-----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, OONu9bsJr6p/P+GclDSKeRcAnwoGJayYRMEsJCmZxqtAV0tiy9bidOkzMOIlte7i 4PrXkc3ikHjyPbuYoztzIA== 0000950135-00-001781.txt : 20000331 0000950135-00-001781.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950135-00-001781 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 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-K SEC ACT: SEC FILE NUMBER: 000-19271 FILM NUMBER: 583957 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-K 1 IDEXX LABORATORIES, INC. 1 UNITED STATES 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, 1999 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. [ ] Based on the closing sale price on March 23, 2000, the aggregate market value of the voting stock held by non-affiliates of the registrant was $938,916,009. 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 35,425,859 on March 23, 2000. 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 17, 2000 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, 1999 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 1999 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, a veterinary Internet portal/application service provider 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 products include water testing products that detect microbial contaminants in water, dairy testing products that detect antibiotic residues in milk and diagnostic products that assist in disease detection, management and eradication in food production animals. 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 test products incorporate a range of delivery systems and detection technologies which are tailored to particular applications and customer needs. 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 and veterinary practice information management software to offer total animal health solutions to the veterinary market through the integration of diagnostics, therapeutics and information systems and services. 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), CITE(R), Colilert(R), Colisure(TM), Defined Substrate Technology(R), DiaSystems(TM), DST(R), Enterolert(TM), Facilitator(TM), FlockChek(R), HerdChek(R), IDEXX VetLab(TM), LacTek(TM), Parallux(TM), PetChek(R), Probe(R), Quanti-Tray(R), SNAP(R), VetConnect(TM), VetLyte(R) and VetTest(R) are trademarks of the Company. Cornerstone(R) is used under a license agreement. Autoread(TM), QBC(R) and VetAutoread(TM) are trademarks of Becton Dickinson and Company ("Becton"). All other products and company names are trademarks of their respective holders. 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 feline 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), and a canine combination test that tests simultaneously for heartworm and Ehrlichia canis, a tick-borne organism that can create a wide range of health problems in dogs. Other small animal assays include tests for 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 phosphatase, ALT (alanine aminotransferase), creatinine, BUN (blood urea nitrogen) 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 Ortho-Clinical Diagnostics, Inc. (formerly known as Johnson and Johnson Clinical Diagnostics, Inc.) ("Ortho") under a Supply Agreement with Ortho (as amended, the "Ortho Agreement"). The Company is required to purchase all of its requirements for slides from Ortho to the extent available. In addition, the Company has committed to minimum annual purchase volumes of certain VetTest Slides during the term of the Ortho 3 4 Agreement. The Ortho Agreement does not prohibit Ortho from selling comparable slides or licensing its slide technology for use in veterinary applications and Ortho 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 Ortho 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 Ortho Agreement expires on December 31, 2010 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 analyzer is based on Quantitative Buffy Coat technology, which uses centrifugal force to separate a blood sample into its key components. The blood sample is centrifuged 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 analyzer, which assists the veterinarian in determining whether disease states are indicated that requires further investigation. Key components evaluated are red blood cells (anemia/internal bleeding), white blood cells (infection, immunosuppression, allergy), and platelets (clotting capability). The system is based on the Becton QBC(R) Autoread(TM) hematology system sold to physicians for human applications. The QBC(R) VetAutoread(TM) hematology system is manufactured for IDEXX by Becton under a development and distribution agreement which requires Becton to supply analyzers to IDEXX through 2008 and reagents through 2010. IDEXX has committed to minimum annual purchases of analyzers and reagents under the agreement. VETTEST SNAP READER. The VetTest SNAP Reader allows the veterinarian to obtain quantitative measurement of hormones including thyroxine and cortisol. These measurements assist 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 with the VetTest chemistry analyzer. Samples and reagents are introduced to the analyzer 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 measures three electrolytes -- sodium, potassium and chloride -- to aid in evaluating acid-base and electrolyte balances and assessing plasma hydration. Samples are introduced to the analyzer 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 analyzer or downloaded to the VetTest analyzer. The Company also provides computer software which facilitates the integration of results obtained on these four systems. This linkage of the four analyzer systems as part of the IDEXX VetLab (the combination of the VetTest, QBC(R) VetAutoread(TM), VetLyte and VetTest SNAP Reader analyzers) 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. VETERINARY LABORATORY AND CONSULTING SERVICES The Company offers commercial veterinary laboratory and consulting services to approximately 6,000 veterinary clinics in the U.S. through facilities located in Arizona, California, Colorado, Illinois, Massachusetts, 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, telemedicine 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 and over the Internet 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 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. 4 5 Approximately 69%, 70% and 71% of the Company's total revenues were derived from sales of veterinary diagnostic products and services in 1999, 1998 and 1997, respectively. INFORMATICS PRODUCTS AND SERVICES The Company's veterinary 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 25,000 veterinary hospitals in North America. The Company's two principal software products are its Cornerstone and Better Choice systems. The Company provides software and hardware support for its PIMS and derives a significant proportion of its revenues from ongoing service contracts. In January 2000, the Company launched VetConnect.com, an Internet portal/application services provider for the veterinary medical market. VetConnect is a comprehensive suite of information and business services designed to support veterinary medical practice and extend the value of the Company's in-clinic products, laboratory and consulting services and information offerings. VetConnect revenues are derived from subscription fees, advertising and related charges and fees on e-commerce and other transactions completed through the site. The goal of VetConnect is to improve animal health by creating a comprehensive, integrated electronic network among veterinarians, their clients, colleagues and animal health companies. VetConnect provides online access to current medical content through agreements with leading veterinary textbook and periodical publishers; business-to-business electronic commerce through strategic alliances with veterinary distributors and suppliers; and real-time access to laboratory results generated by the Company's reference laboratories, to which veterinarians send samples for diagnostic testing. In addition, VetConnect provides e-mail and tools that permit veterinary hospitals to generate and maintain their own web sites and communicate with clients. 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. Blue Ridge currently has 14 products in the registration process with the Center for Veterinary Medicine ("CVM") of the U.S. Food and Drug Administration ("FDA"). These products include a nitazoxanide-based product for treatment of equine protozoal myeloencephalitis, a neurological disease that is believed to affect approximately 200,000 horses in the U. S.; a topical non-steroidal anti-inflammatory for equine use; and an insulin product for treatment of diabetic cats. Blue Ridge also is developing, among other things, antibiotic products that utilize proprietary, long-acting delivery systems. In 1999, Blue Ridge introduced its first product, Facilitator, a liquid bandage for use in dogs, cats and horses. * FOOD AND ENVIRONMENTAL PRODUCTS AND SERVICES The Company sells products that detect microbial contaminants in water and antibiotic residues in milk, and a broad range of diagnostic products for disease surveillance and eradication and health management for production animals. WATER AND DAIRY TESTING PRODUCTS The Company's Colilert, Colilert-18 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, Colilert-18 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, Colilert-18 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 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, Colisure or Enterolert products, enables users to test for microbiological contamination, and to obtain quantitative results without the 5 6 time-consuming steps associated with traditional methods. The Company's Colilert, Colilert-18, Colisure 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, has been published in the Federal Register in Mexico as a proposal for approval and is under evaluation by regulatory agencies in certain countries in South America and Asia. Colilert-18 has received approval in the United Kingdom and is under evaluation by regulatory agencies in Europe. IDEXX is the worldwide leader in rapid testing of antibiotic residue in milk. The Company offers tests on its SNAP platform, and in 1999 introduced the Parallux instrument, which the Company believes is the most automated and complete antibiotic residue testing system in the world. Dairy farmers and producers use these tests for incoming quality assurance of raw milk, and government and food quality managers use them for ongoing surveillance. IDEXX dairy quality tests are designed for convenience in field and laboratory testing applications and are calibrated to detect analytes at specified levels. 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 and a disease in cattle caused by infectious bovine rhinotracheitis. The product line also includes a test for porcine reproductive respiratory syndrome, a swine disease that has been shown to have a severe health impact on infected herds, and for a cattle disease known as mycobacterium 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%, 23% and 24% of the Company's revenues were derived from sales of food and environmental products and services in 1999, 1998 and 1997, respectively. Through a series of transactions completed late in 1999 and early 2000, IDEXX disposed of the food microbiology testing products and services business. Revenues from this business were $14 million, $13 million and $11 million in 1999, 1998 and 1997, 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 and consumables 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 countries, 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, dairy, livestock and poultry products primarily through its direct sales force in the U.S. and Canada. Outside the U.S. and Canada, IDEXX markets these products through selected independent distributors and, in certain countries, through its direct sales force. In 1999, 1998 and 1997, 27%, 28% and 32%, 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. 6 7 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; the development of new detection systems incorporating advances in immunology, cell and molecular biology, microbiology, DNA probes and other technologies; the development and delivery of new information solutions for its customers in veterinary, food and environmental markets; and the development of novel veterinary therapeutics. The Company's research and development expenses were approximately $27.3, $22.7 and $17.1 million in 1999, 1998 and 1997, respectively. PATENTS AND LICENSES The Company holds 27 U.S. patents and has filed patent applications for 26 other processes or products. The Company also holds five foreign patents and has filed 20 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 Beckman Coulter. The Company purchases all of its VetTest analyzers from Tokyo Parts Industrial Co., all of its VetTest slides from Ortho and all of its hematology components from Becton. Certain key components of the Colilert product are available only from a single source. 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 Ortho, Tokyo Parts Industrial Co. and Becton covering its anticipated 2000 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 information 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 animal health information on the Internet, the Company competes primarily with start-up Internet companies. The Company competes in this market primarily on quality of content, ease of use and integration with existing practice management systems. 7 8 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 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 Center for Veterinarian Medicine ("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. Most tests for water quality are regulated in the U.S. by the United States Environmental Protection Agency ("EPA"). The EPA regulatory process involves submission of extensive product performance data in accordance with an EPA approved protocol, evaluation of the data by the EPA and publication for public comment of any proposed approval in the Federal Register prior to final approval. The sale of water testing products also is subject to extensive and lengthy regulatory processes in many other countries around the world. The sale of dairy testing products in the U.S. is regulated by the FDA in conjunction with the Association of Official Analytical Chemists - Research Institute ("AOAC-RI"). Before a product may be sold, extensive product performance data must be submitted in accordance with a protocol that is approved by the FDA and the AOAC-RI. Following approval of a product by FDA, the product must also be approved by the National Conference on Interstate Milk Shipments ("NCIMS"), an oversight body that includes state, federal and industry representatives. While some foreign countries accept AOAC-RI approval as part of their regulatory approval process, many countries have separate regulatory processes. 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, 1999, IDEXX had approximately 2,050 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 management software business. 8 9 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 In January 1998, a complaint was filed in the U.S. District Court for the District of Maine captioned ROBERT A. ROSE, et.al. v. DAVID E. SHAW, ERWIN F. WORKMAN, JR. and IDEXX LABORATORIES, INC. The plaintiffs purport 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. In July 1999, the U.S. District Court granted the Company's motion to dismiss the case for failure to state a claim. However in August 1999, the plaintiffs appealed that ruling to the U.S. Court of Appeals for the First Circuit. In February 2000, the Company entered into a Memorandum of Understanding (the "MOU") with the plaintiffs pursuant to which the parties have agreed to settle the suit. Pursuant to the MOU, the Company and the plaintiffs have filed a Stipulation of Settlement (the "Stipulation") with the U.S. District Court. Subject to certain conditions, the Stipulation will become effective following approval by the District Court and expiration of the time for any appeal. No assurance can be given that the District Court will approve the Stipulation or otherwise that the suit will be finally settled on the terms contained in the MOU. The proposed settlement (in excess of the portion reimbursed through insurance) will not affect results of operations in 2000. In the event that the suit is not settled, 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. In December 1997, SA Scientific, Inc. ("SAS") filed suit against the Company in the State of Texas District Court. SAS has alleged breach of a development and supply agreement between SAS and the Company, negligent misrepresentation, fraud and conversion of SAS's intellectual property, and is seeking $8,000,000 in actual damages, $24,000,000 in punitive damages, further unspecified damages and attorneys' fees. The Company has filed an answer to the complaint denying SAS's allegations and has asserted counterclaims against SAS for breach of contract, fraud and conversion of the Company's property. 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. EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows:
NAME AGE TITLE ---- --- ----- David E. Shaw................... 48 President, Chief Executive Officer and Chairman of the Board of Directors Erwin F. Workman, Jr., Ph.D..... 53 Executive Vice President and Chief Scientific Officer Ralph K. Carlton................ 44 Senior Vice President S. Sam Fratoni, Ph.D............ 52 Vice President Robert S. Hulsy................. 55 Vice President Roland H. Johnson............... 46 Vice President Louis W. Pollock................ 46 Vice President Roy V. H. Pollock, D.V.M., Ph.D. 50 Vice President Merilee Raines.................. 44 Vice President, Finance
Mr. Shaw has been President and Chief Executive Officer of the Company since July 1999. Mr. Shaw served as Chairman of the Board of Directors and Chief Executive Officer of the Company from its founding in 1983 until February 1999, and as President from 1983 until October 1993. He was Executive Chairman from February 1999 to July 1999. Prior to founding the Company, he was a Vice President of Agribusiness Associates, Inc., an international management consulting firm. 9 10 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, Inc. Mr. Carlton has been Senior Vice President of the Company since joining the Company in February 1997. He has been President of the Company's Information business since October 1999. From February 1997 to October 1999, Mr. Carlton served as Chief Financial Officer. Prior to joining the Company in February 1997, Mr. Carlton was a Senior Vice President with the investment banking firm of Donaldson, Lufkin & Jenrette, from March 1995. 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. Dr. Fratoni has been Vice President of the Company since May 1997 and President of the Company's Food and Environmental Division since July 1999. From May 1997 to July 1999 Dr. Fratoni was Vice President of Human Resources of the Company and from October 1996 to May 1997, he was Director of Business Development for the Food and Environmental Division. Prior to joining the Company in October 1996, Dr. Fratoni held various positions with Hewlett Packard Company. Mr. Hulsy has been Vice President of the Company since February 1999 and President of the Company's IDEXX Veterinary Services subsidiary since August 1998. Prior to joining the Company in August 1998, Mr. Hulsy was President of American Environmental Network, Inc. from 1992 to 1998. 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 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 and has been President of the Company's Professional Office Diagnostics Division since July 1999. 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 and as President of the Company's Food and Environmental Division from March 1996 until July 1999. Prior to joining the Company, Mr. Pollock was employed in various sales and marketing positions with Abbott Laboratories, Inc. Dr. Roy V. H. Pollock became a Vice President of the Company in February 1998. Dr. Pollock joined the Company in November 1997 as Vice President of the Company's Informatics Division. In 1999, Dr. Pollock became President of the Company's VetConnect subsidiary. 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. Ms. Raines has been Vice President, Finance of the Company since May 1995. She served as Division Vice President, Finance from March 1995 to May 1995, Director of Finance from 1988 to March 1995 and Controller from 1985 to 1988. 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 1999 Annual Report to Stockholders and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required under this item is included under the section labeled "Selected Financial Information" in the Company's 1999 Annual Report to Stockholders and is incorporated herein by reference. 10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required under this item is included under the heading "Management's Discussions and Analysis of Financial Condition and Results of Operations" in the Company's 1999 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, 1999 and Supplementary Data are included in the Company's 1999 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 2000 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this report. The information required by Part III will appear under the headings "Beneficial Ownership of Common Stock," and "ELECTION OF DIRECTORS--Nominees," "-- Board and Committee Meetings," "--Directors' Compensation" and "-- Executive Compensation." Information regarding executive officers of the Company is furnished in Part I of this Annual Report on Form 10-K under the heading "Executive Officers of the Company." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules (1) The consolidated financial statements set forth in the list below are filed as part of this Annual Report on Form 10-K. (2) The consolidated financial statement schedule set forth in the list below is filed as a part of this Annual Report on Form 10-K. (3) Exhibits filed herewith or incorporated herein by reference are set forth in Item 14(c) below. List of Financial Statements and Schedules referenced in this Item 14. Information incorporated by reference from Exhibit 13 filed herewith: Report of Independent Public Accountants Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Financial Statement Schedules filed herewith: Schedule II - Valuation and Qualifying Accounts All other Schedules are omitted because they are not applicable or not required, or because the required information is already provided herein. (b) None (c) See Exhibit Index on the page immediately preceding exhibits. 11 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: IDEXX LABORATORIES, INC. By: /s/ David E. Shaw ------------------------------------- David E. Shaw President and Chief Executive Officer March 29, 2000 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 President, Chief Executive Officer and March 29, 2000 ------------------------------------------ Chairman of the Board of Directors David E. Shaw /s/ Merilee Raines Vice President, Finance and March 29, 2000 ------------------------------------------ Treasurer (Principal Financial Merilee Raines and Accounting Officer) /s/ Erwin F. Workman, Jr. Executive Vice President, March 29, 2000 ------------------------------------------ Chief Scientific Officer Erwin F. Workman, Jr. and Director /s/ Thomas Craig Director March 29, 2000 ------------------------------------------ Thomas Craig /s/ Mary L. Good Director March 29, 2000 ------------------------------------------ Mary L. Good /s/ John R. Hesse Director March 29, 2000 ------------------------------------------ John R. Hesse /s/ James L. Moody, Jr. Director March 29, 2000 ------------------------------------------ James L. Moody, Jr. /s/ Kenneth Paigen Director March 29, 2000 ------------------------------------------ Kenneth Paigen /s/ William F. Pounds Director March 29, 2000 ------------------------------------------ William F. Pounds /s/ Gabriel Schmergel Director March 29, 2000 ------------------------------------------ Gabriel Schmergel
12 13 EXHIBIT INDEX 2.1(9) 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(7) Restated Certificate of Incorporation of the Company, as amended. **3.2 Amended and Restated By-Laws of the Company. 4.1(1) Rights Agreement, dated as of December 17, 1996, between the Company and BankBoston, N.A. 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(11) Amendment No. 1 to Rights Agreement dated July 22, 1999, between the Company and BankBoston, N.A. 4.3(9) Form of Warrant dated October 1, 1998 to purchase Common Stock of the Company issued to shareholders of Blue Ridge other than employee shareholders. 4.4(9) Form of Warrant dated October 1, 1998 to purchase Common Stock of the Company issued to employee shareholders of Blue Ridge. 4.5 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(2) 1984 Stock Option Plan of the Company, as amended. **10.2 1991 Stock Option Plan of the Company, as amended. **10.3 1991 Director Option Plan of the Company, as amended. 10.4(6) 1997 Director Option Plan of the Company, as amended, with the form of option agreement granted thereunder attached thereto. 10.5(10) 1999 Director Stock Plan. *10.6(3) Supply Agreement, dated January 15, 1992, between the Company and Ortho-Clinical Diagnostics, Inc. ("Ortho") (formerly known as Johnson & Johnson Clinical Diagnostics, Inc.), as assignee of Eastman Kodak Company. *10.6a(2) Amendment to Supply Agreement, dated November 16, 1993, and Second Amendment to Supply Agreement, dated November 19, 1993, between the Company and Ortho. *10.6b(4) Third Amendment to Supply Agreement, dated March 15, 1994, between the Company and Ortho. *10.6c(5) Fourth Amendment to Supply Agreement, effective as of January 1, 1996, between the Company and Ortho. +**10.6d Fifth Amendment to Supply Agreement, dated December 15, 1999, between the Company and Ortho. 10.7(8) Employment Agreement dated April 25, 1997 between the Company and David E. Shaw. 10.8(8) Employment Agreement dated April 25, 1997 between the Company and Erwin F. Workman, Jr., Ph.D. 10.9(12) 1998 Stock Incentive Plan of the Company, as amended. 10.10(13) Agreement dated August 26, 1999 between the Company and David E. Shaw. 10.11(9) Employment Agreement dated September 23, 1998 between the Company and Roland H. Johnson. **13 Annual Report to Stockholders for year ended December 31, 1999. (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 1999. - ------------ (1) Incorporated by reference to the Exhibits to the Company's Registration Statement on Form 8-A dated December 24, 1996 (File No. 0-19271). (2) Incorporated by reference to the Exhibits to the Company's Annual Report on Form 10-K dated March 30, 1994. (3) 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 30, 1992. (4) Incorporated by reference to the Exhibits to the Company's Quarterly Report on Form 10-Q dated May 11, 1994. (5) Incorporated by reference to the Exhibits to the Company's Quarterly Report on Form 10-Q dated July 26, 1996. (6) Incorporated by reference to the Exhibits to the Company's Quarterly Report on Form 10-Q dated August 14, 1997. (7) Incorporated by reference to the Exhibits to the Company's Annual Report on Form 10-K dated March 31, 1997. (8) Incorporated by reference to the Exhibits to the Company's Annual Report on Form 10-K dated March 27, 1998. (9) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated October 1, 1998. (10) Incorporated by reference to the Exhibits to the Company's Quarterly Report on Form 10-Q dated August 13, 1999. (11) Incorporated by reference to the Exhibits to the Company's Current Report on Form 8-K dated July 30, 1999. (12) Incorporated by reference to the Exhibits to the Company's Annual Report on Form 10-K dated March 31, 1999. (13) Incorporated by reference to the Exhibits to the Company's Quarterly Report on Form 10-Q dated November 12, 1999. * Confidential treatment previously granted as to certain portions. ** Filed herewith. + Filed subject to request for confidential treatment. 13 EX-3.2 2 AMENDED AND RESTATED BY-LAWS 1 Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF IDEXX LABORATORIES, INC. (AMENDED THROUGH DECEMBER 8, 1999) 2 BY-LAWS TABLE OF CONTENTS ARTICLE I - Stockholders .................................................. 4 Section 1.1 Place of Meetings ................................... 4 Section 1.2 Annual Meeting ...................................... 4 Section 1.3 Special Meetings .................................... 4 Section 1.4 Notice of Meetings .................................. 4 Section 1.5 Voting List ......................................... 4 Section 1.6 Quorum .............................................. 4 Section 1.7 Adjournments ........................................ 5 Section 1.8 Voting and Proxies .................................. 5 Section 1.9 Action at Meeting ................................... 5 Section 1.10 Introduction of Business at Meeting ................. 5 Section 1.11 Action without Meeting .............................. 6 ARTICLE 2 - Directors ..................................................... 7 Section 2.1 General Powers ...................................... 7 Section 2.2 Number; Election and Qualification .................. 7 Section 2.3 Classes of Directors ................................ 7 Section 2.4 Terms in Office ..................................... 7 Section 2.5 Allocation of Directors Among Classes in the Event of Increases or Decreases in the Number of Directors ... 7 Section 2.6 Tenure .............................................. 8 Section 2.7 Vacancies ........................................... 8 Section 2.8 Resignation ......................................... 8 Section 2.9 Regular Meetings .................................... 8 Section 2.10 Special Meetings .................................... 8 Section 2.11 Notice of Special Meetings .......................... 8 Section 2.12 Meetings by Telephone Conference Calls .............. 8 Section 2.13 Quorum .............................................. 9 Section 2.14 Action at Meeting ................................... 9 Section 2.15 Action by Consent ................................... 9 Section 2.16 Removal ............................................. 9 Section 2.17 Committees .......................................... 9 Section 2.18 Compensation of Directors ........................... 9 Section 2.19 Amendments to Article ............................... 10 ARTICLE 3 - Officers ...................................................... 10 Section 3.1 Enumeration ......................................... 10 Section 3.2 Election ............................................ 10 Section 3.3 Qualification ....................................... 10 Section 3.4 Tenure .............................................. 10 Section 3.5 Resignation and Removal ............................. 10 Section 3.6 Vacancies ........................................... 10 Section 3.7 Chairman of the Board and Vice Chairman of the Board 11 Section 3.8 President ........................................... 11 Section 3.9 Vice President ...................................... 11
2 3 Section 3.10 Secretary and Assistant Secretaries ................. 11 Section 3.11 Treasurer and Assistant Treasurers .................. 11 Section 3.12 Salaries ............................................ 12 ARTICLE 4 - Capital Stock ................................................. 12 Section 4.1 Issuance of Stock ................................... 12 Section 4.2 Certificates of Stock ............................... 12 Section 4.3 Transfers ........................................... 12 Section 4.4 Lost, Stolen or Destroyed Certificates .............. 13 Section 4.5 Record Date ......................................... 13 ARTICLE 5 - General Provisions ............................................ 13 Section 5.1 Fiscal Year ......................................... 13 Section 5.2 Corporate Seal ...................................... 13 Section 5.3 Waiver of Notice .................................... 13 Section 5.4 Voting of Securities ................................ 14 Section 5.5 Evidence of Authority ............................... 14 Section 5.6 Certificate of Incorporation ........................ 14 Section 5.7 Transactions with Interested Parties ................ 14 Section 5.8 Severability ........................................ 15 Section 5.9 Pronouns ............................................ 15 ARTICLE 6 - Amendments .................................................... 15 Section 6.1 By the Board of Directors ........................... 15 Section 6.2 By the Stockholders ................................. 15
3 4 BY-LAWS OF IDEXX LABORATORIES, INC. ARTICLE 1 - STOCKHOLDERS 1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the President or, if not so designated, at the registered office of the corporation. 1.2 ANNUAL MEETING. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Board of Directors or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Board of Directors or the President and stated in the notice of the meeting. If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that special meeting shall have the same effect as if it had been taken at the annual meeting, and in such case all references in these By-Laws to the annual meeting of the stockholders shall be deemed to refer to such special meeting. 1.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at any time by the Chairman of the Board or the President. Business transacted at any special meeting of the stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. 1.5 VOTING LIST. The officer who has charge of the stock ledger of the corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, at a place within the city where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present. 1.6 QUORUM. Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the holders of a majority of the shares 4 5 of the capital stock of the corporation issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. 1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these By-Laws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business, which might have been transacted at the original meeting. 1.8 VOTING AND PROXIES. Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided by law or in the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for him by proxy executed in writing (or in such other manner permitted by the General Corporation Law of Delaware) by the stockholder or his authorized agent and delivered to the Secretary (including by electronic transmission) of the corporation. No such proxy shall be voted or acted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period. 1.9 ACTION IN A MEETING. When a quorum is present at any meeting, the holders of a majority of the stock present or represented and voting on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class present or represented and voting on a matter) shall decide any matter to be voted upon by the stockholders at such meeting, except when a different vote is required by express provision of law, the Certificate of Incorporation or these By-Laws. Any election by stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote at the election. 1.10 INTRODUCTION OF BUSINESS AT MEETING. Except as otherwise provided by law, at any annual or special meeting of stockholders only such business shall be conducted as shall have been properly brought before the meeting. In order to be properly brought before the meeting, such business must have been either (A) specified in the written notice of the meeting (or any supplement thereto) given to stockholders of record on the record date for such meeting by or at the direction of the Board of Directors, (B) brought before the meeting at the direction of the Board of Directors or the chairman of the meeting or (C) specified in a written notice given by or on behalf of a stockholder of record on the record date for such meeting entitled to vote thereat or a duly authorized proxy for such stockholder, in accordance with all of the following requirements. A notice referred to in clause (C) hereof must be delivered personally to or mailed to and received at the principal executive office of the corporation, addressed to the attention of the Secretary, not more than ten (10) days after the date of the initial notice referred to in clause (A) hereof, in the case of business to be 5 6 brought before a special meeting of stockholders, and not less than thirty (30) days prior to the first anniversary date of the initial notice referred to in clause (A) hereof to the previous year's annual meeting, in the case of business to be brought before an annual meeting of stockholders, provided, however, that such notice shall not be required to be given more than sixty (60) days prior to an annual meeting of stockholders. Such notice referred to in clause (C) hereof shall set forth (i) a full description of each such item of business proposed to be brought before the meeting, (ii) the name and address of the person proposing to bring such business before the meeting, (iii) the number and class of shares held of record, held beneficially and represented by proxy by such person as of the record date for meeting (if such date has been made publicly available) and as of the date of such notice, (iv) if any item of such business involves nomination for director, all information regarding each such nominee that would be required to be set forth in a definitive proxy statement filed with the Securities Exchange Commission pursuant to Section 14 of the Securities Act of 1934, as amended, or any successor thereto, and the written consent of each such nominee to serve if elected, and (v) all other information that would be required to be filed with the Securities and Exchanged Commission if, with respect to the business proposed to be brought before the meeting, the person proposing such business was a participant in a solicitation subject to Section 14 of the Securities Exchange Act of 1934, as amended, or any successor thereto. No business shall be brought before any meeting of stockholders of the corporation otherwise than as provided in this paragraph. Notwithstanding the foregoing provisions, the Board of Directors shall be obligated to include information as to any nominee for director in any proxy statement or other communication sent to stockholders. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that any proposed item of business was not brought before the meeting in accordance with the foregoing procedure and, if he should so determine, he shall so declare to the meeting and the defective item of business shall be disregarded. 1.11 ACTION WITHOUT MEETING. Until the closing of a firm commitment, underwritten public offering of the corporation's Common Stock (a "Public Offering"), any action required or permitted to be taken at any annual or special meeting of stockholders of the corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on such action were present and voted. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Effective upon the closing of a Public Offering, stockholders of the corporation may not take any action by written consent in lieu of a meeting. Notwithstanding any other provision of law, the Certificate of Incorporation, as amended, or these By-Laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Section 1.11. 6 7 ARTICLE 2 - DIRECTORS 2.1 GENERAL POWERS. The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation except as otherwise provided by law or the Certificate of Incorporation. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled. 2.2 NUMBER; ELECTION AND QUALIFICATION. The number of directors which shall constitute the whole Board of Directors shall be determined by resolution of the stockholders or the Board of Directors, but in no event shall be less than three. The number of directors may be decreased at any time and from time to time by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of stockholders by such stockholders as have the right to vote on such election. Directors need not be stockholders of the corporation. 2.3 CLASSES OF DIRECTORS. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III. No one class shall have more than one director more than any other class. If a fraction is contained in the quotient arrived at by dividing the authorized number of directors by three, then if such fraction is one-third, the extra director shall be a member of Class I and, if such fraction is two thirds, one of the extra directors shall be a member of Class I and the other extra director shall be a member of Class II, unless otherwise provided for from time to time by resolution adopted by a majority of the Board of Directors. 2.4 TERMS IN OFFICE. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; provided, however, that each initial director in Class I shall serve for a term ending on the date of the annual meeting next following the end of the corporation's fiscal year ending December 31, 1993; each initial director in Class II shall serve for a term ending on the date of the annual meeting next following the end of the corporation's fiscal year ending December 31, 1992; and each initial director in Class III shall serve for a term ending on the date of the annual meeting next following the end of the corporation's fiscal year ending December 31, 1991. 2.5 ALLOCATION OF DIRECTORS AMONG CLASS IN THE EVENT OF INCREASES OR DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as director of the class of which he is a member until the expiration of his current term or his prior death, retirement or resignation and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation, and any newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided 7 8 for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. 2.6 TENURE. Notwithstanding any provisions to the contrary contained herein, each director shall hold office until his successor is elected and qualified, or until his earlier death, resignation or removal. 2.7 VACANCIES. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified, or until his earlier death, resignation or removal. 2.8 RESIGNATION. Any director may resign by delivering his written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 2.9 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders. 2.10 SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time and place, within or without the State of Delaware, designated in a call by the Chairman of the Board, President, two or more directors, or by one director in the event that there is only a single director in the office. 2.11 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of directors shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving notice to such director in person or by telephone at least 48 hours in advance of the meeting, (ii) by sending a telegram or telex or delivering written notice by hand, to his last known business or home address at least 48 hours in advance of the meeting, or (iii) by mailing written notice to his last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. 2.12 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members of any committee designated by the directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. 8 9 2.13 QUORUM. A majority of the total number of the whole Board of Directors shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the number so fixed constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. 2.14 ACTION AT MEETING. At any meeting of the Board of Directors at which a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these By-Laws. 2.15 ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee of the Board Directors may be taken without a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing, and the written consents are filed with the minutes of proceedings of the Board or committee. 2.16 REMOVAL. Any one or more or all of the directors may be removed, with or without cause, by the holders of at least seventy-five percent (75%) of the shares then entitled to vote at an election of directors. 2.17 COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these By-Laws for the Board of Directors. 2.18 COMPENSATION OF DIRECTORS. Directors may be paid such compensation for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service. 9 10 2.19 AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of law, the Certificate of Incorporation or these By-Laws, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least seventy-five percent (75%) of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article 2. ARTICLE 3 - OFFICERS 3.1 ENUMERATION. The officers of the corporation shall consist of a President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of Directors may appoint such other officers, as it may deem appropriate. 3.2 ELECTION. The President, Treasurer and Secretary shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be appointed by the Board of Directors at such meeting or at any other meeting. 3.3 QUALIFICATION. No officer need be a stockholder. Any two or more offices may be held by the same person. 3.4 TENURE. Except as otherwise provided by law, by the Certificate of Incorporation or by these By-Laws, each officer shall hold office until his successor is elected and qualified, unless a different term is specified in the vote choosing or appointing him, or until his earlier death, resignation or removal. 3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer may be removed at any time, with or without cause, by vote of a majority of the entire number of directors then in office. Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the corporation. 3.6 VACANCIES. The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified, or until his earlier death, resignation or removal. 10 11 3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. The Board of Directors may appoint a Chairman of the Board and may designate the Chairman of the Board as Chief Executive Officer. If the Board of Directors appoints a Chairman of the Board, he shall perform such duties and possess such powers as are assigned to him by the Board of Directors. If the Board of Directors appoints a Vice-Chairman of the Board, he shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board, and shall perform such other duties and possess such other powers as may from time to time be vested in him by the Board of Directors. 3.8 PRESIDENT. The President shall, subject to the direction of the Board of Directors, have general charge and supervision of the business of the corporation. Unless otherwise provided by the Board of Directors, he shall preside at all meetings of the stockholders, if he is a director, at all meetings of the Board of Directors. Unless the Board of Directors has designated the Chairman of the Board or another officer as Chief Executive Officer, the President shall be the Chief Executive Officer of the corporation. The President shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. 3.9 VICE PRESIDENTS. Any Vice President shall perform such duties and possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the President and when so performing shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President, the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. 3.10 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform such duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents. Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the President or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors), shall perform the duties and exercise the powers of the Secretary. In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. 3.11 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall perform such duties and shall have such powers as may from time to time be assigned to him by the Board of Directors 11 12 or the President. In addition, the Treasurer shall perform such duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the corporation, to deposit funds of the corporation in depositories selected in accordance with these By-Laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts of such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the corporation. The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the President or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer (or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors), shall perform the duties and exercise the powers of the Treasurer. 3.12 SALARIES. Officers of the corporation shall be entitled to such salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. ARTICLE 4 - CAPITAL STOCK 4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the corporation or the whole or any part of any unissued balance of the authorized capital stock of the corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine. 4.2 CERTIFICATES OF STOCK. Every holder of stock of the corporation shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by him in the corporation. Each such certificate shall be signed by, or in the name of the corporation by, the Chairman or Vice-Chairman, if any, of the Board of Directors, or the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation. Any or all of the signatures on the certificate may be a facsimile. Each certificate for shares of stock which are subject to any restriction on transfers pursuant to the Certificate of Incorporation, the By-Laws, applicable securities laws or any agreement among any number of shareholders or among such holders and the corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction. 4.3 TRANSFERS. Except as otherwise established by rules and regulations adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these By-Laws, the corporation shall be entitled to treat the record 12 13 holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-Laws. 4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The corporation may issue a new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the Board of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the Board of Directors may require for the protection of the corporation or any transfer agent or registrar. 4.5 RECORD DATE. The Board of Directors may fix in advance a date as a record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders or to express consent (or dissent) to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action to which such record date relates. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE 5 - GENERAL PROVISIONS 5.1 FISCAL YEAR. Except as from time to time otherwise designated by the Board of Directors, the fiscal year of the corporation shall begin on the first day of January in each year and end on the last day of December in each year. 5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall be approved by the Board of Directors. 5.3 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be given by law, by the Certificate of Incorporation or by these By-Laws, a waiver of such notice either in writing signed by the person entitled to such notice or such person's duly authorized attorney, or by 13 14 telegraph, cable or any other available method, whether before, at or after the time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice. 5.4 VOTING OF SECURITIES. Except as the directors may otherwise designate, the President or Treasurer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at, any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by this corporation. 5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an Assistant Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action. 5.6 CERTIFICATE OF INCORPORATION. All references in these By-Laws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the corporation, as amended and in effect from time to time. 5.7 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction between the corporation and one or more of the directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 14 15 5.8 SEVERABILITY. Any determination that any provision of these By-Laws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-Laws. 5.9 PRONOUNS. All pronouns used in these By-Laws shall be deemed to refer to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. ARTICLE 6 - AMENDMENTS 6.1 BY THE BOARD OF DIRECTORS. Except as is otherwise set forth in these By-Laws, these By-Laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. 6.2 BY THE STOCKHOLDERS. Except as otherwise set forth in these By-Laws, these By-Laws may be altered, amended or repealed or new by-laws may be adopted by the affirmative vote of the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at any regular meeting of stockholders, or at any special meeting of stockholders, provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such special meeting. 15 EX-10.2 3 1991 STOCK OPTION PLAN 1 Exhibit 10.2 IDEXX LABORATORIES, INC. 1991 STOCK OPTION PLAN (AS OF JULY 21, 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 -1- 2 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 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 -2- 3 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. 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 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. With the approval of the Board of Directors, non-qualified stock options may be transferred by gift to (i) one or more members of the optionee's family or entities controlled by, or for the benefit of the optionee or such family members, or (ii) one or more charitable organizations (including charitable trusts). Except as the Board of Directors may otherwise determine, no option or interest therein may be transferred, assigned, pledged or hypothecated by the optionee during his lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process. 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. -3- 4 (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: (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. -4- 5 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 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. -5- 6 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 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 that 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 -6- 7 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 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. Amended by the Board of Directors on July 21, 1999. -7- EX-10.3 4 1991 DIRECTOR OPTION PLAN 1 Exhibit 10.3 IDEXX LABORATORIES, INC. 1991 DIRECTOR OPTION PLAN (AS OF JULY 21, 1999) 1. PURPOSE The purpose of this 1991 Director Option Plan (the "Plan") of IDEXX Laboratories, Inc. (the "Company") is to encourage ownership in the Company by outside directors of the Company whose continued services are considered essential to the Company's future progress and to provide them with a further incentive to remain as directors of the Company. 2. ADMINISTRATION The Board of Directors shall supervise and administer the Plan. Grants of stock options under the Plan and the amount and nature of the awards to be granted shall be automatic in accordance with Section 5. However, all questions of interpretation of the Plan or of any options issued under it shall be determined by the Board of Directors and such determination shall be final and binding upon all persons having an interest in the Plan. 3. PARTICIPATION IN THE PLAN Directors of the Company who are not employees of the Company or any subsidiary of the Company shall be eligible to participate in the Plan. 4. STOCK SUBJECT TO THE PLAN (a) The maximum number of shares which may be issued under the Plan shall be 500,000 shares of the Company's Common Stock, par value $.10 per share ("Common Stock"), subject to adjustment as provided in Section 9 of the Plan. (b) If any outstanding option under the Plan for any reason expires or is terminated without having been exercised in full, the shares allocable to the unexercised portion of such option shall again become available for grant pursuant to the Plan. (c) All options granted under the Plan shall be non-statutory options not entitled to special tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended to date and as it may be amended from time to time (the "Code"). 5. TERMS, CONDITIONS AND FORM OF OPTIONS Each option granted under the Plan shall be evidenced by a written agreement in such form as the Board of Directors shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: (a) OPTION GRANT DATES. Options shall be granted (i) to all eligible directors who are directors as of April 24, 1991 on each date that he or she is re-elected as a director, and (ii) to all other eligible directors upon his or her initial election as a director and on each subsequent date that he or she is re-elected as a director. (b) SHARES SUBJECT TO OPTION. Except as provided below, each option granted under the Plan shall be exercisable for 20,000 shares of Common Stock. Notwithstanding anything to the contrary contained herein, the -1- 2 number of shares for which an option is granted under the Plan shall be reduced below 20,000 shares of Common Stock (and the exercise period adjusted) in the event of the following: (1) If, after April 24, 1991, a director is initially elected other than at an annual meeting of stockholders and such director is re-elected at the next annual meeting of stockholders, then: (i) the option granted to such director under the Plan in connection with his re-election (the "Second Option") shall be exercisable for such number of shares as is determined by multiplying 18.268493 (which is 6,668 divided by 365) by the number of days between (a) the date which is the third anniversary of the date of grant of the option received by such director under the Plan on the date of his initial election as a director and (b) the date which is the third anniversary of the date of grant of the Second Option; and (ii) all of such shares shall become exercisable on the third anniversary of the date of grant of the Second Option. (2) If a director elected at an annual meeting of stockholders is re-elected at a subsequent annual meeting of stockholders which is earlier than the third annual meeting of stockholders following his prior election, then: (i) the option granted to such director under the Plan in connection with his re-election (the "Subsequent Option") shall be exercisable for either (a) 6,668 shares, if the annual meeting at which such director is re-elected is the first annual meeting following his prior election or (b) 13,334 shares, if the annual meeting at which such director is re-elected is the second annual meeting following his prior election; (ii) if the number of shares under the Subsequent Option is 13,334, then 6,666 shares shall become exercisable on the second anniversary of the date of grant of the Subsequent Option and 6,668 shares shall become exercisable on the third anniversary of the date of grant of the Subsequent Option; and (iii) if the number of shares under the Subsequent Option is 6,668, then all of such shares shall become exercisable on the third anniversary of the date of grant of the Subsequent Option. (c) OPTION EXERCISE PRICE. The option exercise price per share for each option granted under the Plan shall equal (i) the last reported sales price per share of the Company's Common Stock on the NASDAQ National Market System (or, if the Company is traded on a nationally recognized securities exchange on the date of grant, the reported closing sales price per share of the Company's Common Stock by such exchange) on the date of grant (or if no such price is reported on such date such price as reported on the nearest preceding day) or (ii) if the Common Stock is not traded on NASDAQ or any exchange, the fair market value per share on the date of grant as determined by the Board of Directors. (d) LIMITED TRANSFERABILITY. Each option granted under the Plan shall not be transferable by the optionee otherwise than (i) by will, or by the laws of descent and distribution, or (ii) with the approval of the Board of Directors, by gift to (A) one or more members of the optionee's family or entities controlled by, or for the benefit of the optionee or such family members, or (B) to one or more charitable organizations (including charitable trusts). Except as the Board of Directors may otherwise determine, no option or interest therein may be transferred, assigned, pledged or hypothecated by the optionee during his lifetime, whether by operation of the law or otherwise, or be made subject to execution, attachment or similar process. (e) EXERCISE PERIOD. Each option may be exercised on a cumulative basis as to one-third of the shares subject to the option on each of the first, second and third anniversaries of the date of grant of such option, provided that, subject to the provisions of Section 5(f), no option may be exercised more -2- 3 than 90 days after the optionee ceases to serve as a director of the Company. No option shall be exercisable after the expiration of ten years from the date of grant. (f) EXERCISE PERIOD UPON DISABILITY OR DEATH. Notwithstanding the provisions of Section 5(e), any option granted under the Plan may be exercised, to the extent then exercisable, by an optionee who becomes disabled (within the meaning of Section 22(e)(3) of the Code or any successor provision thereto) while acting as a director of the Company, or may be exercised, to the extent then exercisable, upon the death of such optionee while a director of the Company by the person to whom it is transferred by will, by the laws of descent and distribution, or by written notice filed pursuant to Section 5(h), in each case within the period of one year after the date the optionee ceases to be such a director by reason of such disability or death; provided that, no option shall be exercisable after the expiration of ten years from the date of grant. (g) EXERCISE PROCEDURE. Options may be exercised only by written notice to the Company at its principal office accompanied by payment in cash of the full consideration for the shares as to which they are exercised. (h) EXERCISE BY REPRESENTATIVE FOLLOWING DEATH OF DIRECTOR. A director, by written notice to the Company, may designate one or more persons (and from time to time change such designation) including his legal representative, who, by reason of the director's death, shall acquire the right to exercise all or a portion of the option. If the person or persons so designated wish to exercise any portion of the option, they must do so within the term of the option as provided herein. Any exercise by a representative shall be subject to the provisions of the Plan. 6. ASSIGNMENTS The rights and benefits under the Plan may not be assigned except for the designation of a beneficiary as provided in Section 5. 7. TIME FOR GRANTING OPTIONS All options for shares subject to the Plan shall be granted, if at all, not later than five years after the approval of the Plan by the Company's stockholders. 8. LIMITATION OF RIGHTS (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the granting of an option nor any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a director for any period of time. (b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. An optionee shall have no rights as a stockholder with respect to the shares covered by his options until the date of the issuance to him of a stock certificate therefor, and no adjustment will be made for dividends or other rights (except as provided in Section 9) for which the record date is prior to the date such certificate is issued. 9. CHANGES IN COMMON STOCK (a) If the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to such shares of Common Stock or other securities, through 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 distribution with respect to such shares of Common Stock, or other securities, an appropriate and proportionate adjustment will be made in (i) the maximum number and kind of shares reserved for issuance under the Plan, (ii) the number and kind of shares or other securities subject to then outstanding options under the Plan and (iii) 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. No fractional shares will be issued under the Plan on account of any such adjustments. -3- 4 (b) In the event that the Company is merged or consolidated into or with another corporation (in which consolidation or merger the stockholders of the Company receive distribution of cash or securities of another issuer as a result thereof), or in the event that all or substantially all of the assets of the Company are acquired by any other person or entity, or in the event of a reorganization or 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, shall, as to outstanding options, either (i) provide that such options shall be assumed, or equivalent options shall be substituted, by the acquiring or successor corporation (or an affiliate thereof), or (ii) upon written notice to the optionees, provide that all unexercised options will terminate immediately prior to the consummation of such merger, consolidation, acquisition, reorganization or liquidations unless exercised by the optionee within a specified number of days following the date of such notice. 10. AMENDMENT OF THE PLAN The Board of Directors may suspend or discontinue the Plan or review or amend it in any respect whatsoever; provided, however, that without approval of the stockholders of the Company no revision or amendment shall change the number of shares subject to the Plan (except as provided in Section 9), change the designation of the class of directors eligible to receive options, or materially increase the benefits accruing to participants under the Plan. The Plan may not be amended more than once in any six-month period. 11. NOTICE Any written notice to the Company required by any of the provisions of the Plan shall be addressed to the Treasurer of the Company and shall become effective when it is received. 12. GOVERNING LAW The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware. Approved by the Board of Directors on April 24, 1991 Approved by the Stockholders on June 10, 1991 Amended by the Board of Directors on December 15, 1992 Amended by the Board of Directors on February 26, 1993, with amendment to become effective on June 16, 1993 after approval by Stockholders Amendment approved by Stockholders on May 18, 1993, with amendment effective on June 16, 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 July 21, 1999. -4- EX-10.6(D) 5 FIFTH AMENDMENT TO THE SUPPLY AGREEMENT 1 CONFIDENTIAL MATERIAL OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION (*Denotes Omission) EXHIBIT 10.6d (REDACTED) Fifth Amendment to the IDEXX Laboratories, Inc. and Ortho-Clinical Diagnostics, Inc. (as successor in interest to Eastman Kodak Company) Supply Agreement dated January 15, 1992 This Amendment (the "AMENDMENT") is effective as of January 1, 1999, by and between Ortho-Clinical Diagnostics, Inc. (formerly known as Johnson & Johnson Clinical Diagnostics, Inc.), a New York corporation with offices at 100 Indigo Creek Drive, Rochester, N.Y. ("OCD"), and IDEXX Laboratories, Inc., a Delaware corporation, with offices at One IDEXX Drive, Westbrook, Maine, 04092 ("IDEXX"). WHEREAS OCD and IDEXX desire to amend the Supply Agreement dated January 15, 1992, as amended on November 16, 1993, November 19, 1993, March 15, 1994 and January 1, 1996 (such Supply Agreement as so amended being hereinafter referred to as the "SUPPLY AGREEMENT") as provided herein: NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereto agree as follows: 1. All references to Johnson & Johnson Clinical Diagnostics Systems, Inc. or JJCD shall be deemed to be replaced by reference to Ortho-Clinical Diagnostics, Inc. or OCD. 2. In Clause 1, the following definitions are hereby deleted in their entirety and replaced with the following: "the Term" The period from January 1, 1999 until December 31, 2010. "the VETTEST analyzer" The VETTEST VT 8008 analyzer developed by or on behalf of VETTEST S.A., predecessor of IDEXX, for veterinary purposes and using VITROS slides; including (i) any updates or modifications to such analyzer, or (ii) other chemistry testing instrument which, in the case of clause(i) and (ii), is designed by IDEXX to be the bridging instrument to a next-generation veterinary chemistry analyzer *********** *********************************** "the VETTEST slides" VITROS or other OCD chemistry slides specially bar coded, labeled, and/or packaged for the VETTEST analyzer in 2 accordance with the terms of this Agreement and supplied by OCD in accordance with the terms and conditions of this Agreement. 3. In Clause 1, insert the following terms: "the Effective Rebate Rate" For any year, the weighted average percentage reduction in the purchase price of any slides purchased in such year that IDEXX is entitled to receive pursuant to Section 7.03 hereunder. The calculation of the Effective Rebate Rate is illustrated in Schedule 10. "the Prime Rate" For any day in any calendar month, the prime rate of interest as published in the WALL STREET JOURNAL on the last business day of the immediately preceding month. ********************* ***************************** ********************************* ******** 4. Sub-Clause 5.01 is hereby deleted in its entirety and is replaced by the following: 5.01 Attached hereto as SCHEDULE 7 are Purchase Commitments by IDEXX for VETTEST slides for calendar years 1999 through and including 2006. The Purchase Commitments constitute IDEXX's anticipated minimum aggregate purchase quantities for single chemistry VETTEST slides and PANELS/PROFILES slides in the indicated calendar years. For calendar years 2007 through and including 2010, IDEXX shall advise OCD of the Purchase Commitment for each such year not later than October 1 of the preceding year, and upon receipt by OCD, such Purchase Commitments shall be deemed to be incorporated into SCHEDULE 7. IDEXX's aggregate Purchase Commitment for the period 2007 through and including 2010 shall be not less than ********** slides. During each of calendar years 2000 through and including 2002, IDEXX shall purchase not less than ***************** single slides; during each of calendar years 2003 through and including 2006, IDEXX shall purchase not less than *************** single slides; and during each of the calendar years 2007 through and including 2010, IDEXX shall purchase a minimum number of single slides egual to *** of the total Purchase Commitment for such year. Failure by IDEXX to purchase at least the indicated Purchase Commitment quantities of each type of slides in any year may subject IDEXX to the 2 3 requirement to make a payment to OCD as set forth in sub-Clause 5.02 below, but such failure shall in no event otherwise be deemed to be a breach of this Agreement. 5. Sub-Clause 5.04 is hereby deleted in its entirety and is replaced by the following: 5.04 Not later than October 1 of each calendar year commencing October 1, 1999, IDEXX shall notify OCD of forecasted requirements for the subsequent year for each of the VETTEST slides (single slides and PANELS/PROFILES slides) (each such notification, a "PURCHASE FORECAST"), and the order quantities in the subsequent year for each of the VETTEST slides shall be within+/-25% of the such Purchase Forecast unless the parties otherwise agree. As long as slide orders are within the indicated range of+/-25% of the applicable Purchase Forecast, OCD shall deliver the slides in accordance with the orders. The Purchase Forecasts constitute non-binding forecasts which shall be the basis for determining IDEXX's quarterly cash rebate pursuant to sub-Clause 7.03 below. 6. Sub-Clause 7.03 is hereby deleted in its entirety and is replaced by the following: 7.03 Beginning with slide purchases made during calendar year 2000 (which, for the avoidance of doubt, shall not include any slides shipped by OCD in calendar year 2000 to fulfill IDEXX's total 1999 purchase order for ********* slides), IDEXX shall be entitled to receive a cash rebate in the amounts set forth below for total slide purchases that, in any year, exceed the quantities set forth below as follows: Annual Slide Purchases Incremental Cash Rebate - % Off Purchase Price ************** ** ********************** *** ********************** *** ********************** *** ********************** *** ********************** *** ********************** *** The rebate amounts set forth above constitute a percentage reduction in the purchase price of any slides (including both single slides and PANELS/PROFILES slides) purchased above the corresponding quantity. The percentage amounts are incremental (as opposed to cumulative) and relate only to the quantities set forth opposite it. For example, if IDEXX were to purchase ** **** in any one calendar year, it would not be entitled to a *** price reduction on all slides that it purchased in such year, rather, it would be entitled to receive (i) ** purchase price reduction on the first ********* slides purchased, 3 4 (ii) a *** purchase price reduction on all slides purchased over ********** up to and including ********* (iii) an *** purchase price reduction on all slides purchased over ************* up to and including ********** and (iv) a return *** purchase price reduction on all slides purchased over **************** up to and including the ********** slides that it purchased. The foregoing notwithstanding, it is understood and agreed that if IDEXX does not achieve the Purchase Commitments set forth above in any calendar year, then IDEXX shall not be entitled to receive a rebate for such year. In the beginning of each calendar year, beginning with calendar year 2000, OCD shall calculate an estimated Effective Rebate Rate (the "ESTIMATED REBATE RATE") based on the lesser of (i) IDEXX's Purchase Forecast for such year and (ii) **** of the total number of slides that IDEXX purchased in the immediately preceding calendar year. Not later than thirty (30) days after the end of each of the first three calendar quarters in any calendar year (or thirty days after IDEXX completes payment in full for slides purchased during such quarter, if later), OCD shall pay to IDEXX an amount equal to the estimated rebate payment that IDEXX would be entitled to receive in such quarter (the "ESTIMATED REBATE PAYMENT"). The Estimated Rebate Payment for any quarter shall be calculated by (i) multiplying the Estimated Rebate Rate in effect during such quarter by the total purchase price for the VETTEST slides purchased by IDEXX during such quarter and (ii) subtracting from such amount an amount equal to *** of the total calculated in clause (i) above. The foregoing notwithstanding, if, in any calendar year, (i) IDEXX's total slide orders for the immediately preceding calendar year were less than *** of its Purchase Forecast for such preceding calendar year or (ii) OCD determines, in its reasonable discretion, at anytime after the end of the second calendar quarter of such calendar year, that IDEXX is reasonably unlikely to meet its Purchase Forecast for such year, then OCD shall have the right to recalculate the Estimated Rebate Rate based on IDEXX's Purchase Commitment for such year (such recalculated rate being hereinafter referred to as the "New Estimated Rebate Rate"). If OCD elects to recalculate the Estimated Rebate Rate pursuant to the immediately preceding sentence, (i) OCD shall notify IDEXX in writing which notice shall set forth the New Estimated Rebate Rate, (ii) OCD shall calculate all remaining quarterly Estimated Rebate Payments (which may include the Estimated Rebate Payment for the second calendar quarter) using the New Estimated Rebate Rate and (iii) all such Estimated Rebate Payments shall be made in accordance with this sub-clause 7.03, except that such Estimated Rebate Payments shall be less the amount by which the Estimated Rebate Payments received by IDEXX during the then current calendar year exceed the Estimated Rebate Payments IDEXX would have received during such calendar year if the New Estimated Rebate Rate were in effect from the first day of such calendar year. Notwithstanding any provision in this Agreement to the contrary, OCD shall not be required to make any Estimated Rebate Payments to IDEXX in any calendar 4 5 year if (A) any amounts payable to OCD from IDEXX pursuant to this Agreement are overdue, unless such amounts are being disputed in good faith by IDEXX, or (B) OCD determines in its reasonable judgment that IDEXX is reasonably unlikely to meet its Purchase Commitments for such year. In the case of clause (B) above, OCD shall have the right to make such determination at any time after the end of the second calendar quarter of any calendar year (or at the beginning of such calendar year if IDEXX's Purchase Forecast for such year is less than its Purchase Commitment for such year) provided that OCD has consulted with IDEXX and given IDEXX an opportunity (which opportunity shall be available for a period of not less than 5 business days nor more than 10 business days) to demonstrate its intent and ability to meet its Purchase Commitments for such year. For the avoidance of doubt, OCD's obligation to make any Estimated Rebate Payments shall be suspended during the period referred to in the immediately preceding sentence and the days in such period shall not be counted when determining the date by which the next scheduled Estimated Rebate Payment is due and payable. If, after fulfilling the requirements set forth in this paragraph, OCD makes the determination described in clause (B) above, OCD (i) shall promptly notify IDEXX in writing of its determination and (ii) shall thereafter have the right to cease making Estimated Rebate Payments for the remainder of such calendar year. Not later than thirty (30) business days after the end of the last calendar quarter of any calendar year (or thirty days after IDEXX completes payment in full for slides purchased during such quarter, if later), OCD shall pay to IDEXX the amount by which (i) the Effective Rebate Rate multiplied by the total purchase price for VETTEST slides purchased by IDEXX during such calendar year exceeds (ii) the aggregate amount of the Estimated Rebate Payments made by OCD to IDEXX during such calendar year. If the amount in clause (ii) above exceeds the amount in clause (i) above, OCD shall deliver to IDEXX a written notice of such fact (a "Reimbursement Notice") and IDEXX shall pay to OCD, within thirty (30) days of receipt of such notice an amount in cash equal to the amount of such excess. Notwithstanding the foregoing, (i) if any amounts payable to OCD from IDEXX pursuant to this Agreement are overdue, other than amounts that are being disputed in good faith by IDEXX, then OCD shall be entitled to withhold such overdue amount (plus any accrued interest) from any rebate payments to which IDEXX may be entitled and (ii) if IDEXX does not achieve its Purchase Commitment in any given calendar year, then IDEXX shall return all Estimated Rebate Payments received from OCD for such year no later than thirty (30) days after the end of such calendar year. Any overdue payments by OCD or IDEXX of any amounts owed to the other pursuant to this sub-clause 7.03 shall bear interest at a rate per annum equal to*** **********. Such interest shall be payable at the same time as the payment to 5 6 which it relates and shall be calculated daily on the basis of a year of 365 days and the actual number of days elapsed. OCD shall prepare a remittance advice to accompany each rebate payment (or Reimbursement Notice), which shall set forth the reporting period for which the payment is made (or demanded) and a summary sheet which shall detail OCD's calculation of the rebate (or reimbursement). If IDEXX disagrees with the rebate or reimbursement calculation, IDEXX shall promptly notify OCD, and the parties shall review the calculations together in good faith to agree on any appropriate corrections or adjustments. An illustrative representation of the foregoing rebate calculation methodology is attached hereto as SCHEDULE 10. 7. SCHEDULE 7 to the Agreement is hereby deleted in its entirety and replaced by SCHEDULE 7 attached hereto. 8. Clause 31 is hereby added to the Agreement as follows: 31. 1999 REBATE If during calendar year 1999 IDEXX sells worldwide any of the total slide volumes set forth below (counting both single slides and PANELS/PROFILES slides), IDEXX shall be entitled to a cash rebate in the amount set forth opposite such sales volume: 1999 Worldwide Slide Sales Total Cash Rebate *********** ** *********************** ************ *********************** ************ *********** ************ The cash rebates above are not incremental or cumulative. For the avoidance of doubt, the maximum rebate payment that IDEXX could qualify for under this Clause 31 is *********. IDEXX shall provide OCD with estimated sales volume information for calendar year 1999 not later than December 15, 1999. Not later than January 31, 2000, IDEXX shall provide OCD with 1999 actual slide sales volume information and, at any time that OCD may reasonably request, any other supporting information or documentation that OCD may reasonably request. OCD shall calculate IDEXX's rebate accordingly, and shall remit to IDEXX the total rebate amount not later than (i) February 15, 2000 or, if later, (ii) five (5) business days after receipt by OCD, to its reasonable satisfaction, of all information which it requested pursuant to the immediately preceding sentence. Any overdue payments by OCD shall bear interest at a rate per annum equal to 6 7 ***********. Such interest shall be payable at the same time as the payment to which it relates and shall be calculated daily on the basis of a year of 365 days and the actual number of days elapsed. 9. Clause 32 is hereby added to the Agreement as follows: 32. PACKAGING LINE CAPACITY The parties agree that OCD shall make a capital investment to increase the through-put capacity of the Individual Slide Packaging ("ISP") line. OCD estimates the total capital and validation costs to increase the capacity of the ISP line to be ***********. If at any time OCD has reason to believe that the total capital and validation costs will exceed its estimate by more than ***, OCD shall promptly notify IDEXX and thereafter, OCD and IDEXX shall form a joint team, consisting of two representatives from each party. Such team will cooperate in determining the most efficient and cost effective way to increase the capacity of the ISP line taking into account the measures that have been taken, and the costs that have been incurred, up to that time. The parties agree to implement the recommendations of the joint team. The capital and validation costs to increase the capacity of the ISP line shall be borne by OCD. If, however, IDEXX does not achieve, during the combined calendar years 2000 and 2001, its aggregate Purchase Commitments for such years, then IDEXX shall reimburse OCD ******************** of such costs within thirty (30) days after receipt of reasonably detailed documentation supporting such costs. Any overdue payments by IDEXX shall bear interest at a rate per annum equal to ************. Such interest shall be payable at the same time as the payment to which it relates and shall be calculated daily on the basis of a year of 365 days and the actual number of days elapsed. IDEXX shall have the right to assume responsibility for packaging PANELS/PROFILES slides. If IDEXX elects to exercise such right, then (i) IDEXX shall notify OCD in writing that it proposes to assume such responsibility and (ii) thereafter, the parties shall cooperate in developing and implementing a plan to effect such a transition in a mutually acceptable timeframe, which timeframe shall in no event be less than six (6) months from the date OCD receives the notice described in clause (i) above. 10. Clause 33 is hereby added to the Agreement as follows: 33. COST SAVING INITIATIVES The parties will form a joint team prior to March 31, 2000, consisting of two representatives from each party. Such team will cooperate to identify potential savings for both parties relating to slide manufacturing, post-cartridge packaging, 7 8 purchasing, delivery schedules and quality testing processes. If this team identifies cost reduction opportunities, and both parties reasonably and mutually agree to implement such cost reductions, then the parties shall share equally in any cost savings. The parties shall form an additional joint team prior to March 31, 2000, consisting of two representatives from each party. Such team will cooperate to identify areas of potential savings for IDEXX in the distribution process. If this team identifies distribution cost reduction opportunities, and both parties reasonably and mutually agree to implement such cost reductions, then the parties shall share in any cost savings in such proportion as they mutually and in good faith agree. The parties agree that if OCD distributes slides directly to IDEXX's distributors or end-user customers, OCD would invoice IDEXX for distribution services in the same manner that billing for slide products is currently administered under sub-Clause 8.01 of this Agreement. 11. Clause 34 is hereby added to the Agreement as follows: *** ******************* *************************************************************** *************************************************************** *************************************************************** *************************************************************** *************************************************************** **************************************** 8 9 12. Clause 35 is hereby added to the Agreement as follows: 35. INCREMENTAL SALES OPPORTUNITIES If IDEXX provides OCD with specific documentation regarding ******************************* that would require IDEXX to purchase a number of slides over and above its Purchase Commitments for any year and would ************************** ***************************************************************, OCD agrees, upon receipt of any additional information that OCD may reasonably request regarding such *****************, to negotiate in good faith to reach agreement with IDEXX on ************************************************* ****************** and any other related terms and conditions. It is understood and agreed that any slides which IDEXX purchases from OCD ******************************************** *************************, shall be excluded from the determination of IDEXX's slide purchases for purposes of achieving its Purchase Committments and the determination of any rebate entitlement under sub-Clause 7.03 of the Agreement. 13. Except as modified by this Fifth Amendment, all terms and conditions of the Supply Agreement shall continue in full force and effect. 9 10 IN WITNESS WHEREOF, each of the parties have caused this Agreement to be executed by its duly authorized officer to be effective as of the date first above written. ORTHO-CLINICAL IDEXX LABORATORIES, INC. DIAGNOSTICS, INC. By: /s/ David A. Rowan By: /s/ Louis W. Pollock ---------------------------------- ------------------------------- David A. Rowan, Louis W. Pollock, Vice President, Corporate Accounts President, Professional Office Diagnostics Division By: /s/ Cathy Burzik ---------------------------------- Cathy Burzik President, Ortho-Clinical Diagnostics, Inc. 10 11 SCHEDULE 7 - PURCHASE COMMITMENTS - ------------------------------------ ------------------------------------ YEAR MINIMUM SLIDE PURCHASE COMMITMENT (IN MILLIONS) - ------------------------------------ ------------------------------------ 1999 ** - ------------------------------------ ------------------------------------ 2000 ** - ------------------------------------ ------------------------------------ 2001 ** - ------------------------------------ ------------------------------------ 2002 ** - ------------------------------------ ------------------------------------ 2003 ** - ------------------------------------ ------------------------------------ 2004 ** - ------------------------------------ ------------------------------------ 2005 ** - ------------------------------------ ------------------------------------ 2006 ** - ------------------------------------ ------------------------------------ 2007 See Agreement Section 5.01 - ------------------------------------ 2008 - ------------------------------------ 2009 - ------------------------------------ 2010 - ------------------------------------------------------------------------- 11 12 SCHEDULE 10 - ILLUSTRATIVE REBATE CALCULATIONS The Estimated Rebate Payments will be calculated for each of the first three calendar quarters using the Effective Rebate Rate, as described more fully in sub-clause 7.03 of the Agreement. Any required adjustments will be made at the end of the fourth calendar quarter, in accordance with sub-clause 7.03 of the Agreement. EXAMPLE: THE PURCHASE FORECAST FOR A GIVEN YEAR IS ** MILLION SLIDES; PRICING IS ****/SLIDE; BLENDED REBATE PERCENTAGE RATE IS ****, AS FOLLOWS: ********************** million slides * *** = *** million slides ********************** million slides * *** = *** million slides ********************** million slides * *** = *** million slides ********************** million slides * *** = *** million slides ********************** million slides * *** = *** million slides ---------------------------------------------------------------- Total Slides Eligible for Rebate = ***** million slides EFFECTIVE REBATE = TOTAL SLIDES ELIGIBLE FOR REBATE / TOTAL PURCHASES = ****** ********** ACTUAL VOLUME PURCHASED EQUALS VOLUME PROJECTED AT THE BEGINNING OF THE YEAR.
------------------------------------------------------------------------------------------------------------ Actual Qtrly. Effective Rebate Calculated Vol. Purchases % (80MM Rebate Each 20% Holdback Rebate Paid (millions) ($MM) Vol.) Qtr. (millions) (millions) (millions) ------------------------------------------------------------------------------------------------------------- 1st Qtr ** *** **** **** **** **** 2nd Qtr ** ***** **** **** **** **** 3rd Qtr ** ***** **** **** **** **** 4th Qtr ** ***** **** **** **** **** -- ----- ---- ---- ---- ** ***** **** **** **** True-up: **** **** --------------- --------------- Total: **** **** ================ ================
ACTUAL VOLUME PURCHASED IS GREATER THAN VOLUME PROJECTED AT THE BEGINNING OF THE YEAR.
-------------------------------------------------------------------------------------------------------------- Actual Qtrly. Effective Rebate Calculated Vol. Purchases % (80MM Rebate Each 20% Holdback Rebate Paid (millions) ($MM) Vol.) Qtr. (millions) (millions) (millions) ------------------------------------------------------------------------------------------------------------- 1st Qtr * **** **** **** **** **** 2nd Qtr ** ***** **** **** **** **** 3rd Qtr ** ***** **** **** **** **** 4th Qtr ** ***** **** **** **** **** -- ----- ---- ---- ---- ** ***** **** **** **** True-up: **** **** ---------------- ---------------- Total: **** **** ================ ================
12 13 ACTUAL VOLUME PURCHASED IS LOWER THAN VOLUME PROJECTED AT THE BEGINNING OF THE YEAR.
------------------------------------------------------------------------------------------------- Effective Calculated Actual Qtrly. Rebate Rebate Each 20% Vol. Purchases % (80MM Qtr. Holdback Rebate Paid (millions) ($MM) Vol.) (millions) (millions) (millions) ------------------------------------------------------------------------------------------------- 1st Qtr ** **** **** **** **** **** 2nd Qtr ** ***** **** **** **** **** 3rd Qtr ** ***** **** **** **** **** 4th Qtr ** ***** **** **** **** **** -- ----- ------ ---- ---- ** ***** **** **** **** True-up: ****** **** ------ ---- Total: **** **** ================ =================
13 EX-13 6 SELECTED FINANCIAL DATA 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, 1999. The selected consolidated financial data presented below 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, ----------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------------- ------------- ------------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenue.............................. $188,602 $267,677 $262,970 $319,889 $356,214 Cost of revenue...................... 80,860 115,770 141,030 161,698 182,117 -------- -------- -------- -------- -------- Gross profit......................... 107,742 151,907 121,940 158,191 174,097 Expenses: Sales and marketing............... 47,490 64,450 66,383 62,844 56,912 General and administrative........ 17,092 28,271 42,930 43,558 43,055 Research and development.......... 10,192 12,195 17,057 22,687 27,313 Non-recurring operating charge.... -- -- 21,300 -- -- Write-off of in-process research and development.................. -- -- 13,200 37,162 -- -------- -------- -------- -------- -------- Income (loss) from operations........ 32,968 46,991 (38,930) (8,060) 46,817 Interest income, net................. 4,068 8,332 6,670 6,877 5,728 -------- -------- -------- -------- -------- Net income (loss) before provision for (benefit of) income taxes.......... 37,036 55,323 (32,260) (1,183) 52,545 Provision for (benefit of) income taxes............................. 15,542 22,682 (11,140) 14,032 19,967 -------- -------- -------- -------- -------- Net income (loss).................... $ 21,494 $ 32,641 $(21,120) $(15,215) $ 32,578 ======== ======== ======== ======== ======== Net income (loss) per share: Basic............................. $ 0.65 $ 0.88 $ (0.56) $ (0.40) $ 0.85 Diluted........................... 0.61 0.83 (0.56) (0.40) 0.82 Weighted average shares outstanding: Basic............................. 32,946 37,082 37,974 38,513 38,412 Diluted........................... 35,362 39,519 37,974 38,513 39,743
AS OF DECEMBER 31, -------------------------------------------------------------------- 1995 1996 1997 1998 1999 ------------- ------------- ------------- ------------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital.......... $ 228,565 $ 250,590 $ 205,326 $ 188,829 $ 156,891 Total assets............. 312,540 373,852 373,064 386,548 360,158 Total debt............... 1,687 3,000 4,087 9,381 3,543 Stockholders' equity..... 279,125 322,725 302,733 307,840 284,341
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 Companion Animal Group ("CAG") and Food and Environmental Division ("FED"). CAG comprises the Company's veterinary diagnostic products and services, its animal health pharmaceuticals business, and its veterinary informatics and internet business. FED comprises the Company's services and products for food and environmental testing. Through a series of transactions completed in late 1999 and the first quarter of 2000, the Company disposed of substantially all of its businesses related to food microbiology testing. FED now comprises the Company's water and dairy testing business and its production animal services business. 1999 Compared to 1998 COMPANION ANIMAL GROUP Revenue for CAG for 1999 increased 12% to $278.0 million from $247.8 million in 1998. The increase in revenue in 1999 compared to 1998 is primarily attributable to increased sales of consumables used in the Company's veterinary instruments, veterinary reference laboratory services, practice information management hardware, software and services and feline test kits. These increases were partially offset by decreased sales of canine test kits and sales of veterinary instruments. International revenue for CAG increased 4% to $62.4 million, or 22% of total CAG revenue, in 1999, compared to $59.8 million, or 24% of total CAG revenue, in 1998. Gross profit as a percentage of CAG revenue was 48% for 1999 compared to 49% for 1998. Higher sales of lower margin veterinary laboratory services and practice information management software products and services were partially offset by increased sales of higher margin veterinary consumables. FOOD AND ENVIRONMENTAL DIVISION Revenue for FED for 1999 increased 8% to $78.2 million from $72.1 million in 1998. The increase in revenue in 1999 compared to 1998 is primarily attributable to increased sales of water testing products, dairy residue test kits, and food laboratory testing services, partially offset by decreased sales of dehydrated culture media. International revenue for FED increased 6% to $32.1 million, or 41% of total FED revenue, in 1999, compared to $30.2 million, or 42% of total FED revenue, in 1998. Gross profit as a percentage of FED revenue was 53% for 1999 compared to 52% for 1998. Increased sales of higher margin water, dairy residue and livestock test kits were partially offset by a decline in the average unit prices of poultry kits, which was in response to increased competition. OPERATING EXPENSES Sales and marketing expenses were 16% and 20% of revenue in 1999 and 1998, respectively. The decrease as a percentage of revenue and the dollar decrease of $5.9 million were principally attributable to decreases in salary and related expenses resulting from workforce reductions, partially offset by the inclusion of sales and marketing expenses for Blue Ridge Pharmaceuticals, Inc. ("Blue Ridge") acquired in the last quarter of 1998. Research and development expenses were 8% and 7% of revenue in 1999 and 1998, respectively. The increase as a percentage of revenue and the dollar increase of $4.6 million are primarily attributable to the inclusion of a full year of expense for Blue Ridge and development of the VetConnect Internet business. General and administrative expenses were 12% and 14% of revenue in 1999 and 1998, respectively. The decrease as a percentage of revenue and the dollar decrease of $503,000 are primarily attributable to decreases in management bonus expense, provision for bad debts and currency losses. These decreases were partially offset by increased amortization expense as a result of a full year of expense for Blue Ridge in 1999, costs associated with the divestiture of the food laboratory business, and officer severance expenses. 2 3 Net interest income was $5.7 million in 1999 compared to $6.9 million in 1998. The decrease in net interest income over the prior year is due to interest expense on the notes issued in the acquisition of Blue Ridge in the last quarter of 1998, decreased cash balances resulting from the acquisition of Blue Ridge in 1998, the repurchase of shares of the Company's common stock in 1999 and lower domestic interest rates in the first three quarters of 1999. The Company's effective tax rate was 38% in 1999 compared to 39% before the write-off of in-process research and development in 1998. The decrease in the effective tax rate was principally attributable to the renewal of federal and state credits for research and development activities. 1998 Compared to 1997 COMPANION ANIMAL GROUP Revenue for CAG for 1998 increased 24% to $247.8 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 CAG increased 4% to $59.8 million, or 24% of total CAG revenue, in 1998, compared to $57.6 million, or 29% of total CAG revenue, in 1997. Gross profit as a percentage of CAG revenue was 49% 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 16% to $72.1 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. Gross profit as a percentage of FED revenue was 52% for 1998 compared to 53% for 1997. Increased sales of higher margin water, poultry and livestock kits were offset by unfavorable product mix in the food products. OPERATING EXPENSES Sales and marketing expenses were 20% and 25% of revenue in 1998 and 1997, respectively. The decrease as a percentage of revenue and the dollar decrease of $3.5 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 $5.6 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 in October 1998. General and administrative expenses were 14% and 16% of revenue in 1998 and 1997, respectively. In dollars, general and administrative expenses increased $628,000 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. 3 4 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 $1,882 $1,243 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 were pharmaceuticals for companion animals, including horses, and three of the eleven projects were 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 assure a consistent product). The Company utilizes clinical studies to support its applications for approval. The companion animal projects ranged from 19% to 78% complete, while the food animal projects ranged 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. The in process research and development charge attributable to the companion animal projects totaled approximately $33.1 million, and these projects were estimated to 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 totaled approximately $4.1 million, and these projects were estimated to 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 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 4 5 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 believed 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, partially offset by interest expense on the notes issued in the acquisition of Blue Ridge in the last quarter of 1998. 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. * LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had $105.4 million of cash, cash equivalents, and short-term investments and $156.9 million of working capital. During 1999, the Company repurchased 3.9 million shares of the Company's common stock for $64.2 million. See Note 18. The Company's total capital budget for 2000 is approximately $22.8 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 $35.6 million of products in 2000. 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 five acquisitions in 1997, two acquisitions in 1998 and two acquisitions in 1999, 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'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. In recent years sales of the Company's chemistry and hematology analyzers have declined as the Company has achieved increasing market penetration. Future growth in sales of the Company's analyzers and associated consumables will depend in part on the Company's ability to introduce new systems with new features and capabilities. The Company is currently devoting significant resources to the development of such systems. The Company also plans to devote significant resources to the growth of many of its other businesses, including its animal health pharmaceuticals business and VetConnect, an Internet portal/application services provider for the provision of animal health-care information and services to veterinarians. There can be no assurance that the Company will successfully complete the development and commercialization of products and services for existing and new businesses or that such products and services, if commercialized, will meet revenue and profit expectations. 5 6 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. In particular, the Company has encountered increasing competition in the market for canine heartworm diagnostics. Many of the Company's competitors and potential competitors, including large pharmaceutical companies, have substantially greater capital, manufacturing, marketing, and research and development resources than the Company. 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 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 owned or licensed by 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 may be required to obtain licenses to additional technologies from third parties 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. 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 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. 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, including the U.S. Department of Agriculture and U.S. Food and Drug Administration ("FDA") and U.S. Environmental Protection Agency. Commercialization of animal health pharmaceuticals requires submission of substantial clinical, manufacturing and other data to the FDA and regulatory approval can take several years. 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. 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 only 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, including its chemistry and hematology analyzers and associated consumables, from single sources. Failure of such sources to supply product to the Company would have a material adverse effect on the Company's business. In 1999, international revenue was $94.5 million and accounted for 27% 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. 6 7 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 The Year 2000 problem refers to computing failures resulting from the use by computer programs of two digits, rather than four digits, to define a year. This could lead, for example, to a computer recognizing a date using "00" as 1900 rather than 2000. Prior to January 1, 2000, the Company carried out a program to identify and resolve potential Year 2000 problems. The Company's program was focused on its information technology (IT) and non-IT internal systems, the products and services sold by the Company, and the products and services sold by outside vendors. The total cost to the Company to identify and address potential Year 2000 problems was not material to the Company's financial position, results of operations or cash flows. To date the Company has not experienced any significant issues relating to the Year 2000. Although it is not possible to predict whether Year 2000 problems may arise in the future, particularly with respect to distributors, suppliers and other third parties outside of the Company's control, the Company does not believe that Year 2000 issues will have a material adverse impact on the Company's operations or financial results. The Company will continue to monitor its internal systems and its software-related products for Year 2000 issues. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk consists primarily of foreign currency exchange risk. The Company operates subsidiaries in 13 foreign countries and transacts business in local currencies. The Company hedges its cash flows on intercompany sales to minimize foreign currency exposure. The primary purpose of the Company's foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. Corporate policy prescribes the range of allowable hedging activity. The Company primarily utilizes forward exchange contracts and options with a duration of less than 12 months. Gains and losses related to qualifying hedges of foreign currency from commitments or anticipated transactions are deferred in prepaid expenses and are included in the basis of the underlying transaction. Based on the Company's overall currency rate exposure at December 31, 1999, including derivative and other foreign currency sensitive instruments, a 5% change in exchanges rate balances denominated in foreign currencies which is not the functional currency would not have a material impact on the results of operation. However, the effects of a 5% change in exchange rates, if not offset by hedge contracts or related price adjustments would have a material impact on the results of operations. 7 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE PAGE * Report of Independent Public Accountants............................... 9 * Consolidated Balance Sheets as of December 31, 1998 and 1999........... 10 * Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999.................................................. 11 * Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1998 and 1999..................................... 12 * Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999.................................................. 13 * Notes to Consolidated Financial Statements............................. 14 * Schedule II Valuation and Qualifying Accounts.................................... 34 8 9 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, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, 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 January 28, 2000 (except with respect to the matters discussed in Notes 5 and 16, as to which the date is February 28, 2000) 9 10 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------------ 1998 1999 ------------ ---------- ASSETS Current Assets: Cash and cash equivalents.............................. $109,063 $ 58,576 Short-term investments................................. 29,290 46,835 Accounts receivable, less reserves of $5,368 and $4,828 in 1998 and 1999, respectively.................. 47,947 58,353 Inventories............................................ 55,428 47,488 Deferred income taxes.................................. 13,965 14,679 Other current assets................................... 7,653 6,484 -------- -------- Total current assets................................. 263,346 232,415 -------- -------- Long-Term Investments..................................... 17,297 25,517 -------- -------- Property and Equipment, at cost: Land................................................... 1,197 1,196 Buildings.............................................. 4,487 4,528 Leasehold improvements................................. 17,629 18,522 Machinery and equipment................................ 31,917 34,630 Construction in progress............................... 1,840 1,152 Office furniture and equipment......................... 25,423 28,630 -------- -------- 82,493 88,658 Less -- Accumulated depreciation and amortization...... 41,013 49,108 -------- -------- 41,480 39,550 -------- -------- Other Assets, net......................................... 64,425 62,676 -------- -------- $386,548 $360,158 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable....................................... $ 26,816 $ 19,647 Accrued expenses....................................... 32,046 40,183 Current portion of long-term debt...................... 5,190 3,250 Deferred revenue....................................... 10,465 12,444 -------- -------- Total current liabilities............................ 74,517 75,524 -------- -------- Long-term debt, net of current portion.................... 4,191 293 -------- -------- 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 38,831 shares in 1998 and 39,584 shares in 1999........................................ 3,883 3,958 Additional paid-in capital............................. 276,296 284,459 Retained earnings...................................... 31,041 63,619 Accumulated other comprehensive income (loss).......... (3,380) (3,473) Treasury stock (3,899 shares in 1999), at cost......... -- (64,222) -------- -------- Total stockholders' equity........................... 307,840 284,341 -------- -------- $386,548 $360,158 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 10 11 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ------------ ------------ ---------- Revenue.................................... $ 262,970 $ 319,889 $ 356,214 Cost of revenue............................ 141,030 161,698 182,117 --------- --------- --------- Gross profit............................ 121,940 158,191 174,097 --------- --------- --------- Expenses: Sales and marketing..................... 66,383 62,844 56,912 General and administrative.............. 42,930 43,558 43,055 Research and development................ 17,057 22,687 27,313 Non-recurring operating charge.......... 21,300 -- -- Write-off of in-process research and development............................. 13,200 37,162 -- --------- --------- --------- Income (loss) from operations......... (38,930) (8,060) 46,817 Interest income, net.................... 6,670 6,877 5,728 --------- --------- --------- Net income (loss) before provision for (benefit of) income taxes............ (32,260) (1,183) 52,545 Provision for (benefit of) income taxes.... (11,140) 14,032 19,967 --------- --------- --------- Net income (loss)..................... $ (21,120) $ (15,215) $ 32,578 ========= ========= ========= Earnings (loss) per share: Basic........... $ (0.56) $ (0.40) $ 0.85 ========= ========= ========= Earnings (loss) per share: Diluted......... $ (0.56) $ (0.40) $ 0.82 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 11 12 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 TREASURY STOCKHOLDERS' OF SHARES PAR VALUE CAPITAL EARNINGS INCOME (LOSS) STOCK EQUITY --------- --------- ---------- -------- ------------- -------- ------------ BALANCE, December 31, 1996 .... 37,774 $3,777 $ 253,118 $ 67,376 $(1,546) $ -- $ 322,725 Issuance of common stock in settlement of VetTest acquisition................. 6 1 87 -- -- -- 88 Exercise of stock options, including the tax benefit .. 389 39 4,070 -- -- -- 4,109 Comprehensive income (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 income (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 Issuance of common stock to board of directors ......... 13 1 342 -- -- -- 343 Purchase of treasury stock .... -- -- -- -- -- (64,222) (64,222) Exercise of stock options, Including the tax benefit .. 740 74 7,821 -- -- -- 7,895 Comprehensive income (loss): Net income ................. -- -- -- 32,578 -- -- -- Translation adjustment ..... -- -- -- -- (93) -- -- Total comprehensive income . -- -- -- -- -- -- 32,485 ------ ------ --------- -------- ------- -------- --------- BALANCE, December 31, 1999 .... 39,584 $3,958 $ 284,459 $ 63,619 $(3,473) $(64,222) $ 284,341 ====== ====== ========= ======== ======= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 12 13 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ---------------------------------------- 1997 1998 1999 ---------- ---------- --------- Cash Flows From Operating Activities: Net income (loss) ................................ $ (21,120) $ (15,215) $ 32,578 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization ................ 14,425 15,887 17,209 Provision for (benefit of) deferred income tax (14,710) 419 2,019 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 ......................... 23,712 (528) (10,406) Inventories ................................. (11,218) 4,949 5,182 Other current assets ........................ (8,400) 2,781 1,169 Accounts payable ............................ (7,200) 14,344 (7,169) Accrued expenses ............................ 23,693 (12,569) 10,058 Deferred revenue ............................ (483) (1,160) 1,979 --------- --------- --------- Net cash provided by operating activities .. 13,499 46,070 52,619 --------- --------- --------- Cash Flows From Investing Activities: Decrease (increase) in investments, net ......... 6,515 48 (25,765) Purchases of property and equipment ............. (12,507) (8,992) (8,292) Increase in other assets ........................ (3,699) (369) (1,229) Proceeds from sale of business .................. -- -- 350 Acquisition(s) of business(es), net of cash acquired .................................. (23,047) (39,091) (4,088) --------- --------- --------- Net cash used in investing activities ........ (32,738) (48,404) (39,024) --------- --------- --------- Cash Flows From Financing Activities: Repayment of notes payable ...................... (1,509) (2,529) (6,411) Purchase of treasury stock ...................... -- -- (64,222) Proceeds from the exercise of stock options ..... 3,048 5,756 6,611 --------- --------- --------- Net cash provided (used) by financing ......... activities ................................... 1,539 3,227 (64,022) --------- --------- --------- Net effect of Exchange Rate Changes ............... (3,069) 1,198 (60) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents .................................. (20,769) 2,091 (50,487) Cash and Cash Equivalents, Beginning of Year ...... 127,741 106,972 109,063 --------- --------- --------- Cash and Cash Equivalents, End of Year ............ $ 106,972 $ 109,063 $ 58,576 ========= ========= ========= Supplemental Disclosure of Cash Flow Information: Interest paid during the year .................... $ 405 $ 369 $ 405 ========= ========= ========= Income taxes paid during the year ............... $ 8,706 $ 17,385 $ 12,827 ========= ========= ========= Supplemental Disclosure of Noncash Financing Activity: 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 $ -- ========= ========= ========= Receipt of note for sale of assets of IDEXX Food Safety Net, Inc. .............................. $ -- $ -- $ 195 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 13 14 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 veterinary pharmaceuticals and 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'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, -------------------- 1998 1999 ------- ------- Raw materials..... $ 4,871 $ 6,385 Work-in-process... 3,704 4,190 Finished goods.... 46,853 36,913 ------- ------- $55,428 $47,488 ======= ======= (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 14 15 (d) Other Assets Other assets are as follows (in thousands): DECEMBER 31, ------------------- DESCRIPTION USEFUL LIFE 1998 1999 ----------------------- -------------- ------- ------- Patents and trademarks. 10 Years $ 9,372 $ 9,318 Goodwill............... 5-40 Years 50,826 55,187 Non-compete agreements. 3-5 Years 4,330 4,480 Other intangibles...... 5-10 Years 11,146 11,622 ------- ------- 75,674 80,607 Accumulated amortization 21,858 29,138 ------- ------- Intangible assets, net. 53,816 51,469 Other assets........... 10,609 11,207 ------- ------- $64,425 $62,676 ======= ======= 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 the long-term deferred tax asset, cost of products sold to customers with right of return privileges (see Note 1(g)) and long-term deposits. Amortization of intangible assets was $5.0 million, $6.0 million and $7.5 million for the years ended December 31, 1997, 1998 and 1999, respectively. The Company continually assesses the realizability of these assets in accordance with 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. As of the respective balance sheet dates the Company 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 (SFAS No. 123). Under SFAS No. 123, the Company elected the disclosure only 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 for substantially all products. The Company recognizes revenue from non-cancelable 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. Maintenance revenue is billed in advance and recognized over the life of the contracts, usually one year or less. Certain instrument systems are sold to a third-party finance company who leases these systems to its customers with a right-of-return privilege. The third-party finance company can return the instrument system to the Company for a partial refund based on the time from initial sale to product return. The Company recognizes revenue under these contracts over the term of the underlying lease contract. (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. 15 16 (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 accumulated other comprehensive income (loss). Exchange gains and losses arising from transactions denominated in foreign currencies are included in current operations. Included in general and administrative expenses are foreign currency transaction losses of $511,000 and $127,000 and a gain of $597,000 for the years ended December 31, 1997, 1998 and 1999, 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 when the related obligation is settled. The Company enters into these exchange contracts with large multinational financial institutions. As of December 31, 1998, the deferred gains on these contracts totaled $20,000. There were no unrecorded gains or losses on these contracts as of December 31, 1999. The foreign currency contracts, which extend through December 31, 1999 and 2000, respectively, consisted of the following (in thousands): CURRENCY SOLD US DOLLAR EQUIVALENT ------------- ------------------------------ 1998 1999 --------------- ------------- Australian dollar.... $2,394 $ -- Japanese Yen......... 2,469 504 ------ ------ $4,863 $ 504 ====== ====== (j) Disclosure of Fair Value of Financial Instruments and Concentration of Credit Risk Financial instruments 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, 1999. The carrying amounts of the Company's financial instruments approximate fair market value. (k) Earnings (Loss) per Share 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):
1997 1998 1999 ------ ------ ----- SHARES OUTSTANDING FOR BASIC EARNINGS (LOSS) PER SHARE: Weighted average shares outstanding................................ 37,974 38,513 38,412 ====== ====== ====== SHARES OUTSTANDING FOR DILUTED EARNINGS (LOSS) PER SHARE: Weighted average shares outstanding................................ 37,974 38,513 38,412 Shares assumed issued for the acquisition of Blue Ridge Pharmaceuticals, Inc............................................ -- -- 115 Dilutive effect of options issued to employees..................... -- -- 1,216 ------ ------ ------ 37,974 38,513 39,743 ====== ====== ======
The Company incurred losses for the years ending December 31, 1997 and 1998 and has, as a result, excluded the dilutive effect of options issued to employees and assumed shares issued 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. 729,000, 313,000 and 1,294,000 options for 1997, 1998 and 1999, respectively, have been excluded from the calculation of shares outstanding for diluted earnings (loss) per share because they were anti-dilutive. (l) Reclassifications Reclassifications have been made in the consolidated financial statements to conform to the current year's presentation. 16 17 (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 No. 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. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133 was issued in June 1999 and deferred the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000 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): 1997 1998 1999 -------- --------- ------- Domestic..... $ (29,731) $ (16,071) $ 37,253 International.... (2,529) 14,888 15,292 --------- --------- -------- $ (32,260) $ (1,183) $ 52,545 ========= ========= ======== The provisions for (benefit of) income taxes for the years ended December 31, 1997, 1998 and 1999 are comprised of the following (in thousands): DECEMBER 31, ------------------------------------- 1997 1998 1999 -------- -------- ------- Current Federal ...... $ 817 $ 5,758 $10,630 State ........ 954 2,682 3,066 International 1,799 5,173 4,252 -------- -------- ------- 3,570 13,613 17,948 -------- -------- ------- Deferred Federal ...... (12,314) 524 1,955 State ........ (2,396) (105) 64 -------- -------- ------- (14,710) 419 2,019 -------- -------- ------- $(11,140) $ 14,032 $19,967 ======== ======== ======= The provision for (benefit of) income taxes differs from the amount computed by applying the statutory federal income tax rate as follows: DECEMBER 31, ---------------------------- 1997 1998 1999 ------ -------- ------- U.S. federal statutory rate... 35.0% 35.0% 35.0% State income tax, net of federal tax benefit............... 4.1 (217.7) 5.0 International income taxes.. -- 125.0 (2.1) Amortization of non-deductible Assets.................... (1.6) (183.1) 2.2 Write-off of in-process research and development.. (5.1) (1,098.6) -- Non-taxable interest income. 4.1 117.9 (2.9) Other, net.................. (2.0) 35.4 0.8 ------ -------- ------ Effective tax rate.......... 34.5% (1,186.1)% 38.0% ====== ======== ====== 17 18 The components of the domestic net deferred tax asset (liability) included in the accompanying consolidated balance sheets are as follows (in thousands): 1998 1999 --------------------- --------------------- CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- ASSETS: Accruals ................. $ 4,323 $ -- $ 4,531 $ -- Receivable reserves ...... 3,173 -- 2,451 -- Deferred revenue ......... 4,189 -- 3,267 -- Inventory basis differences ............. 2,301 -- 3,017 -- Intangible basis differences ............. -- 6,389 -- 6,732 Tax credit carryforwards.. -- 235 433 -- Net operating loss carryforwards ............ -- 4,434 1,098 1,482 ------- ------- ------- ------ Total assets ............ 13,986 11,058 14,797 8,214 ------- ------- ------- ------ LIABILITIES: Property basis differences -- 928 -- 1,106 Intangible basis Differences ............. -- 470 -- 173 Other .................... 21 -- 118 -- ------- ------- ------- ------ Total liabilities ....... 21 1,398 118 1,279 ------- ------- ------- ------ Net domestic asset ....... $13,965 $ 9,660 $14,679 $6,935 ======= ======= ======= ====== The components of the foreign net deferred tax asset (in thousands): 1998 1999 -------------------- --------------------- CURRENT LONG-TERM CURRENT LONG-TERM ------- --------- ------- --------- ASSETS: Net operating loss carryforwards ......... $ -- $ 3,679 $ -- $ 3,197 Other .................. 135 -- -- -- ----- ------- ------- ------- Total assets .......... 135 3,679 -- 3,197 LIABILITIES: Total liabilities ..... -- -- -- -- VALUATION ALLOWANCE ....... (135) (3,679) -- (3,197) ----- ------- ------- ------- Net asset (liability).. $ -- $ -- $ -- $ -- ===== ======= ======= ======= At December 31, 1999, the Company had domestic net operating loss carryforwards of approximately $7.4 million available to offset future taxable income. Net operating loss carryforwards expire at various dates from 2000 to 2014. The Tax Reform Act of 1986 contains provisions that limit annual availability of the net operating loss carryforwards due to a more than 50% change in ownership that occurred upon the acquisition of certain companies. At December 31, 1999, the Company had net operating loss carryforwards in foreign subsidiaries of approximately $8.1 million available to offset future taxable income. These net operating loss carryforwards expire at various dates beginning in 2003. The Company has recorded a valuation allowance for the assets because realizability is uncertain. As of December 31, 1999, unremitted earnings in subsidiaries outside the United States totaled $21.9 million, on which no United States taxes have been provided. The Company's intention is to reinvest these earnings permanently or to repatriate the earnings only when tax effective to do so. It is not practical to estimate the amount of additional taxes that might be payable upon repatriation of foreign earnings; however, the Company believes that United States foreign tax credits would largely eliminate any United States taxes or offset any foreign withholding taxes. 18 19 (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. Except for preferred stock, the Company has the intent and ability to hold short-term and long-term investments to maturity and records these investments at amortized cost which approximates fair market value. The Company classifies its investment in preferred stock as available-for-sale and values it at 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, -------------------- 1998 1999 ------- -------- Municipal bonds ............. $21,801 $24,785 Preferred stocks ............ -- 9,120 U.S. government obligations . 6,000 8,000 Certificates of deposit ..... 1,031 4,930 Commercial paper ............ 458 -- ------- ------- $29,290 $46,835 ======= ======= Long-term investments are investment securities with original maturities of greater than one year and consist of the following (in thousands): DECEMBER 31, -------------------- 1998 1999 ------- ------- Municipal bonds ........... $13,297 $23,517 Certificates of deposit ... 4,000 -- U.S. government obligations -- 2,000 ------- ------- $17,297 $25,517 ======= ======= (4) NOTES PAYABLE In connection with the acquisition of the business of Consolidated Veterinary Diagnostics, Inc. ("CVD") in July 1996, the Company issued an unsecured note payable for $3.0 million, of which $1.0 million was outstanding at December 31, 1998. The final installment payment of $1 million was made in July 1999. In connection with the Central Veterinary Diagnostic Laboratory acquisition (see Note 15(f)) the Company issued an unsecured note payable for Australian Dollars 900,000 (US $587,000) of which Australian dollars 675,000 (US $439,000) was outstanding at December 31, 1999. 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(e)), the Company issued unsecured notes payable for $7,830,000, of which $3,103,000 was outstanding at December 31, 1999. The notes bear interest at 5.5%, and the final installment is due on October 1, 2000. (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, --------------- 2000 .......... $ 4,832 2001 .......... 4,522 2002 .......... 3,615 2003 .......... 3,347 2004 .......... 2,828 Thereafter .... 9,578 ------- $28,722 ======= 19 20 Rent expense charged to operations under operating leases was approximately $3.8 million, $4.9 million and $5.1 million for the years ended December 31, 1997, 1998 and 1999, 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 $35.6 million of products in 2000. 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. 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. In January 1998, a complaint was filed in the U.S. District Court for the District of Maine captioned ROBERT A. ROSE, et.al. v. DAVID E. SHAW, ERWIN F. WORKMAN, JR. and IDEXX LABORATORIES, INC. The plaintiffs purport 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. In July 1999, the U.S. District Court granted the Company's motion to dismiss the case for failure to state a claim. However in August 1999, the plaintiffs appealed that ruling to the U.S. Court of Appeals for the First Circuit. In February 2000, the Company entered into a Memorandum of Understanding (the "MOU") with the plaintiffs pursuant to which the parties have agreed to settle the suit. Pursuant to the MOU, the Company and the plaintiffs have filed a Stipulation of Settlement (the "Stipulation") with U.S. District Court. Subject to certain conditions, the Stipulation will become effective following approval by the District Court and expiration of the time for any appeal. No assurance can be given that the District Court will approve the Stipulation or otherwise that the suit will be finally settled on the terms contained in the MOU. The proposed settlement (in excess of the portion reimbursed through insurance) will not affect results of operations in 2000. In the event that the suit is not settled, 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. In December 1997, SA Scientific, Inc. ("SAS") filed suit against the Company in the State of Texas District Court. SAS has alleged breach of a development and supply agreement between SAS and the Company, negligent misrepresentation, fraud and conversion of SAS's intellectual property, and is seeking $8,000,000 in actual damages, $24,000,000 in punitive damages, further unspecified damages and attorneys' fees. The Company has filed an answer to the complaint denying SAS's allegations and has asserted counterclaims against SAS for breach of contract, fraud and conversion of the Company's property. 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. 20 21 (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, 1999, $653,000 was included in accrued expenses relating to the non-recurring operating charge. The balance remaining at December 31, 1999 primarily represents severance payments due to terminated employees and lease payments on unutilized facilities. During 1999, the Company paid $2.6 million related to this charge. 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 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 ======== 21 22 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 discounted 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 were pharmaceuticals for companion animals, including horses, and three of the eleven projects were 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 ranged from 19% to 78% complete, while the food animal projects ranged 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 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. 22 23 (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 discounted 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. (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. 23 24 (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 10). 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 $1,000 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, 1999, the Company had 11 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 11 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): YEARS ENDED DECEMBER 31, --------------------------------- 1997 1998 1999 --------- --------- -------- Net income (loss): As reported........... $(21,120) $(15,215) $ 32,578 Pro forma............. (30,563) (21,931) 25,550 Net income (loss) per share: Basic: as reported.... $ (0.56) $ (0.40) $ 0.85 Basic: pro forma...... (0.80) (0.57) 0.67 Diluted: as reported.. (0.56) (0.40) 0.82 Diluted: pro forma.... (0.80) (0.57) 0.64 Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. (a) The 1984 Plan During 1984, the Company established a stock option plan (the "1984 Plan"), under which key employees were granted options to purchase Common Stock at exercise prices not less than the fair market value as of the date of grant, as determined by the Board of Directors. On April 24, 1991, the Board of Directors terminated the 1984 Plan such that no further options may be granted under the Plan. (b) The 1991 Plan During 1991, the Board of Directors approved the 1991 Stock Option Plan which, as amended, provides for grants up to 6,475,000 incentive and nonqualified stock options at the discretion of the Compensation Committee of the Board of Directors. Incentive Stock Options are granted at the fair market value on the date of grant and expire 10 years from the date of grant. Incentive Stock Options for greater than 10% shareholders are granted at 110% of the fair market value and expire five years from the date of grant. Nonqualified options may be granted at no less than 100% of the fair market value on the date of grant. The vesting schedule of all options is determined by the Compensation Committee of the Board of Directors at the time of grant. 24 25 (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 were not officers or employees of the Company received nonstatutory options to purchase shares of the Company's Common Stock. On May 19, 1999 this plan was terminated and replaced with the 1999 Director Stock 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 2,500,000 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. 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) The 1999 Director Stock Plan During 1999, the Board of Directors approved the 1999 Director Stock Plan pursuant to which Directors who are not officers or employees of the Company may receive shares of the Company's Common Stock. A total of 80,000 shares of Common Stock may be issued under the 1999 Director Stock Plan. As of December 31, 1999, 12,860 shares were issued under this plan, and the fair value of these shares of $343,000 was charged to expense. (g) 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. (h) Idetek, Inc. Plans During 1986, the Board of Directors of Idetek approved the 1985 Incentive Stock Option Plan (the "1985 Idetek Plan"). Options were granted at the fair market value on the date of grant and expire 10 years from the date of grant. Options for greater than 10% shareholders were granted at no less than 110% of the fair market value and expire five years from the date of grant. The 1985 Idetek Plan was terminated by the Board of Directors of Idetek as to future grants. 25 26 During 1987, the Board of Directors of Idetek approved the 1987 Stock Option Plan (the "1987 Idetek Plan"), which provided 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 in August 1996, 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, 1997, 1998 and 1999 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, 1996 .................. 4,352 $18.41 ====== ====== 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 ====== Granted ...................................... 1,341 $22.51 Exercised .................................... (669) 7.35 Terminated ................................... (325) 18.45 ------ ------ Outstanding, December 31, 1999 .................. 5,726 $16.78 ====== ====== Exercisable, December 31, 1999 .................. 2,624 $13.85 ====== ====== Weighted average fair value of options granted in 1999 .......................................... $11.21 ====== 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. 26 27 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 1997, 1998 and 1999, respectively: no dividend yield for all years; expected volatility of 52% for 1997, 64% for 1998, and 54% for 1999; risk-free interest rates of 6.33%, 5.34% and 5.28% for 1997, 1998 and 1999, respectively; and expected lives of 4.55 years for 1997, 3.96 years for 1998 and 4.62 years for 1999. At December 31, 1999, 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 ---------------- ------- ------------ --------- ------- --------- $ 1.25 -- $ 9.88 843 $ 6.63 2.50 843 $ 6.63 11.22 -- 17.00 1,928 14.61 7.26 817 14.58 17.35 -- 21.03 1,640 17.95 6.81 758 17.94 21.88 -- 46.00 1,315 25.00 8.49 206 25.44 (i) 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 119,027 in 1997, 71,734 in 1998 and 66,887 in 1999. 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 1997, 1998 and 1999, respectively: no dividend yield for all years; an expected life of one year for all years; expected volatility of 72% for 1997, 64% for 1998, and 54% for 1999; and risk-free interest rates of 6.14%, 5.34% and 5.45% for 1997, 1998 and 1999, respectively. The weighted-average fair value of those purchase rights granted in 1997, 1998 and 1999 was $7.15, $6.57 and $7.40 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 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. 27 28 (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 1997, 1998 and 1999. (12) SIGNIFICANT CUSTOMERS During the years ended December 31, 1998 and 1999 one customer accounted for 11% and 10%, 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 No. 131) during the fourth quarter of 1998. SFAS No. 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 Companion Animal Group ("CAG"), the Food and Environmental Division ("FED") and other. The CAG develops, designs, and distributes products and performs services for veterinarians. The CAG also manufactures certain biology-based test kits for veterinarians and develops products for therapeutic applications in companion animals. 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 CAG and FED distribute products and services world-wide. Other is primarily comprised of 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. 28 29 Revenues are attributed to geographic areas based on the location of the customer (in thousands):
CAG FED OTHER TOTAL ---------- ------- --------- --------- 1999 Revenue .............................. $ 278,025 $78,189 $ -- $ 356,214 Depreciation and Amortization ........ 14,289 2,920 -- 17,209 Interest Income (Expense) ............ (151) -- 5,879 5,728 Provision for Income Taxes ........... 14,182 4,108 1,677 19,967 Net Income (Loss) .................... 23,140 6,704 2,734 32,578 Segment Assets ....................... 158,833 36,632 164,693 360,158 Expenditures for Property ............ 6,051 2,241 -- 8,292 1998 Revenue .............................. $ 247,766 $72,123 $ -- $ 319,889 Depreciation and Amortization ........ 13,786 2,101 -- 15,887 Interest Income (Expense) ............ (48) -- 6,925 6,877 Provision for Income Taxes ........... 10,150 2,017 1,865 14,032 Net Income (Loss) .................... (20,335) 3,154 1,966 (15,215) Segment Assets ....................... 166,390 32,860 187,298 386,548 Expenditures for Property ............ 7,158 1,834 -- 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 ....................... 149,806 36,596 186,662 373,064 Expenditures for Property ............ 10,916 1,591 -- 12,507
Revenue by principal geographic areas was as follows (in thousands): YEARS ENDED DECEMBER 31, ------------------------------------ 1997 1998 1999 -------- -------- -------- Americas United States ....................... $179,353 $229,934 $261,370 Canada .............................. 9,668 8,719 9,667 South America ....................... 4,189 6,131 6,723 Europe United Kingdom ...................... 20,088 22,011 23,370 Germany ............................. 9,594 8,737 8,996 France .............................. 7,869 7,645 8,033 Other Europe ........................ 13,735 16,048 16,245 Asia Pacific Region Japan ............................... 10,250 11,271 11,629 Australia ........................... 4,513 5,800 5,766 Other Asia Pacific ............................ 3,711 3,593 4,415 -------- -------- -------- Total ................................. $262,970 $319,889 $356,214 ======== ======== ======== 29 30 Net property by principal geographic areas was as follows (in thousands): DECEMBER 31, --------------------------------- 1997 1998 1999 ------- ------- ------- Americas United States ........................ $69,570 $87,597 $83,065 Other Americas ....................... 13 59 514 Europe United Kingdom ....................... 1,510 1,402 1,452 Germany .............................. 321 229 137 France ............................... 783 614 73 Netherlands .......................... 73 1,445 1,631 Other Europe ......................... 507 568 519 Asia Pacific Region Japan ................................ 1,539 1,284 1,178 Australia ............................ 1,650 1,501 1,420 Other Asia Pacific ................... 645 597 661 ------- ------- ------- Total .................................. $76,611 $95,296 $90,650 ======= ======= ======= (14) ACCRUED EXPENSES Accrued expenses consist of the following (in thousands): DECEMBER 31, -------------------- 1998 1999 ------- ------- Accrued compensation and related expenses .......................................... $11,197 $11,094 Accrued income taxes ................................ 2,926 10,177 Accrued non-recurring operating charge ............................................ 3,225 653 Other accrued expenses .............................. 14,698 18,259 ------- ------- $32,046 $40,183 ======= ======= (15) ACQUISITIONS (a) 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 and 1998, the Company paid $250,000 in both years. The payments were 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. The Company subsequently sold this subsidiary in February 2000. See Note 16(b). (b) 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: 30 31 * 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. (c) 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. (d) Agri-West Laboratory On March 1, 1998, the Company, through its wholly-owned subsidiary, IDEXX Food Safety Net Services, Inc. ("IFSNI"), 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. The Company subsequently sold the assets of IFSNI in December 1999. See Note 16(a). (e) 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 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): YEARS ENDED 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. 31 32 (f) Veterinary Reference Laboratories The Company's 1997, 1998 and 1999 consolidated results of operations also include the results of operations of a veterinary reference laboratory business acquired in 1997 for aggregate purchase price of approximately $844,000 in cash, the issuance of $587,000 in unsecured notes payable, plus the assumption of certain liabilities. The Company's 1999 consolidated results of operations include the results of operations of two veterinary reference laboratory businesses acquired in 1999 for an aggregate purchase price of $4.1 million, the issuance of $539,000 in unsecured notes payable, plus the assumption of certain liabilities. In connection with these acquisitions, the company entered into non-competition agreements with the sellers for up to ten years. 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 information because of immateriality. These acquisitions are as follows: * On December 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. * On March 31, 1999, the Company acquired the assets and assumed certain liabilities of the veterinary laboratory business of Sonora Quest Laboratories, LLC (Sonora) which operated a veterinary laboratory in Arizona. * On December 1, 1999, the Company acquired the assets and certain liabilities of the veterinary laboratory business of the Tufts University School of Veterinary Medicine which operated a veterinary laboratory in Massachusetts. (16) DIVESTITURES Through a series of transactions in December 1999 and February 2000 the Company sold certain assets and subsidiaries of its Food and Environmental Division. As a result of these transactions, the Company recorded a loss of approximately $400,000 in 1999 and anticipates that it will record an immaterial gain in 2000. The results of operations of these businesses have been included in the consolidated results of operations through the respective sale dates. Pro forma information has not been presented because of immateriality. (a) IDEXX Food Safety Net Services, Inc. On December 21, 1999, the Company sold substantially all the assets and the business of IDEXX Food Safety Net Services, Inc. to Food Safety Net Services Ltd. for $350,000 in cash, $195,000 note payable and the assumption of certain liabilities. The note bears interest at 6% and is due in twelve quarterly installments. In addition, the Company entered into a non-compete agreement for five years. (b) Food Products and Acumedia Manufacturers, Inc. During February 2000, the Company sold certain assets and the rights to its Lightning, Simplate and Bind product lines and its subsidiary Acumedia Manufacturers, Inc. ("Acumedia") for $10.4 million in cash, $450,000 note payable, and the assumption of certain liabilities. The Company will also receive up to an additional $1.0 million based on revenue of the Acumedia business between the sale date and February 16, 2001. The note bears interest at 7% and is due on February 16, 2001. In addition, the Company entered into non-compete agreements for up to five years. 32 33 (17) SERVICE REVENUE Service revenue, which includes laboratory service revenue and maintenance and repair revenue, totaled approximately $46.6 million, $62.5 million and $72.6 million in 1997, 1998 and 1999, respectively. The cost of service revenue in 1997, 1998 and 1999 totaled approximately $28.4 million, $45.6 million and $58.8 million, respectively. (18) STOCK REPURCHASE PROGRAM During 1999, the Board of Directors authorized the purchase of up to six million shares of the Company's Common Stock in the open market or in negotiated transactions. As of December 31, 1999, approximately 3.9 million shares of Common Stock were repurchased under this program. (19) INFORMATION REGARDING CLASSES OF SIMILAR PRODUCTS OR SERVICES (UNAUDITED) Approximately 71%, 70% and 69% of the Company's revenues were derived from the sale of veterinary diagnostic products and services in 1997, 1998 and 1999, respectively. Approximately 24%, 23% and 22% of revenues were derived from sales of food and environmental products and services in 1997, 1998, and 1999, respectively. (20) SUMMARY OF QUARTERLY DATA (UNAUDITED) A summary of quarterly data follows (in thousands, except per share data): 1998 QUARTER ENDED ------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- Revenue .................... $77,793 $80,886 $78,487 $ 82,723 Gross profit ............... 38,039 40,100 39,067 40,985 Operating profit (loss) .... 4,590 6,641 7,863 (27,154) Net income (loss) .......... 3,761 5,098 5,996 (30,070) Earnings (loss) per share: Basic .................... 0.10 0.13 0.16 (0.78) Diluted .................. 0.10 0.13 0.15 (0.78) 1999 QUARTER ENDED ------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- Revenue .................... $89,648 $91,524 $86,422 $ 88,620 Gross profit ............... 44,874 44,614 41,487 43,122 Operating income ........... 10,433 11,610 11,951 12,823 Net income ................. 7,281 8,025 8,428 8,844 Earnings per share: Basic ..................... 0.19 0.20 0.22 0.24 Diluted ................... 0.18 0.20 0.21 0.24 33 34 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, 1997 .................... $ 4,001 $ 2,246 $1,165 $ 5,082 December 31, 1998 .................... 5,082 1,357 1,071 5,368 December 31, 1999 .................... 5,368 270 810 4,828 Accrued non-recurring operating charge: December 31, 1997 .................... -- 21,300 9,360 11,940 December 31, 1998 .................... 11,940 -- 8,715 3,225 December 31, 1999 .................... 3,225 -- 2,572 653
34 35 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 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 CALENDAR 1999 First Quarter ............. $ 27 11/16 $ 19 3/4 Second Quarter ............ 27 7/8 19 5/16 Third Quarter ............. 22 7/16 15 Fourth Quarter ............ 19 5/8 14 11/16 As of December 31, 1999, there were 1,687 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. 35 EX-21 7 SUBSIDIARIES OF THE COMPANY 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 VetConnect, Inc. Delaware TD Acquisition Corp. Delaware 36 EX-23.1 8 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, 333-36007, 333-56685, 333-78765 and 333-78769. /s/ Arthur Andersen LLP Boston, Massachusetts March 23, 2000 37 EX-27 9 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, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000874716 IDEXX LABORATORIES, INC. 1,000 U.S. DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 58,576 46,835 63,181 4,828 47,488 232,415 88,658 49,108 360,158 75,524 293 0 0 3,958 280,383 360,158 283,573 356,214 123,364 182,117 127,010 270 476 52,545 19,967 32,578 0 0 0 32,578 0.85 0.82
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