-----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, CAsYEwB3UsNUlHVi1tM4wOdezL4ID18Wa/t8qLHOaZe9yR172eA7MrbZ6uAROjtH QXrA5Bie1PyiHStGe8Smiw== 0000950135-98-004656.txt : 19980813 0000950135-98-004656.hdr.sgml : 19980813 ACCESSION NUMBER: 0000950135-98-004656 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NASD 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-Q SEC ACT: SEC FILE NUMBER: 000-19271 FILM NUMBER: 98683665 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-Q 1 IDEXX LABORATORIES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 0-19271 IDEXX LABORATORIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 01-0393723 (State of incorporation) (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) 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of July 31, 1998, 38,612,146 shares of the registrant's Common Stock, $.10 par value, were outstanding. Page 1 2 IDEXX LABORATORIES, INC. AND SUBSIDIARIES INDEX PAGE PART I -- FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets June 30, 1998 and December 31, 3 1997 Consolidated Statements of Operations 4 Three and Six Months Ended June 30, 1998 and June 30, 1997 Consolidated Statements of Cash Flows 5 Six Months Ended June 30, 1998 and June 30, 1997 Notes to Consolidated Financial Statements 6-11 Item 2. Management's Discussion and Analysis of Financial Condition 12-15 and Results of Operations PART II -- OTHER INFORMATION Item 1. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security-Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 Page 2 3 PART II -- FINANCIAL INFORMATION ITEM 1. -- FINANCIAL STATEMENTS IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $129,637 $106,972 Short-term investments 35,677 35,502 Accounts receivable, less reserves of $5,187 and $5,082 in 1998 and 1997, respectively 49,246 47,341 Inventories 51,049 60,174 Deferred income taxes 15,396 15,396 Other current assets 4,088 8,832 -------- -------- Total current assets 285,093 274,217 LONG-TERM INVESTMENTS 12,530 11,134 PROPERTY AND EQUIPMENT, AT COST: Construction in Progress 1,257 1,390 Leasehold improvements 16,852 16,596 Land 1,198 1,193 Buildings 4,485 4,462 Machinery and equipment 29,514 26,359 Office furniture and equipment 22,798 22,804 -------- -------- 76,104 72,804 Less-- Accumulated depreciation & amortization 35,727 30,387 -------- -------- 40,377 42,417 OTHER ASSETS, NET 47,564 49,280 -------- -------- $385,564 $377,048 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 15,686 $ 12,472 Accrued expenses 39,014 42,147 Notes payable 2,547 4,087 Deferred revenue 14,341 15,609 -------- -------- Total current liabilities 71,588 74,315 COMMITMENTS AND CONTINGENCIES (Note 5) -- -- STOCKHOLDERS' EQUITY: Common stock, $0.10 par value Authorized 60,000 shares Issued and outstanding 38,599 shares in 1998 and 38,169 shares in 1997 3,860 3,817 Additional paid-in capital 260,344 257,275 Retained earnings 55,115 46,256 Cumulative translation adjustment (5,343) (4,615) -------- -------- Total stockholders' equity 313,976 302,733 -------- -------- $385,564 $377,048 ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 3 4 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, ------------------------ -------------------------- 1998 1997 1998 1997 ------- ------- -------- -------- Revenue $80,886 $58,890 $158,679 $119,424 Cost of revenue 39,884 31,713 78,736 61,811 ------- ------- -------- -------- Gross Profit 41,002 27,177 79,943 57,613 Expenses: Sales and marketing 16,094 16,921 31,932 34,019 General and administrative 13,334 11,642 26,871 21,777 Research and development 4,933 3,849 9,909 7,326 ------- ------- -------- -------- Income (loss) from operations 6,641 (5,235) 11,231 (5,509) Interest income, net 1,716 1,687 3,292 3,452 ------- ------- -------- -------- Net income (loss) before provision for income taxes 8,357 (3,548) 14,523 (2,057) Provision for (benefit of) income taxes 3,259 (1,480) 5,664 (883) ------- ------- -------- -------- Net income (loss) $ 5,098 $(2,068) $ 8,859 $ (1,174) ------- ------- -------- -------- Net income (loss) per share: Basic $ 0.13 $ (0.05) $ 0.23 $ (0.03) ------- ------- -------- -------- Net income (loss) per share: Diluted $ 0.13 $ (0.05) $ 0.22 $ (0.03) ------- ------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 4 5 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED ------------------------------- JUNE 30, JUNE 30, 1998 1997 -------- -------- Cash Flows from Operating Activities: Net income (loss) $ 8,859 $ (1,174) Adjustments to reconcile net income (loss) to net cash provided by operating activities - Depreciation and amortization 7,908 6,799 Changes in assets and liabilities - Accounts receivable (1,904) 21,650 Inventories 9,026 (23,133) Other current assets 4,744 4,142 Accounts payable 3,214 4,806 Accrued expenses (2,686) (5,520) Deferred revenue (1,268) 325 -------- -------- Net cash provided by operating activities 27,893 7,895 -------- -------- Cash Flows from Investing Activities: Purchases of property and equipment (2,971) (8,852) Decrease (increase) in investments, net (1,571) 2,109 (Increase) decrease in other assets (88) (34) Acquisitions (see Note 5) (986) (9,027) -------- -------- Net cash used in investing activities (5,616) (15,804) -------- -------- Cash Flows from Financing Activities: Repayment of notes payable (1,569) (509) Proceeds from the exercise of stock options 2,685 1,819 -------- -------- Net cash provided by financing activities 1,116 1,310 -------- -------- Net Effect of Foreign Currency Translation (728) (1,990) -------- -------- Net increase (decrease) in Cash and Cash Equivalents 22,665 (8,589) Cash and Cash Equivalents, beginning of period 106,972 127,741 -------- -------- Cash and Cash Equivalents, end of period $129,637 $119,152 ======== ======== Supplemental Disclosure of Cash Flow Information: Interest paid during the period $ 140 $ 96 ======== ======== Income taxes paid during the period $ 5,635 $ 4,606 ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 5 6 IDEXX LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The unaudited financial statements included herein have been prepared by IDEXX Laboratories, Inc. and subsidiaries (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission and include, in the opinion of management, all adjustments which the Company considers necessary for a fair presentation of such information. The December 31, 1997 Balance Sheet was derived from the audited Consolidated Balance Sheets contained in the Company's latest stockholders' annual report. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto which are contained in the Company's latest stockholders' annual report. The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements reflect the application of certain accounting policies described in this and other notes to the consolidated financial statements. a. Principles of 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. Certain reclassifications have been made in the 1997 consolidated financial statements to conform with the current years presentation. c. The Company accounts for cash equivalents and short-term investments in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). Accordingly, the Company's cash equivalents and short-term investments are classified as held-to-maturity and are recorded at amortized cost which approximates market value. Cash Equivalents and Short-term Investments: 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): JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ Government bonds $16,000 $ -- Municipal bonds 15,975 6,140 U.S. Treasury bills -- 20,047 Time deposits 1,500 6,749 Commercial paper 458 2,016 Other short-term investments 1,744 550 ------- ------- $35,677 $35,502 ======= ======= Page 6 7 Long-term investments are investment securities with original maturities of greater than one year and consist of the following (in thousands): JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ Municipal bonds $12,530 $10,165 Other long term investments -- 969 ------- ------- $12,530 $11,134 ======= ======= d. 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): JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ Raw materials $10,171 $ 9,235 Work-in-process 7,384 8,421 Finished goods 33,494 42,518 ------- ------- $51,049 $60,174 ======= ======= e. During 1997 the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128). All prior earnings per share amounts have been retroactively restated. Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the quarter. The computation of diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased for the assumed exercise of dilutive options using the treasury stock method. Shares outstanding for purposes of calculating diluted earnings (loss) per share for the six months ended June 30, 1997 is derived from the arithmetic average of the weighted average shares outstanding for (i) the three months ended March 31, 1997 plus options issued to employees and (ii) the three months ended June 30, 1997, because the Company incurred a loss for the six months ended June 30, 1997. The following is a reconciliation of shares outstanding for basic and diluted earnings per share:
Three Months Ended Six Months Ended June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------- ------------- -------------- ------------- Shares outstanding for basic earnings per share: Weighted average shares outstanding 38,480 37,953 38,367 37,889 ====== ====== ====== ====== Shares outstanding for diluted earnings per share: Weighted average shares outstanding 38,480 37,953 38,367 37,889 Dilutive effect of options issued to employees 1,803 -- 1,460 943 ------ ------ ------ ------ 40,283 37,953 39,827 38,832 ====== ====== ====== ======
Page 7 8 3. NON-RECURRING OPERATING CHARGE During the third and fourth quarters of 1997 the Company recorded a non-recurring operating charge of $34.5 million. The non-recurring operating charge included the write-downs and write-offs of certain assets and accrual of costs related to a significant workforce reduction. The charge consisted of the following (in thousands): Write-off of in-process research and development $13,200 Legal settlement and related costs 8,000 Severance, benefits and related costs 9,000 Idle capacity and lease termination costs 2,700 Asset impairment 1,600 ------- $34,500 ======= As of June 30, 1998, $4.7 million was included in accrued expense relating to the non-recurring operating charge. During 1997 the Company acquired two veterinary practice management software companies (see Note 6). To assist in the allocation of purchase price associated with these acquisitions, the Company obtained an independent appraisal. That appraisal identified approximately $13.2 million as in-process research and development, which was charged to operations in accordance with FASB Interpretation No. 4 "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method." In September 1997, the Company settled a patent infringement suit brought by Barnes-Jewish Hospital ("BJH") regarding IDEXX's heartworm diagnostic products. The total costs of the settlement, including certain legal fees, were included in the non-recurring operating charge. Under the settlement, the Company agreed to pay BJH $5.5 million, a portion of which payment will be creditable against earned royalties on certain products. The Company has terminated the employment of a total of 228 employees. Of this total, 79 employees are associated with the consolidation of the veterinary practice management software business into the Eau Claire, Wisconsin facility, 57 employees are associated with the consolidation of sales, marketing and distribution operations in Europe, 33 employees are associated with reductions in domestic sales and marketing operations, 18 employees are associated with reductions in sales and marketing operations in the Pacific Rim region, 16 employees are associated with the closure of the Sunnyvale, California research and development facility and 25 employees are associated with a reduction in positions in management and financial operations. As of June 30, 1998, the severance program was essentially complete except for the consolidation of the European facilities scheduled to occur in the fourth quarter of 1998. As discussed above, the Company is consolidating certain veterinary practice management software operations into the Eau Claire, Wisconsin facility and has closed the leased Sunnyvale, California research and development facility. As a result of these consolidations, the Company has leased facilities which have become excess until the end of their respective lease terms. Additionally, the Company has determined that it will not pursue certain immunoassay technology with respect to which it has invested a total of $1.6 million in fixed assets and license fees. 4. COMPREHENSIVE INCOME In June 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 must be adopted for fiscal years beginning after December 15, 1997 and all prior periods must be retroactively restated. SFAS 130 also requires application of this statement as of the beginning of the Company's fiscal year. Other comprehensive income for the Company consists of foreign currency translation adjustments resulting from the translation of the financial statements of the Company's foreign subsidiaries. Accordingly, below is a summary of comprehensive income in accordance with this statement (in thousands): Page 8 9
Three Months Ended Six Months Ended -------------------- -------------------- June 30 June 30 June 30 June 30 1998 1997 1998 1997 ------- ------- ------- ------- Net income $5,098 $(2,068) $8,859 $(1,174) Other comprehensive income, net of tax Foreign currency translation adjustments (156) 56 (444) (1,194) ------ ------- ------ ------- Comprehensive income (loss) $4,942 $(2,012) $8,415 $(2,368) ====== ======== ====== ========
5. COMMITMENTS AND CONTINGENCIES From time to time the Company has received notices alleging that the Company's products infringe third-party proprietary rights. In particular, the Company has received notices claiming that certain of the Company's immunoassay products infringe third-party patents. Except as noted below with respect to the patent infringement suit filed by Synbiotics Corporation, the Company is not aware of any pending litigation with respect to such claims. Patent litigation frequently is complex and expensive, and the outcome of patent litigation can be difficult to predict. There can be no assurance that the Company will prevail in any infringement proceedings that have been or may be commenced against the Company. A significant portion of the Company's revenue in the three month period ended June 30, 1998 was attributable to products incorporating certain immunoassay technologies and products relating to the diagnosis of canine heartworm infection. If the Company were to be precluded from selling such products or required to pay damages or make additional royalty or other payments with respect to such sales, the Company's business and results of operations could be materially and adversely affected. On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed suit against the Company in the U.S. District Court for the District of Connecticut. In its complaint, CDC Technologies alleges that the Company's conduct in, and its relationships with its distributors in connection with, the distribution of the Company's hematology products (i) violate federal and state antitrust statutes, (ii) violate Connecticut statutes regarding unfair trade practices, and (iii) constitute a civil conspiracy and interfere with CDC Technologies' business relations. The relief sought by CDC Technologies includes treble damages for antitrust violations as well as compensatory and punitive damages, and an injunction to prevent the Company from interfering with CDC Technologies' relations with distributors. The Company has filed an answer denying the allegations in CDC's complaint. In March 1998, the court granted the Company's motion for summary judgment in the case, however CDC is appealing that ruling. The Company is unable to assess the likelihood of an adverse result or estimate the amount of any damages which the Company may be required to pay. Any adverse outcome resulting in the payment of damages would adversely affect the Company's results of operations. On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit against the Company in the U.S. District Court for the Southern District of California for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988 (the "`631 Patent"). The `631 Patent, which is owned by Synbiotics, claims certain assays, methods and compositions for the diagnosis of canine heartworm infection. The primary relief sought by Synbiotics is an injunction against the Company which would prevent the Company from selling canine heartworm diagnostic products which infringe the `631 Patent, as well as treble damages for past infringement. This suit was not served on the Company within the time period specified under applicable court rules and was dismissed without prejudice in April 1998, however Synbiotics is not precluded from filing a new suit in the future. While the Company believes that it has meritorious defenses against claims of infringement of the `631 Patent, the Company is unable to assess the likelihood of an adverse result or estimate the amount of any damages the Company may be required to pay. If the Company is precluded from selling canine heartworm diagnostic products or required to pay damages or make additional royalty or other payments with respect to such sales, the Company's business and results of operations could be materially and adversely affected. On January 9, 1998, a complaint was filed in the U.S. District Court for the District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F. WORKMAN, JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff purports to represent a class of purchasers of the common stock of the Company from July 19, 1996 through March 24, 1997. The complaint claims that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 promulgated pursuant thereto, by virtue of false or misleading statements made during the class period. The complaint also claims that the individual defendants are liable as "control persons" under Section 20(a) of that Act. In addition, the complaint claims that the individual defendants sold some of their own common stock of the Company, during the class Page 9 10 period, at times when the market price for the stock allegedly was inflated. While the Company and other defendants deny the allegations and will defend this suit vigorously, the Company is unable to assess the likelihood of an adverse result or estimate the amount of damages which the Company may be required to pay. Any adverse outcome resulting in the payment of damages would adversely affect the Company's results of operations. 6. ACQUISITIONS 1997 ACQUISITIONS The Company's consolidated results of operations include the results of operations of a manufacturing company, a foreign distribution company, a foreign veterinary reference laboratory, and two veterinary practice management companies acquired in 1997. These businesses were acquired for aggregate purchase prices equaling approximately $24.3 million in cash, the issuance of notes payable for $2.1 million and the assumption of certain liabilities. In 1998, the Company has paid a total of approximately $750,000 in additional purchase price based on the results of operations of certain acquired businesses described above. The additional payments were recorded as additional goodwill and are being amortized over the remaining life of the respective goodwill. In connection with the acquisition of the businesses described above, the Company entered into non-compete agreements for periods of up to three years with certain of the former stockholders, and may become obligated to pay additional amounts to management of these companies based on achieving certain operating results. 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 dates of acquisition. The purchase prices have been allocated to the net assets acquired on a preliminary basis and are subject to revision. Approximately $13.2 million, identified through independent valuation, of the purchase price related to the acquisition of the software companies has been charged to operations as "in process research and development" in accordance with Financial Accounting Standards Board Interpretation No. 4 "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method." The Company has not presented pro forma financial information relating to any of these acquisitions because of immateriality. These acquisitions are as follows: - On January 30, 1997, the Company acquired all of the capital stock of Acumedia Manufacturers, Inc., located in Baltimore, Maryland, which specializes in the manufacture of dehydrated cultured media. - On March 13, 1997, the Company acquired all of the capital stock of National Information Systems Corporation, located in Eau Claire, Wisconsin, which supplies practice management computer systems to veterinarians under the trade name Advanced Veterinary Systems. - On July 1, 1997, the Company, through its wholly-owned subsidiary, IDEXX Laboratories (Taiwan), Inc., acquired certain assets and business rights of Wintek Bio-Science Inc., located in Taipei, Taiwan, which distributed diagnostic products to veterinarians and hospitals in Taiwan. - On July 18, 1997, the Company acquired all of the capital stock of Professionals' Software, Inc., located in Effingham, Illinois, which supplies practice management computer systems to veterinarians. - On December 1, 1997, the Company, through its wholly-owned subsidiary IDEXX Laboratories Pty. Ltd., acquired certain assets and assumed certain liabilities of Lording & Friend Pty. Ltd. and Clinpath Pty. Ltd. (operating under the name Central Veterinary Diagnostic Laboratory), which operated a veterinary reference laboratory in Australia. 1998 ACQUISITION The Company's consolidated results of operations include the results of operations of Agri-West Laboratory, a food testing laboratory located in Texas, which was acquired on March 1, 1998. The Company acquired certain assets and assumed certain liabilities of Agri-West Laboratory through its wholly-owned subsidiary IDEXX Food Safety Net Services, Inc. for approximately $250,000 in cash. Page 10 11 In connection with the acquisition of this business, the Company entered into non-compete agreements for five years with the former owners, and may become obligated to pay additional amounts to management of the business based on achieving certain operating results. The Company has accounted for this acquisition under the purchase method of accounting. The results of operations of this business have been included in the Company's consolidated results of operations since the date of acquisition. The Company has not presented pro forma financial information relating to this acquisition because of immateriality. Page 11 12 ITEM 2. IDEXX LABORATORIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Total revenue for the second quarter of 1998 increased 37% to $80.9 million from $58.9 million for the second quarter of 1997. Total revenue for the six months ended June 30, 1998 increased 33% to $158.7 million from $119.4 million for the first six months of 1997. The increase in total revenue for the quarter ended June 30, 1998 compared to the same period in 1997 was principally attributable to increased sales of veterinary test kits and consumables, increased sales in the Company's practice management software division partially resulting from the acquisition of Professionals' Software, Inc. in July 1997, increased sales of veterinary reference laboratory services, and increased sales of products for use in food and water testing. These increases were partially offset by lower sales of veterinary instruments. The increase in revenue for the six-month period ended June 30, 1998 as compared to the same period in the prior year was principally attributable to the same factors noted for the three-month period. Reduced sales levels of the Company's veterinary test kits and consumables in 1997 were principally a result of a program to reduce U.S. distributor inventories of these products. This program was substantially completed by the end of the quarter ended June 30, 1997. Sales of test kits and consumables resumed growth following this one-time reduction in distributor inventories. Unit sales of instruments have continued to decline primarily as a result of high market penetration, a restructuring of sales channels and a shift in sales emphasis toward consumables. International revenue increased 12% to $23.3 million in the second quarter of 1998, and 5% to $44.5 million for the six months ended June 30, 1998, compared to $20.9 million and $42.4 million, respectively, for the prior year periods. Revenues of $13.2 million and $26.1 million for the three- and six-month periods ended June 30, 1998, respectively, remained relatively constant in Europe compared to the same periods in the prior year. Revenue from the Company's European subsidiaries, transacted in local currencies, increased approximately 3% and 2% for the three- and six-month periods ended June 30, 1998, respectively, as compared to the same periods in 1997. Increased sales of veterinary consumables and food and water testing products were largely offset by decreases in the number of instruments sold. Revenues increased by 46% to $6.3 million and 24% to $11.3 million in the Pacific Rim region (Japan, Asia, Australia, Taiwan) for the three- and six-month periods ended June 30, 1998, respectively, compared to the same periods in 1997. Revenue from the Company's Pacific Rim region, transacted in local currencies, increased approximately 67% and 37% for the three- and six-month periods ended June 30, 1998, respectively, as compared to the same periods in 1997. Revenues in the Pacific Rim increased for the three- and six-month periods ended June 30, 1998 primarily due to increased sales of veterinary test kits and consumables and the inclusion of revenues from the acquisition of Wintek Bio-Science Inc. in July 1997, partially offset by a decline in instrument sales. Increases in revenue in South America were partially offset by decreases in Canada. Gross profit as a percentage of revenue was 51% and 50% for the three- and six-month periods ended June 30, 1998, respectively, and 46% and 48% for the same periods in 1997. Higher sales of higher gross margin veterinary test kits and consumables and lower sales of lower margin instruments were offset by increased sales of lower margin veterinary practice management software products and services and veterinary laboratory services. In the accompanying financial statements, the Company has reclassified certain 1997 courier costs in its veterinary laboratory business from sales and marketing into cost of sales to conform to 1998 presentation. Sales and marketing expenses were 20% of revenue for the three- and six-month periods ended June 30, 1998, respectively, compared to 29% and 28% respectively, for the same periods in 1997. The decrease as a percentage of revenue and the dollar decreases of $827,000 and $2.1 million, respectively, are principally attributable to a decrease in salary and related expenses resulting from workforce reductions. Research and development expenses were 6% of revenue for the three- and six-month periods ended June 30, 1998 compared to 7% and 6% for the same periods in 1997. In dollars, such expenses increased 28% and 35% for the three- and six-month periods ended June 30, 1998, respectively, as compared to the same period in 1997, reflecting additional resources and related overhead to support product development, partially offset by the closure of the Company's research facility in Sunnyvale, California. Page 12 13 General and administrative expenses were 16% and 17% of revenue for the three and six-month periods ended June 30, 1998, respectively, compared to 20% and 18%, respectively, for the same periods in the prior year. The dollar increases of $1.7 million and $5.1 million for the three- and six-month periods ended June 30, 1998 in comparison to the same periods in 1997 are principally attributable to an increase in management incentive compensation, an increase in consulting expenses associated with business restructuring and additional costs associated with veterinary laboratories and management training and recruiting, partially offset by a reduction in legal expenses and lower provision for uncollectible accounts. Net interest income was $1.7 million and $3.3 million for the three- and six-month periods ended June 30, 1998 as compared to $1.7 million and $3.5 million for the same periods in 1997. The decrease for the six-month period ended June 30, 1998 compared to the same period in 1997 is due to a decline in interest rates offset by a slight increase in the average balance of cash and investments. The Company's effective tax rate was 39% for the three- and six-month periods ended June 30, 1998 compared to 42% and 43% for the same periods in 1997. The decrease in the effective tax rate results from the return to higher profitability, which decreases the relative impact of net non-deductible expenses and net non-taxable income on the effective tax rate. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1998, the Company had cash, cash equivalents, and short-term investments of $165.3 million and $213.5 million of working capital. The Company believes that current cash and short-term investments and funds expected to be generated from operations will be sufficient to fund the Company's current 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 and one acquisition to date in 1998, and may make additional acquisitions. Identifying and pursuing acquisition opportunities, integrating acquired products and businesses, and managing growth requires a significant amount of management time and skill. There can be no assurances that the Company will be effective in identifying and effecting attractive acquisitions, assimilating acquisitions or managing future growth. The Company has experienced and may experience in the future significant fluctuations in its quarterly operating results. Factors such as the introduction and market acceptance of new products and services, the demand for existing products and services, the mix of products and services sold and the mix of domestic versus international revenue could contribute to this quarterly variability. The Company operates with relatively little backlog and has few long-term customer contracts and substantially all of its product and service revenue in each quarter results from orders received in that quarter, which makes the Company's financial performance more susceptible to an unexpected downturn in business and more unpredictable. In addition, the Company's expense levels are based in part on expectations of future revenue levels, and a shortfall in expected revenue could therefore result in a disproportionate decrease in the Company's net income. The markets in which the Company competes are subject to rapid and substantial technological change. The Company encounters, and expects to continue to encounter, intense competition in the sale of its current and future products and services. Many of the Company's competitors and potential competitors have substantially greater capital, manufacturing, marketing, and research and development resources than the Company. The Company's future success will depend in part on its ability to continue to develop new products and services both for its existing markets and for any new markets the Company may enter in the future. The Company believes that it has established a leading position in many of the markets for its animal health diagnostic products and services, and the maintenance and any future growth of its position in these markets is dependent upon the successful development and introduction of new products and services. The Company also plans to devote significant resources to the growth of its veterinary laboratory business and Page 13 14 its business in the food, hygiene and environmental markets and to the development of an animal pharmaceutical product business, where the Company's operating experience and product and technology base are more limited than in its animal health diagnostic product markets. There can be no assurance that the Company will successfully complete the development and commercialization of products and services for existing and new businesses. The Company's success is heavily dependent upon its proprietary technologies. The Company relies on a combination of patent, trade secret, trademark and copyright law to protect its proprietary rights. There can be no assurance that the patent applications filed by the Company will result in patents being issued, that any patents of the Company will afford protection against competitors with similar technologies, or that the Company's non-disclosure agreements will provide meaningful protection for the Company's trade secrets and other proprietary information. Moreover, in the absence of patent protection, the Company's business may be adversely affected by competitors who independently develop substantially equivalent technologies. In addition, the Company licenses certain technologies used in its products from third parties, and the Company may be required to obtain licenses to additional technologies in order to continue to sell certain products. There can be no assurance that any technology licenses which the Company desires or is required to obtain will be available on commercially reasonable terms. From time to time the Company receives notice alleging that the Company's products infringe third party proprietary rights. Patent litigation frequently is complex and expensive and the outcome of patent litigation can be difficult to predict. There can be no assurance that the Company will prevail in any infringement proceedings that have been or may be commenced against the Company, and an adverse outcome may preclude the Company from selling certain products or require the Company to pay damages or make additional royalty or other payments with respect to such sales. In addition, from time to time other types of lawsuits are brought against the Company, wherein an adverse outcome could adversely affect the Company's results of operations. Certain components used in the Company's products are currently available from only one source and others are available from only a limited number of sources. The Company's inability to develop alternative sources if and as required in the future, or to obtain sufficient sole or limited source components as required, could result in cost increases or reductions or delays in product shipments. Certain technologies licensed by the Company and incorporated into its products are also available from a single source, and the Company's business may be adversely affected by the expiration or termination of any such licenses or any challenges to the technology rights underlying such licenses. In addition, the Company currently purchases or is contractually required to purchase certain of the products that it sells from one source. Failure of such sources to supply product to the Company may have a material adverse effect on the Company's business. For the six months ended June 30, 1998, international revenue was $44.5 million, or 28% or 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 that my be different from those in the United States, and designing products in compliance with such foreign standards may be difficult or expensive. Other risks associated with foreign operations include possible disruptions in transportation of the Company's products, the differing product and service needs of foreign customers, difficulties in building and managing foreign operations, fluctuations in the value of foreign currencies, import/export duties and quotas, and unexpected regulatory, economic or political changes in foreign markets. The development, manufacturing, distribution and marketing of certain of the Company's products and provision of its services, both in the United States and abroad, are subject to regulation by various domestic and foreign governmental agencies. Delays in obtaining, or the failure to obtain, any necessary regulatory approvals could have a material adverse effect on the Company's future product and service sales and operations. Any acquisitions of new products, services and technologies may subject the Company to additional areas of government regulations. The Company is conducting an evaluation of its information technology systems and its products for Year 2000 compliance. The Company's worldwide accounting system is Year 2000 compliant, and Year 2000 issues related to its other information technology systems will be addressed through planned upgrades prior to 2000. A substantial majority of the Company's products, including its instrument-based diagnostic systems and a majority of its installed base of veterinary practice management software systems, already are Year 2000 compliant. The Company expects that by the end of 1998 all practice management systems offered by the Company will be Year 2000 compliant. The cost of upgrading the Company's information technology systems and its practice management systems are not expected to be material to the Company's financial condition or results of operations. The Company has commenced an evaluation of the Year 2000 compliance of its vendors, but at this time cannot predict the extent to which its vendors will have Year 2000 problems and the impact of any such problems on the Company. Page 14 15 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. Page 15 16 PART II -- OTHER INFORMATION ITEM 1. -- LEGAL PROCEEDINGS On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed suit against the Company in the U.S. District Court for the District of Connecticut. In its complaint, CDC Technologies alleges that the Company's conduct in, and its relationships with its distributors in connection with, the distribution of the Company's hematology products (i) violate federal and state antitrust statutes, (ii) violate Connecticut statutes regarding unfair trade practices, and (iii) constitute a civil conspiracy and interfere with CDC Technologies' business relations. The relief sought by CDC Technologies includes treble damages for antitrust violations, as well as compensatory and punitive damages, and an injunction to prevent the Company from interfering with CDC Technologies' relations with distributors. The Company has filed an answer denying the allegations in CDC Technologies' complaint. In March 1998, the court granted the Company's motion for summary judgment in the case, however CDC is appealing that ruling. The Company is unable to assess the likelihood of an adverse result or estimate the amount of any damages which the Company may be required to pay. Any adverse outcome resulting in the payment of damages would adversely affect the Company's results of operations. On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit against the Company in the U.S. District Court for the Southern District of California for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988 (the "`631 Patent"). The `631 Patent, which is owned by Synbiotics, claims certain assays, methods and compositions for the diagnosis of canine heartworm infection. The primary relief sought by Synbiotics is an injunction against the Company which would prevent the Company from selling canine heartworm diagnostic products which infringe the `631 Patent, as well as treble damages for past infringement. This suit was not served on the Company within the time period specified under applicable court rules and was dismissed without prejudice in April 1998, however Synbiotics is not precluded from filing a new suit in the future. While the Company believes that it has meritorious defenses against claims of infringement of the `631 Patent, the Company is unable to assess the likelihood of an adverse result or estimate the amount of any damages the Company may be required to pay. If the Company is precluded from selling canine heartworm diagnostic products or required to pay damages or make additional royalty or other payments with respect to such sales, the Company's business and results of operations could be materially and adversely affected. On January 9, 1998, a complaint was filed in the U.S. District Court for the District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F. WORKMAN, JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff purports to represent a class of purchasers of the common stock of the Company from July 19, 1996 through March 24, 1997. The complaint claims that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 promulgated pursuant thereto, by virtue of false or misleading statements made during the class period. The complaint also claims that the individual defendants are liable as "control persons" under Section 20(a) of that Act. In addition, the complaint claims that the individual defendants sold some of their own common stock of the Company, during the class period, at times when the market price for the stock allegedly was inflated. While the Company and other defendants deny the allegations and will defend this suit vigorously, the Company is unable to assess the likelihood of an adverse result or estimate the amount of damages which the Company may be required to pay. Any adverse outcome resulting in the payment of damages would adversely affect the Company's results of operations. Page 16 17 ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS At the Company's Annual Meeting of Stockholders held on May 15, 1998, the following proposals were adopted by the votes specified below:
BROKER PROPOSAL FOR AGAINST ABSTAIN NON-VOTES - ----------------------------------------------------- ------------------------------------------------------ 1. Election of three Class III Directors: E. Robert Kinney 34,574,004 216,463 0 0 James L. Moody, Jr. 34,580,164 210,303 0 0 Erwin F. Workman, Jr., Ph.D. 34,578,151 212,316 0 0 2. Approval of the Company's 1998 Stock Incentive Plan covering 1,800,000 shares of Common Stock authorized for issuance under the plan 19,335,095 15,331,785 123,587 0 3. Ratification of Arthur Andersen LLP as auditors 34,687,067 56,917 46,483 0
The following Class II Directors of the Company were not up for re-election in 1998 and have three-year terms that expire in 1999: John R. Hesse, Kenneth Paigen, Ph.D. and Jeffrey J. Langan. The following Class I Directors of the Company were not up for re-election in 1998 and have three-year terms that expire in 2000: David E. Shaw, William F. Pounds and Mary L. Good, Ph.D. ITEM 5. -- OTHER INFORMATION Proposals of stockholders intended to be presented at the Company's 1999 Annual Meeting of Stockholders must be received by the Company at its principal office in Westbrook, Maine, not later than December 14, 1998 for inclusion in the proxy statement for that meeting. With respect to any stockholder proposal that is not included in the proxy statement, proxies may use discretionary voting authority to vote on such proposal unless the Company receives notice of such proposal at its principal office in Westbrook, Maine, not later than February 27, 1999. ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 1998 Stock Incentive Plan of the Company. 27 Financial Data Schedule for the Quarterly Report on Form 10-Q for the six month period ended June 30, 1998. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the fiscal quarter for which this report is filed. Page 17 18 SIGNATURES Pursuant to the requirements 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. Date: August 12, 1998 /s/ Ralph K. Carlton ---------------------------------------- Ralph K. Carlton, Senior Vice President, Finance and Administration and Chief Financial Officer (Principal Financial Officer) Page 18 EX-10.1 2 1998 STOCK INCENTIVE PLAN 1 EXHIBIT 10.1 IDEXX LABORATORIES, INC. 1998 STOCK INCENTIVE PLAN 1. PURPOSE The purpose of this 1998 Stock Incentive Plan (the "Plan") of IDEXX Laboratories, Inc., a Delaware corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any present or future subsidiary corporations of IDEXX Laboratories, Inc. as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). 2. ELIGIBILITY All of the Company's employees, officers, directors, consultants and advisors (and any individuals who have accepted an offer for employment) are eligible to be granted options or restricted stock awards (each, an "Award") under the Plan. Each person who has been granted an Award under the Plan shall be deemed a "Participant". 3. ADMINISTRATION, DELEGATION (a) ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be administered by the Board of Directors of the Company (the "Board"). The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. 2 (b) APPOINTMENT OF COMMITTEES. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). All references in the Plan to the "Board" shall mean the Board or a Committee of the Board to the extent that the Board's powers or authority under the Plan have been delegated to such Committee. 4. STOCK AVAILABLE FOR AWARDS (a) NUMBER OF SHARES. Subject to adjustment under Section 7, Awards may be made under the Plan for up to 1,800,000 shares of common stock, $.10 par value per share, of the Company (the "Common Stock"). If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) PER-PARTICIPANT LIMIT. Subject to adjustment under Section 7, the maximum number of shares of Common Stock with respect to which an Award may be granted to any Participant under the Plan shall be 500,000 per calendar year. The per-Participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code. 5. STOCK OPTIONS (a) GENERAL. The Board may grant options to purchase Common Stock (each, an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option". (b) INCENTIVE STOCK OPTIONS. An Option that the Board intends to be an "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option. 2 3 (c) EXERCISE PRICE. The Board shall establish the exercise price, which shall in no event be less than 100% of the fair market value of the Common Stock as determined (or in a manner approved) by the Board in good faith ("Fair Market Value") at the time of grant, at the time each Option is granted and specify it in the applicable option agreement. (d) DURATION OF OPTIONS. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement. No option will be granted for a term in excess of 10 years. (e) EXERCISE OF OPTION. Options may be exercised by delivery to the Company of a written notice of exercise signed by the proper person or by any other form of notice (including electronic notice) approved by the Board, together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. (f) PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows: (1) in cash or by check, payable to the order of the Company; (2) except as the Board may, in its sole discretion, otherwise provide in an option agreement, (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price or (iii) delivery of shares of Common Stock owned by the Participant valued at their Fair Market Value, which Common Stock was owned by the Participant at least six months prior to such delivery; (3) to the extent permitted by the Board, in its sole discretion (i) by delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) by payment of such other lawful consideration as the Board may determine; or (4) any combination of the above permitted forms of payment. 6. RESTRICTED STOCK (a) GRANTS. The Board may grant Awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require 3 4 forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, "Restricted Stock Award"). (b) TERMS AND CONDITIONS. The Board shall determine the terms and conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. (c) LIMITATION ON NUMBER OF SHARES. Notwithstanding any provision of the Plan, no more than 10% of the total number of shares issuable under the Plan may be issued in the form of Restricted Stock Awards which are granted with an issue price less than the Fair Market Value on the date of grant. 7. ADJUSTMENTS FOR CHANGES IN COMMON STOCK AND CERTAIN OTHER EVENTS (a) CHANGES IN CAPITALIZATION. In the event of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the per-Participant limits set forth in Section 4(b), (iii) the number and class of securities and exercise price per share subject to each outstanding Option, and (iv) the repurchase price per share subject to each outstanding Restricted Stock Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 7(a) applies and Section 7(c) also applies to any event, Section 7(c) shall be applicable to such event, and this Section 7(a) shall not be applicable. (b) LIQUIDATION OR DISSOLUTION. In the event of a proposed liquidation or dissolution of the Company, the Board shall upon written notice to the Participants provide that (i) all then unexercised Options will (x) become exercisable in full as of a specified time at least 10 business days prior to the effective date of such liquidation or 4 5 dissolution and (y) terminate effective upon such liquidation or dissolution, except to the extent exercised before such effective date, and (ii) all Restricted Stock Awards will become free of all restrictions as of a specified time prior to the effective date of such liquidation or dissolution. (c) ACQUISITION EVENTS (1) DEFINITION. An "Acquisition Event" shall mean: (a) any merger or consolidation of the Company with or into another entity as a result of which the Common Stock is converted into or exchanged for the right to receive cash, securities or other property or (b) any exchange of shares of the Company for cash, securities or other property pursuant to a statutory share exchange transaction. (2) CONSEQUENCES OF AN ACQUISITION EVENT ON OPTIONS. Upon the occurrence of an Acquisition Event, or the execution by the Company of any agreement with respect to an Acquisition Event, the Board shall provide that all outstanding Options shall be assumed, or equivalent options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), provided that any options substituted for Incentive Stock Options shall satisfy, in the determination of the Board, the requirements of Section 424(a) of the Code. Notwithstanding the foregoing, if the acquiring or succeeding corporation (or an affiliate thereof) does not agree to assume, or substitute for, such Options, then the Board shall upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time (the "Acceleration Time") prior to the Acquisition Event and will terminate immediately prior to the consummation of such Acquisition Event, except to the extent exercised by the Participants before the consummation of such Acquisition Event; provided, however, that, in the event of an Acquisition Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"), then the Board may instead provide that all outstanding Options shall terminate upon consummation of such Acquisition Event and that each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options. (3) CONSEQUENCES OF AN ACQUISITION EVENT ON RESTRICTED STOCK AWARDS. Upon the occurrence of an Acquisition Event, the repurchase and other rights of the Company under each outstanding Restricted Stock Award shall inure to the benefit of the Company's successor and shall apply to the cash, securities or other property which the Common Stock was converted into or exchanged for pursuant to such Acquisition 5 6 Event in the same manner and to the same extent as they applied to the Common Stock subject to such Restricted Stock Award. 8. GENERAL PROVISIONS APPLICABLE TO AWARDS (a) TRANSFERABILITY OF AWARDS. Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. (b) DOCUMENTATION. Each Award shall be evidenced by a written instrument in such form as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan. (c) BOARD DISCRETION. Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award. The terms of each Award need not be identical, and the Board need not treat Participants uniformly. (d) TERMINATION OF STATUS. The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award. (e) WITHHOLDING. Each Participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. Except as the Board may otherwise provide in an Award, Participants may satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. (f) AMENDMENT OF AWARD. The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that 6 7 the action, taking into account any related action, would not materially and adversely affect the Participant. (g) CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. (h) ACCELERATION. The Board may at any time provide that any Options shall become immediately exercisable in full or in part or that any Restricted Stock Awards shall be free of restrictions in full or in part. 9. MISCELLANEOUS (a) NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. (b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to such Option are adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the record date for such stock dividend and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend. 7 8 (c) EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on the date on which it is approved by the Company's stockholders. No Awards shall be granted under the Plan after the completion of ten years from the date the Plan was approved by the Board, but Awards previously granted may extend beyond that date. (d) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that, to the extent required by Section 162(m), no Award granted to a Participant designated as subject to Section 162(m) by the Board after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award (to the extent that such amendment to the Plan was required to grant such Award to a particular Participant), unless and until such amendment shall have been approved by the Company's stockholders as required by Section 162(m) (including the vote required under Section 162(m)). (e) GOVERNING LAW. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. Approved by the Board of Directors February 12, 1998. 8 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE IDEXX LABORATORIES, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000874716 IDEXX LABORATORIES, INC. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 129,637 35,677 54,433 5,187 51,049 285,093 76,104 35,727 385,564 71,588 0 0 0 3,860 310,116 385,564 127,873 158,679 56,057 78,736 67,843 869 170 14,523 5,664 8,859 0 0 0 8,859 .23 .22
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