING AND DISTRIBUTION
IDEXX markets, sells and services its products in more than 50 countries
through its marketing, sales and technical service groups as well as through
independent distributors and other resellers. The Company maintains sales
offices outside the U.S. in Australia, France, Germany, Italy, Japan, New
Zealand, the Netherlands, Spain, Taiwan and the United Kingdom.
The Company selects the appropriate distribution channel for its products
based on the type of product, technical service requirements, number and
concentration of customers, regulatory requirements and other factors. The
Company markets its professional office diagnostic products to veterinarians
both directly and through independent veterinary distributors in the U.S., with
most instruments sold directly by IDEXX sales personnel and test kits supplied
both via the distribution channel and directly. Outside the U.S., IDEXX sells
its professional office diagnostic products through independent distributors and
other resellers and, in certain European countries, Australia, Japan, Taiwan and
Canada, through its direct sales force. The Company markets its software
products and veterinary laboratory services through its direct sales force. The
Company markets its livestock and poultry monitoring products directly to
laboratories and other customers through IDEXX salespeople located in the U.S.,
Europe, Japan, Canada, Australia and Malaysia. Those products are also sold
through distributors in Japan and several other countries. The Company markets
its water testing, food quality control and research products primarily through
its direct sales force in the U.S. and Canada. Outside the U.S. and Canada,
IDEXX markets these products through its direct sales force and through selected
independent distributors in certain markets.
In 1997, 32%, and in 1996 and 1995, 34%, of the Company's revenue was
attributable to sales of products and services to customers outside the U.S.
Risks associated with foreign operations include the need for additional
regulatory approvals, possible disruptions in transportation of the Company's
products, the differing product needs of foreign customers, difficulties in
building and managing foreign operations, fluctuations in the value of foreign
currencies, import/export duties and quotas, and unexpected regulatory, economic
or political changes in foreign markets. The Company engages in limited hedging
activities to reduce the effect of foreign currency fluctuations on its
earnings.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on the
enhancement of its existing detection systems; the development of new test kits
for additional diagnostic applications, new types of detection systems
incorporating advances in immunology, cell and molecular biology, microbiology,
DNA probes and other technologies and therapeutics; and the enhancement of its
practice management software systems. The Company seeks to enhance its
competitive position in each of its markets by developing new products to meet
evolving customer needs. These new products include both enhancements of
existing products and the introduction of products based on new technologies or
delivery systems. The Company's research and development expenses were
approximately $17 million, $12.2 million and $10.2 million in 1997, 1996 and
1995, respectively.
PATENTS AND LICENSES
The Company holds 22 U.S. patents and has filed patent applications for 17
other processes or products. The Company also holds four foreign patents and has
filed 18 foreign patent applications which correspond to U.S. patents and patent
applications of the Company.
The Company also has pursued a strategy of licensing patents and
technologies from third parties to provide it with competitive advantages in
selected markets and to accelerate new product introductions. These licenses
include an exclusive royalty-bearing license for diagnostic products for the
feline immunodeficiency virus from The Regents of the University of California,
and an exclusive royalty-bearing license for the Defined Substrate Technology
utilized in the Colilert test. In addition, the Company holds a royalty-bearing
license for canine heartworm tests from Barnes-Jewish Hospital.
The Company currently licenses certain technologies used in its products
from third parties, and expects to continue to do so in the future. Moreover, to
the extent the Company's products embody technologies protected by patents,
copyrights or trade secrets of others, the Company may be required to obtain
licenses to such technologies in order to continue to sell such products. There
can be no assurance that any technology licenses which the Company desires or is
required to obtain will be available on commercially reasonable terms. The
failure to obtain any such licenses may delay or prevent the sale by the Company
of certain new or existing products. See "Legal Proceedings" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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<PAGE> 9
PRODUCTION
Certain components of the Company's products are available from only one
source. The Company purchases all of its CITE devices from Hybritech. The
Company purchases all of its VetTest slides from J&J and all of its hematology
components from Becton. Certain key components of the Colilert product are
available only from a single source. The Company purchases the components of its
Lightning devices and luminometers from single sources. The Company also
purchases certain of the components for its LacTek dairy reader instrument from
single sources. While the Company does not anticipate difficulties in obtaining
the components used in its products, the loss of any of these sources of supply
would have a material adverse effect on the Company. The Company has contractual
commitments or outstanding purchase orders with J&J, Sanyo and Becton covering
its anticipated 1998 requirements for slides, VetTest analyzers, hematology
reagents and instruments.
Substantially all of the Company's revenue in each quarter results from
orders booked in that quarter. Accordingly, the Company maintains no significant
backlog and believes that its backlog at any particular date is not indicative
of future sales.
COMPETITION
Competition in the Company's markets is intense. IDEXX competes with a
large number of companies ranging from very small businesses to large health
care and other companies, many of which have substantially greater financial,
manufacturing, marketing and product and service research resources than the
Company. In general, the particular companies with which IDEXX competes vary
with the Company's different markets. In most of its markets, the Company
competes with a number of companies. However, in the U.S. market for veterinary
laboratory services the Company competes primarily with Antech Diagnostics, a
unit of Veterinary Centers of America, Inc. In the markets for veterinary and
food and environmental test products, the Company competes primarily on the
basis of the ease of use, speed, accuracy and other performance characteristics
of its products and services, the breadth of its product line and services, the
effectiveness of its sales and distribution channels, customer service and
pricing. In the market for veterinary practice management software systems, the
Company competes primarily on the basis of ease of use, speed and other
performance characteristics, the effectiveness of its customer service, advances
in technologies and pricing. In the market for veterinary laboratory services,
the Company competes on the basis of service, price and performance.
Academic institutions, governmental agencies and other public and private
research organizations are also conducting research activities and may
commercialize products on their own or through joint ventures. The existence of
competing products, services or procedures that may be developed in the future
may adversely affect the marketability of products and services developed by the
Company. The Company's competitive position will also depend on its ability to
attract and retain qualified scientific and other personnel, develop effective
proprietary products, implement production and marketing plans, obtain patent
protection and obtain adequate capital resources.
GOVERNMENT REGULATION
Most diagnostic tests for animal health applications are regulated in the
U.S. by the Center for Veterinary Biologics within the U.S. Department of
Agriculture's ("USDA") Animal and Plant Health Inspection Service ("APHIS"). The
APHIS regulatory process involves the submission of product performance data and
manufacturing documentation. Subsequent to regulatory approval to market a
product, APHIS requires that each lot of product be submitted for review prior
to release to customers. In addition, APHIS requires special approval for
marketing products where test results are used in part for government-mandated
disease management programs. A number of foreign governments accept APHIS
approval as part of their separate regulatory approvals. However, compliance
with an extensive regulatory process is required in connection with marketing
products in Japan, Germany, The Netherlands and many other countries. The
Company also is required to have a facility license from APHIS to manufacture
USDA-licensed products at its facility. The Company has obtained such a license
for its current manufacturing facility.
The Company also submits certain of its products for government or industry
certification which is not legally required in order to market the product but
which may be required by customers purchasing the product.
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<PAGE> 10
Certain non-diagnostic products of the Company are used in animal health
applications but do not currently require licensing by APHIS or most foreign
governments. From time to time other federal agencies and Congressional
committees have indicated an interest in implementing further regulation of the
biotechnology industry. The Company is unable to predict whether any such
regulations will be adopted or whether, if adopted, such regulations will
adversely affect the Company's business.
The Colilert product has been approved by the US EPA and the Japanese
Ministry of Health and Welfare for drinking water testing. The Company has also
received Association of Official Analytical Chemists ("AOAC") approval for the
use of Colilert for testing water used as an ingredient in food or in the
production of food. The Company's Colilert-18 product and the Colisure test have
been approved by the US EPA and submitted to United Kingdom regulatory
authorities for approval. Use of this technology for other applications may
require regulatory approval from those agencies, as well as the USDA and the US
FDA. In addition, the Company's SimPlate product used in conjunction with the
Defined Substrate Technology and the Multiple Enzyme Technology, and the
Company's BIND products, have been approved by the AOAC for use in food testing.
The US FDA has recommended certification requirements for certain test kits
used in dairy applications. The Company is in compliance with the recommended
requirements and has received AOAC-RI approval for its SNAP and LacTek
Beta-Lactam test kits. It is expected that the US FDA will impose further
requirements in this area. The Company's Pharmacy is subject to regulation by
CVM of the US FDA, the U.S. Drug Enforcement Agency and in each state in which
it is licensed or may conduct its business. The Company's Acumedia dehydrated
culture media products are subject to regulation by the US FDA.
Any acquisitions of new products and technologies may subject the Company
to additional areas of government regulation. These may involve food, drug and
water quality regulations of the US FDA, the US EPA and the USDA, as well as
state, local and foreign governments. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
EMPLOYEES
As of December 31, 1997, IDEXX had approximately 2,100 full-time and
part-time employees. The Company is not a party to any collective bargaining
agreement and believes that relations with its employees are good.
ITEM 2. PROPERTIES
IDEXX owns approximately 12 acres of land in Westbrook, Maine. IDEXX leases
approximately 290,000 square feet of industrial space in Westbrook, under a
lease expiring in 2008, and approximately 75,000 square feet of industrial space
in Memphis, Tennessee for use as a distribution facility, under a lease expiring
in 2007. The Company's Informatics Division leases approximately 75,000 square
feet of office and manufacturing space in Illinois and Wisconsin. IDEXX also
leases a total of approximately 100,000 square feet of smaller office,
manufacturing and warehouse space in the U.S. and elsewhere in the world. In
addition, the Company owns or leases approximately 114,000 square feet of space
in the U.S., Australia and the United Kingdom for use as veterinary reference
laboratories and office space for its veterinary consulting services. Of this
space, 46,000 square feet is owned by the Company and the remaining amount is
leased, under leases having expiration dates up to the year 2002.
ITEM 3. LEGAL PROCEEDINGS
On February 4, 1993, the Company acquired Environetics, Inc.
("Environetics"), which brought a patent infringement suit with Stephen C.
Edberg, Ph.D. against Millipore Corporation ("Millipore") in the U.S. District
Court for the District of Connecticut on September 30, 1992 (the "Millipore I
suit"). The complaint in the Millipore I suit was subsequently amended to add as
additional plaintiffs Access Medical Systems, Inc., a subsidiary of the Company
("Access"), and Stephen C. Wardlaw, M.D. The primary relief sought by the
plaintiffs was an injunction against Millipore which would prevent Millipore
from selling the Colisure product for the detection of E. coli and total
coliforms in water. The plaintiffs believe the Colisure product infringes U.S.
Patent No. 4,925,789 (the "`789 Patent") covering the Company's Colilert
product, under which Access and Environetics have an exclusive license from Drs.
Edberg and Wardlaw. In addition, on July 26, 1995, the Company, Environetics,
Access and Drs. Edberg and Wardlaw brought a second patent infringement suit
against Millipore in the U.S. District Court for the District of Connecticut
(the "Millipore II suit"). The principal relief sought by the plaintiffs in the
Millipore II suit was an injunction against Millipore which would prevent
Millipore from selling the Colisure product which the plaintiffs believe also
infringes U.S. Patent No. 5,429,933 (the "'933 Patent"), which covers the
Colilert product. The `933 Patent, which is related to the `789 Patent, was
issued in July 1995 to Dr. Edberg, and is exclusively licensed to Access and
Environetics. In November 1997, the Company and Millipore entered into an
agreement in principle to settle the Millipore I and II suits. Under the terms
of the agreement, which was finalized in March 1998, Millipore acknowledged the
validity of the `789 and `933 Patents and agreed to an injunction against
infringement of the patents. Millipore
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<PAGE> 11
also transferred the Colisure product to the Company in March 1998.
On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed
suit against the Company in the U.S. District Court for the District of
Connecticut. In its complaint, CDC Technologies alleges that the Company's
conduct in, and its relationships with its distributors in connection with, the
distribution of the Company's hematology products (i) violate federal and state
antitrust statutes, (ii) violate Connecticut statutes regarding unfair trade
practices, and (iii) constitute a civil conspiracy and interfere with CDC
Technologies' business relations. The relief sought by CDC Technologies includes
treble damages for antitrust violations, as well as compensatory and punitive
damages, and an injunction to prevent the Company from interfering with CDC
Technologies' relations with distributors. The Company has filed an answer
denying the allegations in CDC Technologies' complaint. The Company is unable to
assess the likelihood of an adverse result or estimate the amount of any damages
the Company may be required to pay. Any adverse outcome resulting in the payment
of damages would adversely affect the Company's results of operations.
On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit
against the Company in the U.S. District Court for the Southern District of
California for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988
(the " `631 Patent"). The `631 Patent, which is owned by Synbiotics, claims
assays, certain methods and compositions for the diagnosis of canine heartworm
infection. The primary relief sought by Synbiotics is an injunction against the
Company which would prevent the Company from selling canine heartworm diagnostic
products which infringe the `631 Patent, as well as treble damages for past
infringement. This suit was not served on the Company within the time period
specified under applicable court rules and therefore is expected to be
dismissed by the court, however Synbiotics would not be precluded from filing a
new suit in the future. While the Company believes that it has meritorious
defenses against claims of infringement of the `631 Patent, the Company is
unable to assess the likelihood of an adverse result or estimate the amount of
any damages the Company may be required to pay. If the Company is precluded from
selling canine heartworm diagnostic products or required to pay damages or make
additional royalty or other payments with respect to such sales, the Company's
business and results of operations could be materially and adversely affected.
On January 9, 1998, a complaint was filed in the U.S. District Court for the
District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F. WORKMAN,
JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff purports to
represent a class of purchasers of the common stock of the Company from July 19,
1996 through March 24, 1997. The complaint claims that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange
Commission Rule 10b-5 promulgated pursuant thereto, by virtue of false or
misleading statements made during the class action period. The complaint also
claims that the individual defendants are liable as "control persons" under
Section 20(a) of that Act. In addition, the complaint claims that the individual
defendants sold some of their own common stock of the Company, during the class
period, at times when the market price for the stock allegedly was inflated.
While the Company and the other defendants deny the allegations and will defend
this suit vigorously, the Company is unable to assess the likelihood of an
adverse result or estimate the amount of damages which the Company may be
required to pay. Any adverse outcome resulting in the payment of damages would
adversely affect the Company's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
NAME AGE TITLE
---- --- -----
David E. Shaw.................... 46 Chairman of the Board of Directors and
Chief Executive Officer
Jeffrey J. Langan................ 53 President and Chief Operating Officer
Erwin F. Workman, Jr., Ph.D...... 51 Executive Vice President and Chief
Scientific Officer
Ralph K. Carlton................. 42 Senior Vice President, Finance and
Administration and Chief Financial
Officer
Louis W. Pollock................. 44 Vice President
Roy V. H. Pollock, D.V.M., Ph.D.. 48 Vice President
Christopher J. Quinn............. 39 Vice President
Mr. Shaw founded the Company in 1983, has served as its Chief Executive
Officer since 1983, and served as its President from 1983 until October 1993.
Prior to founding the Company, he was a Vice President of Agribusiness
Associates, Inc., an international management consulting firm.
Mr. Langan joined the Company in November 1997 as President, Chief Operating
Officer and a member of the Board of Directors. Mr. Langan came to the Company
from Thermedics Detection Inc., where he served as President and Chief Executive
Officer from April 1996. Prior to his position with Thermedics Detection Inc.,
Mr. Langan was employed by Hewlett-Packard Company from 1973 to 1996, where he
held several General Manager positions
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<PAGE> 12
including General Manager of the Healthcare Information Management Division and
General Manager of the Clinical Systems Business unit.
Dr. Workman joined the Company in July 1984, and he has served as Chief
Scientific Officer and Executive Vice President since November 1997 and as a
Director since 1993. He also served as President and Chief Operating Officer
from 1993 to November 1997. Before joining the Company, he was Manager of
Research and Development for the Hepatitis and AIDS Business Unit within the
diagnostic division of Abbott Laboratories.
Mr. Carlton joined the Company in February 1997 as Senior Vice President,
Finance and Administration and Chief Financial Officer. Mr. Carlton was a Senior
Vice President with the investment banking firm of Donaldson, Lufkin & Jenrette,
from March 1995 until he joined the Company. From 1986 to March 1995, he was
with the investment banking firm of Goldman, Sachs & Co., where he served in
various capacities, the most recent being as a Vice President.
Mr. Louis W. Pollock became a Vice President of the Company in December
1994 and is President and General Manager of the Company's Food and
Environmental Division. Mr. Pollock joined the Company in 1986 and served in
positions of increasing responsibility in veterinary products sales management
prior to serving as President of the Company's International Division from
December 1994 to March 1996. Prior to joining the Company, Mr. Pollock was
employed in various sales and marketing positions with Abbott Laboratories.
Dr. Roy V. H. Pollock became a Vice President of the Company in February
1998. Dr. Pollock joined the Company in November 1997 as Vice President of the
Company's Informatics Division, and presently serves as President of that
Division and Vice President of the Company. From 1995 until he joined the
Company, Dr. Pollock served as Vice President of the Companion Animal Division
of Pfizer Animal Health. Dr. Pollock was Vice President and Director, Strategic
Product Development, at SmithKline Beecham Animal Health from 1993 to 1995. Dr.
Pollock has also held faculty positions at Cornell University and Purdue
University.
Mr. Quinn became a Vice President of the Company in February 1998. Mr.
Quinn joined the Company in October 1997 as Vice President and General Manager
of the Professional Office Diagnostics Division and now serves as President of
that Division and Vice President of the Company. Mr. Quinn was employed by Bayer
in its Diagnostics Division as Senior Vice President from January 1996 until
joining the Company and as Vice President from 1993 through December 1995. Prior
to his employment at Bayer, Mr. Quinn was employed in various sales and
marketing positions at Baxter International.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information concerning the market price for the Company's Common Stock and
dividend policy is included under the section labeled "Market for the
Registrant's Common Stock and Related Stockholder Information" in the Company's
1997 Annual Report to Stockholders and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required under this item is included under the sections
labeled "Selected Financial Information" in the Company's 1997 Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required under this item is included under the heading
"Management's Discussions and Analysis of Financial Condition and Results of
Operations" in the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements as of December 31, 1997 and
Supplementary Data are included in the Company's 1997 Annual Report to
Stockholders and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10-13.
Except as indicated below, the information required by Part III is omitted
from this Annual Report on Form 10-K, and, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, is incorporated herein by reference
to the definitive proxy statement with respect to the Company's 1998 Annual
Meeting of Stockholders to be filed by the Company with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this report. The information required by Part III will appear under
the headings "Beneficial Ownership of Common Stock," and "ELECTION OF
DIRECTORS--Nominees," "-- Board and Committee Meetings," "-- Directors'
Compensation" and "-- Executive Compensation." Information regarding executive
officers of the Company is furnished in Part I of this Annual Report on Form
10-K under the heading "Executive Officers of the Company."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
(1) The consolidated financial statements set forth in the
list below are filed as part of this Annual Report on Form
10-K.
(2) The consolidated financial statement schedule set forth in
the list below is filed as a part of this Annual Report on
Form 10-K.
(3) Exhibits filed herewith or incorporated herein by
reference are set forth in Item 14(c) below.
List of Financial Statements and Schedules referenced in this
Item 14. Information incorporated by reference from Exhibit 13
filed herewith:
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Financial Statement Schedules filed herewith:
Schedule II - Valuation and Qualifying Accounts
All other Schedules are omitted because they are not
applicable or not required, or because the required
information is already provided herein.
(b) None
(c) See Exhibit Index on the page immediately preceding exhibits.
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized:
IDEXX LABORATORIES, INC.
By: /s/ David E. Shaw
-------------------------
David E. Shaw
Chief Executive Officer
March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID E. SHAW Chairman of the Board of March 27,1998
------------------------- Directors and Chief Executive
David E. Shaw Officer (Principal Executive
Officer) and Director
/s/ RALPH K. CARLTON Senior Vice President, March 27, 1998
------------------------- Finance and Administration and
Ralph K. Carlton Chief Financial Officer
(Principal Financial Officer)
/s/ MERILEE RAINES Vice President, Finance and March 27, 1998
------------------------- Treasurer (Principal Accounting
Merilee Raines Officer)
/s/ JEFFREY J. LANGAN President, Chief Operating March 27, 1998
------------------------- Officer and Director
Jeffrey J. Langan
/s/ ERWIN F. WORKMAN, JR. Executive Vice President, March 27, 1998
------------------------- Chief Scientific Officer
Erwin F. Workman, Jr. and Director
/s/ MARY L. GOOD Director March 27, 1998
-------------------------
Mary L. Good
/s/ JOHN R. HESSE Director March 27, 1998
-------------------------
John R. Hesse
/s/ E. ROBERT KINNEY Director March 27, 1998
-------------------------
E. Robert Kinney
/s/ JAMES L. MOODY, JR. Director March 27, 1998
-------------------------
James L. Moody, Jr.
/s/ KENNETH PAIGEN Director March 27, 1998
-------------------------
Kenneth Paigen
/s/ WILLIAM F. POUNDS Director March 27, 1998
-------------------------
William F. Pounds
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<PAGE> 15
EXHIBIT INDEX
3.1(11) Restated Certificate of Incorporation of the Company, as amended.
3.2(1) Amended and Restated By-Laws of the Company.
4.1(2) Rights Agreement, dated as of December 17, 1996, between the
Company and The First National Bank of Boston, as Rights Agent,
which includes as Exhibit A the Form of Certificate of
Designations, as Exhibit B the Form of Rights Certificate, and as
Exhibit C the Summary of Rights to Purchase Preferred Stock
4.2 Instruments with respect to other long-term debt of the Company
and its consolidated subsidiaries are omitted pursuant to Item
601(b)(4)(iii) of Regulation S-K since the total amount
authorized under each such omitted instrument does not exceed 10
percent of the total assets of the Company and its subsidiaries
on a consolidated basis. The Company hereby agrees to furnish a
copy of any such instrument to the Securities and Exchange
Commission upon request.
10.1(3) 1984 Stock Option Plan of the Company, as amended, with the forms
of option agreements granted thereunder attached thereto.
10.2(3) 1991 Stock Option Plan of the Company, as amended, with the forms
of option agreements granted thereunder attached thereto.
10.3(9) 1991 Director Option Plan of the Company, as amended, with the
forms of option agreements granted thereunder attached thereto.
10.4(10) 1997 Director Option Plan of the Company, as amended, with the
form of option agreement granted thereunder attached thereto.
* 10.5(4) Supply Agreement, dated January 15, 1992, between the Company and
Johnson & Johnson Clinical Diagnostics, Inc., as assignee of
Eastman Kodak Company.
* 10.5a(3) Amendment to Supply Agreement, dated November 16, 1993, and
Second Amendment to Supply Agreement, dated November 19, 1993,
between the Company and Johnson & Johnson Clinical Diagnostics,
Inc., as assignee of Eastman Kodak Company.
* 10.5b(5) Third Amendment to Supply Agreement, dated March 15, 1994,
between the Company and Johnson & Johnson Clinical Diagnostics,
Inc., as assignee of Eastman Kodak Company.
* 10.5c(8) Fourth Amendment to Supply Agreement, effective as of January 1,
1996, between the Company and Johnson & Johnson Clinical
Diagnostics, Inc.
* 10.6(3) Business Development and Sales Agreement, dated October 12, 1993,
between the Company and Becton Dickinson and Company.
* 10.6a(6) Schedules to Business Development and Sales Agreement, dated
October 12, 1993, and Amendment to Business Development and Sales
Agreement, dated as of July 25, 1994, between the Company and
Becton Dickinson and Company.
* 10.6b(7) Second Amendment to Business Development and Sales Agreement,
dated as of January 6, 1995, between the Company and Becton
Dickinson and Company.
* 10.6c(9) Third Amendment to Business Development and Sales Agreement,
dated as of January 22, 1996, between the Company and Becton
Dickinson and Company.
10.7 Letter Agreement dated as of November 24, 1997 between the
Company and Jeffrey J. Langan.
10.8 Employment Agreement dated April 25, 1997 between the Company and
David E. Shaw.
10.9 Employment Agreement dated April 25, 1997 between the Company and
Erwin F. Workman, Jr., Ph.D.
11 Statement regarding computation of per share earnings.
13 Annual Report to Stockholders for year ended December 31, 1997
(only those portions incorporated herein by reference).
21 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
27 Financial Data Schedule for Annual Report on Form 10-K for 1997.
15
<PAGE> 16
- ------------
(1) Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-40447).
(2) Incorporated by reference to the Exhibits to the Company's
Registration Statement on Form 8-A dated December 24, 1996 (File No.
0-19271).
(3) Incorporated by reference to the Exhibits to the Company's Annual
Report on Form 10-K dated March 30, 1994.
(4) Incorporated by reference to the Exhibits to the Company's Amendment
No. 1 on Form 8 dated February 14, 1992 to the Company's Current
Report on Form 8-K dated January 20, 1992.
(5) Incorporated by reference to the Exhibits to the Company's Quarterly
Report on Form 10-Q dated May 11, 1994.
(6) Incorporated by reference to the Exhibits to the Company's Quarterly
Report on Form 10-Q dated August 15, 1994.
(7) Incorporated by reference to the Exhibits to the Company's Annual
Report on Form 10-K dated March 29, 1995.
(8) Incorporated by reference to the Exhibits to the Company's Quarterly
Report on Form 10-Q dated July 26, 1996.
(9) Incorporated by reference to the Exhibits to the Company's Annual
Report on Form 10-K dated March 25, 1996.
(10) Incorporated by reference to the Exhibits to the Company's Quarterly
Report on Form 10-Q dated August 14, 1997.
(11) Incorporated by reference to the Exhibits to the Company's Annual
Report on Form 10-K dated March 28, 1997.
* Confidential treatment previously granted as to certain portions.
16
<PAGE> 1
Exhibit 10.7
November 24, 1997 PERSONAL AND CONFIDENTIAL
Jeffrey J. Langan
23 Stonymeade Way
Acton, Mass. 01720
Dear Jeff:
We are very enthusiastic about having you join our management team as President
and Chief Operating Officer as we continue to pursue significant growth
opportunities at IDEXX. The purpose of this letter is to confirm key elements of
an employment offer. This letter will supersede our letter of October 29, 1997.
1. TITLE AND RESPONSIBILITIES
You will join IDEXX as President and Chief Operating Officer. This job carries
responsibility for most aspects of the management of IDEXX. This would include
management of our long range planning and budgeting processes, achievement of
key operating goals, enhancement of our staffing, training and development
efforts to meet worldclass standards, and reinforcement of our mission, values
and principles as we collectively build one of the world's great companies.
2. COMPENSATION
$300,000 annualized base compensation, plus participation in annual senior
management cash performance bonus programs with a expectation of a cash bonus of
50% of base compensation if personal and corporate goals are met. Performance
reviews with consideration of merit increases are performed annually on a
calendar year basis.
3. IDEXX RETIREMENT AND INCENTIVE SAVINGS PROGRAM
Eligible for enrollment in our 401K plan after 6 months employment prior to
quarterly enrollment dates.
<PAGE> 2
4. IDEXX EMPLOYEE STOCK PURCHASE PROGRAM
Eligible for enrollment in the Plan after 6 months employment prior to twice
annual enrollment dates in January and July. The purpose of this program is to
create opportunities to purchase IDEXX stock on favorable terms.
5. MEDICAL BENEFITS
Contributory medical programs available to you and your family effective on the
first of the month following 30 days of employment.
6. INSURANCE
Life insurance at twice your annual salary. Long term disability at 70% salary
protection after a 90 day absence.
7. VACATION
Four weeks per year.
8. INCENTIVE STOCK OPTIONS
Option to purchase 250,000 shares of IDEXX common stock subject to vesting over
five years and exercisable over 10 years. These options are granted by the IDEXX
Board of Directors at the fair market value at the time of the grant and are
subject to the terms of the IDEXX Incentive Stock Option Grant Agreement and the
Company's incentive stock option plan. It has been customary in the past to make
additional annual grants to senior staff based on performance, and I would
anticipate annual option grants for up to 100,000 shares assuming that
performance goals are met - although any grant following your first full year at
IDEXX will be reduced by 50,000 shares due to the magnitude of this initial
grant.
9. RELOCATION
We expect you to relocate to Maine in mid-1998, and to work at our Westbrook
headquarters in the meantime. Reimbursement for relocation expenses will be
based on IDEXX relocation expense policies which we will provide to you, but
reimbursement would not exceed $50,000.
10. SIGNING BONUS
We will pay you a signing bonus of $100,000 in two parts: 1) $50,000 on February
1, 1998; and 2) $50,000 upon relocation of your family to Maine.
<PAGE> 3
11. SEVERANCE TERMS
Should you be terminated without cause prior to January 1, 2000, IDEXX will
continue to pay your salary for one year at your then existing rate, and you
will continue to receive normal benefits during this period.
12. BOARD OF DIRECTORS
Per our discussions, you will be considered for election to the IDEXX Board of
Directors upon your acceptance of this offer. I believe that you would make a
very strong contribution to the Board.
13. OTHER TERMS
IDEXX Non-Compete and Invention/Non-Disclosure Agreements describe important
terms of employment at IDEXX and must be executed upon commencement of
employment. Additionally, we expect employment to begin by December 1, 1997.
Please re-confirm agreement with the terms of this offer by co-signing this
letter. On behalf of all of my colleagues, let me again say that we look forward
to a long and very rewarding relationship.
Sincerely,
/s/ David E. Shaw
David E. Shaw, Chairman
Chief Executive Officer
ACCEPTED:
/s/ Jeffrey Langan 11/24/97
- --------------------------- -----------------------
Jeffrey Langan Date
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of April 25, 1997 by and between
IDEXX Laboratories, Inc., a Delaware corporation (the "Company"), and David E.
Shaw (the "Executive").
The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive, notwithstanding
the possibility, threat or occurrence of a Change of Control (as defined below)
of the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
(a) The "Effective Date" shall mean the first date during the Change
of Control Period (as defined in Section 1(b)) on which a Change of Control (as
defined in Section 2) occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the Executive's employment
with the Company is terminated prior to the date on which the Change of Control
occurs, and if it is reasonably demonstrated by the Executive that such
termination of employment (i) was at the request of a third party who has taken
steps reasonably calculated to effect a Change of Control or (ii) otherwise
arose in connection with or anticipation of a Change of Control, then for all
purposes of this Agreement the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing
on the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless
<PAGE> 2
previously terminated, the Change of Control Period shall be automatically
extended so as to terminate three years from such Renewal Date, unless at least
120 days prior to the Renewal Date the Company shall give notice to the
Executive that the Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which satisfies the
criteria set forth in clauses (i), (ii) and (iii) of subsection (c) of this
Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequently to the date hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in each case, unless, following such
Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
60% of, respectively, the
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then-outstanding shares of common stock and the combined voting power of the
then-outstanding voting securities entitled to vote generally in the election of
directors, of the corporation resulting from such Business Combination (which as
used in this Section 2(c) shall include, without limitation, a corporation which
as a result of such transaction owns the Company or all or substantially all of
the Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding any
corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination, or the combined voting power of the
then-outstanding voting securities of such corporation and (iii) at least half
of the members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing for
such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the third anniversary of
such date (the "Employment Period"). Except as provided in Section 1(a), nothing
in this Agreement shall, prior to the Effective Date, impose upon the Company
any obligation to retain the Executive as an employee. In addition, nothing in
this Agreement shall restrict the Executive from terminating his employment with
the Company, and no such termination by the Executive shall be deemed a breach
of this Agreement.
4. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be at least commensurate in all material
respects with the most significant of those held, exercised and assigned at any
time during the 120-day period immediately preceding the Effective Date and (B)
the Executive's services shall
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be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions, and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary"), which shall be paid
at a monthly rate, at least equal to twelve times the highest monthly base
salary paid or payable, including any base salary which has been earned but
deferred, to the Executive by the Company and its affiliated companies in
respect of the twelve-month period immediately preceding the month in which the
Effective Date occurs. During the Employment Period, the Annual Base Salary
shall be reviewed no more than 12 months after the last salary increase awarded
to the Executive prior to the Effective Date and thereafter at least annually.
Any increase in Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base Salary shall not
be reduced after any such increase and the term Annual Base Salary as utilized
in this Agreement shall refer to Annual Base Salary as so increased. As used in
this Agreement, the term "affiliated companies" shall include any company
controlled by, controlling or under common control with the Company.
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(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be entitled to receive such annual bonus as may be determined by
the Board of Directors, but in no event less than the annual bonus paid or
payable in respect of the full fiscal year immediately preceding the Effective
Date.
(iii) Incentive Plans. During the Employment Period, the
Executive shall be entitled to participate in all incentive plans, practices,
policies and programs applicable generally to other peer Executives of the
Company and its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with benefits which are
less favorable, in the aggregate, than the most favorable of such plans,
practices, policies and programs in effect for the Executive at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit, Savings and Retirement Plans. During the
Employment Period, the Executive and/or the Executive's family, as the case may
be, shall be eligible for participation in and shall receive all benefits under
welfare benefit, savings and retirement plans, practices, policies and programs
provided by the Company and its affiliated companies (including, without
limitation, medical, prescription, dental, disability, employee life, group
life, split-dollar life, accidental death and travel accident insurance plans
and programs) to the extent applicable generally to other peer executives of the
Company, but in no event shall such plans, practices, policies and programs
provide the Executive with benefits which are less favorable, in the aggregate,
than the most favorable of such plans, practices, policies and programs in
effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, those
provided generally at any time after the Effective Date to other peer executives
of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall
be entitled to receive reimbursement for all reasonable expenses incurred by the
Executive in accordance with the policies, practices and procedures of the
Company in effect immediately prior to the Effective Date.
(vi) Vacation. During the Employment Period, the Executive shall
be entitled to paid vacation in accordance with the plans, policies, programs
and practices of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day
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period immediately preceding the Effective Date or, if more favorable to the
Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(c) Options. Upon the occurrence of a Change of Control, all
outstanding options to purchase shares of Common Stock held by the Executive
shall become immediately exercisable in full.
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. Subject to Section 5(d), the Company may terminate the
Executive's employment during the Employment Period for Cause. For purposes of
this Agreement, "Cause" shall mean:
(i) the willful failure of the Executive to perform
substantially the Executive's duties with the Company (other than any
such failure resulting from incapacity due to physical or mental
illness), which failure is not cured within 30 days after a written
demand for substantial performance is delivered to the Executive by the
Board which specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the
Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
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For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices,
titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt of
notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement or any other provision
hereof requiring a payment or provision of a benefit to the Executive,
other than an isolated, insubstantial and inadvertent failure not
occurring in bad faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than as provided in Section 4(a)(i)(B) hereof
or the Company's requiring the Executive to travel on Company business
to a substantially greater extent than required immediately prior to the
Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of
"Good Reason" made by the Executive shall be conclusive.
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Anything in this Agreement to the contrary notwithstanding, a
termination by the Executive for any reason or no reason during the 30-day
period immediately following the first twelve (12) months after the Effective
Date shall be deemed to be a termination for Good Reason for all purposes of
this Agreement.
(d) Notice of Termination.
(i) Any termination by the Company for Cause, or by the
Executive for Good Reason, shall be effected by Notice of Termination to the
other party hereto given in accordance with Section 12(b) of this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstances in enforcing the
Executive's or the Company's rights hereunder.
(ii) Any Notice of Termination for Cause must be given within
sixty (60) days of the Board learning of the event(s) or circumstance(s) which
the Board believes constitute(s) Cause. Prior to any Notice of Termination for
Cause being given (and prior to any termination for Cause being effective), the
Executive shall be entitled to a hearing before the Board at which he may, at
his election, be represented by counsel and at which he shall have a reasonable
opportunity to be heard. Such hearing shall be held on not less than fifteen
days prior written notice to the Executive stating the Board's intention to
terminate the Executive for Cause and stating in detail the particular event(s)
or circumstance(s) which the Board believes constitute(s) Cause for termination.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, subject, in the case of
termination by the Company, for Cause, to the Company's compliance with Section
5(d)(ii); (ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the date on which
the Company notifies the Executive of such termination; and (iii) if the
Executive's employment is terminated by reason of death or Disability, the Date
of Termination shall be the date
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of death of the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company Upon Termination.
(a) Good Reason: Other Than for Cause, Death or Disability. If,
during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause or Disability or the Executive shall terminate
employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in
cash within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not theretofore paid, (2)
the product of (x) the higher of (I) the highest annual cash bonus paid
to the Executive in the last three fiscal years prior to the Effective
Date and (II) the annual bonus paid or payable, including any bonus or
portion thereof which has been earned but deferred (and annualized for
any fiscal year consisting of less than twelve full months or during
which the Executive was employed for less than twelve full months), for
the most recently completed fiscal year during the Employment Period, if
any (such higher amount being referred to as the "Highest Annual Bonus")
and (y) a fraction, the numerator of which is the number of days in the
current fiscal year through the Date of Termination, and the denominator
of which is 365 and (3) any compensation previously deferred by the
Executive (together with any accrued interest or earnings thereon) and
any accrued vacation pay, in each case to the extent not theretofore
paid (the sum of the amounts described in clauses (1), (2), and (3)
shall be hereinafter referred to as the "Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual
Bonus.
(ii) for 36 months after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would have
been provided to them in accordance with the plans, programs, practices and
policies described in Section 4(b)(iv) of this Agreement (excluding any savings
and/or retirement plans) if the Executive's employment had not been terminated
or, if more favorable to the Executive, as in effect generally at any time
thereafter with respect to
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other peer executives of the Company and its affiliated companies and their
families, provided, however, that if the Executive becomes reemployed with
another employer and is eligible to receive medical or other welfare benefits
under another employer-provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other plan
during such applicable period of eligibility. For purposes of determining
eligibility (but not the time of commencement of benefits) of the Executive for
retiree benefits pursuant to such plans, practices, programs and policies, the
Executive shall be considered to have remained employed until 36 months after
the Date of Termination and to have retired on the last day of such period; and
(iii) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts or
benefits required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or agreement of
the Company and its affiliated companies (such other amounts and benefits shall
be hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations shall be paid
to the Executive's estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the Date of Termination.
(c) Disability. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive, other
than for payment of Accrued Obligations and the timely payment or provision of
Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid
or not yet provided. If the Executive voluntarily terminates employment during
the Employment Period, excluding a termination for Good Reason, this Agreement
shall terminate without further obligations to the Executive, other than for
Accrued Obligations and the timely payment or provision of Other Benefits. In
such case, all
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Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination.
7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive (under this Agreement or otherwise) or others. In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement and such amounts shall not be reduced whether or
not the Executive obtains other employment. The Company agrees to pay as
incurred, to the full extent permitted by law, all legal, accounting and other
fees and expenses (including, without limitation, of expert witnesses) which the
Executive may reasonably incur (i) as a result of any contest (regardless of the
outcome thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"), (ii) in connection with the negotiation and preparation of
this Agreement and (iii) in connection with the Executive's performance of his
obligations under Section 9(c).
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or
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otherwise, but determined without regard to any additional payments required
under this Section 9)(a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing
provisions of this Section 9(a), if it shall be determined that the Executive is
entitled to a Gross-Up Payment, but that the Executive, after taking into
account the Payments and the Gross-Up Payment, would not receive a net after-tax
benefit of at least $50,000 (taking into account both income taxes and any
Excise Tax) as compared to the net after-tax proceeds to the Executive resulting
from an elimination of the Gross-Up Payment and a reduction of the Payments, in
the aggregate, to an amount (the "Reduced Amount") such that the receipt of
Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall
be made to the Executive and the Payments, in the aggregate, shall be reduced to
the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Arthur
Andersen LLP or such other certified public accounting firm as may be designated
by the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with
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the calculations required to be made hereunder. In the event that the Company
exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested by
the Company and available to the Executive relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may,
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<PAGE> 14
at its sole option, either direct the Executive to pay the tax claimed and sue
for a refund or to contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 9(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring
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or withholding any amounts or benefits otherwise payable or to be provided to
the Executive under this Agreement.
11. Successors.
(a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid.
12. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
David E. Shaw, President
IDEXX Laboratories, Inc.
One Idexx Drive
Westbrook, ME 04092
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If to the Company:
IDEXX Laboratories, Inc.
One Idexx Drive
Westbrook, ME 04092
Attention: Chairman of Compensation Committee
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c) of this Agreement, shall not be deemed to be a waiver
of such provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section 1(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company, by written notice to the other, at any time prior to
the Effective Date, in which case the Executive shall have no further rights or
obligations under this Agreement. From and after the Effective Date this
Agreement shall supersede any other agreement between the parties with respect
to the subject matter hereof.
(g) Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators in Portland, Maine, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court of competent jurisdiction.
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ David E. Shaw
----------------------------
David E. Shaw
IDEXX Laboratories, Inc.
By: /s/ Richard B. Thorp
---------------------------------
Its: General Counsel and Secretary
----------------------------------
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EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of April 25, 1997 by and between
IDEXX Laboratories, Inc., a Delaware corporation (the "Company"), and Erwin F.
Workman, Jr., Ph.D. (the "Executive").
The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive, notwithstanding
the possibility, threat or occurrence of a Change of Control (as defined below)
of the Company. The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control and to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions.
(a) The "Effective Date" shall mean the first date during the Change
of Control Period (as defined in Section 1(b)) on which a Change of Control (as
defined in Section 2) occurs. Anything in this Agreement to the contrary
notwithstanding, if a Change of Control occurs and if the Executive's employment
with the Company is terminated prior to the date on which the Change of Control
occurs, and if it is reasonably demonstrated by the Executive that such
termination of employment (i) was at the request of a third party who has taken
steps reasonably calculated to effect a Change of Control or (ii) otherwise
arose in connection with or anticipation of a Change of Control, then for all
purposes of this Agreement the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment.
(b) The "Change of Control Period" shall mean the period commencing
on the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the date one year after the date hereof,
and on each annual anniversary of such date (such date and each annual
anniversary thereof shall be hereinafter referred to as the "Renewal Date"),
unless
<PAGE> 2
previously terminated, the Change of Control Period shall be automatically
extended so as to terminate three years from such Renewal Date, unless at least
120 days prior to the Renewal Date the Company shall give notice to the
Executive that the Change of Control Period shall not be so extended.
2. Change of Control. For the purpose of this Agreement, a "Change of
Control" shall mean:
(a) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then-outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then-outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (iv)
any acquisition by any corporation pursuant to a transaction which satisfies the
criteria set forth in clauses (i), (ii) and (iii) of subsection (c) of this
Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a majority
of the Board; provided, however, that any individual becoming a director
subsequently to the date hereof whose election, or nomination for election by
the Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of the
Company (a "Business Combination"), in each case, unless, following such
Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
60% of, respectively, the
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then-outstanding shares of common stock and the combined voting power of the
then-outstanding voting securities entitled to vote generally in the election of
directors, of the corporation resulting from such Business Combination (which as
used in this Section 2(c) shall include, without limitation, a corporation which
as a result of such transaction owns the Company or all or substantially all of
the Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (ii) no Person (excluding any
corporation resulting from such Business Combination or any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
Business Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such Business Combination, or the combined voting power of the
then-outstanding voting securities of such corporation and (iii) at least half
of the members of the board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing for
such Business Combination; or
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
3. Employment Period. The Company hereby agrees to continue the
Executive in its employ, and the Executive hereby agrees to remain in the employ
of the Company subject to the terms and conditions of this Agreement, for the
period commencing on the Effective Date and ending on the third anniversary of
such date (the "Employment Period"). Except as provided in Section 1(a), nothing
in this Agreement shall, prior to the Effective Date, impose upon the Company
any obligation to retain the Executive as an employee. In addition, nothing in
this Agreement shall restrict the Executive from terminating his employment with
the Company, and no such termination by the Executive shall be deemed a breach
of this Agreement.
4. Terms of Employment.
(a) Position and Duties.
(i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be at least commensurate in all material
respects with the most significant of those held, exercised and assigned at any
time during the 120-day period immediately preceding the Effective Date and (B)
the Executive's services shall
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<PAGE> 4
be performed at the location where the Executive was employed immediately
preceding the Effective Date or any office or location less than 35 miles from
such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions, and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct of activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary"), which shall be paid
at a monthly rate, at least equal to twelve times the highest monthly base
salary paid or payable, including any base salary which has been earned but
deferred, to the Executive by the Company and its affiliated companies in
respect of the twelve-month period immediately preceding the month in which the
Effective Date occurs. During the Employment Period, the Annual Base Salary
shall be reviewed no more than 12 months after the last salary increase awarded
to the Executive prior to the Effective Date and thereafter at least annually.
Any increase in Annual Base Salary shall not serve to limit or reduce any other
obligation to the Executive under this Agreement. Annual Base Salary shall not
be reduced after any such increase and the term Annual Base Salary as utilized
in this Agreement shall refer to Annual Base Salary as so increased. As used in
this Agreement, the term "affiliated companies" shall include any company
controlled by, controlling or under common control with the Company.
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<PAGE> 5
(ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be entitled to receive such annual bonus as may be determined by
the Board of Directors, but in no event less than the annual bonus paid or
payable in respect of the full fiscal year immediately preceding the Effective
Date.
(iii) Incentive Plans. During the Employment Period, the
Executive shall be entitled to participate in all incentive plans, practices,
policies and programs applicable generally to other peer Executives of the
Company and its affiliated companies, but in no event shall such plans,
practices, policies and programs provide the Executive with benefits which are
less favorable, in the aggregate, than the most favorable of such plans,
practices, policies and programs in effect for the Executive at any time during
the 120-day period immediately preceding the Effective Date or, if more
favorable to the Executive, those provided generally at any time after the
Effective Date to other peer executives of the Company and its affiliated
companies.
(iv) Welfare Benefit, Savings and Retirement Plans. During the
Employment Period, the Executive and/or the Executive's family, as the case may
be, shall be eligible for participation in and shall receive all benefits under
welfare benefit, savings and retirement plans, practices, policies and programs
provided by the Company and its affiliated companies (including, without
limitation, medical, prescription, dental, disability, employee life, group
life, split-dollar life, accidental death and travel accident insurance plans
and programs) to the extent applicable generally to other peer executives of the
Company, but in no event shall such plans, practices, policies and programs
provide the Executive with benefits which are less favorable, in the aggregate,
than the most favorable of such plans, practices, policies and programs in
effect for the Executive at any time during the 120-day period immediately
preceding the Effective Date or, if more favorable to the Executive, those
provided generally at any time after the Effective Date to other peer executives
of the Company and its affiliated companies.
(v) Expenses. During the Employment Period, the Executive shall
be entitled to receive reimbursement for all reasonable expenses incurred by the
Executive in accordance with the policies, practices and procedures of the
Company in effect immediately prior to the Effective Date.
(vi) Vacation. During the Employment Period, the Executive shall
be entitled to paid vacation in accordance with the plans, policies, programs
and practices of the Company and its affiliated companies, but in no event shall
such plans, practices, policies and programs provide the Executive with benefits
which are less favorable, in the aggregate, than the most favorable of such
plans, practices, policies and programs in effect for the Executive at any time
during the 120-day
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<PAGE> 6
period immediately preceding the Effective Date or, if more favorable to the
Executive, those provided generally at any time after the Effective Date to
other peer executives of the Company and its affiliated companies.
(c) Options. Upon the occurrence of a Change of Control, all
outstanding options to purchase shares of Common Stock held by the Executive
shall become immediately exercisable in full.
5. Termination of Employment.
(a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of this Agreement of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the 30th day after receipt of such notice by the
Executive (the "Disability Effective Date"), provided that, within the 30 days
after such receipt, the Executive shall not have returned to full-time
performance of the Executive's duties. For purposes of this Agreement,
"Disability" shall mean the absence of the Executive from the Executive's duties
with the Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is determined to be
total and permanent by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative.
(b) Cause. Subject to Section 5(d), the Company may terminate the
Executive's employment during the Employment Period for Cause. For purposes of
this Agreement, "Cause" shall mean:
(i) the willful failure of the Executive to perform
substantially the Executive's duties with the Company (other than any
such failure resulting from incapacity due to physical or mental
illness), which failure is not cured within 30 days after a written
demand for substantial performance is delivered to the Executive by the
Board which specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the
Executive's duties, or
(ii) the willful engaging by the Executive in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
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For purposes of this provision, no act or failure to act, on the part of the
Executive, shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company.
(c) Good Reason. The Executive's employment may be terminated by the
Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities as contemplated by Section 4(a) of this Agreement, or
any other action by the Company which results in a diminution in such
position, authority, duties or responsibilities, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt
of notice thereof given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement or any other provision
hereof requiring a payment or provision of a benefit to the Executive,
other than an isolated, insubstantial and inadvertent failure not
occurring in bad faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at any
office or location other than as provided in Section 4(a)(i)(B) hereof
or the Company's requiring the Executive to travel on Company business
to a substantially greater extent than required immediately prior to
the Effective Date;
(iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 11(c) of this Agreement.
For purposes of this Section 5(c), any good faith determination of
"Good Reason" made by the Executive shall be conclusive.
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<PAGE> 8
Anything in this Agreement to the contrary notwithstanding, a
termination by the Executive for any reason or no reason during the 30-day
period immediately following the first twelve (12) months after the Effective
Date shall be deemed to be a termination for Good Reason for all purposes of
this Agreement.
(d) Notice of Termination.
(i) Any termination by the Company for Cause, or by the
Executive for Good Reason, shall be effected by Notice of Termination to the
other party hereto given in accordance with Section 12(b) of this Agreement. For
purposes of this Agreement, a "Notice of Termination" means a written notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) to the extent applicable, sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than thirty days after the
giving of such notice). The failure by the Executive or the Company to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason or Cause shall not waive any right of the Executive or
the Company, respectively, hereunder or preclude the Executive or the Company,
respectively, from asserting such fact or circumstances in enforcing the
Executive's or the Company's rights hereunder.
(ii) Any Notice of Termination for Cause must be given within
sixty (60) days of the Board learning of the event(s) or circumstance(s) which
the Board believes constitute(s) Cause. Prior to any Notice of Termination for
Cause being given (and prior to any termination for Cause being effective), the
Executive shall be entitled to a hearing before the Board at which he may, at
his election, be represented by counsel and at which he shall have a reasonable
opportunity to be heard. Such hearing shall be held on not less than fifteen
days prior written notice to the Executive stating the Board's intention to
terminate the Executive for Cause and stating in detail the particular event(s)
or circumstance(s) which the Board believes constitute(s) Cause for termination.
(e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, subject, in the case of
termination by the Company, for Cause, to the Company's compliance with Section
5(d)(ii); (ii) if the Executive's employment is terminated by the Company other
than for Cause or Disability, the Date of Termination shall be the date on which
the Company notifies the Executive of such termination; and (iii) if the
Executive's employment is terminated by reason of death or Disability, the Date
of Termination shall be the date
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of death of the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company Upon Termination.
(a) Good Reason: Other Than for Cause, Death or Disability. If,
during the Employment Period, the Company shall terminate the Executive's
employment other than for Cause or Disability or the Executive shall terminate
employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:
A. the sum of (1) the Executive's Annual Base Salary
through the Date of Termination to the extent not theretofore paid, (2)
the product of (x) the higher of (I) the highest annual cash bonus paid
to the Executive in the last three fiscal years prior to the Effective
Date and (II) the annual bonus paid or payable, including any bonus or
portion thereof which has been earned but deferred (and annualized for
any fiscal year consisting of less than twelve full months or during
which the Executive was employed for less than twelve full months), for
the most recently completed fiscal year during the Employment Period,
if any (such higher amount being referred to as the "Highest Annual
Bonus") and (y) a fraction, the numerator of which is the number of
days in the current fiscal year through the Date of Termination, and
the denominator of which is 365 and (3) any compensation previously
deferred by the Executive (together with any accrued interest or
earnings thereon) and any accrued vacation pay, in each case to the
extent not theretofore paid (the sum of the amounts described in
clauses (1), (2), and (3) shall be hereinafter referred to as the
"Accrued Obligations"); and
B. the amount equal to the product of (1) three and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest
Annual Bonus.
(ii) for 36 months after the Executive's Date of Termination, or
such longer period as may be provided by the terms of the appropriate plan,
program, practice or policy, the Company shall continue benefits to the
Executive and/or the Executive's family at least equal to those which would have
been provided to them in accordance with the plans, programs, practices and
policies described in Section 4(b)(iv) of this Agreement (excluding any savings
and/or retirement plans) if the Executive's employment had not been terminated
or, if more favorable to the Executive, as in effect generally at any time
thereafter with respect to
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<PAGE> 10
other peer executives of the Company and its affiliated companies and their
families, provided, however, that if the Executive becomes reemployed with
another employer and is eligible to receive medical or other welfare benefits
under another employer-provided plan, the medical and other welfare benefits
described herein shall be secondary to those provided under such other plan
during such applicable period of eligibility. For purposes of determining
eligibility (but not the time of commencement of benefits) of the Executive for
retiree benefits pursuant to such plans, practices, programs and policies, the
Executive shall be considered to have remained employed until 36 months after
the Date of Termination and to have retired on the last day of such period; and
(iii) to the extent not theretofore paid or provided, the
Company shall timely pay or provide to the Executive any other amounts or
benefits required to be paid or provided or which the Executive is eligible to
receive under any plan, program, policy or practice or contract or agreement of
the Company and its affiliated companies (such other amounts and benefits shall
be hereinafter referred to as the "Other Benefits").
(b) Death. If the Executive's employment is terminated by reason of
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations and the
timely payment or provision of Other Benefits. Accrued Obligations shall be paid
to the Executive's estate or beneficiary, as applicable, in a lump sum in cash
within 30 days of the Date of Termination.
(c) Disability. If the Executive's employment is terminated by
reason of the Executive's Disability during the Employment Period, this
Agreement shall terminate without further obligations to the Executive, other
than for payment of Accrued Obligations and the timely payment or provision of
Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum
in cash within 30 days of the Date of Termination.
(d) Cause; Other than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay to the Executive (x) his Annual Base Salary through the Date of
Termination, (y) the amount of any compensation previously deferred by the
Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid
or not yet provided. If the Executive voluntarily terminates employment during
the Employment Period, excluding a termination for Good Reason, this Agreement
shall terminate without further obligations to the Executive, other than for
Accrued Obligations and the timely payment or provision of Other Benefits. In
such case, all
10
<PAGE> 11
Accrued Obligations shall be paid to the Executive in a lump sum in cash within
30 days of the Date of Termination.
7. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any plan, program,
policy or practice provided by the Company or any of its affiliated companies
and for which the Executive may qualify, nor, subject to Section 12(f), shall
anything herein limit or otherwise affect such rights as the Executive may have
under any contract or agreement with the Company or any of its affiliated
companies. Amounts which are vested benefits or which the Executive is otherwise
entitled to receive under any plan, policy, practice or program of or any
contract or agreement with the Company or any of its affiliated companies at or
subsequent to the Date of Termination shall be payable in accordance with such
plan, policy, practice or program or contract or agreement except as explicitly
modified by this Agreement.
8. Full Settlement. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive (under this Agreement or otherwise) or others. In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement and such amounts shall not be reduced whether or
not the Executive obtains other employment. The Company agrees to pay as
incurred, to the full extent permitted by law, all legal, accounting and other
fees and expenses (including, without limitation, of expert witnesses) which the
Executive may reasonably incur (i) as a result of any contest (regardless of the
outcome thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive about the amount of any payment pursuant to this Agreement), plus in
each case interest on any delayed payment at the applicable Federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended (the "Code"), (ii) in connection with the negotiation and preparation of
this Agreement and (iii) in connection with the Executive's performance of his
obligations under Section 9(c).
9. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding and
except as set forth below, in the event it shall be determined that any payment
or distribution by the Company to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or
11
<PAGE> 12
otherwise, but determined without regard to any additional payments required
under this Section 9)(a "Payment") would be subject to the excise tax imposed by
Section 4999 of the Code or any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment (a "Gross-Up Payment") in an amount such that after payment by the
Executive of all taxes (including any interest or penalties imposed with respect
to such taxes), including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Tax imposed upon
the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment
equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing
provisions of this Section 9(a), if it shall be determined that the Executive is
entitled to a Gross-Up Payment, but that the Executive, after taking into
account the Payments and the Gross-Up Payment, would not receive a net after-tax
benefit of at least $50,000 (taking into account both income taxes and any
Excise Tax) as compared to the net after-tax proceeds to the Executive resulting
from an elimination of the Gross-Up Payment and a reduction of the Payments, in
the aggregate, to an amount (the "Reduced Amount") such that the receipt of
Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall
be made to the Executive and the Payments, in the aggregate, shall be reduced to
the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations
required to be made under this Section 9, including whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, shall be made by Arthur
Andersen LLP or such other certified public accounting firm as may be designated
by the Executive (the "Accounting Firm") which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. In the event that the Accounting
Firm is serving as accountant or auditor for the individual, entity or group
effecting the Change of Control, the Executive shall appoint another nationally
recognized accounting firm to make the determinations required hereunder (which
accounting firm shall then be referred to as the Accounting Firm hereunder). All
fees and expenses of the Accounting Firm shall be borne solely by the Company.
Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by
the Company to the Executive within five days of the receipt of the Accounting
Firm's determination. Any determination by the Accounting Firm shall be binding
upon the Company and the Executive. As a result of the uncertainty in the
application of Section 4999 of the Code at the time of the initial determination
by the Accounting Firm hereunder, it is possible that Gross-Up Payments which
will not have been made by the Company should have been made ("Underpayment"),
consistent with
12
<PAGE> 13
the calculations required to be made hereunder. In the event that the Company
exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is
required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.
(c) The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service that, if successful, would require the payment
by the Company of the Gross-Up Payment. Such notification shall be given as soon
as practicable but no later than ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the nature of
such claim and the date on which such claim is requested to be paid. The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which it gives such notice to the Company (or such shorter
period ending on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:
(i) give the Company any information reasonably requested by the
Company and available to the Executive relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order
effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for any Excise Tax or income tax (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 9(c), the Company shall control all proceedings taken in connection
with such contest and, at its sole option, may pursue or forgo any and all
administrative appeals, proceedings, hearings and conferences with the taxing
authority in respect of such claim and may,
13
<PAGE> 14
at its sole option, either direct the Executive to pay the tax claimed and sue
for a refund or to contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Section 9(c), the Executive becomes entitled to receive
any refund with respect to such claim, the Executive shall (subject to the
Company's complying with the requirements of Section 9(c)) promptly pay to the
Company the amount of such refund (together with any interest paid or credited
thereon after taxes applicable thereto). If, after the receipt by the Executive
of an amount advanced by the Company pursuant to Section 9(c), a determination
is made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Executive
during the Executive's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the Company,
the Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 10 constitute a basis for deferring
14
<PAGE> 15
or withholding any amounts or benefits otherwise payable or to be provided to
the Executive under this Agreement.
11. Successors.
(a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid.
12. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect. This Agreement may not be amended or
modified otherwise than by a written agreement executed by the parties hereto or
their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Executive:
Erwin F. Workman, Jr., Ph.D.
c/o IDEXX Laboratories, Inc.
One Idexx Drive
Westbrook, ME 04092
15
<PAGE> 16
If to the Company:
IDEXX Laboratories, Inc.
One Idexx Drive
Westbrook, ME 04092
Attention: Chairman of Compensation Committee
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state, local or foreign taxes as shall be required to be
withheld pursuant to any applicable law or regulation.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provision of this Agreement or the failure to assert any
right the Executive or the Company may have hereunder, including, without
limitation the right of the Executive to terminate employment for Good Reason
pursuant to Section 5(c) of this Agreement, shall not be deemed to be a waiver
of such provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, subject to Section 1(a) hereof, prior to the Effective Date, the
Executive's employment and/or this Agreement may be terminated by either the
Executive or the Company, by written notice to the other, at any time prior to
the Effective Date, in which case the Executive shall have no further rights or
obligations under this Agreement. From and after the Effective Date this
Agreement shall supersede any other agreement between the parties with respect
to the subject matter hereof.
(g) Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators in Portland, Maine, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court of competent jurisdiction.
16
<PAGE> 17
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, all as of the
day and year first above written.
/s/ Erwin F. Workman, Jr., Ph.D.
--------------------------------
Erwin F. Workman, Jr., Ph.D.
IDEXX Laboratories, Inc.
By: /s/ Richard B. Thorp
-----------------------------
Its: General Counsel and Secretary
------------------------------
17
<PAGE> 1
IDEXX LABORATORIES, INC. EXHIBIT 11
SUPPLEMENTAL CALCULATION OF
SHARES USED IN DETERMINING
NET INCOME PER SHARE (1)
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 1997
--------------------------------------------
<C> <S> <S> <S>
Weighted average common stock
outstanding during the period 32,945,847 37,082,497 37,974,188
Weighted average common stock
equivalents 2,416,256 2,436,325 1,446,947
--------------------------------------------
35,362,103 39,518,822 39,421,135
</TABLE>
(1) Fully diluted net income per share has not been separately presented, as
the amounts would not be materially different from primary net income per
share.
<PAGE> 1
Exhibit 13
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the years ended December 31, 1993, 1994, 1995, 1996 and
1997. The selected consolidated financial data presented below for the five-year
period ended December 31, 1997 have been derived from the Company's consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants. These financial data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
--------- ---------- ----------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................. $93,062 $126,363 $188,602 $267,677 $262,970
Cost of revenue..................... 37,981 53,224 80,860 113,270 134,231
------- -------- -------- --------- --------
Gross Profit........................ 55,081 73,139 107,742 154,407 128,739
Expenses:
Sales and marketing............ 22,751 29,078 47,490 66,950 73,213
General and administrative..... 10,799 13,112 17,092 28,271 42,899
Research and development....... 6,891 8,244 10,192 12,195 17,057
Non-recurring operating charge. -- -- -- -- 34,500
Acquisition costs.............. 725 -- -- -- --
------ ------- ------- -------- -------
Income (loss) from operations....... 13,915 22,705 32,968 46,991 (38,930)
Interest income, net................ 1,127 1,588 4,068 8,332 6,670
Arbitration charge.................. -- 1,459 -- -- --
------ ------- ------- -------- -------
Net income (loss) before provision
for (benefit of) income taxes....... 15,042 22,834 37,036 55,323 (32,260)
Provision for (benefit of) income
taxes............................... 5,388 9,498 15,542 22,682 (11,140)
------- -------- ------- -------- --------
Net income (loss)................... $ 9,654 $ 13,336 $ 21,494 $ 32,641 $(21,120)
======= ======== ======== ======== ========
Net income (loss) per share:
Basic.............................. $ 0.31 $ 0.42 $ 0.65 $ 0.88 $ (0.56)
Net income (loss) per share:
Diluted............................ 0.29 0.40 0.61 0.83 (0.56)
Weighted average shares outstanding:
Basic 30,696 31,383 32,946 37,082 37,974
Weighted average shares outstanding:
Diluted............................ 33,118 33,525 35,362 39,519 37,974
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
--------- ------------ ------------ ----------- ---------
(in thousands)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital........ $62,483 $ 76,575 $ 228,565 $ 250,590 $ 199,902
Total assets........... 97,967 121,741 312,540 373,852 377,048
Total debt............. -- -- 1,687 3,000 4,087
Stockholders' equity .. 83,631 99,786 279,125 322,725 302,733
</TABLE>
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - RESULTS OF OPERATIONS
1997 Compared to 1996
Revenue for 1997 decreased 2% to $263.0 million, from $267.7 million in
1996. The decrease in revenue in 1997 compared to 1996 is primarily attributable
to decreased sales of veterinary instruments, feline test products and canine
test products. Veterinary instrument sales decreased 42%. The decrease
principally related to sales of fewer units and, to a lesser degree, lower
average unit prices for those instruments. The Company expects that instrument
sales will continue to decline as the Company's market penetration increases.
The lower feline and canine product sales were principally due to a program
designed to reduce U.S. distributor inventories of these products. Sales of
these products decreased 34% and 27%, respectively. These decreases were offset
in part by increased sales of veterinary laboratory services, resulting from the
inclusion of a full year of revenues from the four veterinary laboratories
acquired in 1996, the inclusion of revenue from the veterinary practice
management software companies acquired in the first and third quarters of 1997,
and increased sales of food and environmental testing products, principally
attributable to the acquisitions of Acumedia Manufacturers, Inc. in January
1997, and Idetek, Inc. in August 1996.
International revenue decreased 8% to $83.9 million, or 32% of total
Company revenue, in 1997, compared to $91.5 million, or 34% of total Company
revenue, in 1996. Revenue decreased 14% in Europe and 10% in the Pacific Rim
region (Japan, Taiwan and Australia), while revenue increased 29% in Canada and
South America. Revenues transacted in local currencies decreased 8% in Europe
and 3% in the Pacific Rim region, while revenue transacted in local currencies
in Canada and South America increased 30%. The non-currency decrease in sales in
Europe and the Pacific Rim principally relates to fewer unit sales of veterinary
instruments and, to a lesser extent, feline test products. Revenue increases in
Canada and South America are primarily attributable to increased sales of food
and environmental products.
Gross profit as a percentage of revenue was 49% for 1997 compared to 58%
for 1996. The decrease in gross margin is due to less efficient manufacturing
operations caused by lower production volumes; declining average sale prices of
veterinary instruments; a $2.9 million provision for inventory in conjuction
with the non-recurring charge discussed below; the revenue mix impact of lower
sales of higher margin veterinary test products, offset by higher sales of lower
margin veterinary laboratory services and practice management software products
and services; an increase in fixed costs associated with expansion of the
veterinary laboratory business; additional costs associated with the Company's
new distribution center; and certain fixed veterinary service and repair costs
spread over lower veterinary sales volumes.
Sales and marketing expenses were 28% and 25% of revenue in 1997 and 1996,
respectively. The increase as a percentage of revenue and the dollar increase of
$6.3 million were principally attributable to domestic sales and marketing costs
remaining constant while revenue from veterinary test products and veterinary
instruments declined and to additional sales and marketing expenses associated
with the veterinary laboratory businesses acquired in 1996 and veterinary
practice management software businesses acquired in 1997, offset in part by
reductions in European sales and marketing expenses resulting from workforce
reductions.
Research and development expenses were 6% and 5% of revenue in 1997 and
1996, respectively. The increase as a percentage of revenue and the dollar
increase of $4.9 million reflected additional resources and related overhead to
support product development and the addition of veterinary practice management
software development expenses associated with the acquisitions of the veterinary
practice management software businesses discussed above.
General and administrative expenses were 16% and 11% of revenue in 1997 and
1996, respectively. The increase as a percentage of revenue and the dollar
increase of $14.6 million were principally attributable to additional general
and administrative expense associated with acquired businesses, principally
veterinary laboratory businesses and veterinary practice management software
businesses; additional expenses associated with geographic expansion; additional
amortization of goodwill and other intangibles associated with business
acquisitions; currency
2
<PAGE> 3
losses; and an additional provision for bad debts. These increases were offset
in part by a reduction in management bonuses.
On September 29, 1997 the Company announced that it would incur a
non-recurring operating charge of $28.0 million and on February 2, 1998 the
Company announced that it would increase the amount of the charge to $34.5
million. The non-recurring operating charge includes the write-downs and
write-offs of certain assets and the accrual of costs related to a significant
workforce reduction. The charge includes approximately $13.2 million to write
off in-process research and development costs associated with the acquisition of
Professionals' Software, Inc. and the Advanced Veterinary Systems business in
1997; approximately $8.0 million to settle a patent infringement lawsuit brought
by Barnes-Jewish Hospital, including associated legal costs; approximately $9.0
million in severance benefits and related costs associated with workforce
reductions in veterinary practice management software businesses, veterinary
laboratory businesses and certain other domestic and international operations,
and other facility closures; approximately $2.7 million to provide for idle
capacity and lease terminations resulting from consolidation of veterinary
practice management software operations and the closing of the Company's
Sunnyvale, California research and development facility; and approximately $1.6
million to write off assets associated with technology no longer pursued by the
Company.
Net interest income was $6.7 million in 1997 compared to $8.3 million in
1996. The decrease in interest income was due to lower cash and investment
balances during 1997 compared to 1996, due to cash invested in business
acquisitions and in additional fixed assets.
The Company's effective tax rate was 35% in 1997 compared to 41% in 1996.
The change in the effective rate was primarily attributable to the write-off of
non-deductible intangible assets discussed in the non-recurring operating
charge.
1996 Compared to 1995
Revenue for 1996 increased 42% to $267.7 million from $188.6 million in
1995. The increase in revenue was principally attributable to increased sales of
consumables used in the Company's veterinary instruments, veterinary laboratory
services resulting from acquisitions of veterinary reference laboratories,
canine test products, and a quantitative thyroid instrument introduced in the
first quarter of 1996. Price increases in the veterinary clinical products also
contributed to the increase in revenue.
International revenue increased 41% to $91.5 million in 1996 compared to
$65.0 million in 1995. Increased revenue in Europe, which included revenue of
Grange Laboratories Ltd. and Ubitech Aktiebolag acquired during 1996, accounted
for 44% of the increase in international revenue and increased revenue in Japan
accounted for 33% of the increase in international revenue for 1996 compared to
1995. The remaining increase was primarily attributable to increased revenues in
Canada, Asia and Australia. Revenue of the Company's European subsidiaries,
transacted in local currencies, increased 28% in 1996 compared to 1995. In U.S.
dollars, the European revenue increase was 24% to $59.9 million in 1996 compared
to $48.2 million for 1995.
Gross profit as a percentage of revenue was 58% for 1996 compared to 57%
for 1995. Operating and purchasing efficiencies and higher selling prices of
certain veterinary clinical chemistry products exceeded the unfavorable impact
of product mix, which resulted principally from lower margins generated by the
acquisitions of veterinary reference laboratories in 1996.
Sales and marketing expenses were 25% of revenue in 1996 and 1995. The
dollar increase of $19.5 million was principally attributable to additional
personnel in sales functions worldwide.
3
<PAGE> 4
Research and development expenses were 5% of revenue in 1996 and 1995. The
dollar increase of $2.0 million reflected additional resources and related
overhead to support product development.
General and administrative expenses were 11% and 9% of revenue in 1996 and
1995, respectively. The increase as a percentage of revenue and the dollar
increase of $11.2 million were principally attributable to additional operating
expenses and acquisition costs associated with acquisitions and higher legal
expenses in 1996.
Net interest income was $8.3 million in 1996 compared to $4.1 million in
1995. The increase in interest income was due to higher invested cash balances
outstanding during 1996 versus 1995, due in large part to a public stock
offering completed in September 1995 that generated approximately $153.0 million
in net proceeds.
The Company's effective tax rate was 41% in 1996 compared to 42% in 1995.
The decrease in the effective tax rate was principally attributable to income
generated in states with lower income tax rates.
- - LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $142.5 million of cash, cash
equivalents, and short-term investments and $199.9 million of working capital.
The Company's total capital budget for 1998 is approximately $20.0 million.
Under the terms of certain supply agreements with suppliers of the Company's
hematology instruments and consumables, slides for its VetTest instruments and
certain raw materials, the Company has aggregate commitments to purchase
approximately $31.8 million of products in 1998.
The Company believes that current cash and short-term investments, which
include net proceeds from the offering of the Company's Common Stock in 1995,
and funds generated from operations, will be sufficient to fund the Company's
operations for the foreseeable future.
- - FUTURE OPERATING RESULTS
The future operating results of the Company are subject to a number of
factors, including without limitation the following:
The Company's business has grown significantly over the past several years
as a result of both internal growth and acquisitions of products and businesses.
The Company has consummated a number of acquisitions since 1992, including six
acquisitions in 1996 and five acquisitions in 1997, and plans to make additional
acquisitions. Identifying and pursuing acquisition opportunities, integrating
acquired products and businesses, and managing growth require a significant
amount of management time and skill. There can be no assurance that the Company
will be effective in identifying and effecting attractive acquisitions,
assimilating acquisitions or managing future growth.
The Company has experienced and may experience in the future significant
fluctuations in its quarterly operating results. Factors such as the
introduction and market acceptance of new products and services, the mix of
products and services sold and the mix of domestic versus international revenue
could contribute to this quarterly variability. The Company operates with
relatively little backlog and has few long-term customer contracts and
substantially all of its product and service revenue in each quarter results
from orders received in that quarter, which makes the Company's financial
performance more susceptible to an unexpected downturn in business and more
unpredictable. In addition, the Company's expense levels are based in part on
expectations of future revenue levels, and a shortfall in expected revenue could
therefore result in a disproportionate decrease in the Company's net income.
The markets in which the Company competes are subject to rapid and
substantial technological change. The Company encounters, and expects to
continue to encounter, intense competition in the sale of its current and future
4
<PAGE> 5
products and services. Many of the Company's competitors and potential
competitors have substantially greater capital, manufacturing, marketing, and
research and development resources than the Company.
The Company's future success will depend in part on its ability to continue
to develop new products and services both for its existing markets and for any
new markets the Company may enter in the future. The Company believes that it
has established a leading position in many of the markets for its animal health
diagnostic products and services, and the maintenance and any future growth of
its position in these markets is dependent upon the successful development and
introduction of new products and services. The Company also plans to devote
significant resources to the growth of its veterinary laboratory business,
veterinary practice management software business, and its business in the food,
hygiene and environmental markets and to the development of an animal
pharmaceutical product business, where the Company's operating experience and
product and technology base are more limited than in its animal health
diagnostic product markets. There can be no assurance that the Company will
successfully complete the development and commercialization of products and
services for existing and new businesses.
The Company's success is heavily dependent upon its proprietary
technologies. The Company relies on a combination of patent, trade secret,
trademark and copyright law to protect its proprietary rights. There can be no
assurance that patent applications filed by the Company will result in patents
being issued, that any patents of the Company will afford protection against
competitors with similar technologies, or that the Company's non-disclosure
agreements will provide meaningful protection for the Company's trade secrets
and other proprietary information. Moreover, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technologies. In addition, the
Company licenses certain technologies used in its products from third parties,
and the Company may be required to obtain licenses to additional technologies in
order to continue to sell certain products. There can be no assurance that any
technology licenses which the Company desires or is required to obtain will be
available on commercially reasonable terms.
From time to time the Company receives notices alleging that the Company's
products infringe third party proprietary rights. In particular, the Company has
received notices claiming that certain of the Company's immunoassay products
infringe third-party patents. Except as noted in "Legal Proceedings" with
respect to the patent infringement suit filed by Synbiotics Corporation, the
Company is not aware of any pending litigation with respect to such claims.
Patent litigation frequently is complex and expensive and the outcome of patent
litigation can be difficult to predict. There can be no assurance that the
Company will prevail in any infringement proceedings that have been or may be
commenced against the Company, and an adverse outcome may preclude the Company
from selling certain products or require the Company to pay damages or make
additional royalty or other payments with respect to such sales. In addition,
from time to time other types of lawsuits are brought against the Company,
wherein an adverse outcome could adversely affect the Company's results of
operations. See "Legal Proceedings."
Certain components used in the Company's products are currently available
from only one source and others are available from only a limited number of
sources. The Company's inability to develop alternative sources if and as
required in the future, or to obtain sufficient sole or limited source
components as required, could result in cost increases or reductions or delays
in product shipments. Certain technologies licensed by the Company and
incorporated into its products are also available from a single source, and the
Company's business may be adversely affected by the expiration or termination of
any such licenses or any challenges to the technology rights underlying such
licenses. In addition, the Company currently purchases or is contractually
required to purchase certain of the products that it sells from one source.
Failure of such sources to supply product to the Company may have a material
adverse effect on the Company's business.
In 1997, international revenue was $83.9 million and accounted for 32% of
total revenue, and the Company expects that its international business will
continue to account for a significant portion of its total revenue. Foreign
regulatory bodies often establish product standards different from those in the
United States, and designing products in compliance with such foreign standards
may be difficult or expensive. Other risks associated with foreign operations
include possible disruptions in transportation of the Company's products, the
differing product and service needs of foreign customers, difficulties in
building and managing foreign operations, fluctuations in the
5
<PAGE> 6
value of foreign currencies, import/export duties and quotas, and unexpected
regulatory, economic or political changes in foreign markets.
The development, manufacturing, distribution and marketing of certain of
the Company's products and provision of its services, both in the United States
and abroad, are subject to regulation by various domestic and foreign
governmental agencies. Delays in obtaining, or the failure to obtain, any
necessary regulatory approvals could have a material adverse effect on the
Company's future product and service sales and operations. Any acquisitions of
new products, services and technologies may subject the Company to additional
areas of government regulations.
The Company is conducting an evaluation of its information technology
systems and its products for Year 2000 compliance. The Company's worldwide
accounting system is Year 2000 compliant, and Year 2000 issues related to its
other information technology systems will be addressed through planned upgrades
prior to 2000. A substantial majority of the Company's products, including its
instrument-based diagnostic systems and a majority of its installed base of
veterinary practice management software systems, already are Year 2000
compliant. The Company expects that by the end of 1998 all practice management
systems offered by the Company will be Year 2000 compliant. The costs of
upgrading the Company's information technology systems and its practice
management systems are not expected to be material to the Company's financial
condition or results of operations. The Company has commenced an evaluation of
the Year 2000 compliance of its vendors, but at this time cannot predict the
extent to which its vendors will have Year 2000 problems and the impact of any
such problems on the Company.
The development, manufacture, distribution and marketing of the Company's
products and provision of its services involve an inherent risk of product
liability claims and associated adverse publicity. Although the Company
currently maintains liability insurance, there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms or at all.
6
<PAGE> 7
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
Page
----
<S> <C>
- Report of Independent Public Accountants................................. 8
- Consolidated Balance Sheets as of December 31, 1996 and 1997............. 9
- Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997.................................................... 10
- Consolidated Statements of Stockholders' Equity for the Years Ended
December 31,1995, 1996 and 1997........................................ 11
- Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997.................................................... 12
- Notes to Consolidated Financial Statements............................... 13
- Schedule II
Valuation and Qualifying Accounts...................................... 30
</TABLE>
7
<PAGE> 8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IDEXX Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of IDEXX
Laboratories, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IDEXX
Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. The schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 12, 1998
8
<PAGE> 9
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
-------- --------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ...................................... $127,741 $106,972
Short-term investments ......................................... 45,896 35,502
Accounts receivable, less reserves of $4,001 and
$5,082 in 1996 and 1997, respectively ........................ 66,633 47,341
Inventories .................................................... 48,402 60,174
Deferred income taxes .......................................... 5,363 15,396
Other current assets ........................................... 7,682 8,832
-------- --------
Total current assets ...................................... 301,717 274,217
-------- --------
Long-Term Investments ............................................... 7,255 11,134
Property and Equipment, at cost:
Leasehold improvements ......................................... 15,150 16,596
Machinery and equipment ........................................ 21,667 25,432
Office furniture and equipment ................................. 17,348 23,731
Land ........................................................... 890 1,193
Buildings ...................................................... 4,202 4,462
-------- --------
59,257 71,414
Less-- Accumulated depreciation and amortization ............... 22,863 30,387
-------- --------
36,394 41,027
Other Assets, net ................................................... 28,486 50,670
-------- --------
$373,852 $377,048
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................... $ 18,692 $ 12,472
Accrued expenses ............................................... 23,872 42,147
Notes payable .................................................. 3,000 4,087
Deferred revenue ............................................... 5,563 15,609
-------- --------
Total current liabilities ................................. 51,127 74,315
-------- --------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Preferred Stock, $1.00 par value -- Authorized --
500 shares None issued and outstanding ....................... -- --
Series A Junior Participating Preferred Stock, $1.00 par
value Designated -- 100 shares of Preferred Stock
None issued and outstanding .................................. -- --
Common Stock, $0.10 par value-- Authorized--
60,000 shares Issued and outstanding -- 37,774
shares in 1996 and 38,169 shares in 1997 ..................... 3,777 3,817
Additional paid-in capital ..................................... 253,118 257,275
Retained earnings .............................................. 67,376 46,256
Cumulative translation adjustment .............................. (1,546) (4,615)
-------- --------
Total stockholders' equity ................................ 322,725 302,733
-------- --------
$373,852 $377,048
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE> 10
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue...................................... $188,602 $267,677 $262,970
Cost of revenue.............................. 80,860 113,270 134,231
-------- -------- --------
Gross profit............................ 107,742 154,407 128,739
-------- -------- --------
Expenses:
Sales and marketing..................... 47,490 66,950 73,213
General and administrative.............. 17,092 28,271 42,899
Research and development................ 10,192 12,195 17,057
Non-recurring operating charge.......... -- -- 34,500
--------- --------- --------
Income (loss) from operations...... 32,968 46,991 (38,930)
Interest income, net......................... 4,068 8,332 6,670
--------- --------- --------
Net income (loss) before provision
for (benefit of) income taxes...... 37,036 55,323 (32,260)
Provision for (benefit of) income taxes...... 15,542 22,682 (11,140)
-------- -------- --------
Net income (loss).................. $ 21,494 $ 32,641 $(21,120)
======== ======== ========
Earnings (loss) per share: Basic............ $ 0.65 $ 0.88 $ (0.56)
======== ======== ========
Earnings (loss) per share: Diluted.......... $ 0.61 $ 0.83 $ (0.56)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE> 11
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL CUMULATIVE TOTAL
NUMBER $0.10 PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENT EQUITY
----------- --------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 ...... 31,543 $3,154 $ 73,263 $ 23,728 $ (360) $ 99,785
Sale of Common Stock,
net of issuance
costs ..................... 4,600 460 152,504 -- -- 152,964
Exercise of stock
options, including
the tax benefit ........... 406 41 5,039 -- -- 5,080
Net income .................. -- -- -- 21,494 -- 21,494
Translation
Adjustment ................ -- -- -- -- (198) (198)
------- ------ -------- -------- ------- ---------
BALANCE, December 31, 1995 ....... 36,549 3,655 230,806 45,222 (558) 279,125
Issuance of Common
Stock
for acquisition of
Idetek, Inc. .............. 393 39 10,539 (10,487) -- 91
Exercise of stock
options, including the
tax benefit ............... 832 83 11,773 -- -- 11,856
Net income .................. -- -- -- 32,641 -- 32,641
Translation
Adjustment ................ -- -- -- -- (988) (988)
------- ------ -------- -------- ------- ---------
BALANCE, December 31, 1996 ....... 37,774 3,777 253,118 67,376 (1,546) 322,725
Issuance of common stock in
settlement of VetTest
acquisition................ 6 1 87 -- -- 88
Exercise of stock
options, including the
tax benefit ............... 389 39 4,070 -- -- 4,109
Net loss .................... -- -- -- (21,120) -- (21,120)
Translation
Adjustment ................ -- -- -- -- (3,069) (3,069)
------- ------ -------- -------- ------- ---------
BALANCE, December 31, 1997 ....... 38,169 $3,817 $257,275 $ 46,256 $(4,615) $ 302,733
======= ====== ======== ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE> 12
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ..................................... $ 21,494 $ 32,641 $(21,120)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities
Depreciation and amortization .................... 5,742 10,390 14,425
Non-cash portion of non-recurring
operating charge ............................... -- -- 14,800
Changes in assets and liabilities, net
of acquisition(s):
Accounts receivable ......................... (19,587) (18,875) 23,712
Inventories ................................. (7,403) (19,246) (11,218)
Other current assets ........................ (3,211) (6,370) (8,400)
Accounts payable ............................ 1,625 6,062 (7,200)
Accrued expenses ............................ 8,787 9,349 8,983
Deferred revenue ............................ 1,956 1,299 (483)
-------- -------- --------
Net cash provided by
operating activities ................. 9,403 15,250 13,499
-------- -------- --------
Cash Flows From Investing Activities:
Increase in investments, net .......................... (22,800) (5,116) 6,515
Purchases of property and equipment ................... (15,860) (11,783) (12,507)
Increase in other assets .............................. (106) (1,859) (3,699)
Acquisition(s) of business(es), net of cash
acquired ............................................ (3,500) (19,709) (23,047)
-------- -------- --------
Net cash used in investing
Activities .............................. (42,266) (38,467) (32,738)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net
of issuance costs: ................................... 152,964 -- --
Proceeds from issuance of (repayment of)
notes payable ........................................ 1,687 (1,887) (1,509)
Proceeds from the exercise of stock options ............ 2,484 4,580 3,048
-------- -------- --------
Net cash provided by
financing activities .................... 157,135 2,693 1,539
-------- -------- --------
Net effect of Exchange Rate Changes ........................ (198) (987) (3,069)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents .............................................. 124,074 (21,511) (20,769)
Cash and Cash Equivalents, Beginning of Year ............... 25,178 149,252 127,741
-------- -------- --------
Cash and Cash Equivalents, End of Year ..................... $149,252 $127,741 $106,972
======== ======== ========
Supplemental Disclosure of Cash Flow
Information:
Interest paid during the year ......................... $ 19 $ 299 $ 405
======== ======== ========
Income taxes paid during the year ..................... $ 12,073 $ 12,883 $ 8,706
======== ======== ========
Supplemental Disclosure of Noncash Financing
Activity:
Issuance of common stock for
acquisition of Idetek, Inc. ......................... $ -- $ 91 $ --
======== ======== ========
Issuance of common stock in settlement of
VetTest acquisiton .................................. $ -- $ -- $ 88
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
12
<PAGE> 13
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
IDEXX Laboratories, Inc. and subsidiaries (the "Company") develop,
manufacture and distribute products and provide services for the animal health,
food, hygiene and environmental markets. The Company is a developer,
manufacturer and distributor of biology-based detection systems, a developer and
distributor of chemistry-based detection systems, a provider of laboratory
testing, specialized consulting and veterinary pharmacy services, and a
developer and provider of veterinary practice management software systems and
related services. The Company's animal health, food, hygiene and environmental
detection products and services are sold worldwide.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as discussed below and elsewhere in
the notes to the consolidated financial statements. The preparation of these
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(a) Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
(b) Inventories
Inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out) or market. The components of inventories are
as follows (in thousands):
DECEMBER 31,
---------------------
1996 1997
------- -------
Raw materials ...................... $10,080 $ 9,235
Work-in-process .................... 6,606 8,421
Finished goods ..................... 31,716 42,518
------- -------
$48,402 $60,174
======= =======
(c) Depreciation and Amortization
The Company provides for depreciation and amortization using the
declining-balance and straight-line methods by charges to operations in amounts
that allocate the cost of property and equipment over their estimated useful
lives as follows (in thousands):
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
------------------------------------------ -------------
Leasehold improvements ................... Life of lease
Machinery and equipment .................. 3-5 Years
Office furniture and equipment ........... 5-7 Years
Buildings ................................ 40 Years
13
<PAGE> 14
(d) Other Assets
Other assets are as follows:
DECEMBER 31,
-----------------
DESCRIPTION USEFUL LIFE 1996 1997
-------------------------- ----------- ------- -------
Patents and trademarks.... 10 Years $ 9,406 $ 9,348
Goodwill.................. 5-40 Years 19,586 32,256
Non-compete agreements.... 3-5 Years 4,000 4,000
Other intangibles......... 5-10 Years 3,756 8,665
------- -------
36,748 54,269
Accumulated amortization.. 9,196 14,219
------- -------
Intangible assets, net.... $27,552 $40,050
Other assets.............. 934 10,620
------- -------
$28,486 $50,670
======= =======
Substantially all of the patents and trademarks were acquired in connection
with the acquisition of a product line of VetTest S.A. ("VetTest") in 1992.
Goodwill primarily results from acquisitions (see Note 15). Other intangibles
include subscriber lists, prepaid royalties and organization costs. Other assets
include long-term deferred tax asset, long-term non-trade receivables and
long-term deposits. Amortization of intangible assets was $2.0 million, $3.4
million and $5.0 million for the years ended December 31, 1995, 1996 and 1997,
respectively. The Company continually assesses the realizability of these assets
in accordance with the Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, and determined that no impairment has occurred.
(e) Stock-Based Compensation Plans
The Company accounts for stock-based compensation plans under the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under SFAS
No. 123, the Company elected the disclosure method and will continue to account
for stock-based compensation plans under Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees (See Note 8).
(f) Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. This statement requires that the Company recognize a current tax
liability or asset for current taxes payable or refundable and a deferred tax
liability or asset for the estimated future tax effects of temporary differences
and carryforwards to the extent they are realizable.
(g) Revenue Recognition
The Company recognizes product revenue at the time of shipment. The Company
recognizes revenue from non-cancellable software licenses upon product shipment
as collection is probable and no significant vendor obligations remain at the
time of shipment. Service revenue is recognized at the time the service is
performed. Service and maintenance revenue is billed in advance and recognized
over the life of the contracts, usually one year.
(h) Research and Development and Software Development Costs
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, the Company has evaluated the
establishment of technological feasibility of its various products during the
development phase. Due to the dynamic changes in the market, the Company has
concluded that it cannot determine technological feasibility until the
development phase of the project is nearly complete. The Company charges all
research and development expenses to operations in the period incurred as the
costs from the point of technological feasibility to first product release are
immaterial.
14
<PAGE> 15
(i) Foreign Currency Translation and Foreign Exchange Contracts
Assets and liabilities of the Company's foreign subsidiaries are translated
using the exchange rate in effect at the balance sheet date. Revenue and expense
accounts are translated using a weighted average of exchange rates in effect
during the period. Cumulative translation gains and losses are shown in the
accompanying consolidated balance sheets as a separate component of
stockholders' equity. Exchange gains and losses arising from transactions
denominated in foreign currencies are included in current operations. Included
in general and administrative expenses are foreign currency transaction losses
of $359,000, gains of $369,000 and losses of $511,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
The Company enters into foreign currency exchange contracts of its
anticipated intercompany and third party inventory purchases for the next twelve
months in order to minimize the impact of foreign currency fluctuations on these
transactions. The Company's accounting policies for these contracts are based on
the Company's designation of such instruments as hedging transactions. The
Company also utilizes some natural hedges to mitigate its transaction and
commitment exposures. The contracts the Company enters into are firm foreign
currency commitments, and therefore market gains and losses are deferred until
the contract matures, which is the period the related obligation is settled. The
Company enters into these exchange contracts with large multinational financial
institutions. As of December 31, 1997, the unrecorded gains on these contracts
totaled $280,000 and the foreign currency contracts, which extend through
December 31, 1998, consisted of the following (in thousands):
Currency Sold US Dollar Equivalent
Pound sterling $ 5,001
Deutsche mark 4,044
Canadian dollar 3,690
French franc 2,352
Australian dollar 1,791
-------
$16,878
=======
There were no contracts outstanding at December 31, 1996.
(j) Disclosure of Fair Value of Financial Instruments and Concentration of
Credit Risk
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist mainly of cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The Company does not
believe significant credit risk exists at December 31, 1997. The carrying
amounts of the Company's financial instruments approximate fair market value.
(k) Earnings (Loss) per Share
In February 1997 the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share. The Company adopted the provisions of SFAS No.
128 for the year ended December 31, 1997 and all prior periods have been
presented in accordance with SFAS No. 128. In accordance with SFAS No. 128,
basic earnings per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the year.
The computation of diluted earnings per share is similar to the computation of
basic earnings per share, except that the denominator is increased for the
assumed exercise of dilutive options using the treasury stock method unless the
effect is antidilutive. The following is a reconciliation of shares outstanding
for basic and diluted earnings per share (in thousands):
15
<PAGE> 16
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
SHARES OUTSTANDING FOR BASIC EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding 32,946 37,082 37,974
====== ====== ======
SHARES OUTSTANDING FOR DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding 32,946 37,082 37,974
Dilutive effect of options issued to employees 2,416 2,437 --
------ ------ ------
35,362 39,519 37,974
====== ====== ======
</TABLE>
(l) Reclassifications
Reclassifications have been made in the consolidated financial statements to
conform with the current year's presentation.
(m) New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements,
in order to measure all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners. Comprehensive income, as defined by SFAS No. 130, is the total of
net income and all other nonowner changes in equity. Under SFAS No. 130,
companies may include the cumulative total of comprehensive income as a separate
component of its stockholders' equity statement. This statement is effective for
fiscal years beginning after December 15, 1997, and is applicable on both an
interim and annual basis.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. Reportable segments, as defined by
this statement, correspond to the way management organizes units and evaluates
performance internally, and may be based upon products, geography, legal entity,
management structure or a combination of these methods. SFAS No. 131 is
applicable only to public, for-profit entities and is effective for years
beginning after December 15, 1997. Unless impracticable, companies would be
required to restate prior period information upon adoption.
(2) INCOME TAXES
Earnings (losses) before income taxes for each year were as follows
(in thousands):
1995 1996 1997
------- ------- --------
Domestic $29,844 $48,394 $(29,731)
International 7,192 6,929 (2,529)
------- ------- --------
$37,036 $55,323 $(32,260)
======= ======= ========
The provision for (benefit of) income tax for the years ended
December 31, 1995, 1996 and 1997 is comprised of the following (in thousands):
DECEMBER 31,
--------------------------------------
1995 1996 1997
------- ------- --------
Current
Federal ......... $ 9,964 $18,027 $ 817
State ........... 2,979 4,171 954
International ... 3,424 3,190 1,799
------- ------- --------
16,367 25,388 3,570
------- ------- --------
Deferred
Federal ......... (825) (2,070) (12,314)
State ........... -- (636) (2,396)
------- ------- --------
(825) (2,706) (14,710)
------- ------- --------
$15,542 $22,682 $(11,140)
======= ======= ========
16
<PAGE> 17
The provision for (benefit of) income taxes differs from the amount computed
by applying the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate.......... 35.0% 35.0% 35.0%
State income tax, net of federal tax 5.2 4.0 4.1
benefit..............................
International income taxes........... 2.8 1.4 --
Amortization of non-deductible assets -- -- (6.7)
Non-taxable interest income.......... -- -- 4.1
Other, net........................... (1.0) 0.6 (2.0)
---- ---- ----
Effective tax rate................... 42.0% 41.0% 34.5%
==== ==== ====
</TABLE>
The components of the domestic net deferred tax asset (liability) included
in the accompanying consolidated balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
-----------------------------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Accruals $1,423 $ -- $ 6,834 $ --
Receivable reserves 1,081 -- 2,190 --
Deferred revenue 1,932 -- 3,309 --
Inventory basis differences 1,019 -- 3,229 --
Intangible basis differences -- 1,922 -- 6,130
Net operating loss carry
forwards -- 1,659 -- 1,093
------ ------ ------- ------
Total assets 5,455 3,581 15,562 7,223
LIABILITIES:
Property basis differences -- 1,512 -- 1,343
Intangible basis differences -- 573 -- 773
Other 92 -- 166 --
------ ------ ------- ------
Total liabilities 92 2,085 166 2,116
Valuation Allowance -- (2,400) -- --
------ ------ ------- ------
Net assets (liability) $5,363 $ (904) $15,396 $5,107
====== ====== ======= ======
</TABLE>
The components of the net foreign net deferred tax assets (in thousands):
<TABLE>
<CAPTION>
1996 1997
------------------- -----------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------ --------- ------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Net operating loss carry
forwards -- 572 -- 3,470
Other -- -- 199 --
---- ---- ---- ------
Total assets 572 199 3,470
LIABILITIES:
Total liabilities -- -- -- --
VALUATION ALLOWANCE -- (572) (199) (3,470)
---- ---- ---- ------
Net assets (liability) -- -- -- --
==== ==== ==== ======
</TABLE>
During the year ended December 31, 1997, the Company incurred losses in
certain foreign subsidiaries totaling approximately $9.9 million, which
17
<PAGE> 18
increased the gross foreign deferred tax asset. The Company has recorded a
valuation allowance for the assets because realizability is uncertain.
At December 31, 1997, the Company had domestic net operating losses of
approximately $3.1 million available to offset future taxable income. Net
operating loss carryforwards expire at various dates from 1999 to 2010. The Tax
Reform Act of 1986 contains provisions that limit annual availability of the net
operating loss carry forwards due to a more than 50% change in ownership that
occurred upon the acquisition of certain companies.
At December 31, 1997, the Company had net operating losses in foreign
subsidiaries of approximately $8.6 million available to offset further taxable
income. These net operating loss carryforwards expire at various dates beginning
in 2001.
As of December 31, 1997, unremitted earnings in subsidiaries outside the
United States totaled $13.5 million, on which no United States taxes have been
provided. The Company's intention is to reinvest these earnings permanently or
to repatriate the earnings only when tax effective to do so. It is not practical
to estimate the amount of additional taxes that might be payable upon
repatriation of foreign earnings; however, the Company believes that United
States foreign tax credits would largely eliminate any United States taxes or
offset any foreign withholding taxes.
(3) CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS
The Company accounts for investments under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Accordingly, the Company's
cash equivalents, short-term and long-term investments are classified as
held-to-maturity and are recorded at amortized cost which approximates fair
market value.
Cash equivalents are short-term, highly liquid investments with original
maturities of less than three months. Short-term investments are investment
securities with original maturities of greater than three months but less than
one year and consist of the following (in thousands):
DECEMBER 31,
---------------------
1996 1997
------- -------
U.S. treasury bills...... $30,856 $20,047
Municipal bonds.......... 15,040 6,140
Certificates of deposit.. -- 6,749
Commercial paper......... -- 2,016
Foreign bonds............ -- 550
------- -------
$45,896 $35,502
======= =======
Long-term investments are investment securities with original maturities of
greater than one year and consist of the following (in thousands):
DECEMBER 31,
--------------------
1996 1997
------ -------
Municipal bonds......... $3,255 $10,165
U.S. treasury bills..... 4,000 --
Foreign bonds........... -- 515
Certificates of deposit. -- 454
------ -------
$7,255 $11,134
====== =======
(4) NOTES PAYABLE
In connection with the Cardiopet Incorporated ("Cardiopet") acquisition (see
Note 15(a)), the Company issued unsecured notes payable. The notes bore interest
at 9% and were repaid in full in February 1996.
18
<PAGE> 19
In connection with the acquisition of the business of Consolidated
Veterinary Diagnostics, Inc. ("CVD") (see Note 15(b)), the Company issued an
unsecured note payable for $3.0 million, of which $3.0 million and $2.0 million
was outstanding at December 31, 1996 and 1997, respectively. The note bears
interest at 8% and is due in $1.0 million installments in July 1997, 1998 and
1999.
In connection with the merger of Idetek, Inc. ("Idetek") (see Note 15(d)),
the Company assumed a note payable in the amount of $200,000. The note was paid
in full in September 1996.
In connection with the Acumedia Manufacturers, Inc. ("Acumedia") acquisition
(see Note 15(e)), the Company issued unsecured notes payable for $1.5 million,
which was outstanding at December 31, 1997. The notes bore interest at 6% and
were repaid in January 1998.
In connection with the Central Veterinary Diagnostic Laboratory acquisition
(see Note 15(b)) the Company issued an unsecured note payable for $900,000
Australian Dollars ($587,000) which was outstanding at December 31, 1997. The
note bears interest at 6%.
(5) COMMITMENTS AND CONTINGENCIES
The Company leases its facilities under operating leases which expire
through 2008. In addition, the Company is responsible for the real estate taxes
and operating expenses related to these facilities. Minimum annual rental
payments under these agreements are as follows (in thousands):
YEARS ENDING
DECEMBER 31,
--------------
1998.......... $ 3,825
1999.......... 3,164
2000.......... 2,427
2001.......... 2,317
2002.......... 2,099
Thereafter.... 10,155
-------
$23,987
=======
Rent expense charged to operations under operating leases was approximately
$2.1 million, $3.2 million and $3.8 million for the years ended December 31,
1995, 1996 and 1997, respectively.
Under the terms of certain supply agreements with suppliers of the Company's
hematology instruments and consumables, slides for its VetTest instruments, and
certain raw materials, the Company has aggregate commitments to purchase
approximately $31.8 million of products in 1998.
From time to time the Company has received notices alleging that the
Company's products infringe third-party proprietary rights. In particular, the
Company has received notices claiming that certain of the Company's immunoassay
products infringe third-party patents. Except as noted below with respect to the
patent infringement suit filed by Synbiotics Corporation, the Company is not
aware of any pending litigation with respect to such claims. Patent litigation
frequently is complex and expensive, and the outcome of patent litigation can be
difficult to predict. There can be no assurance that the Company will prevail in
any infringement proceedings that have been or may be commenced against the
Company. A significant portion of the Company's revenue in 1997 was attributable
to products incorporating certain immunoassay technologies and products relating
to the diagnosis of canine heartworm infection. If the Company were to be
precluded from selling such products or required to pay damages or make
additional royalty or other payments with respect to such sales, the Company's
business and results of operations could be materially and adversely affected.
On February 4, 1993, the Company acquired Environetics, Inc.
("Environetics"), which brought a patent infringement suit with Stephen C.
Edberg, Ph.D. against Millipore Corporation ("Millipore") in the U.S. District
Court for the District of Connecticut on September 30, 1992 (the "Millipore I
suit"). The complaint in the Millipore I suit was subsequently amended to add as
additional plaintiffs Access Medical Systems, Inc., a subsidiary of the
19
<PAGE> 20
Company ("Access"), and Stephen C. Wardlaw, M.D. The primary relief sought by
the plaintiffs was an injunction against Millipore which would prevent Millipore
from selling the Colisure product for the detection of E. coli and total
coliforms in water. The plaintiffs believe the Colisure product infringes U.S.
Patent No. 4,925,789 (the "`789 Patent") covering the Company's Colilert
product, under which Access and Environetics have an exclusive license from Drs.
Edberg and Wardlaw. In addition, on July 26, 1995 the Company, Environetics,
Access and Drs. Edberg and Wardlaw brought a second patent infringement suit
against Millipore in the U.S. District Court for the District of Connecticut
(the "Millipore II suit"). The principal relief sought by the plaintiffs in the
Millipore II suit was an injunction against Millipore which would prevent
Millipore from selling the Colisure product which the plaintiffs believe also
infringes U.S. Patent No. 5,429,933 (the " `933 Patent"), which covers the
Colilert product. The `933 Patent, which is related to the `789 Patent, was
issued in July 1995 to Dr. Edberg, and is exclusively licensed to Access and
Environetics. In November 1997, the Company and Millipore entered into an
agreement in principle to settle the Millipore I and II suits. Under the terms
of the agreement, which was finalized in March 1998, Millipore acknowledged the
validity of the `789 and `933 Patents and agreed to an injunction against
infringement of the patents. Millipore also transferred the Colisure product to
the Company in March 1998.
On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed suit
against the Company in the U.S. District Court for the District of Connecticut.
In its complaint, CDC Technologies alleges that the Company's conduct in, and
its relationships with its distributors in connection with, the distribution of
the Company's hematology products (i) violate federal and state antitrust
statutes, (ii) violate Connecticut statutes regarding unfair trade practices,
and (iii) constitute a civil conspiracy and interfere with CDC Technologies'
business relations. The relief sought by CDC Technologies includes treble
damages for antitrust violations, as well as compensatory and punitive damages,
and an injunction to prevent the Company from interfering with CDC Technologies'
relations with distributors. The Company has filed an answer denying the
allegations in CDC Technologies' complaint. The Company is unable to assess the
likelihood of an adverse result or estimate the amount of any damages the
Company may be required to pay. Any adverse outcome resulting in the payment of
damages would adversely affect the Company's results of operations.
On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit
against the Company in the U.S. District Court for the Southern District of
California for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988
(the " `631 Patent"). The `631 Patent, which is owned by Synbiotics, claims
certain assays, methods and compositions for the diagnosis of canine heartworm
infection. The primary relief sought by Synbiotics is an injunction against the
Company which would prevent the Company from selling canine heartworm diagnostic
products which infringe the `631 Patent, as well as treble damages for past
infringement. This suit was not served on the Company within the time period
specified under applicable court rules and therefore is expected to be dismissed
by the court, however Synbiotics would not be precluded from filing a new suit
in the future. While the Company believes that it has meritorious defenses
against claims of infringement of the `631 Patent, the Company is unable to
assess the likelihood of an adverse result or estimate the amount of any damages
the Company may be required to pay. If the Company is precluded from selling
canine heartworm diagnostic products or required to pay damages or make
additional royalty or other payments with respect to such sales, the Company's
business and results of operations could be materially and adversely affected.
On January 9, 1998, a complaint was filed in the U.S. District Court for the
District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F. WORKMAN,
JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff purports to
represent a class of purchasers of the common stock of the Company from July 19,
1996 through March 24, 1997. The complaint claims that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange
Commission Rule 10b-5 promulgated pursuant thereto, by virtue of false or
misleading statements made during the class period. The complaint also claims
that the individual defendants are liable as "control persons" under Section
20(a) of that Act. In addition, the complaint claims that the individual
defendants sold some of their own common stock of the Company, during the class
period, at times when the market price for the stock allegedly was inflated.
While the Company and the other defendants deny the allegations and will defend
this suit vigorously, the Company is unable to assess the likelihood of an
adverse result or estimate the amount of damages which the Company may be
required to pay. Any adverse outcome resulting in the payment of damages would
adversely affect the Company's results of operations.
(6) NON-RECURRING OPERATING CHARGE
20
<PAGE> 21
On September 29, 1997 the Company announced a non-recurring operating
charge of $28.0 million and on February 2, 1998 the Company announced that it
would increase the amount of the charge to $34.5 million. The non-recurring
operating charge includes the write-downs and write-offs of certain assets and
accrual of costs related to a significant workforce reduction. The charge
consists of the following (in thousands):
Write-off of in-process research and development $13,200
Legal settlement and related costs 8,000
Severance, benefits and related costs 9,000
Idle capacity and lease termination costs 2,700
Asset Impairment 1,600
-------
$34,500
=======
As of December 31, 1997, $11.9 million was included in accrued expenses relating
to the non-recurring operating charge.
During 1997 the Company acquired two veterinary practice management
software companies (see Note 15 (f)). To assist in the allocation of purchase
price associated with these acquisitions, the Company obtained an independent
appraisal. That appraisal identified approximately $13.2 million as in-process
research and development, which has been charged to operations in accordance
with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method.
In September 1997, the Company settled a patent infringement suit brought by
Barnes-Jewish Hospital ("BJH") regarding IDEXX's heartworm diagnostic products.
The total costs of the settlement, including legal fees, were charged to the
non-recurring operating charge. Under the settlement, the Company agreed to pay
BJH $5.5 million for prior sales of the Company's product and to pay a royalty
based on all future sales.
The Company has terminated the employment of a total of 228 employees. Of
this total, 79 employees are associated with the consolidation of the veterinary
practice management software business into the Eau Claire, Wisconsin facility,
57 employees are associated with the consolidation of sales, marketing and
distribution operations in Europe, 33 employees are associated with reductions
in domestic sales and marketing operations, 18 employees are associated with
reductions in sales and marketing operations in the Pacific Rim region, 16
employees are associated with the closure of the Sunnyvale, California research
and development facility and 25 employees are associated with reduction in
positions in management and financial operations. As of December 31, 1997,
approximately 40 employees have terminated employment, and the Company expects
that the remainder will leave in the first half of 1998.
As discussed above, the Company is consolidating certain veterinary practice
management software operations into the Eau Claire, Wisconsin facility and has
closed the leased Sunnyvale, California research and development facility. As a
result of these consolidations, the Company has leased facilities which have
become excess until the end of their respective lease terms. Additionally, the
Company has determined that it will not pursue certain immunoassay technology
with respect to which it has invested a total of $1.6 million in fixed assets
and license fees.
(7) STOCKHOLDERS' EQUITY
(a) Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
500,000 shares of Preferred Stock, $1.00 par value per share ("Preferred
Stock"), in one or more series. Each such series of Preferred Stock shall have
such number of shares, designations, preferences, voting powers, qualifications
and special or relative rights or privileges as shall be determined by the Board
of Directors, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences, conversion
rights and preemptive rights.
21
<PAGE> 22
(b) Series A Junior Participating Preferred Stock
On December 17, 1996, the Company designated 100,000 shares of Preferred
Stock as Series A Junior Participating Preferred Stock ("Series A Stock") in
connection with its Shareholder Rights Plan (see Note 9). In general, each share
of Series A Stock will: (i) be entitled to a minimum preferential quarterly
dividend of $10 per share and to an aggregate dividend of 1000 times the
dividend declared per share of Common Stock, (ii) in the event of liquidation,
be entitled to a minimum preferential liquidation payment of $1000 per share
(plus accrued and unpaid dividends) and to an aggregate payment of 1000 times
the payment made per share of Common Stock, (iii) have 1000 votes, voting
together with the Common Stock, (iv) in the event of any merger, consolidation
or other transaction in which Common Stock is exchanged, be entitled to receive
1000 times the amount received per share of Common Stock and (v) not be
redeemable. These rights are protected by customary antidilution provisions.
(c) Stock Split
The accompanying consolidated financial statements and related notes for all
periods presented have been adjusted to reflect a two-for-one stock split of the
Common Stock, effected in the form of a stock dividend, on June 5, 1995.
(8) STOCK-BASED COMPENSATION PLANS
At December 31, 1997, the Company had nine stock-based compensation plans,
which are described below. The Company accounts for these plans under the
provisions of SFAS No. 123. Under SFAS No. 123 the Company elected the
disclosure method and will continue to account for stock-based compensation
plans under APB Opinion No. 25. Accordingly, no compensation cost has been
recognized for these plans. Had compensation cost for the Company's nine
stock-based compensation plans been determined consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and net income (loss) per common
and common equivalent share would have been reduced to the following pro forma
amounts (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net income (loss):
As Reported.......................................... $21,494 $32,641 $(21,120)
Pro Forma............................................ $20,182 $28,278 $(30,563)
Net income (loss) per share:
Basic: As Reported................................... $ 0.65 $ 0.88 $ (0.56)
Basic: Pro Forma..................................... $ 0.61 $ 0.76 $ (0.80)
Diluted: As Reported................................. $ 0.61 $ 0.83 $ (0.56)
Diluted: Pro Forma................................... $ 0.57 $ 0.72 $ (0.80)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
(a) The 1984 Plan
During 1984, the Company established a stock option plan (the "1984 Plan"),
under which key employees were granted options to purchase Common Stock at
exercise prices not less than the fair market value as of the date of grant, as
determined by the Board of Directors. On April 24, 1991, the Board of Directors
terminated the 1984 Plan such that no further options may be granted under the
Plan.
(b) The 1991 Plan
During 1991, the Board of Directors approved the 1991 Stock Option Plan
which, as amended, provides for grants up to 6,475,000 incentive and
nonqualified stock options at the discretion of the Compensation Committee of
the Board of Directors. Incentive stock options are granted at the fair market
value on the date of grant and expire 10 years from the date of grant. Incentive
stock options for greater than 10% shareholders are granted at 110% of the fair
market value and expire five years from the date of grant. Nonqualified options
may be granted at no less than 100% of the fair market value on the date of
grant. Income tax benefits attributable to certain exercised stock
22
<PAGE> 23
options are credited to additional paid-in capital. The vesting schedule of all
options is determined by the Compensation Committee of the Board of Directors at
the time of grant.
(c) The 1991 Director Option Plan
During 1991, the Board of Directors approved the 1991 Director Option Plan
(as amended, the "1991 Director Plan") pursuant to which Directors who are not
officers or employees of the Company may receive nonstatutory options to
purchase shares of the Company's Common Stock. The time period for granting
options under the 1991 Director Plan expired in accordance with the terms of the
plan in June 1996.
(d) The 1997 Director Option Plan
During 1997, the Board of Directors approved the 1997 Director Option Plan
(the "1997 Director Plan") pursuant to which Directors who are not officers or
employees of the Company may receive nonstatutory options to purchase shares of
the Company's Common Stock. A total of 300,000 shares of Common Stock may be
issued under the 1997 Director Plan.
(e) ETI Corporation Plan
During 1991, the Board of Directors of ETI approved a Stock Option Plan (the
"ETI Plan"). The ETI Plan provided for the grant of up to 100,000 nonqualified
stock options at the discretion of the Board of Directors of ETI. Options were
granted at the fair market value on the date of grant and expire five years from
the date of grant. The options vest over a four-year period from the date of
grant.
In connection with the merger of ETI and the Company, all outstanding ETI
options became exercisable, in accordance with their original vesting schedule,
for shares of the Company's Common Stock at the same rate at which outstanding
shares of ETI common stock were exchanged for shares of the Company's Common
Stock in the merger. In addition, the exercise price for the options was
proportionately adjusted in accordance with the adjustment to the number of
shares.
(f) Idetek, Inc. Plans
During 1986, the Board of Directors of Idetek approved the 1985 Incentive
Stock Option Plan (the "1985 Idetek Plan"). Options were granted at the fair
market value on the date of grant and expire 10 years from the date of grant.
Options for greater than 10% shareholders were granted at no less than 110% of
the fair market value and expire five years from the date of grant. The 1985
Idetek Plan was terminated by the Board of Directors of Idetek as to future
grants.
During 1987, the Board of Directors of Idetek approved the 1987 Stock Option
Plan (the "1987 Idetek Plan"), which provides for the grant of both incentive
and nonqualified stock options. Incentive stock options were granted at the fair
market value on the date of grant and expire 10 years from the date of grant.
Incentive stock options for greater than 10% shareholders were granted at 110%
of the fair market value and expire five years from the date of grant.
Nonqualified options were granted at 85% of the fair market value on the date of
grant and expire five years from the date of grant. The Company does not intend
to grant any options under the 1987 Idetek Plan in excess of the options
currently outstanding.
In February 1996, the Board of Directors of Idetek approved two separate,
single participant fixed term incentive stock option agreements with certain of
its key executive officers. Options were granted to the individual participant
named in the agreement at prices established by the Board of Directors of Idetek
and such options expire 10 years from the date of grant.
In connection with the merger of Idetek and the Company, all outstanding
Idetek options became exercisable, in accordance with their original vesting
schedule or terms, for shares of the Company's Common Stock at the same rate at
which outstanding shares of Idetek common stock were exchanged for shares of the
Company's Common
23
<PAGE> 24
Stock in the merger. In addition, the exercise price for the options was
proportionately adjusted in accordance with the adjustment to the number of
shares.
A summary of the status of the Company's stock option plans as of December
31, 1995, 1996 and 1997 and changes during the years then ended is presented in
the table and narrative below (in thousands, except weighted average exercise
price):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, December 31, 1994 .................. 3,991 $ 6.72
Granted .................................... 859 22.08
Exercised .................................. (370) 4.95
Terminated ................................. (286) 9.89
----- ------
Outstanding, December 31, 1995 .................. 4,194 $ 9.81
===== ======
Exercisable, December 31, 1995 .................. 2,081 $ 4.66
===== ======
Weighted Average Fair Value of Options
Granted in 1995 ............................... $10.99
======
Granted .................................... 1,120 $39.91
Exercised .................................. (799) 4.39
Terminated ................................. (163) 13.35
----- ------
Outstanding, December 31, 1996 .................. 4,352 $18.41
===== ======
Exercisable, December 31, 1996 .................. 2,038 $ 7.17
===== ======
Weighted Average Fair Value of Options
Granted in 1996 ............................... $21.84
======
Granted .................................... 1,596 $24.14
Exercised .................................. (270) 6.64
Terminated ................................. (97) 21.45
Canceled on repricing, net ................. (494) 36.85
----- ------
Outstanding, December 31, 1997 .................. 5,087 $12.98
===== ======
Exercisable, December 31, 1997 .................. 2,422 $ 9.03
===== ======
Weighted average fair value of options
granted in 1997................................ $ 7.70
======
</TABLE>
In April 1997 the Company implemented a Stock Option Exchange Program (the
"Program") for employees in response to the substantial decline in the trading
price of the Company's Common Stock. Under the Program employees could
voluntarily exchange unexercised stock options and receive new options at $17.35
per share. Employees also were required to forfeit between 0% and 50% of their
options based on their relative position in the Company. There were 2.0 million
options with a weighted average exercise price of $36.85 that were exchanged for
new options. 494,000 net options to acquire shares were forfeited as a result of
the Program. The other terms of the options remained essentially unchanged. The
weighted average fair value of the new options granted was $13.00 per share.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants in 1995, 1996 and 1997, respectively: no
dividend yield for all years; expected volatility of 45% for 1995 and 1996 and
52% for 1997; risk-free interest rates of 6.38%, 6.18% and 6.33% for 1995, 1996
and 1997, respectively; and expected lives of 5.48 years for 1995 and 1996 and
4.55 for 1997.
At December 31, 1997, the options outstanding have the following
characteristics (shares in thousands):
24
<PAGE> 25
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
EXERCISE NUMBER AVERAGE REMAINING NUMBER AVERAGE
PRICE OF EXERCISE CONTRACTUAL OF EXERCISE
RANGE OPTIONS PRICE LIFE OPTIONS PRICE
--------------- -------- -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
$ 0.50 -- $3.97 727 $ 1.92 2.14 726 $ 1.92
5.31 -- 11.38 1,043 7.56 4.79 931 7.33
12.00 -- 17.35 2,830 16.40 8.60 538 16.07
19.25 -- 78.14 487 21.29 7.27 227 22.07
</TABLE>
(g) Employee Stock Purchase Plans
During 1994, the Board of Directors approved the 1994 Employee Stock
Purchase Plan whereby the Company had reserved up to an aggregate of 300,000
shares of Common Stock for issuance in semiannual offerings over a three-year
period. During 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan whereby the Company has reserved and may issue up to an aggregate
of 420,000 shares of Common Stock in semiannual offerings. Also during 1997 the
Board of Directors approved the 1997 International Employee Stock Purchase Plan
whereby the Company has reserved and may issue up to an aggregate of 30,000
shares of Common Stock in semiannual offerings. Stock is sold under each of
these plans at 85% of fair market value, as defined. Shares subscribed to and
issued under the plans were 35,961 in 1995, 33,281 in 1996 and 119,027 in 1997.
Under SFAS No. 123, pro forma compensation cost is recognized for the fair
value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 1995, 1996 and 1997,
respectively: no dividend yield for all years; an expected life of one year for
all years; expected volatility of 45% for 1995 and 1996 and 72% for 1997; and
risk-free interest rates of 6.38%, 6.18% and 6.14% for 1995, 1996 and 1997,
respectively. The weighted-average fair value of those purchase rights granted
in 1995, 1996 and 1997 was $7.98, $10.63 and $7.15 per share, respectively.
(9) PREFERRED STOCK PURCHASE RIGHTS
On December 17, 1996, the Company adopted a Shareholder Rights Plan and
declared a dividend of one preferred stock purchase right for each outstanding
share of Common Stock to stockholders of record at the close of business on
December 30, 1996. Under certain conditions, each right may be exercised to
purchase one one-thousandth of a share of Series A Stock at a purchase price of
$200. The rights will be exercisable only if a person or group has acquired
beneficial ownership of 20% or more of the Common Stock or commenced a tender or
exchange offer that would result in such a person or group owning 30% or more of
the Common Stock. The Company generally will be entitled to redeem the rights,
in whole, but not in part, at a price of $.01 per right at any time until the
tenth business day following a public announcement that a 20% stock position has
been acquired and in certain other circumstances.
If any person or group becomes a beneficial owner of 20% or more of the
Common Stock (except pursuant to a tender or exchange offer for all shares at a
fair price as determined by the outside members of the Company's Board of
Directors), each right not owned by a 20% stockholder will enable its holder to
purchase such number of shares of Common Stock as is equal to the exercise price
of the right divided by one-half of the current market price of the Common Stock
on the date of the occurrence of the event. In addition, if the Company
thereafter is acquired in a merger or other business combination with another
person or group in which it is not the surviving corporation or in connection
with which its Common Stock is changed or converted, or if the Company sells or
transfers 50% or more of its assets or earning power to another person, each
right that has not previously been exercised will entitle its holder to purchase
such number of shares of common stock of such other person as is equal to the
exercise price of the right divided by one-half of the current market price of
such common stock on the date of the occurrence of the event.
(10) IDEXX RETIREMENT AND INCENTIVE SAVINGS PLAN
The Company has established the IDEXX Retirement and Incentive Savings Plan
(the "401(k) Plan"). Employees eligible to participate in the 401(k) Plan may
contribute specified percentages of their salaries, a portion of which will be
matched by the Company. In addition, the Company may make contributions to the
401(k) Plan at the discretion of the Board of Directors. There were no
discretionary contributions in 1995, 1996 or 1997.
25
<PAGE> 26
(11) SIGNIFICANT CUSTOMERS
During each of the years ended December 31, 1995 and 1996 one customer
accounted for 11% and 12%, respectively, of the Company's revenue. The
significant customer in each year was a wholesale distributor of the Company's
products. No customers accounted for greater than 10% of revenue in 1997.
(12) EXPORT SALES
Domestic and export sales as a percentage of total revenue are as follows:
DECEMBER 31,
----------------------
GEOGRAPHIC AREA 1995 1996 1997
----------------- ---- ---- ----
Domestic......... 66% 66% 68%
Europe........... 25 22 20
All others....... 9 12 12
---- ---- ----
100% 100% 100%
=== ==== ====
(13) GEOGRAPHIC INFORMATION
Revenue, net income (loss) and identifiable assets for the Company's U.S.,
European and other operations for each of the three years ended December 31,
1997 are summarized as follows:
<TABLE>
<CAPTION>
UNITED STATES EUROPE OTHER ELIMINATIONS CONSOLIDATED
------------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenue from unaffiliated
locations............... $128,004 $48,210 $12,388 $ -- $188,602
Transfers between geographic
locations............... 28,521 -- 14 (28,535) --
-------- ------- ------- -------- --------
Total revenue............. $156,525 $48,210 $12,402 $(28,535) $188,602
======== ======= ======= ======== ========
Net income (loss)......... $ 17,680 $ 4,051 $ (385) $ 148 $ 21,494
======== ======= ======= ======== ========
Identifiable assets....... $283,836 $20,342 $ 8,331 $ 30 $312,539
======== ======= ======= ======== ========
<CAPTION>
UNITED STATES EUROPE OTHER ELIMINATIONS CONSOLIDATED
------------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Revenue from unaffiliated
locations............... $182,094 $59,911 $25,672 $ -- $267,677
Transfers between geographic
locations............... 41,317 56 -- (41,373) --
-------- ------- ------- -------- --------
Total revenue............. $223,411 $59,967 $25,672 $(41,373) $267,677
======== ======= ======= ======== ========
Net income (loss)......... $ 28,543 $ 3,051 $ 1,313 $ (266) $ 32,641
======== ======= ======= ======== ========
Identifiable assets....... $328,894 $27,889 $17,160 $ (91) $373,852
======== ======= ======= ======== ========
<CAPTION>
UNITED STATES EUROPE OTHER ELIMINATIONS CONSOLIDATED
------------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Revenue from unaffiliated
locations............... $186,357 $51,287 $25,326 $ -- $262,970
Transfers between geographic
locations............... 39,366 1,330 253 (40,949) --
-------- ------- ------- -------- --------
Total revenue............. $225,723 $52,617 $25,579 $(40,949) $262,970
======== ======= ======= ======== ========
Net income (loss)......... $(17,315) $ 838 $(4,338) $ (305) $(21,120)
======== ======= ======= ======== ========
Identifiable assets....... $331,364 $30,526 $15,620 $ (462) $377,048
======== ======= ======= ======== ========
</TABLE>
26
<PAGE> 27
(14) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
DECEMBER 31,
-------------------
1996 1997
------- -------
Accrued payroll and related expenses .. $ 6,404 $ 7,174
Accrued income taxes................... 6,637 6,113
Accrued non-recurring operating
charge ............................. -- 11,940
Other accrued expenses................ 10,831 16,920
------- -------
$23,872 $42,147
======= =======
(15) ACQUISITIONS
(a) Cardiopet Incorporated
On May 11, 1995, the Company acquired Cardiopet for approximately $3.5
million in cash, notes and assumed debt. Cardiopet is a New Jersey-based company
offering cardiology, internal medicine, ultrasound, dermatology and radiology
consulting services to veterinarians. The Company has accounted for this
acquisition using the purchase method of accounting. The results of operations
have been included with those of the Company since May 12, 1995. Pro forma
information has not been presented because of immateriality.
(b) Veterinary Reference Laboratories
The Company's 1996 and 1997 consolidated results of operations include the
results of operations of four veterinary reference laboratory businesses
acquired in 1996 for aggregate purchase prices of approximately $21.3 million in
cash, plus the assumption of certain liabilities.
The Company's 1997 consolidated results of operations also include the
results of operations of a veterinary reference laboratory business acquired in
1997 for an aggregate purchase price of approximately $844,000 in cash, the
issuance of $587,000 in unsecured notes payable, plus the assumption of certain
liabilities.
In connection with the acquisitions, the Company entered into non-compete
agreements for a period of up to five years with certain of the entities, and
their stockholders or former stockholders. The Company has accounted for these
acquisitions under the purchase method of accounting. The results of operations
of each of these businesses has been included in the Company's consolidated
results of operations since each of their respective dates of acquisition. The
Company has not presented pro forma financial information relating to any of
these acquisitions because of immateriality. These acquisitions are as follows:
- On March 29, 1996, the Company acquired all of the capital stock of
VetLab, Inc. which operated two veterinary reference laboratories in
Texas.
- On April 2, 1996, the Company, through its wholly-owned subsidiary
IDEXX Laboratories, Limited, acquired substantially all of the assets
and assumed certain of the liabilities of Grange Laboratories Ltd.,
which operated veterinary reference laboratories in the United
Kingdom.
- On May 15, 1996, the Company acquired all of the capital stock of
Veterinary Services, Inc., which operated veterinary reference
laboratories in Colorado, Illinois and Oklahoma.
- On July 12, 1996, the Company acquired substantially all of the assets
and assumed certain of the liabilities of CVD, which operated
veterinary reference laboratories in Northern California, Oregon and
Nevada.
- On December 1, 1997, the Company, through its wholly-owned subsidiary
IDEXX Laboratories Pty. Ltd., acquired certain assets and assumed
certain liabilities of Lording & Friend Pty. Ltd. and Clinpath Pty.
Ltd. (operating under the name Central Veterinary Diagnostic
Laboratory), which operated a veterinary reference laboratory in
Australia.
The VetLab, VSI and CVD businesses are now part of IDEXX Veterinary
Services, Inc., a wholly-owned subsidiary of the Company.
(c) Ubitech Aktiebolag
27
<PAGE> 28
On July 18, 1996, the Company acquired all of the capital stock of Ubitech
Aktiebolag (now named IDEXX Scandinavia AB ("IDEXX AB")) for $400,000 plus the
assumption of certain liabilities. IDEXX AB, located in Uppsala, Sweden,
manufactures and distributes diagnostic test kits for the livestock industry.
The Company has accounted for this acquisition under the purchase method of
accounting. The results of operations of IDEXX AB have been included in the
Company's consolidated results of operations since the date of acquisition. Pro
forma information has not been presented because of immateriality.
(d) Idetek, Inc.
On August 29, 1996, the Company acquired by merger Idetek by issuing 436,804
shares of its Common Stock, of which approximately 10% are held in escrow, in
exchange for all of the outstanding capital stock of Idetek. In addition,
outstanding options to purchase shares of Idetek capital stock became options to
acquire 110,191 shares of the Company's Common Stock at prices ranging from
$3.13 to $78.14. The value of the shares of the Company's Common Stock issued or
reserved for issuance as a result of the merger totaled approximately $20
million. Idetek, previously located in Sunnyvale, California, manufactured and
distributed detection tests for the food, agricultural and environmental
industries. The Company entered into employment agreements for up to three
years. The Company has accounted for this acquisition by merger as a
"pooling-of-interests". The results of operations of Idetek have been included
in the Company's consolidated results of operations since the date of the
merger. The Company has not restated its financial statements because of
immateriality.
(e) Acumedia Manufacturers, Inc.
On January 30, 1997, the Company acquired all of the capital stock of
Acumedia Manufacturers, Inc. ("Acumedia") for $3.1 million and the issuance of
$1.5 million in notes payable. The Company also agreed to pay an additional
$250,000 based on the results of operations in each of 1997 and 1998. Based on
results for 1997, the Company will pay $250,000, which will be treated as
additional purchase price. Any amount paid for 1998 also will be treated as
additional purchase price. Acumedia, located in Baltimore, Maryland,
manufactures and distributes dehydrated culture media for testing in the food
industry. The Company also entered into employment agreements for up to three
years with certain former stockholders. The Company has accounted for this
acquisition under the purchase method of accounting and the Company has included
the results of operations in its consolidated results of operations since the
date of acquisition. Pro forma information has not been presented because of
immateriality.
(f) Veterinary Practice Management Software Providers
The Company's consolidated results of operations include the results of
operations of two veterinary practice management software businesses acquired in
1997. These businesses were acquired for an aggregate purchase price of
approximately $19.5 million in cash. The Company paid an additional $500,000 as
additional purchase price in February 1998. In connection with these
acquisitions, the Company entered into employment and non-competition agreements
for up to three years with certain former stockholders. The Company has not
presented pro forma financial information because of immateriality. These
acquisitions are as follows:
- On March 13, 1997, the Company acquired all of the capital stock of
National Information Systems Corporation, located in Eau Claire,
Wisconsin, which operated under the trade name of Advanced Veterinary
Systems ("AVS").
- On July 18, 1997, the Company acquired all of the capital stock of
Professionals' Software, Inc. ("PSI"), located in Effingham, Illinois.
(g) Wintek Bio-Science Inc.
On July 1, 1997, the Company, through its wholly-owned subsidiary, IDEXX
Laboratories (Taiwan), Inc., acquired certain assets and assumed certain
liabilities of Wintek Bio-Science Inc. ("Wintek") for $960,000. Wintek, located
in Taipei, Taiwan, distributes diagnostic products to veterinarians and
hospitals in Taiwan. The Company
28
<PAGE> 29
also entered into employment and non-competition agreements with the owners of
Wintek for up to five years. The Company has accounted for this acquisition
under the purchase method of accounting and the Company has included the results
of operations in its consolidated results of operations since the date of
acquisition. Prior to the acquisition, Wintek distributed the Company's products
in Taiwan, however, the annual sales of products to Wintek were immaterial. Pro
forma information has not been presented because of immateriality.
(16) SERVICE REVENUE
Service revenue, which includes laboratory service revenue and maintenance
and repair revenue, was less than 10% of total revenue in 1995 and 1996. In
1997, service revenue totaled approximately $46.6 million. The cost of service
revenue in 1997 totaled approximately $28.4 million.
(17) INFORMATION REGARDING CLASSES OF SIMILAR PRODUCTS OR SERVICES (UNAUDITED)
Approximately 75%, 72% and 57% of the Company's revenues were derived from
the sale of professional office diagnostic products in 1995, 1996 and 1997,
respectively, with approximately 46%, 46% and 39% of revenues, respectively,
attributable to sales of test kits, and approximately 29%, 27% and 18% of
revenues, respectively, attributable to sales of instruments.
Approximately 15% of the Company's 1997 revenues were derived from
veterinary laboratory and consulting services.
(18) SUMMARY OF QUARTERLY DATA (UNAUDITED)
A summary of quarterly data follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1996 QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue............................ $57,400 $65,875 $69,837 $74,565
Gross profit....................... 32,893 37,295 40,476 43,743
Operating income................... 9,540 11,078 12,702 13,671
Net income......................... 6,960 7,893 8,551 9,236
Earnings per share: Basic.......... 0.19 0.21 0.23 0.25
Earnings per share: Diluted........ 0.18 0.20 0.22 0.23
<CAPTION>
1997 QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue............................ $60,534 $58,890 $71,728 $71,818
Gross profit....................... 31,666 28,914 35,940 32,219
Operating loss..................... (273) (5,235) (25,986) (7,436)
Net income (loss).................. 895 (2,068) (16,854) (3,093)
Earnings (loss) per share: Basic... 0.02 (0.05) (0.44) (0.08)
Earnings (loss) per share: Diluted. 0.02 (0.05) (0.44) (0.08)
</TABLE>
29
<PAGE> 30
SCHEDULE II
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSES WRITE-OFFS OF YEAR
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
December 31, 1995........... $1,654 944 88 2,510
December 31, 1996........... 2,510 1,723 232 4,001
December 31, 1997........... 4,001 2,246 1,165 5,082
</TABLE>
30
<PAGE> 31
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock is quoted on the Nasdaq National Market under the symbol
IDXX. The following table sets forth for the periods indicated the high and low
closing sale prices per share of the Common Stock as reported on the Nasdaq
National Market.
HIGH LOW
------- -------
CALENDAR 1996
First Quarter.... $53 1/2 $40 1/4
Second Quarter... 49 37
Third Quarter.... 46 1/4 30 1/2
Fourth Quarter... 45 1/4 30
CALENDAR 1997
First Quarter.... $38 1/2 $11
Second Quarter... 15 7/8 9 1/4
Third Quarter.... 19 5/8 12 1/4
Fourth Quarter... 21 1/8 12 3/4
As of December 31, 1997, there were 1,654 holders of record of the Company's
Common Stock.
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to fund the development and growth
of its business.
31
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE COMPANY
Name Jurisdiction of Incorporation
---- -----------------------------
Access Medical Systems, Inc. Delaware
Acumedia Manufacturers, Inc. Maryland
Cardiopet Incorporated Delaware
Environetics, Inc. Delaware
ETI Corporation Delaware
IDEXX Distribution Corporation Delaware
IDEXX Food Safety Net Services, Inc. Delaware
IDEXX GmbH Germany
IDEXX Laboratories B.V. The Netherlands
IDEXX Laboratories Canada Corporation Canada
IDEXX Laboratories Foreign Sales Corporation U.S. Virgin Islands
IDEXX Laboratories Italia S.r.l. Italy
IDEXX Laboratories, KK Japan
IDEXX Laboratories, Limited England and Wales
IDEXX Laboratories (NZ) Limited New Zealand
IDEXX Laboratories (Taiwan) Inc. Taiwan R.O.C.
IDEXX Logistique et Scientifique Europe S.A. France
IDEXX Management Services Europe S.A. France
IDEXX S.A. France
IDEXX Scandinavia A.B. Sweden
IDEXX Veterinary Services, Inc. Delaware
Professionals' Software, Inc. Delaware
Radiopet Incorporated Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 33-41806, 33-42845, 33-42846, 33-48404,
33-61494, 33-64202, 33-64204, 33-95616, 333-11201, 333-11199, 333-36009,
333-36007.
Arthur Andersen LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE IDEXX
LABORATORIES, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000874716
<NAME> IDEXX LABORATORIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 106,972
<SECURITIES> 35,502
<RECEIVABLES> 52,423
<ALLOWANCES> 5,082
<INVENTORY> 60,174
<CURRENT-ASSETS> 274,217
<PP&E> 71,414
<DEPRECIATION> 30,387
<TOTAL-ASSETS> 377,048
<CURRENT-LIABILITIES> 74,315
<BONDS> 0
0
0
<COMMON> 3,817
<OTHER-SE> 298,916
<TOTAL-LIABILITY-AND-EQUITY> 377,038
<SALES> 216,338
<TOTAL-REVENUES> 262,920
<CGS> 105,804
<TOTAL-COSTS> 134,231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,246
<INTEREST-EXPENSE> 508
<INCOME-PRETAX> (32,260)
<INCOME-TAX> (11,140)
<INCOME-CONTINUING> (21,120)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,120)
<EPS-PRIMARY> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE IDEXX
LABORATORIES, INC. AUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000874716
<NAME> IDEXX LABORATORIES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 127,741,450
<SECURITIES> 45,895,723
<RECEIVABLES> 70,634,284
<ALLOWANCES> 4,001,000
<INVENTORY> 48,401,936
<CURRENT-ASSETS> 301,717,082
<PP&E> 59,256,868
<DEPRECIATION> 22,863,195
<TOTAL-ASSETS> 373,852,335
<CURRENT-LIABILITIES> 51,127,063
<BONDS> 0
0
0
<COMMON> 3,777,411
<OTHER-SE> 318,947,861
<TOTAL-LIABILITY-AND-EQUITY> 373,852,335
<SALES> 267,677,374
<TOTAL-REVENUES> 267,677,374
<CGS> 113,270,667
<TOTAL-COSTS> 113,270,667
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,723,000
<INTEREST-EXPENSE> 299,500
<INCOME-PRETAX> 55,322,797
<INCOME-TAX> 22,682,347
<INCOME-CONTINUING> 32,640,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,640,450
<EPS-PRIMARY> .88
<EPS-DILUTED> .83
</TABLE>
