ANNUAL REPORT TO STOCKHOLDERS
Published on March 31, 1999
EXHIBIT 13
SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five years ended December 31, 1998. The selected
consolidated financial data presented below in the period have been derived from
the Company's consolidated financial statements, which have been audited by
Arthur Andersen LLP, independent public accountants. These financial data should
be read in conjunction with the consolidated financial statements, related notes
and other financial information appearing elsewhere in this Form 10-K.
YEARS ENDED DECEMBER 31,
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Working capital ....... $ 76,575 $228,565 $250,590 $201,342 $184,845
Total assets .......... 121,741 312,540 373,852 377,048 390,532
Total debt ............ -- 1,687 3,000 4,087 9,381
Stockholders' equity .. 99,786 279,125 322,725 302,733 307,840
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
* RESULTS OF OPERATIONS
The Company operates primarily through two business units: the Veterinary
Solutions Group ("VSG") and Food and Environmental Division ("FED"). VSG
comprises the Company's veterinary products and services, with the exception of
its animal health pharmaceuticals business, and FED comprises the Company's
services and products for food and environmental testing. At this time, the
Company's animal health pharmaceuticals business is not material to its
operations.
1998 Compared to 1997
VETERINARY SOLUTIONS GROUP
Revenue for the VSG for 1998 increased 24% to $247.6 million from $200.4
million in 1997. The increase in revenue in 1998 compared to 1997 is primarily
attributable to increased sales of feline and canine test kits, consumables used
in the Company's veterinary instruments, practice information management
hardware, software and services resulting from the acquisition of practice
information management software companies in the first and third quarters of
1997, and veterinary reference laboratory services. These increases were offset
in part by decreased unit sales of veterinary instruments.
International revenue for VSG increased 4% to $59.8 million, or 24% of
total VSG revenue, in 1998, compared to $57.6 million, or 29% of total VSG
revenue, in 1997. Revenue increased 1% in Europe and 24% in the Asia-Pacific
region (Japan, Taiwan and Australia), while revenue decreased 10% in Canada and
South America. In Europe, increased sales of veterinary test kits and
consumables and of veterinary laboratory services were offset by a decline in
veterinary instrument sales. In the Asia-Pacific region, increased sales of
veterinary test kits and consumables and of veterinary laboratory services were
partially offset by a decline in instrument sales due to increased competition.
Gross profit as a percentage of VSG revenue was 50% for 1998 compared to
46% for 1997. Higher sales of higher margin veterinary test kits and consumables
were partially offset by increased sales of lower margin veterinary laboratory
services and practice information management software products and services.
FOOD AND ENVIRONMENTAL DIVISION
Revenue for FED for 1998 increased 15% to $71.9 million from $62.3 million
in 1997. The increase in revenue in 1998 compared to 1997 is primarily
attributable to increased sales of food and environmental testing products,
poultry and livestock test kits, and food laboratory testing services
principally resulting from the acquisition of Agri-West Food Laboratory in March
1998.
International revenue for FED increased 16% to $30.2 million, or 42% of
total FED revenue, in 1998, compared to $26.0 million, or 42% of total FED
revenue, in 1997. Revenue increased 18% in Europe and 26% in Canada and South
America, while revenue decreased 4% in the Asia-Pacific region. In Europe, the
increase in revenue was primarily attributable to increased sales of food and
environmental testing products and poultry and livestock test kits. The
decrease in revenue in the Asia-Pacific region is primarily due to decreased
sales of food testing instruments, poultry and livestock test kits, and residue
test kits partially offset by increased sales of water test kits.
Gross profit as a percentage of FED revenue was 53% for 1998 and 1997.
Increased sales of higher margin water, poultry and livestock kits were offset
by a decline in the average unit prices of poultry and livestock kits, which was
due to increased competition.
2
OPERATING EXPENSES
Sales and marketing expenses were 19% and 25% of revenue in 1998 and 1997,
respectively. The decrease as a percentage of revenue and the dollar decrease of
$4.6 million were principally attributable to an overall reduction in marketing
and sales staff and related expenses resulting from workforce reductions
worldwide, partially offset by the inclusion of a full year of expense for the
veterinary practice information management software and food laboratory service
businesses.
Research and development expenses were 7% and 6% of revenue in 1998 and
1997, respectively. The increase as a percentage of revenue and the dollar
increase of $4.5 million reflected additional resources and related overhead to
support product development and the addition of pharmaceutical development
expenses associated with the acquisition of Blue Ridge Pharmaceuticals, Inc.
("Blue Ridge") in October 1998.
General and administrative expenses were 15% and 16% of revenue in 1998 and
1997, respectively. In dollars, general and administrative expenses increased
$6.4 million from 1997 to 1998. The increase was principally attributable to an
increase in management incentive bonuses from 1997 when no bonuses were paid;
additional expenses associated with the expansion of the veterinary laboratory
business; and additional general and administrative expenses associated with
acquired businesses, principally the acquisition of Blue Ridge in October 1998.
These increases were offset in part by a decrease in the provision for bad debts
and by a decrease in currency losses.
On October 1, 1998 the Company acquired Blue Ridge Pharmaceuticals, Inc., a
development-stage animal health pharmaceutical company with 11 products in
development. At the acquisition date Blue Ridge had no commercially viable
products and no historical revenue stream. The Company allocated the aggregate
purchase price of $59.2 million plus $300,000 of acquisition costs based on the
fair market value of tangible and intangible assets acquired, in accordance with
Accounting Principles Board Opinion No. 16 (APB 16). The acquisition was
accounted for as a purchase in accordance with APB 16 and the results of
operations have been included with the Company's results since the date of
acquisition. To value the intangible assets acquired the Company obtained an
independent appraisal. That appraisal was performed using proven valuation
techniques and supplemental guidance provided by the Securities and Exchange
Commission. The aggregate purchase price was allocated as follows (in
thousands):
Intangibles include $37.2 million for purchased in-process research and
development for projects that do not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash
flows, adjusted using percentage of completion methodology (see below), related
to the in-process research and development projects. The development of these
projects had not yet reached technological feasibility and the in-process
research and development had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date in accordance with FASB Interpretation No.
4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for
by the Purchase Method.
Eight of the eleven projects are pharmaceuticals for companion animals,
including horses, and three of the eleven projects are pharmaceuticals for food
animals. These projects use a combination of proprietary compounds and novel
delivery systems. To be sold commercially the products must be approved by the
Center for Veterinary Medicine (CVM), which is the agency within the Food and
Drug Administration (FDA) that is responsible for managing approval of new
animal drugs. There are five types of data that must be provided to the FDA and
the CVM prior to approval. These include 1) efficacy, 2) safety to the animals
to be treated, 3) safety to the humans who will consume the animal or its
products (if applicable), 4) safety to the environment and 5) good manufacturing
practices (quality control of production to assume a consistent product). The
Company utilizes clinical studies to support its applications for approval. The
companion animal projects range from 19% to 78% complete, while the food animal
projects range from 78% to 93% complete.
These projects are unique and complex and frequently require modification
to the product and the manufacturing process before satisfactory clinical
results can be obtained. The delay in obtaining satisfactory data can result
from any of the five items discussed above and frequently satisfactory results
cannot be obtained.
3
The in process research and development charge attributable to the
companion animal projects totals approximately $33.1 million, and these projects
will require expenditures of $500,000 in 1999, $700,000 in 2000, and $100,000 in
2001. The intangible asset attributable to the food animal projects totals
approximately $4.1 million, and these projects will require expenditures of
$250,000 in 1999 and $50,000 in 2000. Management believes that it is positioned
to complete each of the major research and development programs. These estimates
are subject to change, given the uncertainties of the development process and no
assurance can be given that deviations from these estimates will not occur.
Additionally, these projects will require maintenance expenditures when and if
they have reached a state of technological and commercial feasibility and there
is no assurance that each project will meet either technological or commercial
success. The Company projects that it will first realize revenue from certain
companion animal projects in 1999 with no significant revenue until 2000. The
Company also projects that it will first realize revenue from certain food
animal projects in 2000 with no significant revenue until 2001.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products, estimating the percentage of
completion at the acquisition date, estimating the resulting net risk-adjusted
cash flows from the projects considering the percentage of completion and
discounting the net cash flows to their present value. The percentage of
completion for each project was estimated using costs incurred to date compared
to estimated costs at completion. The revenue projections used to value the
in-process research and development are based on estimates of relevant market
sizes and growth factors and nature and expected timing of new products. The
rate utilized to discount the net cash flows to their present value is based on
the weighted average cost of capital adjusted to consider the risk associated
with these technologies. The Company used a 20% discount factor to value this
in-process research and development.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate and unanticipated events and circumstances are
likely to occur. For these reasons, actual results may vary significantly from
the projected results.
Net interest income was $6.9 million in 1998 compared to $6.7 million in
1997. The increase in interest income is due to higher cash and investment
balances during 1998 compared to 1997.
The Company's effective tax rate was 39% before the write-off of
in-process research and development in 1998 compared to 40% before the
write-off of in-process research and development in 1997. The decrease in the
effective tax rate was primarily attributable to income generated in states with
lower state income tax rates and the utilization of previously unavailable
Federal research and development credits.
1997 Compared to 1996
VETERINARY SOLUTIONS GROUP
Revenue for VSG for 1997 decreased 7% to $200.4 million from $215.5 million
in 1996. The decrease in revenue in 1997 compared to 1996 is primarily
attributable to decreased sales of veterinary instruments and feline and canine
test kits. Veterinary instrument sales decreased 42%. The decrease principally
related to sales of fewer units and, to a lesser degree, lower average unit
prices for those instruments. The lower feline and canine product sales were
principally due to a program designed to reduce U.S. distributor inventories of
these products. Sales of these products decreased 34% and 27%, respectively.
These decreases were offset in part by increased sales of veterinary laboratory
services, resulting from the inclusion of a full year of revenues from the four
veterinary laboratories acquired in 1996, and the inclusion of revenue from the
veterinary practice information management software companies acquired in the
first and third quarters of 1997.
International revenue for VSG decreased 18% to $57.6 million, or 29% of
total VSG revenue, in 1997, compared to $70.5 million, or 33% of total VSG
revenue, in 1996. Revenue decreased 22% in Europe and 16% in the Asia-Pacific
region, while revenue increased 10% in Canada and South America. The decrease
in sales in Europe and the Asia-Pacific region principally relates to fewer
unit sales of veterinary instruments and, to a lesser extent, feline test kits.
Gross profit as a percentage of VSG revenue was 46% for 1997 compared to
57% for 1996. The decrease in gross margin is due to less efficient
manufacturing operations caused by lower production volumes; declining average
sale prices of veterinary instruments; the revenue mix impact of lower sales of
higher margin veterinary test products, offset by higher sales of lower margin
veterinary laboratory services and practice information management software
products and services; an increase in fixed costs associated with expansion of
the veterinary laboratory business; and certain fixed veterinary service and
repair costs spread over lower veterinary sales volumes.
4
FOOD AND ENVIRONMENTAL DIVISION
Revenue for FED for 1997 increased 21% to $62.3 million from $51.6 million
in 1996. The increase in revenue in 1997 compared to 1996 is primarily
attributable to higher unit sales of food and environmental testing products,
food testing consumables, and poultry and livestock test kits, partially offset
by a decline in average unit price of poultry and livestock kits.
International revenue for FED increased 26% to $26.0 million, or 42% of
total FED revenue, in 1997, compared to $20.7 million, or 40% of total FED
revenue, in 1997. Revenue increased 15% in Europe, 24% in the Asia-Pacific
region, and 56% in Canada and South America. The revenue increases in Europe,
the Asia-Pacific region, and in Canada and South America are primarily
attributable to increased sales of food and environmental testing products.
Gross profit as a percentage of FED revenue was 53% for 1997 compared to
57% for 1996. The decrease in gross margin is due to less efficient
manufacturing operations caused by lower production volumes, combined with
unfavorable revenue mix impact.
OPERATING EXPENSES
Sales and marketing expenses were 25% and 24% of revenue in 1997 and 1996,
respectively. The increase as a percentage of revenue and the dollar increase of
$1.9 million were principally attributable to domestic sales and marketing costs
remaining constant while revenue from veterinary test products and veterinary
instruments declined and to additional sales and marketing expenses associated
with the veterinary laboratory businesses acquired in 1996 and veterinary
practice information management software businesses acquired in 1997, offset in
part by reductions in European sales and marketing expenses resulting from
workforce reductions.
Research and development expenses were 6% and 5% of revenue in 1997 and
1996, respectively. The increase as a percentage of revenue and the dollar
increase of $4.9 million reflected additional resources and related overhead to
support product development and the addition of veterinary practice information
management software development expenses associated with the acquisitions of the
veterinary practice information management software businesses discussed above.
General and administrative expenses were 16% and 11% of revenue in 1997 and
1996, respectively. The increase as a percentage of revenue and the dollar
increase of $14.7 million were principally attributable to additional general
and administrative expense associated with acquired businesses, principally
veterinary laboratory businesses and veterinary practice information management
software businesses; additional expenses associated with geographic expansion;
additional amortization of goodwill and other intangibles associated with
business acquisitions; currency losses; and an additional provision for bad
debts. These increases were offset in part by a reduction in management bonuses.
During 1997 the Company recorded a non-recurring operating charge of $34.5
million. The non-recurring operating charge included a $13.2 million write-off
of in process research and development (see below) and $21.3 million of the
write-downs and write-offs of certain assets and the accrual of costs related
to a significant workforce reduction. The $21.3 million charge includes
approximately $8.0 million to settle a patent infringement lawsuit brought by
Barnes-Jewish Hospital, including associated legal costs; approximately $9.0
million in severance benefits and related costs associated with workforce
reductions in veterinary practice information management software businesses,
veterinary laboratory businesses and certain other domestic and international
operations, and other facility closures; approximately $2.7 million to provide
for idle capacity and lease terminations resulting from consolidation of
veterinary practice information management software operations and the closing
of the Company's Sunnyvale, California research and development facility; and
approximately $1.6 million to write off assets associated with technology no
longer pursued by the Company. Also in conjunction with the non-recurring
charge, the Company provided a $2.9 million charge to cost of sales to provide
for inventory related issues.
5
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):
Intangibles include $13.2 million for purchased in-process research and
development for projects that do not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash flows
related to the in-process research and development projects. The development of
these projects had not yet reached technological feasibility and the in-process
research and development had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date in accordance with FASB Interpretation No.
4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for
by the Purchase Method.
The two projects consisted of practice information management software
programs and related modules. These products are used by veterinarians to manage
and operate their veterinary clinics. These projects are unique and complex and
frequently require modification to the product before the products are ready for
commercial markets.
These projects were projected to require expenditures of $500,000 in 1997
and $1.5 million in 1998. Actual expenses approximated these projections. These
projects have been substantially completed in accordance with the original
plans. Management believes the long- term plans for this business continue to be
substantially consistent with the original plan. These projects will require
maintenance expenditures to maintain commercial status and there is no assurance
that each product will meet commercial success. The Company realized revenue
from these products in 1999.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products, estimating the resulting net
risk-adjusted cash flows from the projects and discounting the net cash flows to
their present value. The revenue projections used to value the in-process
research and development are based on estimates of relevant market sizes and
growth factors and nature and expected timing of new products. The rate utilized
to discount the net cash flows to their present value is based on the weighted
average cost of capital adjusted to consider the risk associated with these
technologies. The Company used a 20% discount factor to value this in-process
research and development.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate and unanticipated events and circumstances are
likely to occur. For these reasons, actual results may vary significantly from
the projected results.
6
Net interest income was $6.7 million in 1997 compared to $8.3 million in
1996. The decrease in interest income was due to lower cash and investment
balances during 1997 compared to 1996, due to cash invested in business
acquisitions and in additional fixed assets.
The Company's effective tax rate was 40% before the write-off of
in-process research and development in 1997 compared to 41% in 1996. The
decrease in the effective rate was primarily attributable to income generated in
states with lower state income tax rates.
* LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had $138.4 million of cash, cash
equivalents, and short-term investments and $184.8 million of working capital.
The Company's total capital budget for 1998 is approximately $15.0 million.
Under the terms of certain supply agreements with suppliers of the Company's
hematology instruments and consumables, slides for its VetTest instruments and
certain raw materials, the Company has aggregate commitments to purchase
approximately $34.1 million of products in 1999.
The Company believes that current cash and short-term investments, which
include net proceeds from the offering of the Company's Common Stock in 1995,
and funds generated from operations, will be sufficient to fund the Company's
operations for the foreseeable future.
* FUTURE OPERATING RESULTS
The future operating results of the Company are subject to a number of
factors, including without limitation the following:
The Company's business has grown significantly over the past several years
as a result of both internal growth and acquisitions of products and businesses.
The Company has consummated a number of acquisitions since 1992, including six
acquisitions in 1996, five acquisitions in 1997 and two acquisitions in 1998,
and plans to make additional acquisitions. Identifying and pursuing acquisition
opportunities, integrating acquired products and businesses, and managing growth
require a significant amount of management time and skill. There can be no
assurance that the Company will be effective in identifying and effecting
attractive acquisitions, assimilating acquisitions or managing future growth.
The Company has experienced and may experience in the future significant
fluctuations in its quarterly operating results. Factors such as the
introduction and market acceptance of new products and services, the mix of
products and services sold and the mix of domestic versus international revenue
could contribute to this quarterly variability. The Company operates with
relatively little backlog and has few long-term customer contracts and
substantially all of its product and service revenue in each quarter results
from orders received in that quarter, which makes the Company's financial
performance more susceptible to an unexpected downturn in business and more
unpredictable. In addition, the Company's expense levels are based in part on
expectations of future revenue levels, and a shortfall in expected revenue could
therefore result in a disproportionate decrease in the Company's net income.
The markets in which the Company competes are subject to rapid and
substantial technological change. The Company encounters, and expects to
continue to encounter, intense competition in the sale of its current and future
products and services. Many of the Company's competitors and potential
competitors have substantially greater capital, manufacturing, marketing, and
research and development resources than the Company.
The Company's future success will depend in part on its ability to continue
to develop new products and services both for its existing markets and for any
new markets the Company may enter in the future. The Company believes that it
has established a leading position in many of the markets for its animal health
diagnostic products and services, and the maintenance and any future growth of
its position in these markets is dependent upon the successful development and
introduction of new products and services. The Company also plans to devote
7
significant resources to the growth of its veterinary laboratory business,
veterinary practice information management software business, animal health
pharmaceuticals business and its business in the food, hygiene and environmental
markets, where the Company's operating experience and product and technology
base are more limited than in its animal health diagnostic product markets.
There can be no assurance that the Company will successfully complete the
development and commercialization of products and services for existing and new
businesses.
The Company's success is heavily dependent upon its proprietary
technologies. The Company relies on a combination of patent, trade secret,
trademark and copyright law to protect its proprietary rights. There can be no
assurance that patent applications filed by the Company will result in patents
being issued, that any patents of the Company will afford protection against
competitors with similar technologies, or that the Company's non-disclosure
agreements will provide meaningful protection for the Company's trade secrets
and other proprietary information. Moreover, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technologies. In addition, the
Company licenses certain technologies used in its products from third parties,
and the Company may be required to obtain licenses to additional technologies in
order to continue to sell certain products. There can be no assurance that any
technology licenses which the Company desires or is required to obtain will be
available on commercially reasonable terms.
From time to time the Company receives notices alleging that the Company's
products infringe third party proprietary rights. In particular, the Company has
received notices claiming that certain of the Company's immunoassay products
infringe third-party patents. Except as noted in "Notes to Consolidated
Financial Statements" with respect to the patent infringement suit filed by
Synbiotics Corporation, the Company is not aware of any pending litigation with
respect to such claims. Patent litigation frequently is complex and expensive
and the outcome of patent litigation can be difficult to predict. There can be
no assurance that the Company will prevail in any infringement proceedings that
have been or may be commenced against the Company, and an adverse outcome may
preclude the Company from selling certain products or require the Company to pay
damages or make additional royalty or other payments with respect to such sales.
In addition, from time to time other types of lawsuits are brought against the
Company, wherein an adverse outcome could adversely affect the Company's results
of operations.
Certain components used in the Company's products are currently available
from only one source and others are available from only a limited number of
sources. The Company's inability to develop alternative sources if and as
required in the future, or to obtain sufficient sole or limited source
components as required, could result in cost increases or reductions or delays
in product shipments. Certain technologies licensed by the Company and
incorporated into its products are also available from a single source, and the
Company's business may be adversely affected by the expiration or termination of
any such licenses or any challenges to the technology rights underlying such
licenses. In addition, the Company currently purchases or is contractually
required to purchase certain of the products that it sells from one source.
Failure of such sources to supply product to the Company may have a material
adverse effect on the Company's business.
In 1998, international revenue was $88.7 million and accounted for 28% of
total revenue, and the Company expects that its international business will
continue to account for a significant portion of its total revenue. Foreign
regulatory bodies often establish product standards different from those in the
United States, and designing products in compliance with such foreign standards
may be difficult or expensive. Other risks associated with foreign operations
include possible disruptions in transportation of the Company's products, the
differing product and service needs of foreign customers, difficulties in
building and managing foreign operations, fluctuations in the value of foreign
currencies, import/export duties and quotas, and unexpected regulatory, economic
or political changes in foreign markets.
The development, manufacturing, distribution and marketing of certain of
the Company's products and provision of its services, both in the United States
and abroad, are subject to regulation by various domestic and foreign
governmental agencies. Delays in obtaining, or the failure to obtain, any
necessary regulatory approvals could have a material adverse effect on the
Company's future product and service sales and operations. Any acquisitions of
new products, services and technologies may subject the Company to additional
areas of government regulations.
8
The development, manufacture, distribution and marketing of the Company's
products and provision of its services involve an inherent risk of product
liability claims and associated adverse publicity. Although the Company
currently maintains liability insurance, there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms or at all.
* YEAR 2000
Historically, certain computer programs have been written using two digits,
rather than four digits, to define the applicable year. This could lead, in many
cases, to a computer's recognizing a date using "00" as 1900 rather than the
year 2000. This phenomenon could result in major computer system failures or
miscalculations, and is generally referred to as the "Year 2000" problem or
issue. The following discussion first summarizes the Company's efforts to
identify and resolve Year 2000 issues associated with the Company's information
technology (IT) and non-IT internal systems, the products and services sold by
the Company, and the products and services supplied by outside vendors, and then
addresses total costs, most reasonably likely worst case scenarios, contingency
plans, and the basis for current estimates relating to such efforts.
The Company's worldwide accounting system is Year 2000 ready, and
throughout 1999 the Company expects to complete implementation of any needed
Year 2000 related modifications to its other IT systems. The Company is also
currently assessing its internal non-IT systems and expects to complete testing
and any needed modifications to these systems prior to 2000. Although the
Company does not believe that it will incur material costs or experience
material disruptions in its business associated with preparing its internal
systems for the Year 2000, there can be no assurances that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems, which are composed of third party software, third party hardware that
contains embedded software and the Company's own software products.
The Company's Year 2000 effort has included testing products currently or
recently offered by the Company for Year 2000 issues. All of the Company's
current product offerings are Year 2000 ready. For products that were identified
as needing updates to address Year 2000 issues, the Company has prepared updates
or has removed such products from its product offerings. Some of the Company's
customers, including users of older practice information management systems, are
using product versions that the Company will not support for Year 2000 issues;
the Company is encouraging these customers to migrate to current product
versions that are Year 2000 ready. Notwithstanding these efforts, there can be
no guarantee that one or more current Company products do not contain Year 2000
issues that may result in material costs to the Company.
Because a portion of the Company's business involves the sale of software
systems, the Company's risk of being subjected to lawsuits relating to Year 2000
issues with its software products is likely to be greater than that of companies
that do not sell software products. Because computer systems may involve
different hardware, firmware and software components from different
manufacturers, it may be difficult to determine which component in a computer
system may cause a Year 2000 issue. As a result, the Company may be subjected to
Year 2000 related lawsuits independent of whether its products and services are
Year 2000 ready. The outcomes of any such lawsuits and the impact on the Company
cannot be determined at this time.
The Company has queried its important suppliers and vendors to assess their
Year 2000 readiness. To date, the Company is not aware of any problems that
would materially impact results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that these suppliers and vendors
will be Year 2000 ready. The inability of those parties to complete their Year
2000 resolution process could materially impact the Company. The Company is
currently querying key resellers of Company products regarding Year 2000
readiness. No assurances can be given regarding the state of readiness of such
resellers.
The Company's total cost relating to Year 2000 related activities has not
been and is not expected to be material to the Company's financial position,
results of operations, or cash flows. The Company believes that necessary
modifications will be made on a timely basis. However, there can be no assurance
that there will not be a delay in, or increased costs associated with, the
implementation of such modifications, or that the Company's suppliers, resellers
and customers will adequately prepare for the Year 2000 issue. It is possible
that any such delays,
9
increased costs, or supplier, reseller or customer failures could have a
material adverse impact on the Company's operations and financial results.
The most reasonable likely worst case Year 2000 scenarios for the Company
would include: (i) the failure of infrastructure services provided by government
agencies and other third parties (e.g., electricity, phone service, water,
transport, material delivery, security systems, etc.), (ii) corruption of data
contained in the Company's internal information systems, and (iii) hardware
failure. The Company is currently developing a contingency plan in the event
certain internal or external systems are not Year 2000 ready. However, if the
Company does not become Year 2000 ready in a timely manner, the Year 2000 issue
could have a material adverse impact on the Company's operations by, for
example, impacting the Company's ability to deliver products or services to its
customers.
Current estimates of the costs of the project and the information on which
the Company believes it will complete the Year 2000 modifications are based on
certain assumptions regarding future events, including the continued
availability of certain resources, assurances received from third parties, and
other factors. However, there can be no guarantee that these estimates will be
achieved or that this information is accurate, and therefore the actual results
could differ materially from those anticipated. Specific factors might include,
but are not limited to, the availability and cost of personnel trained in this
area, the degree of cooperation and preparedness of third parties, the ability
to locate and correct all relevant computer codes, and other uncertainties.
10
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To IDEXX Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of IDEXX
Laboratories, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IDEXX
Laboratories, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. The schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 5, 1999
12
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial
statements.
13
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial
statements.
14
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these consolidated financial
statements.
15
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
The accompanying notes are an integral part of these consolidated financial
statements.
16
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
IDEXX Laboratories, Inc. and subsidiaries (the "Company") develop,
manufacture and distribute products and provide services for the veterinary,
food and environmental markets. In the veterinary market the Company develops,
manufactures and distributes biology-based detection systems, develops and
distributes chemistry-based detection systems, provides laboratory testing and
specialized consulting services and develops and distributes veterinary practice
information management software systems and provides related services. In the
food and environmental market the Company develops, manufactures and distributes
biology-based detection systems and provides laboratory testing and specialty
consulting services. The Company also develops animal health pharmaceuticals.
The Company's products and services are sold worldwide.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as discussed below and elsewhere in
the notes to the consolidated financial statements. The preparation of these
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(a) Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
(b) Inventories
Inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out) or market. The components of inventories are
as follows (in thousands):
DECEMBER 31,
-------------------
1997 1998
------- -------
Raw materials............. $ 9,235 $11,342
Work-in-process........... 8,421 5,784
Finished goods............ 42,518 38,302
------- -------
$60,174 $55,428
======= =======
(c) Depreciation and Amortization
The Company provides for depreciation and amortization using the
declining-balance and straight-line methods by charges to operations in amounts
that allocate the cost of property and equipment over their estimated useful
lives as follows:
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
Leasehold improvements.............. Life of lease
Machinery and equipment............. 3-5 Years
Office furniture and equipment...... 5-7 Years
Buildings........................... 40 Years
17
(d) Other Assets
Other assets are as follows (in thousands):
DECEMBER 31,
------------------
DESCRIPTION USEFUL LIFE 1997 1998
----------- ----------- ------- -------
Patents and trademarks.. 10 Years $ 9,348 $ 9,372
Goodwill................ 5-40 Years 32,256 54,697
Non-compete agreements.. 3-5 Years 4,000 4,330
Other intangibles....... 5-10 Years 8,665 11,259
------- -------
54,269 79,658
Accumulated amortization 14,219 21,858
------- -------
Intangible assets, net.. $40,050 $57,800
Other assets............ 9,230 10,609
------- -------
$49,280 $68,409
======= =======
Substantially all of the patents and trademarks were acquired in connection
with the acquisition of a product line of VetTest S.A. ("VetTest") in 1992.
Other intangibles include subscriber lists, existing technology intangible
assets, and prepaid royalties. Other assets include long-term deferred tax
asset, long-term non-trade receivables and long-term deposits. Amortization of
intangible assets was $3.4 million, $5.0 million and $6.0 million for the years
ended December 31, 1996, 1997 and 1998, respectively. The Company continually
assesses the realizability of these assets in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and determined
that no impairment has occurred.
(e) Stock-Based Compensation Plans
The Company accounts for stock-based compensation plans under the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under SFAS
No. 123, the Company elected the disclosure method and will continue to account
for stock-based compensation plans under Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees (See Note 9).
(f) Income Taxes
The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. This statement requires that the Company recognize a current tax
liability or asset for current taxes payable or refundable and a deferred tax
liability or asset for the estimated future tax effects of temporary differences
and carryforwards to the extent they are realizable (See Note 2).
(g) Revenue Recognition
The Company recognizes product revenue at the time of shipment. The Company
recognizes revenue from non-cancellable software licenses upon product shipment
as collection is probable and no significant vendor obligations remain at the
time of shipment. Service revenue is recognized at the time the service is
performed. Service and maintenance revenue is billed in advance and recognized
over the life of the contracts, usually one year or less.
(h) Research and Development and Software Development Costs
In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, the Company has evaluated the
establishment of technological feasibility of its various products during the
development phase. Due to the dynamic changes in the market, the Company has
concluded that it cannot determine technological feasibility until the
development phase of the project is nearly complete. The Company charges all
research and development expenses to operations in the period incurred as the
costs from the point of technological feasibility to first product release are
immaterial.
18
(i) Foreign Currency Translation and Foreign Exchange Contracts
Assets and liabilities of the Company's foreign subsidiaries are translated
using the exchange rate in effect at the balance sheet date. Revenue and expense
accounts are translated using a weighted average of exchange rates in effect
during the period. Cumulative translation gains and losses are shown in the
accompanying consolidated balance sheets as a separate component of
stockholders' equity. Exchange gains and losses arising from transactions
denominated in foreign currencies are included in current operations. Included
in general and administrative expenses are foreign currency transaction gains of
$369,000 and losses of $511,000 and $127,000 for the years ended December 31,
1996, 1997 and 1998, respectively.
The Company enters into foreign currency exchange contracts of its
anticipated intercompany and third party inventory purchases for the next twelve
months in order to minimize the impact of foreign currency fluctuations on these
transactions. The Company's accounting policies for these contracts are based on
the Company's designation of such instruments as hedging transactions which are
supported by firm third-party purchases. The Company also utilizes some natural
hedges to mitigate its transaction and commitment exposures. The contracts the
Company enters into are firm foreign currency commitments, and therefore market
gains and losses are deferred until the contract matures, which is the period
the related obligation is settled. The Company enters into these exchange
contracts with large multinational financial institutions. As of December 31,
1997 and 1998, the deferred gains on these contracts totaled $280,000 and
$28,000, respectively, and the foreign currency contracts, which extend through
December 31, 1998 and 1999, respectively, consisted of the following (in
thousands):
CURRENCY SOLD US DOLLAR EQUIVALENT
------------- --------------------
1997 1998
------- ------
Pound sterling............... $ 5,001 $ --
Deutsche mark................ 4,044 --
Canadian dollar.............. 3,690 --
French franc................. 2,352 --
Australian dollar............ 1,791 2,394
Japanese Yen................. -- 2,469
------- ------
$16,878 $4,863
======= ======
(j) Disclosure of Fair Value of Financial Instruments and Concentration of
Credit Risk
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist mainly of cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The Company does not
believe significant credit risk exists at December 31, 1998. The carrying
amounts of the Company's financial instruments approximate fair market value.
(k) Earnings (Loss) per Share
During 1997 the Company adopted the provisions of SFAS No. 128 Earnings Per
Share and retroactively restated all prior periods in accordance with SFAS No.
128. In accordance with SFAS No. 128, basic earnings per share is computed by
dividing net income (loss) by the weighted average number of shares of Common
Stock outstanding during the year. The computation of diluted earnings per share
is similar to the computation of basic earnings per share, except that the
denominator is increased for the assumed exercise of dilutive options using the
treasury stock method unless the effect is antidilutive. The following is a
reconciliation of shares outstanding for basic and diluted earnings (loss) per
share (in thousands):
19
The Company has incurred losses for the years ending December 31, 1997 and
1998 and as a result, excluded the dilutive effect of options issued to
employees from the calculation of shares outstanding for diluted earnings per
share. If the Company had reported net income, shares outstanding would have
increased by 1,444,000 and 1,720,000 shares, respectively.
(l) Reclassifications
Reclassifications have been made in the consolidated financial statements
to conform with the current year's presentation.
(m) Comprehensive Income
In 1998, the Company adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income, (SFAS No. 130), which requires companies to report all
changes in equity during a period, except those resulting from investment by
owners and distribution to owners, in a financial statement for the period in
which they are recognized. The Company has chosen to disclose comprehensive
income, which encompasses net income and foreign currency translation
adjustments, in the Consolidated Statement of Stockholders' Equity. The Company
considers the foreign currency cumulative translation adjustment to be
permanently invested and therefore has not provided income taxes on those
amounts. Prior years have been restated to conform to SFAS 130 requirements.
(n) New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and requires that an entity recognize all derivatives as either
assets or liabilities on the balance sheet and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. This statement
is effective for fiscal years beginning after June 15, 1999, and is applicable
on both an interim and annual basis. Companies are not required to apply this
statement retroactively to prior periods. The Company does not believe this
statement will have a material impact on the consolidated balance sheet or
statement of operations.
(2) INCOME TAXES
Earnings (losses) before income taxes for each year were as follows (in
thousands):
1996 1997 1998
------- ------- --------
Domestic........................ $48,394 $(29,731) $(16,071)
International................... 6,929 (2,529) 14,888
------- -------- --------
$55,323 $(32,260) $ (1,183)
======= ======== ========
The provisions for (benefit of) income taxes for the years ended December
31, 1996, 1997 and 1998 is comprised of the following (in thousands):
DECEMBER 31,
------------------------------
1996 1997 1998
------- -------- --------
Current
Federal.................... $18,027 $ 817 $ 5,758
State...................... 4,171 954 2,682
International.............. 3,190 1,799 5,173
------- -------- --------
25,388 3,570 13,613
------- -------- --------
Deferred
Federal.................... (2,070) (12,314) 524
State...................... (636) (2,396) (105)
------- -------- --------
(2,706) (14,710) 419
------- -------- --------
$22,682 $(11,140) $ 14,032
======= ======== ========
20
The provision for (benefit of) income taxes differs from the amount
computed by applying the statutory federal income tax rate as follows:
The components of the domestic net deferred tax asset (liability) included
in the accompanying consolidated balance sheets are as follows (in thousands):
The components of the net foreign net deferred tax assets (in thousands):
At December 31, 1998, the Company had domestic net operating losses of
approximately $12.7 million available to offset future taxable income. Net
operating loss carryforwards expire at various dates from 1999 to 2013. The Tax
Reform Act of 1986 contains provisions that limit annual availability of the net
operating loss carry-forwards due to a more than 50% change in ownership that
occurred upon the acquisition of certain companies.
At December 31, 1998, the Company had net operating losses in foreign
subsidiaries of approximately $9.2 million available to offset further taxable
income. These net operating loss carryforwards expire at various dates beginning
in 2002. The Company has recorded a valuation allowance for the assets because
realizability is uncertain.
As of December 31, 1998, unremitted earnings in subsidiaries outside the
United States totaled $16.4 million, on which no United States taxes have been
provided. The Company's intention is to reinvest these earnings
21
permanently or to repatriate the earnings only when tax effective to do so. It
is not practical to estimate the amount of additional taxes that might be
payable upon repatriation of foreign earnings; however, the Company believes
that United States foreign tax credits would largely eliminate any United States
taxes or offset any foreign withholding taxes.
(3) CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS
The Company accounts for investments under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Accordingly, the Company's
cash equivalents, short-term and long-term investments are classified as
held-to-maturity and are recorded at amortized cost which approximates fair
market value.
Cash equivalents are short-term, highly liquid investments with original
maturities of less than three months. Short-term investments are investment
securities with original maturities of greater than three months but less than
one year and consist of the following (in thousands):
Long-term investments are investment securities with original maturities of
greater than one year and consist of the following (in thousands):
(4) NOTES PAYABLE
In connection with the acquisition of the business of Consolidated
Veterinary Diagnostics, Inc. ("CVD") (see Note 15(a)), the Company issued an
unsecured note payable for $3.0 million, of which $2.0 million and $1.0 million
was outstanding at December 31, 1997 and 1998, respectively. The note bears
interest at 8% and is due in three equal annual installments in July 1997, 1998
and 1999.
In connection with the Acumedia Manufacturers, Inc. ("Acumedia")
acquisition (see Note 15(d)), the Company issued unsecured notes payable for
$1.5 million, which was outstanding at December 31, 1997. The notes bore
interest at 6% and were repaid in January 1998.
In connection with the Central Veterinary Diagnostic Laboratory acquisition
(see Note 15(a)) the Company issued an unsecured note payable for Australian
Dollars 900,000 (US $587,000) of which Australian dollars 675,000 (US $551,000)
was outstanding at December 31, 1998. The note bears interest at 6% and is due
in four equal annual installments beginning in December 1998.
In connection with the Blue Ridge Pharmaceuticals, Inc. ("Blue Ridge")
acquisition (see Note 15(h)), the Company issued unsecured notes payable for
$7,830,000, which were outstanding at December 31, 1998. The notes bear interest
at 5.5% and are due in two equal annual installments on October 1, 1999 and
2000.
22
(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):
Rent expense charged to operations under operating leases was approximately
$3.2 million, $3.8 million and $5.6 million for the years ended December 31,
1996, 1997 and 1998, respectively.
Under the terms of certain supply agreements with suppliers of the
Company's hematology instruments and consumables, slides for its VetTest
instruments, and certain raw materials, the Company has aggregate commitments to
purchase approximately $34.1 million of products in 1999.
From time to time the Company has received notices alleging that the
Company's products infringe third-party proprietary rights. In particular, the
Company has received notices claiming that certain of the Company's immunoassay
products infringe third-party patents. Except as noted below with respect to the
patent infringement suit filed by Synbiotics Corporation, the Company is not
aware of any pending litigation with respect to such claims. Patent litigation
frequently is complex and expensive, and the outcome of patent litigation can be
difficult to predict. There can be no assurance that the Company will prevail in
any infringement proceedings that have been or may be commenced against the
Company. A significant portion of the Company's revenue in 1998 was attributable
to products incorporating certain immunoassay technologies and products relating
to the diagnosis of canine heartworm infection. If the Company were to be
precluded from selling such products or required to pay damages or make
additional royalty or other payments with respect to such sales, the Company's
business and results of operations could be materially and adversely affected.
On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed
suit against the Company in the U.S. District Court for the District of
Connecticut. In its complaint, CDC Technologies alleges that the Company's
conduct in, and its relationships with its distributors in connection with, the
distribution of the Company's hematology products (i) violate federal and state
antitrust statutes, (ii) violate Connecticut statutes regarding unfair trade
practices, and (iii) constitute a civil conspiracy and interfere with CDC
Technologies' business relations. The relief sought by CDC Technologies includes
treble damages for antitrust violations, as well as compensatory and punitive
damages, and an injunction to prevent the Company from interfering with CDC
Technologies' relations with distributors. The Company has filed an answer
denying the allegations in CDC Technologies' complaint. In March 1998, the Court
granted the Company's motion for summary judgment in the case, however CDC is
appealing that ruling. The Company is unable to assess the likelihood of an
adverse result or estimate the amount of any damages the Company may be required
to pay. Any adverse outcome resulting in the payment of damages would adversely
affect the Company's results of operations.
On November 12, 1998, Synbiotics Corporation ("Synbiotics") filed suit
against the Company in the U.S. District Court for the Southern District of
California for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988
(the "`631 Patent"). The `631 Patent, which is owned by Synbiotics, claims
certain assays, methods and compositions for the diagnosis of canine heartworm
infection. The primary relief sought by Synbiotics is an injunction against the
Company which would prevent the Company from selling canine heartworm diagnostic
products which infringe the `631 Patent, as well as treble damages for past
infringement. This suit was not served on the Company within the time period
specified under applicable court rules and therefore is expected to be dismissed
by the court, however Synbiotics would not be precluded from filing a new suit
in the future. While the Company
23
believes that it has meritorious defenses against claims of infringement of the
`631 Patent, the Company is unable to assess the likelihood of an adverse result
or estimate the amount of any damages the Company may be required to pay. If the
Company is precluded from selling canine heartworm diagnostic products or
required to pay damages or make additional royalty or other payments with
respect to such sales, the Company's business and results of operations could be
materially and adversely affected.
On January 9, 1998, a complaint was filed in the U.S. District Court for
the District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F.
WORKMAN, JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff
purports to represent a class of purchasers of the common stock of the Company
from July 19, 1996 through March 24, 1997. The complaint claims that the
defendants violated Section 10(b) of the Securities Exchange Act of 1934 and
Securities and Exchange Commission Rule 10b-5 promulgated pursuant thereto, by
virtue of false or misleading statements made during the class period. The
complaint also claims that the individual defendants are liable as "control
persons" under Section 20(a) of that Act. In addition, the complaint claims that
the individual defendants sold some of their own common stock of the Company,
during the class period, at times when the market price for the stock allegedly
was inflated. While the Company and the other defendants deny the allegations
and will defend this suit vigorously, the Company is unable to assess the
likelihood of an adverse result or estimate the amount of damages which the
Company may be required to pay. Any adverse outcome resulting in the payment of
damages would adversely affect the Company's results of operations.
On December 18, 1997, SA Scientific, Inc. ("SAS") filed suit against the
Company in the State of Texas District Court seeking unspecified damages
resulting from the Company's alleged breach of a development and supply
agreement between SAS and the Company. The Company has filed an answer to the
complaint denying SAS's allegations and asserting counterclaims against SAS for
breach of contract and conversion of the Company's property. SAS has filed an
amended complaint seeking $1,500,000 in actual damages related to the Company's
alleged breach of contract, $5,000,000 in punitive damages and further
unspecified damages from the Company's alleged negligent misrepresentation,
fraud and conversion of SAS's intellectual property, and attorneys' fees. The
Company believes that it has meritorious defenses to SAS's claims and is
contesting the matter vigorously. However, the Company is unable to assess the
likelihood of an adverse result or estimate the amount of damages the Company
might be required to pay. Any adverse outcome resulting in payment of damages
would adversely affect the Company's results of operations.
(6) NON-RECURRING OPERATING CHARGE
During 1997 the Company recorded a non-recurring operating charge of $34.5
million. The non-recurring operating charge included a $13.2 million write-off
of in-process research and development (see Note 7) and $21.3 million of the
write-downs and write-offs of certain assets and accrual of costs related to a
significant workforce reduction. The $21.3 million charge consists of the
following (in thousands):
As of December 31, 1998, $3.2 million was included in accrued expenses
relating to the non-recurring operating charge. The balance remaining at
December 31, 1998 primarily represents severance payments due to terminated
employees, unpaid charges related to the consolidation and relocation of
distribution functions in Europe and lease payments on unutilized facilities.
In September 1997, the Company settled a patent infringement suit brought
by Barnes-Jewish Hospital (BJH) regarding IDEXX's heartworm diagnostic products.
The total costs of the settlement, including legal fees, were included in the
non-recurring operating charge.
The Company has terminated the employment of a total of 228 employees. Of
this total, 79 employees were associated with the consolidation of the
veterinary practice information management software business into the Eau
Claire, Wisconsin facility, 57 employees were associated with the consolidation
of sales, marketing and distribution operations in Europe, 33 employees were
associated with reductions in domestic sales and marketing operations, 18
employees were associated with reductions in sales and marketing operations in
the Asia-Pacific region, 16 employees were associated with the closure of the
Sunnyvale, California research and development facility and 25 employees were
associated with reductions in positions in management and financial operations.
As discussed above, the Company consolidated certain veterinary practice
information management software operations into the Eau Claire, Wisconsin
facility and closed the leased Sunnyvale, California research and
24
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):
Intangibles include $37.2 million for purchased in-process research and
development for projects that do not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash
flows, adjusted using percentage of completion methodology (see below), related
to the in-process research and development projects. The development of these
projects had not yet reached technological feasibility and the in-process
research and development had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date in accordance with FASB Interpretation No.
4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for
by the Purchase Method.
Eight of the eleven projects are pharmaceuticals for companion animals,
including horses, and three of the eleven projects are pharmaceuticals for food
animals. These projects use a combination of proprietary compounds and novel
delivery systems. To be sold commercially the products must be approved by the
Center for Veterinary Medicine (CVM), which is the agency within the Food and
Drug Administration (FDA) that is responsible for managing approval of new
animal drugs. There are five types of data that must be provided to the FDA and
the CVM prior to approval. These include 1) efficacy, 2) safety to the animals
to be treated, 3) safety to the humans who will consume the animal or its
products (if applicable), 4) safety to the environment and 5) good manufacturing
practices (quality control of production to assume a consistent product). The
Company utilizes clinical studies to support its applications for approval. The
companion animal projects range from 19% to 78% complete, while the food animal
projects range from 78% to 93% complete.
These projects are unique and complex and frequently require modification
to the product and the manufacturing process before satisfactory clinical
results can be obtained. The delay in obtaining satisfactory data can result
from any of the five items discussed above and frequently satisfactory results
cannot be obtained.
Management believes that it is positioned to complete each of the major
research and development programs. These estimates are subject to change, given
the uncertainties of the development process and no assurance can be given that
deviations from these estimates will not occur. Additionally, these projects
will require maintenance expenditures when and if they have reached a state of
technological and commercial feasibility and there is no assurance that each
project will meet either technological or commercial success. The Company
projects that it will first realize revenue from certain companion animal
projects in 1999 with no significant revenue until 2000. The Company also
projects that it will first realize revenue from certain food animal projects in
2000 with no significant revenue until 2001.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products, estimating the percentage of
completion at the acquisition date, estimating the resulting net risk-adjusted
cash flows from the projects considering the percentage of completion and
discounting the net cash flows to their present value. The percentage of
completion for each project was estimated using costs incurred to date compared
to estimated costs at completion. The revenue projections used to value the
in-process research and development are based on estimates of relevant market
sizes and growth factors and nature and expected timing of new products. The
rate utilized to discount the net cash flows to their
25
present value is based on the weighted average cost of capital adjusted to
consider the risk associated with these technologies. The Company used a 20%
discount factor to value this in-process research and development.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate and unanticipated events and circumstances are
likely to occur. For these reasons, actual results may vary significantly from
the projected results.
(b) Veterinary Practice Information Management Software Companies
During 1997 the Company acquired two veterinary practice information
management software businesses. The Company allocated the aggregate purchase
price of $19.8 million plus $200,000 of acquisition costs based on the fair
market value of tangible and intangible assets acquired, in accordance with
Accounting Principles Board Opinion No. 16 (APB 16). The acquisition was
accounted for as a purchase in accordance with APB 16 and the results of
operations have been included with the Company's results since the dates of
acquisition. To value the intangible assets acquired the Company obtained an
independent appraisal. That appraisal was performed using proven valuation
techniques and methodologies generally accepted in industry. The aggregate
purchase price was allocated as follows (in thousands):
Intangibles include $13.2 million for purchased in-process research and
development for projects that do not have future alternative uses. This
allocation represents the estimated fair value based on risk-adjusted cash flows
related to the in-process research and development projects. The development of
these projects had not yet reached technological feasibility and the in-process
research and development had no alternative uses. Accordingly, these costs were
expensed as of the acquisition date in accordance with FASB Interpretation No.
4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for
by the Purchase Method.
The two projects consisted of practice information management software
programs and related modules. These products are used by veterinarians to manage
and operate their veterinary clinics. These projects are unique and complex and
frequently require modification to the product before the products are ready for
commercial markets. These projects were completed in accordance with the
original plan. These projects will require maintenance expenditures to maintain
commercial status and there is no assurance that each project will meet
commercial success. The Company realized revenue from these products in 1999.
The value assigned to purchased in-process research and development was
determined by estimating the costs to develop the purchased in-process research
and development into commercially viable products, estimating the resulting net
risk-adjusted cash flows from the projects and discounting the net cash flows to
their present value. The revenue projections used to value the in-process
research and development are based on estimates of relevant market sizes and
growth factors and nature and expected timing of new products. The rate utilized
to discount the net cash flows to their present value is based on the weighted
average cost of capital adjusted to consider the risk associated with these
technologies. The Company used a 20% discount factor to value this in-process
research and development.
The forecasts used by the Company in valuing in-process research and
development were based upon assumptions the Company believes to be reasonable
but which are inherently uncertain and unpredictable. The Company's assumptions
may be incomplete or inaccurate and unanticipated events and circumstances are
likely to occur. For these reasons, actual results may vary significantly from
the projected results.
26
(8) STOCKHOLDERS' EQUITY
(a) Preferred Stock
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
500,000 shares of Preferred Stock, $1.00 par value per share ("Preferred
Stock"), in one or more series. Each such series of Preferred Stock shall have
such number of shares, designations, preferences, voting powers, qualifications
and special or relative rights or privileges as shall be determined by the Board
of Directors, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences, conversion
rights and preemptive rights.
(b) Series A Junior Participating Preferred Stock
On December 17, 1996, the Company designated 100,000 shares of Preferred
Stock as Series A Junior Participating Preferred Stock ("Series A Stock") in
connection with its Shareholder Rights Plan (see Note 9). In general, each share
of Series A Stock will: (i) be entitled to a minimum preferential quarterly
dividend of $10 per share and to an aggregate dividend of 1000 times the
dividend declared per share of Common Stock, (ii) in the event of liquidation,
be entitled to a minimum preferential liquidation payment of $1000 per share
(plus accrued and unpaid dividends) and to an aggregate payment of 1000 times
the payment made per share of Common Stock, (iii) have 1000 votes, voting
together with the Common Stock, (iv) in the event of any merger, consolidation
or other transaction in which Common Stock is exchanged, be entitled to receive
1000 times the amount received per share of Common Stock and (v) not be
redeemable. These rights are protected by customary antidilution provisions.
There are no shares of Series A Stock outstanding.
(9) STOCK-BASED COMPENSATION PLANS
At December 31, 1998, the Company had ten stock-based compensation plans,
which are described below. The Company accounts for these plans under the
provisions of SFAS No. 123. Under SFAS No. 123 the Company elected the
disclosure method and will continue to account for stock-based compensation
plans under APB Opinion No. 25. Accordingly, no compensation cost has been
recognized for these plans. Had compensation cost for the Company's ten
stock-based compensation plans been determined consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and net income (loss) per common
and common equivalent share would have been reduced to the following pro forma
amounts (in thousands):
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
(a) The 1984 Plan
During 1984, the Company established a stock option plan (the "1984 Plan"),
under which key employees were granted options to purchase Common Stock at
exercise prices not less than the fair market value as of the date of grant, as
determined by the Board of Directors. On April 24, 1991, the Board of Directors
terminated the 1984 Plan such that no further options may be granted under the
Plan.
27
(b) The 1991 Plan
During 1991, the Board of Directors approved the 1991 Stock Option Plan
which, as amended, provides for grants up to 6,475,000 incentive and
nonqualified stock options at the discretion of the Compensation Committee of
the Board of Directors. Incentive stock options are granted at the fair market
value on the date of grant and expire 10 years from the date of grant. Incentive
stock options for greater than 10% shareholders are granted at 110% of the fair
market value and expire five years from the date of grant. Nonqualified options
may be granted at no less than 100% of the fair market value on the date of
grant. Income tax benefits attributable to certain exercised stock options are
credited to additional paid-in capital. The vesting schedule of all options is
determined by the Compensation Committee of the Board of Directors at the time
of grant.
(c) The 1991 Director Option Plan
During 1991, the Board of Directors approved the 1991 Director Option Plan
(as amended, the "1991 Director Plan") pursuant to which Directors who are not
officers or employees of the Company may receive nonstatutory options to
purchase shares of the Company's Common Stock. The time period for granting
options under the 1991 Director Plan expired in accordance with the terms of the
plan in June 1996.
(d) The 1997 Director Option Plan
During 1997, the Board of Directors approved the 1997 Director Option Plan
(the "1997 Director Plan") pursuant to which Directors who are not officers or
employees of the Company may receive nonstatutory options to purchase shares of
the Company's Common Stock. A total of 300,000 shares of Common Stock may be
issued under the 1997 Director Plan.
(e) 1998 Stock Incentive Plan
During 1998, the Board of Directors approved the 1998 Stock Incentive Plan
(the "1998 Stock Plan") which provides for grants of incentive and nonqualified
stock options and restricted stock awards at the discretion of the Compensation
Committee of the Board of Directors. A total of 1,800,000 shares of Common Stock
may be issued under the 1998 Stock Plan. Options granted under the 1998 Stock
Plan may not be granted at an exercise price less than the fair market value of
the Common Stock on the date granted (or less than 110% of the fair market value
in the case of incentive stock options granted to holders of more than 10% of
the Company's Common Stock). Options may not be granted for a term of more than
10 years. The number of shares subject to restricted stock awards granted at
below 100% of fair market value may not exceed 10% of the total number of shares
of Common Stock issuable under the 1998 Stock Plan. Income tax benefits
attributable to certain exercised stock options and restricted stock are
credited against additional paid-in capital. The vesting schedule of all options
granted under the 1998 Stock Plan and the duration of the Company's repurchase
rights with respect to restricted stock awarded under the 1998 Stock Plan are
determined by the Compensation Committee of the Board of Directors at the time
of grant.
(f) ETI Corporation Plan
During 1991, the Board of Directors of ETI Corporation (ETI), which was
acquired by the Company in 1993, approved a Stock Option Plan (the "ETI Plan").
The ETI Plan provided for the grant of up to 100,000 nonqualified stock options
at the discretion of the Board of Directors of ETI. Options were granted at the
fair market value on the date of grant and expire five years from the date of
grant. The options vest over a four-year period from the date of grant.
In connection with the merger of ETI and the Company, all outstanding ETI
options became exercisable, in accordance with their original vesting schedule,
for shares of the Company's Common Stock at the same rate at which outstanding
shares of ETI common stock were exchanged for shares of the Company's Common
Stock in the merger. In addition, the exercise price for the options was
proportionately adjusted in accordance with the adjustment to the number of
shares.
(g) Idetek, Inc. Plans
During 1986, the Board of Directors of Idetek approved the 1985 Incentive
Stock Option Plan (the "1985 Idetek Plan"). Options were granted at the fair
market value on the date of grant and expire 10 years from the date
28
of grant. Options for greater than 10% shareholders were granted at no less than
110% of the fair market value and expire five years from the date of grant. The
1985 Idetek Plan was terminated by the Board of Directors of Idetek as to future
grants.
During 1987, the Board of Directors of Idetek approved the 1987 Stock
Option Plan (the "1987 Idetek Plan"), which provides for the grant of both
incentive and nonqualified stock options. Incentive stock options were granted
at the fair market value on the date of grant and expire 10 years from the date
of grant. Incentive stock options for greater than 10% shareholders were granted
at 110% of the fair market value and expire five years from the date of grant.
Nonqualified options were granted at 85% of the fair market value on the date of
grant and expire five years from the date of grant. The Company does not intend
to grant any options under the 1987 Idetek Plan in excess of the options
currently outstanding.
In February 1996, the Board of Directors of Idetek approved two separate,
single participant fixed term incentive stock option agreements with certain of
its key executive officers. Options were granted to the individual participant
named in the agreement at prices established by the Board of Directors of Idetek
and such options expire 10 years from the date of grant.
In connection with the merger of Idetek and the Company, all outstanding
Idetek options became exercisable, in accordance with their original vesting
schedule or terms, for shares of the Company's Common Stock at the same rate at
which outstanding shares of Idetek common stock were exchanged for shares of the
Company's Common Stock in the merger. In addition, the exercise price for the
options was proportionately adjusted in accordance with the adjustment to the
number of shares.
A summary of the status of the Company's stock option plans as of December
31, 1996, 1997 and 1998 and changes during the years then ended is presented in
the table and narrative below (in thousands, except weighted average exercise
price):
In April 1997 the Company implemented a Stock Option Exchange Program (the
"Program") for employees in response to the substantial decline in the trading
price of the Company's Common Stock. Under the Program employees could
voluntarily exchange unexercised stock options and receive new options
exercisable at $17.35 per share. Employees also were required to forfeit between
0% and 50% of their options based on their relative position in the Company.
There were 2.0 million options with a weighted average exercise price of $36.85
that were exchanged for new options. 494,000 net options to acquire shares were
forfeited as a result of the Program. The other terms of the options remained
essentially unchanged. The weighted average fair value of the new options
granted was $13.00 per share.
29
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants in 1996, 1997 and 1998, respectively: no
dividend yield for all years; expected volatility of 45% for 1996, 52% for 1997,
and 64% for 1998; risk-free interest rates of 6.18%, 6.33% and 5.34% for 1996,
1997 and 1998, respectively; and expected lives of 5.48 years for 1996, 4.55
years for 1997 and 3.96 years for 1998.
At December 31, 1998, the options outstanding have the following
characteristics (options in thousands):
(h) Employee Stock Purchase Plans
During 1994, the Board of Directors approved the 1994 Employee Stock
Purchase Plan whereby the Company had reserved up to an aggregate of 300,000
shares of Common Stock for issuance in semiannual offerings over a three-year
period. During 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan whereby the Company has reserved and may issue up to an aggregate
of 420,000 shares of Common Stock in semiannual offerings. Also during 1997 the
Board of Directors approved the 1997 International Employee Stock Purchase Plan
whereby the Company has reserved and may issue up to an aggregate of 30,000
shares of Common Stock in semiannual offerings. Stock is sold under each of
these plans at 85% of fair market value, as defined. Shares subscribed to and
issued under the plans were 33,281 in 1996, 119,027 in 1997 and 71,734 in 1998.
Under SFAS No. 123, pro forma compensation cost is recognized for the fair
value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 1996, 1997 and 1998,
respectively: no dividend yield for all years; an expected life of one year for
all years; expected volatility of 45% for 1996, 72% for 1997, and 64% for 1998;
and risk-free interest rates of 6.18%, 6.14% and 5.34% for 1996, 1997 and 1998,
respectively. The weighted-average fair value of those purchase rights granted
in 1996, 1997 and 1998 was $10.63, $7.15 and $6.57 per share, respectively.
(10) PREFERRED STOCK PURCHASE RIGHTS
On December 17, 1996, the Company adopted a Shareholder Rights Plan and
declared a dividend of one preferred stock purchase right for each outstanding
share of Common Stock to stockholders of record at the close of business on
December 30, 1996. Under certain conditions, each right may be exercised to
purchase one one-thousandth of a share of Series A Stock at a purchase price of
$200. The rights will be exercisable only if a person or group has acquired
beneficial ownership of 20% or more of the Common Stock or commenced a tender or
exchange offer that would result in such a person or group owning 30% or more of
the Common Stock. The Company generally will be entitled to redeem the rights,
in whole, but not in part, at a price of $.01 per right at any time until the
tenth business day following a public announcement that a 20% stock position has
been acquired and in certain other circumstances.
If any person or group becomes a beneficial owner of 20% or more of the
Common Stock (except pursuant to a tender or exchange offer for all shares at a
fair price as determined by the outside members of the Company's Board of
Directors), each right not owned by a 20% stockholder will enable its holder to
purchase such number of shares of Common Stock as is equal to the exercise price
of the right divided by one-half of the current market price of the Common Stock
on the date of the occurrence of the event. In addition, if the Company
thereafter is acquired in a merger or other business combination with another
person or group in which it is not the surviving corporation or in connection
with which its Common Stock is changed or converted, or if the Company sells or
transfers 50% or more
30
of its assets or earning power to another person, each right that has not
previously been exercised will entitle its holder to purchase such number of
shares of common stock of such other person as is equal to the exercise price of
the right divided by one-half of the current market price of such common stock
on the date of the occurrence of the event.
(11) IDEXX RETIREMENT AND INCENTIVE SAVINGS PLAN
The Company has established the IDEXX Retirement and Incentive Savings Plan
(the "401(k) Plan"). Employees eligible to participate in the 401(k) Plan may
contribute specified percentages of their salaries, a portion of which will be
matched by the Company. In addition, the Company may make contributions to the
401(k) Plan at the discretion of the Board of Directors. There were no
discretionary contributions in 1996, 1997 and 1998.
(12) SIGNIFICANT CUSTOMERS
During the years ended December 31, 1996 and 1998 one customer accounted
for 12% and 11%, respectively, of the Company's revenue. The significant
customer was a wholesale distributor of the Company's veterinary products. No
customer accounted for greater than 10% of revenue in 1997.
(13) SEGMENT REPORTING
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 131 Disclosures about Segments of an Enterprise and Related
Information, (SFAS 131) during the fourth quarter of 1998. SFAS 131 requires
disclosures about operating segments in annual financial statement and requires
selected information about operating segments in interim financial statements.
It also requires related disclosures about products and services and geographic
areas. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is the chief executive officer.
The Company is organized into business units by market and customer group.
The Company's reportable operating segments include the Veterinary Solutions
Group (VSG), the Food and Environmental Division (FED) and other. The VSG
develops, designs, and distributes products and performs services for
veterinarians. The VSG also manufactures certain biology based test kits for
veterinarians. FED develops, designs, manufactures and distributes products and
performs services to detect disease and contaminants in food animals, food,
water and food processing facilities. Both the VSG and FED distribute products
and services world-wide. Other is primarily comprised of the Company's Blue
Ridge Pharmaceuticals, Inc. subsidiary, which develops products for therapeutic
applications in companion animals and livestock, corporate research and
development, interest income and non-recurring charges.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that
non-recurring charges and most interest income and expense are not allocated to
individual operating segments.
Revenues are attributed to geographic areas based on the location of the
customer.
31
Revenue by principal geographic areas was as follows (in thousands):
32
Net property by principal geographic areas was as follows (in thousands):
(14) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
(15) ACQUISITIONS
(a) Veterinary Reference Laboratories
The Company's consolidated results of operations include the results of
operations of four veterinary reference laboratory businesses acquired in 1996
for aggregate purchase prices of approximately $21.3 million in cash, plus the
assumption of certain liabilities.
The Company's 1997 and 1998 consolidated results of operations also include
the results of operations of a veterinary reference laboratory business acquired
in 1997 for an aggregate purchase price of approximately $844,000 in cash, the
issuance of $587,000 in unsecured notes payable, plus the assumption of certain
liabilities.
In connection with the acquisitions, the Company entered into non-compete
agreements for a period of up to five years with certain of the entities, and
their stockholders or former stockholders. The Company has accounted for these
acquisitions under the purchase method of accounting. The results of operations
of each of these businesses has been included in the Company's consolidated
results of operations since each of their respective dates of acquisition. The
Company has not presented pro forma financial information relating to any of
these acquisitions because of immateriality. These acquisitions are as follows:
* On March 29, 1996, the Company acquired all of the capital stock of
VetLab, Inc. which operated two veterinary reference laboratories in
Texas.
33
* On April 2, 1996, the Company, through its wholly-owned subsidiary
IDEXX Laboratories, Limited, acquired substantially all of the assets
and assumed certain of the liabilities of Grange Laboratories Ltd.,
which operated veterinary reference laboratories in the United
Kingdom.
* On May 15, 1996, the Company acquired all of the capital stock of
Veterinary Services, Inc., which operated veterinary reference
laboratories in Colorado, Illinois and Oklahoma.
* On July 12, 1996, the Company acquired substantially all of the assets
and assumed certain of the liabilities of CVD, which operated
veterinary reference laboratories in Northern California, Oregon and
Nevada.
* On December 1, 1997, the Company, through its wholly-owned subsidiary
IDEXX Laboratories Pty. Ltd., acquired certain assets and assumed
certain liabilities of Lording & Friend Pty. Ltd. and Clinpath Pty.
Ltd. (operating under the name Central Veterinary Diagnostic
Laboratory), which operated a veterinary reference laboratory in
Australia.
The VetLab, VSI and CVD businesses are now part of IDEXX Veterinary
Services, Inc., a wholly-owned subsidiary of the Company.
(b) Ubitech Aktiebolag
On July 18, 1996, the Company acquired all of the capital stock of Ubitech
Aktiebolag (now named IDEXX Scandinavia AB ("IDEXX AB")) for $400,000 plus the
assumption of certain liabilities. IDEXX AB, located in Uppsala, Sweden,
manufactures and distributes diagnostic test kits for the livestock industry.
The Company has accounted for this acquisition under the purchase method of
accounting. The results of operations of IDEXX AB have been included in the
Company's consolidated results of operations since the date of acquisition. Pro
forma information has not been presented because of immateriality.
(c) Idetek, Inc.
On August 29, 1996, the Company acquired by merger Idetek by issuing
393,122 shares of its Common Stock, in exchange for all of the outstanding
capital stock of Idetek. An additional 43,682 shares of common stock were held
in escrow of which 21,843 shares were issued in 1998 and the remainder were
cancelled. In addition, outstanding options to purchase shares of Idetek capital
stock became options to acquire 110,191 shares of the Company's Common Stock at
prices ranging from $3.13 to $78.14. The value of the shares of the Company's
Common Stock issued or reserved for issuance as a result of the merger totaled
approximately $20 million. Idetek, previously located in Sunnyvale, California,
manufactured and distributed detection tests for the food, agricultural and
environmental industries. The Company has accounted for this acquisition by
merger as a pooling-of-interests. The results of operations of Idetek have been
included in the Company's consolidated results of operations since the date of
the merger. The Company has not restated its financial statements because of
immateriality.
(d) Acumedia Manufacturers, Inc.
On January 30, 1997, the Company acquired all of the capital stock of
Acumedia Manufacturers, Inc. ("Acumedia") for $3.1 million and the issuance of
$1.5 million in notes payable. The Company also agreed to pay an additional
$250,000 based on the results of operations in each of 1997 and 1998. Based on
results for 1997, the Company paid $250,000, and based on results for 1998, the
Company will pay $250,000. The 1997 payment was treated as additional purchase
price and the amount to be paid for 1998 also will be treated as additional
purchase price. Acumedia, located in Baltimore, Maryland, manufactures and
distributes dehydrated culture media for testing in the food industry. The
Company also entered into employment agreements for up to three years with
certain former stockholders. The Company has accounted for this acquisition
under the purchase method of accounting and the Company has included the results
of operations in its consolidated results of operations since the date of
acquisition. Pro forma information has not been presented because of
immateriality.
34
(e) Veterinary Practice Information Management Software Providers
The Company's consolidated results of operations include the results of
operations of two veterinary practice information management software businesses
acquired in 1997. These businesses were acquired for an aggregate purchase price
of approximately $19.5 million in cash. The Company paid an additional $500,000
as additional purchase price in February 1998. In connection with these
acquisitions, the Company entered into employment and non-competition agreements
for up to three years with certain former stockholders. The Company has not
presented pro forma financial information because of immateriality.
These acquisitions are as follows:
* On March 13, 1997, the Company acquired all of the capital stock of
National Information Systems Corporation, located in Eau Claire,
Wisconsin, which operated under the trade name of Advanced Veterinary
Systems ("AVS").
* On July 18, 1997, the Company acquired all of the capital stock of
Professionals' Software, Inc. ("PSI"), located in Effingham, Illinois.
(f) Wintek Bio-Science Inc.
On July 1, 1997, the Company, through its wholly-owned subsidiary, IDEXX
Laboratories (Taiwan), Inc., acquired certain assets and assumed certain
liabilities of Wintek Bio-Science Inc. ("Wintek") for $960,000. Wintek, located
in Taipei, Taiwan, distributes diagnostic products to veterinarians and
hospitals in Taiwan. The Company also entered into employment and
non-competition agreements with the owners of Wintek for up to five years. The
Company has accounted for this acquisition under the purchase method of
accounting and the Company has included the results of operations in its
consolidated results of operations since the date of acquisition. Prior to the
acquisition, Wintek distributed the Company's products in Taiwan, however, the
annual sales of products to Wintek were immaterial. Pro forma information has
not been presented because of immateriality.
(g) Agri-West Laboratory
On March 1, 1998, the Company, through its wholly-owned subsidiary, IDEXX
Food Safety Net Services, Inc., acquired certain assets and assumed certain
liabilities of Agri-West Laboratory (Agri-West) for $250,000 from Agri-West
International, Inc. (AWI). Agri-West, located in Dallas and San Antonio, Texas,
performs food contaminant testing for food processors and research institutions.
The Company also entered into employment, consulting and non-competition
agreements with the owners of AWI for up to five years. The Company has
accounted for this acquisition under the purchase method of accounting and has
included the results of operations in its consolidated results since the date of
acquisition. Pro forma information has not been presented because of
immateriality.
(h) Blue Ridge Pharmaceuticals, Inc.
On October 1, 1998, the Company acquired all of the capital stock of Blue
Ridge Pharmaceuticals, Inc. for approximately $39.1 million in cash, $7.8
million in notes, 115,000 shares of the Company's Common Stock and warrants to
acquire 806,000 shares of Common Stock at $31.59 per share which expire on
December 31, 2003. In addition, the Company agreed to issue up to 1.24 million
shares of its Common Stock based on the achievement by the Company's
pharmaceutical business (including Blue Ridge) of net sales and operating
profit targets through 2004. All former shareholders received equal value in
the form of cash/notes/stock, warrants and contingent shares on a per share
basis. The notes, which bear interest at 5.5% annually and are due in two equal
annual installments on October 1, 1999 and 2000, are due to certain key
employees of Blue Ridge, subject to certain contingencies. The shares of Common
Stock are issuable on October 1, 2001 to a key employee of Blue Ridge, subject
to certain contingencies. Blue Ridge is a development-stage animal health
pharmaceutical company located in Greensboro, North Carolina. The Company has
accounted for this acquisition under the purchase method of accounting and has
included the results of operations in its consolidated results since the date
of acquisition. The Company will record the issuance of any of the 1.24 million
shares discussed above as additional goodwill when the shares are issued. Pro
forma results of the Company, assuming the acquisition had been made as of
January 1, 1997 are as follows. Such information includes
35
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):
For purposes of these pro forma operating results, the in-process research
and development was assumed to have been written off on December 31, 1996. Pro
forma operating results presented include only recurring costs resulting from
the acquisition of Blue Ridge.
(16) SERVICE REVENUE
Service revenue, which includes laboratory service revenue and maintenance
and repair revenue, was less than 10% of total revenue in 1996. In 1997 and
1998, service revenue totaled approximately $46.6 million and $62.5 million,
respectively. The cost of service revenue in 1997 and 1998 totaled approximately
$28.4 million and $45.6 million, respectively.
(17) INFORMATION REGARDING CLASSES OF SIMILAR PRODUCTS OR SERVICES (UNAUDITED)
Approximately 80%, 71% and 70% of the Company's revenues were derived from
the sale of veterinary diagnostic products and services in 1996, 1997 and 1998,
respectively. Approximately 19%, 24% and 22% of revenues were derived from sales
of food and environmental products and services in 1996, 1997, and 1998,
respectively.
(18) SUMMARY OF QUARTERLY DATA (UNAUDITED)
A summary of quarterly data follows (in thousands, except per share data):
36
SCHEDULE II
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
37
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.
As of December 31, 1998, there were 1,584 holders of record of the
Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to fund the development and growth
of its business.
38