UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
| [ X ] |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
| [ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER 0-19271
IDEXX LABORATORIES, INC.
| DELAWARE | 01-0393723 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
| ONE IDEXX Drive, Westbrook, Maine | 04092 | |
| (Address of principal executive offices) | (ZIP Code) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.10 par value per share
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
Based on the closing sale price on June 30 , 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant was $1,131,671,822 . For these purposes, the registrant considers its Directors and executive officers to be its only affiliates.
The number of shares outstanding of the registrant’s Common Stock was
34,703,339 on January 30, 2004.
LOCATION IN FORM 10-K
INCORPORATED DOCUMENT
Part III
Specifically identified portions of the Company’s
definitive proxy statement to be filed in connection
with the Company’s Annual Meeting to be held on May
19, 2004 are incorporated herein by reference.
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Annual Report on Form 10-K, including statements relating to management’s expectations regarding new product introductions; the adequacy of the Company’s sources for certain components, raw materials and finished products; and the Company’s ability to utilize certain inventory. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause IDEXX’s results to differ materially from those indicated by such forward-looking statements, including those detailed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and “- Future Operating Results.”
In addition, any forward-looking statements represent the Company’s views only as of the day this Annual Report on Form 10-K was first filed with the Securities and Exchange Commission and should not be relied upon as representing the Company’s views as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so, even if its views change.
PART I.
ITEM 1. BUSINESS
IDEXX Laboratories, Inc. (“we”, “us”, the “Company” or “IDEXX,” which
includes wholly-owned subsidiaries unless the context otherwise requires),
develops, manufactures and distributes products and provides services for the
veterinary and the food and water testing markets. Our products and services
include:
Most of our sales are derived from the sale of our veterinary diagnostic
products and services.
We are a Delaware corporation and were incorporated in 1983. Our
principal executive offices are located at One IDEXX Drive, Westbrook, Maine
04092, our telephone number is 207-856-0300, and our Internet address is
idexx.com.
We make available free of charge on our Website our Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports as soon as reasonably practicable after we file
such information with, or furnish it to, the Securities and Exchange
Commission.
2
PRODUCTS AND SERVICES
We operate primarily through three business segments: products and
services for the veterinary market, which we refer to as our Companion Animal
Group (“CAG”), water quality products (“Water”) and products and services for
production animal health and dairy quality, which we refer to as the Food
Diagnostics Group (“FDG”). See Note 17 to our financial statements included
elsewhere in this report for financial information about our business segments,
including geographic information.
COMPANION ANIMAL GROUP
Rapid Assays
We provide a broad range of single-use, hand held test kits that allow
quick (in most cases, less than ten minutes), accurate and convenient test
results for a variety of companion animal diseases and health conditions.
These products enable veterinarians to provide improved service to animal
owners by delivering test results and a diagnosis at the time of the patient
visit, allowing the veterinarian to initiate therapy or prevention, if
required.
Our principal single-use tests are sold under the SNAP® name, and
include a feline combination test, the SNAP® Combo FIV antibody/FeLV antigen
test, which enables veterinarians to test simultaneously for feline
immunodeficiency virus (“FIV”) (which is similar to the human AIDS virus) and
feline leukemia virus (“FeLV”); a canine combination test, the SNAP® 3Dx®,
which tests simultaneously for Lyme disease,
Ehrlichia canis
and heartworm; and
a canine heartworm-only test. Sales of heartworm tests are greater in the
first half of our fiscal year due to seasonality of the disease.
In addition to our single-use tests, we sell a line of microwell-based
test kits, under the PetChek® name, which are used by larger clinics and
independent laboratories to test multiple samples. PetChek® tests offer
accuracy, ease of use and cost advantages to high-volume customers. We
currently sell PetChek® tests for FeLV, FIV and canine heartworm disease.
Instruments and Consumables
We currently market several instrument systems, as well as associated
consumable products, for use in veterinary clinics. These instruments include
the following:
Blood Chemistry
. Our VetTest® blood chemistry analyzer is used to
measure levels of certain enzymes and other substances in blood in order to
assist the veterinarian in diagnosing physiologic conditions. Twenty-one
separate blood chemistry tests can be performed on the VetTest® analyzer,
with up to 12 tests run in under six minutes after sample application.
Commonly run tests include glucose, alkaline phosphatase, ALT (alanine
aminotransferase), creatinine, BUN (blood urea nitrogen) and total protein.
We purchase all of the reagents used in the VetTest® analyzer (“dry
chemistry slides ” or “VetTest slides”) from Ortho-Clinical Diagnostics, Inc.
(“Ortho”), a subsidiary of Johnson & Johnson. See “Business-Production and
Supply.” In October 2003, we entered into a new agreement with Ortho under
which we are developing a next-generation chemistry analyzer for the veterinary
market based on Ortho’s dry slide technology, and Ortho will supply the slide
consumables used in both the VetTest analyzer and the new analyzer through
2018.
Hematology
. In October 2002 we introduced the LaserCyte® system, a
hematology system that uses laser-flow cytometry technology to analyze
components of blood, including red blood cells, white blood cells, and
platelets. We believe that the LaserCyte® system is the only in-clinic
hematology system that provides veterinarians with a five-part white blood cell
differential and an absolute reticulocyte count, which provides enhanced
diagnostic capabilities to veterinarians. We also sell the QBC® VetAutoread™
hematology analyzer, which is based on the Becton Dickinson QBC® Autoread™
hematology system that is sold to physicians for human applications.
Electrolytes
.
Our VetLyte® system measures three electrolytes –
sodium, potassium and chloride – to aid in evaluating acid-base and
electrolyte balances and assessing plasma hydration. Test results are
available in less than one minute after sample introduction and are either
displayed on the VetLyte® analyzer or downloaded to
the VetTest® analyzer.
3
Quantitative Hormone Testing
. The VetTest® SNAP® Reader allows the
veterinarian to obtain quantitative measurement of hormones, including
thyroxine (T4) and cortisol. These measurements assist in diagnosing and
monitoring the treatment of certain endocrine diseases, such as hyper- and
hypothyroidism, Cushing’s syndrome and Addison’s disease. Samples and reagents
are introduced to the analyzer using our SNAP® device platform.
Computed Radiography
. We market and sell two computed radiography
systems: the IDEXX-CR System, which is appropriate for use in the veterinary
clinic, and the IDEXX-CR Compact System, which is primarily used as a portable
unit in ambulatory veterinary practices, such as equine practices. Our
computed radiography systems generate digital radiograph images, which replace
traditional x-ray film. Use of digital radiographs eliminates the need for the
film and processor, hazardous chemicals and darkroom required for the
production of film images. We are currently involved in litigation with our
supplier of computed radiography instruments. See “Production and Supply”
below.
Veterinary Laboratory and Consulting Services
We offer commercial veterinary laboratory and consulting services in the
U.S. through facilities located in Arizona, California, Colorado, Georgia,
Illinois, Kentucky, Maryland, Massachusetts, New Jersey, Ohio, Oregon and
Texas. Through subsidiaries located in the United Kingdom, Japan and
Australia, we offer commercial veterinary laboratory services to veterinary
clinics located in those countries. Veterinarians use our services by
submitting samples by courier or overnight delivery to one of our facilities.
Our laboratories offer a large selection of tests and diagnostic panels to
detect a number of disease states and other conditions in production and
companion animals.
Additionally, we provide specialized veterinary consultation, telemedicine
and advisory services, including cardiology, radiology, internal medicine,
dermatology and ultrasound consulting. These services permit veterinarians to
obtain readings and interpretations of test results transmitted by telephone
and over the Internet from the veterinarians’ offices.
Approximately 74%, 71% and 72% of the Company’s revenues were derived from
sales of rapid assays, veterinary instruments and consumables and veterinary
laboratory and consulting services within the CAG segment in 2003, 2002 and
2001, respectively.
Information Products and Services
We develop, market and sell practice information management software
systems that run key functions of veterinary clinics, including scheduling,
billing and patient records management. Our systems also provide veterinarians
with the ability to download laboratory results electronically from our
veterinary reference laboratories directly into the patients’ medical records.
We believe we are the leading provider of veterinary practice information
management software systems in the U.S., with an installed base of more than
7,500 of the approximately 25,000 veterinary hospitals in North America. We
also provide software and hardware support and derive a significant portion of
our revenues for this product line from ongoing service contracts.
Veterinary Pharmaceuticals
We develop, market and sell novel therapeutics for the veterinary market.
In December 2000, we introduced ACAREXX® (.01% ivermectin) otic suspension
for the treatment of ear mites in cats, our first drug approved by the U.S.
Food and Drug Administration (“FDA”). In 2002, we commenced active marketing
of PZI VET®, an insulin product for the treatment of diabetic cats, under the
FDA’s regulatory discretion guidelines. In November 2003 we introduced
NAVIGATOR® (32% nitazoxanide) Antiprotozoal Oral Paste, a new treatment for
equine protozoal myeloencephalitis (EPM). EPM is a progressive, degenerative
disease of the central nervous system that can cause serious or even fatal
neurological problems in horses. We currently have a number of other products
under development, including a topical form of diclofenac, a non-steroidal
anti-inflammatory for equine use, and tilmicosin, a long-acting, injectable
form of the antibiotic tilmicosin for cats. We have completed the safety and
efficacy components of our New Animal Drug Application (“NADA”) for diclofenac,
and have submitted
4
information relating to manufacturing in response to questions from the FDA. We
submitted all components in support of a NADA for tilmicosin to the FDA in the
second quarter of 2003.
WATER
Our Colilert®, Colilert-18 and Colisure® tests simultaneously detect
total coliforms and
E. coli
in water. These organisms are broadly used as
indicators of microbial contamination in water. These products utilize
indicator-nutrients that produce a change in color or fluorescence when
metabolized by target microbes in the sample. Our water tests are used by
government laboratories, water utilities and private certified laboratories to
test drinking water in compliance with U.S. Environmental Protection Agency
(“EPA”) standards. The tests also are used in evaluating water used in
production processes (for example, in beverage and pharmaceutical applications)
and in evaluating bottled water, recreational water, waste water and water from
private wells.
Our Enterolert™ product detects enterococci in drinking and
recreational waters. Our Quanti-Tray® products, when used in conjunction with
our Colilert®, Colilert-18, Colisure® or Enterolert™ products, provide
users quantitative measurements of microbial contamination, rather then a
presence/absence indication. The Colilert®, Colilert-18, Colisure® and
Quanti-Tray® products have been approved by the EPA and by regulatory
agencies in certain other countries.
In August 2000, we acquired Genera Technologies Limited, a U.K.-based
company that develops and sells products for detection of cryptosporidia in
water. Cryptosporidia are parasites that can cause potentially fatal
gastrointestinal illness if ingested. Testing of water supplies for
cryptosporidia is mandated by regulation in the United Kingdom, but is not
regulated in other countries at this time.
Approximately 10% of the Company’s revenues were derived from sales of
water testing products in each of 2003, 2002 and 2001.
FOOD DIAGNOSTICS GROUP
Production Animal Services
We sell diagnostic tests and related instrumentation and software that are
used to detect a wide range of diseases and monitor health status in production
animals. Our production animal products are purchased primarily by government
laboratories and poultry and swine producers. Significant products include
diagnostic tests for porcine reproductive and respiratory syndrome and
pseudorabies virus in pigs, Newcastle disease in poultry, and Johne’s disease
and brucellosis in cattle.
We have developed a post-mortem test for bovine spongiform encephalopathy,
or “mad cow disease.” We have submitted an application to the United States
Department of Agriculture (“USDA”) for approval of this test. However, there
is no current testing program in the U.S. that requires use of rapid tests of
the kind that we manufacture, and we do not know when or if the USDA will
implement any such program. We also have submitted an application to the EU
Food Safety Commission seeking a license to sell this product in EU member
countries.
Dairy Testing
Our principal product for use in testing for antibiotic residue in milk is
the SNAP® beta-lactam test. Dairy producers and processors use our tests for
quality assurance of raw milk, and government and food quality managers use
them for ongoing surveillance.
In March, 2003 we entered into an agreement with the FDA under which we
agreed, among other things, to perform specified lot release and stability
testing of our SNAP® beta-lactam products and to provide related data to the
FDA. If the FDA were to determine that one or more lots of product failed to
meet applicable criteria for product performance or stability, the FDA could
take various actions, including requiring us to recall products or restricting
our ability to sell these products. Sales of dairy antibiotic residue testing
products were $16.1 million in 2003.
Approximately 9%, 11% and 10% of the Company’s revenues were derived from
sales of production animal and dairy products and services in 2003, 2002 and
2001, respectively.
5
MARKETING AND DISTRIBUTION
We market, sell and service our products in more than 50 countries through
our marketing, sales and technical service groups, as well as through
independent distributors and other resellers. We maintain sales offices
outside the U.S. in Australia, France, Germany, Italy, Japan, The Netherlands,
Spain, Taiwan and the United Kingdom. In 2003, 2002 and 2001 we spent $71.8
million, $57.0 million and $57.1 million or 15%, 14% and 15% of sales,
respectively, on sales and marketing.
Generally, we will select the appropriate distribution channel for our
products based on the type of product, technical service requirements, number
and concentration of customers, regulatory requirements and other factors. We
market our veterinary diagnostic and pharmaceutical products to veterinarians
both directly and through independent veterinary distributors in the U.S., with
most instruments and laboratory services sold directly by IDEXX sales
personnel, and test kits, pharmaceutical products and instrument consumables
supplied both via the distribution channel and directly. Outside the U.S., we
sell our veterinary diagnostic products through independent distributors and
other resellers and, in certain countries, through our direct sales force. We
market our software products and veterinary laboratory services through our
direct sales force. We market our water, dairy, and production animal products
primarily through our direct sales force in the U.S. and Canada. Outside the
U.S. and Canada, we market these products through selected independent
distributors and, in certain countries, through our direct sales force.
In 2003, 2002 and 2001, 30%, 29% and 28%, respectively, of our revenue was
attributable to sales of products and services to customers outside the U.S.
Risks associated with foreign operations include fluctuations in the value of
foreign currencies, the need for additional regulatory approvals, possible
disruptions in transportation of our products, the differing product needs of
foreign customers, difficulties in building and managing foreign operations,
import/export duties and quotas, and unexpected regulatory, economic or
political changes in foreign markets. We engage in hedging activities to
reduce the effect of foreign currency fluctuations on our earnings. See Note
17 to the consolidated financial statements for information by geographic
region; Note 2(m) to the consolidated financial statements for a description of
our hedging activities; and “Quantitative and Qualitative Disclosure About
Market Risk” for a description of foreign currency exchange risk.
In 2003, 2002 and 2001, no customer accounted for greater than 10% of our
sales. Our largest customers are distributors of our products in the CAG
segment. The largest consumer of our products accounts for approximately 1% of
our sales.
RESEARCH AND DEVELOPMENT
Our business includes the development and introduction of new products and
may involve entry into new business areas. Our research and development
activity is focused primarily on development of new animal drugs, new
diagnostic instrument platforms, new immunoassay devices, new diagnostic tests
and improvements to our diagnostic and testing products. Our research and
development expenses, which consists of salaries, employee benefits, materials
and consulting costs, were approximately $32.3 million, $29.3 million and $28.4
million, or 7% of sales, in 2003, 2002 and 2001, respectively.
PATENTS AND LICENSES
We actively seek to obtain patent protection in the U.S. and other
countries for inventions covering our products and technologies. We also
license patents and technologies from third parties. These licenses include an
exclusive royalty-bearing license of certain patents relating to diagnostic
products for FIV that expire in 2009, from The Regents of the University of
California; an exclusive royalty-bearing license of certain patents utilized in
the Colilert®, Colilert-18, Colisure® and Enterolert™ water testing
products that expire in 2007; exclusive licenses to certain patents and patent
applications relating to detection of Lyme disease that expire beginning in
2019, from Tulane University and the University of Texas; and a non-exclusive
royalty-bearing license from Barnes-Jewish Hospital to certain patents relating
to canine heartworm tests that expire in 2006. In addition, we hold a U.S.
patent, which expires in 2014, covering certain methods and kits for
simultaneously detecting antigens and antibodies, that covers our SNAP® Combo
FeLV/FIV and Canine SNAP® 3Dx® combination tests.
6
To the extent some of our products may now, or in the future, embody
technologies protected by patents, copyrights or trade secrets of others, we
may be required to obtain licenses to such technologies in order to continue to
sell our products. These licenses may not be available on commercially
reasonable terms. Our failure to obtain any such licenses may delay or prevent
the sale of certain new or existing products. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations - Future Operating
Results.”
PRODUCTION AND SUPPLY
VetTest® analyzers are manufactured for us by Tokyo Parts Industrial
Company Ltd. under an agreement that renews annually unless either party
notifies the other of its decision not to renew. VetTest® slides are
supplied exclusively by Ortho under supply agreements with Ortho (the “Ortho
Agreements”). We are required to purchase all of our requirements for
VetTest® slides from Ortho to the extent Ortho is able to supply those
requirements. In addition, we have committed to minimum annual purchase
volumes of certain VetTest® slides through 2010. The Ortho Agreements expire
on December 31, 2018.
The QBC®VetAutoread™ system is manufactured for us by Becton Dickinson
under a development and distribution agreement that requires Becton Dickinson
to supply analyzers to us through 2008 and reagents through 2010. Becton
Dickinson is the sole source of these analyzers and reagents.
We purchase certain other products, raw materials and components from only
one source. These include active ingredients for our pharmaceutical products,
including NAVIGATOR®, computed radiography systems and certain components
used in our SNAP® rapid assay devices, water testing products and
LaserCyte® systems. The loss of some of these sources of supply could have a
material adverse effect on the Company.
The supplier of our computed radiography systems has informed us that it
believes we are in breach of our supply agreement. We believe we have complied
fully with that agreement and we have filed suit against that supplier seeking
declaratory judgment from the court that we are not in breach of the agreement,
an order from the court compelling the supplier to honor our agreement and
damages for certain breaches of the agreement by the supplier. The supplier
has asserted counter-claims against us alleging, among other things, breaches
of implied covenants in the contract. We believe we have strong defenses to
these counter-claims and intend to contest them vigorously. An adverse result
in this litigation could result in loss of supply of our computed radiography
instruments and/or a requirement that we pay damages to the supplier. Revenue
from this product line was $1.3 million in 2003.
We do not generally maintain significant backlog and believe that our
backlog at any particular date historically has not been indicative of future
sales.
COMPETITION
We face intense competition within the markets in which we sell our
products and services. We expect that future competition will become even more
intense, and that we will have to compete with changing technologies, which
could affect the marketability of our products and services. Our competitive
position also will depend on our ability to develop proprietary products,
attract and retain qualified scientific and other personnel, develop and
implement production and marketing plans, obtain patent protection and obtain
adequate capital resources.
We compete with many companies ranging from small businesses focused on
animal health to large pharmaceutical companies. Our competitors vary in our
different markets. Academic institutions, governmental agencies and other
public and private research organizations also conduct research activities and
may commercialize products, which could compete with our products, on their own
or through joint ventures. Some of our competitors have substantially greater
capital, manufacturing, marketing and research and development resources than
we do.
Competitive factors in our different business areas are detailed below:
7
GOVERNMENT REGULATION
Many of our products are subject to regulation by U.S. and foreign
regulatory agencies. The following is a description of the principal
regulations affecting our businesses.
Veterinary diagnostic products
. Most diagnostic tests for animal health
applications are veterinary biological products that are regulated in the U.S.
by the Center for Veterinary Biologics within the USDA Animal and Plant Health
Inspection Service (“APHIS”). The APHIS regulatory approval process involves
the submission of product performance data and manufacturing documentation.
Following regulatory approval to market a product, APHIS requires that each lot
of product be submitted for review before release to customers. In addition,
APHIS requires special approval to market products where test results are used
in part for government-mandated disease management programs. A number of
foreign governments accept APHIS approval as part of their separate regulatory
approvals. However, compliance with an extensive regulatory process is
required in connection with marketing diagnostic products in Japan, Germany,
The Netherlands and many other countries. We also are required to have a
facility license from APHIS to manufacture USDA-licensed products. We have
obtained such a license for our manufacturing facility in Westbrook, Maine.
Our instrument systems are medical devices regulated by the U.S. Food and
Drug Administration (“FDA”) under the Food, Drug and Cosmetics Act (the “FDC
Act”). While the sale of these products does not require premarket approval by
FDA and does not subject us to the FDA’s Good Manufacturing Practices
regulations (“GMPs”), these products must not be adulterated or misbranded
under the FDC Act.
Veterinary pharmaceuticals
. The manufacture and sale of veterinary
pharmaceuticals are regulated by the Center for Veterinary Medicine (“CVM”) of
the FDA. A new animal drug may not be commercially marketed in the U.S. unless
it has been approved as safe and effective by CVM. Approval may be requested
by filing a NADA with CVM containing substantial evidence as to the safety and
effectiveness of the drug. Data regarding manufacturing methods and controls
also are required to be submitted with the NADA. Manufacturers of animal drugs
must also comply with GMPs and Good Laboratory Practices (“GLPs”). Sales of
animal drugs in countries outside the U.S. require compliance with the laws of
those countries, which may be extensive.
Water testing products
. Our water tests are not subject to formal
premarket regulatory approval. However, before a test may be used as part of a
water quality monitoring program required by the EPA, the test must first be
approved by the EPA. The EPA approval process involves submission of extensive
product performance data in accordance with an EPA approved protocol,
evaluation of the data by the EPA and publication for public comment of any
proposed approval in the Federal Register before final approval. Our
Colilert®, Colilert-18, Colisure®, Quanti-Tray®, Filta-Max® and
SimPlate® for heterotropic plate counts (HPC) products have been approved by
the EPA. The sale of water testing products also is subject to extensive and
lengthy regulatory processes in many other countries around the world.
Dairy testing products
. The sale of dairy testing products in the U.S. is
regulated by the FDA in conjunction with the Association of Official Analytical
Chemists - Research Institute (“AOAC-RI”). Before a product may be sold,
extensive product performance data must be submitted in accordance with a
protocol that is approved by the FDA and the AOAC-RI. Following approval of a
product by FDA, the product must also be approved by the National Conference on
Interstate Milk Shipments (“NCIMS”), an oversight body that includes state,
federal and industry representatives. Our dairy antibiotic residue testing
products have been approved by the FDA and NCIMS. While some foreign countries
accept AOAC-RI approval as part of their regulatory approval process, many
countries have separate regulatory processes.
8
Any acquisitions of new products and technologies may subject us to
additional areas of government regulation. These may involve food, drug and
water quality regulations of the FDA, the EPA and the USDA, as well as state,
local and foreign governments. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations - Future Operating Results.”
EMPLOYEES
As of December 31, 2003, IDEXX had approximately 2,473 full-time and
part-time employees. We are not a party to any collective bargaining agreement
and we believe that relations with our employees are good.
•
Point-of-care veterinary diagnostic products;
•
Laboratory and consulting services used by veterinarians;
•
Veterinary pharmaceutical products;
•
Information products and services, including software, used in veterinary practice management;
•
Diagnostic and health-monitoring products and services for production animals;
•
Products that test water for certain microbiological contaminants; and
•
Products that test milk for antibiotic residues.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Table of Contents
•
Veterinary diagnostic products and food and water test products
.
We compete primarily on the basis of the ease of use, speed, accuracy
and other performance characteristics of our products and services, the
breadth of our product line and services, the effectiveness of our
sales and distribution channels, the quality of our technical and
customer service, and pricing.
Table of Contents
•
Veterinary laboratory services
. In this market, we compete
primarily on the basis of quality, service, technology, and price. We
compete in certain geographic locations with Antech Diagnostics, a unit
of VCA Antech, Inc.
•
Veterinary pharmaceuticals
. We compete primarily on the basis of
the performance characteristics of our products.
•
Veterinary practice information management software systems
. We
compete primarily on the basis of ease of use, connectivity to
equipment and other systems, performance characteristics, effectiveness
of our customer service, information handling capabilities, advances in
technologies, and price.
Table of Contents
ITEM 2. PROPERTIES
We lease approximately 297,000 square feet of office and manufacturing space in Westbrook, Maine under a lease expiring in 2018; approximately 97,500 square feet of industrial space in Memphis, Tennessee for use as a distribution facility, under a lease expiring in 2013; approximately 40,000 square feet of office and manufacturing space in Eau Claire, Wisconsin for our veterinary practice information management software business, under a lease expiring in 2009; and approximately 48,000 square feet of warehouse and office space in The Netherlands for use as our headquarters for European operations, under a lease expiring in 2008.
We also lease a total of approximately 25,000 square feet of smaller office, manufacturing and warehouse space in the U.S. and elsewhere in the world. In addition, we own or lease approximately 140,000 square feet of space in the U.S., Australia and the United Kingdom for use as veterinary reference laboratories and office space for our veterinary consulting services. Of this space, 46,000 square feet is owned by us and the remaining amount is leased, under leases having expiration dates up to the year 2012.
We consider that the properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on our business.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers as of February 29, 2004 were as follows:
| Name | Age | Title | ||||
|
|
|
|
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| Jonathan W. Ayers | 47 | President, Chief Executive Officer and Chairman of the Board of Directors | ||||
| William C. Wallen, PhD | 60 | Senior Vice President and Chief Scientific Officer | ||||
| Conan R. Deady | 42 | Vice President, General Counsel and Secretary | ||||
| S. Sam Fratoni, PhD | 56 | Vice President and Chief Information Officer | ||||
| Robert S. Hulsy | 59 | Vice President | ||||
| Laurel E. LaBauve | 45 | Vice President Worldwide Operations | ||||
| Merilee Raines | 48 | Vice President, Chief Financial Officer and Treasurer | ||||
| Quentin Tonelli, PhD | 55 | Vice President | ||||
Mr. Ayers has been Chairman of the Board, Chief Executive Officer and President of IDEXX since January 2002. Prior to joining IDEXX, in 2000 and 2001, Mr. Ayers was President of Carrier Corporation, the largest business unit of United Technologies Corporation, a provider of high-technology products and services to the building systems and aerospace industries, and from 1997 to 1999, he was President of Carrier Asia Pacific Operations. From 1995 to 1997, Mr. Ayers was Vice President, Strategic Planning at United Technologies. Before
9
joining United Technologies, from 1991 to 1995, Mr. Ayers was Principal of Corporate Finance and from 1986 to 1991, he was Vice President of Mergers and Acquisitions, at Morgan Stanley & Co. Mr. Ayers holds an undergraduate degree in molecular biophysics and biochemistry from Yale University and an MBA from Harvard University.
Dr. Wallen has been Senior Vice President and Chief Scientific Officer of IDEXX since September 2003. Prior to joining IDEXX, Dr. Wallen held various positions with Bayer Corporation, most recently as Senior Vice President and Head, Office of Technology for the Diagnostics Division of Bayer Healthcare. From 2001 to 2003, Dr. Wallen served as Senior Vice President and Head of Research, Nucleic Acid Diagnostics Segment; from 1999 to 2001 as Senior Vice President of Research and Development Laboratory Testing Segment; and from 1993 to 1999 as Vice President of Research and Development, Immunodiagnostic and Clinical Chemistry Business Units. Before joining Bayer Corporation, from 1990 to 1993, Dr. Wallen was Vice President Research and Development at Becton Dickinson Advanced Diagnostics.
Mr. Deady has been Vice President and General Counsel of the Company since 1999 and was Deputy General Counsel of the Company from 1997 to 1999. Before joining the Company in 1997, Mr. Deady was Deputy General Counsel of Thermo Electron Corporation, a manufacturer of technology-based instruments. Mr. Deady was previously affiliated with Hale and Dorr LLP, a Boston-based law firm.
Dr. Fratoni has been Vice President of the Company since May 1997 and Chief Information Officer since November 2000. He was President of the Company’s Food and Environmental Group from July 1999 to December 2000. From May 1997 to July 1999, Dr. Fratoni was Vice President of Human Resources of the Company, and from October 1996 to May 1997, he was Director of Business Development for the Food and Environmental Group. Before joining the Company in October 1996, Dr. Fratoni held various positions with Hewlett-Packard Company.
Mr. Hulsy has been Vice President of the Company since February 1999 and President of the Company’s IDEXX Laboratory Services business since August 1998. Before joining the Company in August 1998, Mr. Hulsy was President of American Environmental Network, Inc., a network of environmental laboratories, from 1992 to 1998.
Ms. LaBauve joined IDEXX as Vice President, Worldwide Operations in February 2004. From 1999 until 2004, Ms. LaBauve held various senior positions with the Ortho-Clincial Diagnostics subsidiary of Johnson & Johnson, including General Manager and Vice President, Clinical Laboratory Franchise, from 2002 to 2004; Vice President, Worldwide Systems R&D, from 2000 to 2002; and Vice President Design Excellence, from 1999 to 2000. Prior to joining Ortho, Ms. LaBauve held various positions with AlliedSignal Corporation, most recently serving as Vice President, Six Sigma Quality.
Ms. Raines has been Chief Financial Officer since October 2003 and Vice President, Finance of the Company since May 1995. Ms. Raines served as Division Vice President, Finance from March 1995 to May 1995, Director of Finance from 1988 to March 1995 and Controller from 1985 to 1988.
Dr. Tonelli became Vice President of the Company in June 2001 and currently oversees the Company’s Production Animal Services and Rapid Assay lines of business. Previously he has held various positions with the Company, including Division Vice President for Research and Development and Division Vice President, Business Development. Before joining the Company in 1984, he was a Group Leader of Research and Development for the Hepatitis and AIDS Business Unit within the diagnostic division of Abbott Laboratories, Inc.
10
PART II.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Common Stock is quoted on the NASDAQ Stock Market under the symbol
IDXX. The table below shows the high and low sale prices per share of our
Common Stock as reported on the NASDAQ Stock Market for the years 2003 and
2002.
CALENDAR YEAR
HIGH
LOW
$
37.94
$
31.31
39.10
31.87
45.71
33.40
49.25
42.59
$
29.30
$
24.00
32.62
24.60
32.00
23.80
37.05
29.29
As of December 31, 2003, there were 1,068 holders of record of our Common Stock.
We have never paid any cash dividends on our Common Stock. From time to time our Board of Directors may consider the declaration of a dividend. However, we have no present intention to pay a dividend and we expect to use future earnings to fund the development and growth of the business.
11
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five years ended December 31, 2003. The selected
consolidated financial data presented below have been derived from the
Company’s consolidated financial statements. 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.
For the Years Ended December 31,
(in thousands, except per share data)
2003
2002
2001*
2000*
1999*
$
475,992
$
412,670
$
386,081
$
367,432
$
358,370
245,688
219,945
202,750
190,256
186,386
230,304
192,725
183,331
177,176
171,894
71,846
56,794
57,087
54,956
53,885
45,752
40,787
41,266
40,677
43,969
32,319
29,329
28,426
28,292
27,313
80,387
65,815
56,552
53,251
46,817
2,867
2,955
2,229
4,996
5,728
83,254
68,770
58,781
58,247
52,545
26,278
23,381
21,161
21,615
19,967
(114
)
—
—
—
—
$
57,090
$
45,389
$
37,620
$
36,632
$
32,578
$
1.67
$
1.35
$
1.13
$
1.06
$
0.85
$
1.59
$
1.30
$
1.09
$
1.02
$
0.82
34,271
33,622
33,293
34,574
38,412
35,931
35,043
34,640
36,081
39,743
$
—
$
—
$
—
$
—
$
—
$
255,787
$
162,763
$
100,575
$
75,203
$
130,928
269,853
217,740
164,199
141,781
158,774
521,875
417,426
373,107
335,796
357,982
494
973
8,380
8,472
3,543
413,292
340,973
301,370
261,747
284,341
| * | As a result of the adoption of Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets”, goodwill is no longer amortized commencing January 1, 2002. Goodwill amortization expense, net of tax was $4.5 million, $4.1 million and $4.5 million for each of the years ended December 31, 2001, 2000 and 1999, respectively. See Note 2(e) to the consolidated financial statements. |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
BUSINESS OVERVIEW
We operate primarily through three business segments: the Companion Animal Group (“CAG”), Water testing business (“Water”) and the Food Diagnostics Group (“FDG”). CAG comprises our veterinary diagnostic products and services (rapid assays, instruments, instrument consumables and laboratory and consulting services), veterinary pharmaceuticals, and veterinary information products and services. Water develops, designs, manufactures and distributes products to detect contaminants in water. FDG develops, designs, manufactures and distributes products to detect disease and contaminants in production animals and food. Other encompasses activities that are not included in our three business segments and is comprised primarily of corporate research and development, a CEO succession charge and interest income. We have conformed the financial information about segments for the years ended December 31, 2002 and 2001 to our presentation of reportable segments for the year ended December 31, 2003. Previously we reported two operating segments.
12
The following is a discussion of the strategic and operating factors that
we believe have the most significant effect on the performance of our business.
Companion Animal Group
Our CAG segment accounted for approximately 81% of our sales in 2003 and
is, therefore, our most significant business. The largest product lines within
our CAG segment by percentage of revenue in 2003 are:
Percentage of
CAG Revenue
46
%
24
22
8
100
%
Other consists primarily of practice information management software and services and pharmaceutical products. To date, revenues from sales of pharmaceutical products have not been substantial. However, we are investing significantly in a pipeline of companion animal pharmaceutical products. If we are successful in developing, obtaining FDA approval for, and marketing these products, we believe that sales of pharmaceutical products will become a more material component of CAG sales in the future.
By offering to companion animal veterinarians a broad range and an integrated set of proprietary diagnostic products and services, therapeutics and practice management computer systems, we believe we have developed a strong customer franchise, providing us a strategic advantage over companies with more narrow product or service offerings. Our complementary products and services give us scale in sales and distribution in this market, and permit us to offer programs such as Practice Developer™, a loyalty program that allows clinics to earn points with purchases, depending on the number of product categories they purchase from and the volume of those purchases, and to apply earned points toward, among other things, the purchase of a variety of IDEXX products and services. By offering both point-of-care diagnostics for use in the clinic and outside laboratory services, we are able to develop integrated disease management solutions that leverage the advantages of both point-of-care and laboratory testing. In addition, by integrating our practice management software systems with our instruments and with our reference laboratories, we enhance the veterinary practices of our customers by facilitating the flow of medical information in the clinic.
In the U.S., we sell instrument consumables, rapid assays and pharmaceuticals through distributors, and therefore our reported sales of these products are sales made to distributors, rather than sales to veterinarians, the end-users. Because distributor inventory levels and purchasing patterns may fluctuate, sales of a particular product line in a particular period may not always be representative of the underlying customer demand for the product. Therefore, we closely track sales of these products by our distributors to the clinics (“clinic-level sales”), which we think provides a more accurate picture of the real growth rate for these products. In the discussion of results below, we note certain instances where we believe reported sales have been influenced, positively or negatively, by changes in distributor inventories.
Instruments and Instrument Consumables . Our instrument strategy is to provide veterinarians with an integrated set of instruments (called IDEXX VetLab®) that, individually and together, provide superior diagnostic information in the clinic, enabling veterinarians to practice better medicine and build more profitable practices. We derive substantial revenues from the sale of consumables that are used in these instruments. During the early stage of an instrument life cycle, we derive relatively greater revenues from instrument placements, while consumable sales become relatively more significant in later stages as the installed base of instruments increases and instrument placements begin to decline. Our long-term success in this area of our business is dependent on our ability both to develop and sell new instruments with enhanced diagnostic capabilities and to maximize customer utilization of those instruments, which creates more consumables sales.
We have a large installed base of VetTest® chemistry analyzers, and substantially all of our revenues from that product line are now derived from consumables sales, although we continue to place instruments through sales and through rental and other programs. As a result, the success of this product line is partially dependent on
13
increased customer utilization of those instruments. Toward that end, we seek to educate veterinarians about best medical practices that emphasize the importance of blood chemistry testing for a variety of diagnostic purposes.
We purchase the consumables used in VetTest® chemistry analyzers from Ortho. In October 2003, we entered into a new supply agreement with Ortho, under which we are developing and will introduce a next-generation chemistry analyzer for the veterinary market based on the Ortho dry-slide technology, and Ortho will supply us with the slide consumables used in both the new instrument and the VetTest® chemistry analyzer. The new agreement provides us with a source of dry-slide consumables through 2018 at an expected improved cost over the term of the agreement. The new agreement does not increase, over the prior agreement, the minimum unit volume of slides we are required to purchase from Ortho over the term of the agreement. As a result of this new agreement, we discontinued certain internal development activities relating to an alternative next-generation clinical chemistry instrument. We incurred a non-cash, pre-tax charge in the quarter ended December 31, 2003 of approximately $7.4 million for the impairment of manufacturing equipment purchased for the production of consumables for use in this alternative instrument.
In the fourth quarter of 2002, we introduced our new hematology analyzer, the LaserCyte® system, which provides more extensive hematological diagnostic information than our original platform, the QBC® VetAutoread™ system. Our success in growing hematology revenues over the next several years will depend upon our ability to sell LaserCyte® instruments, although we intend to continue to sell the QBC® VetAutoread™ system. We do not intend to rent LaserCyte® instruments in the foreseeable future. At earlier stages in the life cycle of this product, a substantial portion of LaserCyte® placements will be made at veterinary clinics that already own our QBC® VetAutoread™ instruments. As a result, net consumables sales are not likely to grow significantly in the near future, as we expect the increase in LaserCyte® consumable sales to be largely offset by declines in sales of QBC® VetAutoread™ consumables. However, we believe that the enhanced diagnostic capabilities of the LaserCyte® system will lead veterinarians to perform more in-clinic hematology testing, which will increase consumables sales as our installed base of LaserCyte® systems increases. In addition, we expect the gross margin percentage of LaserCyte® consumables to exceed the gross margin percentage of the QBC® VetAutoread™ consumables.
With all of our instrument lines, we seek to differentiate our products based on superior system capability, quality of diagnostic information, reliability and customer service. Our equipment and consumables typically are sold at a premium price to competitive offerings. Our success depends on our ability to maintain a premium price strategy. In addition, our in-clinic instrumentation competes with outside laboratory services for similar diagnostic information, and such services are typically offered at a lower cost. Therefore, our success also depends on our ability to market the relative attractiveness of in-clinic diagnostic testing, versus less convenient and timely, but lower priced, laboratory testing.
Laboratory Services . We believe that more than half of all diagnostic testing by U.S. veterinarians is done at outside reference laboratories such as our IDEXX Reference Laboratories. We attempt to differentiate our laboratory testing services from those of our competitors primarily on the basis of quality, customer service and technology. Revenue growth in this business is achieved both through increased sales at existing laboratories and through the acquisition of new customers. In the third quarter of 2003 we acquired a laboratory in Kentucky, in the fourth quarter of 2003 we opened a new laboratory in Atlanta and in the first quarter of 2004 we acquired a laboratory in Columbus, Ohio. Profitability of this business is largely the result of our ability to achieve efficiencies from both volume and operational improvements.
Rapid Assays . Our rapid assay business comprises single-use kits for in-clinic testing and microwell-based kits for large clinic and laboratory testing for canine and feline diseases and conditions. Our two principal product lines are canine heartworm products and the SNAP® FIV antibody/FeLV antigen combination test. Our rapid assay strategy is to develop, manufacture, market and sell proprietary tests with superior performance that address important medical needs. As in our other lines of business, we also seek to differentiate our products through superior customer support. These products carry price premiums over competitive products that we believe do not offer equivalent performance and diagnostic capabilities, and which we believe do not include a similar level of support. We augment our product development and customer service efforts with marketing programs that enhance medical awareness and understanding regarding our target diseases and the importance of diagnostic testing.
14
Water
Our strategy in the water testing business is to develop, manufacture, market and sell proprietary products with superior performance, supported by exceptional customer service. Our customers are primarily water utilities to whom strong relationships and customer support are very important. Over the past several years the rate of growth of this product line has slowed as a result of increased competition and market penetration. International sales of water testing products represented 37% of total water product sales in 2003, and we expect that future growth in this business will be significantly dependent on our ability to increase international sales. Growth also will be dependent on our ability to enhance and broaden our product line. Most water microbiological testing is driven by regulation, and in many countries a test may not be used for regulatory testing unless it has been approved by the applicable regulatory body. As a result, we maintain an active regulatory program under which we are seeking regulatory approvals in a number of countries, primarily in Europe.
Food Diagnostics Group
Production Animal Services . We develop, manufacture, market and sell a broad range of tests for various poultry, cattle and swine diseases and conditions, and have an active research and development and in-licensing program in this area. Our strategy is to offer proprietary tests with superior performance characteristics. Disease outbreaks are episodic and unpredictable, and certain diseases that are prevalent at one time may be substantially contained or eradicated. In response to outbreaks, testing initiatives may lead to exceptional demand for certain products in certain periods. Conversely, successful eradication programs may result in significantly decreased demand for certain products. The performance of this business, therefore, can be subject to fluctuation. In 2003, approximately 70% of our sales in this business was international. Because of the significant dependence of this business on international sales, the performance of the business is particularly subject to the various risks described below that are associated with doing business internationally.
Dairy Testing . Our strategy in the dairy testing business is to develop, manufacture and sell antibiotic residue testing products that satisfy applicable regulatory requirements for testing of bulk milk by producers and provide reliable field performance. Sales of dairy testing products have declined over the last several years largely as a result of increased competition in the domestic market. To increase sales of dairy testing products, we will need to increase penetration in geographies outside the United States and in the farm segment of the dairy market.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Inventory
Our inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out) or market. We write down inventory for estimated obsolescence when warranted by our estimates of future demand and market conditions. If actual market conditions are less favorable than those estimated by management, additional inventory write-downs may be required, which would have a negative effect on our results of operations.
As of December 31, 2003, our inventories included $7.2 million of component parts and finished goods associated with our LaserCyte® hematology instrument, which we began shipping to customers in fourth quarter of
15
2002. In addition, we have firm purchase commitments for an additional $3.5 million. We expect to fully realize our investment and purchase commitments. However, if we alter the design of this product, we may be required to write off some or all of the associated inventory.
Valuation of Long-lived and Intangible Assets and Goodwill
We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include but are not limited to the following:
| • | Significant under-performance relative to historical or projected future operating results; | ||
| • | Failure to obtain regulatory approval of certain products; | ||
| • | Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; | ||
| • | Significant increase in the discount rate assumed to present value future cash flow, | ||
| • | Significant negative industry or economic trends; and | ||
| • | Significant advancements or changes in technology. |
When we determine that the carrying value of intangibles, long-lived assets and goodwill may not be recoverable based on a change in events and circumstances discussed above, we measure any impairment based on factors such as projected cash flows. Net intangible assets and goodwill amounted to $61.8 million as of December 31, 2003, consisting of $25.2 million related to veterinary laboratories (of which $24.6 million represents goodwill), $17.3 million related to water test products (of which $14.9 million represents goodwill), $16.0 million related to veterinary pharmaceutical products (of which $13.7 million represents goodwill) and $3.3 million of other (of which $1.8 million represents goodwill).
In 2002, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142 and as a result, we ceased to amortize goodwill, but continued to amortize all other intangibles. We had recorded approximately $5.0 million of goodwill amortization on these amounts during the year ended December 31, 2001, and would have recorded approximately $4.5 million of goodwill amortization during the same periods in 2003 and 2002, if the existing standards had been continued. In addition, we recorded $0.5 million, $0.6 million and $1.5 million of other intangible amortization during the years ended December 31, 2003, 2002 and 2001, respectively. In lieu of goodwill amortization, we were required to perform annual impairment reviews of our goodwill. No impairment was found as a result of either our initial impairment review or our 2003 and 2002 year-end reviews.
Revenue Recognition
We recognize revenue when four criteria are met. These include (i) persuasive evidence that an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price is fixed and determinable, and (iv) collectibility is reasonably assured.
| • | We recognize revenue at the time of shipment to distributors for substantially all products, as title and risk of loss pass to these customers on delivery to the common carrier. We recognize revenue for the remainder of our customers when the product is delivered, except as noted below. Our distributors do not have the right to return products. | ||
| • | We recognize revenue on sales of instruments after the instrument is installed because installation is considered essential to the usability of the instrument, and the customer has accepted the instrument. | ||
| • | We recognize service revenue at the time the service is performed. | ||
| • | We recognize revenue associated with extended maintenance agreements ratably over the life of the contracts. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition. |
16
| • | We recognize revenue from noncancelable software licenses and hardware systems upon installation of the software (and completion of training if applicable) or hardware and customer acceptance because collection is probable and we have no significant further obligations. | ||
| • | We recognize revenue on certain instrument systems under rental programs over the life of the rental agreement. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition. |
When instruments are sold together with extended maintenance agreements, we allocate revenue to the extended maintenance agreement under EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Accordingly the total consideration received is allocated to the elements based on their relative fair values, which is determined by amounts charged separately for the delivered and undelivered elements to other customers. The deferred revenue related to the extended maintenance agreements is recognized ratably over the maintenance period. The delivered elements are recognized as revenue when appropriate under the policies described above. Shipping costs reimbursed by the customer are included in revenue.
We record estimated reductions to revenue in connection with customer programs and incentive offerings, which may give customers future rights such as free or discounted goods or services or trade-in rights. We estimate these reductions based on our experience with similar customer programs in prior years. Revenue reductions are finalized on a quarterly basis for most programs upon issuance of credits or free or discounted products. For the SNAP-Up-the-Savings™ program, estimates of future customer credits are revised quarterly and finalized annually in the third quarter of each year upon the issuance of credits to customers. For our Practice Developer™ volume discount program, we have reduced revenue assuming all points granted will result in future credits because we do not have sufficient experience with this program to estimate customer point forfeitures.
We recognize revenue only in those situations where collection from the customer is reasonably assured. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on detailed analysis of specific client situations and percentage of our accounts receivable by aging category. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances might be required.
Income Taxes
We account for income taxes under SFAS No. 109, “Accounting for Income Taxes.” This statement requires that we recognize a current tax liability or asset for current taxes payable or refundable, respectively; and a deferred tax liability or asset, as the case may be, for the estimated future tax effects of temporary differences between book and tax treatment of assets and liabilities and carryforwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have recorded a valuation allowance on certain deferred tax assets that relate to state and international net operating loss carryforwards and certain other unrealizable international deferred tax assets. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.
We do not provide for U.S. income taxes on earnings of our subsidiaries outside of the U.S. As of December 31, 2003, we had unremitted earnings in subsidiaries outside the U.S. of $60.4 million, on which no U.S. taxes have been provided. Our intention is to reinvest these earnings permanently or to repatriate the earnings only when tax-effective to do so. It is not practical to estimate the amount of additional taxes that might be payable upon repatriation of foreign earnings.
17
Warranty Reserves
We provide for the estimated cost of product warranties at the time revenue is recognized. Our actual warranty obligation is affected by product failure rates and service costs incurred in correcting a product failure. Should actual product failure rates or service costs differ from our estimates, which are based on historical data and engineering estimates, where applicable, revisions to the estimated warranty liability would be required. As of December 31, 2003 and 2002, we had accrued $3.7 million and $0.3 million for estimated warranty expense, respectively. Warranty expense was $4.0 million, $0.4 million and $0.3 million for the years ended December 31, 2003, 2002 and 2001, respectively.
The increase in warranty accrual and expense is due to our launch of the LaserCyte® system in the fourth quarter of 2002. We expect sales of LaserCyte® will continue to increase in 2004 and beyond. We will charge warranty expense to the cost of LaserCyte® sales based upon our experience with instrument sales and engineering information about the system. Should actual warranty expense exceed our estimates, our cost of sales of LaserCyte® systems would increase.
Estimates for Certain Claims
We purchase insurance policies annually for individual and aggregate amounts of employee health insurance claims. We are self-insured for up to $0.1 million per claim and up to an aggregate limit based on the number of employees enrolled in the plan per month, which is estimated to be $10 million annually. We estimate our liability for employee health claims based on individual and aggregate coverage, our monthly claims experience, the number of employees enrolled in the program, and the average time from when a claim is incurred to the time it is reported.
We purchase workers’ compensation insurance policies annually. Prior to January 1, 2003, we were fully insured for workers’ compensation claims. Beginning January 1, 2003, we purchased an insurance policy where we are liable for the first $0.25 million in claims per occurrence and up to an aggregate limit based on payroll, which is estimated to be $1.4 million for 2003. We renewed this policy effective January 1, 2004. We estimate our liability for workers’ compensation claims based on the insurance policy limits, claims incurred and the estimated ultimate cost to litigate and/or settle the claims.
Periodically we are notified that a claim is being made against us. We evaluate each claim based on the facts and circumstances of each claim. If warranted, we provide for our best estimate of the cost to settle or litigate the claim and evaluate the liability recorded quarterly.
RESULTS OF OPERATIONS
Twelve Months Ended December 31, 2003 Compared to Twelve Months Ended December
31, 2002
Revenue
Total Company.
Revenue for the total company increased $63.3 million, or
15%, to $476.0 million from $412.7 million in the same period of the prior
year. The following table presents revenue for the Company and its operating
segments:
Percentage
Percentage
Change from
Net Sales (in thousands)
2003
2002
Dollar Change
Change
Currency
$
384,419
$
326,897
$
57,522
17.6
%
3.6
%
46,936
41,969
4,967
11.8
%
4.2
%
44,637
43,804
833
1.9
%
8.0
%
$
475,992
$
412,670
$
63,322
15.3
%
4.1
%
18
Companion Animal Group. Revenue for CAG increased $57.5 million, or 18%, to $384.4 million from $326.9 million in the same period of the prior year. This increase resulted primarily from sales of instruments, rapid assay products, instrument consumables, laboratory services, pharmaceutical products, and veterinary practice management software and services. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $11.8 million, or 4%, to the increase in CAG revenue.
The increase in sales of instruments (an increase of approximately $18.5 million, or 127%) was due primarily to increased sales of the LaserCyte® hematology system, which was launched in the fourth quarter of 2002, partially offset by lower sales of QBC® VetAutoread ™ systems.
The increase in sales of rapid assay products (an increase of approximately $13.2 million, or 18%) was due to increased domestic clinic-level sales of canine products and to a lesser degree, feline products, higher average unit prices, the impact of reductions in distributors’ inventory levels in 2002 and the favorable impact of currency exchange rates on sales outside the U.S. The increased sales volume was due in part to the apparent temporary difficulty of one of our competitors in supplying certain competitive products to the market. In January 2004 this competitor announced that it had reentered the heartworm market. In addition, another competitor announced that it has entered the heartworm market. As a result, we believe that competition in the heartworm market will increase in 2004.
The increase in sales of instrument consumables (an increase of approximately $13.1 million, or 12%) was due primarily to increased sales of VetTest® slides and, to a lesser extent, LaserCyte® tubes, partially offset by reduced sales of QBC® VetAutoread ™ tubes resulting from the replacement of QBC® VetAutoread ™ systems by LaserCyte® systems. The overall increase in sales of instrument consumables was due to the favorable impact of currency exchange rates on sales outside the U.S., the impact of reductions in distributors’ inventory levels in 2002, higher volume outside the U.S. and increased domestic clinic-level sales.
Shipments to distributors of our consumables and rapid assay products during 2002 were significantly reduced by the Company as part of a plan to reduce product inventories held by distributors. The reduced shipments during 2002 create a favorable year-to-year comparison that causes reported growth in 2003 to exceed the Company’s estimates of the underlying clinic-level growth for these products.
The increase in sales of laboratory services (an increase of approximately $11.9 million, or 15%) resulted primarily from higher volume primarily in the US and to a lesser extent in the UK and Australia, the favorable impact of currency exchange rates on sales at our laboratories outside the U.S. and favorable pricing.
The increase in sales of pharmaceutical products (an increase of approximately $1.8 million, or 35%), resulted from sales of a product licensed to a third party and to a lesser extent growth of existing products.
The increase in sales of veterinary practice management software and services (an increase of approximately $0.6 million, or 3%), resulted primarily from higher volume of complete system sales, and increased hardware sales.
Water. Revenue for Water increased $5.0 million, or 12%, to $46.9 million from $42.0 million for the same period of the prior year. The increase resulted primarily from higher sales volume of water testing products and the favorable impact of currency exchange rates on sales outside the U.S. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $1.8 million, or 4%, to the increase in Water revenue.
Food Diagnostics Group. Revenue for FDG increased $0.8 million, or 2%, to $44.6 million from $43.8 million for the same period of the prior year. The increase was due to the favorable impact of currency exchange rates on sales outside the U.S. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $3.5 million, or 8%, to the increase in FDG revenue.
The increase in sales of production animal diagnostics (an increase of approximately $1.1 million, or 4%) resulted from the favorable impact of currency exchange rates on sales outside the U.S. These increases were partially offset by lower average unit prices and sales volume.
19
The decrease in sales of dairy testing products (a decrease of
approximately $0.3 million, or 2%) was attributable to lower unit sales volume,
offset partially by the favorable impact of currency exchange rates on sales
outside the U.S.
Gross Profit
Total Company.
Gross profit for the total company increased $37.6 million,
or 20%, to $230.3 million from $192.7 million for the same period in the prior
year. As a percentage of total company revenue, gross profit increased to 48%
in 2003 from 47% in 2002. The following table presents gross profit and gross
profit percentage for the Company and its operating segments:
Percent of
Percent of
Gross Profit (in thousands)
2003
Sales
2002
Sales
$
175,612
45.7
%
$
142,726
43.7
%
31,483
67.1
%
28,612
68.2
%
23,209
52.0
%
21,387
48.8
%
$
230,304
48.4
%
$
192,725
46.7
%
Companion Animal Group. Gross profit for CAG increased $32.9 million, or 23%, to $175.6 million from $142.7 million in the same period of the prior year due to increased sales volume across the CAG product lines and, to a lesser extent, to an increase in the gross profit percentage. As a percentage of CAG revenue, gross profit increased to 46% from 44% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to greater relative sales of rapid assay products and the 2003 termination of a low margin veterinary referral business, productivity improvements across CAG product lines in service and distribution operations, the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses, reduced amortization of VetTest® instruments in our rental and trade-up programs as units become fully amortized and increased average unit prices of rapid assay products and laboratory services. These increases were partially offset by higher sales of our lower gross margin LaserCyte® hematology instrument and by the higher cost of VetTest® slides purchased in 2002 and sold in 2003 as a result of the 2002 renegotiation of our VetTest® slide supply agreement with Ortho. VetTest® slides purchased in 2002 were sold as of the end of the third quarter of 2003. Therefore, beginning in the fourth quarter of 2003, the associated cost of sales was reduced to a level more comparable with the first nine months of 2002.
Water. Gross profit for Water increased $2.9 million, or 10%, to $31.5 million from $28.6 million for the same period in the prior year, primarily due to increased revenue partially offset by a decrease in the gross profit percentage. As a percentage of Water revenue, gross profit decreased to 67% from 68% for the same period in the prior year. The decrease in gross profit percentage was attributable primarily to higher royalty expenses, the net impact of currency exchange and exchange contract losses, unfavorable manufacturing variances, and an unfavorable product mix of higher sales of lower margin accessories.
Food Diagnostics Group. Gross profit for FDG increased $1.8 million, or 9%, to $23.2 million from $21.4 million for the same period in the prior year, primarily due to an increase in the gross profit percentage. As a percentage of FDG revenue, gross profit increased to 52% from 49% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to reduced inventory writedowns in 2003 compared to those recognized in the same period in 2002, primarily on an instrument and related components sold by the dairy business.
20
Operating Expenses
Total Company.
Total company operating expenses increased $23.0 million to
$149.9 from $126.9 million for the same period of the prior year. As a
percentage of revenues, operating expenses remained flat at 31%. The following
tables present operating expenses and operating income for the Company and its
operating segments:
Operating Expenses
Percentage of
Percentage of
Dollar
Percentage
(in thousands)
2003
Sales
2002
Sales
Change
Change
$
120,396
31.3
%
$
96,674
29.6
%
$
23,722
24.5
%
10,549
22.5
%
10,235
24.4
%
314
3.1
%
15,603
35.0
%
13,724
31.3
%
1,879
13.7
%
3,369
N/A
6,277
N/A
(2,908
)
(46.3
%)
$
149,917
31.5
%
$
126,910
30.8
%
$
23,007
18.1
%
Operating Income
Percentage of
Percentage of
Dollar
Percentage
(in thousands)
2003
Sales
2002
Sales
Change
Change
$
55,216
14.4
%
$
46,052
14.1
%
$
9,164
19.9
%
20,934
44.6
%
18,377
43.8
%
2,557
13.9
%
7,606
17.0
%
7,663
17.5
%
(57
)
(0.7
%)
(3,369
)
N/A
(6,277
)
N/A
2,908
(46.3
%)
$
80,387
16.9
%
$
65,815
15.9
%
$
14,572
22.1
%
Companion Animal Group. Operating expenses for CAG increased $23.7 million, or 25%, to $120.4 million from $96.7 million in the same period of the prior year. The increase was attributable to a 28% (approximately $12.7 million) increase in sales and marketing expense, a $7.5 million increase in other expense, a 9% (approximately $1.9 million) increase in research and development expense, and a 6% (approximately $1.7 million) increase in general and administrative expense. The increase in sales and marketing expenses resulted primarily from increased personnel and marketing program costs, increased costs to support the ramp up in LaserCyte® sales and the unfavorable impact of foreign currency denominated expenses.
The increase in other expense is primarily due to a $7.4 million charge for the write-down of production equipment purchased for the manufacture of consumables for use in an alternative clinical chemistry system. In October 2003 we extended our relationship with Ortho, which supplies the VetTest slides. We committed to develop a next generation clinical chemistry system based on Ortho’s dry slide technology and discontinued efforts to develop the alternative system.
The increase in research and development expense results from increased staffing. The increase in administrative expenses reflects higher spending on information technology and other corporate functions and an increase in bad debt provisions, offset partially by the elimination of certain expenses related to legal matters that concluded in 2002.
Water. Operating expenses for Water increased $0.3 million, or 3%, to $10.5 million from $10.2 million in the same period of the prior year. The increase was attributable to a 21% (approximately $0.9 million) increase in sales and marketing expenses and an 11% (approximately $0.2 million) increase in research and development expenses, partly offset by a $0.8 million reduction in other expenses. The increase in sales and marketing expenses resulted primarily from increased marketing activities and headcount. The increase in research and development expenses was due to new product development efforts. The decrease in other expenses reflects the absence of certain non-recurring expenses that were recognized in 2002 associated with a write-off of intangible assets and litigation that concluded in 2002.
Food Diagnostics Group. Operating expenses for FDG increased $1.9 million, or 14%, to $15.6 million from $13.7 million in the same period of the prior year. The increase was attributable to a 23% (approximately $1.4 million) increase in sales and marketing expenses, a 17% ($0.7 million) increase in administrative expenses, and a 16% ($0.6 million) increase in research and development expenses, partly offset by a $0.8 million increase in other income. The increase in sales and marketing expenses resulted primarily from increased marketing activities and headcount, and from expenses incurred in connection with the formation of the China joint venture (see Note 14 to
21
the consolidated financial statements). The increase in administrative expenses reflects an increase in administrative support expenses outside of the U.S., including support of the China joint venture and higher spending on information technology and other corporate functions. The increase in research and development expenses was due to new product development efforts, primarily related to products for diagnosis of transmissible spongiform encephalopathies. The increase in other income was primarily due to a favorable revision of an estimate of royalty obligations under a technology license.
Other. Operating expenses for 2003 decreased $2.9 million or 46% to $3.4 million from $6.3 million for the same period in period in the year. The decrease resulted primarily from $3.4 million in non-recurring benefits provided in 2002 in connection with the retirement of our former Chairman and Chief Executive Officer in January 2002, partly offset by corporate research and development hiring costs incurred in 2003.
Interest Income
Net interest income was $2.9 million for 2003 compared with $3.0 million during 2002. The decrease was due to lower effective interest rates and the receipt in 2002 of $0.3 million in interest on a domestic tax refund. The decrease was partially offset by interest earned on higher invested cash balances.
Provision for Income Taxes
Our effective tax rate was 31.5% for 2003 compared with 34.0% for 2002. The decrease in the effective rate is due to ongoing domestic and international tax planning initiatives, revisions to prior year international tax estimates and the charge to write-down fixed assets discussed above occurring in a high-tax jurisdiction. The write-down reduced the effective tax rate by 0.5%.
Twelve Months Ended December 31, 2002 Compared to Twelve Months Ended December
31, 2001
Revenue
Total Company.
Revenue for the total company increased $26.6 million, or
7%, to $412.7 million from $386.1 million in the same period of the prior year.
The following table presents revenue for the Company and its operating
segments:
Percentage
Percentage
Change from
Net Sales (in thousands)
2002
2001
Dollar Change
Change
Currency
$
326,897
$
308,048
$
18,849
6.1
%
0.7
%
41,969
38,303
3,666
9.6
%
1.0
%
43,804
39,730
4,074
10.3
%
1.5
%
$
412,670
$
386,081
$
26,589
6.9
%
0.9
%
Companion Animal Group. Revenue for CAG increased $18.8 million, or 6%, to $326.9 million from $308.0 million in the same period of the prior year. The increase resulted primarily from sales of laboratory services and instrument consumables and, to a lesser extent, rapid assay products, veterinary practice management software and services and instruments. These increases were partially offset by reduced sales of pharmaceutical products. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $2.3 million or 1% to the increase CAG revenue.
The increase in sales of laboratory services (an increase of approximately $7.3 million, or 10%) resulted primarily from higher volume worldwide and, to a lesser extent, price increases in the U.S. and the impact of currency exchange rates on sales at our laboratories outside the U.S.
The increase in sales of instrument consumables (an increase of approximately $6.2 million, or 6%) resulted primarily from increased unit sales of VetTest® slides worldwide and, to a lesser extent, the impact of currency exchange rates on sales outside of the U.S. The increase in revenues was positively impacted by depressed 2001 sales that resulted from a late 2000 marketing program that pulled sales into 2000. Revenues were negatively impacted due to a decrease in distributor inventories of instrument consumables in 2002.
22
The increase in sales of rapid assay products (an increase of approximately $3.1 million, or 5%) resulted primarily from increased clinic-level sales of canine heartworm and feline test kits, offset primarily by the negative impact of changes in distributor inventory levels, and increased accruals on sales of canine heartworm test kits due to higher customer participation in a volume rebate program.
The increase in sales of veterinary practice management software and services (an increase of approximately $1.4 million, or 7%), resulted primarily from higher volume of complete system sales, and increased hardware upgrade sales.
The increase in sales of instruments (an increase of approximately $1.1 million, or 8%) was due to sales of LaserCyte® systems and, to a lesser extent, VetTest® systems, partially offset by reduced sales of our QBC® VetAutoread™ hematology instrument, primarily due to a shift in marketing and customer focus to the LaserCyte® system.
The decrease in sales of pharmaceutical products (a decrease of $0.3 million or 6%) was due to a decline in sales of the Company’s ACAREXX® feline ear mite treatment, offset partially by increased sales of PZI VET® insulin, which was launched on a commercial basis in the fourth quarter of 2002.
Water. Revenue for Water increased $3.7 million, or 10%, to $42.0 million from $38.3 million for the same period of the prior year. The increase resulted primarily from increased sales volume in Europe and the Americas, and to a lesser extent, price increases in the U.S.
Food Diagnostics Group. Revenue for FDG increased $4.1 million, or 10%, to $43.8 million from $39.7 million for the same period of the prior year. The increase was primarily due to increased sales of production animal diagnostics offset partially by a decrease in sales of dairy testing products.
The increase in sales of production animal diagnostics (an increase of approximately $4.9 million, or 22%) resulted primarily from higher unit sales of livestock products and, to a lesser extent, price increases on livestock products and the impact of currency exchange rates on sales outside of the U.S. Approximately half of the increased sales of livestock products were the result of government sponsored testing initiatives in Germany.
The decrease in sales of dairy testing products (a decrease of
approximately $0.8 million, or 5%) was primarily attributable to lower unit
sales volume as a result of increased competition.
Gross Profit
Total Company.
Gross profit for the total company increased $9.4 million,
or 5%, to $192.7 million from $183.3 million for the same period in the prior
year.As a percentage of total company revenue, gross profit remained flat at
47%.The following table presents gross profit and gross profit percentage for
the Company and its operating segments:
Percent of
Percent of
Gross Profit (in thousands)
2002
Sales
2001
Sales
$
142,726
43.7
%
$
137,782
44.7
%
28,612
68.2
%
26,130
68.2
%
21,387
48.8
%
19,419
48.9
%
$
192,725
46.7
%
$
183,331
47.5
%
Companion Animal Group. Gross profit for CAG increased $4.9 million, or 4%, to $142.7 million from $137.8 million in the same period of the prior year, primarily due to increased sales volume across the CAG product lines, partially offset by a reduction in the gross profit percentage. As a percentage of CAG revenue, gross profit declined from 45% for the same period in the prior year to 44%. The decrease in gross profit percentage was attributable primarily to foreign exchange hedge contract losses in 2002 compared to gains in 2001; increased amortization due to additional placements of VetTest® instruments in our rental and trade-up programs; and a net unfavorable change in manufacturing variances. These factors were offset partially by productivity improvements across CAG product lines, partly due to increased revenue spread against the fixed cost portion of our expense base;
23
the positive impact of the strengthening of the Euro and British Pound on sales denominated in those currencies; reversal of an accrual for potential loss on our VetTest® slide supply agreement with Ortho as a result of an amendment to our supply agreement in October 2002 that reduced our minimum purchase obligations under the agreement; and higher prices, primarily on laboratory services and feline test kits.
Water. Gross profit for Water increased $2.5 million, or 9%, to $28.6 million from $26.1 million for the same period in the prior year, primarily due to increased sales volume. As a percentage of Water revenue, gross profit was unchanged at 68%. Gross profit percentage benefited from favorable manufacturing variances and reduced inventory writedowns, higher prices, and the positive impact of the strengthening of the Euro and British Pound on revenue. These increases were offset by higher distribution costs.
Food Diagnostics Group.
Gross profit for FDG increased $2.0 million, or
10%, to $21.4 million from $19.4 million for the same period in the prior year,
primarily due to increased sales volume in production animal diagnostics. As a
percentage of FDG revenue, gross profit was unchanged at 49%. Gross profit
percentage benefited from a favorable mix of higher margin poultry and
livestock products, reduced distribution and freight costs, higher prices for
livestock products, and the positive impact of the strengthening of the Euro
and British Pound on revenue. These increases were offset by higher inventory
writedowns of certain dairy and production animal diagnostic products and
royalty accruals on certain livestock products.
Operating Expenses
Total Company.
Total company operating expenses increased $0.1 million to
$126.9 from $126.8 million for the same period of the prior year. As a
percentage of revenues, operating expenses declined to 31% from 33%. The
following tables present operating expenses and operating income for the
Company and its operating segments:
Operating Expenses
Percentage of
Percentage of
Dollar
Percentage
(in thousands)
2002
Sales
2001
Sales
Change
Change
$
96,674
29.6
%
$
101,183
32.8
%
$
(4,509
)
(4.5
%)
10,235
24.4
%
9,807
25.6
%
428
4.4
%
13,724
31.3
%
13,066
32.9
%
658
5.0
%
6,277
N/A
2,723
N/A
3,554
130.5
%
$
126,910
30.8
%
$
126,779
32.8
%
$
131
0.1
%
Operating Income
Percentage of
Percentage of
Dollar
Percentage
(in thousands)
2002
Sales
2001
Sales
Change
Change
$
46,052
14.1
%
$
36,599
11.9
%
$
9,453
25.8
%
18,377
43.8
%
16,323
42.6
%
2,054
12.6
%
7,663
17.5
%
6,353
16.0
%
1,310
20.6
%
(6,277
)
N/A
(2,723
)
N/A
(3,554
)
130.5
%
$
65,815
15.9
%
$
56,552
14.6
%
$
9,263
16.4
%
Companion Animal Group. Operating expenses for CAG decreased $4.5 million, or 4%, to $96.7 million from $101.2 million in the same period of the prior year. This decrease resulted primarily from the impact of adoption of SFAS No. 142 (under which the Company ceased amortizing goodwill); a reduction in severance and related costs; a reduction in marketing expense associated with feline diagnostic products (due to a direct-to-consumer marketing campaign in 2001); a reduction in bad debt expense; and savings from the consolidation of our pharmaceuticals and companion animal diagnostics sales forces. These decreases were offset partially by increased spending on sales and marketing (including the unfavorable impact of foreign exchange) to support higher sales volumes; litigation spending, net of a settlement received, related to the Company’s patent infringement lawsuit against Abaxis, Inc. and S.A. Scientific, Inc.; and increased research and development expenses.
Water. Operating expenses for Water increased $0.4 million, or 4%, to $10.2 million from $9.8 million in the same period of the prior year. The increase was attributable to the write-off of non-performing intangible assets (associated with the 2000 acquisition of Genera Technologies Limited), litigation that concluded in 2002, and new product development efforts, offset partially by the impact of adoption of SFAS No. 142 and a reduction in bad debt expense.
24
Food Diagnostics Group. Operating expenses for FDG increased $0.7 million, or 5%, to $13.7 million from $13.1 million in the same period of the prior year. The increase was primarily due to new product development efforts, primarily related to products for diagnosis of transmissible spongiform encephalopathies; increased marketing activities and headcount; and an increase in administrative support expenses outside of the U.S. These increases were partially offset by a decrease in bad debt experience.
Other. Operating expenses for other, which consist of $2.9 million in corporate research and development and $3.4 million in charges related to our Chief Executive Officer succession, increased $3.6 million to $6.3 million from $2.7 million in the same period of the prior year. The increase resulted primarily from benefits provided in connection with the retirement of our former Chairman and Chief Executive Officer in January 2002. Under an employment agreement, we were required to make certain payments to our former Chief Executive Officer and provide certain benefits to him following his retirement and the succession to our new Chief Executive Officer. During 2002 we incurred charges under this agreement of $3.4 million, of which $1.8 million was non-cash.
Interest Income
Net interest income was $3.0 million for 2002 compared with $2.2 million during 2001. The increase was due to higher invested cash balances and the receipt of $0.3 million in interest on a domestic tax refund. These increases were partially offset by lower effective interest rates.
Provision for Income Taxes
Our effective tax rate was 34% for 2002 compared with 36% for 2001. The reduction in the effective tax rate was primarily due to the elimination of nondeductible goodwill associated with the adoption of SFAS No. 142.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached consensus on EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”). EITF No. 00-21 addresses the accounting treatment for arrangements that provide for the delivery or performance of multiple products or services where the delivery of a product, system or performance of services may occur at different points in time or over different periods of time. EITF No. 00-21 requires the separation of the multiple deliverables that meet certain requirements into individual units of accounting that are accounted for separately under the appropriate authoritative accounting literature. EITF No. 00-21 is applicable to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company adopted the provisions of EITF No. 00-21 effective January 2003. The adoption of EITF No. 00-21 had no material impact on the consolidated financial statements.
In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. FIN 45 also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligation under certain guarantees it has issued. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, for financial statements for interim or annual periods ending after December 15, 2002. We have adopted the additional disclosure provisions of this statement required for the year ended December 31, 2002 and the recognition provisions for the quarter ended March 31, 2003. There were no impacts of the adoption of this statement.
In December 2003, the FASB issued FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46R”). FIN 46R provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and on the determination of when such entities are required to be included in the consolidated financial statements of the business enterprise that holds an interest in the variable interest entity. This new model for consolidation applies to
25
an entity in which either (1) the equity investors do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46R requires additional related disclosures. Certain disclosure provisions of FIN 46R apply to all financial statements issued after January 31, 2003, the consolidation provisions apply to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date, and the remaining provisions, with the exception of interest in special purpose entities, apply at the end of the first fiscal year or interim period ending after March 15, 2004 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Application for interest in special purpose entities is required for periods after December 15, 2003. The adoption of FIN 46R had no material impact on the consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” (“SAB No.104”) which replaces SAB No. 101. This staff accounting bulletin revises or rescinds portions of the interpretative guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The principal revisions relate to the rescission of material no longer necessary because of private sector developments in U.S. generally accepted accounting principles. This staff accounting bulletin also rescinds the Revenue Recognition in Financial Statements Frequently Asked Questions and Answers document issued in conjunction with Topic 13. Selected portions of that document have been incorporated into Topic 13. SAB No. 104 also rescinds the accounting guidance in SAB No. 101 related to multiple-element arrangements as this guidance has been superseded as a result of the issuance of EITF 00-21. The adoption of this standard did not have a material impact on the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
We fund the capital needs of our business through cash generated from operations. At December 31, 2003 and 2002, we had $220.7 million and $147.2 million of cash, cash equivalents and short-term investments, respectively, and working capital of $269.9 million and $217.7 million, respectively. As of December 31, 2003 and 2002, we also had long-term investments primarily in municipal bonds of $35.1 million and $15.6 million, respectively. As of December 31, 2003 and 2002 we had total cash, short-term investments and long-term investments of $255.8 million and $162.8 million, respectively.
Effective January 1, 2003, we entered into a workers’ compensation insurance policy where we retain the first $0.25 million in claim liability per incident and up to specific limits, based on payroll, in claim liability in the aggregate. We renewed this workers’ compensation policy effective January 1, 2004. We are liable for up to $1.4 million in aggregate claim liability for 2003 and estimate that we will be liable for up to $2.0 million for 2004. We have recorded our estimated claim liability as of December 31, 2003 based on claims incurred and the estimated ultimate cost to settle the claims. The insurance company administers and pays these claims and we reimburse the insurance company for our portion of these claims. The insurance company also provides insurance for claims above the individual occurrence and aggregate limits. We issued a $0.5 million letter of credit to the insurance company as security for these claims as of December 31, 2003 and agreed to issue an additional $0.6 million letter of credit for 2004.
We purchased approximately $16.9 million in fixed assets and $2.7 million in other long-term assets during the year ended December 31, 2003, principally related to the CAG segment. Our total capital budget for 2004 is approximately $23.0 million. Research and development expense as a percentage of revenue for 2004 is expected to be consistent with 2003 levels. Under certain supply agreements with suppliers of veterinary instruments, slides for our VetTest® instruments and certain raw materials, at December 31, 2003 we had aggregate commitments to purchase approximately $68.3 million of products in 2004.
Cash provided by operating activities was $117.2 million during 2003. Cash of $16.6 million was provided by an increase in accruals, defined as accrued expenses, accrued employee compensation and related expenses, accrued taxes and accrued marketing and customer programs, attributable primarily to increased liabilities for taxes, compensation and related liabilities and warranty expense. Cash of $13.0 million was generated from the income tax benefit obtained due to the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options. Cash of $9.6 million was generated by an increase to accounts payable due primarily to the timing of quarterly shipments of VetTest slides from Ortho. The non-cash write down of manufacturing equipment
26
reduced our net income by $7.4 million and therefore is added back to cash generated from operations. Cash of $5.6 million was used by an increase in accounts receivable due to high sales volume.
During 1999 and 2000, the Board of Directors authorized the purchase of up to 10,000,000 shares of our common stock in the open market or in negotiated transactions. In October 2003, the Board authorized the purchase of an additional 2,000,000 shares of common stock. During 2003, we repurchased approximately 927,000 shares of our common stock for $36.2 million. As of December 31, 2003, 2002 and 2001, approximately 9,541,000, 8,614,000 and 7,614,000 cumulative shares, respectively, had been repurchased under these programs. During 2003, the Company received approximately 133,000 shares of stock, which were owned by the holder for greater than six months, in payment for the exercise price of stock options. The shares of stock had a fair market value of $4.9 million. See Note 11 to the consolidated financial statements.
We are required to make the following payments in the years below:
(in thousands)
Total
2004
2005-2006
2007-2008
After 2008
$
8,848
$
375
$
1,469
$
2,454
$
4,550
41,113
5,707
8,879
6,920
19,607
192,229
68,329
64,900
41,300
17,700
$
242,190
$
74,411
$
75,248
$
50,674
$
41,857
| (1) | Of this amount, $170.4 million represents our minimum purchase obligation under our VetTest® slide supply agreement with Ortho. |
We believe that current cash, short-term investments, long-term investments, and funds generated from operations will be sufficient to fund our operations and capital purchase requirements.
FUTURE OPERATING RESULTS
The future operating results of IDEXX involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below, as well as those discussed elsewhere in this report.
IDEXX’s Future Growth Depends on Several Factors
The future success of our business depends upon our ability to successfully implement various strategies, including:
| • | developing, manufacturing and marketing new products with new features and capabilities, including pharmaceutical products and a new clinical chemistry instrument, and improving and enhancing existing products, including LaserCyte®; | ||
| • | expanding our market by increasing use of our products by our customers; | ||
| • | strengthening our sales and marketing activities both within the U.S. and in geographies outside of the U.S.; | ||
| • | developing and implementing new technology development and licensing strategies; and identifying and completing acquisitions that enhance our existing businesses or create new business areas for us. | ||
| However, we may not be able to successfully implement some or all of these strategies and increase or sustain our rate of growth. |
27
IDEXX’s Markets Are Competitive and Subject to Rapid and Substantial Technological Change
We face intense competition within the markets in which we sell our products and services. We expect that future competition will become even more intense, and that we will have to compete with changing and improving technologies. Some of our competitors and potential competitors, including large pharmaceutical companies, have substantially greater capital, manufacturing, marketing and research and development resources than we do.
IDEXX’s Products and Services Are Subject to Various Government Regulations
In the U.S., the manufacture and sale of our products are regulated by agencies such as the U.S. Department of Agriculture (“USDA”), U.S. Food and Drug Administration (“FDA”) and the U.S. Environmental Protection Agency (“EPA”). Most diagnostic tests for animal health applications, including our canine, feline, poultry and livestock tests, must be approved by the USDA prior to sale. Our water testing products must be approved by the EPA before they may be used by customers in the U.S. as a part of a water quality monitoring program required by the EPA. Our pharmaceutical and dairy testing products require approval by the FDA. The manufacture and sale of our products are subject to similar laws in many foreign countries. Any failure to comply with legal and regulatory requirements relating to the manufacture and sale of our products in the U.S. or in other countries could result in fines and sanctions against us or removals of our products from the market, which could have a material adverse effect on our results of operations.
We have entered into an agreement with the FDA under which we have agreed, among other things, to perform specified lot release and stability testing of our SNAP® Beta-lactam dairy testing products and to provide related data to the FDA. If the FDA were to determine that one or more lots of product failed to meet applicable criteria for product performance or stability, the FDA could take various actions, including requiring us to recall products or restricting our ability to sell these products. Sales of dairy antibiotic residue testing products were $16.1 million in 2003.
Commercialization of animal health pharmaceuticals in the U.S. requires prior approval by the FDA. To obtain such approvals we are required to submit substantial clinical, manufacturing and other data to the FDA. Regulatory approval for products submitted to the FDA may take several years and following approval, the FDA continues to regulate all aspects of the manufacture, labeling, storage, record keeping and promotion of pharmaceutical products. We have two animal pharmaceutical products in registration with the FDA, including a nonsteroidal anti-inflammatory for the treatment of lameness in horses and an injectible antibiotic for cats. Failure to obtain, or delays in obtaining, FDA approval for these products would have a negative impact on our future growth.
Changes in Veterinary Medical Practices Could Negatively Affect Operating Results
We believe that more than half of all veterinary diagnostic testing occurs in laboratories. Although we have a significant laboratory business, our in-clinic testing business is more material to our results of operations. If testing by companion animal veterinarians generally were to shift towards increased laboratory testing and away from in-clinic testing, this shift could have a material adverse effect on our results of operations.
The market for diagnostic tests could be negatively impacted by the introduction or broad market acceptance of vaccines or preventatives for the diseases and conditions for which we sell diagnostic tests and services. Eradication or substantial declines in the prevalence of certain diseases also could lead to a decline in diagnostic testing for such diseases. Such a decline could have a material adverse effect on the results of operations.
IDEXX’s Success Is Heavily Dependent Upon Its Proprietary Technologies
We rely on a combination of patent, trade secret, trademark and copyright law to protect our proprietary rights. If we do not have adequate protection of our proprietary rights, our business may be affected by competitors who develop substantially equivalent technologies that compete with us.
We cannot assure that we will obtain issued patents, that any patents issued or licensed to us will remain valid, or that any patents owned or licensed by us will provide protection against competitors with similar technologies. Even if our patents cover products sold by our competitors, the time and expense of litigating to enforce our patent rights could be substantial, and could have a material adverse effect on our results of operations.
28
In addition, expiration of patent rights could result in substantial new competition in the markets for products previously covered by those patent rights.
In the past, we have received notices claiming that our products infringe third-party patents and we may receive such notices in the future. Patent litigation is complex and expensive and the outcome of patent litigation can be difficult to predict. We cannot assure that we will win a patent litigation case or negotiate an acceptable resolution of such a case. If we lose, we may be stopped from selling certain products and/or we may be required to pay damages and/or ongoing royalties as a result of the lawsuit. Any such adverse result could have a material adverse effect on our results of operations.
IDEXX Purchases Materials for Its Products from a Limited Number of Sources
We currently purchase certain products and materials from single sources or a limited number of sources. Some of the products that we purchase from these sources are proprietary, and therefore may not be available from other sources. These products include our VetTest chemistry and QBC® VetAutoread™ hematology analyzers and related consumables, computed radiography systems, active ingredients for pharmaceutical products, including NAVIGATOR®, and certain components of our SNAP® rapid assay devices, water testing products, and LaserCyte® systems. If we are unable to obtain adequate quantities of these products in the future, then we could face cost increases or reductions or delays in product shipments, which could have a material adverse effect on our results of operations.
The supplier of our computed radiography systems has informed us that it believes we are in breach of our supply agreement. We believe we have complied fully with that agreement and we have filed suit against that supplier seeking declaratory judgment from the court that we are not in breach of the agreement, an order from the court compelling the supplier to honor our agreement and damages for certain breaches of the agreement by the supplier. The supplier has asserted counter-claims against us alleging, among other things, breaches of implied covenants in the contract. We believe we have strong defenses to these counter-claims and intend to contest them vigorously. An adverse result in this litigation could result in loss of supply of our computed radiography instruments and/or a requirement that we pay damages to the supplier. Revenue from this product line was $1.3 million in 2003.
The slides sold for use in our VetTest® instruments are purchased under an agreement with Ortho at fixed prices. Under this agreement we are required to purchase a minimum of $170.4 million of slides through 2010. To the extent that slides purchased under the contract exceed demand for the slides, we may incur losses in the future under this agreement. To the extent that we are unable to maintain current pricing levels on sales of slides to our customers, our profits on slide sales would decline because we purchase slides at fixed prices.
IDEXX’s Biologic Products are Complex and Difficult to Manufacture
Many of our products are biologics, which are products that are comprised of materials from living organisms, such as antibodies, cells and sera. Manufacturing biologic products is highly complex. Unlike products that rely on chemicals for efficacy (such as most pharmaceuticals), biologics are difficult to characterize due to the inherent variability of biological materials. Difficulty in characterizing biological materials limits the precision of specifications for these materials, which creates greater risk in the manufacturing process. We attempt to mitigate risk associated with the manufacture of biologics by utilizing multiple vendors, manufacturing some of these materials ourselves and maintaining substantial inventories of materials that have demonstrated the appropriate characteristics. However, there can be no assurance that we will be able to maintain adequate sources of biological materials or that biological materials that we maintain in inventory will yield finished products that satisfy applicable product release criteria. Our inability to obtain necessary biological materials or to manufacture successfully biologic products that incorporate such materials would have a material adverse effect on our results of operations.
IDEXX’s Sales Are Dependent on Distributor Purchasing Patterns
We sell many of our products, including substantially all of the rapid assays and instrument consumables sold in the U.S., through distributors. Because significant product sales are made to a limited number of customers, unanticipated changes in the timing and size of distributor purchases can have a negative effect on quarterly results.
29
| Our financial performance, therefore, is subject to an unexpected downturn in product demand and may be unpredictable. |
Inventories of Pharmaceutical Products Under Development May Not Be Usable
While our pharmaceutical products are under development, we may carry related active ingredients, other raw materials and finished goods as assets on our balance sheet when recovery of the asset value from future sales is deemed probable. To the extent that these inventories become unusable due to unanticipated delays in obtaining FDA approval for these products, or to our failure to obtain such approvals, we may be required to write down those inventories, which could have a material adverse effect on our results of operations.
International Revenue Accounts for a Significant Portion of IDEXX’s Total Revenue
Various risks associated with foreign operations may impact our international sales. Possible risks include fluctuations in the value of foreign currencies, disruptions in transportation of our products, the differing product and service needs of foreign customers, difficulties in building and managing foreign operations, import/export duties and quotas, and unexpected regulatory, economic or political changes in foreign markets. Prices that we charge to foreign customers may be different than the prices we charge for the same products in the U.S. due to competitive, market or other factors. As a result, the mix of domestic and international sales in a particular period could have a material impact on our results for that period.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our financial market risk consists primarily of foreign currency exchange rate risk. We operate subsidiaries in 13 foreign countries and transact business in local currencies. We attempt to hedge the majority of our cash flow on intercompany sales to minimize foreign currency exposure. See Note 2(m) to our consolidated financial statements.
The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. Corporate policy prescribes the range of allowable hedging activity. We primarily utilize forward exchange contracts with a duration of less than 12 months. Gains and losses related to qualifying hedges of foreign currency from commitments or anticipated transactions are deferred in prepaid expenses or accruals and are included in the basis of the underlying transaction. Our hedging strategy is consistent with prior periods. Our hedging strategy provides that we employ the full amount of our hedges for the succeeding year at the conclusion of our budgeting process for that year, which is complete by the end of the preceding year. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the following twelve months. Accordingly, our risk with respect to foreign currency exchange rate fluctuations may vary throughout each annual cycle. As of December 31, 2003, the Company had $3.0 million in unrealized losses on foreign exchange contracts designated as hedges recorded in other comprehensive income, which is net of $1.4 million in taxes.
Our currency rate exposure at December 31, 2003 consisted of local currency revenues and expenses, the impact of hedge contracts and balances denominated in a currency other than the Company’s or its subsidiaries’ functional currency. Based on our overall currency rate exposure excluding unrealized losses of $4.4 million at December 31, 2003 and $2.6 million at December 31, 2002, a 10% strengthening of the U.S. dollar relative to foreign currencies would reduce operating income by approximately $2.2 million for 2004. A 10% strengthening of the U.S. dollar from December 31, 2002 would have reduced operating income for 2003 by approximately $2.4 million. A 10% weakening of the U.S. dollar relative to foreign currencies at December 31, 2003 would increase operating income by approximately $2.2 million in 2004. A 10% weakening of the U.S. dollar from December 31, 2002 would have increased operating income by approximately $2.4 million in 2003. As of December 31, 2003 a 10% strengthening of the U.S. dollar relative to foreign currencies, excluding the impact of hedge contracts currently in place, would reduce operating income by approximately $8.1 million in 2004 , compared to $7.4 million in 2003 and the effects of a 10% weakening of U.S. dollar relative to foreign currencies, excluding the impact of hedge contracts currently in place, would increase operating income by approximately $8.1 million in 2004 compared to $7.4 million in 2003.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted as a separate section of this report commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2003. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2003, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
(b) Changes in Internal Controls. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the year ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the sections entitled “Board of Directors” and “Election of Directors” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled “Executive Compensation and Related Information” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled “Ownership of Common Stock by Directors and Officers” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.
31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled “Executive Compensation and Related Information — Employment Agreements” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled “Ratification of Independent Auditors — Independent Auditors’ Fees” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
| (a) | ||||
| (1) and (2) | The financial statements set forth in the Index to Consolidated Financial Statements and the Consolidated Financial Statement Schedule are filed as a part of this Annual Report on Form 10-K commencing on page F-1. | |||
| (b) |
Reports on
Form 8-K
On October 20, 2003, the Company furnished a Current Report on Form 8-K, under Item 12, containing a copy of its earnings release for the quarter ended September 30, 2003. |
|||
| (a)(3) | and (c) | The exhibits in the Exhibit Index immediately preceding the exhibits are filed as part of this Annual Report on Form 10-K. |
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
| IDEXX Laboratories, Inc. | ||
| By: /s/ Jonathan W. Ayers | ||
|
|
||
| Jonathan W. Ayers | ||
| President and Chief Executive Officer | ||
| March 3, 2004 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| SIGNATURE | TITLE | DATE | ||
|
|
|
|
||
|
/s/ Jonathan W. Ayers
Jonathan W. Ayers |
President, Chief Executive Officer and
Chairman of the Board of Directors |
March 3, 2004 | ||
|
/s/ Merilee Raines
Merilee Raines |
Vice President, Chief Financial
Officer and Treasurer (Principal Financial and Accounting Officer) |
March 3, 2004 | ||
|
/s/ Thomas Craig
Thomas Craig |
Director | March 3, 2004 | ||
|
/s/ Errol De Souza, PhD
Errol De Souza, PhD |
Director | March 3, 2004 | ||
|
/s/ William T. End
William T. End |
Director | March 3, 2004 | ||
|
/s/ Mary L. Good, PhD
Mary L. Good, PhD |
Director | March 3, 2004 | ||
|
/s/ Rebecca M. Henderson, PhD
Rebecca M. Henderson, PhD |
Director | March 3, 2004 | ||
|
/s/ Brian P. McKeon
Brian P. McKeon |
Director | March 3, 2004 | ||
|
/s/ James L. Moody, Jr.
James L. Moody, Jr. |
Director | March 3, 2004 |
33
EXHIBIT INDEX
Exhibit No.
Description
3.1
Restated Certificate of Incorporation of the Company, as amended (filed as Exhibit No. 3.1 to
Annual Report on Form 10-K for the year ended December 31, 1996, File No. 0-19271, and
incorporated herein by reference).
3.2
Amended and Restated By-Laws of the Company (filed as Exhibit No. 3.2 to Quarterly Report on Form
10-Q for the quarter ended September 30, 2000, File No. 0-19271, and incorporated herein by
reference).
4.1
Amended and Restated Rights Agreement, dated as of January 22, 2001, between the Company and
American Stock Transfer & Trust Company as Rights Agent, which includes as Exhibit A the Form of
Certificate of Designations, as Exhibit B the Form of Rights Certificate, and as Exhibit C the
Summary of Rights to Purchase Preferred Stock (filed as Exhibit No. 1 to Amendment No. 2 to
Registration Statement on Form 8-A/A dated March 14, 2001, File No. 0-19271, and incorporated
herein by reference).
4.2
Instruments with respect to other long-term debt of the Company and its consolidated subsidiaries
are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K since the total amount authorized
under each such omitted instrument does not exceed 10 percent of the total assets of the Company
and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any
such instrument to the Securities and Exchange Commission upon request.
10.1
1991 Stock Option Plan of the Company, as amended (filed as Exhibit No. 10.2 to Annual Report on
Form 10-K for the year ended December 31, 2001, File No. 0-19271 (“2001 Form 10-K”), and
incorporated herein by reference).
10.2
1991 Director Option Plan of the Company, as amended (filed as Exhibit No. 10.4 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001, File No. 0-19271 (“June 2001 10-Q”), and
incorporated herein by reference).
10.3
1997 Director Option Plan of the Company, as amended, with the form of option agreement granted
thereunder attached thereto (filed as Exhibit No. 10.1 to Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, File No. 0-19271, and incorporated herein by reference).
10.4
2003 Employee Stock Purchase Plan (filed as Exhibit No. 10.3 to Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003, File No. 0-19271 (“June 2003 10-Q”) and incorporated herein by
reference).
10.5
1997 International Employee Stock Purchase Plan (filed as Appendix C to Definitive Proxy
Statement filed April 24, 1997, File No. 0-19271 (“April 1997 Proxy”), and incorporated herein by
reference).
10.6
1999 Director Stock Plan of the Company (filed as Exhibit No. 10.1 to Quarterly Report on Form
10-Q for the quarter ended June 30, 1999, File No. 0-19271, and incorporated herein by
reference).
10.7*
U.S. Supply Agreement, effective as of October 16, 2003, between the Company and Ortho-Clinical
Diagnostics, Inc. (“Ortho”) (filed herewith).
10.8*
European Supply Agreement, effective as of October 17, 2003, between the Company and Ortho (filed
herewith).
10.9
1998 Stock Incentive Plan of the Company, as amended (filed as Exhibit No. 10.1 to Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002, File No. 0-19271, and incorporated
herein by reference).
10.10
2000 Director Option Plan of the Company (filed as Exhibit No. 10.5 to June 2001 10-Q, and
incorporated herein by reference).
10.11
Employment Agreement dated January 22, 2002 between the Company and Jonathan W. Ayers (filed as
Exhibit No. 10.13 to 2001 Form 10-K, and incorporated herein by reference).
10.12
Executive Employment Agreement dated January 28, 2002 between the Company and Jonathan W. Ayers
(filed as Exhibit No. 10.14 to 2001 Form 10-K, and incorporated herein by reference).
10.13
Executive Employment Agreement dated September 8, 2003 between the Company and William C. Wallen
(filed herewith).
10.14
Letter Agreement dated August 12, 2003 between the Company and William C. Wallen (filed herewith).
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULE
| PAGE | ||||
| * | Reports of Independent Auditors | F-2 | ||
| * | Consolidated Balance Sheets as of December 31, 2003 and 2002 | F-4 | ||
| * | Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001. | F-5 | ||
| * | Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001. | F-6 | ||
| * | Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001. | F-7 | ||
| * | Notes to Consolidated Financial Statements | F-8 | ||
| * | Schedule II | |||
| Valuation and Qualifying Accounts | F-32 |
F-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of IDEXX Laboratories, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of IDEXX Laboratories, Inc. and its subsidiaries (the “Company”) at December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein as of and for the years ended December 31, 2003 and 2002 when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The consolidated financial statements and financial statement schedule of the Company for the year ended December 31, 2001, prior to the revisions described in Notes 4 and 17, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements and financial statement schedule in their report dated January 24, 2002.
As discussed in Note 4 to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill upon adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142, “ Goodwill and Other Intangible Assets. ”
As discussed above, the consolidated financial statements of the Company for the year ended December 31, 2001 were audited by other independent accountants who have ceased operations. As described in Note 4, these consolidated financial statements have been restated to include the transitional disclosures required by SFAS No. 142, “ Goodwill and Other Intangible Assets ,” which was adopted by the Company as of January 1, 2002. As described in Note 17, these consolidated financial statements have also been restated to reflect the change in composition of the Company’s reportable segments. We audited the transitional disclosures for 2001 described in Note 4 and the adjustments described in Note 17 that were applied to restate the 2001 consolidated financial statements. In our opinion, the transitional disclosures are appropriate and the adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such adjustments and transitional disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.
/s/PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
January 23, 2004
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of IDEXX Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of IDEXX Laboratories, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. 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 in the United States. 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, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with generally accepted accounting principles in the United States.
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.
/s/ARTHUR ANDERSEN LLP (1)
Boston, Massachusetts
January 24, 2002
| (1) | This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with IDEXX Laboratories, Inc.’s Annual Report on Form 10-K filing for the fiscal year ended December 31, 2001. The inclusion of this previously issued Arthur Andersen LLP report is pursuant to the “Temporary Final Rule and Final Rule Requirements for Arthur Andersen LLP Auditing Clients,” issued by the Securities and Exchange Commission in March 2002. Note that the previously issued Arthur Andersen LLP report includes references to certain fiscal years that are not required to be presented in the accompanying consolidated financial statements as of and for the year ended December 31, 2003. This audit report has not been reissued by Arthur Andersen LLP in connection with the filing of this Annual Report on Form 10-K. As described in Note 4, the Company has presented the transitional disclosures for 2001 required by SFAS No. 142, “Goodwill and Other Intangible Assets”. Also as described in Note 17, the 2001 financial statements have been restated to reflect the change in composition of the Company’s reportable segments. The Arthur Andersen LLP report does not extend to any of these changes to the 2001 consolidated financial statements. The transitional disclosures and adjustments to the 2001 consolidated financial statements referred to in Notes 4 and 17 were reported on by PricewaterhouseCoopers LLP as stated in their report appearing herein. |
F-3
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| December 31, | ||||||||||
|
|
||||||||||
| 2003 | 2002 | |||||||||
|
|
|
|||||||||
|
ASSETS
|
||||||||||
|
Current Assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 186,717 | $ | 113,788 | ||||||
|
Short-term investments
|
33,988 | 33,403 | ||||||||
|
Accounts receivable, less reserves of $1,950 and $2,415 in 2003 and 2002, respectively
|
53,976 | 45,689 | ||||||||
|
Inventories
|
75,333 | 75,086 | ||||||||
|
Deferred income taxes
|
13,775 | 13,934 | ||||||||
|
Other current assets
|
6,800 | 6,114 | ||||||||
|
|
|
|
||||||||
|
Total current assets
|
370,589 | 288,014 | ||||||||
|
|
|
|
||||||||
|
Long-term investments
|
35,082 | 15,572 | ||||||||
|
|
|
|
||||||||
|
Property and Equipment, at cost:
|
||||||||||
|
Land
|
1,202 | 1,195 | ||||||||
|
Buildings
|
5,213 | 5,144 | ||||||||
|
Leasehold improvements
|
23,139 | 22,290 | ||||||||
|
Machinery and equipment
|
44,843 | 45,296 | ||||||||
|
Office furniture and equipment
|
34,802 | 35,521 | ||||||||
|
Construction in progress
|
2,824 | 5,863 | ||||||||
|
|
|
|
||||||||
|
|
112,023 | 115,309 | ||||||||
|
Less accumulated depreciation and amortization
|
66,799 | 65,854 | ||||||||
|
|
|
|
||||||||
|
|
45,224 | 49,455 | ||||||||
|
|
|
|
||||||||
|
Other Long-term Assets:
|
||||||||||
|
Goodwill, net of accumulated amortization of $30,361 and $29,948 for 2003 and 2002,
respectively
|
54,994 | 52,321 | ||||||||
|
Other intangible assets, net of accumulated amortization of $5,090 and $4,373 for 2003 and 2002, respectively
|
6,772 | 3,836 | ||||||||
|
Other noncurrent assets, net
|
9,214 | 8,228 | ||||||||
|
|
|
|
||||||||
|
|
70,980 | 64,385 | ||||||||
|
|
|
|
||||||||
|
TOTAL ASSETS
|
$ | 521,875 | $ | 417,426 | ||||||
|
|
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||||
|
Current Liabilities:
|
||||||||||
|
Accounts payable
|
$ | 19,160 | $ | 9,427 | ||||||
|
Accrued expenses
|
23,926 | 20,173 | ||||||||
|
Accrued employee compensation and related expenses
|
20,792 | 17,052 | ||||||||
|
Accrued taxes
|
21,327 | 8,817 | ||||||||
|
Accrued marketing and customer programs
|
6,762 | 6,170 | ||||||||
|
Notes payable
|
494 | 973 | ||||||||
|
Deferred revenue
|
8,275 | 7,662 | ||||||||
|
|
|
|
||||||||
|
Total current liabilities
|
100,736 | 70,274 | ||||||||
|
|
|
|
||||||||
|
Long-term Liabilities:
|
||||||||||
|
Deferred tax liabilities
|
236 | 226 | ||||||||
|
Warranty reserve
|
1,053 | 46 | ||||||||
|
Deferred revenue
|
5,772 | 5,907 | ||||||||
|
|
|
|
||||||||
|
Total long-term liabilities
|
7,061 | 6,179 | ||||||||
|
|
|
|
||||||||
|
Commitments and Contingencies (Note 8)
|
||||||||||
|
Partner’s Interest in Consolidated Subsidiary (Note 14)
|
786 | — | ||||||||
|
|
|
|
||||||||
|
Stockholders’ Equity:
|
||||||||||
|
Preferred stock, $1.00 par value; Authorized: 500 shares, none issued and outstanding
|
— | — | ||||||||
|
Series A Junior Participating Preferred Stock, $1.00 par value; Designated: 100 shares of Preferred Stock, none issued
and outstanding
|
— | — | ||||||||
|
Common stock, $0.10 par value; Authorized: 60,000 shares; Issued and outstanding: 44,390 and 42,331 shares in 2003 and
2002, respectively
|
4,439 | 4,233 | ||||||||
|
Additional paid-in capital
|
383,249 | 334,348 | ||||||||
|
Deferred equity-based compensation; Issued and outstanding: 3 units in 2003
|
138 | — | ||||||||
|
Retained earnings
|
240,350 | 183,260 | ||||||||
|
Accumulated other comprehensive income (loss)
|
4,565 | (2,511 | ) | |||||||
|
Treasury stock (9,711 shares in 2003 and 8,650 shares in 2002), at cost
|
(219,449 | ) | (178,357 | ) | ||||||
|
|
|
|
||||||||
|
Total stockholders’ equity
|
413,292 | 340,973 | ||||||||
|
|
|
|
||||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 521,875 | $ | 417,426 | ||||||
|
|
|
|
||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| For the Years Ended December 31, | ||||||||||||||
|
|
||||||||||||||
| 2003 | 2002 | 2001 | ||||||||||||
|
|
|
|
||||||||||||
|
Revenue:
|
||||||||||||||
|
Product
revenue
|
$ | 363,284 | $ | 308,651 | $ | 289,934 | ||||||||
|
Service
revenue
|
112,708 | 104,019 | 96,147 | |||||||||||
|
|
|
|
|
|||||||||||
|
|
475,992 | 412,670 | 386,081 | |||||||||||
|
Cost of revenue:
|
||||||||||||||
|
Cost of product
revenue
|
166,382 | 143,768 | 128,643 | |||||||||||
|
Cost of service
revenue
|
79,306 | 76,177 | 74,107 | |||||||||||
|
|
|
|
|
|||||||||||
|
|
245,688 | 219,945 | 202,750 | |||||||||||
|
|
|
|
|
|||||||||||
|
Gross
profit
|
230,304 | 192,725 | 183,331 | |||||||||||
|
|
|
|
|
|||||||||||
|
Expenses:
|
||||||||||||||
|
Sales and
marketing
|
71,846 | 56,794 | 57,087 | |||||||||||
|
General and
administrative
|
45,752 | 40,787 | 41,266 | |||||||||||
|
Research and
development
|
32,319 | 29,329 | 28,426 | |||||||||||
|
|
|
|
|
|||||||||||
|
Income from
operations
|
80,387 | 65,815 | 56,552 | |||||||||||
|
Interest
income
|
2,867 | 2,955 | 2,229 | |||||||||||
|
|
|
|
|
|||||||||||
|
Income before provisions for income
taxes and partner’s
interest
|
83,254 | 68,770 | 58,781 | |||||||||||
|
Provision for income
taxes
|
26,278 | 23,381 | 21,161 | |||||||||||
|
Partner’s interest in loss of
subsidiary
|
(114 | ) | — | — | ||||||||||
|
|
|
|
|
|||||||||||
|
Net
income
|
$ | 57,090 | $ | 45,389 | $ | 37,620 | ||||||||
|
|
|
|
|
|||||||||||
|
Earnings per share:
|
||||||||||||||
|
Basic
|
$ | 1.67 | $ | 1.35 | $ | 1.13 | ||||||||
|
|
|
|
|
|||||||||||
|
Diluted
|
$ | 1.59 | $ | 1.30 | $ | 1.09 | ||||||||
|
|
|
|
|
|||||||||||
|
Weighted average shares outstanding:
|
||||||||||||||
|
Basic
|
34,271 | 33,622 | 33,293 | |||||||||||
|
|
|
|
|
|||||||||||
|
Diluted
|
35,931 | 35,043 | 34,640 | |||||||||||
|
|
|
|
|
|||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except per share amounts)
| Common Stock | Accumulated | ||||||||||||||||||||||||||||||||
|
|
Additional | Deferred | Other | Total | |||||||||||||||||||||||||||||
| Number of | $ 0.10 | Paid-in | Equity-based | Retained | Comprehensive | Treasury | Stockholders’ | ||||||||||||||||||||||||||
| Shares | Par Value | Capital | Compensation | Earnings | Income (Loss) | Stock | Equity | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
Balance January 1, 2001
|
40,255 | $ | 4,025 | $ | 296,914 | $ | — | $ | 100,251 | $ | (4,964 | ) | $ | (134,479 | ) | $ | 261,747 | ||||||||||||||||
|
Purchase of treasury stock
|
— | — | — | — | — | — | (12,986 | ) | (12,986 | ) | |||||||||||||||||||||||
|
Exercise of stock options (including tax benefit)
|
984 | 99 | 16,980 | — | — | — | — | 17,079 | |||||||||||||||||||||||||
|
Shares issued in connection with Blue Ridge
acquisition
|
115 | 11 | (11 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
Comprehensive income (loss):
|
|||||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | 37,620 | — | — | — | |||||||||||||||||||||||||
|
Unrealized gain on investments,
net of tax of $29
|
— | — | — | — | — | 44 | — | — | |||||||||||||||||||||||||
|
Unrealized loss on forward
exchange contracts, net of tax of $174
|
— | — | — | — | — | (266 | ) | — | — | ||||||||||||||||||||||||
|
Translation adjustment
|
— | — | — | — | — | (1,508 | ) | — | — | ||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | — | — | — | — | — | 35,890 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
Balance December 31, 2001
|
41,354 | 4,135 | 313,883 | — | 137,871 | (6,694 | ) | (147,465 | ) | 301,730 | |||||||||||||||||||||||
|
Purchase of treasury stock
|
— | — | — | — | — | — | (29,830 | ) | (29,830 | ) | |||||||||||||||||||||||
|
Exercise of stock options (including tax benefit)
|
960 | 96 | 20,467 | — | — | — | (1,062 | ) | 19,501 | ||||||||||||||||||||||||
|
Exercise of warrants
|
17 | 2 | (2 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
Comprehensive income (loss):
|
|||||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | 45,389 | — | — | — | |||||||||||||||||||||||||
|
Unrealized gain on investments,
net of tax of $70
|
— | — | — | — | — | 107 | — | — | |||||||||||||||||||||||||
|
Unrealized loss on forward
exchange contracts, net of tax of $699
|
— | — | — | — | — | (1,428 | ) | — | — | ||||||||||||||||||||||||
|
Translation adjustment
|
— | — | — | — | — | 5,504 | — | — | |||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | — | — | — | — | — | 49,572 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
Balance December 31, 2002
|
42,331 | 4,233 | 334,348 | — | 183,260 | (2,511 | ) | (178,357 | ) | 340,973 | |||||||||||||||||||||||
|
Purchase of treasury stock
|
— | — | — | — | — | — | (36,195 | ) | (36,195 | ) | |||||||||||||||||||||||
|
Exercise of stock options (including tax benefit)
|
1,934 | 193 | 48,914 | — | — | — | (4,897 | ) | 44,210 | ||||||||||||||||||||||||
|
Exercise of warrants
|
125 | 13 | (13 | ) | — | — | — | — | — | ||||||||||||||||||||||||
|
Issuance of deferred stock units
|
138 | 138 | |||||||||||||||||||||||||||||||
|
Comprehensive income (loss):
|
|||||||||||||||||||||||||||||||||
|
Net income
|
— | — | — | — | 57,090 | — | — | — | |||||||||||||||||||||||||
|
Unrealized loss on investments,
net of tax of
$86
|
— | — | — | — | — | (131 | ) | — | — | ||||||||||||||||||||||||
|
Unrealized loss on forward
exchange contracts, net of tax of
$523
|
— | — | — | — | — | (1,334 | ) | — | — | ||||||||||||||||||||||||
|
Translation adjustment
|
— | — | — | — | — | 8,541 | — | — | |||||||||||||||||||||||||
|
Total comprehensive income
|
64,166 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
|
Balance December 31, 2003
|
44,390 | $ | 4,439 | $ | 383,249 | $ | 138 | $ | 240,350 | $ | 4,565 | $ | (219,449 | ) | $ | 413,292 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| For the Years Ended December 31, | |||||||||||||||
|
|
|||||||||||||||
| 2003 | 2002 | 2001 | |||||||||||||
|
|
|
|
|||||||||||||
|
Cash Flows From Operating Activities:
|
|||||||||||||||
|
Net
income
|
$ | 57,090 | $ | 45,389 | $ | 37,620 | |||||||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|||||||||||||||
|
Depreciation and
amortization
|
18,897 | 20,124 | 22,229 | ||||||||||||
|
Write-down of fixed
assets
|
7,359 | — | — | ||||||||||||
|
Non-cash portion of CEO succession
charge
|
— | 1,836 | — | ||||||||||||
|
Partner’s interest in loss of subsidiary
|
(114 | ) | — | — | |||||||||||
|
Provision for (recovery of) uncollectible
accounts
|
114 | (906 | ) | 547 | |||||||||||
|
Provision for (benefit of) deferred income taxes
|
(1,192 | ) | 3,815 | (380 | ) | ||||||||||
|
Tax benefit on exercise of non-qualified stock options and
disqualifying dispositions
|
13,045 | 5,716 | 3,035 | ||||||||||||
|
Provision for deferred equity-based compensation
|
138 | — | — | ||||||||||||
|
Changes in assets and liabilities, net of acquisitions and disposals
|
|||||||||||||||
|
Accounts
receivable
|
(5,567 | ) | 7,800 | 5,007 | |||||||||||
|
Inventories
|
71 | 11,405 | (20,319 | ) | |||||||||||
|
Other current
assets
|
1,062 | (934 | ) | (407 | ) | ||||||||||
|
Accounts
payable
|
9,560 | (1,590 | ) | (2,750 | ) | ||||||||||
|
Accrued
expenses
|
16,552 | 10,474 | 449 | ||||||||||||
|
Deferred
revenue
|
140 | 124 | 1,333 | ||||||||||||
|
|
|
|
|
||||||||||||
|
Net cash provided by
operating
activities
|
117,155 | 103,253 | 46,364 | ||||||||||||
|
Cash Flows From Investing Activities:
|
|||||||||||||||
|
Purchase of short- and long-term investments
|
(58,177 | ) | (33,605 | ) | (56,839 | ) | |||||||||
|
Sales and maturities of short- and long-term investments
|
37,865 | 18,716 | 52,200 | ||||||||||||
|
Purchase of property and equipment
|
(16,896 | ) | (15,087 | ) | (17,381 | ) | |||||||||
|
Acquisition of equipment leased to customers
|
(2,724 | ) | (2,444 | ) | (4,210 | ) | |||||||||
|
Acquisition(s) of business(es), net of cash acquired
|
(2,300 | ) | (375 | ) | — | ||||||||||
|
|
|
|
|
||||||||||||
|
Net cash used in investing
activities
|
(42,232 | ) | (32,795 | ) | (26,230 | ) | |||||||||
|
Cash Flows from Financing Activities:
|
|||||||||||||||
|
Payment of notes
payable
|
(510 | ) | (7,462 | ) | (144 | ) | |||||||||
|
Purchase of treasury
stock
|
(35,817 | ) | (29,830 | ) | (12,986 | ) | |||||||||
|
Proceeds from the exercise of stock options
|
31,165 | 11,949 | 14,044 | ||||||||||||
|
|
|
|
|
||||||||||||
|
Net cash provided (used)
by financing
activities
|
(5,162 | ) | (25,343 | ) | 914 | ||||||||||
|
Net effect of exchange rates on cash
|
3,168 | 2,007 | (389 | ) | |||||||||||
|
|
|
|
|
||||||||||||
|
Net increase in cash and cash equivalents
|
72,929 | 47,122 | 20,659 | ||||||||||||
|
Cash and cash equivalents at beginning of year
|
113,788 | 66,666 | 46,007 | ||||||||||||
|
|
|
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 186,717 | $ | 113,788 | $ | 66,666 | |||||||||
|
|
|
|
|
||||||||||||
|
Supplemental Disclosure of Cash Flow Information:
|
|||||||||||||||
|
Interest
paid
|
$ | 16 | $ | 38 | $ | 79 | |||||||||
|
|
|
|
|
||||||||||||
|
Income taxes
paid
|
$ | 1,977 | $ | 16,428 | $ | 19,476 | |||||||||
|
|
|
|
|
||||||||||||
|
Supplemental Disclosure of Non-Cash Information:
|
|||||||||||||||
|
Value of mature shares exchanged in stock option exercises
|
$ | 4,897 | $ | 1,062 | $ | — | |||||||||
|
|
|
|
|
||||||||||||
|
Payable for treasury
stock
|
$ | 378 | $ | — | $ | — | |||||||||
|
|
|
|
|
||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF BUSINESS
IDEXX Laboratories, Inc. (the “Company”) develops, manufactures and
distributes products and provides services for the veterinary and the food and
water testing markets. The Company operates primarily through three business
segments: products and services for the veterinary market, which is referred to
as the Companion Animal Group (“CAG”), water quality products (“Water”) and
products and services for production animal health and dairy quality, which is
referred to as the Food Diagnostics Group (“FDG”). See Note 17. The
Company’s products and services are sold worldwide.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Consolidation
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries, and all other entities in which the
Company has a variable interest and is determined to be the primary
beneficiary. All material intercompany transactions and balances have been
eliminated in consolidation.
(b) Estimates
The preparation of these financial statements in accordance with
accounting principles generally accepted in the United States of America
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an ongoing basis, the Company
evaluates its estimates, including those related to customer programs and
incentives, product returns, bad debts, inventories, investments, intangible
assets, income taxes, warranty obligations, restructuring and contingencies.
The Company accrues contingent liabilities when it is probable that future
expenditures will be made and such expenditures can reasonably be estimated.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
(c) Inventories
Inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out) or market. The Company writes down
inventory for estimated obsolescence when warranted by estimates of future
demand and market conditions. If actual market conditions are less favorable
than those estimated by management, additional inventory write-downs may be
required, which would have a negative effect on results of operations. Certain
major components of inventory are discussed in more detail below.
Nitazoxanide
. The Company’s nitazoxanide product for the treatment of
equine protozoal myeloencephalitis (“EPM”) was approved by the U.S. Food and
Drug Administration (“FDA”) in November 2003. The Company’s inventories as of
December 31, 2003 included $8.6 million of inventory associated with the
nitazoxanide product, consisting of $8.3 million of active ingredient and $0.3
million of finished goods. $8.0 million of active ingredient included in
inventory at December 31, 2003 will expire in 2005 and the remainder will
expire in 2006 and 2007. Upon use of unexpired active ingredient in the
manufacture of finished goods, the active ingredient shelf life is no longer
relevant. The shelf life of the finished goods is 48 months from the date of
manufacture, regardless of the age of the active ingredient used to manufacture
the finished goods.
In November 2003 the Company entered into an agreement with the supplier
of the active ingredient to exchange approximately 66% of its active ingredient
for active ingredient that will expire in 2008 or later. As a result of the
product approval by the FDA and the inventory exchange, we believe that we will
manufacture our nitazoxanide inventory into finished goods and sell those
finished goods prior to product expiration.
F-8
The Company evaluates its nitazoxanide inventory on a quarterly basis for
realizability. During the years ended December 31, 2003 and 2002, we incurred
no further write-downs for this inventory due to expected product expiration.
The Company’s quarterly evaluation is based upon the active ingredient raw
materials and finished goods expiration dates described and assumptions
regarding sales volumes that we expect to achieve.
VetTest® Chemistry Slides
. The Company’s inventories as of December 31,
2003 included $34.8 million of slides used in its VetTest® chemistry
instruments. Most of the slides have a shelf life of 24 months at the date of
manufacture. The average remaining shelf life at December 31, 2003 was 18.1
months. In addition, the Company is required to purchase a minimum of $170.4
million of slides from Ortho-Clinical Diagnostics, Inc (“Ortho”) through
December 31, 2010.
During the quarter ended September 30, 2002, the Company amended the
contract with Ortho to reduce its minimum purchase commitment for both 2002 and
the life of the contract by 30 million slides (or approximately $17.7 million)
in consideration for the Company’s agreement to forego approximately $2.0
million of certain volume rebates on slides purchased in 2002. As a result of
this amendment, the Company reversed the previously established contract loss
reserve of $0.7 million, of which $0.4 million was provided in 2002. During
the quarter ended December 31, 2003, the Company entered into a new contract
with Ortho which extended the term of the supply agreement through 2018 and
left the contract minimum purchase commitments unchanged. As a result of the
current and projected demand for VetTest ® slides, the Company’s commitment
to develop a next generation chemistry analyzer that will utilize these slides
and the ratable decrease in annual slide purchases from Ortho through 2010, the
Company believes that it will not incur a loss under the contract.
LaserCyte® Hematology Instrument
. As of December 31, 2003, the
Company’s inventories included $7.2 million of component parts and finished
goods associated with its LaserCyte® hematology instrument, which the Company
began shipping to customers in the fourth quarter of 2002. In addition, the
Company has firm purchase commitments for an additional $3.5 million.
The components of inventories are as follows
(in thousands)
:
(d) Property and Equipment
The Company records property and equipment at cost net of accumulated
depreciation and amortization. When an item is sold or retired, the cost and
related accumulated depreciation is relieved, and the resulting gain or loss,
if any, is recognized in the statement of operations. 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:
The Company recorded depreciation expense of $14.5 million, $15.2 million
and $12.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
F-9
(e) Goodwill and Other Intangible Assets
The Company provides for amortization using the straight-line method by
charges to operations in amounts that allocate the intangible assets over their
estimated useful lives as follows:
The Company assesses the impairment of identifiable intangibles and
long-lived assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors the Company considers important
that could trigger an impairment review include, but are not limited to, the
following:
The Company continually assesses the realizability of these assets in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.
144”). If an impairment review is triggered, the Company evaluates the
carrying value of long-lived assets by determining if impairment exists based
on estimated undiscounted future cash flows over the remaining useful life of
the assets and comparing that value to the carrying value of the assets. If the
carrying value of the asset is greater than the estimated future cash flows,
the asset is written down to its estimated fair value. In determining expected
future cash flows, assets are grouped at the lowest level for which cash flows
are identifiable and independent of cash flows from other asset groups. The
cash flow estimates that are used contain management’s best estimates, using
appropriate and customary assumptions and projections at the time.
(f) Warranty Reserves
The Company provides for the estimated cost of product warranties at the
time revenue is recognized. The Company’s actual warranty obligation is
affected by product failure rates and service costs incurred in correcting a
product failure. Should actual product failure rates or service costs differ
from management’s estimates, which are based on historical data and engineering
estimates where applicable, revisions to the estimated warranty liability would
be required. The increase in the warranty reserve for the year ended December
31, 2003 is due primarily to the warranty provision on increased sales of
LaserCyte® instruments. Below is a summary of changes in accrued warranty
reserve for products sold to customers for the years ended December 31, 2003
and 2002, respectively
(in thousands)
:
F-10
(g) 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, respectively;
and a deferred tax liability or asset, as the case may be, for the estimated
future tax effects of temporary differences between book and tax treatment of
assets and liabilities and carryforwards to the extent they are realizable. We
record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we consider future taxable
income and ongoing prudent and feasible tax planning strategies in assessing
the need for a valuation allowance, in the event we were to determine that we
would be able to realize our deferred tax assets in the future in excess of the
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of our net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made. See Note 6.
(h) Revenue Recognition
The Company recognizes revenue when four criteria are met. These include
(i) persuasive evidence that an arrangement exists, (ii) delivery has occurred
or services have been rendered, (iii) the seller’s price is fixed and
determinable, and (iv) collectibility is reasonably assured.
When instruments are sold together with extended maintenance agreements,
the Company allocates revenue to the extended maintenance agreement under EITF
00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.”
Accordingly the total consideration received is allocated to the elements based
on their relative fair values, which is determined by amounts charged
separately for the delivered and undelivered elements to other customers. The
deferred revenue related to the extended maintenance agreements is recognized
ratably over the maintenance period. The delivered elements are recognized as
revenue when appropriate under the policies described above. Shipping costs
reimbursed by the customer are included in revenue.
The Company records estimated reductions to revenue in connection with
customer programs and incentive offerings, which may give customers future
rights such as free or discounted goods or services or trade-in rights. The
Company estimates these reductions based on its experience with similar
customer programs in prior years. Revenue reductions are finalized on a
quarterly basis for most programs upon issuance of credits or free or
discounted products. For the SNAP-Up-the-Savings™ program, estimates of
future customer credits are revised quarterly and finalized annually in the
third quarter of each year upon the issuance of credits to customers. For the
F-11
Company’s Practice Developer™ volume discount program, the Company has
reduced revenue assuming all points granted will result in future credits
because the Company does not have sufficient experience with this program to
estimate customer point forfeitures.
The Company recognizes revenue only in those situations where collection
from the customer is reasonably assured. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The Company bases its estimates on
detailed analysis of specific client situations and percentage of its accounts
receivable by aging category. If the financial condition of the Company’s
customers were to deteriorate, resulting in an impairment of their ability to
make payment, additional allowances may be required.
(i) Research and Development and Software Development Costs
Research and Development costs are expensed as incurred. In accordance
with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed” (“SFAS No. 86”), the Company evaluates its
software research and development costs for capitalization after the
technological feasibility of software and products containing software has been
established. No software development costs have been capitalized by the Company
because costs eligible for capitalization under SFAS No. 86 have been
insignificant. Research and development expenses consist of salaries, employee
benefits, materials and consulting costs.
(j) Advertising and Promotion Costs
The Company expenses advertising costs to sales and marketing expense in
the period they are incurred.
(k) Stock-Based Compensation
The Company measures compensation related to employee stock-based
compensation plans in accordance with Accounting Principles Board (“APB”)
Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and
elects to disclose the pro forma impact of accounting for stock-based
compensation plans under the provisions of SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS No. 123”) and SFAS No. 148, “Accounting for
Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB No.
123” (“SFAS No. 148”). Accordingly, no SFAS No. 123-based employee
compensation cost has been recognized for these plans.
Had compensation cost for the Company’s stock-based compensation and
employee stock purchase plans been determined consistent with the provisions of
SFAS No. 123, the Company’s net income and net income per common and common
equivalent share would have been reduced to the following pro forma amounts
(in thousands, except per share amounts)
:
See Note 12 for discussion of the
Company’s stock-based compensation plans.
F-12
(l) Foreign Currency Translation
Assets and liabilities of the Company’s foreign subsidiaries are
translated using the exchange rate in effect at the balance sheet date.
Revenue and expense accounts are translated using a weighted average of
exchange rates in effect during the period. Cumulative translation gains and
losses are shown in the accompanying consolidated balance sheets as a separate
component of accumulated other comprehensive income (loss). Exchange gains and
losses arising from transactions denominated in foreign currencies other than a
subsidiary’s functional currency are included in current operations. Included
in general and administrative expenses are foreign currency translation gains
of $1.0 million and $0.3 million for the years ended December 31, 2003 and
2002, respectively and a foreign currency translation loss of $0.6 million for
the year ended December 31, 2001.
(m) Derivative Instruments and Hedging
The Company follows SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities” as amended by SFAS No. 137, “Accounting for Derivative
Instruments and Hedging Activities — Deferral of the Effective Date of SFAS No.
133,” and SFAS No. 138, “Accounting for Certain Derivative Instruments and
Hedging Activities — An Amendment of SFAS No. 133.” (“SFAS No. 133, As
Amended”). SFAS No. 133 As Amended requires that all derivatives, including
forward currency exchange contracts, be recognized on the balance sheet at fair
value. Derivatives that are not hedges must be recorded at fair value through
earnings. If a derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative are either offset against the
change in fair value of the hedged item through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
Company immediately records in earnings the extent to which a hedge is not
effective in achieving offsetting changes in fair value.
The Company enters into foreign currency exchange contracts of its
anticipated intercompany 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. The
Company also utilizes some natural hedges to mitigate its transaction and
commitment exposures. The contracts the Company enters into are firm foreign
currency commitments, and, therefore, market gains and losses are deferred
until the contract matures, which is the period when the related obligation is
settled. The Company enters into these exchange contracts with large
multinational financial institutions. The Company does not hold or engage in
transactions involving derivative instruments for purposes other than risk
management. The Company hedges less than the full value of forecasted
intercompany sales and thus no significant ineffectiveness has resulted or been
recorded through the statement of operations. As of December 31, 2003, the
Company recorded $4.4 million in unrealized losses through accumulated other
comprehensive loss from foreign exchange contracts with 2004 expiration dates.
As of December 31, 2002, the Company recorded $2.6 million in unrealized losses
through accumulated other comprehensive loss from foreign exchange contracts
with 2003 expiration dates. The foreign currency contracts, which extend
through December 31, 2004 and 2003, respectively, consisted of the following
(in thousands)
:
Gains and losses on foreign exchange contracts intended as hedges for
intercompany sales of goods are recorded in cost of sales. Included in cost of
goods sold are foreign exchange losses of $6.7 million and $2.6 million for the
year ended December 31, 2003 and 2002, respectively, and foreign exchange gains
of $1.4 million for the year ended December 31, 2001.
F-13
(n) Disclosure of Fair Value of Financial Instruments and Concentration of Risk
Financial instruments consist mainly of cash and cash equivalents,
investments, accounts receivable, accounts payable and notes payable.
Financial instruments that potentially subject the Company to concentrations of
credit risk are principally cash, cash equivalents, short-term investments and
accounts receivable. The Company places its investments in highly rated
financial institutions and investment grade money market funds, municipal bonds
and preferred stock. Concentration of credit risk with respect to accounts
receivable is limited to certain customers to whom the Company makes
substantial sales. To reduce risk, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
accounts receivable credit risk exposure is limited. The Company maintains an
allowance for potential credit losses, but historically has not experienced any
significant credit losses related to an individual customer or groups of
customers in any particular industry or geographic area. The carrying amounts
of the Company’s financial instruments approximate fair market value.
Certain parts and finished goods are available only from one source. While
the Company does not anticipate difficulties in obtaining any of the components
used in its products, the loss of any of these sources of supply would have a
material adverse effect on the Company.
(o) Reclassifications
Reclassifications have been made in the consolidated financial statements
to conform to the current year’s presentation.
(p) Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” requires companies to
report all changes in equity during a period, resulting from net income and
transactions or other events and circumstances from non-owner sources, in a
financial statement for the period in which they are recognized. The Company
has chosen to disclose comprehensive income, which encompasses net income,
foreign currency translation adjustments and the difference between the cost
and the fair market value of investments in debt securities and foreign
exchange contracts, 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. Other comprehensive income (loss) consists of the following as of
December 31, 2003 and 2002, respectively,
(in thousands)
:
(q) New Accounting Standards
In November 2002, the Emerging Issues Task Force (“EITF”) of the Financial
Accounting Standards Board (“FASB”) reached consensus on EITF No. 00-21,
“Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF No.
00-21”). EITF No. 00-21 addresses the accounting treatment for arrangements
that provide for the delivery or performance of multiple products or services
where the delivery of a product, system or performance of services may occur at
different points in time or over different periods of time. EITF No. 00-21
requires the separation of the multiple deliverables that meet certain
requirements into individual units of accounting that are accounted for
separately under the appropriate authoritative accounting literature. EITF No.
00-21 is applicable to revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company adopted the provisions of EITF No.
00-21 effective January 2003. The adoption of EITF No. 00-21 had no material
impact on the consolidated financial statements.
In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107
and rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45 requires that
a guarantor recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken by issuing the guarantee.
F-14
FIN 45 also requires additional disclosures to be made by a guarantor in
its interim and annual financial statements about its obligation under certain
guarantees it has issued. The accounting requirements for the initial
recognition of guarantees are applicable on a prospective basis for guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective for all guarantees outstanding, regardless of when they were issued
or modified, for financial statements for interim or annual periods ending
after December 15, 2002. We have adopted the additional disclosure provisions
of this statement required for the year ended December 31, 2002 and the
recognition provisions for the quarter ended March 31, 2003. There were no
impacts of the adoption of this statement.
In December 2003, the FASB issued FASB Interpretation No. 46R,
“Consolidation of Variable Interest Entities, an interpretation of ARB 51”
(“FIN 46R”). FIN 46R provides guidance on the identification of entities for
which control is achieved through means other than through voting rights
(“variable interest entities”) and on the determination of when such entities
are required to be included in the consolidated financial statements of the
business enterprise that holds an interest in the variable interest entity.
This new model for consolidation applies to an entity in which either (1) the
equity investors do not have a controlling financial interest or (2) the equity
investment at risk is insufficient to finance that entity’s activities without
receiving additional subordinated financial support from other parties. In
addition, FIN 46R requires additional related disclosures. Certain disclosure
provisions of FIN 46R apply to all financial statements issued after January
31, 2003, the consolidation provisions apply to variable interest entities
created after January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after that date, and the remaining provisions,
with the exception of interest in special purpose entities, apply at the end of
the first fiscal year or interim period ending after March 15, 2004 to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. Application for interest in special purpose
entities is required for periods after December 15, 2003. The adoption of FIN
46R had no material impact on the consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No.
104, “Revenue Recognition,” (“SAB No. 104”) which replaces SAB No. 101. This
staff accounting bulletin revises or rescinds portions of the interpretative
guidance included in Topic 13 of the codification of staff accounting bulletins
in order to make this interpretive guidance consistent with current
authoritative accounting and auditing guidance and SEC rules and regulations.
The principal revisions relate to the rescission of material no longer
necessary because of private sector developments in U.S. generally accepted
accounting principles. This staff accounting bulletin also rescinds the Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
document issued in conjunction with Topic 13. Selected portions of that
document have been incorporated into Topic 13. SAB No. 104 also rescinds the
accounting guidance in SAB No. 101 related to multiple-element arrangements as
this guidance has been superseded as a result of the issuance of EITF 00-21.
The adoption of this standard did not have a material impact on the
consolidated financial statements.
NOTE 3 CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS
Cash equivalents are short-term, highly liquid investments purchased with
original maturities of less than three months.
The Company accounts for investments under SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities” as available-for-sale.
Investments are recorded at amortized cost and adjusted to fair market value
through other comprehensive income. Gains on sales of investments were not
significant for the years ended December 31, 2003 and 2002.
Short-term investments, which have a cost basis of $33.9 million and $33.3
million as of December 31, 2003 and 2002, respectively, are investment
securities with maturities of greater than three months, but less than one
year, and consist of the following
(in thousands)
:
F-15
Long-term investments, which have a cost basis of $35.1 million and $15.4
million as of December 31, 2003 and 2002, respectively, are investment
securities with maturities of greater than one year and less than five years
and consist of the following
(in thousands)
:
NOTE 4 OTHER NON-CURRENT ASSETS, INTANGIBLE ASSETS AND GOODWILL
Other noncurrent assets are as follows
(in thousands)
:
Intangible assets consist of the following
(in thousands)
:
Amortization of intangible assets excluding goodwill was $0.5 million,
$0.6 million and $1.5 million for the years ended December 31, 2003, 2002 and
2001, respectively. During the year ended December 31, 2003 the Company
acquired $2.1 million in licenses, $0.9 million in intangibles related to joint
venture described in Note 14 and $0.4 million related to an acquisition in the
CAG segment.
Amortization expense of intangible assets is expected to be as follows
(in
thousands)
:
During the quarter ended September 30, 2002, the Company discontinued
development of a product based on certain technology acquired as part of the
Genera Technologies Limited (“Genera”) acquisition. As a result, the Company
recorded additional amortization of $0.5 million in general and administrative
expense within the Water segment to reflect the impairment of intangible asset.
F-16
Goodwill consists of the following
(in thousands)
:
The change in goodwill noted above is a result of changes in foreign
currency exchange rates, except as discussed in Note 16. The Company did not
acquire any goodwill nor did it record any impairment charges in 2003.
In 2002, SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No.
142”), became effective and as a result, the Company ceased to amortize
approximately $50.7 million of goodwill beginning January 1, 2002. The Company
had recorded approximately $5.0 million of amortization on these amounts during
2001 and would have recorded approximately $4.5 million of amortization during
2002 and 2003 if the existing standards had been continued. Under SFAS No. 142,
amortization of goodwill is replaced with periodic tests for impairment. The
Company was required to perform an initial impairment review of its goodwill as
of January 1, 2002, under the transitional provisions of SFAS No. 142. Since
then, the Company has been required to perform annual tests of its goodwill for
impairment or additional tests whenever events or circumstances indicate an
impairment may exist. For its transitional and annual impairment test, the
Company identified its reporting units, allocated assets and liabilities
(including goodwill) to the reporting units and compared the reporting units’
net book value to their estimated fair value. No impairment was identified as a
result of either the transitional or year-end annual reviews. The fair value of
the reporting units was estimated using a discounted cash flow approach. The
cash flow estimates used contain management’s best estimates, using appropriate
and customary assumptions and projections at the time.
Net income and earnings per share for the years ended December 31, 2003
and 2002, and for the year ended December 31, 2001, adjusted to exclude expense
from amortization of goodwill (net of taxes), are as follows (in thousands, except per share amounts):
NOTE 5 NOTES PAYABLE
In connection with the acquisition of Genera in August 2000, the Company
issued $8.5 million in notes payable to a former shareholder of Genera, of
which $7.0 million was secured by cash in escrow. The remaining $1.5 million
was unsecured and noninterest bearing, and was discounted at 6% to a fair value
of $1.3 million. In April 2002, the Company repaid $7.5 million, of which $7.0
million was paid from the cash held in escrow. The remaining unsecured portion
of $1.0 million is due in three annual installments, beginning in August 2002.
The noteholder elected to defer the August 2002 payment of $0.5 million until
April 2003. The noteholder elected to defer the August 2003 payment of $0.25
million until 2004. The interest rate on the deferred notes is 3%.
F-17
NOTE 6 INCOME TAXES
Earnings before income taxes for each year were as follows
(in thousands)
:
The provisions for income taxes for the years ended December 31, 2003,
2002 and 2001 are comprised of the following
(in thousands
):
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate as follows:
The reduction in the effective tax rate from 2001 to 2002 was due
primarily to the elimination of non-deductible goodwill amortization associated
with the adoption of SFAS No. 142. The reduction in the effective tax rate
from 2002 to 2003 was due primarily to domestic and international tax planning
initiatives, the charge to write-down fixed assets occurring in a high-tax rate
jurisdiction (See Note 16) and revisions to prior year international tax
estimates.
F-18
The components of the net deferred tax asset (liability) included in the
accompanying consolidated balance sheets are as follows
(in thousands)
:
At December 31, 2003, the Company had domestic net operating loss
carryforwards of approximately $0.2 million available to offset future taxable
income. Net operating loss carryforwards expire at various dates beginning in
2004 through 2014. The Tax Reform Act of 1986 contains provisions that limit
annual availability of the net operating loss carryforwards due to a more than
50% change in ownership that occurred upon the acquisition of certain
companies.
At December 31, 2003, the Company had net operating loss carryforwards
outside the United States and in state jurisdictions of approximately $52.6
million available to offset future taxable income. These net operating loss
carryforwards expire at various dates beginning in 2004. The Company has
recorded a valuation allowance for the assets because realizability is
uncertain.
At December 31, 2003, unremitted earnings in subsidiaries outside the
United States totaled $60.4 million, on which no United States taxes have been
provided. The Company’s intention is to reinvest these earnings permanently or
to repatriate the earnings only when tax effective to do so. It is not
practical to estimate the amount of additional taxes that might be payable upon
repatriation of earnings from jurisdictions outside the United States; however,
the Company believes that United States foreign tax credits would largely
eliminate any United States taxes or offset any foreign withholding taxes.
NOTE 7 EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted average number of shares of common stock and deferred stock units
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 and other
potentially dilutive securities using the treasury stock method unless the
effect is antidilutive.
F-19
The following is a reconciliation of shares outstanding for basic and
diluted earnings per share
(in thousands)
:
Deferred stock units outstanding are included in shares outstanding for
basic and diluted earnings per share because the associated shares of the
Company’s common stock are issuable for no cash consideration, the number of
shares of the Company’s common stock to be issued is fixed and issuance is not
contingent. See Note 12.
In connection with the Company’s acquisition of the capital stock of Blue
Ridge Pharmaceuticals, Inc. (“Blue Ridge”) in 1998, the Company issued warrants
to acquire 806,000 shares of common stock at $31.59 per share that expired on
September 30, 2003. As of December 31, 2003, all of the warrants were
exercised or had expired.
Certain options and warrants to acquire shares have been excluded from the
calculation of shares outstanding for dilutive earnings per share because they
were anti-dilutive. The weighted average number of anti-dilutive rights (options
and warrants) to acquire shares, the weighted average exercise prices of such
anti-dilutive rights and the weighted average market value of shares used to
calculate the dilutive effect of options and warrants were as follows
(in
thousands, except per share amounts)
:
NOTE 8 COMMITMENTS, CONTINGENCIES AND GUARANTEES
Commitments
The Company leases its facilities under operating leases, which expire
through 2018. In addition, the Company is responsible for the real estate
taxes and operating expenses related to these facilities. The Company also has
lease commitments for automobiles and office equipment. Minimum annual rental
payments under these agreements are as follows
(in thousands
):
F-20
Rent expense charged to operations under operating leases was
approximately $6.0 million, $5.9 million and $5.6 million for the years ended
December 31, 2003, 2002 and 2001, respectively.
Under the terms of certain supply agreements with suppliers of the
Company’s veterinary instruments, slides for its VetTest® instruments, and
certain raw materials, the Company has aggregate commitments to purchase
approximately $192.2 million of products through 2010. In addition, the Company
has various minimum royalty payments due through 2015 of $8.8 million.
The Company also has certain commitments associated with a joint venture. See
Note 14.
Contingencies
In connection with the Company’s acquisition of the capital stock of Blue
Ridge in 1998, the Company agreed to issue up to 1,241,000 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.
As of December 31, 2003, up to 298,000 of the 1,241,000 shares described above
theoretically could be issued to the former Blue Ridge shareholders. However,
the Company does not anticipate that it will issue any additional shares in
connection with this agreement.
Effective January 1, 2003, the Company entered into a workers’
compensation insurance policy where the Company retains the first $0.25 million
in claim liability per incident and up to specific limits, based on payroll, in
claim liability in the aggregate. The Company renewed this workers’
compensation policy effective January 1, 2004. The Company is liable for up to
$1.4 million in aggregate claim liability for 2003 and estimates that it will
be liable for up to $2.0 million for 2004. The Company has recorded its
estimated claim liability as of December 31, 2003 based on claims incurred and
the estimated ultimate cost to settle the claims. The insurance company
administers and pays these claims and the Company reimburses the insurance
company for the Company’s portion of these claims. The insurance company also
provides insurance for claims above the individual occurrence and aggregate
limits. The Company issued a $0.5 million letter of credit to the insurance
company as security for these claims as of December 31, 2003 and agreed to
issue an additional $0.6 million letter of credit for 2004.
The Company currently purchases certain products and materials from single
sources or a limited number of sources. Some of the products that the Company
purchases from these sources are proprietary, and therefore may not be
available from other sources. These products include the Company’s VetTest®
chemistry and QBC® VetAutoread™ hematology analyzers and related consumables,
computed radiography systems, active ingredients for pharmaceutical products,
including NAVIGATOR®, and certain components of the Company’s SNAP® rapid assay
devices, water testing products, and LaserCyte® systems. If the Company is
unable to obtain adequate quantities of these products in the future, then it
could face cost increases or reductions or delays in product shipments, which
could have a material adverse effect on its results of operations.
From time to time, the Company has received notices alleging that the
Company’s products infringe third-party proprietary rights, although 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 may be commenced
against the Company. If the Company loses any such litigation, it may be
stopped from selling certain products and/or it may be required to pay damages
as a result of the litigation.
The Company is subject to claims that arise in the ordinary course of
business, including with respect to actual and threatened litigation and other
matters. The Company accrues contingent liabilities when it is probable that
future expenditures will be made and such expenditures can reasonably be
estimated. However, the Company’s actual losses with respect to these
contingencies could exceed the Company’s accruals.
Guarantees
The following is a summary of the Company’s agreements and obligations
that it has determined to be within the scope of FIN 45.
F-21
The Company’s Amended and Restated Certificate of Incorporation provides
that the Company will indemnify its officers and directors to the maximum
extent permitted by Delaware law. The maximum payment that the Company may be
required to make under such provisions is theoretically unlimited and is
impossible to determine. The Company maintains directors’ and officers’
liability insurance, which may provide reimbursement to the Company for
payments made to, or on behalf of, officers and directors pursuant to the
indemnification provisions. The Company’s indemnification obligations were
grandfathered under the provisions of FIN No. 45 as they were in effect prior
to December 31, 2002. Accordingly, the Company has recorded no liability for
such obligations as of December 31, 2003.
The Company enters into agreements with third parties in the ordinary
course of business under which the Company is obligated to indemnify such third
parties for and against various risks and losses. The precise terms of such
indemnities vary with the nature of the agreement. In many cases, the Company
limits the maximum amount of its indemnification obligations, but in some cases
those obligations may be theoretically unlimited. The Company has not incurred
material expenses in discharging any of these indemnification obligations, and
based on its analysis of the nature of the risks involved, the Company believes
that the fair value of these agreements is minimal. Accordingly, the Company
has recorded no liabilities for these obligations as of December 31, 2003.
When acquiring a business, the Company sometimes assumes liability for
certain events or occurrences that took place prior to the date of acquisition.
The maximum potential amount of future payments the Company could be required
to make for such obligations is undeterminable at this time. All of these
obligations were grandfathered under the provisions of FIN No. 45 as they were
in effect prior to December 31, 2002. Accordingly, the Company has no
liabilities recorded for these liabilities as of December 31, 2003.
NOTE 9 STOCKHOLDERS’ EQUITY
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.
On December 17, 1996, the Company designated 100,000 shares of Preferred
Stock as Series A Junior Participating Preferred Stock (“Series A Stock”) in
connection with its Shareholder Rights Plan. See Note 10. In general, each
share of Series A Stock will: (i) be entitled to a minimum preferential
quarterly dividend of $10 per share and to an aggregate dividend of 1,000 times
the dividend declared per share of Common Stock, (ii) in the event of
liquidation, be entitled to a minimum preferential liquidation payment of
$1,000 per share (plus accrued and unpaid dividends) and to an aggregate
payment of 1,000 times the payment made per share of Common Stock, (iii) have
1,000 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 1,000 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.
NOTE 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
$200.00. 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
F-22
time until the tenth business day following a public announcement that a
20% stock position has been acquired and in certain other circumstances.
If any person or group becomes a beneficial owner of 20% or more of the
Common Stock (except pursuant to a tender or exchange offer for all shares at a
fair price as determined by the outside members of the Company’s Board of
Directors), each right not owned by a 20% stockholder will enable its holder to
purchase such number of shares of Common Stock as is equal to the exercise
price of the right divided by one-half of the current market price of the
Common Stock on the date of the occurrence of the event. In addition, if the
Company thereafter is acquired in a merger or other business combination with
another person or group in which it is not the surviving corporation or in
connection with which its Common Stock is changed or converted, or if the
Company sells or transfers 50% or more of its assets or earning power to
another person, each right that has not previously been exercised will entitle
its holder to purchase such number of shares of common stock of such other
person as is equal to the exercise price of the right divided by one-half of
the current market price of such common stock on the date of the occurrence of
the event.
NOTE 11 TREASURY STOCK
The Company’s Board of Directors has approved the repurchase of up to
12,000,000 shares of the Company’s common stock in the open market or in
negotiated transactions. During the years ended December 31, 2003, 2002 and
2001, the Company repurchased approximately 927,000, 1,000,000 and 590,000
shares, respectively, of common stock for $36.2 million, $29.8 million and
$13.0 million, respectively. From the inception of the stock repurchase
programs in August 1999 to December 31, 2003, the Company had repurchased
9,541,000 shares for $213.5 million. Additionally, during 2003 and 2002, the
Company received approximately 133,000 and 36,000 shares of stock,
respectively, which were owned by the holder for greater than six months, in
payment for the exercise price of stock options. The shares of stock had a fair
market value of $4.9 million and $1.1 million, respectively.
NOTE 12 STOCK-BASED COMPENSATION PLANS
The Company’s stock-based compensation plans are described below. Each of
these plans, and any amendments thereto increasing the number of shares
issuable thereunder, was approved by the Company’s stockholders.
1991 Stock Option Plan
During 1991, the Board of Directors approved the 1991 Stock Option Plan
(“1991 Stock Plan”), which, as amended, provided 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 were granted at
the fair market value on the date of grant and expired ten years from the date
of grant. Incentive stock options for greater than 10% shareholders were
granted at 110% of the fair market value and expired five years from the date
of grant. Nonstatutory options could be granted at no less than 100% of the
fair market value on the date of grant. The vesting schedule of all options is
determined by the Compensation Committee of the Board of Directors at the time
of grant. In May 2003, the 1991 Stock Plan was terminated and replaced with
the 2003 Stock Incentive Plan and remaining shares transferred to the 2003
Stock Incentive Plan.
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 were not
officers or employees of the Company were eligible to 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.
1997 Director Option Plan
During 1997, the Board of Directors approved the 1997 Director Option Plan
(the “1997 Director Plan”) pursuant to which Directors who were not officers or
employees of the Company received nonstatutory options to
F-23
purchase shares of the Company’s common stock. On May 19, 1999, this plan
was terminated and replaced with the 1999 Director Stock Plan.
1998 Stock Incentive Plan
During 1998, the Board of Directors approved the 1998 Stock Incentive Plan
(the “1998 Stock Plan”), which provided for grants of incentive and
nonqualified stock options at the discretion of the Compensation Committee of
the Board of Directors. A total of 4,100,000 shares of common stock could be
issued under the 1998 Stock Plan as amended. Options granted under the 1998
Stock Plan could 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 could not be granted for a
term of more than ten years. The vesting schedule of all options granted under
the 1998 Stock Plan was determined by the Compensation Committee of the Board
of Directors at the time of grant. In May 2003, the 1998 Stock Plan was
terminated and replaced with the 2003 Stock Incentive Plan and remaining shares
transferred to the 2003 Stock Incentive Plan.
1999 Director Stock Plan
During 1999, the Board of Directors approved the 1999 Director Stock Plan
pursuant to which Directors who were not officers or employees of the Company
received shares of the Company’s common stock. A total of 80,000 shares of
common stock were issuable under the 1999 Director Stock Plan. In May 2000,
the 1999 Director Stock Plan was terminated and replaced with the 2000 Director
Option Plan. As of December 31, 2000, 13,364 shares had been issued under the
1999 Director Stock Plan, and the fair value of these shares of $0.4 million
was charged to expense in 1999 and 2000.
2000 Director Option Plan
During 2000, the Board of Directors approved the 2000 Director Option Plan
(the “2000 Director Plan”) pursuant to which Directors who were not officers or
employees of the Company received nonstatutory options to purchase shares of
the Company’s common stock. Under the 2000 Director Plan, each nonemployee
Director was granted an option to purchase 6,500 shares of common stock at each
annual meeting of the Company’s shareholders. Options granted under the 2000
Director Plan had an exercise price equal to the fair market value of the
Company’s common stock on the date of grant, vest fully on the first
anniversary of the date of grant and expire ten years from the date of grant.
A total of 200,000 shares of common stock may be issued under the plan. In May
2003, the 2000 Director Plan was terminated and replaced with the 2003 Stock
Inventive Plan and remaining shares transferred to the 2003 Stock Incentive
Plan.
2003 Stock Incentive Plan
During 2003, the Board of Directors approved the 2003 Stock Incentive
Plan, as amended (the “2003 Stock Plan”) pursuant to which employees and
Directors of the Company may receive various types of stock-based incentives,
including stock options, restricted stock, stock appreciation rights and
deferred stock units. A total of 1,850,000 shares of common stock may be issued
under the 2003 Stock Plan as amended, provided that no more than 1,500,000
shares will be available for the grant of incentive stock options, and no more
than 600,000 shares will be available for awards other than stock options and
stock appreciation rights. Options granted under the 2003 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
ten years. The vesting schedule of all options granted under the 2003 Stock
Plan is determined by the Compensation Committee of the Board of Directors at
the time of grant.
Deferred Compensation Plans
During 2003, the Company adopted new compensation policies for Directors
who are not officers or employees. Under these new policies, non-employee
Directors are required to defer a portion of their director compensation in the
form of unissued shares of the Company’s common stock (“Deferred Stock Units”)
pursuant to the Company’s Director Deferred Compensation Plan. The Deferred
Stock Units are valued at the closing sale price
F-24
of the common stock on the date of grant and will be exchanged for a fixed
number of shares of common stock by the Company one year following a Director’s
resignation or retirement. The value of these Deferred Stock Units is expensed
as compensation when earned, but in all cases prior to the issuance of the
Deferred Stock Units. The Company also has adopted an Executive Deferred
Compensation Plan (the “Executive Plan”) under which certain members of the
Company’s management may elect to defer a portion of their cash compensation,
beginning with 2003 incentive compensation payable in the first quarter of
2004, in Deferred Stock Units. These Deferred Stock Units will be exchanged for
a fixed number of shares of common stock on dates determined by the employee,
subject to the limitations of the Executive Plan. The Deferred Stock Units are
presented in the stockholders’ equity section of the balance sheet as Deferred
equity-based compensation.
Employee Stock Purchase Plans
During 1994, the Board of Directors approved the 1994 Employee Stock
Purchase Plan, under which 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, under which the Company has reserved and may
issue up to an aggregate of 620,000 shares of Common Stock in semiannual
offerings. Also during 1997, the Board of Directors approved the 1997
International Employee Stock Purchase Plan, under which 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 in the plans. Shares subscribed to and issued under
the plans were 50,200, 53,000 and 54,550 in 2003, 2002 and 2001, respectively.
Summary of Transactions Under Stock Option Plans
A summary of the status of the Company’s stock option plans as of December
31, 2001, 2002 and 2003 and changes during the years then ended are presented
in the table below
(in thousands, except weighted average exercise price)
:
As of December 31, 2003, a total of 1,897,000 shares of Common Stock were
available for future grants under the Company’s stock option plans.
F-25
Summary of Stock Options Outstanding
The following summarizes information about all stock options issued and
outstanding as of December 31, 2003
(in thousands, except exercise price and
per share amounts)
:
Fair Value of Stock-Based Compensation
As discussed in Note 2(k), the Company accounts for stock-based
compensation to employees in accordance with APB No. 25, and elects to disclose
the pro forma impact of accounting for stock-based compensation plans under the
provisions of SFAS No. 123 and SFAS No.148. Accordingly, no SFAS No. 123-based
employee compensation cost has been recognized for these plans.
In order to determine the pro forma impact under SFAS No. 123, 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:
In order to determine the pro forma impact under SFAS No. 123, the fair
value of the purchase rights issued under the employee stock purchase plans is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
The weighted average fair value of options and purchase rights granted
were as follows:
NOTE 13 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. The Company matched $1.7 million for the year 2003,
$1.6 million for
F-26
the year 2002, and $1.6 million for the year 2001. 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 2003, 2002 and
2001.
NOTE 14 JOINT VENTURE
On June 18, 2003, the Company and Beijing Fortunate Century Animal Health
Co., Ltd. (“BFCAH”), formed a joint venture, Beijing IDEXX-Yuanheng
Laboratories Co. Limited (the “Venture”), to assemble and market veterinary
diagnostic products for production animals in China. The Venture is
headquartered in Beijing, China. The Company’s initial equity interest in the
Venture is 40%, however, the Company is committed to acquire an additional 20%
of the Venture from BFCAH within two years, subject to Chinese government
approval. The Company bears an economic risk that is greater than its equity
interest and also has the ability to make decisions that significantly affect
the results of the activities of the Venture through majority board
representation. Therefore, the Venture will be consolidated into the Company’s
financial statements in accordance with FIN 46R. The Company contributed $1.5
million during the year ended December 31, 2003 and is obligated to make future
capital contributions of $0.6 million before August 11, 2005. The Company is
obligated to pay $0.6 million for the additional 20% interest discussed above,
and will make an additional $1.5 million capital contribution to the Venture
within three months after the approval by the Chinese government of the
additional 20% interest.
The Company is also obligated to make available to the Venture selected
technology, know-how and licenses and to assist with certain logistical,
management training and operating matters. In connection with the joint venture
agreement, the Company has not entered into indemnification agreements or
assumed liabilities predating the establishment of the Venture.
NOTE 15 CEO SUCCESSION
In January 2002, the Company’s Chairman and Chief Executive Officer was
succeeded by its current Chairman and Chief Executive Officer. Under an
employment agreement, the Company was required to make certain payments to its
former Chief Executive Officer and provide certain benefits to him following
this succession. During the year ended December 31, 2002, the Company incurred
a pre-tax charge of $3.4 million, $1.8 million of which was non-cash, related
to this agreement. During the year ended December 31, 2003 the Company
incurred a pre-tax charge of $0.1 million due to changes in estimates related
to this agreement. As of December 31, 2003 and 2002, $0.1 million and $0.9
million, respectively, was due under this agreement and recorded in accrued
liabilities. The amount outstanding as of December 31, 2003 will be paid out
over 2004.
NOTE 16 IMPAIRMENT OF LONG-LIVED ASSETS
During the second quarter of 2002, the Company ceased its distributorship
of certain third-party products in Taiwan. As a result of this event, the
Company recorded an impairment charge of $0.25 million related to goodwill of
its Taiwan subsidiary, which was acquired in 1997.
During the third quarter of 2002, the Company discontinued certain
products acquired in the acquisition of Genera, a reporting unit in the Water
segment. The Company allocated a portion of the purchase price to an
intangible asset related to this product at the acquisition date. The
remaining unamortized balance of the intangible asset at the time of impairment
of $0.5 million was charged to other expense.
During the fourth quarter of 2003, the Company entered into a new
agreement with Ortho. Under the new agreement, the Company is developing and
will introduce a next-generation chemistry analyzer for the veterinary market
based on Ortho’s dry-slide technology, and Ortho will supply the Company
with the slide consumables used in both the new instrument and the VetTest®
chemistry analyzer currently sold by the Company. As a result of this
agreement the Company decided to discontinue efforts to develop an alternative
chemistry system and incurred a non-cash charge of $7.4 million to write-down
equipment purchased to manufacture the consumable used in the alternative
chemistry system.
F-27
NOTE 17 SEGMENT REPORTING
The Company discloses information regarding its segments in accordance
with the provisions of SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (“SFAS No. 131”). SFAS No. 131 requires
disclosures about operating segments in annual financial statements and
requires selected information about operating segments in interim financial
statements. It also requires related disclosures about products and services
and geographic areas. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision-making
group, in deciding how to allocate resources and in assessing performance. The
Company’s chief operating decision maker is the Chief Executive Officer.
The Company is organized into business units by market and customer group.
The Company’s reportable operating segments include the Companion Animal Group
(“CAG”), the Water testing business (“Water”) and the Food Diagnostics Group
(“FDG”) and other. CAG develops, designs, manufactures, and distributes
products and performs services for veterinarians. CAG also manufactures certain
biology-based test kits for veterinarians and develops products for therapeutic
applications in companion animals. Water develops, designs, manufactures and
distributes products to detect contaminants in water. FDG develops, designs,
manufactures and distributes products and performs services to detect disease
and contaminants in food animals and food. Other encompasses activities that
are not included in the Company’s reportable segments and is primarily
comprised of corporate research and development, CEO succession charge and
interest income. Assets categorized as other include cash, short-term
investments, long-term investments, deferred tax assets and other miscellaneous
current and long-term assets. The Company has conformed the financial
information about segments for the years ended December 31, 2002 and 2001 to
its presentation of reportable segments for the year ended December 31, 2003.
Previously the Company reported two operating segments.
F-28
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that most
interest income and expense are not allocated to individual operating segments
and income taxes are provided (benefited) on each segment using the overall
effective rate. Below is the Company’s segment information
(in thousands)
:
Table of Contents
December 31,
2003
2002
$
16,732
$
22,547
7,615
5,769
50,986
46,770
$
75,333
$
75,086
Estimated
Asset Classification
Useful Life
Leasehold improvements
Shorter of life of lease or useful life
Machinery and equipment
3-5 years
Office furniture and
equipment
3-7 years
Buildings
40 years
Table of Contents
Estimated
Asset Classification
Useful Life
Patents
15 years
Noncompete agreements
5-10 years
Customer lists
5 years
Licenses
5-10 years
Rental instruments sold under recourse
3 years
Other
5-10 years
•
Significant under-performance relative to historical or projected future operating results;
•
Failures to obtain regulatory approval of certain products;
•
Significant changes in the manner of the Company’s use of the
acquired assets or the strategy for its overall business;
•
Significant increase in the discount rate assumed to present value future cash flow;
•
Significant negative industry or economic trends; and
•
Significant advancements or changes in technology.
For the Years Ended December 31,
2003
2002
$
343
$
439
3,775
355
238
(284
)
(662
)
(167
)
3,694
343
1,053
46
$
2,641
$
297
Table of Contents
•
The Company recognizes revenue at the time of shipment to
distributors for substantially all products as title and risk of loss
pass to these customers on delivery to the common carrier. The Company
recognizes revenue for the remainder of its customers when the product
is delivered to the customer except as noted below. The Company’s
distributors do not have the right to return products.
•
The Company recognizes revenue on sales of instruments after the
instrument is installed because installation is considered essential to
the usability of the instrument, and the customer has accepted the
instrument.
•
The Company recognizes service revenue at the time the service is
performed.
•
The Company recognizes revenue associated with extended maintenance
agreements over the life of the contracts. Amounts collected in
advance of revenue recognition are recorded as a current or long-term
liability based on the time from the balance sheet date to the future
date of revenue recognition.
•
The Company recognizes revenue from noncancelable software licenses
and hardware systems upon installation of the software (and completion
of training if applicable) or hardware and the customer has accepted
the system because at this time collection is probable and the Company
has no significant further obligations.
•
The Company recognizes revenue on certain instrument systems under
rental programs over the life of the rental agreement. Amounts
collected in advance of revenue recognition are recorded as a current
or long-term liability based on the time from the balance sheet date to
the future date of revenue recognition.
Table of Contents
For the Years Ended December 31,
2003
2002
2001
$
57,090
$
45,389
$
37,620
—
1,116
—
(7,999
)
(8,242
)
(5,406
)
(7,999
)
(7,126
)
(5,406
)
$
49,091
$
38,263
$
32,214
$
1.67
$
1.35
$
1.13
1.43
1.14
0.97
1.59
1.30
1.09
1.37
1.09
0.93
Table of Contents
U.S. Dollar Equivalent
Currency Sold
2003
2002
$
27,674
$
19,308
13,798
13,206
10,352
9,380
1,440
1,479
1,634
2,672
—
334
$
54,898
$
46,379
Table of Contents
December 31,
2003
2002
$
20
$
151
(3,028
)
(1,694
)
7,573
(968
)
$
4,565
$
(2,511
)
Table of Contents
December 31,
2003
2002
$
32,988
$
32,403
1,000
1,000
$
33,988
$
33,403
Table of Contents
December 31,
2003
2002
$
35,082
$
14,572
—
1,000
$
35,082
$
15,572
December 31,
Description
2003
2002
$
4,117
$
2,147
3,505
4,230
1,592
1,851
$
9,214
$
8,228
December 31, 2003
December 31, 2002
Accumulated
Accumulated
Cost
Amortization
Cost
Amortization
$
1,945
$
1,945
$
1,945
$
1,945
3,800
998
1,725
719
588
220
341
149
1,500
270
430
176
3,725
1,359
3,368
1,055
304
298
400
329
$
11,862
$
5,090
$
8,209
$
4,373
Amortization
Expense
$
621
578
509
478
426
Table of Contents
December 31,
2003
2002
$
24,565
$
23,363
13,745
13,745
1,568
1,561
14,912
13,483
204
169
$
54,994
$
52,321
For the Years Ended December 31,
2003
2002
2001
$
57,090
$
45,389
$
37,620
—
—
4,466
$
57,090
$
45,389
$
42,086
$
1.67
$
1.35
$
1.13
—
—
0.13
$
1.67
$
1.35
$
1.26
$
1.59
$
1.30
$
1.09
—
—
0.12
$
1.59
$
1.30
$
1.21
Table of Contents
2003
2002
2001
$
58,582
$
49,176
$
46,027
24,786
19,594
12,754
$
83,368
$
68,770
$
58,781
For the Years Ended December 31,
2003
2002
2001
$
18,122
$
12,733
$
15,325
3,811
2,594
3,510
5,537
4,239
2,706
27,470
19,566
21,541
(978
)
2,976
(133
)
(170
)
774
(247
)
(44
)
65
—
(1,192
)
3,815
(380
)
$
26,278
$
23,381
$
21,161
December 31,
2003
2002
2001
35.0
%
35.0
%
35.0
%
2.8
3.2
3.6
(5.0
)
(3.6
)
(3.0
)
—
—
1.6
(0.8
)
(0.8
)
(0.8
)
(0.5
)
0.2
(0.4
)
31.5
%
34.0
%
36.0
%
Table of Contents
2003
2002
Current
Long-Term
Current
Long-Term
$
7,095
$
—
$
6,391
$
—
711
—
1,438
—
2,239
1,692
2,585
1,880
2,445
—
2,797
—
—
2,081
—
3,259
—
1,326
—
20
52
3,837
99
4,175
1,383
—
774
—
13,925
8,936
14,084
9,334
(150
)
(3,839
)
(150
)
(4,125
)
13,775
5,097
13,934
5,209
—
(164
)
—
(1,858
)
—
(990
)
—
(1,375
)
—
(62
)
—
(55
)
—
(1,216
)
—
(3,288
)
$
13,775
$
3,881
$
13,934
$
1,921
Table of Contents
2003
2002
2001
34,270
33,622
33,293
1
—
—
34,271
33,622
33,293
34,271
33,622
33,293
—
—
65
1,613
1,421
1,282
47
—
—
35,931
35,043
34,640
For the Years Ended December 31,
2003
2002
2001
37
155
306
—
787
806
$
42.60
$
29.95
$
29.29
$
—
$
31.59
$
31.59
$
39.35
$
29.31
$
25.20
Years Ending December 31,
Amount
$
5,707
4,784
4,095
3,565
3,355
19,607
$
41,113
Table of Contents
Table of Contents
(a)
Preferred Stock
(b)
Series A Junior Participating Preferred Stock
Table of Contents
Table of Contents
Table of Contents
Total
Exercisable
Weighted
Weighted
Number of
Average
Number of
Average
Shares
Exercise Price
Shares
Exercise Price
5,632
$
17.17
2,815
$
14.82
1,114
23.88
(927
)
13.86
(534
)
19.58
5,285
18.98
2,617
16.45
1,326
26.28
(905
)
13.06
(245
)
24.79
5,461
21.47
2,659
18.92
948
35.37
(1,885
)
18.37
(251
)
25.73
4,273
25.67
1,607
21.71
Table of Contents
Options Outstanding
Options Exercisable
Weighted
Weighted
Average
Weighted
Number
Average
Remaining
Number
Average
Exercise Price
of
Exercise
Contract
of
Exercise
Range
Options
Price
Life
Options
Price
$
13.69
$
22.50
1,036
$
18.15
4.62
769
$
17.90
22.69
25.20
1,395
24.02
6.87
562
23.98
26.63
34.23
969
27.27
7.80
274
27.59
34.27
46.60
873
35.45
9.16
2
37.55
For the Years Ended December 31,
2003
2002
2001
None
None
None
55
%
55
%
48
%
3.2
%
3.3
%
4.4
%
6.1
6.0
5.2
For the Years Ended December 31,
2003
2002
2001
None
None
None
40
%
40
%
48
%
1.0
%
1.2
%
2.2
%
0.5
0.5
0.5
For the Years Ended December 31,
2003
2002
2001
$
19.07
$
14.28
$
11.21
8.96
6.95
7.07
Table of Contents
Table of Contents
Table of Contents
For the Years Ended December 31,
Consolidated
CAG
Water
FDG
Other
Total
$
384,419
$
46,936
$
44,637
$
—
$
475,992
$
55,216
$
20,934
$
7,606
$
(3,369
)
$
80,387
—
—
—
2,867
2,867
55,216
20,934
7,606
(502
)
83,254
17,405
6,598
2,433
(158
)
26,278
—
—
114
—
114
$
37,811
$
14,336
$
5,287
$
(344
)
$
57,090
$
18,079
$
317
$
501
$
—
$
18,897
198,267
27,330
16,119
280,159
521,875
16,115
109
672
—
16,896
$
326,897
$
41,969
$
43,804
$
—
$
412,670
$
46,052
$
18,377
$
7,663
$
(6,277
)
$
65,815
—
—
—
2,955
2,955
46,052
18,377
7,663
(3,322
)
68,770
15,658
6,248
2,606
(1,131
)
23,381
$
30,394
$
12,129
$
5,057
$
(2,191
)
$
45,389
$
18,827
$
886
$
411
$
—
$
20,124
195,280
22,425
15,098
184,623
417,426
14,696
82
309
—
15,087
$
308,048
$
38,303
$
39,730
$
—
$
386,081
$
36,599
$
16,323
$
6,353
$
(2,723
)
$
56,552
—
—
—
2,229
2,229
36,599
16,323
6,353
(494
)
58,781
13,176
5,876
2,287
(178
)
21,161
$
23,423
$
10,447
$
4,066
$
(316
)
$
37,620
$
20,389
$
1,401
$
439
$
—
$
22,229
207,515
25,067
16,203
124,322
373,107
16,749
147
485
—
17,381
F-29
Revenue by principal geographic area was as follows
(in thousands)
:
For the Years Ended December 31,
2003
2002
2001
$
331,852
$
293,591
$
279,702
14,688
12,074
11,352
4,803
4,262
5,456
351,343
309,927
296,510
36,521
31,141
28,005
16,295
11,706
8,372
11,653
8,927
7,600
25,936
20,814
17,113
90,405
72,588
61,090
15,077
13,283
12,812
13,566
9,935
8,776
5,601
6,937
6,893
34,244
30,155
28,481
$
475,992
$
412,670
$
386,081
Net long-lived assets by principal geographic areas was as follows
(in
thousands)
:
December 31,
2003
2002
2001
$
77,176
$
80,465
$
80,036
22
135
161
77,198
80,600
80,197
19,266
17,618
16,660
54
10
66
84
36
52
1,753
881
1,252
547
481
297
21,704
19,026
18,327
594
680
841
6,517
5,231
4,483
977
75
575
8,088
5,986
5,899
$
106,990
$
105,612
$
104,423
F-30
NOTE 18 SUMMARY OF QUARTERLY DATA (UNAUDITED)
A summary of quarterly data follows
(in thousands, except per share data)
:
For the Quarters Ended
March 31,
June 30,
September 30,
December 31,
$
109,247
$
121,846
$
120,061
$
124,838
51,462
59,671
59,090
60,081
17,447
24,334
23,286
15,320
12,062
16,690
15,973
12,365
$
0.36
$
0.49
$
0.46
$
0.36
$
0.34
$
0.47
$
0.44
$
0.34
$
96,551
$
105,690
$
104,534
$
105,895
43,061
49,895
50,760
49,009
10,316
18,699
18,300
18,500
7,185
12,964
12,483
12,757
$
0.21
$
0.38
$
0.37
$
0.38
$
0.21
$
0.37
$
0.36
$
0.36
F-31
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
(in thousands)
Balance at
Charges to
Balance at
Beginning
Costs and
End
of Year
Expenses
Write-Offs
of Year
$
4,390
$
547
$
944
$
3,993
3,993
(906
)
672
2,415
2,415
114
579
1,950
1,904
2,248
3,850
302
302
1,891
1,151
1,042
1,042
135
960
217
F-32
Exhibit 10.7
Confidential Materials omitted and filed separately with the
AGREEMENT
THIS AGREEMENT is made effective as of the 16th day of October, 2003, between IDEXX Operations, Inc., a Delaware corporation whose principal place of business is at 6100 East Shelby Drive, Memphis, Tennessee 38141, U.S.A. (“ IDEXX ”) and Ortho-Clinical Diagnostics, Inc., a New York corporation with offices at 100 Indigo Creek Drive, Rochester, New York, U.S.A. (“ OCD ”).
WHEREAS, OCD has been a supplier of analyzers for human applications and dry slides, and IDEXX has been a supplier of analyzers for animal applications;
WHEREAS, OCD and IDEXX Laboratories, Inc. (“ IDEXX Parent ”), the parent company of IDEXX, entered into a supply agreement effective as of January 1, 1999 (the “ Prior US Agreement ”) with respect to the supply of VITROS slides in the United States and Asia for use on the VETTEST Analyzer (as defined below); and
WHEREAS, OCD and IDEXX Europe B.V. (“ IDEXX BV ”) entered into a supply agreement effective as of January 1, 1999 with respect to the supply of VITROS slides in Europe for use on the VETTEST Analyzer (the “ Prior Europe Agreement ”), and intend to amend and restate the Prior Europe Agreement shortly after the date hereof to make certain modifications thereto; and
WHEREAS, OCD, IDEXX Parent and IDEXX BV entered into that certain Operations Agreement effective as of January 1, 1999 (the “ Operations Agreement ”); and
WHEREAS, OCD, IDEXX Parent and IDEXX BV entered into that certain Amendment, Release and Settlement Agreement dated as of September 12, 2002 (the “ Settlement Agreement ”) for purposes of, among other things, amending the Prior US Agreement, the Prior Europe Agreement and the Operations Agreement and resolving certain disputes between the parties; and
WHEREAS, OCD and IDEXX desire to expand their relationship in order to create a New Analyzer (as defined below) for animal applications, which will expand the sales of OCD’s dry slides and IDEXX’s analyzers, and to make IDEXX products more competitive;
WHEREAS, OCD and IDEXX through this Agreement desire to combine certain of their respective skills and intellectual property and to invest significant capital to create the New Analyzer and related panel holder design, which is expected to provide a better product offering to customers;
WHEREAS, this Agreement will ensure IDEXX of a continuing supply of Dry Slides necessary for its continued sale of analyzers, including the New Analyzer .
WHEREAS, OCD and IDEXX now desire to enter into new arrangements for the supply and development of diagnostic slides and analyzers, the terms and conditions of which are documented herein;
NOW THEREFORE, the parties hereby agree as follows:
In this Agreement the following expressions shall have the meaning set opposite
them.
1.
DEFINITIONS
“Agreements”
This Agreement and the Europe Agreement.
“Analyzers”
The VETTEST Analyzer and the New Analzyer.
“Commencement Date”
October 16, 2003.
“Dry Slide”
A chemical composition, comprising a layered, coated dry film, specifically
formulated to analyze for a body constituent, which composition is immediately
hydrated by any undiluted bodily fluid, including without limitation a VITROS slide.
For avoidance of doubt, the term “Dry Slide” shall not include any assay based on
immunomagnetic particle technology or any assay for which the analyte is DNA or RNA.
“Effective Rebate Rate”
For any year, the weighted average percentage reduction in the purchase price of any
slides purchased in such year that IDEXX is entitled to receive pursuant to Section
7.03 hereunder. The calculation of the Effective Rebate Rate is illustrated in
Schedule 7
.
“Europe Agreement”
The Prior Europe Agreement, until such time as it is amended and restated as
contemplated by the preamble; from and after such time, the “Europe Agreement” shall
mean the Prior Europe Agreement as so amended and restated.
“Exclusivity Territory”
The United States of America and its possessions (including Puerto Rico), Canada,
Australia, New Zealand, Japan, India, South Korea and Taiwan.
2
“Existing Special [**] Slides”
VETTEST slides that have been [**], as of the date of this Agreement, pursuant to
Section 4 of the Operations Agreement.
“IDEXX BV”
IDEXX Europe B.V., a Netherlands corporation.
“New Analyzer”
A new chemistry analyzer that uses OCD Dry Slides for veterinary applications, as
contemplated by Article 3 of this Agreement, and any updates or modifications to such
analyzer.
“New Chemistry Slides”
As defined in Section 5.06.
“New Slide/Panel Design”
A new slide format for VETTEST slides to be used in conjunction with the New
Analyzer, as well as a panel holder for such slides, as contemplated by Article 3,
and any updates or modifications to such design.
“New Slides”
VETTEST slides that are formatted and packaged in accordance with the New Slide/Panel
Design, as contemplated by Article 3.
“New Special [**] Slides”
VETTEST slides that have been [**] pursuant to Section 7.04 of this Agreement.
“PANELS/PROFILES”
Packages of VETTEST slides for VETTEST Analyzers consisting of two or more sets of
slides of specified chemistries. The initial PANEL and the initial PROFILES shall
consist of the slides set forth on
Schedule 3
attached hereto, with any changes or
additional PANELS/PROFILES to be mutually agreed upon by the parties as specified in
Schedule 3
.
“Prime Rate”
For any day in any calendar month, the prime rate of interest as published in the
Wall Street Journal
on the last business day of the immediately preceding month.
“Proportionate Share”
The percentage obtained by dividing (i) the number of VETTEST slides purchased by
IDEXX in a given period,
by
(ii) the total number of VETTEST slides
3
purchased by IDEXX and its affiliates during such period.
“Special [**] Slides”
Existing Special [**] Slides and New Special [**] Slides.
“Term”
As defined in Section 18.01.
“Territory”
Worldwide, except the European Union, Africa, and the countries listed on
Schedule 10
attached hereto.
“VETTEST Analyzer”
The analyzer currently marketed as the VETTEST VT 8008 analyzer and any updates or
modifications to such analyzer.
“VETTEST slides”
Dry Slides currently manufactured by OCD, specially designed, bar coded, labeled,
and/or packaged for one or more of the Analyzers in accordance with the terms of this
Agreement and supplied by OCD in accordance with the terms and conditions of this
Agreement.
“VETTEST tips”
Metering tips sourced by OCD for use with the VETTEST Analyzer, specially packaged
and supplied to IDEXX in accordance with the terms of this Agreement.
“VITROS slides”
The Dry Slides currently manufactured by OCD for use in any current VITROS analyzer,
including without limitation the DT60.
All references to currency in this Agreement shall mean U.S. Dollars unless otherwise specifically indicated.
| 2. | EFFECTIVE DATE OF AGREEMENT | |
| 2.01 This Agreement shall become effective upon the Commencement Date. This Agreement shall apply solely within the Territory; except that Sections 3.04, 3.05 and 3.06 shall apply worldwide. | ||
| 3. | DEVELOPMENT OF NEW ANALYZER AND NEW SLIDE/PANEL DESIGN |
| 3.01 | IDEXX and its affiliates shall, at their expense, and with cooperation from OCD as set forth below, devote chemistry instrument development resources to the development and launch of the New Analyzer. IDEXX and its affiliates shall use |
4
| commercially reasonable efforts to achieve commercial launch of such analyzer within the United States within [**] years of the Commencement Date. IDEXX shall have control and management of New Analyzer development, and sole approval of New Analyzer specifications. | |||
| 3.02 | IDEXX and its affiliates shall, at their expense, design, develop and validate the New Slide/Panel Design, together with the injection molding tooling for the panel holder and associated label content and art work. IDEXX shall have control and management of New Slide/Panel Design development, and sole approval of New Slide/Panel Design specifications. | ||
| 3.03 | The parties recognize that the design, development and validation of the New Analyzer and the New Slide/Panel Design (the “ Development Program ”) will benefit from the cooperation of both parties as set forth in this Article 3. Accordingly, OCD agrees, until the third anniversary of the Commencement Date (the “ Development Period ”), to make technical personnel reasonably available from time to time upon the reasonable request of IDEXX and upon reasonable notice, (i) up to a maximum of 250 hours per calendar quarter, to provide consulting services with respect to development of the New Analyzer, including rendering advice, reviewing proposed instrument designs and making recommendations and (ii) up to a maximum of 250 hours per calendar quarter, to provide consulting services with respect to development of the New Slide/Panel Design, including rendering advice, reviewing proposed slide format and panel holder designs and making recommendations. In connection with such consulting services, OCD may, but shall not be obligated to, disclose materials or other information to IDEXX that OCD considers to be proprietary or confidential. IDEXX agrees that, except as otherwise expressly agreed by OCD in writing, (a) IDEXX shall not acquire any rights to such materials or information, other than as set forth in paragraphs 3.04 through 3.07 below and (b) such materials and information shall be subject to the non-disclosure provisions of Schedule 2 and shall not be used by IDEXX for any purpose for as long as they remain subject to those provisions. | ||
| 3.04 | Ownership of any inventions resulting from the activities of the parties during the Development Period and directly in connection with the Development Program shall vest in the party or parties which, by virtue of the United States patent law, is/are entitled to apply for and obtain patents for said invention. Such inventions the ownership of which (determined as aforesaid) vests (a) solely in IDEXX are hereinafter referred to as “ IDEXX Inventions ”, (b) solely in OCD are hereinafter referred to as “ OCD Inventions ” and (c) jointly in IDEXX and OCD are hereinafter referred to as “ Joint Inventions ”. | ||
| IDEXX shall be responsible for filing, prosecuting and maintaining patent applications and patents relating to Joint Inventions; provided that IDEXX will reasonably consult with OCD regarding any such applications; and provided |
5
| further that if IDEXX elects not to file, prosecute or maintain any such patent application or patent in any country, OCD will have the right, but not the obligation, at its expense, to file, prosecute and maintain such patent or patent application. All patent applications relating to Joint Inventions shall be drafted and prosecuted by an outside law firm mutually agreed upon by IDEXX and OCD. | |||
| Except as otherwise set forth in the immediately preceding paragraph, the parties agree to execute and do all things necessary to vest the title and interest in such property rights in the relevant party as set out above, at the expense of said relevant party, which shall pay the costs of the prosecution of all applications for intellectual property rights to which it becomes entitled under this Agreement. A party agreed to be not responsible for the preparation and filing of patent applications on Joint Inventions shall have the right to review such applications a reasonable time prior to filing. | |||
| 3.05 | As used herein, “ Background Technology ” shall mean all technical information, know-how, processes, techniques, discoveries and inventions (patented, patentable or otherwise) owned by OCD that are not OCD Inventions or Joint Inventions, which OCD in its discretion provides IDEXX to facilitate IDEXX’s development of the New Analyzer or New Slide/Panel Design. To the extent the New Analyzer or New Slide/Panel Design include any Background Technology provided by OCD, OCD hereby grants IDEXX and its affiliates a non-exclusive, worldwide, perpetual, royalty-free, fully paid license, with the right to assign in connection with any assignment of this Agreement, but without the right to sublicense, to make, have made, use, sell, offer to sell and import New Analyzers and the New Slide/Panel Design using Background Technology in the field of Dry Slide diagnostic testing of non-human animals. The licenses granted by this Section 3.05 are subject to any rights of third parties in or to such intellectual property, and are limited to intellectual property that relates to equipment, instrumentation or packaging, rather than slides or reagents. Subject only to the licenses granted by this Section 3.05, OCD shall, retain all right, title and interest in and to the Background Technology, notwithstanding that any such technology is provided to IDEXX or included in the New Analyzer or New Slide/Panel Design. For avoidance of doubt, IDEXX and its affiliates shall have no right to use Background Technology other than in connection with the New Analyzer or the New Slide/Panel Design. | ||
| 3.06 | IDEXX hereby grants OCD and its affiliates a non-exclusive, worldwide, perpetual, royalty-free, fully paid license, with the right to assign in connection with any assignment of this Agreement, but without the right to sublicense, to make, have made, use, sell, offer to sell and import products and services using IDEXX Inventions, in the field of human Dry Slide diagnostic testing. The licenses granted to OCD in this paragraph are subject to any rights of third parties in or to such intellectual property, and are limited to intellectual property that relates to equipment, instrumentation or packaging, rather than slides or reagents. |
6
| For the avoidance of doubt, the licenses granted to OCD in this paragraph shall include the right for OCD to use IDEXX Inventions on any non-human animal species for the development of a product for marketing into the field of human Dry Slide diagnostic testing. | |||
| OCD hereby grants IDEXX and its affiliates a non-exclusive, worldwide, perpetual, royalty-free, fully paid license, with the right to assign in connection with any assignment of this Agreement, but without the right to sublicense, to make, have made, use, sell, offer to sell and import New Analyzers and the New Slide/Panel Design using OCD Inventions, in the field of Dry Slide diagnostic testing of non-human animals. The licenses granted to IDEXX in this paragraph are subject to any rights of third parties in or to such intellectual property, and are limited to intellectual property that relates to equipment, instrumentation or packaging, rather than slides or reagents. | |||
| 3.07 | OCD hereby agrees that neither it nor its affiliates shall, prior to December 31, 2018, grant any third party the license to make, have made, use, sell, offer to sell and import products and services using Joint Inventions in the field of diagnostic testing of non-human animals; provided, the foregoing restrictions shall not prohibit the assignment by OCD of its interest in such Joint Inventions in connection with any assignment of this Agreement, nor, to the extent that any of the following actions may be deemed to be a license, shall they prohibit OCD from collaborating with any third party in the development of products using Joint Inventions in such field, from having any products using Joint Inventions made by any third party for sale in such field, or from selling any products using Joint Inventions into such field through any third party distributor or sales agent. | ||
| IDEXX hereby agrees that neither it nor its affiliates shall, prior to December 31, 2018, grant any third party the license to make, have made, use, sell, offer to sell and import products and services using Joint Inventions in field of human diagnostic testing; provided, the foregoing restrictions shall not prohibit the assignment by IDEXX of its interest in such Joint Inventions in connection with any assignment of this Agreement, nor, to the extent that any of the following actions may be deemed to be a license, shall they prohibit IDEXX from collaborating with any third party in the development of products using Joint Inventions in such field, from having any products using Joint Inventions made by any third party for sale in such field, or from selling any products using Joint Inventions into such field through any third party distributor or sales agent. | |||
| The provisions of this Section 3.07 do not diminish any of the parties’ respective obligations under Article 9 of this Agreement. | |||
| 3.08 | (a) IDEXX shall develop detailed specifications for the New Slide/Panel Design, and the parties shall meet promptly thereafter to review such specifications (the “ Design Review ”). In connection with the Design Review, |
7
| IDEXX shall also provide OCD with a good faith forecast of the number of New Slides that IDEXX and IDEXX BV anticipate ordering during each of the first five years following the date of the first commercial sale of the New Analyzer (the “ Design Forecast ”). In addition, IDEXX shall provide OCD with its good faith estimate of its and IDEXX BV’s annual requirements for New Slides during the subsequent three years. Within 60 days after the Design Review, or such other period as the parties may agree, OCD shall provide IDEXX a detailed summary showing OCD’s good faith estimate of (1) the cost to install a production line (including without limitation design costs, engineering costs, equipment costs and validation costs) for the New Slide/Panel Design (“ Automation Costs ”) and (2) the ongoing expenses per New Slide associated with the formatting and packaging of New Slides that are in excess of OCD’s current expenses for manufacturing and packaging the current VITROS-formatted slides in 50-count cartridges (“ Incremental Manufacturing Costs ”). |
| (b) Automation Costs shall exclude the cost of any injection molding tooling associated with the New Slide/Panel Design, for which IDEXX shall be solely responsible. The parties shall mutually agree on the selection of a third party vendor for such tooling. IDEXX shall own such tooling. After installation, OCD shall be solely responsible for the maintenance and repair of any such tooling. | |||
| (c) Incremental Manufacturing Costs shall be based on the average annual volumes of New Slides set forth in the Design Forecast during the first five years following the date of the first commercial sale of the New Analyzer, and will include the cost of direct labor and materials (including without limitation plastic components and all packaging materials), facility allocation and reasonable overhead, and will exclude depreciation of any Automation Costs. | |||
| (d) If OCD’s estimated Automation Costs are $[**] or less, and OCD’s estimated Incremental Manufacturing Costs are $[**] or less per New Slide, then OCD shall manufacture and package New Slides in accordance with IDEXX’s specifications for the New Slide/Panel Design and supply them to IDEXX for the Term as provided in this Agreement. In this case, OCD shall be solely responsible for all Automation Costs and all costs of manufacturing such slides, including Incremental Manufacturing Costs, regardless of whether OCD’s actual costs are different than the estimates provided to IDEXX. | |||
| (e) If OCD’s estimated Automation Costs are greater than $[**], or OCD’s estimated Incremental Manufacturing Costs are greater than $[**] per New Slide, then OCD may elect to be solely responsible for all such costs, in which case OCD shall manufacture and package New Slides in accordance with IDEXX’s specifications for the New Slide/Panel Design and supply them to IDEXX for the Term as provided in this Agreement. In this case, OCD shall be solely responsible for all Automation Costs and all costs of manufacturing such slides, |
8
| including Incremental Manufacturing Costs, regardless of whether OCD’s actual costs are different than the estimates provided to IDEXX. | |||
| (f) If OCD does not elect to be solely responsible for all costs as provided in paragraph (e) of this Section 3.08, then IDEXX shall have the option of either (1) changing the New Slide/Panel Design to reduce OCD’s costs, such that paragraph (d) of this Section 3.08 applies, or (2) assuming the entire amount (or such lesser portion as the parties mutually agree) of OCD’s estimated Automation Costs that exceeds $[**] and assuming the entire amount (or such lesser portion as the parties mutually agree) of OCD’s estimated Incremental Manufacturing Costs that exceeds $[**] per New Slide, or (3) performing the formatting and packaging of New Slides independently, as more particularly described below. | |||
| (g) If IDEXX elects to assume a portion of OCD’s Automation Costs or Incremental Manufacturing Costs as set forth in clause (2) of paragraph (f) of this Section 3.08, then (1) in the event actual Automation Costs exceed the amount contemplated by the parties under clause (2) of paragraph (f) of this Section 3.08, IDEXX and OCD shall [**] of such excess Automation Costs and (2) OCD shall be solely responsible for all costs of manufacturing and packaging New Slides, including Incremental Manufacturing Costs, that are not assumed by IDEXX, regardless of whether OCD’s actual costs are different than it had estimated when the parties agreed to the portion to be assumed by IDEXX, and OCD shall supply such slides to IDEXX for the Term as provided in this Agreement. | |||
| (h) If IDEXX elects to perform the formatting and packaging of the New Slides independently of OCD, then (1) in lieu of New Slides, OCD shall supply IDEXX with VITROS slides in the format currently manufactured for the VITROS mainframe analyzers and/or the VETTEST Analyzer (i.e., VITROS slides packaged in 50-count cartridges, before further formatting and packaging for VETTEST Analyzer requirements), as applicable for New Slides, for the Term as provided in this Agreement, and all references in this Agreement to New Slides or to VETTEST slides, to the extent referring to OCD’s obligation to supply New Slides, shall mean such VITROS slides packaged in 50-count cartridges and (2) solely with respect to New Slides, the prices for Tiers 2 and 3 in the table set forth in Section 7.02 shall be reduced by $[**] per New Slide. | |||
| (i) The parties acknowledge that the specifications for the New Slide/Panel Design may change after the initial Design Review in accordance with IDEXX’s requirements. If OCD has elected to perform the formatting and packaging of the New Slides, then all incremental costs resulting from such change in specifications, to the extent that they cause Automation Costs to exceed $[**] or Incremental Manufacturing Costs to exceed $[**] per New Slide, shall be borne by the parties as they may agree. If the parties cannot so agree, then IDEXX may make the election provided for in paragraph (h) of this Section 3.08, in which case IDEXX shall reimburse OCD for OCD’s Automation Costs incurred and take |
9
| ownership of any capital equipment and related design materials funded as Automation Costs and developed in connection with OCD’s new production line for the New Slide/Panel Design to the date of IDEXX’s election, and OCD shall cooperate with IDEXX in the transfer of such equipment and materials to IDEXX. If IDEXX has elected to perform the formatting and packaging of the New Slides independently of OCD, and if such change in specifications could reasonably result in a significant reduction in Automation Costs or Incremental Manufacturing Costs, then IDEXX shall notify OCD of such fact and OCD shall have the option to request that the parties conduct a further Design Review in accordance with paragraph (a) of this Section 3.08, and OCD shall be permitted to re-estimate its Automation Costs and Incremental Manufacturing Costs, to require that the parties conduct the cost review, as otherwise provided in this Section 3.08, and to make the election in paragraph 3.08(e). | |||
| (j) If IDEXX and IDEXX BV shall not have attained [**]% of the Design Forecast during the first five years following the date of the first commercial sale of the New Analyzer, then IDEXX shall reimburse OCD for an amount equal to the product of (a) the Automation Costs borne by OCD, times (b) a fraction, the numerator of which is the number of slides by which IDEXX’s and IDEXX BV’s actual purchases of New Slides falls short of the Design Forecast and the denominator of which is the Design Forecast; provided that, for avoidance of doubt, there shall be no change in the price of New Slides as a result of the failure to attain such percentage of the Design Forecast. | |||
| (k) If OCD elects to format and package New Slides, and if in the future the through-put capacity of such packaging line is insufficient to meet IDEXX’s and IDEXX BV’s forecasted demand, any additional capital investment or other costs required to meet such demand (other than for injection molding tooling), whether by increasing the through-put capacity of the packaging line or adding a new packaging line, shall be borne by the parties in the same relative proportions as all previous Automation Costs; and IDEXX shall bear the costs for required injection molding tooling. | |||
| (l) Notwithstanding anything in this Section 3.08 to the contrary, if the Design Forecast indicates that IDEXX and IDEXX BV expect to purchase fewer than [**] New Slides hereunder during the first five years following the date of first commercial sale of the New Analyzer, then OCD may in its sole discretion elect to be released from any obligation to format and package the New Slides, in which event IDEXX’s sole options hereunder shall be either (1) to reduce OCD’s costs to a level that is acceptable to OCD in light of the Design Forecast, or (2) to perform the formatting and packaging of New Slides independently, as more particularly described in paragraph 3.08(h) above. |
| 3.09 | IDEXX acknowledges that it has not relied upon any guarantee or assurance from OCD, express or implied, regarding the technical feasibility of the New Analyzer |
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| or the New Slide/Panel Design in deciding to engage in the development of the New Analyzer and New Slide/Panel Design, and that OCD shall have no liability with respect to IDEXX’s termination of any of its other product development activities. |
| 4. | AGREEMENT TO SUPPLY |
| 4.01 | Subject to the terms and conditions of this Agreement, OCD undertakes to manufacture for IDEXX and to supply to IDEXX VETTEST slides, VETTEST tips and Vetrol controls. OCD shall supply VETTEST slides in compliance with the VETTEST Slide Quality Assurance Procedures set out in Schedule 1 . All slides supplied to IDEXX hereunder are supplied solely for sale within the Territory; provided that IDEXX may make limited sales to IDEXX BV solely for purposes of adjusting inventory levels according to unanticipated changes in regional demand. For the avoidance of doubt, nothing in this Agreement shall obligate OCD, with respect to any particular chemistry, to furnish IDEXX with slides for such chemistry in any slit format that OCD does not currently manufacture for such chemistry, or that would otherwise be uneconomical for OCD to supply to IDEXX (other than the slit formats for such chemistry that OCD then sells or has agreed in writing to sell to IDEXX). | ||
| 4.02 | (a) Notwithstanding any other provision of this Agreement, if after [**] the annual volume of VETTEST slides purchased by IDEXX and IDEXX BV is less than [**] slides, then OCD may in its sole discretion elect to be released from any obligation to format and package the New Slides and/or package other VETTEST slides, in which event IDEXX’s sole options hereunder shall be either (x) to accept an increase in slide prices for New Slides and/or other VETTEST slides that is adequate to compensate OCD for any increase in its costs due to such reduction in volume, or (y) with respect to slides for which IDEXX does not accept a price increase under the preceding clause (x), to perform the formatting and packaging of New Slides and/or the packaging of other VETTEST slides, as applicable, independently of OCD. |
| (b) If IDEXX elects to perform the formatting and packaging of New Slides, then (1) in lieu of New Slides OCD shall supply IDEXX with VITROS slides in the format currently manufactured for the VITROS mainframe analyzers and/or the VETTEST Analyzer (i.e., VITROS slides packaged in 50-count cartridges, before further formatting and packaging for VETTEST Analyzer requirements), as applicable for New Slides, for the Term as provided in this Agreement, and all references in this Agreement to New Slides or to VETTEST slides, to the extent referring to OCD’s obligation to supply New Slides, shall mean such VITROS slides packaged in 50-count cartridges, (2) the prices for Tiers 2 and 3 in the table set forth in Section 7.02 shall be reduced by $[**] per New Slide, (3) IDEXX shall take ownership of any capital equipment and related design materials funded as Automation Costs and developed in connection with OCD’s new production |
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| line for the New Slide/Panel Design, and OCD shall cooperate with IDEXX in the transfer of such equipment and materials to IDEXX and (4) IDEXX shall reimburse OCD for the book value of such equipment. | |||
| (c) If IDEXX elects to perform the packaging of VETTEST slides other than New Slides, then (1) in lieu of such other VETTEST slides OCD shall supply IDEXX with VITROS slides in the format currently manufactured for the VETTEST Analyzer (i.e., VITROS slides packaged in 50-count cartridges, before further formatting and packaging for VETTEST Analyzer requirements) for the Term as provided in this Agreement, and all references in this Agreement to VETTEST slides, to the extent referring to OCD’s obligation to supply such slides (other than New Slides), shall mean such VITROS slides packaged in 50-count cartridges, (2) the prices for Tiers 1, 2 and 3 in the table set forth in Section 7.02 shall be reduced by $[**] per slide for VETTEST slides (other than New Slides), (3) IDEXX shall take ownership of OCD’s packaging lines for VETTEST slides (other than New Slides), except equipment which OCD requires for the packaging of slides for the VITROS DT60 (or next generation OCD analyzer), but in any event including the VETTEST “panel assembly machine” (PAM) line which is used currently to package PANELS/PROFILES, and OCD shall cooperate with IDEXX in the transfer of such packaging line(s) to IDEXX and (4) IDEXX shall reimburse OCD for the book value of such transferred equipment. | |||
| (d) In either case if IDEXX elects to perform the formatting and packaging of New Slides and/or the packaging of other VETTEST slides independently, the parties shall cooperate to determine an appropriate timetable for the transfer of responsibilities to IDEXX, such that the supply of slides to IDEXX shall continue without interruption. | |||
| (e) For the avoidance of doubt, nothing in this Agreement shall obligate OCD to transfer to IDEXX any capital equipment used by OCD in the manufacture of VITROS slides. |
| 5. | FORECASTS, COMMITMENTS AND ORDERS |
| 5.01 | Attached hereto as Schedule 4 are aggregate Purchase Commitments by IDEXX and IDEXX BV for VETTEST slides for the VETTEST Analyzer for calendar years 2003 through and including 2010. The Purchase Commitments constitute the aggregate anticipated minimum aggregate purchase quantities by IDEXX and IDEXX BV for single chemistry VETTEST slides and PANELS/PROFILES slides in the indicated calendar years. | ||
| Existing Special [**] Slides, New Special [**] Slides and New Chemistry Slides shall be excluded from the determination of IDEXX’s and IDEXX BV’s slide purchases for purposes of achieving their aggregate Purchase Commitments under Section 5.01 of this Agreement or the Europe Agreement, as the case may be. |
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| Failure by IDEXX and IDEXX BV to purchase, in the aggregate, at least the indicated Purchase Commitment quantities of each type of slides in any year may subject IDEXX to the requirement to make a payment to OCD as set forth in Section 5.02 below, but such failure shall in no event otherwise be deemed to be a breach of this Agreement. | |||
| 5.02 | If IDEXX and IDEXX BV fail to purchase in the aggregate the quantities of slides for the VETTEST Analyzer set forth as Purchase Commitments on Schedule 4 in a particular calendar year, unless there has been a Material Adverse Change (as defined in the following paragraph), IDEXX shall pay, or shall cause IDEXX BV to pay, to OCD within 30 days after the end of such calendar year [**]% of the product of (i) the number of each type of slides (single or PANELS/PROFILES) by which IDEXX and IDEXX BV have in the aggregate fallen short of the Purchase Commitment and (ii) the lowest per-slide price for the applicable type of slides under either of the Agreements. | ||
| For the purposes of this Section 5.02, “ Material Adverse Changes ” shall mean material changes in the veterinary clinical chemistry markets which result from (a) the commercial introduction into the veterinary market, other than by IDEXX or its affiliates, of a technology not previously available in the veterinary clinical chemistry market, (b) the eradication of one or more diseases, or the development of new disease therapies, treatments or diagnostics, which significantly reduces demand for veterinary clinical chemistry testing or (c) the inability or unwillingness of OCD to supply VETTEST or VITROS slides in accordance with IDEXX’s Annual Purchase Forecasts pursuant to Section 5.04 below. Whether a Material Adverse Change has occurred will be determined by reference to the effect of a change in the veterinary clinical chemistry market on IDEXX and IDEXX BV taken as a whole, and not on either individually. | |||
| The parties shall discuss in good faith any assertion by IDEXX or IDEXX BV that a Material Adverse Change has occurred or is continuing. If the parties agree that a Material Adverse Change has occurred or is continuing, they shall negotiate in good faith with respect to appropriate reductions in Purchase Commitments, VETTEST slide prices (including single and PANELS/PROFILES slides) and/or amounts which would otherwise be payable pursuant to the first sentence of this Section 5.02 to appropriately allocate the effects of such Material Adverse Change on the parties. | |||
| 5.03 | Order and delivery of VETTEST slides (including PANELS/PROFILES) shall be made in multiples of 100 boxes. Unless otherwise agreed between the parties in any particular case, IDEXX shall place orders for slides four times per calendar year, for delivery in each calendar quarter of the year. Each order shall specify a business day delivery date for each delivery, which shall be not less than three months after the order date. Unless otherwise agreed between the parties in any |
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| particular case the number of deliveries shall be limited to four per year. IDEXX shall order quantities for delivery in any quarter in accordance with its good faith estimates of actual demand, with allowance for reasonable inventory management requirements and consistent with IDEXX’s stated desire to minimize its inventory levels. | |||
| Order and delivery of the VETTEST tips shall be made in multiples of 10,000 tips (20 cartons each containing 500 tips). Unless otherwise agreed between the parties in any particular case, the number of orders and deliveries of the VETTEST tips and Vetrols shall be limited to two in each year. OCD shall deliver the VETTEST tips and Vetrols in the ordered quantities in each year. | |||
| 5.04 | Not later than October 1 of each year, commencing October 1, 2003, IDEXX shall notify OCD of the aggregate forecasted requirements of IDEXX for the subsequent calendar year for each of the VETTEST slides (single slides and PANELS/PROFILES slides for the VETTEST Analyzer and New Slides) (each such notification, an “ Annual Purchase Forecast ”). The aggregate order quantities in the subsequent year for each of the VETTEST slides shall be within ±25% of such aggregate Annual Purchase Forecast unless the parties otherwise agree. As long as slide orders do not exceed the applicable Annual Purchase Forecast by more than 25%, OCD shall deliver the slides in accordance with the orders. The Annual Purchase Forecasts constitute non-binding forecasts for OCD’s planning purposes and shall also be the basis for determining estimated slide pricing pursuant to Section 7.02 below and the cash rebate pursuant to Section 7.03 below. | ||
| In addition to the Annual Purchase Forecast, IDEXX shall furnish to OCD updated quarterly forecasts of the aggregate requirements of IDEXX for VETTEST slides in the four succeeding calendar quarters. The parties understand that such forecasts are merely estimates to assist OCD in production planning and are not to be considered orders or binding in any way. | |||
| The parties shall further coordinate with one another to keep OCD apprised of IDEXX’s current and anticipated inventories of stock keeping units and relevant conditions in the veterinary market. The provisions of this paragraph shall terminate immediately upon delivery by OCD of a notice of termination of Section 9.04. | |||
| 5.05 | In the event that IDEXX in any year notifies OCD that it wishes to order quantities which exceed the quantities mentioned in Section 5.04 above by more than 25%, OCD will endeavor to supply the excess quantities and notify IDEXX of the extent of its ability to so supply. | ||
| 5.06 | It is understood and agreed that orders for the VETTEST slides shall include only those chemistries set forth in Schedule 5 hereto, as amended from time to time by |
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| agreement of the parties. IDEXX may at any time request that the additional chemistries listed on Schedule 8 hereof, in the form they are available at the Commencement Date to the human market on VITROS slides, be added as VETTEST slides to Schedule 5 (any VETTEST slides so added, containing such additional chemistries, are referred to herein as “ New Chemistry Slides ”). Prior to adding a New Chemistry Slide on Schedule 5 , the parties will negotiate in good faith to determine the initial price for such slides in accordance with the immediately following paragraph and shall set forth such price on Schedule 6 . IDEXX shall have the right, from time to time, to elect to remove any New Chemistry Slides from Schedule 5 , and Schedule 5 and Schedule 6 shall be updated to reflect such removal. IDEXX acknowledges that neither this nor any other provision of this Agreement shall obligate OCD to supply IDEXX with any slide or other product based on any technology that is not incorporated in the VITROS slides or VETTEST slides that OCD sells as of the date hereof. | |||
| Until [**], the price per slide for any New Chemistry Slides shall be the greater of $[**] and [**] (as determined by OCD in good faith and taking into account IDEXX’s and IDEXX BV’s good faith forecast for the quantity of the chemistry in question). For orders placed for delivery during each calendar year beginning with [**], if [**] of any New Chemistry Slide is determined to be greater than $[**] (as determined by OCD in good faith and taking into account IDEXX’s and IDEXX BV’s good faith forecast for the quantity of the chemistry in question), then the minimum price per slide for such New Chemistry Slides shall be [**]; provided, that so long as IDEXX and IDEXX BV order [**] or more of such slides in the aggregate in any calendar year, the minimum price per slide for such New Chemistry Slides shall not exceed $[**]. OCD shall have the right, from time to time and in good faith, to revise its determination of [**] of any New Chemistry Slide that is priced on Schedule 6 if IDEXX’s and IDEXX BV’s aggregate actual annual orders of such slide fall below [**], and Schedule 6 shall be updated to reflect such revised [**]. | |||
| In the event that a chemistry listed in Schedule 5 should become known by OCD to be unavailable at any future date during the Term, OCD will so notify IDEXX at the earliest practicable date, and the parties shall cooperate to determine an appropriate course of action. |
| 6. | DELIVERY |
| 6.01 | Following acknowledgement by OCD of each order placed by IDEXX and on or before the delivery due date, OCD shall complete delivery of the appropriate quantity of slides and tips within ± 10%. Deviations of delivery quantities from order quantities within the ± 10% range may be compensated by IDEXX in the first subsequent order placed, subject to Section 5. In the event of a price increase for one or more of the VETTEST slides, such compensating quantity of such slides shall be processed at the previous lower price. |
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| 6.02 | Order and delivery for all purchases hereunder shall be F.O.B. OCD’s facility in the U.S.A. | ||
| 6.03 | Unless otherwise advised in writing by OCD to IDEXX, OCD shall pack the VETTEST slides in accordance with OCD’s standard shipping configuration which is known to IDEXX and which at the Commencement Date contains approximately 60 cases per pallet, each case containing 100 boxes of slides. | ||
| 6.04 | The parties shall reasonably cooperate to identify and implement potential savings for both parties, consistent with the principles of lean manufacturing across the value chain, in all processes in their relationship, including without limitation improvements relating to slide manufacturing, packaging, ordering, build schedules, component purchasing, delivery schedules, quality testing and calibration processes, and product distribution processes (including direct shipment to IDEXX distributors and end-users), and including without limitation, identifying and implementing processes to reduce the number of slide lots supplied to IDEXX and to reduce IDEXX calibration time; provided, that neither party shall be obligated to implement a process change for which its net costs exceed its net benefits. |
| 7. | PRICES |
| 7.01 | Subject to the provisions of Sections 3.08 and 4.02 that contemplate OCD’s delivery of slides in 50-count cartridges if IDEXX elects to format and/or package slides independently, all references to pricing for VETTEST slides in this agreement refer to the completed and packaged product in form ready for delivery to an end-user. The initial prices for each of the VETTEST slides (including the PANELS/ PROFILES) shall be as set forth in Schedule 5 hereto. Such prices are broken out to provide prices for each individual product code for the following geographic regions (additional regions may be added, and changes within regions may be agreed to, from time to time in writing by the parties): |
| US—United States, Canada and all other countries not identified in this Section 7.01; |
| Asian—Brunei, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Viet Nam. |
| Australia/New Zealand |
| IDEXX agrees that OCD may audit IDEXX’s books and records to verify sales of VETTEST slides in any region. |
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| 7.02 | (a) The prices set forth in Schedule 5 shall remain in effect for orders placed through December 31, [**]. |
| (b) For orders placed for delivery during each calendar year beginning with [**], the price for each VETTEST slide listed on Schedule 5 (whether New Slides, single chemistry VETTEST slides for the VETTEST Analyzer, or per slide in PANELS/PROFILES, and, for avoidance of doubt, including New Chemistry Slides, subject to Section 5.06), within the respective volume tiers set forth below (aggregating for this purpose purchases by IDEXX and IDEXX BV) shall be as set forth for such volume tier; provided , that Existing Special [**] Slides and New Special [**] Slides shall not be priced by reference to the volume tiers but will be priced as otherwise set forth below. For purposes of determining purchase volumes, up to [**] Existing Special [**] Slides shall be included in the determination, and all other Existing Special [**] Slides and New Special [**] Slides shall be excluded from the determination. The stated price shall apply only to slides purchased within the corresponding volume tier, and only with respect to the quantities within such tier. |
| Annual Volume Tier | Price per Slide | |||
|
|
|
|||
|
Tier 1: Up to [**]
|
$ | [**] | ||
|
Tier 2: In excess of [**], but not exceeding [**]
|
$ | [**] | ||
|
Tier 3: In excess of [**]
|
$ | [**] | ||
| For all orders for Existing Special [**] Slides, the price per slide shall be as agreed between the parties pursuant to Section 4 of the Operations Agreement. | |||
| For all orders for New Special [**] Slides, the price per slide shall be as agreed between the parties pursuant to Section 7.04 of this Agreement. | |||
| Notwithstanding the foregoing, the price per slide for any New Chemistry Slide that is priced on Schedule 6 shall never be lower than the greater of (a) the minimum price as determined in accordance with Section 5.06 and identified on Schedule 6 as amended from time to time and (b) the price that would otherwise apply pursuant to the pricing tiers set forth above. | |||
| Promptly after IDEXX and IDEXX BV provide their aggregate Annual Purchase Forecast for a calendar year pursuant to Section 5.04 and Section 5.04 of the Europe Agreement, the parties shall calculate the weighted average price of slides included in such forecast (the “ First Estimated Blended Price ”). |
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| Upon determination of the First Estimated Blended Price applicable to a calendar year, for each order placed by IDEXX for delivery during the first three calendar quarters of such year, the amount invoiced and paid per slide listed on Schedule 5 shall be the First Estimated Blended Price . | |||
| Before IDEXX places its order for the fourth calendar quarter of the year, the parties shall review IDEXX’s and IDEXX BV’s respective fourth-quarter orders and re-calculate the weighted average price of slides based on IDEXX’s and IDEXX BV’s aggregate actual orders for the first three quarters and their orders for the fourth quarter (the “ Second Estimated Blended Price ”). If the Second Estimated Blended Price is different than the First Estimated Blended Price, the amount invoiced and paid per slide listed on Schedule 5 shall be the Second Estimated Blended Price. In addition, either party may calculate the resulting adjustment (up or down) for each slide delivered for the first three quarters to reflect the difference between the First Estimated Blended Price and the Second Estimated Blended Price, such that the amount paid by IDEXX for all slides delivered during the first three calendar quarters shall equal the Second Estimated Blended Price. If the adjustment is an upwards adjustment, then IDEXX shall pay OCD the aggregate amount of such adjustment, together with interest on such amount (calculated as set forth below), within 30 days of OCD’s request for such payment. If the adjustment is a downwards adjustment, then OCD shall pay IDEXX the aggregate amount of such adjustment, together with interest on such amount (calculated as set forth below), within 30 days of IDEXX’s request for such payment (or, at IDEXX’s option, apply such amount as a credit against IDEXX’s third or fourth quarter invoice). | |||
| Within 30 days after the end of the year (or 30 days after IDEXX and IDEXX BV complete payment in full for all slides purchased during the year, if later), the parties shall perform a final calculation of the weighted average price based on all slides ordered by IDEXX and IDEXX BV and delivered during the year (the “ Final Blended Price ”). If the Final Blended Price is different than the Second Estimated Blended Price, then IDEXX or OCD, as the case may be, shall make a final payment to the other, so that the final amount paid by IDEXX per slide for all slides ordered and delivered during the year shall equal the Final Blended Price. The party obligated to make such final payment shall do so within 30 days after the determination of the Final Blended Price. | |||
| Any adjustment payments made pursuant to either of the immediately preceding paragraphs, and any overdue payments by OCD or IDEXX of any amounts owed to the other pursuant to this Section 7.02, shall bear interest at a rate per annum equal to the Prime Rate. Such interest shall be calculated based on a 365-day year and the actual number of days elapsed since the due date for the applicable payment to which it relates. |
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| For avoidance of doubt, the blended price calculations of this Section 7.02 shall apply only to chemistries listed on Schedule 5 , and only after calendar year [**]. |
| (c) OCD may, at its option, increase all prices for slides ordered for delivery (i) on or after January 1, [**] by an amount not to exceed [**]% of the “PPI Increase” (as defined below), provided that OCD may not increase prices under this clause (i) unless the PPI Increase is greater than [**]%; and (ii) on or after January 1, [**]by an amount (x) as provided in the preceding clause (i) or (y) by an amount not to exceed [**]% of the PPI Increase, provided that OCD may not increase prices under this subclause (y) unless the PPI Increase is greater than [**]%. OCD may calculate the PPI Increase each year beginning in [**], and any resulting price increase shall be effective for orders placed for delivery during the following calendar year and thereafter, unless and until increased again in accordance with the procedures set forth in this paragraph. For purposes of this Agreement, the “ PPI Increase ” shall be calculated by dividing (x) the average monthly “PPI” level for the most recent 12-month period ending with and including June of the year in which the PPI Increase is being calculated (each such period, a “ Measurement Period ”), by (y) the average monthly PPI level for the 12-month period immediately preceding that described in clause (x) (the “ Baseline Period ” with respect to such Measurement Period), then subtracting 1 and converting the remaining fraction into a percentage. All calculations shall be based on the latest version of the PPI level published as of the date the calculation is made. For purposes of this Agreement, “ PPI ” means the United States Producer Price Index – [**] (not seasonally adjusted), current series identification [**], as published by the Bureau of Labor Statistics on its Web site (www.bls.gov/ppi), or if not available from such Web site, then as published by the Bureau of Labor Statistics in its monthly periodical “ Producer Price Indexes .” OCD shall give IDEXX written notice of any price increase pursuant to this paragraph 7.02(c) at least 120 days before the beginning of the calendar year for which a price increase is to take effect; otherwise, the prices shall remain unaffected by such increase for such year. | |||
| (d) With respect to slides ordered for delivery on or after January 1, [**], if OCD’s aggregate cost of [**] (as defined below) for the most recent Measurement Period has increased on a per VETTEST slide basis as compared with the applicable Baseline Period by an amount that exceeds the PPI Increase for such Measurement Period as applied to the [**] for such Baseline Period, on a per VETTEST slide basis, then OCD shall be permitted to increase the price of each slide sold to IDEXX by the amount of such excess. “[**]” means [**] that are [**]. Schedule 9 attached hereto contains an example, for illustration purposes only, of the calculations described in this paragraph 7.02(d) and in paragraph 7.02(e). | |||
| (e) With respect to slides ordered for delivery on or after January 1, [**], if IDEXX’s share of Special Event Costs (as defined below) for the most recent |
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| Measurement Period has increased on a per VETTEST slide basis as compared with the applicable Baseline Period by an amount that exceeds [**] above the PPI Increase for such Measurement Period as applied to IDEXX’s share of Special Event Costs for such Baseline Period, on a per VETTEST slide basis, then OCD shall be permitted to increase the price of each slide sold to IDEXX by the amount of such excess. “ Special Event Costs ” means the aggregate net amount of (i) [**] with respect to [**] on which [**], (ii) [**] in the [**], and (iii) [**] as a result of [**]. “ IDEXX’s share ” of any of the foregoing shall mean the [**] that is attributable to the [**]. | |||
| (f) OCD shall give IDEXX written notice of any price increase pursuant to paragraph 7.02(d) or 7.02(e) at least 120 days before the beginning of the calendar year for which a price increase is to take effect; otherwise, the prices shall remain unaffected by such increase for such year. Any price increase pursuant to paragraph 7.02(d) or 7.02(e) shall be effective for orders placed for delivery during the following calendar year and thereafter, unless and until (i) increased again in accordance with the procedures set forth in such paragraphs or (ii) there occurs a decrease in any of the costs upon which the price increase was based (or any such cost that was relevant in one measuring period is not relevant in subsequent periods, for example, certain validation or other one-time costs incurred for compliance purposes), in which event IDEXX’s price per slide shall be reduced to the extent of such decrease (or one-time cost). In addition, OCD agrees to consider in good faith any request by IDEXX to reimburse OCD pursuant to paragraph 7.02(e) by a process other than an increase in slide prices, such as a lump sum payment or series of payments. Furthermore, with respect to any one-time cost or other temporary cost lasting no more than one year, IDEXX shall have the right to make such reimbursement in equal periodic payments (no less frequently than quarterly) over a period that is no longer than one year. | |||
| (g) OCD shall give IDEXX reasonable detail as to its incremental [**] costs and incremental Special Event Costs on which it seeks to base a price increase pursuant to paragraph 7.02(d) or 7.02(e) or otherwise pass on to IDEXX pursuant to paragraph 7.02(f); provided, however, that IDEXX shall not have any right to obtain any details concerning OCD’s actual costs (other than such incremental cost differences used in such calculation). | |||
| (h) At any time after OCD’s aggregate annual sales volume of VITROS slides and VETTEST slides shall have declined more than [**]% from [**], the parties shall, at OCD’s request, discuss appropriate pricing of slides under this Agreement. Neither party shall be obligated to agree to any price change under this Section 7.02(h). | |||
| (i) OCD agrees that IDEXX shall have the right, no more than once per calendar year, to cause a nationally recognized independent accounting firm to conduct an audit, on reasonable advance notice and during normal business hours, |
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| of OCD’s books and records to the extent reasonably necessary to confirm OCD’s price increase calculations under this Section 7.02. Any report prepared by such independent accounting firm shall contain such firm’s conclusion concerning the validity of OCD’s price increase; provided, however, that such report shall not contain, and IDEXX shall not have any right to obtain, any details concerning OCD’s actual costs (other than incremental cost differences used in the calculation of OCD price increases). | |||
| (j) IDEXX agrees that OCD may audit IDEXX’s books and records relating to orders of VETTEST slides to confirm the pricing calculations under this Section 7.02. |
| 7.03 | The provisions of this Section 7.03 shall apply only to purchases of VETTEST slides for the VETTEST Analyzer during calendar years [**]. IDEXX shall be entitled to receive its Proportionate Share (based on sales during a calendar year) of a cash rebate in the amount set forth below if the total aggregate slide purchases by IDEXX and IDEXX BV, in calendar year [**], exceed the aggregate quantities set forth below: |
| Incremental Cash Rebate – | ||||||
| Annual Slide Purchases | % Off Purchase Price | |||||
| 0 |
[**]
|
[**] | % | |||
|
[**]
|
[**] | % | ||||
|
[**]
|
[**] | % | ||||
|
[**]
|
[**] | % | ||||
|
[**]
|
[**] | % | ||||
|
[**]
|
[**] | % | ||||
|
[**] and above
|
[**] | % | ||||
| The rebate amounts set forth above constitute a percentage reduction in the purchase price of any slides (including both single slides and PANELS/PROFILES slides) purchased above the corresponding quantity. The percentage amounts are incremental (as opposed to cumulative) and relate only to the quantities set forth opposite it. For example, if IDEXX and IDEXX BV were to purchase, in the aggregate, [**] slides in calendar year [**], they would not be entitled to a [**]% price reduction on all slides that they purchased in such year, rather, they would be entitled to receive (i) [**] purchase price reduction on the first [**] slides purchased, (ii) a [**]% purchase price reduction on all slides purchased over [**], up to and including [**], (iii) an [**]% purchase price reduction on all slides purchased over [**] up to and including [**], and (iv) a [**]% purchase price reduction on all slides purchased over [**] up to and including the [**] slides that they purchased. The foregoing notwithstanding, it is understood and agreed that if IDEXX and IDEXX BV do not, in the aggregate, achieve the aggregate Purchase Commitments set forth in Section 5 in any calendar year, then they shall not be entitled to receive a rebate for such year. |
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| In the beginning of calendar year [**], OCD shall calculate an estimated Effective Rebate Rate (the “ Estimated Rebate Rate ”) based on the lesser of (i) IDEXX’s and IDEXX BV’s aggregate Annual Purchase Forecast for such year and (ii) [**]% of the total aggregate number of slides that IDEXX and IDEXX BV together purchased in [**]. The Estimated Rebate Rate for calendar year [**] shall be such that the average VETTEST slide price for [**], after giving effect to the rebate, shall be $[**]. Not later than thirty (30) days after the end of each of the first three calendar quarters of [**] (or thirty days after IDEXX and IDEXX BV complete payment in full for slides purchased during such quarter, if later), OCD shall pay to IDEXX its Proportionate Share (based on purchases during the preceding quarter) of an amount equal to the aggregate estimated rebate payment that IDEXX and IDEXX BV would together be entitled to receive in such quarter (the “ Estimated Rebate Payment ”). The Estimated Rebate Payment for any such quarter shall be calculated by (i) multiplying the Estimated Rebate Rate in effect during such quarter by the total aggregate purchase price for the VETTEST slides purchased by IDEXX and IDEXX BV during such quarter and (ii) subtracting from such amount an amount equal to [**]% of the total calculated in clause (i) above. The foregoing notwithstanding, if, in calendar year [**], (i) IDEXX’s and IDEXX BV’s total aggregate slide orders for the immediately preceding calendar year were less than [**]% of their aggregate Annual Purchase Forecast for such preceding calendar year or (ii) OCD determines, in its reasonable discretion, at any time after the end of the second calendar quarter of such calendar year, or IDEXX indicates at any time, that IDEXX and IDEXX BV are reasonably unlikely to meet their aggregate Annual Purchase Forecast for such year, then OCD shall have the right to recalculate the Estimated Rebate Rate based on IDEXX’s and IDEXX BV’s aggregate Purchase Commitment for such year (such recalculated rate being hereinafter referred to as the “ New Estimated Rebate Rate ”). If OCD elects to recalculate the Estimated Rebate Rate pursuant to the immediately preceding sentence, (i) OCD shall notify IDEXX in writing which notice shall set forth the New Estimated Rebate Rate, (ii) OCD shall calculate all remaining quarterly Estimated Rebate Payments (which may include the Estimated Rebate Payment for the second calendar quarter) using the New Estimated Rebate Rate and (iii) all such Estimated Rebate Payments shall be made in accordance with this sub-clause 7.03, except that such Estimated Rebate Payments shall be less the amount by which the aggregate Estimated Rebate Payments received by IDEXX and IDEXX BV during the then current calendar year exceed the aggregate Estimated Rebate Payments they would have received during such calendar year if the New Estimated Rebate Rate were in effect from the first day of such calendar year. | |||
| Notwithstanding any provision in this Agreement to the contrary, OCD shall not be required to pay to IDEXX its Proportionate Share of any Estimated Rebate Payments in any calendar year if (A) any amounts payable to OCD from IDEXX pursuant to this Agreement are overdue, unless such amounts are being disputed |
22
| in good faith by IDEXX, or (B) OCD determines in its reasonable judgment that IDEXX and IDEXX BV are reasonably unlikely to meet their aggregate Purchase Commitments for such year. In the case of clause (B) above, OCD shall have the right to make such determination at any time after the end of the second calendar quarter of calendar year [**], as the case may be (or such earlier time as IDEXX or IDEXX BV indicates (through an Annual Purchase Forecast or otherwise) that their aggregate slide purchases are reasonably likely to be less than their aggregate Purchase Commitment for such year), provided that OCD has consulted with IDEXX and given IDEXX an opportunity (which opportunity shall be available for a period of not less than 5 business days nor more than 10 business days) to demonstrate its and IDEXX BV’s intent and ability to meet their aggregate Purchase Commitments for such year. For the avoidance of doubt, OCD’s obligation to make any Estimated Rebate Payments shall be suspended during the period referred to in the immediately preceding sentence and the days in such period shall not be counted when determining the date by which the next scheduled Estimated Rebate Payment is due and payable. If, after fulfilling the requirements set forth in this paragraph, OCD makes the determination described in clause (B) above, OCD (i) shall promptly notify IDEXX in writing of its determination and (ii) shall thereafter have the right to cease making Estimated Rebate Payments for the remainder of such calendar year. | |||
| Not later than thirty (30) business days after the end of the last calendar quarter of calendar year [**], as the case may be (or thirty days after IDEXX and IDEXX BV complete payment in full for slides purchased during such quarter, if later), OCD shall pay to IDEXX its Proportionate Share (based on purchases during such calendar year) of the amount by which (i) the Effective Rebate Rate multiplied by the total aggregate purchase price for VETTEST slides purchased by IDEXX and IDEXX BV during such calendar year exceeds (ii) the total aggregate amount of the Estimated Rebate Payments made by OCD to IDEXX and IDEXX BV during such calendar year. If the amount in clause (ii) above exceeds the amount in clause (i) above, OCD shall deliver to IDEXX a written notice of such fact (a “ Reimbursement Notice ”) and IDEXX shall pay to OCD, within thirty (30) days of receipt of such notice an amount in cash equal to its Proportionate Share of the amount of such excess. | |||
| Notwithstanding the foregoing, if IDEXX and IDEXX BV do not achieve their aggregate Purchase Commitment in calendar year [**], as the case may be, then IDEXX shall return all Estimated Rebate Payments received from OCD for such year no later than thirty (30) days after the end of such calendar year. | |||
| An illustrative representation of the foregoing rebate calculation methodology is attached hereto as Schedule 7 . | |||
| Notwithstanding any other provision of this Section 7.03, if any amounts payable to OCD from IDEXX pursuant to this Agreement are overdue, other than amounts |
23
| that are being disputed in good faith by IDEXX, then OCD shall be entitled to withhold such overdue amount (plus any accrued interest) from any rebate payments to which IDEXX may be entitled. Any overdue payments by OCD or IDEXX of any amounts owed to the other pursuant to this Section 7.03 shall bear interest at a rate per annum equal to the Prime Rate. Such interest shall be payable at the same time as the payment to which it relates and shall be calculated daily on the basis of a year of 365 days and the actual number of days elapsed. | |||
| OCD shall prepare a remittance advice to accompany each rebate payment (or Reimbursement Notice), which shall set forth the reporting period for which the payment is made (or demanded) and a summary sheet which shall detail OCD’s calculation of the rebate (or reimbursement). If IDEXX disagrees with the rebate or reimbursement calculation, IDEXX shall promptly notify OCD, and the parties, together with IDEXX BV if appropriate, shall review the calculations together in good faith to agree on any appropriate corrections or adjustments. | |||
| Any Special [**] Slides and any New Chemistry Slides shall be excluded from the determination of any rebate entitlement under Section 7.03 of this Agreement or the Europe Agreement, as the case may be, and the rebates described in Section 7.03 shall not apply to such slides. | |||
| 7.04 | If IDEXX provides OCD with specific documentation regarding [**] that would require IDEXX and IDEXX BV, collectively, to purchase, in any calendar year, a number of slides over and above their most recent aggregate Annual Purchase Forecast for such year, [**] for slides, [**] for slides [**] by this Agreement, OCD agrees, within two weeks of its receipt of all additional information that OCD may reasonably request regarding such [**], to inform IDEXX as to whether or not OCD [**] in respect of [**], the number of slides [**] for such slides, and any other related terms and conditions that OCD deems applicable. OCD shall consider such requests in good faith. OCD agrees that [**] IDEXX or IDEXX BV pursuant to [**], remain in effect with respect to [**] until such time as [**], as the case may be. |
| 8. | INVOICES AND PAYMENT |
| 8.01 | OCD shall invoice IDEXX in respect of each order for the VETTEST slides upon completion by OCD of the delivery of such order. Each order shall be billed by OCD under one invoice in US dollars and payment shall be made by IDEXX in US dollars not later than thirty (30) days following the date of invoice. |
| 9. | EXCLUSIVITY |
| 9.01 | OCD undertakes not to sell or otherwise supply, and to cause its affiliates not to sell or otherwise supply, any Dry Slides (whether or not such slides are finished or complete) bar-coded for use in any Analyzers to any person, firm or company |
24
| other than IDEXX or its affiliates. The provisions of this Section 9.01 shall survive the termination of this Agreement unless all of the following shall be true: (i) prior to such termination IDEXX (or its permitted assignees) and its affiliates shall have ceased to market the VETTEST slides, (ii) such cessation shall not have been a consequence of action by OCD, and (iii) OCD shall have complied with its obligations under this Agreement prior to such termination. | |||
| 9.02 | IDEXX undertakes not to market, and to cause its affiliates not to market, any Dry Slide for any chemistry identified on Schedule 5 , as amended from time to time, other than Dry Slides obtained by such person directly from OCD, to the extent that the desired chemistries are available from OCD; provided that, for purposes of adjusting inventory levels according to unanticipated changes in regional demand, IDEXX may purchase from IDEXX BV VETTEST slides that IDEXX BV obtained directly from OCD . | ||
| 9.03 | (a) In consideration of the mutual obligations and commitments of the parties, IDEXX shall not actively promote, and shall cause IDEXX Parent and the other persons listed on Schedule 11 not to actively promote, the sale within the Exclusivity Territory of any Dry Slide for any chemistry identified on Schedule 5 , as amended from time to time, or any instruments for use with any such Dry Slides, to any person (other than OCD and its affiliates) other than for use in the field of diagnostic testing of non-human animals. IDEXX may in its discretion terminate this provision at any time on [**] years’ prior written notice to OCD; provided that such notice may not be delivered until after June 30, [**]. |
| (b) Should OCD sell or cause to be sold for use in the field of diagnostic testing of non-human animals any product whose scope includes four or more of the chemistries identified on Schedule 5 , then IDEXX may, in its sole discretion, terminate the provisions of Section 9.03(a) immediately upon written notice to OCD. If IDEXX delivers such notice of termination of Section 9.03(a) under this Section 9.03(b), then OCD may in its discretion terminate the provisions of Section 9.04(a) of this Agreement immediately upon written notice to IDEXX. |
| 9.04 | (a) In consideration of the mutual obligations and commitments of the parties, OCD shall not actively promote, and shall cause the other persons (which for purposes of this clause may be divisions of OCD’s affiliates) listed on Schedule 12 not to actively promote, the sale within the Exclusivity Territory of any Dry Slide for any chemistry identified on Schedule 5 , as amended from time to time, or any instruments for use with any such Dry Slides, to any person (other than IDEXX and its affiliates) for use in the field of diagnostic testing of non-human animals; provided that this provision shall not apply to (i) any instruments weighing more than 200 pounds, or to any slides sold for use on such instruments, unless and until the parties have executed the distribution agreement contemplated by Section 10.04 hereof and (ii) Ortho-Clinical Diagnostics K.K. until January 1, 2004. OCD may in its discretion terminate this provision at any time on [**] |
25
| years’ prior written notice to IDEXX; provided that such notice may not be delivered until after June 30, [**]. The minimum purchase obligations of IDEXX shall terminate upon delivery of such a notice of termination. |
| (b) Should IDEXX fail to sell at least [**] units of the New Analyzer before December 31, [**], then OCD may in its discretion terminate the provisions of Section 9.04(a) immediately upon written notice to IDEXX delivered after December 31, [**]; provided, that if OCD does not deliver such notice before IDEXX sells [**] units of the New Analyzer, then the provisions of this Section 9.04(b) shall be of no further effect. If IDEXX can demonstrate that it has expended in excess of $[**] on the development of the New Analyzer from the Effective Date through December 31, [**], then IDEXX shall be given an additional [**] to sell the requisite [**] units of the New Analyzer. If OCD delivers such notice of termination of Section 9.04(a) under this Section 9.04(b), then IDEXX may in its discretion terminate the provisions of Section 9.03 of this Agreement immediately upon written notice to OCD. | |||
| (c) Should IDEXX sell or cause to be sold for use in the field of diagnostic testing of non-human animals any product, other than the New Analyzer, whose scope includes four or more of the chemistries identified on Schedule 5 , then OCD may, in its sole discretion, terminate the provisions of Section 9.04(a) immediately upon written notice to IDEXX. If OCD delivers such notice of termination of Section 9.04(a) under this Section 9.04(c), then IDEXX may in its discretion terminate the provisions of Section 9.03(a) of this Agreement immediately upon written notice to OCD. | |||
| (d) Notwithstanding any other provision of this Section 9.04, OCD and its affiliates shall continue to have the right to sell, directly or through distributors, VITROS analyzers and VITROS slides to all persons that are current VITROS end-user customers as of the Commencement Date, and to renew or extend the term of any contracts with such end-user customers or, solely for the purpose of sales to such end-user customers, with such distributors. |
| 9.05 | OCD shall use commercially reasonable efforts to (i) ensure that no OCD Dry Slides (including without limitation VITROS slides to which bar coding for use in any Analyzer has been added) are supplied, marketed, distributed or sold, by anyone other than IDEXX or its affiliates and their respective authorized distributors, for use in the Analyzers and (ii) promptly enjoin or otherwise terminate any such supplying, marketing, distribution or sale. Notwithstanding the foregoing, OCD’s obligation to use commercially reasonable efforts for the purposes of this Section 9.05 shall not include any obligation to reduce non-VETTEST VITROS slide prices. | ||
| OCD shall, where permitted by applicable law, use commercially reasonable efforts to include a provision in future supply and distributor contracts, that if a |
26
| customer opens a mainframe slide cartridge and otherwise repackages or modifies OCD slides for a use other than for which the slides are sold by OCD, such activity, if not ceased upon notice, shall give OCD the right to terminate such contract. OCD will use commercially reasonable efforts to exercise such right where the customer does not cease such activity after due notice and a reasonable opportunity to cure. OCD and IDEXX shall also reasonably cooperate in efforts to stop any such unauthorized slide repackaging or modification, where the modified or repackaged slides are supplied, marketed or sold for use in Analyzers. | |||
| In the event of a breach by OCD of this Section 9.05, OCD shall pay IDEXX, as IDEXX’s exclusive remedy for such breach, an amount equal to $[**] per slide sold for use in the Analyzers in breach of this Section 9.05. | |||
| 9.06 | Within ninety (90) days of the date that either party (for purposes of this Section 9.06, the “ Introducing Party ”) (i) builds or acquires a prototype of any veterinary clinical chemistry diagnostic instrument that is designed to analyze [**] or more of the chemistries identified on Schedule 5 (a “ Veterinary Diagnostic Product ”) or (ii) has expended $[**] on a formal development project, or the acquisition of technology, for a Veterinary Diagnostic Product, such Introducing Party shall provide to the other party written notice of such decision. In addition, IDEXX agrees to provide such a notice if IDEXX Parent or IDEXX BV takes any of the actions described in clauses (i) or (ii) of this paragraph. | ||
| 9.07 | During the Term of this Agreement, neither party shall directly recruit or otherwise directly solicit for employment (or instruct any third party so to do) any U.S. sales representative or first line sales manager of the other party ; provided that the foregoing shall not prohibit any advertisement or general solicitation or recruitment activity (or any hiring pursuant thereto) that is not specifically targeted at such persons. |
10.
MARKETING ARRANGEMENTS
10.01
IDEXX will be responsible for all marketing arrangements for
the Analyzers and the VETTEST slides. IDEXX may appoint any of
OCD’s medical/surgical dealers as distributors of or agents for the
Analyzers and the VETTEST slides but will not be obliged to do so.
10.02
IDEXX will be responsible for the establishment of dealer
performance criteria for all dealers including OCD’s
medical/surgical dealers (if any are appointed by IDEXX as
distributors of the Analyzers and the VETTEST slides).
10.03
IDEXX will keep OCD informed of and consult with OCD as to
marketing arrangements for the Analyzers and the VETTEST slides but
will not be obligated to OCD beyond the terms of this Agreement in
connection with such marketing arrangements.
27
10.04
OCD hereby grants to IDEXX the exclusive right to
distribute, solely in the veterinary market, under the terms set
forth in this Section 10.4, VITROS slides and VITROS analyzers that
run solely VITROS slides. The parties also agree to use good faith,
commercially reasonable efforts to negotiate a definitive
distribution agreement not later than December 31, 2003. OCD agrees
to refer any inquiries for VITROS analyzers in the veterinary market
to IDEXX, and shall not accept any orders for such analyzers in the
veterinary market. IDEXX agrees to refer any inquiries for VITROS
analyzers outside the veterinary market to OCD, and shall not accept
any orders for such analyzers outside the veterinary market.
Notwithstanding any other provision of this Section 10.04, OCD and
its affiliates shall continue to have the right to sell, directly or
through distributors, VITROS analyzers and VITROS slides to all
persons that are current VITROS end-user customers as of the
Commencement Date, and to renew or extend the term of any contracts
with such customers or, solely for the purpose of sales to such
customers, with such distributors.
The parties shall discuss terms for any sales opportunity in the
veterinary market in good faith, on a case-by-case basis. OCD
shall be responsible, at its sole expense, for providing warranty
and out-of-warranty service and support to any customers to whom
IDEXX sells a VITROS analyzer; provided that such analyzer is then
covered by a maintenance agreement between OCD and that customer.
IDEXX shall not modify or customize any VITROS product supplied
hereunder, or remove or alter any product labels or re-label any
products, packaging or related materials for VITROS product
supplied hereunder. OCD shall provide IDEXX, without charge, with
such training in the marketing and sale of VITROS products and with
such marketing and technical assistance and product information as
OCD may, in its discretion, consider necessary to assist with the
promotion and sale of the products; provided that OCD’s training
obligation shall be limited to training employees of IDEXX to
train other IDEXX employees and sales agents.
IDEXX shall defend and indemnify OCD from and against all damages,
liabilities, costs and expenses (including reasonable attorneys’
fees and costs) arising out of any claim resulting from (a) any
negligent act or omission or any willful misconduct by IDEXX in
connection with the VITROS products supplied by OCD under this
Section 10.04 or (b) any statement, representation or warranty made
by IDEXX or any of its agents with respect to a VITROS product that
is not contained in the labeling or package insert and is not
otherwise approved by OCD in writing or (c) any breach of IDEXX’s
covenants in the preceding paragraph. OCD shall defend and
indemnify IDEXX from and against all damages, liabilities, costs
and expenses (including reasonable attorneys’ fees and costs)
arising out of any claim (i) for injuries or death to persons or
animals or damage to or destruction of tangible property arising
out of the use of VITROS products sold under this Section 10.04
(whether claimed by reason of breach of warranty, negligence,
28
| product defect or other similar cause of action, regardless of the form in which any such claim is made) or (ii) that any VITROS product sold under this Section 10.04 infringes a patent, copyright, trademark or trade secret of a third party; provided that this clause (ii) shall not apply to any claim arising out of the use of any product in conjunction with products not supplied by OCD. The indemnity procedures set forth in Section 16.06 shall apply to this Section 10.04. | |||
| The provisions of this Section 10.04 shall apply only within the Exclusivity Territory. Furthermore, the provisions of this Section 10.04 granting IDEXX exclusivity or restricting sales or marketing by or on behalf of OCD shall, (a) automatically terminate immediately upon the termination of Section 9.04(a) and (b) not apply to (i) any instruments weighing more than 200 pounds, or to any slides sold for use on such instruments, unless and until the parties have executed the distribution agreement contemplated by this Section 10.04 and (ii) Ortho-Clinical Diagnostics K.K. until January 1, 2004. |
11.
SALES SUPPORT
11.01
IDEXX will be responsible for all necessary sales support
for the Analyzers and the VETTEST slides.
11.02
OCD’s sole obligation in respect of sale support shall be at
its own expense to assist IDEXX in resolving specific problems
resulting from the failure of VETTEST slides to conform to
specifications.
12.
TESTING
12.01
01 OCD shall disclose to IDEXX its quality assurance procedures
used in final evaluation of the VETTEST slides and full particulars
thereof as set out in the VETTEST Slide Quality Assurance Procedures
forming
Schedule 1
to this Agreement. OCD shall operate such
quality assurance procedures in accordance with
Schedule 1
.
12.02
Upon prior written notice from IDEXX, OCD shall grant
authorized representatives of IDEXX access to that part of OCD
production facilities which conducts final evaluation of the VETTEST
slides for the purpose of enabling such representatives to monitor
the application by OCD of the VETTEST Slide Quality Assurance
Procedures set out in
Schedule 1
. Such access shall be granted by
OCD to IDEXX and IDEXX BV no more than twice in any twelve-month
period. With respect to VETTEST slides for use in the New Analyzer,
IDEXX shall be permitted to monitor those stages of the production
process that are unique to VETTEST slides for the New Analyzer, but
with respect to VETTEST slides for the VETTEST Analyzer, such access
shall be limited to OCD’s final evaluation facilities. All
information obtained as a result of the audits contemplated by this
Section 12.02 shall be subject to the provisions of
Schedule 2
.
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13.
BAR CODING AND PACKAGING
13.01
The VETTEST slides shall be printed by OCD with special bar
coding for use in Analyzers.
13.02
OCD shall package the VETTEST slides and tips for the
VETTEST Analyzer in the physical manner as used for the VITROS
slides and tips at the time of packaging of such VETTEST slides and
tips. In the event of a change in VITROS slide or tip packaging
which has an impact on such VETTEST slide or tip packaging, OCD
shall notify IDEXX as early as practicable of the relevant
particulars of such change.
13.03
Except as authorized by Section 14.01 below, the label
content and art work associated with VETTEST slides and package
materials (including without limitation package materials for the
New Slides) shall not include any trademarks, trade names, or trade
dress of OCD. IDEXX shall furnish such label content and art work
to OCD on a timely basis, and such label content and art work shall
not be changed at any time during the Term without the prior
agreement of the parties.
14.
TRADE MARKS AND TRADE NAMES
14.01
01 OCD expressly authorizes IDEXX to use the phrase
“manufactured by Ortho-Clinical Diagnostics, Inc. for IDEXX (IDEXX
ADDRESS)” on package materials for VETTEST slides (including without
limitation package materials for the New Slides). No other uses of
OCD’s trademarks, trade names or trade dress are authorized by this
Agreement.
14.02
IDEXX shall neither acquire, nor claim any right, title or
interest in or to any of OCD’s trade marks or trade names by virtue
of this Agreement or through advertising and sale of the Analyzers
or the VETTEST slides or otherwise.
15.
PATENT INDEMNITIES
15.01
OCD shall indemnify and hold IDEXX harmless for all loss,
damage, cost and expense whatsoever, including legal fees, patent
attorney’s fees and court costs that IDEXX may incur or become
liable for as a result of any action, suit or claim alleging
infringement of any patent held by a third party arising from the
use and/or sale of the VETTEST slides or tips to the extent that
such action, suit, or claim relates in a material way to the
specification for the VITROS slides or tips. If as a result of any
judgment or settlement it is determined that a claim or claims of a
third party patent is infringed by the use and/or sale of the
VETTEST slides or tips as aforesaid and IDEXX is required to make
any payments to any third party as a result thereof, IDEXX may
off-set all such payments against any present and/or future payments
to be made to OCD hereunder.
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15.02
IDEXX shall indemnify and hold OCD harmless for all loss,
damage, cost and expense whatsoever, including legal fees, patent
attorney’s fees and court costs that OCD may incur or become liable
for as a result of any action, suit or claim alleging infringement
of any patent held by a third party arising from (a) the
manufacture, use or sale of the VETTEST slides or tips to the extent
that the VETTEST slides or tips differ from the VITROS slides or
tips, (b) the manufacture, use or sale of the New Slide/Panel
Design, or (c) the manufacture, use or sale of any Analyzer.
15.03
All claims for indemnity under this Article 15 shall be
subject to the rights, obligations and procedures set forth in
Section 16.06 below.
16.
WARRANTY, LIABILITY AND INDEMNIFICATION
16.01
OCD hereby warrants that:
(a)
the VETTEST slides delivered to IDEXX shall be in
compliance with
Schedule 1
, and
(b)
OCD shall pack and ship products under this
Agreement in a manner consistent with OCD’s usual practices,
which shall be sufficient to protect the products from damage
during normal shipping and handling.
16.02
In the event of a breach on the part of OCD of Section 16.01
above, OCD’s liability shall be limited to the replacement of the
VETTEST slides or tips found to be defective, including shipping
costs for return of defective slides or tips and delivery of
replacement slides or tips.
16.03
OCD’s liability as stated in Section 16.02 shall be subject
to the following conditions:
| (a) | IDEXX shall notify OCD promptly of any noncompliance contrary to Section 16.01(a) or damage contrary to Section 16.01(b). | ||
| (b) | IDEXX and its transferees shall not alter or modify the VETTEST slides or packaging of the VETTEST slides or tips without prior approval of OCD. | ||
| 16.04 | Except as provided in this Section 16 there are no other warranties, express or implied, including warranties for fitness for any particular use or of merchantability. | ||
| 16.05 | Subject to Section 15, IDEXX shall indemnify and hold harmless OCD from and against any claim, loss, damage, or expense (including attorney’s fees) with |
31
17.
SECRECY
respect to any physical injury to persons, animals or property
arising out of or in connection with IDEXX’s use or sale of any
Analyzer or the VETTEST slides, and any claim of infringement of
any trademark (except OCD’s own trademark), trade dress, trade
secret, or copyright. IDEXX shall notify OCD (a) at the
commencement of any action or suit based on any such claim and (b)
in the event of any injunction or other order prohibiting the sale
or use of any Analyzer or VETTEST slide.
16.06
Any party claiming indemnification under this Agreement (the
“
Indemnitee
”) shall notify the party from which indemnification is
claimed (the “
Indemnifying Party
”) in writing promptly upon becoming
aware of any claim to which such indemnification may apply. Failure
to provide such notice shall constitute a waiver of the Indemnifying
Party’s indemnity obligations hereunder if, and only to the extent
that, the Indemnifying Party is materially damaged thereby. The
Indemnifying Party shall have the right to assume and control the
defense of the claim at its own expense. If the right to assume and
have sole control of the defense is exercised, the Indemnitee shall
have the right to participate in, but not to control, such defense
at its own expense. If the Indemnifying Party does not assume the
defense of the claim, the Indemnitee may defend the claim at the
Indemnifying Party’s expense. The Indemnitee will not settle or
compromise the claim without the prior written consent of the
Indemnifying Party. The Indemnifying Party will not, without the
consent of the Indemnitee (which consent will not be unreasonably
withheld), settle or compromise the claim in any manner which would
have an adverse effect on the Indemnitee, unless (x) prior to such
settlement or compromise the Indemnifying Party acknowledges in
writing its obligation to pay in full the amount of the settlement
or compromise and the Indemnitee is furnished with security
reasonably satisfactory to it that the Indemnifying Party can in
fact pay such amount, (y) such settlement or compromise includes a
full release of such claim against the Indemnitee and (z) such
settlement or compromise provides for no relief or remedy other than
money damages. The Indemnitee shall reasonably cooperate with the
Indemnifying Party and will make available to the Indemnifying Party
all pertinent information under the control of the Indemnitee.
17.01
Each of IDEXX, IDEXX Parent and OCD agrees to protect
confidential information disclosed to it upon terms set out in
Schedule 2
attached hereto.
18.
PERIOD OF AGREEMENT
18.01
Subject to the terms and conditions set forth herein, the
term (the “
Term
”) of the Agreement shall be the period from the
Commencement Date until December 31, 2018
.
32
| 19. | TERMINATION |
| 19.01 | This Agreement may be terminated by either party in any of the following events: | ||
| (a) | If the other party is guilty of gross or persistent breaches of the terms of this Agreement, which breaches are not remedied to the satisfaction of the other party after ninety (90) days notice in writing to do so. Any such breach shall entitle the innocent party to terminate this Agreement by notice in writing which notice shall be effective at the end of ninety (90) days following the date of such notice. | ||
| (b) | If the other party becomes insolvent or compounds with its creditors or goes into liquidation (other than for the purposes of corporate reorganization) then the innocent party may terminate this Agreement by notice in writing which shall have immediate effect. | ||
| (c) | If such party elects to cease marketing Dry Slide diagnostic products, then it shall have the right, by notice given at any time after January 1, [**], to terminate this Agreement upon[**] years’ prior written notice. | ||
| 19.02 | Changes in the equity ownership or corporate reorganizations of either party shall not be grounds for termination of this Agreement, except that if more than [**]% of the outstanding capital stock of IDEXX or IDEXX Parent is owned or controlled by a competitor of OCD, OCD may in its discretion terminate the provisions of Sections 9.04 and 10.04 of this Agreement immediately upon written notice to IDEXX. If OCD delivers such notice of termination under this Section 19.02, then IDEXX may in its discretion terminate the provisions of Section 9.03 of this Agreement immediately upon written notice to OCD. | ||
| 19.03 | This Agreement shall terminate automatically upon any termination of the Europe Agreement. | ||
| 19.04 | The provisions of this Agreement dealing with rights and obligations after termination of this Agreement, including without limitation Sections 3.04, 3.05, 3.06, 3.07, 15, 16, 17, 21, 22, 23, 24, 25, 26, 29 and 30, shall survive the expiration or termination of this Agreement and continue to be enforceable to the extent necessary to achieve the logical and intended purposes of such provisions. |
20.
FORCE MAJEURE
20.01
Neither party shall be liable for any failure or delay in
performing any of its respective obligations under this Agreement
to the extent that such failure or delay is due to any cause beyond
its reasonable control (a “
Force Majeure Event
”). The
non-performing party shall give the other party prompt written
notice of such inability to perform and shall use commercially
reasonable efforts to resume
33
| performance as soon as reasonably practicable. If as a result of a Force Majeure Event OCD is unable, using commercially reasonable efforts, to meet its supply obligations to IDEXX hereunder for a period exceeding twenty-four months, or if IDEXX reasonably determines that it will not be feasible for OCD through the use of commercially reasonable efforts to resume the supply of VETTEST slides within twenty-four months, then either party may terminate this Agreement immediately upon written notice to the other party. |
21.
GOVERNING LAW; JURISDICTION
21.01
The construction, validity and performance of this Agreement
shall be governed in all respects by the laws of the State of New
York, USA. Any legal actions relating to this Agreement must be
brought in the court of appropriate jurisdiction in the State of New
York, which shall have exclusive jurisdiction, and the parties
hereby waive any claim of lack of jurisdiction or inconvenient
forum. The prevailing party in any litigation under this Agreement
shall be entitled to an award of its costs, including reasonable
attorneys’ fees and expenses. Each party hereto waives its right to
trial of any issue by jury. Each party hereto waives any claim to
punitive, exemplary or multiplied damages from the other. Each
party hereto waives any claim of consequential damages from the
other.
22.
SEVERABILITY
22.01
Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction. If
the final judgment of a court of competent jurisdiction declares
that any term or provision hereof is invalid or unenforceable, then
the parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the
scope, duration, or area of the term or provision, to delete
specific words or phrases, or to replace any invalid or
unenforceable term or provision with a term or provision that is
valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified after the
expiration of the time within which the judgment may be appealed.
23.
WAIVERS
23.01
Failure of either party to this Agreement to insist upon
strict observance or compliance with all its terms and conditions in
one or more instances shall not be deemed to be a waiver of its
right to insist upon such observance or compliance with such term or
condition or with any other terms or conditions hereof in the
future.
34
24.
PRIOR AGREEMENTS; INTERPRETATION
24.01
As of the Commencement Date, this Agreement shall take
effect in substitution for the Prior US Agreement, the Operations
Agreement (except as otherwise provided in Section 7.04 of this
Agreement), Section B (Amendments) of the Settlement Agreement, and
all or any other previous agreements relating to the subject matter
hereof whether the same are formal agreements or agreements that
would be inferred from the parties’ correspondence or conduct, and
all such substituted agreements shall be deemed to have been
terminated by mutual consent on the Commencement Date; provided,
however, that nothing contained herein shall be deemed to modify or
terminate the Europe Agreement, except that the Purchase Commitments
and Annual Purchase Forecasts referred to in Section 5 and in
Schedule 4
of this Agreement and the Europe Agreement represent the
aggregate commitments and forecasts of IDEXX and IDEXX BV and not
the individual commitments and forecasts of IDEXX BV under the
Europe Agreement or IDEXX under this Agreement.
25.
ENTIRE AGREEMENT
25.01
This Agreement, together with the Europe Agreement, the
Settlement Agreement (other than Section B thereof), and that
certain memorandum agreement dated September 12, 2003 regarding
slide packaging (as amended to date), constitutes the complete
agreement of the parties concerning the subject matter hereof and
thereof during the Term, and, with respect to all periods from and
after the Commencement Date, supersedes all prior agreements between
the parties regarding its subject matter.
26.
ALTERATION OR MODIFICATION
26.01
No alteration, amendment or modification to this Agreement
or the attached Schedules shall be of any force or effect unless in
writing and signed by both parties. No modification shall be
effected by the acknowledgement or acceptance of purchase order
forms or order confirmations or invoices or other documents
containing different conditions.
27.
ASSIGNMENT
27.01
This Agreement shall not be capable of assignment by either
party to a company of which it owns less than a majority or which
owns less than a majority of the party save in the case of (i) an
assignment at OCD’s sole discretion to an acquiror of OCD’s dry
slide business or (ii) an assignment at IDEXX’s sole discretion to
an acquiror of IDEXX’s VETTEST and New Analyzer business; provided
that no assignment shall release the assigning party from any
obligations hereunder. In the case of an assignment under the
preceding clause (ii) to an entity which is a competitor of OCD’s
diagnostics business, OCD may in its discretion terminate
35
| the provisions of Section 9.04 of this Agreement immediately upon written notice to IDEXX. If OCD delivers such notice of termination of Section 9.04 under this Section 27.01, then IDEXX’s assignee may in its discretion terminate the provisions of Section 9.03 of this Agreement immediately upon written notice to OCD. | |||
| This Agreement shall be binding on and inure to the benefit of the parties hereto and their permitted successors and assigns. |
| 28. | GOVERNING LANGUAGE |
| 28.01 | [Reserved] |
29.
NOTICES
29.01
Any notice, statement or other communication to be given by
one party to the other hereunder may be given by registered mail,
airmail, nationally recognized courier, facsimile or telex to the
party concerned at the addresses set out below:
Ortho-Clinical Diagnostics, Inc.
1001 US Highway 202
Raritan, New Jersey 08869, USA
For the attention of: Vice President and General Manager, Americas
With a copy to:
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933, USA
For the attention of: Office of General Counsel
IDEXX Operations, Inc.
6100 East Shelby Drive
Memphis, Tennessee 38141, USA
For the attention of: President
With a copy to:
IDEXX Laboratories, Inc.
One IDEXX Drive
Westbrook, Maine 04092, USA
For the attention of: Office of General Counsel
29.02
Any notice, payment or communication so given or made shall
be deemed to have been received at the time when in the ordinary
course of transmission the same should have reached its destination.
Either party may change its address for the
36
| purpose of this Agreement by giving notice of such change to the other party pursuant to the provisions of this Section. For purposes of this Section 29, notice given by OCD to IDEXX BV under the Europe Agreement shall be deemed given to IDEXX. |
30.
GUARANTY
30.01
IDEXX Parent hereby guarantees to OCD the due performance
and observance by IDEXX of all of the provisions of the Agreement to
be performed and observed by it under this Agreement, for which
IDEXX Parent shall be jointly and severally liable, without
requiring any notice of non-payment, non-performance or
non-observance, or proof of notice or demand, all of which IDEXX
Parent hereby waives. OCD may proceed against IDEXX Parent
separately or jointly, before, after or simultaneously with
proceeding against IDEXX for default. This guaranty shall not be
terminated, affected or impaired in any way by reason of (i) the
assertion by OCD against IDEXX of any of the rights or remedies
reserved to OCD under this Agreement, (ii) the commencement by OCD
of any proceedings against IDEXX, (iii) the granting by OCD of any
extensions of time or indulgence to IDEXX, (iv) any change in or
amendment to this Agreement, or (v) any payment or performance being
invalid in connection with any bankruptcy, insolvency,
reorganization or similar proceedings in respect to IDEXX. This
guaranty is absolute and unconditional and shall continue in full
force and effect as to any renewal, extension, amendment, addition,
assignment or transfer or other modification of this Agreement,
whether or not IDEXX Parent shall have been notified of or consented
to any such action, and regardless of bankruptcy or insolvency of
IDEXX or the actual or purported rejection by a trustee in such
bankruptcy of this Agreement or any limitation on any claim in such
bankruptcy for damages resulting from the actual or purported
termination of this Agreement or the enforceability in such
bankruptcy of this Agreement. IDEXX Parent hereby agrees that this
guaranty shall continue to be effective or shall be reinstated, as
the case may be, if at any time payment of any sum hereby guaranteed
is rescinded or must be otherwise restored or returned by OCD upon
the insolvency, bankruptcy or reorganization of IDEXX, or otherwise,
all as though such payment had not been made.
37
IN WITNESS WHEREOF and intending to be legally bound, the parties hereto have caused this Agreement to be duly executed in duplicate by their respective authorized representatives the day and year first written above.
| ORTHO-CLINICAL | IDEXX OPERATIONS, INC. | ||
| DIAGNOSTICS, INC. | |||
| By: | /s/ Tony Zezzo | By: | /s/ Conan R. Deady |
|
|
|
||
| Tony Zezzo, | Conan R. Deady, | ||
| Vice President and General Manager, | Vice President | ||
| Americas | |||
| Solely as to Sections 17 and 30 | |||
| IDEXX LABORATORIES, INC. | |||
| By: | /s/ Jonathan W. Ayers | ||
|
|
|||
| Jonathan W. Ayers, | |||
| President and Chief Executive Officer | |||
38
Schedule 1 – VetTest® Slide Quality Assurance Procedures
VETTEST Slides for the VETTEST Analyzer :
Introduction
The following procedure constitutes a generic overview of the quality assurance provisions for finishing of VITROS slides and applies in like manner to product release for the VETTEST slides.
VETTEST Slide Quality Assurance
VETTEST slides will be produced to the same quality standards as VITROS and DT 60 slides for OCD’s human market unless otherwise agreed to by IDEXX.
Bar Coding
Bar code printing on the VETTEST slides will render the VETTEST slides incompatible with use in VITROS analyzers. OCD will reserve certain number sequences for generation of the bar code patterns on the VETTEST slides.
New Slides :
Specifications to be determined by IDEXX as part of the Development Program and, together with quality assurance procedures, reasonably agreed in writing by the parties for purposes of this Schedule 1 .
39
Schedule 2
Section 1. Obligation to Keep Information Confidential . Each party agrees to hold, and to cause its respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence the terms of the Agreements, and all documents and information concerning the other party, whether oral or written, furnished or made known to such party in connection with either of the Agreements or any project or discussion under, or related to, either of the Agreements; provided that no party shall be required to keep any information confidential (i) if such party is compelled to disclose such information by judicial or administrative process or by other requirements of law (including without limitation the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended) and such party has provided prior written notice to the other party and given such other party reasonable opportunity to contest disclosure or (ii) to the extent such information can be shown to have been (A) previously known to such party on a nonconfidential basis, (B) in the public domain through no fault of such party, (C) later lawfully acquired from a third party source or (D) independently developed by such party without reference to confidential information. The foregoing notwithstanding, any party may disclose information concerning the other party or the Agreements to its and its affiliates’ officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with its performance of this Agreement so long as such persons are informed by such party of the confidential nature of such information and are directed by such party to treat such information confidentially, it being understood and agreed that such party shall be responsible for any failure to treat such information confidentially by such persons. The obligation of each party to hold any information in confidence shall be satisfied if it exercises the same care with respect to such information as it would to preserve the confidentiality of its own similar information. The confidentiality provisions of this Schedule 2 shall remain in effect for so long as this Agreement is in effect and for a period of three (3) years thereafter.
Section 2. Public Announcements . No party to this Agreement shall originate any news release or other public announcement, written or oral, relating to this Agreement or the Europe Agreement, without the prior written consent of the other party, except to the extent such news release or other public announcement is required by law; provided that in the event an announcement is required by law, the party issuing same shall still be required to use its commercially reasonable efforts to consult with the other party or parties named or referred to in such announcement prior to its release as the circumstances reasonably permit, in order to allow such other party or parties to comment on the use of their names or the references to them and, after its release, shall provide such other party or parties with a copy thereof. If a party has previously reviewed and approved a public announcement, its further approval shall not be required with respect to those provisions of subsequent announcements that are substantially similar in scope and substance to provisions that have been previously approved. In no event shall IDEXX or IDEXX Parent use the name “Johnson & Johnson” or “J&J” in any publicity relating to this Agreement or the Europe Agreement, whether written or oral, other than to state that OCD is “a Johnson & Johnson company” or a (wholly-owned) subsidiary of Johnson & Johnson.
40
Section 3. Governing Law . The construction, validity and performance of this Schedule 2 shall be governed in all respects by the laws of the State of New York, USA.
Section 4. Notices . Any notices required to be given under this Schedule 2 shall be given in the manner specified by Section 29 of the Agreement.
41
Schedule 3 - Panels/Profiles
(Applicable only to VETTEST Analyzer)
The initial PANEL shall be the “Pre-Anesthetic Panel” consisting of four sets of the following six VETTEST slides:
| BUN | Urea Nitrogen | |
| ALT | Alanine aminotransferase | |
| GLU | Glucose | |
| TP | Total protein | |
| CREA | Creatinine | |
| ALKP | Alkaline phosphatase |
The initial PROFILES shall be the “General Health Profile” and the “Large
Animal Profile”, each consisting of two sets of 12 VETTEST slides as follows:
General Health Profile
Large Animal Profile
ALB
Albumin
ALB
Albumin
ALKP
Alkaline phosphatase
ALKP
Alkaline phosphatase
ALT(SGPT)
Alanine aminotransferase
AST
AST
AMYL
Amylase
Ca
2+
Calcium
Ca
2+
Calcium
CK
CK
CHOL
Cholesterol
GGT
Gamma GT
CREA
Creatinine
GLU
Glucose
GLU
Glucose
PHOS
Inorganic phosphate
PHOS
Inorganic phosphate
LDH
LDH
TBIL
Total bilirubin
MG
Magnesium
TP
Total protein
TP
Total Protein
BUN
Urea Nitrogen
BUN
Urea Nitrogen
Packaging for the Pre-Anesthetic Panels, the General Health Profiles and the Large Animal Profiles for the VETTEST Analyzer has been previously agreed upon by the parties, and any changes to the slide composition or packaging of the initial PANEL or the initial PROFILES shall be negotiated in good faith and mutually agreed upon by OCD and IDEXX. The slide composition, packaging and initial pricing of any additional PANELS/PROFILES shall be mutually agreed upon by OCD and IDEXX. Unless otherwise agreed by the parties in writing with respect to one or more specific PANELS or PROFILES, all purchases by IDEXX or IDEXX BV of VETTEST slides packaged as PANELS/PROFILES shall be credited against the Annual Purchase Forecasts and Purchase Commitments for such slides under this Agreement and the Europe Agreement.
New Slide/Panel Design for the New Analyzer shall be as developed by IDEXX under Article 3.
42
Schedule 4 - Purchase Commitments
Minimum Slide Purchase
Year
Commitment ([**])
[**]
[**]
[**]
[**]
[**]
[**]
[**]
[**]
43
Schedule 5 - Products and Prices
(as of the Commencement Date)
Sales Region
US Sales
Asian Sales
164 9706
318 3258
US Pricing
>1500
Single Slides (Bx 25)
Catalog Number
bxs*
<1500 bxs*
Asian Pricing
822 7134
$
[**]
$
[**]
$
[**]
831 5459
$
[**]
$
[**]
$
[**]
808 3750
$
[**]
$
[**]
$
[**]
181 6842
$
[**]
$
[**]
$
[**]
820 8191
$
[**]
$
[**]
$
[**]
811 3979
$
[**]
$
[**]
$
[**]
804 8191
$
[**]
$
[**]
$
[**]
835 4888
$
[**]
$
[**]
$
[**]
835 8582
$
[**]
$
[**]
$
[**]
818 3477
$
[**]
$
[**]
$
[**]
853 8670
$
[**]
$
[**]
$
[**]
826 1315
$
[**]
$
[**]
$
[**]
813 0536
$
[**]
$
[**]
$
[**]
835 1082
$
[**]
$
[**]
$
[**]
196 6191
$
[**]
$
[**]
$
[**]
108 0266
$
[**]
$
[**]
$
[**]
807 0856
$
[**]
$
[**]
$
[**]
838 0396
$
[**]
$
[**]
$
[**]
193 7093
$
[**]
$
[**]
$
[**]
192 2285
$
[**]
$
[**]
$
[**]
150 7326
$
[**]
$
[**]
$
[**]
100 0793
$
[**]
$
[**]
$
[**]
Profile Slides (Bx 24)
Catalog Number
US Pricing
Asian Pricing
160 7175
$
[**]
$
[**]
801 5109
$
[**]
$
[**]
680 0071
$
[**]
$
[**]
Other
Catalog Number
WW Pricing
869 9852
$
[**]
175 7384
$
[**]
| * | per chemistry per order |
44
Schedule 5 - Products and Prices (continued)
Sales Region: Australia/New Zealand
Customer No.: 314 8251
Single Slides (Box of 25)
Catalog Number
Australia/NZ Pricing
822 7134
$
[**]
831 5459
$
[**]
808 3750
$
[**]
181 6842
$
[**]
820 8191
$
[**]
811 3979
$
[**]
804 8191
$
[**]
835 4888
$
[**]
835 8582
$
[**]
818 3477
$
[**]
853 8670
$
[**]
826 1315
$
[**]
813 0536
$
[**]
835 1082
$
[**]
196 6191
$
[**]
108 0266
$
[**]
807 0856
$
[**]
838 0396
$
[**]
193 7093
$
[**]
192 2285
$
[**]
150 7326
$
[**]
100 0793
$
[**]
Profile Slides (Box of 24)
Catalog Number
Australia/NZ Pricing
160 7175
$
[**]
801 5109
$
[**]
680 0071
$
[**]
Other
Catalog Number
WW Pricing
869 9852
$
[**]
175 7384
$
[**]
45
Schedule 6 – Minimum Prices for New Chemistries
46
Schedule 7 - Illustrative Rebate Calculations
The Estimated Rebate Payments will be calculated for each of the first three calendar quarters using the Effective Rebate Rate, as described more fully in sub-clause 7.03 of the Agreement. Any required adjustments will be made at the end of the fourth calendar quarter, in accordance with sub-clause 7.03 of the Agreement.
Example : The aggregate Annual Purchase Forecast for IDEXX and IDEXX BV in a given year is [**] slides; pricing is $[**]/slide; blended rebate percentage rate is [**]%, as follows:
| [**] slides * [**]% = [**] slides | ||
| [**] slides * [**]% = [**] slides | ||
| [**] slides * [**]% = [**] slides | ||
| [**] slides * [**]% = [**] slides | ||
| [**] slides * [**] % = [**] slides | ||
| Total Slides Eligible for Rebate = [**] slides | ||
| Effective Rebate = Total slides eligible for rebate / total purchases = [**] = [**]% |
Actual aggregate volume purchased by IDEXX and IDEXX BV equals volume projected at the beginning of the year
.
Actual Qtrly.
Calculated
[**]%
Vol.
Purchases
Effective Rebate
Rebate Each
Holdback
Rebate Paid
([**])
($[**])
% ([**] Vol.)
Qtr. ([**])
([**])
([**])
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
$
[**]
$
[**]
$
[**]
True-up:
$
[**]
$
[**]
Total:
$
[**]
$
[**]
Actual aggregate volume purchased by IDEXX and IDEXX BV is greater than volume projected at the beginning of the year
.
Actual Qtrly.
Calculated
[**]%
Vol.
Purchases
Effective Rebate
Rebate Each
Holdback
Rebate Paid
([**])
($[**])
% ([**] Vol.)
Qtr.([**])
([**])
([**])
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
$
[**]
$
[**]
$
[**]
True-up:
$
[**]
$
[**]
Total:
$
[**]
$
[**]
47
Actual aggregate volume purchased by IDEXX and IDEXX BV is lower than volume projected at the beginning of the year
.
Actual Qtrly.
Calculated
[**]%
Vol.
Purchases
Effective Rebate
Rebate Each
Holdback
Rebate Paid
([**])
($[**])
% ([**] Vol.)
Qtr. ([**])
([**])
([**])
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
$
[**]
$
[**]
$
[**]
True-up:
$
[**]
$
[**]
Total:
$
[**]
$
[**]
Calculation of IDEXX’s Proportionate Share of rebate (assuming Actual aggregate volume purchased by IDEXX and IDEXX BV equals volume projected at the beginning of the year) :
Assumptions :
| • | Number of slides purchased by IDEXX and its wholly-owned subsidiaries other than IDEXX BV: [**] slides | |
| • | Total number of slides purchase by IDEXX and its wholly-owned subsidiaries: [**] slides | |
| • | Total rebate earned: $[**] |
Calculation :
IDEXX’s rebate equals: [**] slides / [**] slides * $[**], or $[**].
48
Schedule 8 – Eligible New Chemistry Slides
[**]
49
Schedule 9 - Example of Cost Adjustment Calculations
(Assumes PPI = [**]%)
Scenario 1
Scenario 2
% of OCD
’s
Year 1
% Change
Year 2
$ Change
% Change
Year 2
$ Change
Costs
Usage
Cost
In Cost
Cost
in Cost
in Cost
Cost
in Cost
[**]
%
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
[**]
%
$
[**]
-$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
$
[**]
[**]
$
[**]
$
[**]
Total
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
Total (x[**])
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
Scenario 1 Conclusion: [**]Cost Adjustment Required (Other Costs Increased by < [**]% over PPI)
Scenario 2 Conclusion: [**] Costs Adjustments Required
$
[**]
$
[**]
$
[**]
$
[**]
$
[**]
$
[**]
$
[**]
$
[**]
* - [**] Costs - [**] $[**], or $[**]/slide @ [**] slides
50
Schedule 10 – Excluded Countries
Albania
Liechtenstein
Andorra
Lithuania
Armenia
Macedonia
Azerbaijan
Malta
Bahrain
Monaco
Belarus
Norway
Bosnia and Herzegovina
Oman
Bulgaria
Pakistan
Croatia
Poland
Cyprus
Qatar
Czech Republic
Romania
Estonia
Russia
Faroes Islands
San Marino
Georgia
Saudi Arabia
Hungary
Slovakia
Iceland
Slovenia
Iran
Switzerland
Iraq
Syria
Israel
Tajikistan
Jordan
Turkey
Kazakhstan
Turkmenistan
Kuwait
Ukraine
Kyrgyzstan
United Arab Emirates
Latvia
Uzbekestan
Lebanon
Yemen
51
Schedule 11 – IDEXX Entities
IDEXX Laboratories Canada Corporation (Canada)
IDEXX Laboratories Pty. Ltd. (Australia)
IDEXX Laboratories (NZ) Ltd. (New Zealand)
IDEXX Laboratories, KK (Japan)
IDEXX Laboratories (Taiwan) Inc. (Taiwan)
52
Schedule 12 – OCD Entities
Ortho-Clinical Diagnostics, a division of Janssen-Ortho Inc. (Canada)
Ortho-Clinical Diagnostics, a division of Johnson & Johnson Medical Pty. Limited (Australia)
Ortho-Clinical Diagnostics K.K. (Japan)
Ortho-Clinical Diagnostics, a division of Johnson & Johnson Limited (India)
Ortho-Clinical Diagnostics, a division of Johnson & Johnson Pte. Ltd. (Singapore)
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Exhibit 10.8
Confidential Materials omitted and filed separately with the
AGREEMENT
THIS AGREEMENT is made effective as of the 17 th day of October, 2003, between IDEXX Europe B.V., a corporation organized under the law of The Netherlands whose principal place of business is at Koolhovenlaan 20, 1119 NE - Schiphol-Rijk, The Netherlands (“ IDEXX ”) and Ortho-Clinical Diagnostics, Inc., a New York corporation with offices at 100 Indigo Creek Drive, Rochester, New York, U.S.A. (“ OCD ”), and amends and restates the supply agreement effective as of January 1, 1999 between IDEXX and OCD (the “ Prior Europe Agreement ”).
WHEREAS, OCD has been a supplier of analyzers for human applications and dry slides, and IDEXX has been a supplier of analyzers for animal applications; and
WHEREAS, OCD and IDEXX Operations, Inc. (“ IDEXX US ”) have entered into an agreement in the United States (the “ US Agreement ”) to (a) combine certain of their respective skills and intellectual property and to invest significant capital to create a New Analyzer (as defined below) and related panel holder design for animal applications, which is expected to provide a superior analyzer offering to customers, expand the sales of OCD dry slides and IDEXX analyzers, and make IDEXX products more competitive and (b) ensure IDEXX US a continuing supply of Dry Slides necessary for its continued sale of analyzers, including the New Analyzer; and
WHEREAS, in the United States and in the Territory (as defined herein) different market conditions as well as regulatory differences prevail, for which reasons OCD and IDEXX desire to enter into a separate agreement for the supply of Dry Slides in the European market and the other regions in the Territory; and as is the case with the US Agreement, OCD and IDEXX desire to reflect herein their mutual investments and exchange of know-how in connection with the supply of Dry Slides as well as their desire to enter into new arrangements for the supply of diagnostic slides and analyzers for Europe and the other regions in the Territory, the terms and conditions of which are documented herein;
NOW THEREFORE, the parties hereby agree as follows:
In this Agreement the following expressions shall have the meaning set opposite
them.
1.
DEFINITIONS
“Agreements”
This Agreement and the US Agreement.
“Analyzers”
The VETTEST Analyzer and the New Analzyer.
“Commencement Date”
October 17, 2003.
“Dry Slide”
A chemical composition, comprising a
layered, coated dry film, specifically
formulated to analyze for a body
constituent, which composition is
immediately hydrated by any undiluted
bodily fluid, including without limitation
a VITROS slide. For avoidance of doubt,
the term “Dry Slide” shall not include any
assay based on immunomagnetic particle
technology or any assay for which the
analyte is DNA or RNA.
“Effective Rebate Rate”
For any year, the weighted average
percentage reduction in the purchase price
of any slides purchased in such year that
IDEXX is entitled to receive pursuant to
Section 7.03 hereunder. The calculation of
the Effective Rebate Rate is illustrated in
Schedule 7
.
“Exclusivity Territory”
Austria, Belgium, France, Germany, Italy,
Netherlands, Portugal, Spain, Switzerland
and the United Kingdom.
“Existing Special [**] Slides”
VETTEST slides that have been [**], as of
the date of this Agreement, pursuant to
Section 4 of the Operations Agreement.
“IDEXX Parent”
IDEXX Laboratories, Inc., a Delaware, USA
corporation, the parent company of IDEXX.
“IDEXX US”
IDEXX Operations, Inc., a Delaware, USA
corporation.
“New Analyzer”
A new chemistry analyzer that uses OCD Dry
Slides for veterinary applications, as
contemplated by
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Article 3 of the US Agreement, and any
updates or modifications to such analyzer.
“New Chemistry Slides”
As defined in Section 5.06.
“New Slide/Panel Design”
A new slide format for VETTEST slides to be used
in conjunction with the New Analyzer, as well as
a panel holder for such slides, as contemplated
by Article 3 of the US Agreement, and any
updates or modifications to such design.
“New Slides”
VETTEST slides that are formatted and packaged
in accordance with the New Slide/Panel Design,
as contemplated by Article 3 of the US
Agreement.
“New Special [**] Slides”
VETTEST slides that have been [**] pursuant to
Section 7.04 of this Agreement.
“Operations Agreement”
The Operations Agreement effective as of January
1, 1999 among OCD, IDEXX Parent and IDEXX.
“PANELS/PROFILES”
Packages of VETTEST slides for VETTEST Analyzers
consisting of two or more sets of slides of
specified chemistries. The initial PANEL and
the initial PROFILES shall consist of the slides
set forth on
Schedule 3
attached hereto, with
any changes or additional PANELS/PROFILES to be
mutually agreed upon by the parties as specified
in
Schedule 3
.
“Prime Rate”
For any day in any calendar month, the prime
rate of interest as published in the
Wall Street
Journal
on the last business day of the
immediately preceding month.
“Proportionate Share”
The percentage obtained by dividing (i) the
number of VETTEST slides purchased by IDEXX in a
given period,
by
(ii) the total number of
VETTEST slides purchased by IDEXX and its
affiliates during such period.
“Settlement Agreement”
The Amendment, Release and Settlement Agreement
dated as of September 12, 2002 among OCD, IDEXX
Parent and IDEXX.
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“Special [**] Slides”
Existing Special [**] Slides and New Special
[**] Slides.
“Term”
As defined in Section 18.01.
“Territory”
The European Union, Africa, and the countries
listed on
Schedule 10
attached hereto.
“VETTEST Analyzer”
The analyzer currently marketed as the VETTEST
VT 8008 analyzer and any updates or
modifications to such analyzer.
“VETTEST slides”
Dry Slides currently manufactured by OCD,
specially designed, bar coded, labeled, and/or
packaged for one or more of the Analyzers in
accordance with the terms of this Agreement or
the US Agreement and supplied by OCD in
accordance with the terms and conditions of this
Agreement.
“VETTEST tips”
Metering tips sourced by OCD for use with the
VETTEST Analyzer, specially packaged and
supplied to IDEXX in accordance with the terms
of this Agreement.
“VITROS slides”
The Dry Slides currently manufactured by OCD for
use in any current VITROS analyzer, including
without limitation the DT60.
All references to currency in this Agreement shall mean U.S. Dollars unless otherwise specifically indicated.
2.
EFFECTIVE DATE OF AGREEMENT
2.01
This Agreement shall become effective upon the Commencement
Date. This Agreement shall apply solely within the Territory.
3.
NEW SLIDES AND THE NEW SLIDE/PANEL DESIGN
3.01
Notwithstanding any other provision of this Agreement, OCD’s
obligations hereunder to supply, format or package New Slides
hereunder shall be conditioned upon the successful development of
the New Slides, the New Analyzer and the New Slide/Panel Design in
accordance with Article 3 of the US Agreement.
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| 3.02 | If IDEXX US elects under Section 3.08 of the US Agreement to perform the formatting and packaging of the New Slides independently of OCD, then (1) in lieu of New Slides, OCD shall supply IDEXX with VITROS slides in the format currently manufactured for the VITROS mainframe analyzers and/or the VETTEST Analyzer (i.e., VITROS slides packaged in 50-count cartridges, before further formatting and packaging for VETTEST Analyzer requirements), as applicable for New Slides, for the Term as provided in this Agreement, and all references in this Agreement to New Slides or to VETTEST slides, to the extent referring to OCD’s obligation to supply New Slides, shall mean such VITROS slides packaged in 50-count cartridges and (2) solely with respect to New Slides, the prices for Tiers 2 and 3 in the table set forth in Section 7.02 shall be reduced by $[**] per New Slide. |
| 4. | AGREEMENT TO SUPPLY |
| 4.01 | Subject to the terms and conditions of this Agreement, OCD undertakes to manufacture for IDEXX and to supply to IDEXX VETTEST slides, VETTEST tips and Vetrol controls. OCD shall supply VETTEST slides in compliance with the VETTEST Slide Quality Assurance Procedures set out in Schedule 1 . All slides supplied to IDEXX hereunder are supplied solely for sale within the Territory; provided that IDEXX may make limited sales to IDEXX US solely for purposes of adjusting inventory levels according to unanticipated changes in regional demand. For the avoidance of doubt, nothing in this Agreement shall obligate OCD, with respect to any particular chemistry, to furnish IDEXX with slides for such chemistry in any slit format that OCD does not currently manufacture for such chemistry, or that would otherwise be uneconomical for OCD to supply to IDEXX (other than the slit formats for such chemistry that OCD then sells or has agreed in writing to sell to IDEXX). | ||
| 4.02 | (a) Notwithstanding any other provision of this Agreement, if after [**] the annual volume of VETTEST slides purchased by IDEXX and IDEXX US is less than [**] slides, then OCD may in its sole discretion elect to be released from any obligation to format and package the New Slides and/or package other VETTEST slides, in which event IDEXX’s sole options hereunder shall be either (x) to accept an increase in slide prices for New Slides and/or other VETTEST slides that is adequate to compensate OCD for any increase in its costs due to such reduction in volume, or (y) with respect to slides for which IDEXX does not accept a price increase under the preceding clause (x), but which IDEXX US has elected to format and/or package independently of OCD as provided in Section 4.02 of the US Agreement, to obtain such slides from IDEXX US. |
| (b) If IDEXX US elects under Section 4.02 of the US Agreement to perform the formatting and packaging of New Slides, then (1) in lieu of New Slides OCD shall supply IDEXX with VITROS slides in the format currently manufactured for the VITROS mainframe analyzers and/or the VETTEST Analyzer (i.e., VITROS |
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| slides packaged in 50-count cartridges, before further formatting and packaging for VETTEST Analyzer requirements), as applicable for New Slides, for the Term as provided in this Agreement, and all references in this Agreement to New Slides or to VETTEST slides, to the extent referring to OCD’s obligation to supply New Slides, shall mean such VITROS slides packaged in 50-count cartridges, and (2) the prices for Tiers 2 and 3 in the table set forth in Section 7.02 shall be reduced by $[**] per New Slide. | |||
| (c) If IDEXX US elects under Section 4.02 of the US Agreement to perform the packaging of VETTEST slides other than New Slides, then (1) in lieu of such other VETTEST slides OCD shall supply IDEXX with VITROS slides in the format currently manufactured for the VETTEST Analyzer (i.e., VITROS slides packaged in 50-count cartridges, before further formatting and packaging for VETTEST Analyzer requirements) for the Term as provided in this Agreement, and all references in this Agreement to VETTEST slides, to the extent referring to OCD’s obligation to supply such slides (other than New Slides), shall mean such VITROS slides packaged in 50-count cartridges, and (2) the prices for Tiers 1, 2 and 3 in the table set forth in Section 7.02 shall be reduced by $[**]per slide for VETTEST slides (other than New Slides). |
| 5. | FORECASTS, COMMITMENTS AND ORDERS |
| 5.01 | Attached hereto as Schedule 4 are aggregate Purchase Commitments by IDEXX and IDEXX US for VETTEST slides for the VETTEST Analyzer for calendar years 2003 through and including 2010. The Purchase Commitments constitute the aggregate anticipated minimum aggregate purchase quantities by IDEXX and IDEXX US for single chemistry VETTEST slides and PANELS/PROFILES slides in the indicated calendar years. | ||
| Existing Special [**] Slides, New Special [**] Slides and New Chemistry Slides shall be excluded from the determination of IDEXX’s and IDEXX US’s slide purchases for purposes of achieving their aggregate Purchase Commitments under Section 5.01 of this Agreement or the US Agreement, as the case may be. | |||
| Failure by IDEXX and IDEXX US to purchase, in the aggregate, at least the indicated Purchase Commitment quantities of each type of slides in any year may subject IDEXX to the requirement to make a payment to OCD as set forth in Section 5.02 below, but such failure shall in no event otherwise be deemed to be a breach of this Agreement. | |||
| 5.02 | If IDEXX and IDEXX US fail to purchase in the aggregate the quantities of slides for the VETTEST Analyzer set forth as Purchase Commitments on Schedule 4 in a particular calendar year, unless there has been a Material Adverse Change (as defined in the following paragraph), IDEXX shall pay, or shall cause IDEXX US to pay, to OCD within 30 days after the end of such calendar year [**]% of the |
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| product of (i) the number of each type of slides (single or PANELS/PROFILES) by which IDEXX and IDEXX US have in the aggregate fallen short of the Purchase Commitment and (ii) the lowest per-slide price for the applicable type of slides under either of the Agreements. | |||
| For the purposes of this Section 5.02, “ Material Adverse Changes ” shall mean material changes in the veterinary clinical chemistry markets which result from (a) the commercial introduction into the veterinary market, other than by IDEXX or its affiliates, of a technology not previously available in the veterinary clinical chemistry market, (b) the eradication of one or more diseases, or the development of new disease therapies, treatments or diagnostics, which significantly reduces demand for veterinary clinical chemistry testing or (c) the inability or unwillingness of OCD to supply VETTEST or VITROS slides in accordance with IDEXX’s Annual Purchase Forecasts pursuant to Section 5.04 below. Whether a Material Adverse Change has occurred will be determined by reference to the effect of a change in the veterinary clinical chemistry market on IDEXX and IDEXX US taken as a whole, and not on either individually. | |||
| The parties shall discuss in good faith any assertion by IDEXX or IDEXX US that a Material Adverse Change has occurred or is continuing. If the parties agree that a Material Adverse Change has occurred or is continuing, they shall negotiate in good faith with respect to appropriate reductions in Purchase Commitments, VETTEST slide prices (including single and PANELS/PROFILES slides) and/or amounts which would otherwise be payable pursuant to the first sentence of this Section 5.02 to appropriately allocate the effects of such Material Adverse Change on the parties. | |||
| 5.03 | Order and delivery of VETTEST slides (including PANELS/PROFILES) shall be made in multiples of 100 boxes. Unless otherwise agreed between the parties in any particular case, IDEXX shall place orders for slides four times per calendar year, for delivery in each calendar quarter of the year. Each order shall specify a business day delivery date for each delivery, which shall be not less than three months after the order date. Unless otherwise agreed between the parties in any particular case the number of deliveries shall be limited to four per year. IDEXX shall order quantities for delivery in any quarter in accordance with its good faith estimates of actual demand, with allowance for reasonable inventory management requirements and consistent with IDEXX’s stated desire to minimize its inventory levels. | ||
| Order and delivery of the VETTEST tips shall be made in multiples of 10,000 tips (20 cartons each containing 500 tips). Unless otherwise agreed between the parties in any particular case, the number of orders and deliveries of the VETTEST tips and Vetrols shall be limited to two in each year. OCD shall deliver the VETTEST tips and Vetrols in the ordered quantities in each year. |
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| 5.04 | Not later than October 1 of each year, commencing October 1, 2003, IDEXX shall notify OCD of the aggregate forecasted requirements of IDEXX for the subsequent calendar year for each of the VETTEST slides (single slides and PANELS/PROFILES slides for the VETTEST Analyzer and New Slides) (each such notification, an “ Annual Purchase Forecast ”). The aggregate order quantities in the subsequent year for each of the VETTEST slides shall be within ±25% of such aggregate Annual Purchase Forecast unless the parties otherwise agree. As long as slide orders do not exceed the applicable Annual Purchase Forecast by more than 25%, OCD shall deliver the slides in accordance with the orders. The Annual Purchase Forecasts constitute non-binding forecasts for OCD’s planning purposes and shall also be the basis for determining estimated slide pricing pursuant to Section 7.02 below and the cash rebate pursuant to Section 7.03 below. | ||
| In addition to the Annual Purchase Forecast, IDEXX shall furnish to OCD updated quarterly forecasts of the aggregate requirements of IDEXX for VETTEST slides in the four succeeding calendar quarters. The parties understand that such forecasts are merely estimates to assist OCD in production planning and are not to be considered orders or binding in any way. | |||
| For production planning purposes, the parties shall further coordinate with one another to keep OCD apprised of IDEXX’s current and anticipated inventories of stock keeping units and relevant conditions in the veterinary market. The provisions of this paragraph shall terminate immediately upon any termination of the corresponding provisions of Section 5.04 of the US Agreement. | |||
| 5.05 | In the event that IDEXX in any year notifies OCD that it wishes to order quantities which exceed the quantities mentioned in Section 5.04 above by more than 25%, OCD will endeavor to supply the excess quantities and notify IDEXX of the extent of its ability to so supply. | ||
| 5.06 | It is understood and agreed that orders for the VETTEST slides shall include only those chemistries set forth in Schedule 5 hereto, as amended from time to time by agreement of the parties. IDEXX may at any time request that the additional chemistries listed on Schedule 8 hereof, in the form they are available at the Commencement Date to the human market on VITROS slides, be added as VETTEST slides to Schedule 5 (any VETTEST slides so added, containing such additional chemistries, are referred to herein as “ New Chemistry Slides ”). Prior to adding a New Chemistry Slide on Schedule 5 , the parties will negotiate in good faith to determine the initial price for such slides in accordance with the immediately following paragraph and shall set forth such price on Schedule 6 . IDEXX shall have the right, from time to time, to elect to remove any New Chemistry Slides from Schedule 5 , and Schedule 5 and Schedule 6 shall be updated to reflect such removal. IDEXX acknowledges that neither this nor any other provision of this Agreement shall obligate OCD to supply IDEXX with any |
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| slide or other product based on any technology that is not incorporated in the VITROS slides or VETTEST slides that OCD sells as of the date hereof. | |||
| Until [**], the price per slide for any New Chemistry Slides shall be the greater of $[**] and [**] (as determined by OCD in good faith and taking into account IDEXX’s and IDEXX US’s good faith forecast for the quantity of the chemistry in question). For orders placed for delivery during each calendar year beginning with [**], if [**] of any New Chemistry Slide is determined to be greater than $[**] (as determined by OCD in good faith and taking into account IDEXX’s and IDEXX US’s good faith forecast for the quantity of the chemistry in question), then the minimum price per slide for such New Chemistry Slides shall be [**]; provided, that so long as IDEXX and IDEXX US order [**] or more of such slides in the aggregate in any calendar year, the minimum price per slide for such New Chemistry Slides shall not exceed $[**]. OCD shall have the right, from time to time and in good faith, to revise its determination of [**] of any New Chemistry Slide that is priced on Schedule 6 if IDEXX’s and IDEXX US’s aggregate actual annual orders of such slide fall below [**], and Schedule 6 shall be updated to reflect such revised [**]. | |||
| In the event that a chemistry listed in Schedule 5 should become known by OCD to be unavailable at any future date during the Term, OCD will so notify IDEXX at the earliest practicable date, and the parties shall cooperate to determine an appropriate course of action. |
| 6. | DELIVERY |
| 6.01 | Following acknowledgement by OCD of each order placed by IDEXX and on or before the delivery due date, OCD shall complete delivery of the appropriate quantity of slides and tips within ± 10%. Deviations of delivery quantities from order quantities within the ± 10% range may be compensated by IDEXX in the first subsequent order placed, subject to Section 5. In the event of a price increase for one or more of the VETTEST slides, such compensating quantity of such slides shall be processed at the previous lower price. | ||
| 6.02 | Order and delivery for all purchases hereunder shall be F.O.B. OCD’s facility in the U.S.A. | ||
| 6.03 | Unless otherwise advised in writing by OCD to IDEXX, OCD shall pack the VETTEST slides in accordance with OCD’s standard shipping configuration which is known to IDEXX and which at the Commencement Date contains approximately 60 cases per pallet, each case containing 100 boxes of slides. | ||
| 6.04 | The parties shall reasonably cooperate to identify and implement potential savings for both parties, consistent with the principles of lean manufacturing across the value chain, in all processes in their relationship, including without limitation |
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| improvements relating to slide manufacturing, packaging, ordering, build schedules, component purchasing, delivery schedules, quality testing and calibration processes, and product distribution processes (including direct shipment to IDEXX distributors and end-users), and including without limitation, identifying and implementing processes to reduce the number of slide lots supplied to IDEXX and to reduce IDEXX calibration time; provided, that neither party shall be obligated to implement a process change for which its net costs exceed its net benefits. |
| 7. | PRICES |
| 7.01 | Subject to the provisions of Sections 3.02 and 4.02 that contemplate OCD’s delivery of slides in 50-count cartridges if IDEXX US elects to format and/or package slides independently, all references to pricing for VETTEST slides in this agreement refer to the completed and packaged product in form ready for delivery to an end-user. The initial prices for each of the VETTEST slides (including the PANELS/ PROFILES) shall be as set forth in Schedule 5 hereto. | ||
| 7.02 | (a) The prices set forth in Schedule 5 shall remain in effect for orders placed through December 31, [**]. | ||
| (b) For orders placed for delivery during each calendar year beginning with [**], the price for each VETTEST slide listed on Schedule 5 (whether New Slides, single chemistry VETTEST slides for the VETTEST Analyzer, or per slide in PANELS/PROFILES, and, for avoidance of doubt, including New Chemistry Slides, subject to Section 5.06), within the respective volume tiers set forth below (aggregating for this purpose purchases by IDEXX and IDEXX US) shall be as set forth for such volume tier; provided , that Existing Special [**] Slides and New Special [**] Slides shall not be priced by reference to the volume tiers but will be priced as otherwise set forth below. For purposes of determining purchase volumes, up to [**] Existing Special [**] Slides shall be included in the determination, and all other Existing Special [**] Slides and New Special [**] Slides shall be excluded from the determination. The stated price shall apply only to slides purchased within the corresponding volume tier, and only with respect to the quantities within such tier. |
| Annual Volume Tier | Price per Slide | |||
|
|
|
|||
|
Tier 1: Up to [**]
|
$ | [**] | ||
|
Tier 2: In excess of [**] but not exceeding [**]
|
$ | [**] | ||
|
Tier 3: In excess of [**]
|
$ | [**] | ||
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| For all orders for Existing Special [**] Slides, the price per slide shall be as agreed between the parties pursuant to Section 4 of the Operations Agreement. | |||
| For all orders for New Special [**] Slides, the price per slide shall be as agreed between the parties pursuant to Section 7.04 of this Agreement. | |||
| Notwithstanding the foregoing, the price per slide for any New Chemistry Slide that is priced on Schedule 6 shall never be lower than the greater of (a) the minimum price as determined in accordance with Section 5.06 and identified on Schedule 6 as amended from time to time and (b) the price that would otherwise apply pursuant to the pricing tiers set forth above. | |||
| Promptly after IDEXX and IDEXX US provide their aggregate Annual Purchase Forecast for a calendar year pursuant to Section 5.04 and Section 5.04 of the US Agreement, the parties shall calculate the weighted average price of slides included in such forecast (the “ First Estimated Blended Price ”). | |||
| Upon determination of the First Estimated Blended Price applicable to a calendar year, for each order placed by IDEXX for delivery during the first three calendar quarters of such year, the amount invoiced and paid per slide listed on Schedule 5 shall be the First Estimated Blended Price . | |||
| Before IDEXX places its order for the fourth calendar quarter of the year, the parties shall review IDEXX’s and IDEXX US’s respective fourth-quarter orders and re-calculate the weighted average price of slides based on IDEXX’s and IDEXX US’s aggregate actual orders for the first three quarters and their orders for the fourth quarter (the “ Second Estimated Blended Price ”). If the Second Estimated Blended Price is different than the First Estimated Blended Price, the amount invoiced and paid per slide listed on Schedule 5 shall be the Second Estimated Blended Price. In addition, either party may calculate the resulting adjustment (up or down) for each slide delivered for the first three quarters to reflect the difference between the First Estimated Blended Price and the Second Estimated Blended Price, such that the amount paid by IDEXX for all slides delivered during the first three calendar quarters shall equal the Second Estimated Blended Price. If the adjustment is an upwards adjustment, then IDEXX shall pay OCD the aggregate amount of such adjustment, together with interest on such amount (calculated as set forth below), within 30 days of OCD’s request for such payment. If the adjustment is a downwards adjustment, then OCD shall pay IDEXX the aggregate amount of such adjustment, together with interest on such amount (calculated as set forth below), within 30 days of IDEXX’s request for such payment (or, at IDEXX’s option, apply such amount as a credit against IDEXX’s third or fourth quarter invoice). | |||
| Within 30 days after the end of the year (or 30 days after IDEXX and IDEXX US complete payment in full for all slides purchased during the year, if later), the |
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| parties shall perform a final calculation of the weighted average price based on all slides ordered by IDEXX and IDEXX US and delivered during the year (the “ Final Blended Price ”). If the Final Blended Price is different than the Second Estimated Blended Price, then IDEXX or OCD, as the case may be, shall make a final payment to the other, so that the final amount paid by IDEXX per slide for all slides ordered and delivered during the year shall equal the Final Blended Price. The party obligated to make such final payment shall do so within 30 days after the determination of the Final Blended Price. | |||
| Any adjustment payments made pursuant to either of the immediately preceding paragraphs, and any overdue payments by OCD or IDEXX of any amounts owed to the other pursuant to this Section 7.02, shall bear interest at a rate per annum equal to the Prime Rate. Such interest shall be calculated based on a 365-day year and the actual number of days elapsed since the due date for the applicable payment to which it relates. | |||
| For avoidance of doubt, the blended price calculations of this Section 7.02 shall apply only to chemistries listed on Schedule 5 , and only after calendar year [**]. | |||
| (c) OCD may, at its option, increase all prices for slides ordered for delivery (i) on or after January 1, [**] by an amount not to exceed [**]% of the “PPI Increase” (as defined below), provided that OCD may not increase prices under this clause (i) unless the PPI Increase is greater than [**]%; and (ii) on or after January 1, [**] by an amount (x) as provided in the preceding clause (i) or (y) by an amount not to exceed [**]% of the PPI Increase, provided that OCD may not increase prices under this subclause (y) unless the PPI Increase is greater than [**]%. OCD may calculate the PPI Increase each year beginning in [**], and any resulting price increase shall be effective for orders placed for delivery during the following calendar year and thereafter, unless and until increased again in accordance with the procedures set forth in this paragraph. For purposes of this Agreement, the “ PPI Increase ” shall be calculated by dividing (x) the average monthly “ PPI ” level for the most recent 12-month period ending with and including June of the year in which the PPI Increase is being calculated (each such period, a “ Measurement Period ”), by (y) the average monthly PPI level for the 12-month period immediately preceding that described in clause (x) (the “ Baseline Period ” with respect to such Measurement Period), then subtracting 1 and converting the remaining fraction into a percentage. All calculations shall be based on the latest version of the PPI level published as of the date the calculation is made. For purposes of this Agreement, “ PPI ” means the United States Producer Price Index – [**] (not seasonally adjusted), current series identification [**], as published by the Bureau of Labor Statistics on its Web site (www.bls.gov/ppi), or if not available from such Web site, then as published by the Bureau of Labor Statistics in its monthly periodical “ Producer Price Indexes .” OCD shall give IDEXX written notice of any price increase pursuant to this paragraph 7.02(c) at least 120 days before the beginning of the calendar year for which a price increase |
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| is to take effect; otherwise, the prices shall remain unaffected by such increase for such year. | |||
| (d) With respect to slides ordered for delivery on or after January 1, [**], if OCD’s aggregate cost of [**] (as defined below) for the most recent Measurement Period has increased on a per VETTEST slide basis as compared with the applicable Baseline Period by an amount that exceeds the PPI Increase for such Measurement Period as applied to the [**] for such Baseline Period, on a per VETTEST slide basis, then OCD shall be permitted to increase the price of each slide sold to IDEXX by the amount of such excess. “[**]” means [**] that are [**]. Schedule 9 attached hereto contains an example, for illustration purposes only, of the calculations described in this paragraph 7.02(d) and in paragraph 7.02(e). | |||
| (e) With respect to slides ordered for delivery on or after January 1, [**], if IDEXX’s share of Special Event Costs (as defined below) for the most recent Measurement Period has increased on a per VETTEST slide basis as compared with the applicable Baseline Period by an amount that exceeds [**] above the PPI Increase for such Measurement Period as applied to IDEXX’s share of Special Event Costs for such Baseline Period, on a per VETTEST slide basis, then OCD shall be permitted to increase the price of each slide sold to IDEXX by the amount of such excess. “ Special Event Costs ” means the aggregate net amount of (i) [**] with respect to [**] on which [**], (ii) [**] in the [**], and (iii) [**] as a result of [**]. “ IDEXX’s share ” of any of the foregoing shall mean the [**] that is attributable to the [**]. | |||
| (f) OCD shall give IDEXX written notice of any price increase pursuant to paragraph 7.02(d) or 7.02(e) at least 120 days before the beginning of the calendar year for which a price increase is to take effect; otherwise, the prices shall remain unaffected by such increase for such year. Any price increase pursuant to paragraph 7.02(d) or 7.02(e) shall be effective for orders placed for delivery during the following calendar year and thereafter, unless and until (i) increased again in accordance with the procedures set forth in such paragraphs or (ii) there occurs a decrease in any of the costs upon which the price increase was based (or any such cost that was relevant in one measuring period is not relevant in subsequent periods, for example, certain validation or other one-time costs incurred for compliance purposes), in which event IDEXX’s price per slide shall be reduced to the extent of such decrease (or one-time cost). In addition, OCD agrees to consider in good faith any request by IDEXX to reimburse OCD pursuant to paragraph 7.02(e) by a process other than an increase in slide prices, such as a lump sum payment or series of payments. Furthermore, with respect to any one-time cost or other temporary cost lasting no more than one year, IDEXX shall have the right to make such reimbursement in equal periodic payments (no less frequently than quarterly) over a period that is no longer than one year. |
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| (g) OCD shall give IDEXX reasonable detail as to its incremental [**] costs and incremental Special Event Costs on which it seeks to base a price increase pursuant to paragraph 7.02(d) or 7.02(e) or otherwise pass on to IDEXX pursuant to paragraph 7.02(f); provided, however, that IDEXX shall not have any right to obtain any details concerning OCD’s actual costs (other than such incremental cost differences used in such calculation). | |||
| (h) At any time after OCD’s aggregate annual sales volume of VITROS slides and VETTEST slides shall have declined more than [**]% from [**], the parties shall, at OCD’s request, discuss appropriate pricing of slides under this Agreement. Neither party shall be obligated to agree to any price change under this Section 7.02(h). | |||
| (i) OCD agrees that IDEXX shall have the right, no more than once per calendar year, to cause an internationally recognized independent accounting firm to conduct an audit, on reasonable advance notice and during normal business hours, of OCD’s books and records to the extent reasonably necessary to confirm OCD’s price increase calculations under this Section 7.02. Any report prepared by such independent accounting firm shall contain such firm’s conclusion concerning the validity of OCD’s price increase; provided, however, that such report shall not contain, and IDEXX shall not have any right to obtain, any details concerning OCD’s actual costs (other than incremental cost differences used in the calculation of OCD price increases). | |||
| (j) IDEXX agrees that OCD may audit IDEXX’s books and records relating to orders of VETTEST slides to confirm the pricing calculations under this Section 7.02. |
| 7.03 | The provisions of this Section 7.03 shall apply only to purchases of VETTEST slides for the VETTEST Analyzer during calendar years [**]. IDEXX shall be entitled to receive its Proportionate Share (based on sales during a calendar year) of a cash rebate in the amount set forth below if the total aggregate slide purchases by IDEXX and IDEXX US, in calendar year [**], exceed the aggregate quantities set forth below: |
| Incremental Cash Rebate – | ||
| Annual Slide Purchases | % Off Purchase Price | |
| 0 [**] | [**]% | |
| [**] | [**]% | |
| [**] | [**]% | |
| [**] | [**]% | |
| [**] | [**]% | |
| [**] | [**]% | |
| [**] and above | [**]% |
14
| The rebate amounts set forth above constitute a percentage reduction in the purchase price of any slides (including both single slides and PANELS/PROFILES slides) purchased above the corresponding quantity. The percentage amounts are incremental (as opposed to cumulative) and relate only to the quantities set forth opposite it. For example, if IDEXX and IDEXX US were to purchase, in the aggregate, [**] slides in calendar year [**], they would not be entitled to a [**]% price reduction on all slides that they purchased in such year, rather, they would be entitled to receive (i) [**] purchase price reduction on the first [**] slides purchased, (ii) a [**]% purchase price reduction on all slides purchased over [**], up to and including [**], (iii) an [**]% purchase price reduction on all slides purchased over [**] up to and including [**], and (iv) a [**]% purchase price reduction on all slides purchased over [**] up to and including the [**] slides that they purchased. The foregoing notwithstanding, it is understood and agreed that if IDEXX and IDEXX US do not, in the aggregate, achieve the aggregate Purchase Commitments set forth in Section 5 in any calendar year, then they shall not be entitled to receive a rebate for such year. | |||
| In the beginning of calendar year [**], OCD shall calculate an estimated Effective Rebate Rate (the “ Estimated Rebate Rate ”) based on the lesser of (i) IDEXX’s and IDEXX US’s aggregate Annual Purchase Forecast for such year and (ii) [**]% of the total aggregate number of slides that IDEXX and IDEXX US together purchased in [**]. The Estimated Rebate Rate for calendar year [**]shall be such that the average VETTEST slide price for [**], after giving effect to the rebate, shall be $[**]. Not later than thirty (30) days after the end of each of the first three calendar quarters of [**] (or thirty days after IDEXX and IDEXX US complete payment in full for slides purchased during such quarter, if later), OCD shall pay to IDEXX its Proportionate Share (based on purchases during the preceding quarter) of an amount equal to the aggregate estimated rebate payment that IDEXX and IDEXX US would together be entitled to receive in such quarter (the “ Estimated Rebate Payment ”). The Estimated Rebate Payment for any such quarter shall be calculated by (i) multiplying the Estimated Rebate Rate in effect during such quarter by the total aggregate purchase price for the VETTEST slides purchased by IDEXX and IDEXX US during such quarter and (ii) subtracting from such amount an amount equal to [**]% of the total calculated in clause (i) above. The foregoing notwithstanding, if, in calendar year [**], (i) IDEXX’s and IDEXX US’s total aggregate slide orders for the immediately preceding calendar year were less than [**]% of their aggregate Annual Purchase Forecast for such preceding calendar year or (ii) OCD determines, in its reasonable discretion, at any time after the end of the second calendar quarter of such calendar year, or IDEXX indicates at any time, that IDEXX and IDEXX US are reasonably unlikely to meet their aggregate Annual Purchase Forecast for such year, then OCD shall have the right to recalculate the Estimated Rebate Rate based on IDEXX’s and IDEXX US’s aggregate Purchase Commitment for such year (such recalculated rate being hereinafter referred to as the “ New Estimated Rebate Rate ”). If OCD elects to recalculate the Estimated Rebate Rate pursuant to the immediately |
15
| preceding sentence, (i) OCD shall notify IDEXX in writing which notice shall set forth the New Estimated Rebate Rate, (ii) OCD shall calculate all remaining quarterly Estimated Rebate Payments (which may include the Estimated Rebate Payment for the second calendar quarter) using the New Estimated Rebate Rate and (iii) all such Estimated Rebate Payments shall be made in accordance with this sub-clause 7.03, except that such Estimated Rebate Payments shall be less the amount by which the aggregate Estimated Rebate Payments received by IDEXX and IDEXX US during the then current calendar year exceed the aggregate Estimated Rebate Payments they would have received during such calendar year if the New Estimated Rebate Rate were in effect from the first day of such calendar year. | |||
| Notwithstanding any provision in this Agreement to the contrary, OCD shall not be required to pay to IDEXX its Proportionate Share of any Estimated Rebate Payments in any calendar year if (A) any amounts payable to OCD from IDEXX pursuant to this Agreement are overdue, unless such amounts are being disputed in good faith by IDEXX, or (B) OCD determines in its reasonable judgment that IDEXX and IDEXX US are reasonably unlikely to meet their aggregate Purchase Commitments for such year. In the case of clause (B) above, OCD shall have the right to make such determination at any time after the end of the second calendar quarter of calendar year [**], as the case may be (or such earlier time as IDEXX or IDEXX US indicates (through an Annual Purchase Forecast or otherwise) that their aggregate slide purchases are reasonably likely to be less than their aggregate Purchase Commitment for such year), provided that OCD has consulted with IDEXX and given IDEXX an opportunity (which opportunity shall be available for a period of not less than 5 business days nor more than 10 business days) to demonstrate its and IDEXX US’s intent and ability to meet their aggregate Purchase Commitments for such year. For the avoidance of doubt, OCD’s obligation to make any Estimated Rebate Payments shall be suspended during the period referred to in the immediately preceding sentence and the days in such period shall not be counted when determining the date by which the next scheduled Estimated Rebate Payment is due and payable. If, after fulfilling the requirements set forth in this paragraph, OCD makes the determination described in clause (B) above, OCD (i) shall promptly notify IDEXX in writing of its determination and (ii) shall thereafter have the right to cease making Estimated Rebate Payments for the remainder of such calendar year. | |||
| Not later than thirty (30) business days after the end of the last calendar quarter of calendar year [**], as the case may be (or thirty days after IDEXX and IDEXX US complete payment in full for slides purchased during such quarter, if later), OCD shall pay to IDEXX its Proportionate Share (based on purchases during such calendar year) of the amount by which (i) the Effective Rebate Rate multiplied by the total aggregate purchase price for VETTEST slides purchased by IDEXX and IDEXX US during such calendar year exceeds (ii) the total aggregate amount of the Estimated Rebate Payments made by OCD to IDEXX and IDEXX US during |
16
| such calendar year. If the amount in clause (ii) above exceeds the amount in clause (i) above, OCD shall deliver to IDEXX a written notice of such fact (a “ Reimbursement Notice ”) and IDEXX shall pay to OCD, within thirty (30) days of receipt of such notice an amount in cash equal to its Proportionate Share of the amount of such excess. | |||
| Notwithstanding the foregoing, if IDEXX and IDEXX US do not achieve their aggregate Purchase Commitment in calendar year [**], as the case may be, then IDEXX shall return all Estimated Rebate Payments received from OCD for such year no later than thirty (30) days after the end of such calendar year. | |||
| An illustrative representation of the foregoing rebate calculation methodology is attached hereto as Schedule 7 . | |||
| Notwithstanding any other provision of this Section 7.03, if any amounts payable to OCD from IDEXX pursuant to this Agreement are overdue, other than amounts that are being disputed in good faith by IDEXX, then OCD shall be entitled to withhold such overdue amount (plus any accrued interest) from any rebate payments to which IDEXX may be entitled. Any overdue payments by OCD or IDEXX of any amounts owed to the other pursuant to this Section 7.03 shall bear interest at a rate per annum equal to the Prime Rate. Such interest shall be payable at the same time as the payment to which it relates and shall be calculated daily on the basis of a year of 365 days and the actual number of days elapsed. | |||
| OCD shall prepare a remittance advice to accompany each rebate payment (or Reimbursement Notice), which shall set forth the reporting period for which the payment is made (or demanded) and a summary sheet which shall detail OCD’s calculation of the rebate (or reimbursement). If IDEXX disagrees with the rebate or reimbursement calculation, IDEXX shall promptly notify OCD, and the parties, together with IDEXX US if appropriate, shall review the calculations together in good faith to agree on any appropriate corrections or adjustments. | |||
| Any Special [**] Slides and any New Chemistry Slides shall be excluded from the determination of any rebate entitlement under Section 7.03 of this Agreement or the US Agreement, as the case may be, and the rebates described in Section 7.03 shall not apply to such slides. | |||
| 7.04 | If IDEXX provides OCD with specific documentation regarding [**] that would require IDEXX and IDEXX US, collectively, to purchase, in any calendar year, a number of slides over and above their most recent aggregate Annual Purchase Forecast for such year, [**] for slides, [**] for slides [**] by this Agreement, OCD agrees, within two weeks of its receipt of all additional information that OCD may reasonably request regarding such [**], to inform IDEXX as to whether or not OCD [**] in respect of [**], the number of slides [**] for such slides, and any other related terms and conditions that OCD deems applicable. OCD shall |
17
| consider such requests in good faith. OCD agrees that [**] IDEXX or IDEXX US pursuant to [**] remain in effect with respect to [**] until such time as [**] as the case may be. |
| 8. | INVOICES AND PAYMENT |
| 8.01 | OCD shall invoice IDEXX in respect of each order for the VETTEST slides upon completion by OCD of the delivery of such order. Each order shall be billed by OCD under one invoice in US dollars and payment shall be made by IDEXX in US dollars not later than thirty (30) days following the date of invoice. |
| 9. | EXCLUSIVITY |
| 9.01 | OCD undertakes not to sell or otherwise supply, and to cause its affiliates not to sell or otherwise supply, any Dry Slides (whether or not such slides are finished or complete) bar-coded for use in any Analyzers to any person, firm or company other than IDEXX or its affiliates. The provisions of this Section 9.01 shall survive the termination of this Agreement unless all of the following shall be true: (i) prior to such termination IDEXX (or its permitted assignees) and its affiliates shall have ceased to market the VETTEST slides, (ii) such cessation shall not have been a consequence of action by OCD, and (iii) OCD shall have complied with its obligations under this Agreement prior to such termination. | ||
| 9.02 | IDEXX undertakes not to market, and to cause its affiliates not to market, any Dry Slide for any chemistry identified on Schedule 5 , as amended from time to time, other than Dry Slides obtained by such person directly from OCD, to the extent that the desired chemistries are available from OCD; provided that, for purposes of adjusting inventory levels according to unanticipated changes in regional demand, IDEXX may purchase from IDEXX US VETTEST slides that IDEXX US obtained directly from OCD. The provisions of this Section 9.02 shall terminate [**] years after the Commencement Date with respect to VETTEST slides for the VETTEST Analyzer, and [**] years after the first commercial sale of the New Analyzer in the Territory, with respect to New Slides. At the time of termination (with respect to VETTEST slides for the VETTEST Analyzer, or New Slides, as the case may be), the parties shall negotiate whether they wish to renew the arrangements set out in this Section 9.02 with respect to VETTEST slides for the VETTEST Analyzer, or New Slides, as the case may be. Any renewal of these arrangements shall be set forth in a written agreement entered into by the parties. |
10.
MARKETING ARRANGEMENTS
10.01
IDEXX will be responsible for all marketing arrangements for
the Analyzers and the VETTEST slides. IDEXX may appoint any of
OCD’s medical/surgical dealers as distributors of or agents for the
Analyzers and the VETTEST slides but will not be obliged to do so.
18
10.02
IDEXX will be responsible for the establishment of dealer
performance criteria for all dealers including OCD’s
medical/surgical dealers (if any are appointed by IDEXX as
distributors of the Analyzers and the VETTEST slides).
10.03
IDEXX will keep OCD informed of and consult with OCD as to
marketing arrangements for the Analyzers and the VETTEST slides but
will not be obligated to OCD beyond the terms of this Agreement in
connection with such marketing arrangements.
10.04
OCD hereby grants to IDEXX the exclusive right to
distribute, to customers in the veterinary market, under the terms
set forth in this Section 10.04, VITROS slides and VITROS analyzers
that run solely VITROS slides. The parties also agree to use good
faith, commercially reasonable efforts to negotiate a definitive
distribution agreement not later than December 31, 2003.
Notwithstanding any other provision of this Section 10.04, OCD and
its affiliates shall continue to have the right to sell, directly or
through distributors, VITROS analyzers and VITROS slides to all
persons that are current VITROS end-user customers as of the
Commencement Date, and to renew or extend the term of any contracts
with such customers or, solely for the purpose of sales to such
customers, with such distributors.
The parties shall discuss terms for any sales opportunity in the
veterinary market in good faith, on a case-by-case basis. OCD
shall be responsible, at its sole expense, for providing warranty
and out-of-warranty service and support to any customers to whom
IDEXX sells a VITROS analyzer; provided that such analyzer is then
covered by a maintenance agreement between OCD and that customer.
IDEXX shall not modify or customize any VITROS product supplied
hereunder, or remove or alter any product labels or re-label any
products, packaging or related materials for VITROS product
supplied hereunder. OCD shall provide IDEXX, without charge, with
such training in the marketing and sale of VITROS products and with
such marketing and technical assistance and product information as
OCD may, in its discretion, consider necessary to assist with the
promotion and sale of the products; provided that OCD’s training
obligation shall be limited to training employees of IDEXX to
train other IDEXX employees and sales agents.
IDEXX shall defend and indemnify OCD from and against all damages,
liabilities, costs and expenses (including reasonable attorneys’
fees and costs) arising out of any claim resulting from (a) any
negligent act or omission or any willful misconduct by IDEXX in
connection with the VITROS products supplied by OCD under this
Section 10.04 or (b) any statement, representation or warranty made
by IDEXX or any of its agents with respect to a VITROS product that
is not contained in the labeling or package insert and is not
otherwise approved by OCD in writing or (c) any breach of IDEXX’s
covenants in the preceding paragraph. OCD
19
| shall defend and indemnify IDEXX from and against all damages, liabilities, costs and expenses (including reasonable attorneys’ fees and costs) arising out of any claim (i) for injuries or death to persons or animals or damage to or destruction of tangible property arising out of the use of VITROS products sold under this Section 10.04 (whether claimed by reason of breach of warranty, negligence, product defect or other similar cause of action, regardless of the form in which any such claim is made) or (ii) that any VITROS product sold under this Section 10.04 infringes a patent, copyright, trademark or trade secret of a third party; provided that this clause (ii) shall not apply to any claim arising out of the use of any product in conjunction with products not supplied by OCD. The indemnity procedures set forth in Section 16.06 shall apply to this Section 10.04. | |||
| The provisions of this Section 10.04 shall apply only within the Exclusivity Territory. Furthermore, the provisions of this Section 10.04 granting IDEXX exclusivity shall (a) automatically terminate immediately upon the termination of Section 9.02 and (b) not apply to any instruments weighing more than 200 pounds, or to any slides sold for use on such instruments, unless and until the parties have executed the distribution agreement contemplated by this Section 10.04. |
11.
SALES SUPPORT
11.01
IDEXX will be responsible for all necessary sales support
for the Analyzers and the VETTEST slides.
11.02
OCD’s sole obligation in respect of sale support shall be at
its own expense to assist IDEXX in resolving specific problems
resulting from the failure of VETTEST slides to conform to
specifications.
12.
TESTING
12.01
OCD shall disclose to IDEXX its quality assurance procedures
used in final evaluation of the VETTEST slides and full particulars
thereof as set out in the VETTEST Slide Quality Assurance Procedures
forming
Schedule 1
to this Agreement. OCD shall operate such
quality assurance procedures in accordance with
Schedule 1
.
12.02
Upon prior written notice from IDEXX, OCD shall grant
authorized representatives of IDEXX access to that part of OCD
production facilities which conducts final evaluation of the VETTEST
slides for the purpose of enabling such representatives to monitor
the application by OCD of the VETTEST Slide Quality Assurance
Procedures set out in
Schedule 1
. Such access shall be granted by
OCD to IDEXX and IDEXX US no more than twice in any twelve-month
period. With respect to VETTEST slides for use in the New Analyzer,
IDEXX shall be permitted to monitor those stages of the production
process that are unique to
20
| VETTEST slides for the New Analyzer, but with respect to VETTEST slides for the VETTEST Analyzer, such access shall be limited to OCD’s final evaluation facilities. All information obtained as a result of the audits contemplated by this Section 12.02 shall be subject to the provisions of Schedule 2 . |
13.
BAR CODING AND PACKAGING
13.01
The VETTEST slides shall be printed by OCD with special bar
coding for use in Analyzers.
13.02
OCD shall package the VETTEST slides and tips for the
VETTEST Analyzer in the physical manner as used for the VITROS
slides and tips at the time of packaging of such VETTEST slides and
tips. In the event of a change in VITROS slide or tip packaging
which has an impact on such VETTEST slide or tip packaging, OCD
shall notify IDEXX as early as practicable of the relevant
particulars of such change.
13.03
Except as authorized by Section 14.01 below, the label
content and art work associated with VETTEST slides and package
materials (including without limitation package materials for the
New Slides) shall not include any trademarks, trade names, or trade
dress of OCD. IDEXX shall furnish such label content and art work
to OCD on a timely basis, and such label content and art work shall
not be changed at any time during the Term without the prior
agreement of the parties.
14.
TRADE MARKS AND TRADE NAMES
14.01
OCD expressly authorizes IDEXX to use the phrase
“manufactured by Ortho-Clinical Diagnostics, Inc. for IDEXX (IDEXX
ADDRESS)” on package materials for VETTEST slides (including without
limitation package materials for the New Slides). No other uses of
OCD’s trademarks, trade names or trade dress are authorized by this
Agreement.
14.02
IDEXX shall neither acquire, nor claim any right, title or
interest in or to any of OCD’s trade marks or trade names by virtue
of this Agreement or through advertising and sale of the Analyzers
or the VETTEST slides or otherwise.
15.
PATENT INDEMNITIES
15.01
OCD shall indemnify and hold IDEXX harmless for all loss,
damage, cost and expense whatsoever, including legal fees, patent
attorney’s fees and court costs that IDEXX may incur or become
liable for as a result of any action, suit or claim alleging
infringement of any patent held by a third party arising from the
use and/or sale of the VETTEST slides or tips to the extent that
such action, suit, or claim relates in a material way to the
specification for the VITROS slides or tips. If as a result of any
judgment or settlement it is determined that a claim or claims
21
of a third party patent is infringed by the use and/or sale of the
VETTEST slides or tips as aforesaid and IDEXX is required to make
any payments to any third party as a result thereof, IDEXX may
off-set all such payments against any present and/or future
payments to be made to OCD hereunder.
15.02
IDEXX shall indemnify and hold OCD harmless for all loss,
damage, cost and expense whatsoever, including legal fees, patent
attorney’s fees and court costs that OCD may incur or become liable
for as a result of any action, suit or claim alleging infringement
of any patent held by a third party arising from (a) the
manufacture, use or sale of the VETTEST slides or tips to the extent
that the VETTEST slides or tips differ from the VITROS slides or
tips, (b) the manufacture, use or sale of the New Slide/Panel
Design, or (c) the manufacture, use or sale of any Analyzer.
15.03
All claims for indemnity under this Article 15 shall be
subject to the rights, obligations and procedures set forth in
Section 16.06 below.
16.
WARRANTY, LIABILITY AND INDEMNIFICATION
16.01
OCD hereby warrants that:
(a)
the VETTEST slides delivered to IDEXX shall be in
compliance with
Schedule 1
, and
(b)
OCD shall pack and ship products under this
Agreement in a manner consistent with OCD’s usual practices,
which shall be sufficient to protect the products from damage
during normal shipping and handling.
16.02
In the event of a breach on the part of OCD of Section 16.01
above, OCD’s liability shall be limited to the replacement of the
VETTEST slides or tips found to be defective, including shipping
costs for return of defective slides or tips and delivery of
replacement slides or tips.
16.03
OCD’s liability as stated in Section 16.02 shall be subject
to the following conditions:
(a)
IDEXX shall notify OCD promptly of any
noncompliance contrary to Section 16.01(a) or damage contrary
to Section 16.01(b).
(b)
IDEXX and its transferees shall not alter or
modify the VETTEST slides or packaging of the VETTEST slides
or tips without prior approval of OCD.
22
16.04
Except as provided in this Section 16 there are no other
warranties, express or implied, including warranties for fitness for
any particular use or of merchantability.
16.05
Subject to Section 15, IDEXX shall indemnify and hold
harmless OCD from and against any claim, loss, damage, or expense
(including attorney’s fees) with respect to any physical injury to
persons, animals or property arising out of or in connection with
IDEXX’s use or sale of any Analyzer or the VETTEST slides, and any
claim of infringement of any trademark (except OCD’s own trademark),
trade dress, trade secret, or copyright. IDEXX shall notify OCD (a)
at the commencement of any action or suit based on any such claim
and (b) in the event of any injunction or other order prohibiting
the sale or use of any Analyzer or VETTEST slide.
16.06
Any party claiming indemnification under this Agreement (the
“
Indemnitee
”) shall notify the party from which indemnification is
claimed (the “
Indemnifying Party
”) in writing promptly upon becoming
aware of any claim to which such indemnification may apply. Failure
to provide such notice shall constitute a waiver of the Indemnifying
Party’s indemnity obligations hereunder if, and only to the extent
that, the Indemnifying Party is materially damaged thereby. The
Indemnifying Party shall have the right to assume and control the
defense of the claim at its own expense. If the right to assume and
have sole control of the defense is exercised, the Indemnitee shall
have the right to participate in, but not to control, such defense
at its own expense. If the Indemnifying Party does not assume the
defense of the claim, the Indemnitee may defend the claim at the
Indemnifying Party’s expense. The Indemnitee will not settle or
compromise the claim without the prior written consent of the
Indemnifying Party. The Indemnifying Party will not, without the
consent of the Indemnitee (which consent will not be unreasonably
withheld), settle or compromise the claim in any manner which would
have an adverse effect on the Indemnitee, unless (x) prior to such
settlement or compromise the Indemnifying Party acknowledges in
writing its obligation to pay in full the amount of the settlement
or compromise and the Indemnitee is furnished with security
reasonably satisfactory to it that the Indemnifying Party can in
fact pay such amount, (y) such settlement or compromise includes a
full release of such claim against the Indemnitee and (z) such
settlement or compromise provides for no relief or remedy other than
money damages. The Indemnitee shall reasonably cooperate with the
Indemnifying Party and will make available to the Indemnifying Party
all pertinent information under the control of the Indemnitee.
17.
SECRECY
17.01
Each of IDEXX, IDEXX Parent and OCD agrees to protect
confidential information disclosed to it upon terms set out in
Schedule 2 attached hereto.
23
18.
PERIOD OF AGREEMENT
18.01
Subject to the terms and conditions set forth herein, the
term (the “Term”) of the Agreement shall be the period from the
Commencement Date until December 31, 2018.
19.
TERMINATION
19.01
This Agreement may be terminated by either party in any of
the following events:
(a)
If the other party is guilty of gross or
persistent breaches of the terms of this Agreement, which
breaches are not remedied to the satisfaction of the other
party after ninety (90) days notice in writing to do so. Any
such breach shall entitle the innocent party to terminate this
Agreement by notice in writing which notice shall be effective
at the end of ninety (90) days following the date of such
notice.
(b)
If the other party becomes insolvent or compounds
with its creditors or goes into liquidation (other than for
the purposes of corporate reorganization) then the innocent
party may terminate this Agreement by notice in writing which
shall have immediate effect.
(c)
If such party elects to cease marketing Dry Slide
diagnostic products, then it shall have the right, by notice
given at any time after January 1, [**], to terminate this
Agreement upon [**] years’ prior written notice.
19.02
Changes in the equity ownership or corporate reorganizations
of either party shall not be grounds for termination of this
Agreement, except that if more than [**]% of the outstanding capital
stock of IDEXX or IDEXX Parent is owned or controlled by a
competitor of OCD, OCD may in its discretion terminate the
provisions of Section 10.04 of this Agreement immediately upon
written notice to IDEXX.
19.03
This Agreement shall terminate automatically upon any
termination of the US Agreement.
19.04
The provisions of this Agreement dealing with rights and
obligations after termination of this Agreement, including without
limitation Sections 15, 16, 17, 21, 22, 23, 24, 25, 26, 28, 29 and
30, shall survive the expiration or termination of this Agreement
and continue to be enforceable to the extent necessary to achieve
the logical and intended purposes of such provisions.
24
20.
FORCE MAJEURE
21.
GOVERNING LAW; JURISDICTION
22.
SEVERABILITY
20.01
Neither party shall be liable for any failure or delay in
performing any of its respective obligations under this Agreement
to the extent that such failure or delay is due to any cause beyond
its reasonable control (a “
Force Majeure Event
”). The
non-performing party shall give the other party prompt written
notice of such inability to perform and shall use commercially
reasonable efforts to resume performance as soon as reasonably
practicable. If as a result of a Force Majeure Event OCD is unable,
using commercially reasonable efforts, to meet its supply
obligations to IDEXX hereunder for a period exceeding twenty-four
months, or if IDEXX reasonably determines that it will not be
feasible for OCD through the use of commercially reasonable efforts
to resume the supply of VETTEST slides within twenty-four months,
then either party may terminate this Agreement immediately upon
written notice to the other party.
21.01
The construction, validity and performance of this Agreement
shall be governed in all respects by the laws of the State of New
York, USA. Any legal actions relating to this Agreement must be
brought in the court of appropriate jurisdiction in the State of New
York, which shall have exclusive jurisdiction, and the parties
hereby waive any claim of lack of jurisdiction or inconvenient
forum. The prevailing party in any litigation under this Agreement
shall be entitled to an award of its costs, including reasonable
attorneys’ fees and expenses. Each party hereto waives its right to
trial of any issue by jury. Each party hereto waives any claim to
punitive, exemplary or multiplied damages from the other. Each
party hereto waives any claim of consequential damages from the
other.
22.01
Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or
provision in any other situation or in any other jurisdiction. If
the final judgment of a court of competent jurisdiction declares
that any term or provision hereof is invalid or unenforceable, then
the parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the
scope, duration, or area of the term or provision, to delete
specific words or phrases, or to replace any invalid or
unenforceable term or provision with a term or provision that is
valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and
this Agreement shall be enforceable as so modified after the
expiration of the time within which the judgment may be appealed.
25
23.
WAIVERS
23.01
Failure of either party to this Agreement to insist upon
strict observance or compliance with all its terms and conditions in
one or more instances shall not be deemed to be a waiver of its
right to insist upon such observance or compliance with such term or
condition or with any other terms or conditions hereof in the
future.
24.
PRIOR AGREEMENTS; INTERPRETATION
24.01
As of the Commencement Date, this Agreement shall take
effect in substitution for the Prior Europe Agreement, the
Operations Agreement (except as otherwise provided in Section 7.04
of this Agreement), Section B (Amendments) of the Settlement
Agreement, and all or any other previous agreements relating to the
subject matter hereof whether the same are formal agreements or
agreements that would be inferred from the parties’ correspondence
or conduct, and all such substituted agreements shall be deemed to
have been terminated by mutual consent on the Commencement Date;
provided, however, that nothing contained herein shall be deemed to
modify or terminate the US Agreement, except that the Purchase
Commitments and Annual Purchase Forecasts referred to in Section 5
and in
Schedule 4
of this Agreement and the US Agreement represent
the aggregate commitments and forecasts of IDEXX and IDEXX US and
not the individual commitments and forecasts of IDEXX US under the
US Agreement or IDEXX under this Agreement. For avoidance of doubt,
this Agreement (as it may be amended or restated from time to time)
is the “Europe Agreement” referred to in the US Agreement.
25.
ENTIRE AGREEMENT
25.01
This Agreement, together with the US Agreement, the
Settlement Agreement (other than Section B thereof), and that
certain memorandum agreement dated September 12, 2003 regarding
slide packaging (as amended to date), constitutes the complete
agreement of the parties concerning the subject matter hereof and
thereof during the Term, and, with respect to all periods from and
after the Commencement Date, supersedes all prior agreements between
the parties regarding its subject matter.
26.
ALTERATION OR MODIFICATION
26.01
No alteration, amendment or modification to this Agreement
or the attached Schedules shall be of any force or effect unless in
writing and signed by both parties. No modification shall be
effected by the acknowledgement or acceptance of purchase order
forms or order confirmations or invoices or other documents
containing different conditions.
26
27.
ASSIGNMENT
27.01
This Agreement shall not be capable of assignment by either
party to a company of which it owns less than a majority or which
owns less than a majority of the party save in the case of (i) an
assignment at OCD’s sole discretion to an acquiror of OCD’s dry
slide business or (ii) an assignment at IDEXX’s sole discretion to
an acquiror of IDEXX’s VETTEST and New Analyzer business; provided
that no assignment shall release the assigning party from any
obligations hereunder. In the case of an assignment under the
preceding clause (ii) to an entity which is a competitor of OCD’s
diagnostics business, OCD may in its discretion terminate the
provisions of Section 10.04 granting IDEXX exclusivity or
restricting sales or marketing by or on behalf of OCD immediately
upon written notice to IDEXX.
This Agreement shall be binding on and inure to the benefit of the
parties hereto and their permitted successors and assigns.
28.
GOVERNING LANGUAGE
28.01
This Agreement is drafted in English. If this Agreement is
translated into a language other than English, then the original
English version of this Agreement shall control all questions of
interpretation with respect thereto. Any other documents delivered
or given pursuant to this Agreement, including notices, shall be in
English.
29.
NOTICES
29.01
Any notice, statement or other communication to be given by
one party to the other hereunder may be given by registered mail,
airmail, internationally recognized courier, facsimile or telex to
the party concerned at the addresses set out below:
Ortho-Clinical Diagnostics, Inc.
1001 US Highway 202
Raritan, New Jersey 08869, USA
For the attention of: Vice President and General Manager, Americas
With a copy to:
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933, USA
For the attention of: Office of General Counsel
27
IDEXX Europe B.V.
Koolhovenlaan 20
1119 NE — Schiphol-Rijk
The Netherlands
For the attention of: Director of European Finance and Administration
With a copy to:
IDEXX Laboratories, Inc.
One IDEXX Drive
Westbrook, Maine 04092, USA
For the attention of: Office of General Counsel
29.02
Any notice, payment or communication so given or made shall
be deemed to have been received at the time when in the ordinary
course of transmission the same should have reached its destination.
Either party may change its address for the purpose of this
Agreement by giving notice of such change to the other party
pursuant to the provisions of this Section. For purposes of this
Section 29, notice given by OCD to IDEXX US under the US Agreement
shall be deemed given to IDEXX.
30.
GUARANTY
30.01
IDEXX Parent hereby guarantees to OCD the due performance
and observance by IDEXX of all of the provisions of the Agreement to
be performed and observed by it under this Agreement, for which
IDEXX Parent shall be jointly and severally liable, without
requiring any notice of non-payment, non-performance or
non-observance, or proof of notice or demand, all of which IDEXX
Parent hereby waives. OCD may proceed against IDEXX Parent
separately or jointly, before, after or simultaneously with
proceeding against IDEXX for default. This guaranty shall not be
terminated, affected or impaired in any way by reason of (i) the
assertion by OCD against IDEXX of any of the rights or remedies
reserved to OCD under this Agreement, (ii) the commencement by OCD
of any proceedings against IDEXX, (iii) the granting by OCD of any
extensions of time or indulgence to IDEXX, (iv) any change in or
amendment to this Agreement, or (v) any payment or performance being
invalid in connection with any bankruptcy, insolvency,
reorganization or similar proceedings in respect to IDEXX. This
guaranty is absolute and unconditional and shall continue in full
force and effect as to any renewal, extension, amendment, addition,
assignment or transfer or other modification of this Agreement,
whether or not IDEXX Parent shall have been notified of or consented
to any such action, and regardless of bankruptcy or insolvency of
IDEXX or the actual or purported rejection by a trustee in such
bankruptcy of this Agreement or any limitation on any claim in such
bankruptcy for damages resulting from the actual or purported
termination of this Agreement
28
| or the enforceability in such bankruptcy of this Agreement. IDEXX Parent hereby agrees that this guaranty shall continue to be effective or shall be reinstated, as the case may be, if at any time payment of any sum hereby guaranteed is rescinded or must be otherwise restored or returned by OCD upon the insolvency, bankruptcy or reorganization of IDEXX, or otherwise, all as though such payment had not been made. |
IN WITNESS WHEREOF and intending to be legally bound, the parties hereto have caused this Agreement to be duly executed in duplicate by their respective authorized representatives the day and year first written above.
|
ORTHO-CLINICAL
DIAGNOSTICS, INC. |
IDEXX EUROPE B.V. | |||||
| By: | /s/Tony Zezzo | By: | /s/Conan R. Deady | |||
|
|
|
|||||
| Tony Zezzo, | Conan R. Deady, | |||||
| Vice President and General Manager, | Director | |||||
| Americas | ||||||
|
Solely as to Sections 17 and 30
IDEXX LABORATORIES, INC. |
||||||
| By: | /s/Jonathan W. Ayers | |||||
|
|
||||||
| Jonathan W. Ayers, | ||||||
| President and Chief Executive Officer | ||||||
29
Schedule 1 – VetTest® Slide Quality Assurance Procedures
VETTEST Slides for the VETTEST Analyzer :
Introduction
The following procedure constitutes a generic overview of the quality assurance provisions for finishing of VITROS slides and applies in like manner to product release for the VETTEST slides.
VETTEST Slide Quality Assurance
VETTEST slides will be produced to the same quality standards as VITROS and DT 60 slides for OCD’s human market unless otherwise agreed to by IDEXX.
Bar Coding
Bar code printing on the VETTEST slides will render the VETTEST slides incompatible with use in VITROS analyzers. OCD will reserve certain number sequences for generation of the bar code patterns on the VETTEST slides.
New Slides :
Specifications to be determined by IDEXX US as part of the Development Program contemplated in the US Agreement and, together with quality assurance procedures, reasonably agreed in writing by OCD and IDEXX US for purposes of this Schedule 1 .
30
Schedule 2
Section 1. Obligation to Keep Information Confidential . Each party agrees to hold, and to cause its respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence the terms of the Agreements, and all documents and information concerning the other party, whether oral or written, furnished or made known to such party in connection with either of the Agreements or any project or discussion under, or related to, either of the Agreements; provided that no party shall be required to keep any information confidential (i) if such party is compelled to disclose such information by judicial or administrative process or by other requirements of law (including without limitation the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended) and such party has provided prior written notice to the other party and given such other party reasonable opportunity to contest disclosure or (ii) to the extent such information can be shown to have been (A) previously known to such party on a nonconfidential basis, (B) in the public domain through no fault of such party, (C) later lawfully acquired from a third party source or (D) independently developed by such party without reference to confidential information. The foregoing notwithstanding, any party may disclose information concerning the other party or the Agreements to its and its affiliates’ officers, directors, employees, accountants, counsel, consultants, advisors and agents in connection with its performance of this Agreement so long as such persons are informed by such party of the confidential nature of such information and are directed by such party to treat such information confidentially, it being understood and agreed that such party shall be responsible for any failure to treat such information confidentially by such persons. The obligation of each party to hold any information in confidence shall be satisfied if it exercises the same care with respect to such information as it would to preserve the confidentiality of its own similar information. The confidentiality provisions of this Schedule 2 shall remain in effect for so long as this Agreement is in effect and for a period of three (3) years thereafter.
Section 2. Public Announcements . No party to this Agreement shall originate any news release or other public announcement, written or oral, relating to this Agreement or the US Agreement, without the prior written consent of the other party, except to the extent such news release or other public announcement is required by law; provided that in the event an announcement is required by law, the party issuing same shall still be required to use its commercially reasonable efforts to consult with the other party or parties named or referred to in such announcement prior to its release as the circumstances reasonably permit, in order to allow such other party or parties to comment on the use of their names or the references to them and, after its release, shall provide such other party or parties with a copy thereof. If a party has previously reviewed and approved a public announcement, its further approval shall not be required with respect to those provisions of subsequent announcements that are substantially similar in scope and substance to provisions that have been previously approved. In no event shall IDEXX or IDEXX Parent use the name “Johnson & Johnson” or “J&J” in any publicity relating to this Agreement or the US Agreement, whether written or oral, other than to state that OCD is “a Johnson & Johnson company” or a (wholly-owned) subsidiary of Johnson & Johnson.
31
Section 3. Governing Law . The construction, validity and performance of this Schedule 2 shall be governed in all respects by the laws of the State of New York, USA.
Section 4. Notices . Any notices required to be given under this Schedule 2 shall be given in the manner specified by Section 29 of the Agreement.
32
Schedule 3 - Panels/Profiles
(Applicable only to VETTEST Analyzer)
The initial PANEL shall be the “Pre-Anesthetic Panel” consisting of four sets of the following six VETTEST slides:
| BUN | Urea Nitrogen | |
| ALT | Alanine aminotransferase | |
| GLU | Glucose | |
| TP | Total protein | |
| CREA | Creatinine | |
| ALKP | Alkaline phosphatase |
[**]The initial PROFILES shall be the “General Health Profile” and the “Large
Animal Profile”, each consisting of two sets of 12 VETTEST slides as follows:
General Health Profile
Large Animal Profile
ALB
Albumin
ALB
Albumin
ALKP
Alkaline phosphatase
ALKP
Alkaline phosphatase
ALT(SGPT)
Alanine aminotransferase
AST
AST
AMYL
Amylase
Ca
2+
Calcium
Ca
2+
Calcium
CK
CK
CHOL
Cholesterol
GGT
Gamma GT
CREA
Creatinine
GLU
Glucose
GLU
Glucose
PHOS
Inorganic phosphate
PHOS
Inorganic phosphate
LDH
LDH
TBIL
Total bilirubin
MG
Magnesium
TP
Total protein
TP
Total Protein
BUN
Urea Nitrogen
BUN
Urea Nitrogen
Packaging for the Pre-Anesthetic Panels, the General Health Profiles and the Large Animal Profiles for the VETTEST Analyzer has been previously agreed upon by the parties, and any changes to the slide composition or packaging of the initial PANEL or the initial PROFILES shall be negotiated in good faith and mutually agreed upon by OCD and IDEXX. The slide composition, packaging and initial pricing of any additional PANELS/PROFILES shall be mutually agreed upon by OCD and IDEXX. Unless otherwise agreed by the parties in writing with respect to one or more specific PANELS or PROFILES, all purchases by IDEXX or IDEXX US of VETTEST slides packaged as PANELS/PROFILES shall be credited against the Annual Purchase Forecasts and Purchase Commitments for such slides under this Agreement and the US Agreement.
New Slide/Panel Design for the New Analyzer shall be as developed by IDEXX US under Article 3 of the US Agreement.
33
Schedule 4 - Purchase Commitments
Minimum Slide Purchase
Year
Commitment ( [**] )
2003
[**]
2004
[**]
2005
[**]
2006
[**]
2007
[**]
2008
[**]
2009
[**]
2010
[**]
34
Schedule 5 - Products and Prices
Customer No.: 314 8251
(as of the Commencement Date)
Single Slides (Box of 25)
Catalog Number
Territory Pricing
822 7134
$
[**]
831 5459
$
[**]
808 3750
$
[**]
181 6842
$
[**]
820 8191
$
[**]
811 3979
$
[**]
804 8191
$
[**]
835 4888
$
[**]
835 8582
$
[**]
818 3477
$
[**]
853 8670
$
[**]
826 1315
$
[**]
813 0536
$
[**]
835 1082
$
[**]
196 6191
$
[**]
108 0266
$
[**]
807 0856
$
[**]
838 0396
$
[**]
193 7093
$
[**]
192 2285
$
[**]
150 7326
$
[**]
100 0793
$
[**]
Profile Slides (Box of 24)
Catalog Number
Territory Pricing
160 7175
$
[**]
801 5109
$
[**]
680 0071
$
[**]
Other
Catalog Number
WW Pricing
869 9852
$
[**]
175 7384
$
[**]
35
Schedule 6 – Minimum Prices for New Chemistries
36
Schedule 7 - Illustrative Rebate Calculations
The Estimated Rebate Payments will be calculated for each of the first three calendar quarters using the Effective Rebate Rate, as described more fully in sub-clause 7.03 of the Agreement. Any required adjustments will be made at the end of the fourth calendar quarter, in accordance with sub-clause 7.03 of the Agreement.
Example : The aggregate Annual Purchase Forecast for IDEXX and IDEXX US in a given year is [**] slides; pricing is $[**]/slide; blended rebate percentage rate is [**]%, as follows:
|
[**] slides * [**]% = [**] slides
[**] slides * [**]% = [**] slides [**] slides * [**]% = [**] slides [**] slides * [**]% = [**] slides [**] slides * [**]% = [**] slides Total Slides Eligible for Rebate = [**] slides |
Effective
Rebate = Total slides eligible for rebate / total purchases =
[**] = [**]%
Actual aggregate volume purchased by IDEXX and IDEXX US equals volume projected at the beginning of the year
.
Actual Qtrly.
Calculated
[**]%
Vol.
Purchases
Effective Rebate
Rebate Each Qtr.
Holdback
Rebate Paid
([**])
($[**])
% [**] Vol.)
([**])
([**])
([**])
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
$
[**]
$
[**]
$
[**]
True-up:
$
[**]
$
[**]
Total:
$
[**]
$
[**]
Actual aggregate volume purchased by IDEXX and IDEXX US is greater than volume projected at the beginning of the year
.
Actual Qtrly.
Calculated
[**]%
Vol.
Purchases
Effective Rebate
Rebate Each Qtr.
Holdback
Rebate Paid
([**])
($[**])
% 9[**] Vol.)
([**])
([**])
([**])
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
$
[**]
$
[**]
$
[**]
True-up:
$
[**]
$
[**]
Total:
$
[**]
$
[**]
37
Actual aggregate volume purchased by IDEXX and IDEXX US is lower than volume projected at the beginning of the year
.
Actual Qtrly.
Calculated
[**]%
Vol.
Purchases
Effective Rebate
Rebate Each Qtr.
Holdback
Rebate Paid
([**])
($[**])
% [**] Vol.)
([**])
([**])
([**])
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
[**]
%
$
[**]
$
[**]
$
[**]
[**]
$
[**]
$
[**]
$
[**]
$
[**]
True-up:
$
[**]
$
[**]
Total:
$
[**]
$
[**]
Calculation of IDEXX’s Proportionate Share of rebate (assuming Actual aggregate volume purchased by IDEXX and IDEXX US equals volume projected at the beginning of the year) :
Assumptions :
| • | Number of slides purchased by IDEXX: [**] slides | |
| • | Total number of slides purchase by IDEXX and its affiliates: [**] slides | |
| • | Total rebate earned: $[**] |
Calculation :
IDEXX’s rebate equals: [**] slides / [**] slides * $[**], or $[**].
38
Schedule 8 – Eligible New Chemistry Slides
[**]
39
\
Schedule 9 – Example of Cost Adjustment Calculations
(Assumes PPI = [**]%)
Scenario 1
Scenario 2
% of
OCD’s
Year 1
% Change
Year 2
$ Change
% Change
Year 2
$ Change
Costs
Usage
Cost
In Cost
Cost
in Cost
in Cost
Cost
in Cost
[**]
[**]
%
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
[**]
[**]
%
$
[**]
[**]
%
$
[**]
-$
[**]
[**]
%
$
[**]
$
[**]
[**]
[**]
%
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
[**]
[**]
%
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
[**]
$
[**]
[**]
$
[**]
$
[**]
[**]
$
[**]
$
[**]
Total
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
Total (x[**])
$
[**]
[**]
%
$
[**]
$
[**]
[**]
%
$
[**]
$
[**]
Scenario 1 Conclusion: [**]Cost Adjustment Required (Other Costs Increased by < [**]% over PPI)
Scenario 2 Conclusion: [**] Costs Adjustments Required
$
[**]
$
[**]
$
[**]
$
[**]
$
[**]
$
[**]
$
[**]
$
[**]
* - [**] Costs - [**] $[**], or $[**]/slide @ [**] slides
40
Schedule 10 – Additional Countries in the Territory
Albania
Liechtenstein
Andorra
Lithuania
Armenia
Macedonia
Azerbaijan
Malta
Bahrain
Monaco
Belarus
Norway
Bosnia and Herzegovina
Oman
Bulgaria
Pakistan
Croatia
Poland
Cyprus
Qatar
Czech Republic
Romania
Estonia
Russia
Faroes Islands
San Marino
Georgia
Saudi Arabia
Hungary
Slovakia
Iceland
Slovenia
Iran
Switzerland
Iraq
Syria
Israel
Tajikistan
Jordan
Turkey
Kazakhstan
Turkmenistan
Kuwait
Ukraine
Kyrgyzstan
United Arab Emirates
Latvia
Uzbekistan
Lebanon
Yemen
41
Exhibit 10.13
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of September 8, 2003, (this “Agreement”), by and between IDEXX Laboratories, Inc., a Delaware corporation (the “Company”) and William C. Wallen (the “Executive”).
The Board of Directors of the Company (the “Board”) has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Certain Definitions .
(a) The “Effective Date” shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive’s employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the “Effective Date” shall mean the date immediately prior to the date of such termination of employment.
(b) The “Change of Control Period” shall mean the period commencing on the date hereof and ending on the second anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the “Renewal Date”), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 120 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.
2. Change of Control . For the purpose of this Agreement, a “Change of Control” shall mean:
(a) The acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction which satisfies the criteria set forth in clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or
(b) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequently to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or
(c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, immediately following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, of the corporation resulting from such Business Combination (which as used in this Section 2(c) shall include, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination, or the combined voting power of the then-outstanding voting securities of such corporation and (iii) at least half of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or
2
(d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company.
3. Employment Period . The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the earlier of (i) the second anniversary of such date or (ii) the termination of the Executive’s employment pursuant to Section 5 hereof (the “Employment Period”). Except as provided in Section 1(a), nothing in this Agreement shall, prior to the Effective Date, impose upon the Company any obligation to retain the Executive as an employee. In addition, nothing in this Agreement shall restrict the Executive from terminating his employment with the Company, and no such termination by the Executive shall be deemed a breach of this Agreement.
4. Terms of Employment .
(a) Position and Duties .
(i) During the Employment Period, (A) the Executive’s position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive’s services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location.
(ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company or the terms of this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.
(b) Compensation .
(i) Base Salary . During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated
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companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term “affiliated companies” shall include any company controlled by, controlling or under common control with the Company.
(ii) Annual Bonus . In addition to Annual Base Salary, the Executive shall be entitled to receive such annual bonus as may be determined by the Board of Directors, but in no event less than the annual bonus paid or payable in respect of the full fiscal year immediately preceding the Effective Date.
(iii) Incentive Plans . During the Employment Period, the Executive shall be entitled to participate in all incentive plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(iv) Welfare Benefit, Savings and Retirement Plans . During the Employment Period, the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit, savings and retirement plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, split-dollar life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(v) Expenses . During the Employment Period, the Executive shall be entitled to receive reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies, practices and procedures of the Company in effect immediately prior to the Effective Date.
(vi) Vacation . During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the plans, policies, programs and practices of the Company and its affiliated companies, but in no event shall such plans, practices, policies and
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programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies.
(c) Options . Upon the occurrence of a Change of Control, all outstanding options to purchase shares of Common Stock held by the Executive shall become immediately exercisable in full.
5. Termination of Employment.
(a) Death or Disability . The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.
(b) Cause . Subject to Section 5(d), the Company may terminate the Executive’s employment during the Employment Period for Cause. For purposes of this Agreement, “Cause” shall mean:
| (i) the willful failure of the Executive to perform substantially the Executive’s duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness), which failure is not cured within 30 days after a written demand for substantial performance is delivered to the Executive by the Board which specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive’s duties, or | |
| (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. |
For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company.
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(c) Good Reason . The Executive’s employment may be terminated by the Executive with or without Good Reason. For purposes of this Agreement, “Good Reason” shall mean:
| (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; | |
| (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement or any other provision hereof requiring a payment or provision of a benefit to the Executive, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; | |
| (iii) the Company’s requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company’s requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; | |
| (iv) any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Agreement; or | |
| (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. |
For purposes of this Section 5(c), any good faith determination of “Good Reason” made by the Executive shall be conclusive.
Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first twelve (12) months after the Effective Date shall be deemed to be a termination for Good Reason for all purposes of this Agreement.
(d) Notice of Termination .
(i) Any termination by the Company for Cause, or by the Executive for Good Reason, shall be effected by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set
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forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstances in enforcing the Executive’s or the Company’s rights hereunder.
(ii) Any Notice of Termination for Cause must be given within sixty (60) days of the Board learning of the event(s) or circumstance(s) which the Board believes constitute(s) Cause. Prior to any Notice of Termination for Cause being given (and prior to any termination for Cause being effective), the Executive shall be entitled to a hearing before the Board at which he may, at his election, be represented by counsel and at which he shall have a reasonable opportunity to be heard. Such hearing shall be held on not less than fifteen days prior written notice to the Executive stating the Board’s intention to terminate the Executive for Cause and stating in detail the particular event(s) or circumstance(s) which the Board believes constitute(s) Cause for termination.
(e) Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, subject, in the case of termination by the Company, for Cause, to the Company’s compliance with Section 5(d)(ii); (ii) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination; and (iii) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be.
6. Obligations of the Company Upon Termination .
(a) Good Reason; Other Than for Cause, Death or Disability . If, during the Employment Period, the Company shall terminate the Executive’s employment other than for Cause, Death or Disability or the Executive shall terminate employment for Good Reason:
(i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts:
| A. the sum of (1) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the highest annual cash bonus paid to the Executive with respect to the last three fiscal years prior to the Effective Date and (II) the annual bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the “Highest Annual Bonus”) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts |
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| described in clauses (1), (2), and (3) shall be hereinafter referred to as the “Accrued Obligations”); and |
| B. the amount equal to the product of (1) two and (2) the sum of (x) the Executive’s Annual Base Salary and (y) the Highest Annual Bonus. |
(ii) for 24 months after the Executive’s Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive’s family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement (excluding any savings and/or retirement plans) if the Executive’s employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer-provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until 24 months after the Date of Termination and to have retired on the last day of such period;
(iii) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”); and
(iv) the Company shall timely reimburse the Executive up to an aggregate of $25,000 for expenses incurred in connection with outplacement services and relocation costs incurred in connection with obtaining new employment outside the State of Maine until the earlier of (i) 24 months following the termination of Executive’s employment or (ii) the date the Executive secures full time employment.
(b) Death . If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, this Agreement shall terminate without further obligations to the Executive’s legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination.
(c) Disability . If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.
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(d) Cause; Other than for Good Reason . If the Executive’s employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid or not yet provided. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.
7. Nonexclusivity of Rights . Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.
8. Full Settlement . The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive (under this Agreement or otherwise) or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal, accounting and other fees and expenses (including, without limitation, of expert witnesses) which the Executive may reasonably incur (i) as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”), (ii) in connection with the negotiation and preparation of this Agreement and (iii) in connection with the Executive’s performance of his obligations under Section 9(c).
9. Certain Additional Payments by the Company .
(a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment, benefit, or distribution by the Company to or for the benefit of the Executive which constitutes a “parachute payment” within the meaning of Section 280G of the Code (whether provided pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required
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under this Section 9)(a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and excise tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the “Reduced Amount”) such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount.
(b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by PricewaterhouseCoopers LLP or such other certified public accounting firm as may be designated by the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid.
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The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:
| (i) give the Company any information reasonably requested by the Company and available to the Executive relating to such claim, | |
| (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, | |
| (iii) cooperate with the Company in good faith in order effectively to contest such claim, and | |
| (iv) permit the Company to participate in any proceedings relating to such claim; |
provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or to contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the
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requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.
10. Confidential Information . The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive’s employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts or benefits otherwise payable or to be provided to the Executive under this Agreement.
11. Successors .
(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid.
12. Miscellaneous .
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
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(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
| If to the Executive: | ||
| William C. Wallen | ||
| c/o IDEXX Laboratories, Inc. | ||
| One Idexx Drive | ||
| Westbrook, ME 04092 | ||
| If to the Company: | ||
| IDEXX Laboratories, Inc. | ||
| One Idexx Drive | ||
| Westbrook, ME 04092 | ||
| Attention: Chairman of Compensation Committee |
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
(f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is “at will” and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive’s employment and/or this Agreement may be terminated by either the Executive or the Company, by written notice to the other, at any time prior to the Effective Date, in which case the Executive shall have no further rights or obligations under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof.
(g) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in Portland, Maine, in accordance with the rules of the American Arbitration
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Association then in effect. Judgment may be entered on the arbitrator’s award in any court of competent jurisdiction.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.
| EXECUTIVE: | ||||
| /s/William C. Wallen | ||||
|
|
||||
| William C. Wallen | ||||
| COMPANY: | ||||
| IDEXX LABORATORIES, INC. | ||||
| By: | /s/Jonathan W. Ayers | |||
|
|
||||
| Name: Jonathan W. Ayers | ||||
| Title: Chairman and CEO | ||||
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Exhibit 10.14
August 12, 2003
William C. Wallen, PhD
30 Woods End Drive
Wilton, CT 06897
Dear Bill:
Allow me to extend my congratulations on behalf of IDEXX Laboratories, Inc., as we offer you the position of Senior Vice President & Chief Science Officer, reporting to me. This position is critically important to our future success and represents an outstanding opportunity for significant impact on IDEXX. We look forward to working with you and adding your skills and perspective to the strong leadership team already in place.
The specific terms and conditions of your employment will be in accordance with Company policies and our discussions to date and are as follows:
| 1. | Compensation | |
| $340,000 annualized. Performance reviews to be conducted on IDEXX’s annual calendar year cycle, with consideration for merit increase at the conclusion of 2004. | ||
| 2. | Bonus | |
| Annual consideration for bonus based on performance against agreed-upon objectives and consistent with guidelines for Senior Vice President level (currently 70% of base salary at plan levels), typically paid in February of the year following the year in which earned. Predetermined bonus of $238,000 for 2003 to be paid in February of 2004. IDEXX policy states payment is contingent upon employment through date of bonus payment. | ||
| 3. | Equity Incentive | |
| Option to purchase 110,000 shares of IDEXX Common Stock subject to equal annual vesting over five years and exercisable at the market price as of the date of the grant. This grant reflects a signing award as well as the award that would otherwise have been granted in February of 2004. All stock options are subject to the terms of the applicable stock option agreements and the Company’s stock incentive plan. Consideration for additional equity incentive compensation beginning in early 2005 as part of annual performance review and recognition process consistent with guidelines for Senior Vice President level. | ||
| 4. | Signing bonus | |
| $75,000 included in first paycheck. In the event that you resign from IDEXX within the first six months of employment and we have not asked for your resignation, the amount of the signing bonus is to be repaid at 100%. |
| William C. Wallen, PhD | 8/12/03 |
| 5. | IDEXX Retirement and Incentive Savings Plan - (401K Plan) | |
| Eligible to enroll in IDEXX’s Retirement and Incentive Savings Plan (401(k)) the first of the month after completing one month of employment. Beginning the first of the month after six months of continuous employment, IDEXX will match $.50 on the dollar for the first 6% that you contribute to your 401(k). | ||
| 6. | IDEXX Employee Stock Purchase Plan - (ESPP) | |
| Eligible to enroll in the ESPP after one month of employment prior to an enrollment date. Enrollments are held twice a year (January and July). | ||
| 7. | Employee Assistance Program - (EAP) | |
| Eligible for referral services in the EAP after one month of employment prior to an enrollment date. Enrollments occur the first of each month. | ||
| 8. | Insurance Benefits |
| a. | Health - Contributory programs available for you and your family effective on the first of the month following one month of employment. | ||
| b. | Dental - Contributory program available for you and your family effective on the first of the month following one month of employment. | ||
| c. | Basic Life - Two times annual salary at no cost to employee. | ||
| d. | Basic Accidental Death & Dismemberment - Two times annual salary at no cost to employee. | ||
| e. | Supplemental Life - Optional contributory increments of term life (1x, 2x or 3x of annual salary) in addition to Basic Life. | ||
| f. | Dependent Life - Term life insurance for employee’s spouse and children. | ||
| g. | Short Term Disability - 80% of salary (on 6th day of absence) up to 90 days. | ||
| h. | Long Term Disability - 70% salary protection after a 12-week absence. |
| 9. | Flexible Spending Accounts | |
| Optional accounts that provide the ability to save taxes on money spent for childcare or uninsured medical expenses. | ||
| 10. | Vacation | |
| 25 days per year (pro-rated for first calendar year). | ||
| 11. | Tuition Assistance | |
| Eligible for tuition assistance after 6 months of employment; reimbursement percentage based on class grade. |
2
| William C. Wallen, PhD | 8/12/03 |
| 12. | Relocation | |
| Reimbursement of relocation expenses covered under IDEXX’s relocation policy of up to $125,000. IDEXX Human Resources will manage the relocation process. Please refer to the attached Relocation Policy for guidelines. In the event that you resign from IDEXX within the first six months of employment and we have not asked for your resignation, the amount of the relocation allowance is to be repaid at 100%. In the event that you resign from IDEXX during months 7 through 18 of your employment and we have not asked for your resignation, you must repay pro rata the relocation allowance according to your dates of service. | ||
| 13. | Severance | |
| If your employment is terminated at any time by the Company other than for cause (as defined below), for a period of two years following such termination the Company will continue to pay your base salary and provide you with benefits equivalent to those received by you prior to termination. For these purposes, “cause” is defined as (a) willful, material misconduct; (b) gross negligence in the performance of your duties on behalf of the Company; or (c) a breach of either your invention and non-disclosure agreement or non-compete agreement with the Company. | ||
| The Company will have the option to make such payments in a lump sum and, if the Company cannot provide you with the same benefits that you received while you were employed by the Company due to eligibility restrictions under the applicable plans, then the Company may pay you a sum of money that, net of all applicable tax withholdings, is sufficient to allow you to purchase equivalent benefits. | ||
| 14. | Executive Employment Agreement | |
| You will be protected under an Executive Employment Agreement (attached) providing certain benefits applicable following a change in control of the Company. | ||
| 15. | Other terms | |
| The attached Non-Compete Agreement, Invention and Non-Disclosure Agreement and Code of Ethics describe other important terms and conditions of employment for all IDEXX employees. These agreements must be executed prior to receipt of any confidential company information and, at the latest, upon commencement of employment at IDEXX. |
3
| William C. Wallen, PhD | 8/12/03 |
This letter supersedes any and all prior communications, written, oral or electronic, between you and any IDEXX employee or agent regarding the terms of your employment by IDEXX or any of its subsidiaries. This letter shall not constitute a contract of employment. This offer is subject to satisfactory completion of appropriate reference checks, and the approval of the Compensation Committee of the Board. By signing below, you consent to our contacting your former employers and other references concerning your work experience, character, and background.
Please sign and return a copy of this letter to me by August 19, 2003. In the meantime, please do not hesitate to call me if you have any questions, and again, congratulations!
| Sincerely, | ||
| /s/Jonathan W. Ayers | ||
| Chief Executive Officer |
Attachments (Three Agreements, Relocation Policy, Benefits Summary, Code of Ethics)
Accepted By:
| /s/William C. Wallen | 8/15/2003 | |
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| William C. Wallen | Date |
4
Exhibit 21
IDEXX LABORATORIES, INC.
SUBSIDIARIES OF THE COMPANY
NAME
JURISDICTION OF INCORPORATION
Cardiopet Incorporated
Delaware
Genera Technologies Limited
England and Wales
IDEXX Distribution, Inc.
Massachusetts
IDEXX Europe B.V.
The Netherlands
IDEXX GmbH
Germany
IDEXX Laboratories B.V.
The Netherlands
IDEXX Laboratories Canada Corporation
Canada
IDEXX Laboratories Foreign Sales Corporation
U.S. Virgin Islands
IDEXX Laboratories Italia S.r.l.
Italy
IDEXX Laboratories, KK
Japan
IDEXX Laboratories Limited
England and Wales
IDEXX Laboratories (NZ) Limited
New Zealand
IDEXX Laboratories Pty. Limited
Australia
IDEXX Laboratories, S. de R.L. de C.V.
Mexico
IDEXX Laboratories, S.L.
Spain
IDEXX Laboratories (Taiwan) Inc.
Taiwan R.O.C.
IDEXX Operations, Inc.
Delaware
IDEXX Pharmaceuticals, Inc.
Delaware
IDEXX S.A.R.L.
France
IDEXX Scandinavia AB
Sweden
IDEXX UK Acquisition Limited
England and Wales
IDEXX Veterinary Services, Inc.
Delaware
VetConnect Systems, Inc.
Delaware
Veterinary Pathology Services Pty. Limited
Australia
All of the Company’s subsidiaries are wholly owned.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (Nos. 333-36007 and 333-70846) and Form S-8 (Nos.
33-41806, 33-42845, 33-42846, 33-48404, 33-61494, 33-64202, 33-64204, 33-95616,
333-11201, 333-11199, 333-36009, 333-56685, 333-78765, 333-78769, 333-43172,
333-43170, 333-27733, 333-105426, 333-108906 and 333-108905) of IDEXX
Laboratories, Inc. of our report dated January 23, 2004 relating to the
financial statements and financial statement schedule, which appears in this
Form 10-K.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
January 23, 2004
Exhibit 23.2
NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP
IDEXX Laboratories, Inc. (“IDEXX”) was unable after reasonable efforts to
obtain the written consent of Arthur Andersen LLP (“Andersen”), IDEXX’s former
independent public accountants, to incorporate by reference the report of
Andersen, dated January 24, 2002, on the financial statements of IDEXX for the
fiscal year ended December 31, 2001. Such report appears herein and in the
Annual Report on Form 10-K filed by IDEXX with the Securities and Exchange
Commission on March 21, 2002, as required by Section 7 of the Securities Act of
1933, as amended (the “Securities Act”). However, Rule 437a of the Securities
Act permits IDEXX to dispense with the requirement to file the written consent
of Andersen. As a result, Andersen may not have any liability under Section
11(a) of the Securities Act for any untrue statements of a material fact
contained in the financial statements audited by Andersen or any omissions of a
material fact required to be stated therein. Accordingly, IDEXX’s stockholders
may be unable to assert a claim against Andersen under Section 11(a) of the
Securities Act.
Exhibit 31.1
I, Jonathan W. Ayers, certify that:
| 1) | I have reviewed this annual report on Form 10-K for the year ended December 31, 2003 of IDEXX Laboratories, Inc. (the “Annual Report”); | |
| 2) | Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; | |
| 3) | Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; | |
| 4) | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; | ||
| b) | [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]; | ||
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report, based on such evaluation; and | ||
| d) | disclosed in this Annual Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5) | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 3, 2004 | /s/Jonathan W. Ayers | |
|
|
||
| Jonathan W. Ayers, Chairman, | ||
| President and Chief Executive Officer |
Exhibit 31.2
I, Merilee Raines, certify that:
| 1) | I have reviewed this annual report on Form 10-K for the year ended December 31, 2003 of IDEXX Laboratories, Inc. (the “Annual Report”); | |
| 2) | Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; | |
| 3) | Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; | |
| 4) | The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; | ||
| b) | [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986]; | ||
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Annual Report, based on such evaluation; and | ||
| d) | disclosed in this Annual Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5) | The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 3, 2004 | /s/Merilee Raines | |
|
|
||
| Merilee Raines | ||
| Vice President, Chief Financial Officer & Treasurer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C.
In connection with the Annual Report on Form 10-K of IDEXX Laboratories,
Inc. (the “Company”) for the year ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002, that:
A signed original of this written statement required by Section 906, has been
provided to IDEXX Laboratories, Inc. and will be retained by IDEXX
Laboratories, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
SECTION 1350
AS ADOPTED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1)
The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/Jonathan W. Ayers
March 3, 2004
Jonathan W. Ayers
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C.
In connection with the Annual Report on Form 10-K of IDEXX Laboratories,
Inc. (the “Company”) for the year ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the
undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002, that:
A signed original of this written statement required by Section 906, has been
provided to IDEXX Laboratories, Inc. and will be retained by IDEXX
Laboratories, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
SECTION 1350
AS ADOPTED BY
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1)
The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/Merilee Raines
March 3, 2004
Merilee Raines
Vice President, Chief Financial Officer & Treasurer