1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1997
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-19271
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IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 01-0393723
(State of incorporation) (I.R.S. Employer Identification No.)
ONE IDEXX DRIVE, WESTBROOK, MAINE 04092
(Address of principal executive offices) (Zip Code)
(207) 856-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 1997, 38,155,153 shares of the registrant's Common Stock, $.10
par value, were outstanding.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Operations
Three Months Ended
March 31, 1997 and March 31, 1996 4
Consolidated Statements of Cash Flows
Three Months Ended
March 31, 1997 and March 31, 1996 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 14-15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes certain forward-looking statements
about the business of IDEXX Laboratories, Inc. and its subsidiaries (the
"Company") including, without limitation, the belief that the Company's current
cash and short-term investments will be sufficient to fund its on-going
operations for the foreseeable future, that the Company has meritorious defenses
in certain of its litigation matters and statements regarding the Company's plan
to reduce distributor inventories of certain of its products. Such
forward-looking statements are subject to risk and uncertainties that could
cause the Company's actual results to vary materially from those indicated in
such forward-looking statements. These risks and uncertainties are discussed in
more detail in the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 2 of Part I of this
report.
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PART I -- FINANCIAL INFORMATION
Item 1. -- Financial Statements
--------------------
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
ASSETS
March 31, December 31,
1997 1996
--------- ------------
CURRENT ASSETS:
Cash and cash equivalents $109,759 $127,741
Short-term investments 33,638 45,896
Accounts receivable, less reserves of $5,015
and $4,001 in 1997 and 1996, respectively 62,318 66,633
Inventories 60,884 48,402
Other current assets 8,295 13,045
-------- --------
Total current assets 274,894 301,717
LONG-TERM INVESTMENTS 19,045 7,255
PROPERTY AND EQUIPMENT, AT COST:
Land 897 890
Buildings and improvements 4,305 4,202
Leasehold improvements 16,415 15,150
Machinery and equipment 19,760 18,847
Office furniture and equipment 21,922 19,371
Construction-in-progress 496 797
-------- --------
63,795 59,257
Less -- Accumulated depreciation and amortization 24,871 22,863
-------- --------
38,924 36,394
OTHER ASSETS, Net 39,804 28,486
-------- --------
$372,667 $373,852
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,508 $ 18,692
Accrued expenses 20,398 23,872
Notes payable 4,500 3,000
Deferred revenue 6,896 5,563
-------- --------
Total current liabilities 49,302 51,127
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value
Authorized 60,000 shares
Issued and outstanding 38,130 shares in 1997
and 37,774 shares in 1996 3,813 3,777
Additional paid-in capital 254,912 253,117
Retained earnings 68,270 67,376
Cumulative translation adjustment (3,630) (1,545)
-------- --------
Total stockholders' equity 323,365 322,725
-------- --------
$372,667 $373,852
======== ========
See accompanying notes to consolidated financial statements.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
------------------------
March 31, March 31,
1997 1996
--------- ------------
Revenue $60,534 $57,400
Cost of revenue 28,868 24,507
------- -------
Gross Profit 31,666 32,893
Expenses:
Sales and marketing 18,205 15,711
General and administrative 10,258 4,833
Research and development 3,476 2,809
------- -------
Income (loss) from operations (273) 9,540
Interest income, net 1,764 2,256
------- -------
Net income before provision for
income taxes 1,491 11,796
Provision for income taxes 596 4,836
------- -------
Net income $ 895 $ 6,960
======= =======
Net income per common and common equivalent share $ 0.02 $ 0.18
======= =======
Weighted average number of common and
common equivalent shares outstanding 39,711 39,362
======= =======
See accompanying notes to consolidated financial statements.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
-------------------------
March 31, March 31,
1997 1996
--------- ------------
Cash Flows from Operating Activities:
Net income $ 895 $ 6,960
Adjustments to reconcile net income to net cash
provided by (used in) operating activities,
net of acquisitions:
Depreciation and amortization 3,046 2,135
Changes in assets and liabilities:
Accounts receivable 5,942 (11,709)
Inventories (11,519) (5,239)
Other current assets 4,763 (2,032)
Accounts payable (1,581) 3,214
Accrued expenses (4,556) 310
Deferred revenue 225 533
-------- --------
Net cash used in operating activities (2,785) (5,828)
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment (5,237) (1,782)
Decrease (increase) in short-term investments 12,258 (15,848)
Decrease (increase) in long-term investments (11,790) 2,244
Decrease (increase) in other assets 71 (294)
Acquisitions of business, net of cash acquired (9,027) --
-------- --------
Net cash used in investing activities (13,725) (15,680)
-------- --------
Cash Flows from Financing Activities:
Payment of notes payable (509) (1,688)
Proceeds from the exercise of stock options 1,122 2,901
-------- --------
Net cash provided by financing activities 613 1,213
-------- --------
Net effect of Exchange Rate Changes (2,085) (274)
-------- --------
Net decrease in Cash and Cash Equivalents (17,982) (20,569)
Cash and Cash Equivalents, beginning of period 127,741 149,252
-------- --------
Cash and Cash Equivalents, end of period $109,759 $128,683
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 35 $ 119
======== ========
Income taxes paid during the period $ 3,927 $ 3,308
======== ========
See accompanying notes to consolidated financial statements.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements included herein have been prepared by
IDEXX Laboratories, Inc. and subsidiaries (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission and
include, in the opinion of management, all adjustments which the Company
considers necessary for a fair presentation of such information. The
December 31, 1996 Balance Sheet was derived from the audited Consolidated
Balance Sheets contained in the Company's latest stockholders' annual
report. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations. These statements should be read in conjunction with
the Company's audited consolidated financial statements and notes thereto
which are contained in the Company's latest stockholders' annual report.
The results for the interim periods presented are not necessarily
indicative of results to be expected for the full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies described in this and other
notes to the consolidated financial statements.
a. Principles of Consolidation: The accompanying consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
b. Certain reclassifications have been made in the 1996 consolidated
financial statements to conform with the current year's
presentation.
c. The Company accounts for cash equivalents and marketable securities
in accordance with Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity
Securities". Accordingly, the Company's cash equivalent and
short-term investments are classified as held-to-maturity and are
recorded at amortized cost which approximates market value.
Cash Equivalents and Short-term Investments: Cash equivalents are
short-term, highly liquid investments with original maturities of
less than three months. Short-term investments are investment
securities with original maturities of greater than three months but
less than one year and consist of the following (in thousands):
March 31, December 31,
1997 1996
--------- ------------
Municipal bonds $ 8,000 $15,040
U.S. Treasury bills 23,825 30,856
Commercial paper 750 --
Certificates of Deposit 1,063 --
------- -------
$33,638 $45,896
======= =======
Long-term investments are investment securities with original
maturities of greater than one year and consist of the following (in
thousands):
March 31, December 31,
1997 1996
--------- ------------
Municipal bonds $15,045 $3,255
U.S. Treasury note 4,000 4,000
------- ------
$19,045 $7,255
======= ======
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d. Inventories include material, labor and overhead, and are stated at
the lower of cost (first-in, first-out) or market. The components
of inventories are as follows (in thousands):
March 31, December 31,
1997 1996
--------- ------------
Raw materials $ 8,489 $10,081
Work-in-process 6,991 6,605
Finished goods 45,404 31,716
------- -------
$60,884 $48,402
======= =======
3. NET INCOME PER SHARE
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding during
each period, computed in accordance with the treasury stock method. Fully
diluted net income per common and common equivalent share has not been
presented as it is not significantly different.
In February 1997 the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128 "Earnings per
Share" (SFAS No. 128). SFAS No. 128 must be adopted as of December 31,
1997 and all prior earnings per share amounts must be retroactively
restated.
In accordance with Staff Accounting Bulletin No. 74, the Company is
disclosing the effect this statement would have on the three months ended
March 31, 1997 and 1996 on a pro forma basis. The following table
summarizes the pro forma earnings per share amounts under SFAS No. 128 (in
thousands, except per share amounts):
Net Per Share
Income Shares Amount
------------- ------ --------------
For the three months ended March 31, 1997
-----------------------------------------
Net income $895 -- --
Basic earnings per share:
Income available to common stockholders 895 37,932 $0.02
=====
Diluted earnings per share:
Options issued to employees -- 1,779 --
------
Income available to common stockholders
plus assumed conversions $895 39,711 $0.02
==== ====== =====
For the three months ended March 31, 1996
-----------------------------------------
Net income $6,960 -- --
Basic earnings per share:
Income available to common stockholders 6,960 36,600 $0.19
=====
Diluted earnings per share:
Options issued to employees -- 2,762 --
------
Income available to common stockholders
plus assumed conversions $6,960 39,362 $0.18
====== ====== =====
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
quarter. The computation of diluted earnings per common share is similar
to the computation of basic earnings per common share except that the
denominator is increased for the assumed exercise of dilutive options
using the treasury stock method.
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4. COMMITMENTS AND CONTINGENCIES
From time to time the Company has received notices alleging that the
Company's products infringe third-party proprietary rights. In particular,
the Company has received notices claiming that certain of the Company's
immunoassay products infringe third-party patents. Except as noted below
with respect to the patent infringement suit brought by The Jewish
Hospital of St. Louis, no litigation has been brought against the Company
with respect to such claims. Patent litigation frequently is complex and
expensive, and the outcome of patent litigation can be difficult to
predict. There can be no assurance that the Company will prevail in any
infringement proceedings that have been or may be commenced against the
Company. A significant portion of the Company's revenue in the three
month period ended March 31, 1997 was attributable to products
incorporating certain immunoassay technologies and products relating to
the diagnosis of canine heartworm infection. If the Company were to be
precluded from selling such products or required to pay damages or make
additional royalty or other payments with respect to such sales, the
Company's business and results of operations could be materially and
adversely affected.
On February 4, 1993, the Company acquired Environetics, Inc.
("Environetics"), which brought a patent infringement suit with Stephen
Edberg, Ph.D. against Millipore Corporation ("Millipore") in the U.S.
District Court for the District of Connecticut on September 30, 1992 (the
"Millipore I suit"). The complaint in the Millipore I suit was
subsequently amended to add as additional plaintiffs Access Medical
Systems, Inc., a subsidiary of the Company ("Access"), and Stephen C.
Wardlaw, M.D. The primary relief sought by the plaintiffs is an injunction
against Millipore which would prevent Millipore from selling a competitive
product that the plaintiffs believe infringes U.S. Patent No. 4,925,789
(the "'789 Patent") covering the Company's Colilert product, under which
Access and Environetics have an exclusive license from Drs. Edberg and
Wardlaw. Millipore has filed a counterclaim alleging that the '789 Patent
is invalid or not infringed.
In addition, on July 26, 1995, the Company, Environetics, Access and Drs.
Edberg and Wardlaw brought a second patent infringement suit against
Millipore in the U.S. District Court for the District of Connecticut (the
"Millipore II suit"). The principal relief sought by the plaintiffs in the
Millipore II suit is an injunction against Millipore which would prevent
Millipore from selling a product which the plaintiffs believe infringes
U.S. Patent No. 5,429,933 (the "'933 Patent"), which also covers the
Colilert product. The '933 Patent, which is related to the '789 Patent,
was issued in July 1995 to Dr. Edberg. Access and Environetics have an
exclusive license under the '933 Patent from Drs. Edberg and Wardlaw.
Millipore has filed a counterclaim alleging that the '933 Patent is
invalid or not infringed and is seeking to add a counterclaim alleging
misappropriation of trade secrets.
If the plaintiffs do not prevail in the Millipore I and Millipore II
suits, the Company anticipates that the Colilert product would encounter
increased competition, which could adversely affect sales of the Colilert
product.
On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed
suit against the Company in the U.S. District Court for the District of
Connecticut. In its complaint, CDC Technologies alleges that the Company's
conduct in, and its relationships with its distributors in connection
with, the distribution of the Company's hematology products (i) violate
federal and state antitrust statutes, (ii) violate Connecticut statutes
regarding unfair trade practices, and (iii) constitute a civil conspiracy
and interfere with CDC Technologies' business relations. The relief sought
by CDC Technologies includes treble damages for antitrust violations as
well as compensatory and punitive damages, and an injunction to prevent
the Company from interfering with CDC Technologies' relations with
distributors. The Company has filed an answer denying the allegations in
CDC's complaint. The Company is unable to assess the likelihood of an
adverse result or estimate the amount of any damages which the Company may
be required to pay. Any adverse outcome resulting in the payment of
damages would adversely affect the Company's results of operations.
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On May 26, 1995, The Jewish Hospital of St. Louis (the "Hospital") brought
a suit against the Company which is currently pending in the U.S. District
Court for the District of Maine for infringement of U.S. Patent No.
4,839,275 issued June 13, 1989 (the "'275 Patent"). The '275 Patent,
which is owned by the Hospital, claims certain methods and compositions
for the diagnosis of canine heartworm infection. The primary relief sought
by the Hospital is an injunction against the Company which would prevent
the Company from selling canine heartworm diagnostic products which
infringe the '275 Patent, as well as treble damages for past infringement.
While the Company believes that it has meritorious defenses in this
matter, the Company is unable to assess the likelihood of an adverse
result or estimate the amount of any damages which the Company may be
required to pay. If the Company is precluded from selling canine heartworm
diagnostic products or required to pay damages or make additional royalty
or other payments with respect to such sales, the Company's business and
results of operations could be materially and adversely affected.
On September 18, 1995, Purisys Inc. ("Purisys"), a producer of home
pollution test kits, and certain of its employees filed suit against the
Company in the Supreme Court of the State of New York. In their complaint,
the plaintiffs allege that the Company has breached promises and made
negligent misrepresentations, and has breached fiduciary and other duties.
The complaint was dismissed as to Purisys in April 1997, but remains
pending as to the other plaintiffs, who are seeking damages in excess of
$50.0 million. The Company purchased a 15% equity interest in Purisys in
August 1994 for $616,000, and the Company subsequently advanced
additional amounts to Purisys to purchase certain international
distribution rights. In March 1995, the Company ceased advancing funds
to Purisys, which filed for protection under the Bankruptcy Code in July
1995. While the Company believes it has meritorious defenses, the
Company is unable to assess the likelihood of an adverse result or
estimate the amount of any damages which the Company may be required to
pay. Any adverse outcome resulting in the payment of damages would
adversely affect the Company's results of operations.
5. ACQUISITIONS
1996 ACQUISITIONS
-----------------
The Company's consolidated results of operations include the results of
operations of four veterinary reference laboratory businesses and two
manufacturers of detection and diagnostic tests acquired in 1996. These
businesses were acquired by the Company for aggregate purchase prices
equaling approximately $19.7 million in cash, the issuance of a note
payable for $3.0 million, the assumption of certain liabilities and the
issuance of the Company's Common Stock and options exercisable for Common
Stock totaling approximately $20 million.
In connection with the acquisition of the veterinary reference laboratory
businesses and one of the manufacturing businesses, the Company entered
into non-compete agreements for a period of up to five years with certain
of the entities, stockholders or former stockholders, and may become
obligated to pay additional amounts to management of these companies based
on achieving certain operating results. The Company has accounted for
these acquisitions under the purchase method of accounting. The results of
operations of each of these businesses has been included in the Company's
consolidated results of operations since each of their respective dates of
acquisition. The Company has not presented pro forma financial information
relating to any of these acquisitions because of immateriality. These
acquisitions are as follows:
- On March 29, 1996, the Company acquired all of the capital stock
of VetLab, Inc. ("VetLab"), which operated two veterinary
reference laboratories in Texas.
- On April 2, 1996, the Company, through its wholly-owned
subsidiary, IDEXX Laboratories, Limited, acquired substantially
all of the assets and assumed certain of the liabilities of
Grange Laboratories Ltd. ("Grange Laboratories"). Grange
Laboratories' business, which includes veterinary reference
laboratories in the United Kingdom, is now operated as a division
of IDEXX Laboratories, Limited.
- On May 15, 1996, the Company acquired all of the capital stock of
Veterinary Services, Inc. ("VSI"), which operated veterinary
reference laboratories in Colorado, Illinois and Oklahoma.
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- On July 12, 1996, the Company acquired substantially all of the
assets and assumed certain of the liabilities of Consolidated
Veterinary Diagnostics, Inc. ("CVD"). As a result of the CVD
acquisition, the Company is operating CVD's veterinary reference
laboratories in Northern California, Oregon and Nevada.
- On July 18, 1996, the Company acquired all of the capital stock
of Ubitech Aktiebolag, located in Uppsala, Sweden, which
manufactures and distributes diagnostic test kits for the
livestock industry.
The VetLab, VSI and CVD businesses are a part of IDEXX Veterinary
Services, Inc., a wholly-owned subsidiary of the Company.
In connection with the Company's acquisition by merger of Idetek, Inc.
("Idetek") on August 29, 1996, the Company issued 436,804 shares of its
Common Stock, of which approximately 10% are held in escrow, in exchange
for all of the outstanding capital stock of Idetek. In addition,
outstanding options to purchase shares of Idetek capital stock became
options to acquire 110,191 shares of the Company's Common Stock at prices
ranging from $3.13 to $78.14. The value of the shares of the Company's
Common Stock issued or reserved for issuance as a result of the merger
totaled approximately $20 million. Idetek, located in Sunnyvale,
California, manufactured and distributed detection tests for the food,
agricultural and environmental industries. The Company has accounted for
this acquisition by merger as a "pooling-of-interests". The results of
operations of Idetek have been included in the Company's consolidated
results of operations since the date of the merger. The Company has not
restated its financial statements because of immateriality.
1997 ACQUISITIONS
-----------------
The Company's consolidated results of operations include the results of
operations of a manufacturing company and a software company acquired in
1997. These businesses were acquired for aggregate purchase prices
equaling approximately $9.9 million in cash, the issuance of a note
payable for $1.5 million and the assumption of certain liabilities.
In connection with the acquisition of the businesses described above, the
Company entered into non-compete agreements for a period of up to three
years with certain of the former stockholders, and may become obligated to
pay additional amounts to management of these companies based on achieving
certain operating results. The Company has accounted for these
acquisitions under the purchase method of accounting. The results of
operations of each of these businesses has been included in the Company's
consolidated results of operations since each of their respective dates of
acquisition. The Company has not presented pro forma financial information
relating to any of these acquisitions because of immateriality. These
acquisitions are as follows:
- On January 30, 1997, the Company acquired all of the capital
stock of Acumedia Manufacturers, Inc., located in Baltimore,
Maryland, which specializes in the manufacture of dehydrated
cultured media.
- On March 13, 1997, the Company acquired all of the capital stock
of National Information Systems Corporation, located in Eau
Claire, Wisconsin, which supplies practice management computer
systems to veterinarians under the trade name Advanced
Veterinary Systems.
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Item 2.
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Total revenue for the first quarter of 1997 increased 5% to $60.5 million from
$57.4 million for the first quarter of 1996. The increase in total revenue was
principally attributable to increases in veterinary laboratory services
resulting from acquisitions of veterinary reference laboratories and food and
environmental businesses principally resulting from the acquisition of Idetek.
However, the Company experienced decreased sales of veterinary testing
instruments and certain veterinary test products. The decreases in sales of the
Company's veterinary test products were principally a result of a program to
reduce distributor inventories of these products.
International revenue increased 7% to $21.5 million in the first quarter of
1997 compared to $20.1 million in the first quarter of 1996. Revenues increased
by 49% or $1.6 million in the Pacific Rim region (Japan, Asia, Australia) and
63% or $1.0 million in Canada for the three months ended March 31, 1997
compared to the same period in 1996. Revenues decreased 10% or $1.5 million in
Europe for the same period in 1997 versus 1996.
Revenues in the Pacific Rim transacted in local currencies increased 61%, while
revenues in Europe, transacted in local currencies, decreased only 4% for the
three months ended March 31, 1997 compared to the same period in 1996.
Gross profit as a percentage of revenue was 52% for the three month period ended
March 31, 1997 compared to 57% for the same period in 1996. The decrease in
gross profit as a percentage of revenue was principally attributable to a
decline in sales of the Company's higher margin veterinary test products.
Sales and marketing expenses were 30% of revenue for the three month period
ended March 31, 1997 compared to 27% in the first quarter of 1996. The dollar
increase of $2.5 million in the first quarter of 1997 compared to the same
period in 1996 is principally attributable to the additional sales and marketing
expenses resulting from the acquisition of the veterinary laboratory businesses
in 1996.
Research and development expenses were 6% of revenue for the three months ended
March 31, 1997 compared to 5% of revenue for the same period in 1996. In
dollars, such expenses increased 24% for the three months ended March 31, 1997
as compared to the same period in 1996, reflecting additional resources and
related overhead to support product development.
General and administrative expenses increased from 8% to 17% of revenue for the
three month period ended March 31, 1997 as compared to the same period in 1996.
The dollar increase of $5.4 million in the first quarter of 1997 compared to the
same period in 1996 is principally attributable to additional operating expenses
and acquisition costs associated with the acquisition of the veterinary
laboratory businesses, additional operating expenses associated with business
expansion, higher provision for uncollectible accounts and higher legal
expenses.
Net interest income was $1.8 million for the three month period ended March 31,
1997 compared to $2.3 million for the same period in 1996. The decrease in
interest income over the prior year is due to the use of previously invested
cash in acquiring the veterinary laboratory and other businesses since the
first quarter of 1996.
The Company's effective tax rate was 40% for the three month period ended March
31, 1997 compared to 41% for the same period in 1996. The decrease in the
effective tax rate was principally attributable to income generated in states
with lower state income tax rates.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997 the Company had cash, cash equivalents, and short-term
investments of $143.4 million and $225.6 million of working capital.
The Company believes that current cash and short-term investments and funds
expected to be generated from operations will be sufficient to fund the
Company's operations for the foreseeable future.
FUTURE OPERATING RESULTS
The future operating results of the Company are subject to a number of factors,
including without limitation the following:
The Company's business has grown significantly over the past several years as a
result of both internal growth and acquisitions of products and businesses. The
Company has consummated a number of acquisitions since 1992, including six
acquisitions in 1996 and two acquisitions to date in 1997, and may make
additional acquisitions. Identifying and pursuing acquisition opportunities,
integrating acquired products and businesses, and managing growth requires a
significant amount of management time and skill. There can be no assurance that
the Company will be effective in identifying and effecting attractive
acquisitions, assimilating acquisitions or managing future growth.
The Company has experienced and may experience in the future significant
fluctuations in its quarterly operating results. Factors such as the
introduction and market acceptance of new products and services, the demand for
existing products and services, the mix of products and services sold and the
mix of domestic versus international revenue could contribute to this quarterly
variability. The Company operates with relatively little backlog and has few
long-term customer contracts and substantially all of its product and service
revenue in each quarter results from orders received in that quarter, which
makes the Company's financial performance more susceptible to an unexpected
downturn in business and more unpredictable. In addition, the Company's expense
levels are based in part on expectations of future revenue levels, and a
shortfall in expected revenue could therefore result in a disproportionate
decrease in the Company's net income.
The markets in which the Company competes are subject to rapid and substantial
technological change. The Company encounters, and expects to continue to
encounter, intense competition in the sale of its current and future products
and services. Many of the Company's competitors and potential competitors have
substantially greater capital, manufacturing, marketing, and research and
development resources than the Company.
The Company's future success will depend in part on its ability to continue to
develop new products and services both for its existing markets and for any new
markets the Company may enter in the future. The Company believes that it has
established a leading position in many of the markets for its animal health
diagnostic products and services, and the maintenance and any future growth of
its position in these markets is dependent upon the successful development and
introduction of new products and services. The Company also plans to devote
significant resources to the growth of its veterinary laboratory business and
its business in the food, hygiene and environmental markets and to the
development of an animal pharmaceutical product business, where the Company's
operating experience and product and technology base are more limited than in
its animal health diagnostic product markets. There can be no assurance that the
Company will successfully complete the development and commercialization of
products and services for existing and new businesses.
The Company's success is heavily dependent upon its proprietary technologies.
The Company relies on a combination of patent, trade secret, trademark and
copyright law to protect its proprietary rights. There can be no assurance that
patent applications filed by the Company will result in patents being issued,
that any patents of the Company will afford protection against competitors with
similar technologies, or that the Company's non-disclosure agreements will
provide meaningful protection for the Company's trade secrets and other
proprietary information. Moreover, in the absence of patent protection, the
Company's business may be adversely affected by competitors who independently
develop substantially equivalent technologies. In addition, the Company licenses
certain technologies used in its products from third parties, and the Company
may be required to obtain licenses to additional technologies in order to
continue to sell certain products. There can be no assurance that any technology
licenses which the Company desires or is required to obtain will be available on
commercially reasonable terms.
From time to time the Company receives notices alleging that the Company's
products infringe third party proprietary rights. Patent litigation frequently
is complex and expensive and the outcome of patent litigation can be difficult
to predict. There can be no assurance that the Company will prevail in any
infringement proceedings that have been or may be commenced against the Company,
and an adverse outcome may preclude the Company from selling certain products or
require the Company to pay damages or make additional royalty or other payments
with respect to such sales. In addition, from time to time other types of
lawsuits are brought against the Company, wherein an adverse outcome could
adversely affect the Company's results of operations.
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Certain components used in the Company's products are currently available from
only one source and others are available from only a limited number of sources.
The Company's inability to develop alternative sources if and as required in the
future, or to obtain sufficient sole or limited source components as required,
could result in cost increases or reductions or delays in product shipments.
Certain technologies licensed by the Company and incorporated into its products
are also available from a single source, and the Company's business may be
adversely affected by the expiration or termination of any such licenses or any
challenges to the technology rights underlying such licenses. In addition, the
Company currently purchases or is contractually required to purchase certain of
the products that it sells from one source. Failure of such sources to supply
product to the Company may have a material adverse effect on the Company's
business.
In the three months ended March 31, 1997, international revenue increased 7%
over the same period in 1996 to $21.5 million, or 36% of total revenue, and the
Company expects that its international business will continue to account for a
significant portion of its total revenue. Foreign regulatory bodies often
establish product standards different from those in the United States, and
designing products in compliance with such foreign standards may be difficult or
expensive. Other risks associated with foreign operations include possible
disruptions in transportation of the Company's products, the differing product
and service needs of foreign customers, difficulties in building and managing
foreign operations, fluctuations in the value of foreign currencies,
import/export duties and quotas, and unexpected regulatory, economic or
political changes in foreign markets.
The development, manufacturing, distribution and marketing of certain of the
Company's products and provision of its services, both in the United States and
abroad, are subject to regulation by various domestic and foreign governmental
agencies. Delays in obtaining, or the failure to obtain, any necessary
regulatory approvals could have a material adverse effect on the Company's
future product and service sales and operations. Any acquisitions of new
products, services and technologies may subject the Company to additional areas
of government regulations.
The development, manufacture, distribution and marketing of the Company's
products and provision of its services involve an inherent risk of product
liability claims and associated adverse publicity. Although the Company
currently maintains liability insurance, there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms or at all.
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PART II -- OTHER INFORMATION
Item 1. -- Legal Proceedings
-----------------
On February 4, 1993, the Company acquired Environetics, Inc.
("Environetics"), which brought a patent infringement suit with Stephen
Edberg, Ph.D. against Millipore Corporation ("Millipore") in the U.S.
District Court for the District of Connecticut on September 30, 1992 (the
"Millipore I suit"). The complaint in the Millipore I suit was
subsequently amended to add as additional plaintiffs Access Medical
Systems, Inc., a subsidiary of the Company ("Access"), and Stephen C.
Wardlaw, M.D. The primary relief sought by the plaintiffs is an injunction
against Millipore which would prevent Millipore from selling a competitive
product that the plaintiffs believe infringes U.S. Patent No. 4,925,789
(the "'789 Patent") covering the Company's Colilert product, under which
Access and Environetics have an exclusive license from Drs. Edberg and
Wardlaw. Millipore has filed a counterclaim alleging that the '789 Patent
is invalid or not infringed.
In addition, on July 26, 1995 the Company, Environetics, Access and Drs.
Edberg and Wardlaw brought a second patent infringement suit against
Millipore in the U.S. District Court for the District of Connecticut (the
"Millipore II suit"). The principal relief sought by the plaintiffs in the
Millipore II suit is an injunction against Millipore which would prevent
Millipore from selling a product which the plaintiffs believe infringes
U.S. Patent No. 5,429,933 (the "'933 Patent"), which also covers the
Colilert product. The '933 Patent, which is related to the '789 Patent,
was issued in July 1995 to Dr. Edberg. Access and Environetics have an
exclusive license under the '933 Patent from Drs. Edberg and Wardlaw.
Millipore has filed a counterclaim alleging that the '933 Patent is
invalid or not infringed and is seeking to add a counterclaim alleging
misappropriation of trade secrets.
If the plaintiffs do not prevail in the Millipore I and Millipore II
suits, the Company anticipates that the Colilert product would encounter
increased competition, which could adversely affect sales of the Colilert
product.
On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed
suit against the Company in the U.S. District Court for the District of
Connecticut. In its complaint, CDC Technologies alleges that the Company's
conduct in, and its relationships with its distributors in connection
with, the distribution of the Company's hematology products (i) violate
federal and state antitrust statutes, (ii) violate Connecticut statutes
regarding unfair trade practices, and (iii) constitute a civil conspiracy
and interfere with CDC Technologies' business relations. The relief sought
by CDC Technologies includes treble damages for antitrust violations, as
well as compensatory and punitive damages, and an injunction to prevent
the Company from interfering with CDC Technologies' relations with
distributors. The Company has filed an answer denying the allegations in
CDC Technologies' complaint. The Company is unable to assess the
likelihood of an adverse result or estimate the amount of any damages
which the Company may be required to pay. Any adverse outcome resulting in
the payment of damages would adversely affect the Company's results of
operations.
On May 26, 1995, The Jewish Hospital of St. Louis (the "Hospital") brought
a suit against the Company which is currently pending in the U.S. District
Court for the District of Maine for infringement of U.S. Patent No.
4,839,275 issued June 13, 1989 (the "'275 Patent"). The '275 Patent,
which is owned by the Hospital, claims certain methods and compositions
for the diagnosis of canine heartworm infection. The primary relief sought
by the Hospital is an injunction against the Company which would prevent
the Company from selling canine heartworm diagnostic products which
infringe the '275 Patent, as well as treble damages for past infringement.
While the Company believes that it has meritorious defenses in this
matter, the Company is unable to assess the likelihood of an adverse
result or estimate the amount of any damages which the Company may be
required to pay. If the Company is precluded from selling canine heartworm
diagnostic products or required to pay damages or make additional royalty
or other payments with respect to such sales, the Company's business and
results of operations could be materially and adversely affected.
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On September 18, 1995, Purisys Inc. ("Purisys"), a producer of home
pollution test kits, and certain of its employees filed suit against the
Company in the Supreme Court of the State of New York. In their complaint,
the plaintiffs allege that the Company has breached promises and made
negligent misrepresentations, and has breached fiduciary and other duties.
The complaint was dismissed as to Purisys in April 1997 but remains
pending as to the other plaintiffs, who are seeking damages in excess
of $50.0 million. The Company purchased a 15% equity interest in Purisys
in August 1994 for $616,000, and the Company subsequently advanced
additional amounts to Purisys to purchase certain international
distribution rights. In March 1995, the Company ceased advancing funds
to Purisys, which filed for protection under the Bankruptcy Code in July
1995. While the Company believes it has meritorious defenses, the Company
is unable to assess the likelihood of an adverse result or estimate the
amount of any damages which the Company may be required to pay. Any
adverse outcome resulting in the payment of damages would adversely
affect the Company's results of operations.
Item 6. -- Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits Page
----
21. Subsidiaries of the Company. 17
27. Financial Data Schedule for the Quarterly Report on Form
10-Q for the three-month period ended March 31, 1997. 18
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fiscal quarter
for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEXX LABORATORIES, INC.
Date: May 15, 1997
/s/ Merilee Raines
-----------------------------------------
Merilee Raines, Vice President of Finance
(Principal Accounting Officer)
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