-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q752mB8XpTlNks0oWqPajQeG5/OfZqcRXMlto2IbjA0SRdlVYRZzUWJkZApMF08/ 4cMi+ONpoUyyRee9tbTHMw== 0000950135-99-001697.txt : 19990402 0000950135-99-001697.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950135-99-001697 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDEXX LABORATORIES INC /DE CENTRAL INDEX KEY: 0000874716 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 010393723 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19271 FILM NUMBER: 99579963 BUSINESS ADDRESS: STREET 1: ONE IDEXX DR CITY: WESTBROOK STATE: ME ZIP: 04092 BUSINESS PHONE: 2078560300 MAIL ADDRESS: STREET 1: ONE IDEXX DR CITY: WESTBROOK STATE: ME ZIP: 04092 FORMER COMPANY: FORMER CONFORMED NAME: IDEXX CORP / DE DATE OF NAME CHANGE: 19600201 10-K405 1 IDEXX LABORATORIES, INC. 1 ================================================================================ 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)
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)
(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
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.
1 2 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. ================================================================================ 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. ================================================================================ 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. 2 3 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 3 4 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 4 5 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. 5 6 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. 6 7 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; 7 8 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 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 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. 10 11 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows:
NAME AGE TITLE 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
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 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 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 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:
SIGNATURE TITLE DATE /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
14 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 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 EX-10.2 2 1991 STOCK OPTION PLAN 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 - 1 - 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. - 2 - 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: - 3 - 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 - 4 - 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 - 5 - 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 - 6 - 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. - 7 - EX-10.10 3 1998 STOCK INCENTIVE PLAN OF THE COMPANY 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 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 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 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 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 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 6 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 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 EX-10.11 4 AGREEMENT WITH COMPANY AND DAVID SHAW 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 EX-13 5 ANNUAL REPORT TO STOCKHOLDERS 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.
YEARS ENDED DECEMBER 31, ----------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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
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 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. 2 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): 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 =======
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 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 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 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): 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 ========
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 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 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 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 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 11 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
PAGE * 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
11 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 13 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, --------------------- 1997 1998 -------- -------- ASSETS 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 13 14 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 -------- -------- -------- 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) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 14 15 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
COMMON STOCK -------------------- ACCUMULATED ADDITIONAL OTHER TOTAL NUMBER $0.10 PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' OF SHARES PAR VALUE CAPITAL EARNINGS INCOME (LOSS) EQUITY --------- --------- ---------- -------- ------------- ------------- 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 ====== ====== ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 15 16 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1997 1998 -------- -------- -------- 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 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 16 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 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 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):
1996 1997 1998 ------ ------ ------ 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 ====== ====== ======
19 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 21 The provision for (benefit of) income taxes differs from the amount computed by applying the statutory federal income tax rate as follows:
DECEMBER 31, ------------------------ 1996 1997 1998 ---- ---- ------- 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%) ==== ==== =======
The components of the domestic net deferred tax asset (liability) included in the accompanying consolidated balance sheets are as follows (in thousands):
1997 1998 ------------------- ------------------- CURRENT LONG-TERM CURRENT LONG-TERM --------- --------- -------- --------- 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 ======== ======= ======== =======
The components of the net foreign net deferred tax assets (in thousands):
1997 1998 ------------------ ------------------ CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- 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)... $ -- $ -- $ -- $ -- ===== ======= ===== =======
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 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):
DECEMBER 31, ------------------- 1997 1998 -------- -------- 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 ======== ========
Long-term investments are investment securities with original maturities of greater than one year and consist of the following (in thousands):
DECEMBER 31, -------------------- 1997 1998 -------- -------- Municipal bonds..... $ 10,165 $ 13,297 Foreign bonds....... 515 -- Certificates of 454 4,000 deposit............. -------- -------- $ 11,134 $ 17,297 ======== ========
(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 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):
YEARS ENDING DECEMBER 31, ------------- 1999.................... $ 4,801 2000.................... 4,414 2001.................... 4,254 2002.................... 3,586 2003.................... 3,404 Thereafter.............. 12,430 -------- $ 32,889 ========
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 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):
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 ========
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 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): 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 =======
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 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): 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 ========
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 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):
DECEMBER 31, --------------------------------- 1996 1997 1998 -------- --------- --------- Net income (loss): 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)
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 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 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):
WEIGHTED NUMBER AVERAGE OF EXERCISE SHARES PRICE ------ -------- 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 =======
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 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):
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 ------------------ ------- -------- --------- ------- -------- $ 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
(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 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 32
(in thousands) VSG FED OTHER TOTAL 1998 --------- --------- --------- --------- 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
Revenue by principal geographic areas was as follows (in thousands):
DECEMBER 31, ------------------------------- 1996 1997 1998 ------------------------------- Americas 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 ========= ========= =========
32 33 Net property by principal geographic areas was as follows (in thousands):
DECEMBER 31, ----------------------------------- 1996 1997 1998 -------- -------- --------- 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 ======== ======== ========
(14) ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
DECEMBER 31, --------------------- 1997 1998 --------- -------- 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 ======== ========
(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 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 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 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):
DECEMBER 31, --------------------- 1997 1998 --------- --------- 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
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):
1997 QUARTER ENDED ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- 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)
1998 QUARTER ENDED ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- 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)
36 37 SCHEDULE II IDEXX LABORATORIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END OF YEAR EXPENSES WRITE-OFFS OF YEAR ---------- ---------- ---------- -------- 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
37 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.
HIGH LOW ---------- -------- 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
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 EX-21 6 SUBSIDIARIES 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 EX-23.1 7 CONSENT OF ARTHUR ANDERSEN LLP 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 EX-27 8 FINANCIAL DATA SCHEDULE
5 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. 0000874716 IDEXX LABORATORIES, INC. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 109,063 29,290 53,315 5,368 55,428 263,346 82,493 41,013 390,532 78,501 4,191 0 0 3,883 303,957 390,532 257,343 319,889 112,473 158,119 168,474 1,357 0 (1,183) 14,032 (15,215) 0 0 0 (15,215) (0.40) (0.40)
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