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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, 1998
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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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 ___
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_ .
Based on the closing sale price on March 26, 1999, the aggregate market
value of the voting stock held by non-affiliates of the registrant was
$891,213,126. 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
39,069,039 on March 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
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LOCATION IN FORM 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 19, 1999 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, 1998 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 1998 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 veterinary, food 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 information management software systems and
related services and pharmaceutical products. The substantial majority of the
Company's revenue is currently derived from the sale of veterinary diagnostic
products and services and veterinary practice information management systems and
services, where the Company believes it holds leading market positions. The
Company's veterinary diagnostic 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 comprehensive information 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 is also developing products for veterinary therapeutic applications. The
Company's food and environmental testing products and services and consultative
services are used to detect various contaminants in food, food processing
environments and water, to assist in maintaining safe food and food processing
environments and to assist in disease detection, management and eradication in
food production animals.
The Company currently offers 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 350
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 information management software
systems. Through locations in the U.S., England, Japan and Australia, the
Company provides rapid, affordable, high-quality laboratory services to
veterinarians. In October 1998, the Company acquired Blue Ridge Pharmaceuticals,
Inc., a company engaged in the development of novel therapeutics for the
veterinary market.
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 diagnostics, veterinary practice
information 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.
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IDEXX(R), Better Choice(TM), Bind(R), Cardiopet(R), CITE(R), Colilert(R),
Colisure(TM), Defined Substrate Technology(R), DiaSystems(TM), DST(R),
Enterolert(TM), FlockChek(R), HerdChek(R), IDEXX Food Safety Net(TM), IDEXX
VetLab(TM), LacTek(TM), Lightning(R), Parallux(TM), Patient Advisor(TM),
PetChek(R), Probe(R), Quanti-Tray(R), SNAP(R), SimPlate(TM), Veterinary Practice
Manager(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). Cornerstone(R) is used under license by the Company.
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 and environmental
markets.
* VETERINARY PRODUCTS AND SERVICES
IMMUNOASSAYS
The Company provides a broad range of point-of-care diagnostic products for
use by veterinarians in testing for a variety of companion 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 and horses. 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 produced 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 veterinary immunoassays use enzyme labels to indicate the
presence or absence of a specific analyte. In these enzyme-linked immunosorbent
assays ("ELISA"), the test results are measured through a color change, which
varies in proportion to the amount of the analyte present in the sample.
The Company offers SNAP immunoassays to detect feline leukemia virus
("FeLV") 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 FeLV and feline immunodeficiency virus
("FIV") (which resembles the human AIDS virus). 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 product tests for immune status in newborn foals.
The Company also markets a line of ELISA 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 a microwell-based test kit for feline
coronavirus under the DiaSystems trade name.
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 ANALYZER. 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 analyzers are manufactured for the Company by
Tokyo Parts Industrial Co. under an agreement that renews annually 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
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
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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) HEMATOLOGY SYSTEM. The QBC(R) VetAutoread(TM)
hematology system is 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)
hematology system 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) hematology system is based on the Becton
QBC(R) Autoread(TM) hematology system sold to physicians in private practices
for human applications. The QBC(R) VetAutoread(TM) hematology 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 downloaded and displayed on the VetTest analyzer.
VETLYTE SYSTEM. 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 instruments) 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. The Company
expects to introduce in 1999 similar links to its other practice management
systems, Cornerstone and Veterinary Practice Manager.
VETERINARY LABORATORY AND CONSULTING SERVICES
The Company 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, and pathology.
Additionally, the Company provides specialized veterinary consultation and
advisory services, including cardiology, radiology, internal medicine,
dermatology and ultrasound consulting. These services permit veterinarians to
obtain readings and interpretations of test results transmitted by telephone
from the veterinarians' offices. The services can be provided during the course
of a visit, thereby giving veterinarians immediate access to specialists. The
Company employs or retains
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as consultants approximately 33 board-certified 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 70%, 71% and 80% of the Company's total revenues were derived
from sales of veterinary diagnostic products and services in 1998, 1997 and
1996, respectively.
INFORMATICS PRODUCTS AND SERVICES
The Company's informatics business was formed in 1997 with the acquisition
of Advanced Veterinary Systems, located in Eau Claire, Wisconsin, and
Professionals' Software, Inc., located in Effingham, Illinois. In 1998 most
operations were consolidated in Eau Claire, Wisconsin. The Company provides
comprehensive veterinary practice information management solutions designed to
assist veterinarians in delivering high quality medical care and increasing the
profitability of their businesses. The Company believes that it is the leading
provider of veterinary practice information management systems ("PIMS") in the
U.S. with an installed based of more than 8,000 of the approximately 21,000
veterinary hospitals in North America. The Company supplies software, hardware,
network design, installation, education and support for companion animal, food
animal, equine, and emergency veterinary practices.
The Company's two principal software products are its Cornerstone and Better
Choice systems.
CORNERSTONE. The Company's lead PIMS product is Cornerstone, a proprietary
Windows-based software product that assists veterinarians in all aspects of
veterinary hospital management, including maintaining client and patient
records, appointment scheduling, invoicing, billing, dispensing and inventory
management. The software facilitates sending reminders of needed health care to
selected customers and assists in the management of critical business functions
such as pricing, client analysis, and staff productivity. The software is sold
as a core package with additional, optional modules. Optional modules include an
advanced client communication module, Patient Advisor, and an image management
program that allows the clinic to transmit radiographs and other images over the
internet to consultants for expert second opinions. The Company believes that
Cornerstone is the most widely-used Windows-based PIMS in veterinary medicine
with over 1,000 installations.
BETTER CHOICE. The Company also offers an AccuCobol-based PIMS, Better
Choice, that is especially well suited for practices with multiple locations
because of its ability to share records across sites. Better Choice also has
features particularly useful for livestock, equine and emergency practices. The
program is compatible with both Unix and Windows operating systems. Optional
modules allow direct transmission of results from the IDEXX VetTest blood
chemistry analyzer to the hospitals' patient records and transmission of
digitized radiographs and other images to the Company's veterinary medical
specialists via the internet.
The Company provides software and hardware support for its Cornerstone,
Better Choice, and Veterinary Practice Manager products and derives a
significant proportion of its revenues from ongoing service contracts.
VETERINARY PHARMACEUTICALS
In October 1998 the Company acquired Blue Ridge Pharmaceuticals, Inc.
("Blue Ridge"), a privately-held company engaged in the development of novel
therapeutics for the veterinary market. Blue Ridge was formed in 1996 to develop
products for therapeutic applications in companion animals and livestock that
might not fit the strategic goals of larger pharmaceutical companies marketing
both human and veterinary products. The Company believes that most research and
development at larger multi-national pharmaceutical companies is dedicated to
products expected to result in gross sales in excess of $50 million, and that
substantial opportunities exist for the development and sale of niche products
solely for the veterinary market. Blue Ridge currently has a number of products
in the registration process with the Center for Veterinary Medicine ("CVM") of
the U. S. Food and Drug Administration ("FDA"). These products include
antibiotics using long-acting delivery technologies and fertility enhancement
products.
* FOOD AND ENVIRONMENTAL PRODUCTS AND SERVICES
The Company sells a variety of detection products that help assure the
safety and wholesomeness of water and food, such as drinking water, dairy
products, poultry and meat, and food processing environments. Detection targets
include microbial contaminants such as total coliforms, E. coli and enterococci,
pathogenic bacteria such as Salmonella, and other contaminants such as food and
antibiotic residues. The Company also provides a broad range of diagnostic
products to food animal producers and government customers for disease
surveillance and eradication and health management programs.
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WATER TESTING PRODUCTS
The Company's Colilert and Colisure tests, based on Defined Substrate
Technology ("DST"), 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 and Colisure 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 and Colisure
tests are used by government laboratories, water utilities and private certified
laboratories to test drinking water in compliance with U.S. Environmental
Protection Agency ("EPA") standards. The tests are also used in evaluating water
used in production processes (for example, in food, beverage and pharmaceutical
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 EPA. In addition, the
Colilert test has also been approved in Japan, Brazil, Argentina, Colombia,
Chile, New Zealand and parts of Australia, and is under evaluation by regulatory
agencies in Europe and certain other countries in South America.
FOOD SAFETY AND HYGIENE PRODUCTS AND SERVICES
The Company currently offers several test kits which are used by worldwide
dairy producers, food companies and government laboratories to test for
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. In 1999 the Company expects to introduce the
Parallux system, a fully automated instrument for detecting antibiotic residues
in milk.
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 and retail outlets. 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
generate a visible signal 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. BIND gives results in approximately 22
hours, more rapidly and without the time-consuming steps associated with
traditional methods.
The Company also produces a line of more than 350 dehydrated culture media
products. These products are used primarily for bacterial detection in the food
industry.
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In 1998, the Company introduced the IDEXX Food Safety Net, which is intended
to offer a comprehensive and integrated network of products and laboratory
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.
PRODUCTION ANIMAL SERVICES
The Company's HerdChek product line consists of 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
product line also includes a test for porcine reproductive respiratory syndrome
("PRRS"), a swine disease that has been shown to have a severe health impact on
infected herds, and for a cattle disease known as mycopbacterium
paratuberculosis ("Johne's disease"), which can cause significant economic loss
for cattle producers.
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 in cattle,
and Mycoplasma gallisepticum ("MG") and Mycoplasma synoviae ("MS") infections in
poultry. 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 Company's FlockChek product line comprises a range of enzyme immunoassay
test kits and related instrumentation and software used in poultry health
management programs. 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.
Approximately 22%, 24% and 19% of the Company's revenues were derived from
sales of food and environmental products and services in 1998, 1997 and 1996,
respectively.
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 veterinary 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
veterinary 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 water and food safety 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. The Company markets its livestock and poultry
diagnostic products directly to laboratories and other customers through IDEXX
salespeople located in the U.S., Europe, Japan, Canada, Australia, Brazil and
Taiwan. Those products are also sold through distributors in Japan, Southeast
Asia, the Middle East and parts of Eastern Europe.
In 1998, 1997 and 1996, 28%, 32% and 34%, respectively, 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;
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enhancement of its practice information management software systems; and the
development of novel veterinary therapeutics. 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 $21.5 million, $17.1 million and $12.2 million in 1998, 1997 and
1996, respectively.
PATENTS AND LICENSES
The Company holds 26 U.S. patents and has filed patent applications for 29
other processes or products. The Company also holds five foreign patents and has
filed 17 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."
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, Tokyo Parts Industrial Co.
and Becton covering its anticipated 1999 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 quality.
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
8
<PAGE> 9
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
diagnostic 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 manufacture and sale of veterinary drugs are regulated by the CVM of the
FDA. A new animal drug may not be commercially marketed in the United States
unless it has been approved as safe and effective by CVM. Approval may be
requested by filing a New Animal Drug Application ("NADA") with CVM containing
substantial evidence as to the safety and effectiveness of the drug. For food
animals, the data must also include extensive data to support a withdrawal
period or other use restriction to ensure that the proposed drug use will
produce animals and animal products that are safe for human consumption. Data
regarding manufacturing methods and controls is also required to be submitted
with the NADA. Manufacturers of animal drugs must also comply with the FDA's
Good Manufacturing Practices. Sale of animal drugs in countries outside the
United States requires compliance with the laws of those countries, which may be
extensive.
The Colilert product has been approved in the U.S., Canada, Japan, Brazil,
Argentina, Colombia, Chile, New Zealand and parts of Australia for drinking
water testing. The Colilert product has also received approval from AOAC
(Association of Official Analytical Chemists) and is included in "Standard
Methods for the Examination of Water and Wastewater". The Company's Colilert-18,
Colisure, Quanti-Tray and Quanti-Tray 2000 products have been approved by EPA
and are also included in Standard Methods. Use of DST (Defined Substrate
Technology) for other applications may require regulatory approval from EPA and
other government agencies. In addition, the SimPlate product used in conjunction
with Mutliple Enzyme Technology for detection of total bacteria, and the
Company's BIND products, have been approved by AOAC-RI (AOAC-Research Institute)
for use in food testing.
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 FDA, the 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, 1998, 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, approximately 75,000 square feet of industrial space in
Memphis, Tennessee for use as a distribution facility, under a lease expiring in
2007, and approximately 60,000 square feet of office and manufacturing space in
Illinois and Wisconsin for its veterinary practice information management
software business. 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 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,
9
<PAGE> 10
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. In March 1998, the Court granted the
Company's motion for summary judgment in the case, however CDC is appealing that
ruling. 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 12, 1998, 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 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.
On December 18, 1997, SA Scientific, Inc. ("SAS") filed suit against the
Company in the State of Texas District Court seeking unspecified damages
resulting from the Company's alleged breach of a development and supply
agreement between SAS and the Company. The Company has filed an answer to the
complaint denying SAS's allegations and asserting counterclaims against SAS for
breach of contract and conversion of the Company's property. SAS has filed an
amended complaint seeking $1,500,000 in actual damages related to the Company's
alleged breach of contract, $5,000,000 in punitive damages and further
unspecified damages from the Company's alleged negligent misrepresentation,
fraud and conversion of SAS's intellectual property, and attorneys' fees. The
Company believes that it has meritorious defenses to SAS's claims and is
contesting the matter vigorously. However, the Company is unable to assess the
likelihood of an adverse result or estimate the amount of damages the Company
might be required to pay. Any adverse outcome resulting in 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.
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<PAGE> 11
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
<S> <C> <C>
David E. Shaw..................... 47 Executive Chairman of the Board of Directors
Jeffrey J. Langan................. 54 President and Chief Executive Officer
Erwin F. Workman, Jr., Ph.D....... 52 Executive Vice President and Chief Scientific Officer
Ralph K. Carlton.................. 43 Senior Vice President, Finance and Administration and Chief
Financial Officer
Roland H. Johnson................. 45 Vice President
Louis W. Pollock.................. 45 Vice President
Roy V. H. Pollock, D.V.M., Ph.D... 49 Vice President
Christopher J. Quinn.............. 40 Vice President
</TABLE>
Mr. Shaw has been Executive Chairman of the Board of Directors of the
Company since February 1999. Mr. Shaw served as Chairman of the Board of
Directors and Chief Executive Officer of the Company from its foundation in 1983
until February 1999, and as 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 has been a Director and President of the Company since November
1997 and Chief Executive Officer of the Company since February 1999. 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 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. Johnson became a Vice President of the Company in October 1998. He has
been President and Chief Executive Officer of Blue Ridge since August 1996. For
15 years prior to forming Blue Ridge, Mr. Johnson was employed by the Ciba
Animal Health, most recently as Vice President Sales and Service.
Mr. Louis W. Pollock became a Vice President of the Company in December
1994. 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 practice information management software business, and presently
serves as President of that business 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
Company's in-clinic diagnostic testing business and now serves as President of
that business 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.
11
<PAGE> 12
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
1998 Annual Report to Stockholders and is incorporated herein by reference.
As partial consideration for all of the outstanding capital stock of Blue
Ridge Pharmaceuticals, Inc., acquired on October 1, 1998, the Company issued
warrants to purchase 806,000 shares of the Company's Common Stock to the former
stockholders of Blue Ridge. The warrants are exercisable at a price of $31.59
per share until December 31, 2003. The warrants were issued pursuant to the
exemption from the registration requirements of, the Securities Act of 1933
provided by Section 4(2) of that Act. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Notes to Consolidated
Financial Statements" in the Company's 1998 Annual Report to Stockholders
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 1998 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 Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's 1998 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements as of December 31, 1998 and
Supplementary Data are included in the Company's 1998 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 1999 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."
12
<PAGE> 13
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) During the quarter ended December 31, 1998, the Company filed a
Current Report on Form 8-K dated October 1, 1998 (the "Form 8-K")
reporting the acquisition by the Company of Blue Ridge
Pharmaceuticals, Inc. ("Blue Ridge").
The Form 8-K, as amended by Amendment No. 1 on Form 8-K/A filed
November 12, 1998, contains (i) audited financial statements for
Blue Ridge for the year ended December 31, 1997, (ii) unaudited
financial statements for Blue Ridge for the six months ended
June 30, 1998 and (iii) unaudited pro forma condensed combined
financial information for the year ended December 31, 1997 and
the six months ended June 30, 1998.
(c) See Exhibit Index on the page immediately preceding exhibits.
13
<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/ JEFFREY J. LANGAN
-------------------------------------
Jeffrey J. Langan
President and Chief Executive Officer
March 30, 1999
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ DAVID E. SHAW Executive Chairman of the Board of March 30, 1999
--------------------------- Directors and Director
David E. Shaw
/s/ JEFFREY J. LANGAN President, Chief Executive March 30, 1999
--------------------------- Officer (Principal Executive Officer)
Jeffrey J. Langan and Director
/s/ RALPH K. CARLTON Senior Vice President, March 30, 1999
--------------------------- Finance and Administration and
Ralph K. Carlton Chief Financial Officer
(Principal Financial Officer)
/s/ MERILEE RAINES Vice President, Finance and March 30, 1999
--------------------------- Treasurer (Principal Accounting
Merilee Raines Officer)
/s/ ERWIN F. WORKMAN, JR. Executive Vice President, March 30, 1999
--------------------------- Chief Scientific Officer
Erwin F. Workman, Jr. and Director
/s/ MARY L. GOOD Director March 30, 1999
---------------------------
Mary L. Good
Director
---------------------------
John R. Hesse
/s/ E. Robert Kinney Director March 30, 1999
---------------------------
E. Robert Kinney
/s/ JAMES L. MOODY, JR. Director March 30, 1999
---------------------------
James L. Moody, Jr.
/s/ KENNETH PAIGEN Director March 30, 1999
---------------------------
Kenneth Paigen
/s/ WILLIAM F. POUNDS Director March 30, 1999
---------------------------
William F. Pounds
</TABLE>
14
<PAGE> 15
EXHIBIT INDEX
2.1(13) Stock Purchase Agreement dated as of September 23, 1998 by and among
the Company, Blue Ridge Pharmaceuticals, Inc. ("Blue Ridge") and the
stockholders of Blue Ridge. Certain schedules and exhibits to the
agreement (each of which are identified in the agreement) have been
omitted in reliance upon Rule 601 (b)(2) of Regulation S-K. The
Company hereby undertakes to furnish such schedules and exhibits to
the Commission supplementally upon request.
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(13) Form of Warrant dated October 1, 1998 to purchase Common Stock of the
Company issued to shareholders of Blue Ridge other than employee
shareholders.
4.3(13) Form of Warrant dated October 1, 1998 to purchase Common Stock of the
Company issued to employee shareholders of Blue Ridge.
4.4 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 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(12) Letter Agreement dated as of November 24, 1997 between the Company and
Jeffrey J. Langan.
10.8(12) Employment Agreement dated April 25, 1997 between the Company and
David E. Shaw.
10.9(12) Employment Agreement dated April 25, 1997 between the Company and
Erwin F. Workman, Jr., Ph.D.
**10.10 1998 Stock Incentive Plan of the Company, as amended
**10.11 Employment Agreement dated February 17, 1999 between the Company and
David E. Shaw.
**13 Annual Report to Stockholders for year ended December 31, 1998. (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 1998.
- ------------
(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.
15
<PAGE> 16
(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.
(12) Incorporated by reference to the Exhibits to the Company's Annual
Report on Form 10-K dated March 27, 1998.
(13) Incorporated by reference to the Exhibits to the Company's Current
Report on Form 8-K dated October 1, 1998.
* Confidential treatment previously granted as to certain portions.
** Filed herewith
16
<PAGE> 1
Exhibit 10.2
IDEXX LABORATORIES, INC.
1991 STOCK OPTION PLAN
(AS OF FEBRUARY 17, 1999)
1. PURPOSE.
The purpose of this plan (the "Plan") is to secure for IDEXX
Laboratories, Inc. (the "Company") and its shareholders the benefits arising
from capital stock ownership by employees, officers and directors of, and
consultants or advisors to, the Company and its parent and subsidiary
corporations who are expected to contribute to the Company's future growth and
success. Except where the context otherwise requires, the term "Company" shall
include the parent and all present and future subsidiaries of the Company as
defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as
amended or replaced from time to time (the "Code"). Those provisions of the Plan
which make express reference to Section 422 of the Code shall apply only to
Incentive Stock Options (as that term is defined in the Plan).
2. TYPE OF OPTIONS AND ADMINISTRATION.
(a) TYPES OF OPTIONS. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (or a Committee
designated by the Board of Directors) and may be either incentive stock options
("Incentive Stock Options") meeting the requirements of Section 422 of the Code
or non-qualified options which are not intended to meet the requirements of
Section 422 of the Code.
(b) ADMINISTRATION. The Plan will be administered by the Board of
Directors of the Company, whose construction and interpretation on the terms and
provisions of the Plan shall be final and conclusive. The Board of Directors may
in its sole discretion grant options to purchase shares of the Company's Common
Stock, par value $.10 per share ("Common Stock"), and issue shares upon exercise
of such options as provided in the Plan. The Board shall have authority, subject
to the express provisions of the Plan, to construe the respective option
agreements and the Plan, to prescribe, amend and rescind rules and regulations
relating to the Plan, to determine the terms and provisions of the respective
options agreements, which need not be identical, and to make all other
determinations in the judgment of the Board of Directors necessary or desirable
for the administration of the Plan. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director or person acting pursuant to authority delegated by the
Board of Directors shall be liable for any action or determination made in good
faith. The Board of Directors may, to the full extent permitted by or consistent
with applicable laws or regulations (including, without limitation, applicable
state law and Rule 16b-3 promulgated under the Securities Exchange Act of 1934
(the "Exchange Act"), or any successor rule ("Rule 16b-3")), delegate any or all
of its powers under the Plan to a committee (the "Committee") appointed by the
Board of Directors, and if the Committee is so appointed all references to the
Board of Directors in the Plan shall mean and relate to such Committee.
(c) APPLICABILITY OF RULE 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 shall apply to the Company only at such time as
the Company's Common Stock or another class of equity security is registered
under the Exchange Act, and then only to such persons as are required to file
reports under Section 16(a) of the Exchange Act.
3. ELIGIBILITY.
(a) GENERAL. Options may be granted to persons who are, at the time of
grant, employees or officers of, or consultants or advisors to, the Company;
PROVIDED, that Incentive Stock Options may be granted only to persons who are
eligible to receive such options under Section 422 of the Code. In addition,
no person shall be granted any Incentive Stock Option under the Plan who, at the
time such option is granted, owns, directly or indirectly, stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, unless the requirements of Section 11(b) are satisfied. The attribution
of stock ownership provisions of Section 424(d) of the Code, and any successor
provisions thereto, shall be applied in determining the shares of stock owned by
a person for purposes of applying the foregoing percentage limitation. A person
who has been granted an
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<PAGE> 2
option may, if he or she is otherwise eligible, be granted an additional option
or options if the Board of Directors shall so determine. Subject to adjustment
as provided in Section 15 below, the maximum number of shares with respect to
which options may be granted to any employee under the Plan shall not exceed
1,000,000 shares of common stock during any one calendar year. For the purpose
of calculating such maximum number, (a) an option shall continue to be treated
as outstanding notwithstanding its repricing, cancellation, or expiration and
(b) the repricing of an outstanding option or the issuance of a new option in
substitution for a cancelled option shall be deemed to constitute the grant of a
new additional option separate from the original grant of the option that is
repriced or cancelled.
(b) GRANT OF OPTIONS TO DIRECTORS AND OFFICERS. From and after the
registration of the Common Stock of the Company under the Exchange Act, the
selection of a director or an officer (as the terms "director" and "officer" are
defined for the purposes of Rule 16b-3) as a recipient of an option, the timing
of the option grant, the exercise price of the option and the number of shares
subject to the option shall be determined either (i) by the Board of Directors,
of which all members shall be "disinterested persons" (as hereinafter defined),
or (ii) by a committee of two or more directors having full authority to act in
the matter, of which all members shall be "disinterested persons". For the
purposes of the Plan, a director shall be deemed to be a "disinterested person"
only is such person qualifies as a "disinterested person" within the meaning of
Rule 16b-3, as such term is interpreted from time to time.
4. STOCK SUBJECT TO PLAN.
Subject to adjustment as provided in Section 15 below, the maximum
number of shares of Common Stock of the Company which may be issued and sold
under the Plan is 6,475,000 shares. Such shares may be authorized and unissued
shares or may be shares issued and thereafter acquired by the Company. If an
option granted under the Plan shall expire or terminate for any reason without
having been exercised in full, the unpurchased shares subject to such option
shall again be available for subsequent option grants under the Plan. If shares
issued upon exercise of an option under the Plan are tendered to the Company in
payment of the exercise price of an option granted under the Plan, such tendered
shares shall again be available for subsequent option grants under the Plan;
provided, that in no event shall (i) the total number of shares issued pursuant
to the exercise of Incentive Stock Options under the Plan, on a cumulative
basis, exceed the maximum number of shares authorized for issuance under the
Plan exclusive of shares made available for issuance pursuant to this sentence
or (ii) the total number of shares issued pursuant to the exercise of options by
persons who are required to file reports under Section 16(a) of the Exchange
Act, on a cumulative basis, exceed the maximum number of shares authorized for
issuance under the Plan exclusive of shares made available for issuance pursuant
to this sentence.
5. FORMS OF OPTION AGREEMENTS.
As a condition to the grant of an option under the Plan, each recipient
of an option shall execute an option agreement in such form not inconsistent
with the Plan as may be approved by the Board of Directors. Each option
agreement shall specifically state whether the options granted thereby are
intended to be Incentive Stock Options or non-qualified options. Such option
agreements may differ among recipients.
6. PURCHASE PRICE.
(a) GENERAL. The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Board of Directors, PROVIDED,
HOWEVER, that the exercise price shall not be less than 100% of the fair market
value of such stock, as determined by the Board of Directors, at the time of
grant of such option, or less than 110% of such fair market value in the case of
options described in Section 11(b).
(b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may
provide for the payment of the exercise price by delivery of cash or a check to
the order of the Company in an amount equal to the exercise price of such
options, or, to the extent provided in the applicable option agreement, (i) by
delivery to the Company of shares of Common Stock of the Company already owned
by the optionee having a fair market value equal in amount to the exercise price
of the options being exercised, (ii) by any other means which the Board of
Directors determines are consistent with the purpose of the Plan and with the
applicable laws and regulations (including, without limitation, the provisions
of Rule 16b-3 and Regulation T promulgated by the Federal Reserve Board) or
(iii) by any combination of such methods of payment. The fair market value of
any shares of the Company's Common Stock or other non-cash consideration which
may be delivered upon exercise of an option shall be determined by the Board of
Directors.
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<PAGE> 3
7. OPTION PERIOD.
Each option and all rights thereunder shall expire on such date as the
Board of Directors shall determine, except that (i) in the case of an Incentive
Stock Option, such date shall not be later than ten years after the date on
which the option is granted, (ii) in the case of an Incentive Stock Option
described in Section 11(b), such date shall not be later than five years after
the date on which the option is granted and (iii) in all cases, options shall be
subject to earlier termination as provided in the Plan.
8. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be exercisable either in full
or in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.
9. NONTRANSFERABILITY OF OPTIONS.
Incentive Stock Options and options granted to directors and officers
shall not be assignable or transferable by the person to whom they are granted,
either voluntarily or by operation of law, except by will or the laws of decent
and distribution, and, during the life of the optionee, shall be exercisable
only by the optionee; provided, however, that non-qualified stock options may be
transferred by directors and officers pursuant to a qualified domestic relations
order (as defined in Rule 16b-3).
10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Except as provided in Section 11(d) with respect to Incentive Stock
Options, the Board of Directors shall determine the period of time during which
an optionee may exercise an option following (i) the termination of the
optionee's employment or other relationship with the Company or (ii) the death
or disability of the optionee. Such periods shall be set forth in the agreement
evidencing such option.
11. INCENTIVE STOCK OPTIONS.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
(b) 10% STOCKHOLDER. If any employee to whom an Incentive Stock Option
is to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(i) the purchase price per share of the Common Stock subject to
such Incentive Stock Option shall not be less than 110% of the fair
market value of one share of Common Stock at the time of grant; and
(ii) the option exercise period shall not exceed five years from
the date of grant.
(c) DOLLAR LIMITATION. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate fair market value (determined as of
the respective date or dates of grant) of more than $100,000.
(d) TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
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<PAGE> 4
(i) an Incentive Stock Option may be exercised within the period
of three months after the date the optionee ceases to be an employee of
the Company (or within such lesser period as may be specified in the
applicable option agreement), provided, that the agreement with respect
to such option may designate a longer exercise period and that the
exercise after such three-month period shall be treated as the exercise
of a non-qualified option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee,
the Incentive Stock Option may be exercised by the person to whom it is
transferred by will or the laws of descent and distribution within the
period of one year after the date of death (or within such lesser period
as may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of
Section 22(e)(3) of the Code or any successor provision thereto) while
in the employ of the Company, the Incentive Stock Option may be
exercised within the period of one year after the date the optionee
ceases to be such an employee because of such disability (or within such
lesser period as may be specified in the applicable option agreement).
For all purposes of the Plan and any option granted hereunder,
"employment" shall be defined in accordance with the provisions of Section
1.421-7(h) of the Income Tax Regulations (or any successor regulations).
Notwithstanding the foregoing provisions, no Incentive Stock Option may be
exercised after its expiration date.
12. ADDITIONAL PROVISIONS.
(a) ADDITIONAL OPTION PROVISIONS. The Board of Directors may, in its
sole discretion, include additional provision in any option agreement covering
options granted under the Plan, including without limitation restrictions on
transfer, repurchase rights, commitments to pay cash bonuses, to make, arrange
for or guaranty loans or to transfer other property to optionees upon exercise
of options, or such other provisions as shall be determined by the Board of
Directors; PROVIDED THAT such additional provisions shall not be inconsistent
with any other term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan to fail to
qualify as an Incentive Stock Option within the meaning of Section 422 of the
Code.
(b) ACCELERATION, EXTENSION, ETC. The Board of Directors may, in its
sole discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular option or options granted under the
Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3.
13. GENERAL RESTRICTIONS.
(a) INVESTMENT REPRESENTATIONS. The Company may require any person to
whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws, or with covenants or representations made by
the Company in connection with any public offering of its Common Stock.
(b) COMPLIANCE WITH SECURITIES LAWS. Each option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the consent
or approval of any governmental or regulatory body, or that the disclosure of
non-public information or the satisfaction of any other condition is necessary
as a condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction of
such condition shall have been effected or obtained on conditions acceptable to
the Board of Directors. Nothing herein shall be deemed to require the Company to
apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.
14. RIGHTS AS A SHAREHOLDER.
The holder of an option shall have no rights as a shareholder with
respect to any shares covered by the option (including, without limitation, any
rights to receive dividends or non-cash distributions with respect to such
shares) until
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<PAGE> 5
the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
15. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS AND RELATED TRANSACTIONS.
(a) GENERAL. If, through or as a result of any merger, consolidation,
sale of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other similar transaction, (i) the outstanding shares of Common Stock
are increased or decreased or are exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment may be made in (x) the maximum number
and kind of shares reserved for issuance under the Plan, (y) the number and kind
of shares or other securities subject to then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable, provided that no adjustment shall be made pursuant
to this Section 15 if such adjustment would cause the Plan to fail to comply
with Section 422 of the Code or with Rule 16b-3.
(b) BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this
Section 15 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
16. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
(a) GENERAL. In the event of a consolidation or merger or sale of all or
substantially all of the assets of the Company in which outstanding shares of
Common Stock are exchanged for securities, cash or other property of any other
corporation or business entity or in the event of a liquidation of the Company,
the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i)
provide that such options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), PROVIDED that any such options substituted for Incentive Stock Options
shall meet the requirements of Section 425(a) of the Code, (ii) upon written
notice to the optionees, provide that all unexercised options will terminate
immediately prior to the consummation of such transaction unless exercised by
the optionee within a specified period following the date of such notice, (iii)
in the event of a merger under the terms of which holders of the Common Stock of
the Company will receive upon consummation thereof a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such outstanding options
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding options in exchange for
the termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full immediately prior to such event.
(b) SUBSTITUTE OPTIONS. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interface in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
18. OTHER EMPLOYEE BENEFITS.
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are
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<PAGE> 6
determined, including, without limitation, benefits under any bonus, pension,
profit-sharing, life insurance or salary continuation plan, except as otherwise
specifically determined by the Board of Directors.
19. AMENDMENT OF THE PLAN.
(a) The Board of Directors may at any time, and from time to time,
modify or amend the Plan in any respect, except that if at any time the approval
of the shareholders of the Company is required under Section 422 of the Code or
any successor provision with respect to Incentive Stock Options or under Rule
16b-3 or with respect to options held by persons who are required to file
reports pursuant to Section 16(a) of the Exchange Act, the Board of Directors
may not effect such modification or amendment without such approval. In
addition, the Board of Directors may not amend Section 24 of the Plan without
the prior approval of the shareholders of the Company.
(b) The termination or any modification or amendment of the Plan shall
not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Board of Directors may amend outstanding option agreements in a
manner not inconsistent with the Plan. The Board of Directors shall have the
right to amend or modify (i) the terms and provisions of the Plan and of any
outstanding Incentive Stock Options granted under the Plan to the extent
necessary to qualify any or all such options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code and (ii) the terms and
provisions of the Plan and of any outstanding option to the extent necessary to
ensure the qualification of the Plan under Rule 16b-3.
20. WITHHOLDING.
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a fair
market value equal to such withholding obligation. The fair market value of the
shares used to satisfy such withholding obligation shall be determined by the
Company as of the date that the amount of tax to be withheld is to be
determined. An optionee who has made an election pursuant to this Section 20(a)
may only satisfy his or her withholding obligation with shares of Common Stock
which are not subject to any repurchase, forfeiture, unfulfilled vesting or
other similar requirements.
(b) Notwithstanding the foregoing, in the case of a director or officer,
no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements of Rule
16b-3.
21. CANCELLATION AND NEW GRANT OF OPTIONS, ETC.
The Board of Directors shall have the authority to effect, at any time
and from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no further Incentive Stock Options shall be granted. Amendments to the Plan
not requiring shareholder approval shall become effective when adopted by the
Board of Directors; amendments requiring shareholder approval (as provided in
Section 19) shall become effective when adopted by the Board of Directors, but
no Incentive Stock Option granted after the date of such amendment shall become
exercisable (to the extent that such amendment to the Plan was required to
enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment
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<PAGE> 7
shall have been approved by the Company's shareholders. If such shareholder
approval is not obtained within twelve months of the Board's adoption of such
amendment, any Incentive Stock Options granted on or after the date of such
amendment shall terminate to the extent that such amendment to the Plan was
required to enable the Company to grant such option to a particular optionee.
Subject to this limitation, options may be granted under the Plan at any time
after the effective date and before the date fixed for termination of the Plan.
(b) TERMINATION. Unless sooner terminated in accordance with Section 16,
the Plan shall terminate, with respect to Incentive Stock Options, upon the
earlier of (i) the close of business on the day next preceding the tenth
anniversary of the date of its adoption by the Board of Directors, or (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to the exercise or cancellation of options granted under the
Plan. Unless sooner terminated in accordance with Section 16, the Plan shall
terminate with respect to options which are not Incentive Stock Options on the
date specified in (ii) above. If the date of termination is determined under (i)
above, then options outstanding on such date shall continue to have force and
effect in accordance with the provisions of the instruments evidencing such
options.
23. PROVISIONS FOR FOREIGN PARTICIPANTS.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
24. PROHIBITION ON REPRICING OF OPTIONS.
Neither the Board of Directors nor the Company may amend the terms of
any issued and outstanding option to reduce the exercise price, other than
pursuant to Section 15 of the Plan, without prior approval of shareholders of
the Company.
Adopted by the Board of Directors on April 24, 1991; adopted by stockholders on
June 10, 1991.
Amended by the Board of Directors on February 12, 1992; amendment approved by
stockholders on May 1, 1992.
Amended by the Board of Directors on February 26, 1993; amendment approved by
stockholders on May 18, 1993.
Number of shares covered by the Plan reflects 2 for 1 stock split in the form of
a stock dividend paid on October 1, 1993.
Amended by the Board of Directors on February 9, 1995; amendment approved by
stockholders on May 26, 1995.
Number of shares covered by the Plan reflects 2 for 1 stock split in the form of
a stock dividend paid on June 5, 1995.
Amended by the Board of Directors on March 5, 1996; amendment approved by the
stockholders on May 24, 1996.
Amended by the Board of Directors on February 17, 1999.
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<PAGE> 1
Exhibit 10.10
IDEXX LABORATORIES, INC.
1998 STOCK INCENTIVE PLAN
(AS OF FEBRUARY 17, 1999)
1. PURPOSE
The purpose of this 1998 Stock Incentive Plan (the "Plan") of IDEXX
Laboratories, Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's stockholders.
Except where the context otherwise requires, the term "Company" shall include
any present or future subsidiary corporations of IDEXX Laboratories, Inc. as
defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and
any regulations promulgated thereunder (the "Code").
2. ELIGIBILITY
All of the Company's employees, officers, directors, consultants and
advisors (and any individuals who have accepted an offer for employment) are
eligible to be granted options or restricted stock awards (each, an "Award")
under the Plan. Each person who has been granted an Award under the Plan shall
be deemed a "Participant".
3. ADMINISTRATION, DELEGATION
(a) ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be administered
by the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(b) APPOINTMENT OF COMMITTEES. To the extent permitted by applicable
law, the Board may delegate any or all of its powers under the Plan to one or
more committees or subcommittees of the Board (a "Committee"). All references in
the Plan
<PAGE> 2
to the "Board" shall mean the Board or a Committee of the Board to the extent
that the Board's powers or authority under the Plan have been delegated to such
Committee.
4. STOCK AVAILABLE FOR AWARDS
(a) NUMBER OF SHARES. Subject to adjustment under Section 7, Awards may
be made under the Plan for up to 1,800,000 shares of common stock, $.10 par
value per share, of the Company (the "Common Stock"). If any Award expires or
is terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not being issued,
the unused Common Stock covered by such Award shall again be available for the
grant of Awards under the Plan, subject, however, in the case of Incentive Stock
Options (as hereinafter defined), to any limitation required under the Code.
Shares issued under the Plan may consist in whole or in part of authorized but
unissued shares or treasury shares.
(b) PER-PARTICIPANT LIMIT. Subject to adjustment under Section 7, the
maximum number of shares of Common Stock with respect to which an Award may be
granted to any Participant under the Plan shall be 500,000 per calendar year.
The per-Participant limit described in this Section 4(b) shall be construed and
applied consistently with Section 162(m) of the Code.
5. STOCK OPTIONS
(a) GENERAL. The Board may grant options to purchase Common Stock (each,
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) INCENTIVE STOCK OPTIONS. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) EXERCISE PRICE. The Board shall establish the exercise price, which
shall in no event be less than 100% of the fair market value of the Common Stock
as determined (or in a manner approved) by the Board in good faith ("Fair Market
Value") at the time of grant, at the time each Option is granted and specify it
in the applicable option agreement.
2
<PAGE> 3
(d) DURATION OF OPTIONS. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement. No option will be granted for a term in excess of
10 years.
(e) EXERCISE OF OPTION. Options may be exercised by delivery to the
Company of a written notice of exercise signed by the proper person or by any
other form of notice (including electronic notice) approved by the Board,
together with payment in full as specified in Section 5(f) for the number of
shares for which the Option is exercised.
(f) PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise
of an Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may, in its sole discretion, otherwise
provide in an option agreement, (i) delivery of an irrevocable and unconditional
undertaking by a creditworthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price, (ii) delivery by the Participant to
the Company of a copy of irrevocable and unconditional instructions to a
creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price or (iii) delivery of shares of Common Stock
owned by the Participant valued at their Fair Market Value, which Common Stock
was owned by the Participant at least six months prior to such delivery;
(3) to the extent permitted by the Board, in its sole discretion
(i) by delivery of a promissory note of the Participant to the Company on terms
determined by the Board, or (ii) by payment of such other lawful consideration
as the Board may determine; or
(4) any combination of the above permitted forms of payment.
6. RESTRICTED STOCK
(a) GRANTS. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
3
<PAGE> 4
(b) TERMS AND CONDITIONS. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
(c) LIMITATION ON NUMBER OF SHARES. Notwithstanding any provision of the
Plan, no more than 10% of the total number of shares issuable under the Plan may
be issued in the form of Restricted Stock Awards which are granted with an issue
price less than the Fair Market Value on the date of grant.
7. ADJUSTMENTS FOR CHANGES IN COMMON STOCK AND CERTAIN OTHER EVENTS
(a) CHANGES IN CAPITALIZATION. In the event of any stock split, reverse
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the per-Participant limits set forth in Section 4(b), (iii) the number and
class of securities and exercise price per share subject to each outstanding
Option, and (iv) the repurchase price per share subject to each outstanding
Restricted Stock Award shall be appropriately adjusted by the Company (or
substituted Awards may be made, if applicable) to the extent the Board shall
determine, in good faith, that such an adjustment (or substitution) is necessary
and appropriate. If this Section 7(a) applies and Section 7(c) also applies to
any event, Section 7(c) shall be applicable to such event, and this Section 7(a)
shall not be applicable.
(b) LIQUIDATION OR DISSOLUTION. In the event of a proposed liquidation
or dissolution of the Company, the Board shall upon written notice to the
Participants provide that (i) all then unexercised Options will (x) become
exercisable in full as of a specified time at least 10 business days prior to
the effective date of such liquidation or dissolution and (y) terminate
effective upon such liquidation or dissolution, except to the extent exercised
before such effective date, and (ii) all Restricted Stock Awards will become
free of all restrictions as of a specified time prior to the effective date of
such liquidation or dissolution.
(c) ACQUISITION EVENTS
4
<PAGE> 5
(1) DEFINITION. An "Acquisition Event" shall mean: (a) any merger
or consolidation of the Company with or into another entity as a result of which
the Common Stock is converted into or exchanged for the right to receive cash,
securities or other property or (b) any exchange of shares of the Company for
cash, securities or other property pursuant to a statutory share exchange
transaction.
(2) CONSEQUENCES OF AN ACQUISITION EVENT ON OPTIONS. Upon the
occurrence of an Acquisition Event, or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall provide that all
outstanding Options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), provided that any options substituted for Incentive Stock Options
shall satisfy, in the determination of the Board, the requirements of Section
424(a) of the Code. Notwithstanding the foregoing, if the acquiring or
succeeding corporation (or an affiliate thereof) does not agree to assume, or
substitute for, such Options, then the Board shall upon written notice to the
Participants, provide that all then unexercised Options will become exercisable
in full as of a specified time (the "Acceleration Time") prior to the
Acquisition Event and will terminate immediately prior to the consummation of
such Acquisition Event, except to the extent exercised by the Participants
before the consummation of such Acquisition Event; provided, however, that, in
the event of an Acquisition Event under the terms of which holders of Common
Stock will receive upon consummation thereof a cash payment for each share of
Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition
Price"), then the Board may instead provide that all outstanding Options shall
terminate upon consummation of such Acquisition Event and that each Participant
shall receive, in exchange therefor, a cash payment equal to the amount (if any)
by which (A) the Acquisition Price multiplied by the number of shares of Common
Stock subject to such outstanding Options (whether or not then exercisable),
exceeds (B) the aggregate exercise price of such Options.
(3) CONSEQUENCES OF AN ACQUISITION EVENT ON RESTRICTED STOCK
AWARDS. Upon the occurrence of an Acquisition Event, the repurchase and other
rights of the Company under each outstanding Restricted Stock Award shall inure
to the benefit of the Company's successor and shall apply to the cash,
securities or other property which the Common Stock was converted into or
exchanged for pursuant to such Acquisition Event in the same manner and to the
same extent as they applied to the Common Stock subject to such Restricted Stock
Award.
8. GENERAL PROVISIONS APPLICABLE TO AWARDS
(a) TRANSFERABILITY OF AWARDS. Except as the Board may otherwise
determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by
5
<PAGE> 6
operation of law, except by will or the laws of descent and distribution, and,
during the life of the Participant, shall be exercisable only by the
Participant. References to a Participant, to the extent relevant in the context,
shall include references to authorized transferees.
(b) DOCUMENTATION. Each Award shall be evidenced by a written instrument
in such form as the Board shall determine. Each Award may contain terms and
conditions in addition to those set forth in the Plan.
(c) BOARD DISCRETION. Except as otherwise provided by the Plan, each
Award may be made alone or in addition or in relation to any other Award. The
terms of each Award need not be identical, and the Board need not treat
Participants uniformly.
(d) TERMINATION OF STATUS. The Board shall determine the effect on an
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) WITHHOLDING. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, Participants may satisfy such tax obligations in whole or
in part by delivery of shares of Common Stock, including shares retained from
the Award creating the tax obligation, valued at their Fair Market Value. The
Company may, to the extent permitted by law, deduct any such tax obligations
from any payment of any kind otherwise due to a Participant.
(f) AMENDMENT OF AWARD. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant. In addition,
neither the Board nor the Company may amend the terms of any issued and
outstanding Awards to reduce the exercise price, other than pursuant to Section
7 of the Plan, without the prior approval of the Company's stockholders.
(g) CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated
to deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award
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<PAGE> 7
have been met or removed to the satisfaction of the Company, (ii) in the opinion
of the Company's counsel, all other legal matters in connection with the
issuance and delivery of such shares have been satisfied, including any
applicable securities laws and any applicable stock exchange or stock market
rules and regulations, and (iii) the Participant has executed and delivered to
the Company such representations or agreements as the Company may consider
appropriate to satisfy the requirements of any applicable laws, rules or
regulations.
(h) ACCELERATION. The Board may at any time provide that any Options
shall become immediately exercisable in full or in part or that any Restricted
Stock Awards shall be free of restrictions in full or in part.
9. MISCELLANEOUS
(a) NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
with respect to an Award until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the record date for
such stock dividend and the distribution date for such stock dividend shall be
entitled to receive, on the distribution date, the stock dividend with respect
to the shares of Common Stock acquired upon such Option exercise,
notwithstanding the fact that such shares were not outstanding as of the close
of business on the record date for such stock dividend.
(c) EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on
the date on which it is approved by the Company's stockholders. No Awards shall
be granted under the Plan after the completion of ten years from the date the
Plan was approved by the Board, but Awards previously granted may extend beyond
that date.
(d) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time, provided that, to the extent required
by Section 162(m), no Award granted to a Participant designated as subject to
Section 162(m) by
7
<PAGE> 8
the Board after the date of such amendment shall become exercisable, realizable
or vested, as applicable to such Award (to the extent that such amendment to the
Plan was required to grant such Award to a particular Participant), unless and
until such amendment shall have been approved by the Company's stockholders as
required by Section 162(m) (including the vote required under Section 162(m)).
In addition, the second sentence of Section 8(f) of the Plan may not be amended
by the Board without the prior approval of the Company's stockholders.
(e) GOVERNING LAW. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
Approved by the Board of Directors February 12, 1998.
Adopted by the Stockholders on May 15, 1998.
Amended by the Board of Directors on February 17, 1999.
8
<PAGE> 1
Exhibit 10.11
AGREEMENT
This Agreement is entered into by IDEXX Laboratories, Inc. (IDEXX) and David E.
Shaw (Shaw) regarding the planned appointment of Jeffrey Langan to succeed Shaw
as Chief Executive Officer of IDEXX, and the continued employment of Shaw by
IDEXX. The parties agree as follows:
1. For three years following the date that succession occurs, or such longer
period as may be mutually agreed upon (the "Term"), Shaw agrees to serve,
and IDEXX agrees to retain Shaw, as a part time employee of IDEXX with the
title of "Executive Chairman", unless Shaw voluntarily resigns prior to the
expiration of the Term.
2. During the Term, Shaw will perform responsibilities consistent with his
position as Executive Chairman, as agreed upon with the Board of Directors,
such as Board governance, strategic planning, participation in major
business development initiatives, and assistance in organization
development and external relations.
3. Shaw's base salary during the Term shall be reduced to $350,000 in the
first year, and will be subject to adjustment in future years of the Term
by mutual agreement. Eligibility for cash bonuses or stock option grants
will be at the discretion of the Board of Directors. During the Term, Shaw
will continue to participate at his current level in IDEXX benefit programs
including on-site or off-site administrative support and office facilities.
4. If, during the Term, Shaw's employment is terminated by IDEXX or terminated
by Shaw as a result of a breach of this Agreement by IDEXX, all stock
options granted to Shaw will immediately vest, and Shaw will continue to
receive compensation and benefits, at the rate then in effect, for the
balance of the Term.
5. The Employment Agreement dated April 25, 1997 between Shaw and IDEXX will
remain in effect.
Agreed to as of February 17, 1999.
--
For IDEXX Laboratories, Inc.:
By: /s/ William F. Pounds /s/ David E. Shaw
--------------------------- ------------------------------
William F. Pounds, Chairman David E. Shaw
Compensation Committee
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five years ended December 31, 1998. The selected
consolidated financial data presented below in the period 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,
-----------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ................................. $126,363 $188,602 $267,677 $ 262,970 $ 319,889
Cost of revenue ......................... 53,224 80,860 115,770 141,030 158,118
-------- -------- -------- --------- ---------
Gross Profit ............................ 73,139 107,742 151,907 121,940 161,771
Expenses:
Sales and marketing ................ 29,078 47,490 64,450 66,383 61,773
General and administrative ......... 13,112 17,092 28,271 42,930 49,373
Research and development ........... 8,244 10,192 12,195 17,057 21,523
Non-recurring operating charge ..... -- -- -- 21,300 --
Write-off of in-process research
and development................... -- -- -- 13,200 37,162
-------- -------- -------- --------- ---------
Income (loss) from operations ........... 22,705 32,968 46,991 (38,930) (8,060)
Interest income, net .................... 1,588 4,068 8,332 6,670 6,877
Arbitration charge ...................... 1,459 -- -- -- --
-------- -------- -------- --------- ---------
Net income (loss) before provision for
(benefit of) income taxes ............. 22,834 37,036 55,323 (32,260) (1,183)
Provision for (benefit of) income taxes.. 9,498 15,542 22,682 (11,140) 14,032
-------- -------- -------- --------- ---------
Net income (loss) ....................... $ 13,336 $ 21,494 $ 32,641 $ (21,120) $ (15,215)
======== ======== ======== ========= =========
Net income (loss) per share:
Basic .............................. $ 0.42 $ 0.65 $ 0.88 $ (0.56) $ (0.40)
Net income (loss) per share:
Diluted ............................ 0.40 0.61 0.83 (0.56) (0.40)
Weighted average shares outstanding:
Basic .............................. 31,383 32,946 37,082 37,974 38,513
Weighted average shares outstanding:
Diluted ............................ 33,525 35,362 39,519 37,974 38,513
</TABLE>
YEARS ENDED DECEMBER 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Working capital ....... $ 76,575 $228,565 $250,590 $201,342 $184,845
Total assets .......... 121,741 312,540 373,852 377,048 390,532
Total debt ............ -- 1,687 3,000 4,087 9,381
Stockholders' equity .. 99,786 279,125 322,725 302,733 307,840
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
* RESULTS OF OPERATIONS
The Company operates primarily through two business units: the Veterinary
Solutions Group ("VSG") and Food and Environmental Division ("FED"). VSG
comprises the Company's veterinary products and services, with the exception of
its animal health pharmaceuticals business, and FED comprises the Company's
services and products for food and environmental testing. At this time, the
Company's animal health pharmaceuticals business is not material to its
operations.
1998 Compared to 1997
VETERINARY SOLUTIONS GROUP
Revenue for the VSG for 1998 increased 24% to $247.6 million from $200.4
million in 1997. The increase in revenue in 1998 compared to 1997 is primarily
attributable to increased sales of feline and canine test kits, consumables used
in the Company's veterinary instruments, practice information management
hardware, software and services resulting from the acquisition of practice
information management software companies in the first and third quarters of
1997, and veterinary reference laboratory services. These increases were offset
in part by decreased unit sales of veterinary instruments.
International revenue for VSG increased 4% to $59.8 million, or 24% of
total VSG revenue, in 1998, compared to $57.6 million, or 29% of total VSG
revenue, in 1997. Revenue increased 1% in Europe and 24% in the Asia-Pacific
region (Japan, Taiwan and Australia), while revenue decreased 10% in Canada and
South America. In Europe, increased sales of veterinary test kits and
consumables and of veterinary laboratory services were offset by a decline in
veterinary instrument sales. In the Asia-Pacific region, increased sales of
veterinary test kits and consumables and of veterinary laboratory services were
partially offset by a decline in instrument sales due to increased competition.
Gross profit as a percentage of VSG revenue was 50% for 1998 compared to
46% for 1997. Higher sales of higher margin veterinary test kits and consumables
were partially offset by increased sales of lower margin veterinary laboratory
services and practice information management software products and services.
FOOD AND ENVIRONMENTAL DIVISION
Revenue for FED for 1998 increased 15% to $71.9 million from $62.3 million
in 1997. The increase in revenue in 1998 compared to 1997 is primarily
attributable to increased sales of food and environmental testing products,
poultry and livestock test kits, and food laboratory testing services
principally resulting from the acquisition of Agri-West Food Laboratory in March
1998.
International revenue for FED increased 16% to $30.2 million, or 42% of
total FED revenue, in 1998, compared to $26.0 million, or 42% of total FED
revenue, in 1997. Revenue increased 18% in Europe and 26% in Canada and South
America, while revenue decreased 4% in the Asia-Pacific region. In Europe, the
increase in revenue was primarily attributable to increased sales of food and
environmental testing products and poultry and livestock test kits. The
decrease in revenue in the Asia-Pacific region is primarily due to decreased
sales of food testing instruments, poultry and livestock test kits, and residue
test kits partially offset by increased sales of water test kits.
Gross profit as a percentage of FED revenue was 53% for 1998 and 1997.
Increased sales of higher margin water, poultry and livestock kits were offset
by a decline in the average unit prices of poultry and livestock kits, which was
due to increased competition.
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<PAGE> 3
OPERATING EXPENSES
Sales and marketing expenses were 19% and 25% of revenue in 1998 and 1997,
respectively. The decrease as a percentage of revenue and the dollar decrease of
$4.6 million were principally attributable to an overall reduction in marketing
and sales staff and related expenses resulting from workforce reductions
worldwide, partially offset by the inclusion of a full year of expense for the
veterinary practice information management software and food laboratory service
businesses.
Research and development expenses were 7% and 6% of revenue in 1998 and
1997, respectively. The increase as a percentage of revenue and the dollar
increase of $4.5 million reflected additional resources and related overhead to
support product development and the addition of pharmaceutical development
expenses associated with the acquisition of Blue Ridge Pharmaceuticals, Inc.
("Blue Ridge") in October 1998.
General and administrative expenses were 15% and 16% of revenue in 1998 and
1997, respectively. In dollars, general and administrative expenses increased
$6.4 million from 1997 to 1998. The increase was principally attributable to an
increase in management incentive bonuses from 1997 when no bonuses were paid;
additional expenses associated with the expansion of the veterinary laboratory
business; and additional general and administrative expenses associated with
acquired businesses, principally the acquisition of Blue Ridge in October 1998.
These increases were offset in part by a decrease in the provision for bad debts
and by a decrease in currency losses.
On October 1, 1998 the Company acquired Blue Ridge Pharmaceuticals, Inc., a
development-stage animal health pharmaceutical company with 11 products in
development. At the acquisition date Blue Ridge had no commercially viable
products and no historical revenue stream. The Company allocated the aggregate
purchase price of $59.2 million plus $300,000 of acquisition costs based on the
fair market value of tangible and intangible assets acquired, in accordance with
Accounting Principles Board Opinion No. 16 (APB 16). The acquisition was
accounted for as a purchase in accordance with APB 16 and the results of
operations have been included with the Company's results since the date of
acquisition. To value the intangible assets acquired the Company obtained an
independent appraisal. That appraisal was performed using proven valuation
techniques and supplemental guidance provided by the Securities and Exchange
Commission. The aggregate purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Current assets, including cash of $1,243 $ 1,882
Long-term assets 118
Deferred tax assets 3,444
Current liabilities (3,400)
Intangibles 200
In-process research and development 37,162
Goodwill 20,094
=======
$59,500
=======
</TABLE>
Intangibles include $37.2 million for purchased in-process research and
development for projects that do not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash
flows, adjusted using percentage of completion methodology (see below), related
to the in-process research and development projects. The development of these
projects had not yet reached technological feasibility and the in-process
research and development had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date in accordance with FASB Interpretation No.
4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for
by the Purchase Method.
Eight of the eleven projects are pharmaceuticals for companion animals,
including horses, and three of the eleven projects are pharmaceuticals for food
animals. These projects use a combination of proprietary compounds and novel
delivery systems. To be sold commercially the products must be approved by the
Center for Veterinary Medicine (CVM), which is the agency within the Food and
Drug Administration (FDA) that is responsible for managing approval of new
animal drugs. There are five types of data that must be provided to the FDA and
the CVM prior to approval. These include 1) efficacy, 2) safety to the animals
to be treated, 3) safety to the humans who will consume the animal or its
products (if applicable), 4) safety to the environment and 5) good manufacturing
practices (quality control of production to assume a consistent product). The
Company utilizes clinical studies to support its applications for approval. The
companion animal projects range from 19% to 78% complete, while the food animal
projects range from 78% to 93% complete.
These projects are unique and complex and frequently require modification
to the product and the manufacturing process before satisfactory clinical
results can be obtained. The delay in obtaining satisfactory data can result
from any of the five items discussed above and frequently satisfactory results
cannot be obtained.
3
<PAGE> 4
The in process research and development charge attributable to the
companion animal projects totals approximately $33.1 million, and these projects
will require expenditures of $500,000 in 1999, $700,000 in 2000, and $100,000 in
2001. The intangible asset attributable to the food animal projects totals
approximately $4.1 million, and these projects will require expenditures of
$250,000 in 1999 and $50,000 in 2000. Management believes that it is positioned
to complete each of the major research and development programs. These estimates
are subject to change, given the uncertainties of the development process and no
assurance can be given that deviations from these estimates will not occur.
Additionally, these projects will require maintenance expenditures when and if
they have reached a state of technological and commercial feasibility and there
is no assurance that each project will meet either technological or commercial
success. The Company projects that it will first realize revenue from certain
companion animal projects in 1999 with no significant revenue until 2000. The
Company also projects that it will first realize revenue from certain food
animal projects in 2000 with no significant revenue until 2001.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products, estimating the percentage of
completion at the acquisition date, estimating the resulting net risk-adjusted
cash flows from the projects considering the percentage of completion and
discounting the net cash flows to their present value. The percentage of
completion for each project was estimated using costs incurred to date compared
to estimated costs at completion. The revenue projections used to value the
in-process research and development are based on estimates of relevant market
sizes and growth factors and nature and expected timing of new products. The
rate utilized to discount the net cash flows to their present value is based on
the weighted average cost of capital adjusted to consider the risk associated
with these technologies. The Company used a 20% discount factor to value this
in-process research and development.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate and unanticipated events and circumstances are
likely to occur. For these reasons, actual results may vary significantly from
the projected results.
Net interest income was $6.9 million in 1998 compared to $6.7 million in
1997. The increase in interest income is due to higher cash and investment
balances during 1998 compared to 1997.
The Company's effective tax rate was 39% before the write-off of
in-process research and development in 1998 compared to 40% before the
write-off of in-process research and development in 1997. The decrease in the
effective tax rate was primarily attributable to income generated in states with
lower state income tax rates and the utilization of previously unavailable
Federal research and development credits.
1997 Compared to 1996
VETERINARY SOLUTIONS GROUP
Revenue for VSG for 1997 decreased 7% to $200.4 million from $215.5 million
in 1996. The decrease in revenue in 1997 compared to 1996 is primarily
attributable to decreased sales of veterinary instruments and feline and canine
test kits. 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 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, and the inclusion of revenue from the
veterinary practice information management software companies acquired in the
first and third quarters of 1997.
International revenue for VSG decreased 18% to $57.6 million, or 29% of
total VSG revenue, in 1997, compared to $70.5 million, or 33% of total VSG
revenue, in 1996. Revenue decreased 22% in Europe and 16% in the Asia-Pacific
region, while revenue increased 10% in Canada and South America. The decrease
in sales in Europe and the Asia-Pacific region principally relates to fewer
unit sales of veterinary instruments and, to a lesser extent, feline test kits.
Gross profit as a percentage of VSG revenue was 46% for 1997 compared to
57% 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; 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 information management software
products and services; an increase in fixed costs associated with expansion of
the veterinary laboratory business; and certain fixed veterinary service and
repair costs spread over lower veterinary sales volumes.
4
<PAGE> 5
FOOD AND ENVIRONMENTAL DIVISION
Revenue for FED for 1997 increased 21% to $62.3 million from $51.6 million
in 1996. The increase in revenue in 1997 compared to 1996 is primarily
attributable to higher unit sales of food and environmental testing products,
food testing consumables, and poultry and livestock test kits, partially offset
by a decline in average unit price of poultry and livestock kits.
International revenue for FED increased 26% to $26.0 million, or 42% of
total FED revenue, in 1997, compared to $20.7 million, or 40% of total FED
revenue, in 1997. Revenue increased 15% in Europe, 24% in the Asia-Pacific
region, and 56% in Canada and South America. The revenue increases in Europe,
the Asia-Pacific region, and in Canada and South America are primarily
attributable to increased sales of food and environmental testing products.
Gross profit as a percentage of FED revenue was 53% for 1997 compared to
57% for 1996. The decrease in gross margin is due to less efficient
manufacturing operations caused by lower production volumes, combined with
unfavorable revenue mix impact.
OPERATING EXPENSES
Sales and marketing expenses were 25% and 24% of revenue in 1997 and 1996,
respectively. The increase as a percentage of revenue and the dollar increase of
$1.9 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 information 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 information
management software development expenses associated with the acquisitions of the
veterinary practice information 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 $14.7 million were principally attributable to additional general
and administrative expense associated with acquired businesses, principally
veterinary laboratory businesses and veterinary practice information management
software businesses; additional expenses associated with geographic expansion;
additional amortization of goodwill and other intangibles associated with
business acquisitions; currency losses; and an additional provision for bad
debts. These increases were offset in part by a reduction in management bonuses.
During 1997 the Company recorded a non-recurring operating charge of $34.5
million. The non-recurring operating charge included a $13.2 million write-off
of in process research and development (see below) and $21.3 million of the
write-downs and write-offs of certain assets and the accrual of costs related
to a significant workforce reduction. The $21.3 million charge includes
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 information 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 information 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. Also in conjunction with the non-recurring
charge, the Company provided a $2.9 million charge to cost of sales to provide
for inventory related issues.
5
<PAGE> 6
During 1997 the Company acquired two veterinary practice information
management software businesses. The Company allocated the aggregate purchase
price of $19.8 million plus $200,000 of acquisition costs based on the fair
market value of tangible and intangible assets acquired, in accordance with
Accounting Principles Board Opinion No. 16 (APB 16). The acquisition was
accounted for as a purchase in accordance with APB 16 and the results of
operations have been included with the Company's results since the dates of
acquisition. To value the intangible assets acquired the Company obtained an
independent appraisal. That appraisal was performed using proven valuation
techniques and methodologies generally accepted in industry. The aggregate
purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Current assets, including cash of $848 $ 8,172
Long-term assets 789
Current liabilities (13,377)
Intangibles 3,650
In-process research and development 13,200
Goodwill 7,566
========
$ 20,000
========
</TABLE>
Intangibles include $13.2 million for purchased in-process research and
development for projects that do not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash flows
related to the in-process research and development projects. The development of
these projects had not yet reached technological feasibility and the in-process
research and development had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date in accordance with FASB Interpretation No.
4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for
by the Purchase Method.
The two projects consisted of practice information management software
programs and related modules. These products are used by veterinarians to manage
and operate their veterinary clinics. These projects are unique and complex and
frequently require modification to the product before the products are ready for
commercial markets.
These projects were projected to require expenditures of $500,000 in 1997
and $1.5 million in 1998. Actual expenses approximated these projections. These
projects have been substantially completed in accordance with the original
plans. Management believes the long- term plans for this business continue to be
substantially consistent with the original plan. These projects will require
maintenance expenditures to maintain commercial status and there is no assurance
that each product will meet commercial success. The Company realized revenue
from these products in 1999.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products, estimating the resulting net
risk-adjusted cash flows from the projects and discounting the net cash flows to
their present value. The revenue projections used to value the in-process
research and development are based on estimates of relevant market sizes and
growth factors and nature and expected timing of new products. The rate utilized
to discount the net cash flows to their present value is based on the weighted
average cost of capital adjusted to consider the risk associated with these
technologies. The Company used a 20% discount factor to value this in-process
research and development.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate and unanticipated events and circumstances are
likely to occur. For these reasons, actual results may vary significantly from
the projected results.
6
<PAGE> 7
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 40% before the write-off of
in-process research and development in 1997 compared to 41% in 1996. The
decrease in the effective rate was primarily attributable to income generated in
states with lower state income tax rates.
* LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $138.4 million of cash, cash
equivalents, and short-term investments and $184.8 million of working capital.
The Company's total capital budget for 1998 is approximately $15.0 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 $34.1 million of products in 1999.
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, five acquisitions in 1997 and two acquisitions in 1998,
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
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
7
<PAGE> 8
significant resources to the growth of its veterinary laboratory business,
veterinary practice information management software business, animal health
pharmaceuticals business and its business in the food, hygiene and environmental
markets, 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 "Notes to Consolidated
Financial Statements" 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.
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 1998, international revenue was $88.7 million and accounted for 28% 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 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.
8
<PAGE> 9
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.
* YEAR 2000
Historically, certain computer programs have been written using two digits,
rather than four digits, to define the applicable year. This could lead, in many
cases, to a computer's recognizing a date using "00" as 1900 rather than the
year 2000. This phenomenon could result in major computer system failures or
miscalculations, and is generally referred to as the "Year 2000" problem or
issue. The following discussion first summarizes the Company's efforts to
identify and resolve Year 2000 issues associated with the Company's information
technology (IT) and non-IT internal systems, the products and services sold by
the Company, and the products and services supplied by outside vendors, and then
addresses total costs, most reasonably likely worst case scenarios, contingency
plans, and the basis for current estimates relating to such efforts.
The Company's worldwide accounting system is Year 2000 ready, and
throughout 1999 the Company expects to complete implementation of any needed
Year 2000 related modifications to its other IT systems. The Company is also
currently assessing its internal non-IT systems and expects to complete testing
and any needed modifications to these systems prior to 2000. Although the
Company does not believe that it will incur material costs or experience
material disruptions in its business associated with preparing its internal
systems for the Year 2000, there can be no assurances that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems, which are composed of third party software, third party hardware that
contains embedded software and the Company's own software products.
The Company's Year 2000 effort has included testing products currently or
recently offered by the Company for Year 2000 issues. All of the Company's
current product offerings are Year 2000 ready. For products that were identified
as needing updates to address Year 2000 issues, the Company has prepared updates
or has removed such products from its product offerings. Some of the Company's
customers, including users of older practice information management systems, are
using product versions that the Company will not support for Year 2000 issues;
the Company is encouraging these customers to migrate to current product
versions that are Year 2000 ready. Notwithstanding these efforts, there can be
no guarantee that one or more current Company products do not contain Year 2000
issues that may result in material costs to the Company.
Because a portion of the Company's business involves the sale of software
systems, the Company's risk of being subjected to lawsuits relating to Year 2000
issues with its software products is likely to be greater than that of companies
that do not sell software products. Because computer systems may involve
different hardware, firmware and software components from different
manufacturers, it may be difficult to determine which component in a computer
system may cause a Year 2000 issue. As a result, the Company may be subjected to
Year 2000 related lawsuits independent of whether its products and services are
Year 2000 ready. The outcomes of any such lawsuits and the impact on the Company
cannot be determined at this time.
The Company has queried its important suppliers and vendors to assess their
Year 2000 readiness. To date, the Company is not aware of any problems that
would materially impact results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that these suppliers and vendors
will be Year 2000 ready. The inability of those parties to complete their Year
2000 resolution process could materially impact the Company. The Company is
currently querying key resellers of Company products regarding Year 2000
readiness. No assurances can be given regarding the state of readiness of such
resellers.
The Company's total cost relating to Year 2000 related activities has not
been and is not expected to be material to the Company's financial position,
results of operations, or cash flows. The Company believes that necessary
modifications will be made on a timely basis. However, there can be no assurance
that there will not be a delay in, or increased costs associated with, the
implementation of such modifications, or that the Company's suppliers, resellers
and customers will adequately prepare for the Year 2000 issue. It is possible
that any such delays,
9
<PAGE> 10
increased costs, or supplier, reseller or customer failures could have a
material adverse impact on the Company's operations and financial results.
The most reasonable likely worst case Year 2000 scenarios for the Company
would include: (i) the failure of infrastructure services provided by government
agencies and other third parties (e.g., electricity, phone service, water,
transport, material delivery, security systems, etc.), (ii) corruption of data
contained in the Company's internal information systems, and (iii) hardware
failure. The Company is currently developing a contingency plan in the event
certain internal or external systems are not Year 2000 ready. However, if the
Company does not become Year 2000 ready in a timely manner, the Year 2000 issue
could have a material adverse impact on the Company's operations by, for
example, impacting the Company's ability to deliver products or services to its
customers.
Current estimates of the costs of the project and the information on which
the Company believes it will complete the Year 2000 modifications are based on
certain assumptions regarding future events, including the continued
availability of certain resources, assurances received from third parties, and
other factors. However, there can be no guarantee that these estimates will be
achieved or that this information is accurate, and therefore the actual results
could differ materially from those anticipated. Specific factors might include,
but are not limited to, the availability and cost of personnel trained in this
area, the degree of cooperation and preparedness of third parties, the ability
to locate and correct all relevant computer codes, and other uncertainties.
10
<PAGE> 11
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.............................. 12
* Consolidated Balance Sheets as of December 31, 1997 and 1998.......... 13
* Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998................................................. 14
* Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998.................................... 15
* Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998................................................. 16
* Notes to Consolidated Financial Statements............................ 17
* Schedule II
Valuation and Qualifying Accounts................................... 37
</TABLE>
11
<PAGE> 12
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,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, 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 5, 1999
12
<PAGE> 13
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- --------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................... $106,972 $109,063
Short-term investments ...................................... 35,502 29,290
Accounts receivable, less reserves of $5,082 and
$5,368 in 1997 and 1998, respectively .................... 47,341 47,947
Inventories ................................................. 60,174 55,428
Deferred income taxes ....................................... 15,396 13,965
Other current assets ........................................ 8,832 7,653
-------- --------
Total current assets ................................... 274,217 263,346
-------- --------
Long-Term Investments ............................................ 11,134 17,297
Property and Equipment, at cost:
Land ........................................................ 1,193 1,197
Buildings ................................................... 4,462 4,487
Leasehold improvements ...................................... 16,596 17,629
Machinery and equipment ..................................... 25,432 31,917
Construction in progress .................................... 1,390 1,840
Office furniture and equipment .............................. 23,731 25,423
-------- --------
72,804 82,493
Less-- Accumulated depreciation and amortization ............ 30,387 41,013
-------- --------
42,417 41,480
Other Assets, net ................................................ 49,280 68,409
-------- --------
$377,048 $390,532
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................ $ 12,472 $ 26,816
Accrued expenses ............................................ 42,147 32,046
Current portion of long-term debt ........................... 2,647 5,190
Deferred revenue ............................................ 15,609 14,449
-------- --------
Total current liabilities .............................. 72,875 78,501
-------- --------
Long-term debt, net of current portion ........................... 1,440 4,191
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 38,169 shares in 1997 and 38,831
shares in 1998 ............................................ 3,817 3,883
Additional paid-in capital ................................... 257,275 276,296
Retained earnings ............................................ 46,256 31,041
Accumulated other comprehensive income (loss) ................ (4,615) (3,380)
-------- --------
Total stockholders' equity ............................. 302,733 307,840
-------- --------
$377,048 $390,532
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE> 14
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue............................................ $267,677 $262,970 $319,889
Cost of revenue.................................... 115,770 141,030 158,118
-------- -------- --------
Gross profit.................................. 151,907 121,940 161,771
-------- -------- --------
Expenses:
Sales and marketing........................... 64,450 66,383 61,773
General and administrative.................... 28,271 42,930 49,373
Research and development...................... 12,195 17,057 21,523
Non-recurring operating charge................ -- 21,300 --
Write-off of in-process research and
development................................... -- 13,200 37,162
-------- -------- --------
Income (loss) from operations............ 46,991 (38,930) (8,060)
Interest income, net............................... 8,332 6,670 6,877
-------- -------- --------
Net income (loss) before provision for
(benefit of) income taxes.............. 55,323 (32,260) (1,183)
Provision for (benefit of) income taxes............ 22,682 (11,140) 14,032
-------- -------- --------
Net income (loss)........................ $ 32,641 $(21,120) $(15,215)
======== ======== ========
Earnings (loss) per share: Basic................... $ 0.88 $ (0.56) $ (0.40)
======== ======== ========
Earnings (loss) per share: Diluted................. $ 0.83 $ (0.56) $ (0.40)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 15
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
NUMBER $0.10 PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL EARNINGS INCOME (LOSS) EQUITY
--------- --------- ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
Comprehensive income:
Net income ..................... -- -- -- 32,641 -- --
Translation adjustment ......... -- -- -- -- (988) --
Total Comprehensive income .... -- -- -- -- -- 31,653
------ ------ -------- -------- ------- --------
BALANCE, December 31, 1996 .......... 37,774 3,777 253,118 67,376 (1,546) 322,725
Issuance of common stock in
settlement of VetTest .......... 6 1 87 -- -- 88
acquisition
Exercise of stock options,
including the tax benefit ...... 389 39 4,070 -- -- 4,109
Comprehensive loss:
Net loss ....................... -- -- -- (21,120) -- --
Translation adjustment ......... -- -- -- -- (3,069) --
Total Comprehensive loss ....... -- -- -- -- -- (24,189)
------ ------ -------- -------- ------- --------
BALANCE, December 31, 1997 .......... 38,169 3,817 257,275 46,256 (4,615) 302,733
Issuance of common stock in
settlement of Idetek, Inc.,
escrow ........................ 22 2 (2) -- -- --
Issuance of common stock and
warrants for acquisition of
Blue Ridge Pharmaceuticals,
Inc. ........................... -- -- 12,323 -- -- 12,323
Exercise of stock options,
including the tax benefit ...... 640 64 6,700 -- -- 6,764
Comprehensive loss:
Net loss ....................... -- -- -- (15,215) -- --
Translation adjustment ......... -- -- -- -- 1,235 --
Total Comprehensive loss ....... -- -- -- -- -- (13,980)
------ ------ -------- -------- ------- --------
BALANCE, December 31, 1998 .......... 38,831 $3,883 $276,296 $ 31,041 $(3,380) $307,840
====== ====== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 16
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ................................... $ 32,641 $(21,120) $(15,215)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization ................... 10,390 14,425 15,887
Non-cash portion of non-recurring operating charge .. -- 1,600 --
Non-cash write-off of in-process research and
development ....................................... -- 13,200 37,162
Changes in assets and liabilities, net of
acquisition(s)
Accounts receivable ............................. (18,875) 23,712 (528)
Inventories ..................................... (19,246) (11,218) 4,949
Other current assets ............................ (6,370) (8,400) 2,781
Accounts payable ................................ 6,062 (7,200) 14,344
Accrued expenses ................................ 9,349 8,983 (12,150)
Deferred revenue ................................ 1,299 (483) (1,160)
-------- -------- --------
Net cash provided by operating activities ..... 15,250 13,499 46,070
-------- -------- --------
Cash Flows From Investing Activities:
Decrease (increase) in investments, net ............. (5,116) 6,515 48
Purchases of property and equipment ................. (11,783) (12,507) (8,992)
Increase in other assets ............................ (1,859) (3,699) (369)
Acquisition(s) of business(es), net of
cash acquired ...................................... (19,709) (23,047) (39,091)
-------- -------- --------
Net cash used in investing activities ........... (38,467) (32,738) (48,404)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from repayment of notes payable ............ (1,887) (1,509) (2,529)
Proceeds from the exercise of stock options ......... 4,580 3,048 5,756
-------- -------- --------
Net cash provided by financing activities ....... 2,693 1,539 3,227
-------- -------- --------
Net effect of Exchange Rate Changes ................... (987) (3,069) 1,198
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents .. (21,511) (20,769) 2,091
Cash and Cash Equivalents, Beginning of Year .......... 149,252 127,741 106,972
-------- -------- --------
Cash and Cash Equivalents, End of Year ................ $127,741 $106,972 $109,063
======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the year ....................... $ 299 $ 405 $ 369
======== ======== ========
Income taxes paid during the year ................... $ 12,883 $ 8,706 $ 17,385
======== ======== ========
Supplemental Disclosure of Noncash Financing Activity:
Issuance of common stock for acquisition of
Idetek, Inc. ...................................... $ 91 $ -- $ --
======== ======== ========
Issuance of common stock in settlement of VetTest
Acquisition ....................................... $ -- $ 88 $ --
======== ======== ========
Issuance of notes, common stock and warrants for
acquisition of Blue Ridge Pharmaceuticals, Inc. ... $ -- $ -- $ 20,153
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 17
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 veterinary,
food and environmental markets. In the veterinary market the Company develops,
manufactures and distributes biology-based detection systems, develops and
distributes chemistry-based detection systems, provides laboratory testing and
specialized consulting services and develops and distributes veterinary practice
information management software systems and provides related services. In the
food and environmental market the Company develops, manufactures and distributes
biology-based detection systems and provides laboratory testing and specialty
consulting services. The Company also develops animal health pharmaceuticals.
The Company's 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,
-------------------
1997 1998
------- -------
Raw materials............. $ 9,235 $11,342
Work-in-process........... 8,421 5,784
Finished goods............ 42,518 38,302
------- -------
$60,174 $55,428
======= =======
(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:
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
17
<PAGE> 18
(d) Other Assets
Other assets are as follows (in thousands):
DECEMBER 31,
------------------
DESCRIPTION USEFUL LIFE 1997 1998
----------- ----------- ------- -------
Patents and trademarks.. 10 Years $ 9,348 $ 9,372
Goodwill................ 5-40 Years 32,256 54,697
Non-compete agreements.. 3-5 Years 4,000 4,330
Other intangibles....... 5-10 Years 8,665 11,259
------- -------
54,269 79,658
Accumulated amortization 14,219 21,858
------- -------
Intangible assets, net.. $40,050 $57,800
Other assets............ 9,230 10,609
------- -------
$49,280 $68,409
======= =======
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.
Other intangibles include subscriber lists, existing technology intangible
assets, and prepaid royalties. Other assets include long-term deferred tax
asset, long-term non-trade receivables and long-term deposits. Amortization of
intangible assets was $3.4 million, $5.0 million and $6.0 million for the years
ended December 31, 1996, 1997 and 1998, 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 9).
(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 (See Note 2).
(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 or less.
(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.
18
<PAGE> 19
(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 gains of
$369,000 and losses of $511,000 and $127,000 for the years ended December 31,
1996, 1997 and 1998, 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 which are
supported by firm third-party purchases. 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 and 1998, the deferred gains on these contracts totaled $280,000 and
$28,000, respectively, and the foreign currency contracts, which extend through
December 31, 1998 and 1999, respectively, consisted of the following (in
thousands):
CURRENCY SOLD US DOLLAR EQUIVALENT
------------- --------------------
1997 1998
------- ------
Pound sterling............... $ 5,001 $ --
Deutsche mark................ 4,044 --
Canadian dollar.............. 3,690 --
French franc................. 2,352 --
Australian dollar............ 1,791 2,394
Japanese Yen................. -- 2,469
------- ------
$16,878 $4,863
======= ======
(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, 1998. The carrying
amounts of the Company's financial instruments approximate fair market value.
(k) Earnings (Loss) per Share
During 1997 the Company adopted the provisions of SFAS No. 128 Earnings Per
Share and retroactively restated all prior periods 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 (loss) per
share (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
SHARES OUTSTANDING FOR BASIC EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding............................ 37,082 37,974 38,513
====== ====== ======
SHARES OUTSTANDING FOR DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding............................. 37,082 37,974 38,513
Dilutive effect of options issued to employees.................. 2,437 -- --
------ ------ ------
39,519 37,974 38,513
====== ====== ======
</TABLE>
19
<PAGE> 20
The Company has incurred losses for the years ending December 31, 1997 and
1998 and as a result, excluded the dilutive effect of options issued to
employees from the calculation of shares outstanding for diluted earnings per
share. If the Company had reported net income, shares outstanding would have
increased by 1,444,000 and 1,720,000 shares, respectively.
(l) Reclassifications
Reclassifications have been made in the consolidated financial statements
to conform with the current year's presentation.
(m) Comprehensive Income
In 1998, the Company adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income, (SFAS No. 130), which requires companies to report all
changes in equity during a period, except those resulting from investment by
owners and distribution to owners, in a financial statement for the period in
which they are recognized. The Company has chosen to disclose comprehensive
income, which encompasses net income and foreign currency translation
adjustments, in the Consolidated Statement of Stockholders' Equity. The Company
considers the foreign currency cumulative translation adjustment to be
permanently invested and therefore has not provided income taxes on those
amounts. Prior years have been restated to conform to SFAS 130 requirements.
(n) New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires that an entity recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. This statement
is effective for fiscal years beginning after June 15, 1999, and is applicable
on both an interim and annual basis. Companies are not required to apply this
statement retroactively to prior periods. The Company does not believe this
statement will have a material impact on the consolidated balance sheet or
statement of operations.
(2) INCOME TAXES
Earnings (losses) before income taxes for each year were as follows (in
thousands):
1996 1997 1998
------- ------- --------
Domestic........................ $48,394 $(29,731) $(16,071)
International................... 6,929 (2,529) 14,888
------- -------- --------
$55,323 $(32,260) $ (1,183)
======= ======== ========
The provisions for (benefit of) income taxes for the years ended December
31, 1996, 1997 and 1998 is comprised of the following (in thousands):
DECEMBER 31,
------------------------------
1996 1997 1998
------- -------- --------
Current
Federal.................... $18,027 $ 817 $ 5,758
State...................... 4,171 954 2,682
International.............. 3,190 1,799 5,173
------- -------- --------
25,388 3,570 13,613
------- -------- --------
Deferred
Federal.................... (2,070) (12,314) 524
State...................... (636) (2,396) (105)
------- -------- --------
(2,706) (14,710) 419
------- -------- --------
$22,682 $(11,140) $ 14,032
======= ======== ========
20
<PAGE> 21
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,
------------------------
1996 1997 1998
---- ---- -------
<S> <C> <C> <C>
U.S. federal statutory rate ..... 35.0% 35.0% 35.0%
State income tax, net of federal
tax benefit ................... 4.0 4.1 (217.7)
International income taxes ..... 1.4 -- 125.0
Amortization of non-deductible
assets ........................ -- (1.6) (183.1)
Write-off of in-process
research and development ...... -- (5.1) (1,098.6)
Non-taxable interest income ..... -- 4.1 117.9
Other, net ...................... 0.6 (2.0) 35.4
---- ---- -------
Effective tax rate .............. 41.0% 34.5% (1,186.1%)
==== ==== =======
</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>
1997 1998
------------------- -------------------
CURRENT LONG-TERM CURRENT LONG-TERM
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Accruals .................... $ 6,834 $ -- $ 4,323 $ --
Receivable reserves.......... 2,190 -- 3,173 --
Deferred revenue............. 3,309 -- 4,189 --
Inventory basis differences.. 3,229 -- 2,301 --
Intangible basis
differences................ -- 6,130 -- 6,389
Tax credit carryforwards..... -- -- -- 235
Net operating loss carry
forwards..................... -- 1,093 -- 4,434
-------- ------- -------- -------
Total assets............... 15,562 7,223 13,986 11,058
-------- ------- -------- -------
LIABILITIES:
Property basis differences... -- 1,343 -- 928
Intangible basis
differences................ -- 773 -- 470
Other........................ 166 -- 21 --
------- ------- ------- -------
Total liabilities.......... 166 2,116 21 1,398
------- ------- ------- -------
Net assets................. $ 15,396 $ 5,107 $ 13,965 $ 9,660
======== ======= ======== =======
</TABLE>
The components of the net foreign net deferred tax assets (in thousands):
<TABLE>
<CAPTION>
1997 1998
------------------ ------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Net operating loss
carryforwards............. $ -- $ 3,470 $ -- $ 3,679
Other...................... 199 -- 135 --
----- ------- ----- -------
Total assets............. 199 3,470 135 3,679
LIABILITIES:
Total liabilities........ -- -- -- --
VALUATION ALLOWANCE........... (199) (3,470) (135) (3,679)
----- ------- ----- -------
Net assets (liability)... $ -- $ -- $ -- $ --
===== ======= ===== =======
</TABLE>
At December 31, 1998, the Company had domestic net operating losses of
approximately $12.7 million available to offset future taxable income. Net
operating loss carryforwards expire at various dates from 1999 to 2013. 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, 1998, the Company had net operating losses in foreign
subsidiaries of approximately $9.2 million available to offset further taxable
income. These net operating loss carryforwards expire at various dates beginning
in 2002. The Company has recorded a valuation allowance for the assets because
realizability is uncertain.
As of December 31, 1998, unremitted earnings in subsidiaries outside the
United States totaled $16.4 million, on which no United States taxes have been
provided. The Company's intention is to reinvest these earnings
21
<PAGE> 22
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):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
U.S. treasury bills. $ 20,047 $ 6,000
Municipal bonds..... 6,140 21,801
Certificates of
deposit............. 6,749 1,031
Commercial paper.... 2,016 458
Foreign bonds....... 550 --
-------- --------
$ 35,502 $ 29,290
======== ========
</TABLE>
Long-term investments are investment securities with original maturities of
greater than one year and consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Municipal bonds..... $ 10,165 $ 13,297
Foreign bonds....... 515 --
Certificates of 454 4,000
deposit............. -------- --------
$ 11,134 $ 17,297
======== ========
</TABLE>
(4) NOTES PAYABLE
In connection with the acquisition of the business of Consolidated
Veterinary Diagnostics, Inc. ("CVD") (see Note 15(a)), the Company issued an
unsecured note payable for $3.0 million, of which $2.0 million and $1.0 million
was outstanding at December 31, 1997 and 1998, respectively. The note bears
interest at 8% and is due in three equal annual installments in July 1997, 1998
and 1999.
In connection with the Acumedia Manufacturers, Inc. ("Acumedia")
acquisition (see Note 15(d)), 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(a)) the Company issued an unsecured note payable for Australian
Dollars 900,000 (US $587,000) of which Australian dollars 675,000 (US $551,000)
was outstanding at December 31, 1998. The note bears interest at 6% and is due
in four equal annual installments beginning in December 1998.
In connection with the Blue Ridge Pharmaceuticals, Inc. ("Blue Ridge")
acquisition (see Note 15(h)), the Company issued unsecured notes payable for
$7,830,000, which were outstanding at December 31, 1998. The notes bear interest
at 5.5% and are due in two equal annual installments on October 1, 1999 and
2000.
22
<PAGE> 23
(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):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
-------------
<S> <C>
1999.................... $ 4,801
2000.................... 4,414
2001.................... 4,254
2002.................... 3,586
2003.................... 3,404
Thereafter.............. 12,430
--------
$ 32,889
========
</TABLE>
Rent expense charged to operations under operating leases was approximately
$3.2 million, $3.8 million and $5.6 million for the years ended December 31,
1996, 1997 and 1998, 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 $34.1 million of products in 1999.
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 1998 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 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. In March 1998, the Court
granted the Company's motion for summary judgment in the case, however CDC is
appealing that ruling. 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 12, 1998, 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
23
<PAGE> 24
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.
On December 18, 1997, SA Scientific, Inc. ("SAS") filed suit against the
Company in the State of Texas District Court seeking unspecified damages
resulting from the Company's alleged breach of a development and supply
agreement between SAS and the Company. The Company has filed an answer to the
complaint denying SAS's allegations and asserting counterclaims against SAS for
breach of contract and conversion of the Company's property. SAS has filed an
amended complaint seeking $1,500,000 in actual damages related to the Company's
alleged breach of contract, $5,000,000 in punitive damages and further
unspecified damages from the Company's alleged negligent misrepresentation,
fraud and conversion of SAS's intellectual property, and attorneys' fees. The
Company believes that it has meritorious defenses to SAS's claims and is
contesting the matter vigorously. However, the Company is unable to assess the
likelihood of an adverse result or estimate the amount of damages the Company
might be required to pay. Any adverse outcome resulting in payment of damages
would adversely affect the Company's results of operations.
(6) NON-RECURRING OPERATING CHARGE
During 1997 the Company recorded a non-recurring operating charge of $34.5
million. The non-recurring operating charge included a $13.2 million write-off
of in-process research and development (see Note 7) and $21.3 million of the
write-downs and write-offs of certain assets and accrual of costs related to a
significant workforce reduction. The $21.3 million charge consists of the
following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
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
--------
$ 21,300
========
</TABLE>
As of December 31, 1998, $3.2 million was included in accrued expenses
relating to the non-recurring operating charge. The balance remaining at
December 31, 1998 primarily represents severance payments due to terminated
employees, unpaid charges related to the consolidation and relocation of
distribution functions in Europe and lease payments on unutilized facilities.
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 included in the
non-recurring operating charge.
The Company has terminated the employment of a total of 228 employees. Of
this total, 79 employees were associated with the consolidation of the
veterinary practice information management software business into the Eau
Claire, Wisconsin facility, 57 employees were associated with the consolidation
of sales, marketing and distribution operations in Europe, 33 employees were
associated with reductions in domestic sales and marketing operations, 18
employees were associated with reductions in sales and marketing operations in
the Asia-Pacific region, 16 employees were associated with the closure of the
Sunnyvale, California research and development facility and 25 employees were
associated with reductions in positions in management and financial operations.
As discussed above, the Company consolidated certain veterinary practice
information management software operations into the Eau Claire, Wisconsin
facility and closed the leased Sunnyvale, California research and
24
<PAGE> 25
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 had invested a total of
$1.6 million in fixed assets and license fees.
(7) WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT
(a) Blue Ridge Pharmaceuticals, Inc.
On October 1, 1998 the Company acquired Blue Ridge Pharmaceuticals, Inc., a
development-stage animal health pharmaceutical company with 11 products in
development. At the acquisition date Blue Ridge had no commercially viable
products and no historical revenue stream. The Company allocated the aggregate
purchase price of $59.2 million plus $300,000 of acquisition costs based on the
fair market value of tangible and intangible assets acquired, in accordance with
Accounting Principles Board Opinion No. 16 (APB 16). The acquisition was
accounted for as a purchase in accordance with APB 16 and the results of
operations have been included with the Company's results since the date of
acquisition. To value the intangible assets acquired the Company obtained an
independent appraisal. That appraisal was performed using proven valuation
techniques and supplemental guidance provided by the Securities and Exchange
Commission. The aggregate purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Current assets, including cash of $1,243 $ 1,882
Long-term assets 118
Deferred tax assets 3,444
Current liabilities (3,400)
Intangibles 200
In-process research and development 37,162
Goodwill 20,094
=======
$59,500
=======
</TABLE>
Intangibles include $37.2 million for purchased in-process research and
development for projects that do not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash
flows, adjusted using percentage of completion methodology (see below), related
to the in-process research and development projects. The development of these
projects had not yet reached technological feasibility and the in-process
research and development had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date in accordance with FASB Interpretation No.
4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for
by the Purchase Method.
Eight of the eleven projects are pharmaceuticals for companion animals,
including horses, and three of the eleven projects are pharmaceuticals for food
animals. These projects use a combination of proprietary compounds and novel
delivery systems. To be sold commercially the products must be approved by the
Center for Veterinary Medicine (CVM), which is the agency within the Food and
Drug Administration (FDA) that is responsible for managing approval of new
animal drugs. There are five types of data that must be provided to the FDA and
the CVM prior to approval. These include 1) efficacy, 2) safety to the animals
to be treated, 3) safety to the humans who will consume the animal or its
products (if applicable), 4) safety to the environment and 5) good manufacturing
practices (quality control of production to assume a consistent product). The
Company utilizes clinical studies to support its applications for approval. The
companion animal projects range from 19% to 78% complete, while the food animal
projects range from 78% to 93% complete.
These projects are unique and complex and frequently require modification
to the product and the manufacturing process before satisfactory clinical
results can be obtained. The delay in obtaining satisfactory data can result
from any of the five items discussed above and frequently satisfactory results
cannot be obtained.
Management believes that it is positioned to complete each of the major
research and development programs. These estimates are subject to change, given
the uncertainties of the development process and no assurance can be given that
deviations from these estimates will not occur. Additionally, these projects
will require maintenance expenditures when and if they have reached a state of
technological and commercial feasibility and there is no assurance that each
project will meet either technological or commercial success. The Company
projects that it will first realize revenue from certain companion animal
projects in 1999 with no significant revenue until 2000. The Company also
projects that it will first realize revenue from certain food animal projects in
2000 with no significant revenue until 2001.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products, estimating the percentage of
completion at the acquisition date, estimating the resulting net risk-adjusted
cash flows from the projects considering the percentage of completion and
discounting the net cash flows to their present value. The percentage of
completion for each project was estimated using costs incurred to date compared
to estimated costs at completion. The revenue projections used to value the
in-process research and development are based on estimates of relevant market
sizes and growth factors and nature and expected timing of new products. The
rate utilized to discount the net cash flows to their
25
<PAGE> 26
present value is based on the weighted average cost of capital adjusted to
consider the risk associated with these technologies. The Company used a 20%
discount factor to value this in-process research and development.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate and unanticipated events and circumstances are
likely to occur. For these reasons, actual results may vary significantly from
the projected results.
(b) Veterinary Practice Information Management Software Companies
During 1997 the Company acquired two veterinary practice information
management software businesses. The Company allocated the aggregate purchase
price of $19.8 million plus $200,000 of acquisition costs based on the fair
market value of tangible and intangible assets acquired, in accordance with
Accounting Principles Board Opinion No. 16 (APB 16). The acquisition was
accounted for as a purchase in accordance with APB 16 and the results of
operations have been included with the Company's results since the dates of
acquisition. To value the intangible assets acquired the Company obtained an
independent appraisal. That appraisal was performed using proven valuation
techniques and methodologies generally accepted in industry. The aggregate
purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Current assets, including cash of $848 $ 8,172
Long-term assets 789
Current liabilities (13,377)
Intangibles 3,650
In-process research and development 13,200
Goodwill 7,566
========
$ 20,000
========
</TABLE>
Intangibles include $13.2 million for purchased in-process research and
development for projects that do not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash flows
related to the in-process research and development projects. The development of
these projects had not yet reached technological feasibility and the in-process
research and development had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date in accordance with FASB Interpretation No.
4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for
by the Purchase Method.
The two projects consisted of practice information management software
programs and related modules. These products are used by veterinarians to manage
and operate their veterinary clinics. These projects are unique and complex and
frequently require modification to the product before the products are ready for
commercial markets. These projects were completed in accordance with the
original plan. These projects will require maintenance expenditures to maintain
commercial status and there is no assurance that each project will meet
commercial success. The Company realized revenue from these products in 1999.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products, estimating the resulting net
risk-adjusted cash flows from the projects and discounting the net cash flows to
their present value. The revenue projections used to value the in-process
research and development are based on estimates of relevant market sizes and
growth factors and nature and expected timing of new products. The rate utilized
to discount the net cash flows to their present value is based on the weighted
average cost of capital adjusted to consider the risk associated with these
technologies. The Company used a 20% discount factor to value this in-process
research and development.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate and unanticipated events and circumstances are
likely to occur. For these reasons, actual results may vary significantly from
the projected results.
26
<PAGE> 27
(8) 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.
(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.
There are no shares of Series A Stock outstanding.
(9) STOCK-BASED COMPENSATION PLANS
At December 31, 1998, the Company had ten 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 ten
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,
---------------------------------
1996 1997 1998
-------- --------- ---------
Net income (loss):
<S> <C> <C> <C>
As Reported.............. $ 32,641 $ (21,120) $ (15,215)
Pro Forma................ 28,278 (30,563) (21,931)
Net income (loss) per share:
Basic: As Reported....... $ 0.88 $ (0.56) $ (0.40)
Basic: Pro Forma......... 0.76 (0.80) (0.62)
Diluted: As Reported..... 0.83 (0.56) (0.40)
Diluted: Pro Forma....... 0.72 (0.80) (0.62)
</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.
27
<PAGE> 28
(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 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) 1998 Stock Incentive Plan
During 1998, the Board of Directors approved the 1998 Stock Incentive Plan
(the "1998 Stock Plan") which provides for grants of incentive and nonqualified
stock options and restricted stock awards at the discretion of the Compensation
Committee of the Board of Directors. A total of 1,800,000 shares of Common Stock
may be issued under the 1998 Stock Plan. Options granted under the 1998 Stock
Plan may not be granted at an exercise price less than the fair market value of
the Common Stock on the date granted (or less than 110% of the fair market value
in the case of incentive stock options granted to holders of more than 10% of
the Company's Common Stock). Options may not be granted for a term of more than
10 years. The number of shares subject to restricted stock awards granted at
below 100% of fair market value may not exceed 10% of the total number of shares
of Common Stock issuable under the 1998 Stock Plan. Income tax benefits
attributable to certain exercised stock options and restricted stock are
credited against additional paid-in capital. The vesting schedule of all options
granted under the 1998 Stock Plan and the duration of the Company's repurchase
rights with respect to restricted stock awarded under the 1998 Stock Plan are
determined by the Compensation Committee of the Board of Directors at the time
of grant.
(f) ETI Corporation Plan
During 1991, the Board of Directors of ETI Corporation (ETI), which was
acquired by the Company in 1993, 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.
(g) 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
28
<PAGE> 29
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 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, 1996, 1997 and 1998 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
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------ --------
<S> <C> <C>
Outstanding, December 31, 1995..................... 4,194 $ 9.81
----- -------
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
=======
Granted....................................... 1,233 $ 17.46
Exercised..................................... (555) 7.95
Terminated.................................... (386) 16.69
----- -------
Outstanding, December 31, 1998..................... 5,379 $ 14.26
===== =======
Exercisable, December 31, 1998..................... 2,600 $ 11.17
===== =======
Weighted average fair value of options granted in
1998............................................... $ 8.79
=======
</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
exercisable 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.
29
<PAGE> 30
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 1996, 1997 and 1998, respectively: no
dividend yield for all years; expected volatility of 45% for 1996, 52% for 1997,
and 64% for 1998; risk-free interest rates of 6.18%, 6.33% and 5.34% for 1996,
1997 and 1998, respectively; and expected lives of 5.48 years for 1996, 4.55
years for 1997 and 3.96 years for 1998.
At December 31, 1998, the options outstanding have the following
characteristics (options in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE REMAINING NUMBER AVERAGE
EXERCISE PRICE OF EXERCISE CONTRACT OF EXERCISE
RANGE OPTIONS PRICE LIFE OPTIONS PRICE
------------------ ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
$ 0.75 -- $ 5.21 766 $ 3.45 2.24 766 $ 3.45
6.06 -- 9.88 545 7.96 3.80 545 7.96
11.22 -- 17.35 3,175 15.65 7.76 993 15.73
17.75 -- 46.00 900 22.39 7.87 297 21.70
</TABLE>
(h) 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 33,281 in 1996, 119,027 in 1997 and 71,734 in 1998.
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 1996, 1997 and 1998,
respectively: no dividend yield for all years; an expected life of one year for
all years; expected volatility of 45% for 1996, 72% for 1997, and 64% for 1998;
and risk-free interest rates of 6.18%, 6.14% and 5.34% for 1996, 1997 and 1998,
respectively. The weighted-average fair value of those purchase rights granted
in 1996, 1997 and 1998 was $10.63, $7.15 and $6.57 per share, respectively.
(10) 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
30
<PAGE> 31
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.
(11) 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 1996, 1997 and 1998.
(12) SIGNIFICANT CUSTOMERS
During the years ended December 31, 1996 and 1998 one customer accounted
for 12% and 11%, respectively, of the Company's revenue. The significant
customer was a wholesale distributor of the Company's veterinary products. No
customer accounted for greater than 10% of revenue in 1997.
(13) SEGMENT REPORTING
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 131 Disclosures about Segments of an Enterprise and Related
Information, (SFAS 131) during the fourth quarter of 1998. SFAS 131 requires
disclosures about operating segments in annual financial statement and requires
selected information about operating segments in interim financial statements.
It also requires related disclosures about products and services and geographic
areas. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is the chief executive officer.
The Company is organized into business units by market and customer group.
The Company's reportable operating segments include the Veterinary Solutions
Group (VSG), the Food and Environmental Division (FED) and other. The VSG
develops, designs, and distributes products and performs services for
veterinarians. The VSG also manufactures certain biology based test kits for
veterinarians. FED develops, designs, manufactures and distributes products and
performs services to detect disease and contaminants in food animals, food,
water and food processing facilities. Both the VSG and FED distribute products
and services world-wide. Other is primarily comprised of the Company's Blue
Ridge Pharmaceuticals, Inc. subsidiary, which develops products for therapeutic
applications in companion animals and livestock, corporate research and
development, interest income and non-recurring charges.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that
non-recurring charges and most interest income and expense are not allocated to
individual operating segments.
Revenues are attributed to geographic areas based on the location of the
customer.
31
<PAGE> 32
<TABLE>
<CAPTION>
(in thousands)
VSG FED OTHER TOTAL
1998 --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue.......................... $ 247,604 $ 71,938 $ 347 $ 319,889
Depreciation and Amortization.... 13,272 2,101 514 15,887
Interest Income (Expense)........ (161) -- 7,038 6,877
Provision for Income Taxes....... 11,538 1,978 516 14,032
Net Income (Loss)................ 18,047 3,093 (36,355) (15,215)
Segment Assets................... 149,084 32,860 208,588 390,532
Expenditures for Property........ 7,139 1,834 19 8,992
1997
Revenue.......................... 200,366 62,349 255 262,970
Depreciation and Amortization.... 12,612 1,807 6 14,425
Interest Income (Expense)........ (280) -- 6,950 6,670
Provision for (Benefit of) Income
Taxes.......................... (2,248) 1,566 (10,458) (11,140)
Net Income (Loss)................ (3,373) 2,349 (20,096) (21,120)
Segment Assets................... 153,790 36,596 186,662 377,048
Expenditures for Property........ 10,916 1,591 -- 12,507
1996
Revenue.......................... 215,514 51,624 539 267,677
Depreciation and Amortization.... 9,340 1,042 8 10,390
Interest Income (Expense)........ (161) -- 8,493 8,332
Provision for Income Taxes....... 16,772 2,317 3,593 22,682
Net Income ...................... 24,135 3,334 5,172 32,641
Segment Assets................... 154,279 23,463 196,110 373,852
Expenditures for Property........ 10,580 1,203 -- 11,783
</TABLE>
Revenue by principal geographic areas was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997 1998
-------------------------------
Americas
<S> <C> <C> <C>
United States...... $ 176,476 $ 179,353 $ 229,934
Canada............. 7,672 9,668 8,719
South America...... 3,064 4,189 6,131
Europe
United Kingdom..... 18,348 20,088 22,011
Germany............ 13,870 9,594 8,737
France............. 15,779 7,869 7,645
Other Europe....... 11,914 13,735 16,048
Asia Pacific Region
Japan.............. 14,042 10,250 11,271
Australia.......... 3,958 4,513 5,800
Other Asia
Pacific........... 2,554 3,711 3,593
--------- --------- ---------
Total................ $ 267,677 $ 262,970 $ 319,889
========= ========= =========
</TABLE>
32
<PAGE> 33
Net property by principal geographic areas was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Americas
United States............................. $ 57,983 $ 73,554 $ 91,581
Other Americas............................ 19 13 59
Europe
United Kingdom............................ 1,650 1,510 1,402
Germany................................... 422 321 229
France.................................... 451 783 614
Netherlands............................... 49 73 1,445
Other Europe.............................. 539 507 568
Asia Pacific Region
Japan..................................... 1,299 1,539 1,284
Australia................................. 296 1,650 1,501
Other Asia Pacific........................ -- 645 597
-------- -------- --------
Total....................................... $ 62,708 $ 80,595 $ 99,280
======== ======== ========
</TABLE>
(14) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
--------- --------
<S> <C> <C>
Accrued compensation and related
expenses......................... $ 7,174 $ 11,197
Accrued income taxes............... 6,113 2,926
Accrued non-recurring operating
charge........................... 11,940 3,225
Other accrued expenses............. 16,920 14,698
-------- ------
$ 42,147 $ 32,046
======== ========
</TABLE>
(15) ACQUISITIONS
(a) Veterinary Reference Laboratories
The Company's 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 and 1998 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.
33
<PAGE> 34
* 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.
(b) Ubitech Aktiebolag
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.
(c) Idetek, Inc.
On August 29, 1996, the Company acquired by merger Idetek by issuing
393,122 shares of its Common Stock, in exchange for all of the outstanding
capital stock of Idetek. An additional 43,682 shares of common stock were held
in escrow of which 21,843 shares were issued in 1998 and the remainder were
cancelled. 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 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.
(d) 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 paid $250,000, and based on results for 1998, the
Company will pay $250,000. The 1997 payment was treated as additional purchase
price and the amount to be 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.
34
<PAGE> 35
(e) Veterinary Practice Information Management Software Providers
The Company's consolidated results of operations include the results of
operations of two veterinary practice information 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.
(f) 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 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.
(g) Agri-West Laboratory
On March 1, 1998, the Company, through its wholly-owned subsidiary, IDEXX
Food Safety Net Services, Inc., acquired certain assets and assumed certain
liabilities of Agri-West Laboratory (Agri-West) for $250,000 from Agri-West
International, Inc. (AWI). Agri-West, located in Dallas and San Antonio, Texas,
performs food contaminant testing for food processors and research institutions.
The Company also entered into employment, consulting and non-competition
agreements with the owners of AWI for up to five years. The Company has
accounted for this acquisition under the purchase method of accounting and has
included the results of operations in its consolidated results since the date of
acquisition. Pro forma information has not been presented because of
immateriality.
(h) Blue Ridge Pharmaceuticals, Inc.
On October 1, 1998, the Company acquired all of the capital stock of Blue
Ridge Pharmaceuticals, Inc. for approximately $39.1 million in cash, $7.8
million in notes, 115,000 shares of the Company's Common Stock and warrants to
acquire 806,000 shares of Common Stock at $31.59 per share which expire on
December 31, 2003. In addition, the Company agreed to issue up to 1.24 million
shares of its Common Stock based on the achievement by the Company's
pharmaceutical business (including Blue Ridge) of net sales and operating
profit targets through 2004. All former shareholders received equal value in
the form of cash/notes/stock, warrants and contingent shares on a per share
basis. The notes, which bear interest at 5.5% annually and are due in two equal
annual installments on October 1, 1999 and 2000, are due to certain key
employees of Blue Ridge, subject to certain contingencies. The shares of Common
Stock are issuable on October 1, 2001 to a key employee of Blue Ridge, subject
to certain contingencies. Blue Ridge is a development-stage animal health
pharmaceutical company located in Greensboro, North Carolina. The Company has
accounted for this acquisition under the purchase method of accounting and has
included the results of operations in its consolidated results since the date
of acquisition. The Company will record the issuance of any of the 1.24 million
shares discussed above as additional goodwill when the shares are issued. Pro
forma results of the Company, assuming the acquisition had been made as of
January 1, 1997 are as follows. Such information includes
35
<PAGE> 36
adjustments to reflect additional interest expense and loss of investment
income, both net of tax and goodwill amortization (in thousands except per
share data and unaudited):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Revenue............................. $ 262,970 $ 321,441
Net income (loss)................... (25,765) 16,735
Earnings (loss) per share: Basic.... (.68) .43
Earnings (loss) per share: Diluted.. (.68) .42
</TABLE>
For purposes of these pro forma operating results, the in-process research
and development was assumed to have been written off on December 31, 1996. Pro
forma operating results presented include only recurring costs resulting from
the acquisition of Blue Ridge.
(16) SERVICE REVENUE
Service revenue, which includes laboratory service revenue and maintenance
and repair revenue, was less than 10% of total revenue in 1996. In 1997 and
1998, service revenue totaled approximately $46.6 million and $62.5 million,
respectively. The cost of service revenue in 1997 and 1998 totaled approximately
$28.4 million and $45.6 million, respectively.
(17) INFORMATION REGARDING CLASSES OF SIMILAR PRODUCTS OR SERVICES (UNAUDITED)
Approximately 80%, 71% and 70% of the Company's revenues were derived from
the sale of veterinary diagnostic products and services in 1996, 1997 and 1998,
respectively. Approximately 19%, 24% and 22% of revenues were derived from sales
of food and environmental products and services in 1996, 1997, and 1998,
respectively.
(18) SUMMARY OF QUARTERLY DATA (UNAUDITED)
A summary of quarterly data follows (in thousands, except per share data):
<TABLE>
<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 .............. 30,437 27,177 34,026 30,300
Operating income (loss).... (273) (5,235) (25,986) (7,436)
Net income ................ 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>
<TABLE>
<CAPTION>
1998 QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue .................. $ 77,793 $ 80,886 $ 78,487 $ 82,723
Gross profit ............. 38,941 41,002 39,940 41,888
Operating profit (loss) . 4,590 6,641 7,863 (27,154)
Net income (loss) ........ 3,761 5,098 5,596 (29,670)
Earnings (loss) per share:
Basic .................. 0.10 0.13 0.16 (0.77)
Earnings (loss) per share:
Diluted ................ 0.10 0.13 0.15 (0.77)
</TABLE>
36
<PAGE> 37
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, 1996........ $2,510 $1,723 $ 232 $4,001
December 31, 1997........ 4,001 2,246 1,165 5,082
December 31, 1998........ 5,082 1,357 1,071 5,368
Accrued non-recurring operating
charge:
December 31, 1997........ -- 21,300 9,360 11,940
December 31, 1998........ 11,940 -- 8,715 3,225
</TABLE>
37
<PAGE> 38
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.
<TABLE>
<CAPTION>
HIGH LOW
---------- --------
<S> <C> <C>
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
CALENDAR 1998
First Quarter.................. $ 18 7/8 $ 12 7/8
Second Quarter................. 25 5/16 17 5/8
Third Quarter.................. 24 15/16 17 1/2
Fourth Quarter................. 27 13/16 18 1/4
</TABLE>
As of December 31, 1998, there were 1,584 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.
38
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Name Jurisdiction of Incorporation
---- -----------------------------
Acumedia Manufacturers, Inc. Maryland
Blue Ridge Pharmaceuticals, Inc. Delaware
Cardiopet Incorporated Delaware
IDEXX Distribution Corporation Delaware
IDEXX Europe B.V. The Netherlands
IDEXX Food Safety Net Services, Inc. Delaware
IDEXX GmbH Germany
IDEXX Informatics, Inc. Delaware
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 Pty. Ltd. Australia
IDEXX Laboratories, S. de R.L. de C.V. Mexico
IDEXX Laboratories, S.L. Spain
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.R.L. France
IDEXX Scandinavia A.B. Sweden
IDEXX Service, S.A. de C.V. Mexico
IDEXX Veterinary Services, Inc. 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,
333-36002 and 333-56685.
/s/ Authur Andersen LLP
Boston, Massachusetts
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE IDEXX
LABORATORIES, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE 12
MONTHS ENDED DECEMBER 31, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 109,063
<SECURITIES> 29,290
<RECEIVABLES> 53,315
<ALLOWANCES> 5,368
<INVENTORY> 55,428
<CURRENT-ASSETS> 263,346
<PP&E> 82,493
<DEPRECIATION> 41,013
<TOTAL-ASSETS> 390,532
<CURRENT-LIABILITIES> 78,501
<BONDS> 4,191
0
0
<COMMON> 3,883
<OTHER-SE> 303,957
<TOTAL-LIABILITY-AND-EQUITY> 390,532
<SALES> 257,343
<TOTAL-REVENUES> 319,889
<CGS> 112,473
<TOTAL-COSTS> 158,119
<OTHER-EXPENSES> 168,474
<LOSS-PROVISION> 1,357
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,183)
<INCOME-TAX> 14,032
<INCOME-CONTINUING> (15,215)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,215)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
