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 JUNE 30, 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 July 31, 1997, 38,029,186 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: 3
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
Consolidated Statements of Operations 4
Three and Six Months Ended
June 30, 1997 and June 30, 1996
Consolidated Statements of Cash Flows 5
Six Months Ended
June 30, 1997 and June 30, 1996
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 15-16
Item 4. Submission of Matters to a Vote of Security-Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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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)
June 30, December 31,
1997 1996
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $119,152 $127,741
Short-term investments 39,237 45,896
Accounts receivable, less reserves of $5,597
and $4,001 in 1997 and 1996, respectively 46,540 66,633
Inventories 71,326 48,402
Other current assets 8,917 13,045
-------- --------
Total current assets 285,172 301,717
LONG-TERM INVESTMENTS 11,805 7,255
PROPERTY AND EQUIPMENT, AT COST:
Construction in Progress 498 797
Leasehold improvements 16,458 15,150
Land 1,164 890
Building 4,393 4,202
Machinery and equipment 24,703 20,870
Office furniture and equipment 21,071 17,348
-------- --------
68,287 59,257
Less -- Accumulated depreciation & amortization 27,189 22,863
-------- --------
41,098 36,394
OTHER ASSETS 39,787 28,486
-------- --------
$377,862 $373,852
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,895 $ 18,692
Accrued expenses 19,426 23,872
Notes payable 4,500 3,000
Deferred revenue 7,912 5,563
-------- --------
Total current liabilities 55,733 51,127
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value
Authorized 60,000 shares
Issued and outstanding 38,019 shares in 1997
and 37,774 shares in 1996 3,802 3,777
Additional paid-in capital 255,661 253,118
Retained earnings 66,202 67,376
Cumulative translation adjustment (3,536) (1,546)
-------- --------
Total stockholders' equity 322,129 322,725
-------- --------
$377,862 $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 Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Revenue $58,890 $65,875 $119,424 $123,275
Cost of revenue 29,976 28,580 58,844 53,087
------- ------- -------- --------
Gross Profit 28,914 37,295 60,580 70,188
Expenses:
Sales and marketing 18,549 16,019 36,754 31,730
General and administrative 11,751 7,107 22,009 11,940
Research and development 3,849 3,091 7,326 5,901
------- ------- -------- --------
Income (loss) from operations (5,235) 11,078 (5,509) 20,617
Interest income, net 1,687 2,301 3,452 4,558
------- ------- -------- --------
Net income (loss) before provision for
income taxes (3,548) 13,379 (2,057) 25,175
Provision for (benefit of) income taxes (1,480) 5,485 (883) 10,322
------- ------- -------- --------
Net income (loss) $(2,068) $ 7,894 $ (1,174) $ 14,853
======= ======= ======== ========
Net income (loss) per common and
common equivalent share $ (0.05) $ 0.20 $ (0.03) $ 0.38
======= ======= ======== ========
Weighted average number of
common and common equivalent
shares outstanding 37,953 39,288 38,832 39,322
======= ======= ======== ========
See accompanying notes to consolidated financial statements.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30, June 30,
1997 1996
---- ----
Cash Flows from Operating Activities:
Net income $ (1,174) $ 14,853
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 6,799 3,543
Changes in assets and liabilities -
Accounts receivable 21,650 (14,199)
Inventories (23,133) (12,003)
Other current assets 4,142 (2,438)
Accounts payable 4,806 11,613
Accrued expenses (5,520) 2,557
Deferred revenue 325 960
-------- --------
Net cash provided by
operating activities 7,895 4,886
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment (8,852) (5,476)
Decrease (increase) in investments, net 2,109 (10,454)
(Increase) decrease in other assets (34) 618
Acquisitions (see Note 5) (9,027) (2,571)
-------- --------
Net cash used in investing activities (15,804) (17,883)
-------- --------
Cash Flows from Financing Activities:
Repayment of notes payable (509) (1,688)
Proceeds from the exercise of stock options 1,819 5,373
-------- --------
Net cash provided by financing activities 1,310 3,685
-------- --------
Net Effect of Foreign Currency Translation (1,990) (532)
-------- --------
Net decrease in Cash and Cash Equivalents (8,589) (9,844)
Cash and Cash Equivalents, beginning of period 127,741 149,252
-------- --------
Cash and Cash Equivalents, end of period $119,152 $139,408
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 96 $ 127
======== ========
Income taxes paid during the period $ 4,606 $ 6,744
======== ========
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 years presentation.
c. The Company adopted Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115) effective January 1, 1994. 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):
June 30, December 31,
1997 1996
---- ----
Municipal bonds $ 7,240 $15,040
U.S. Treasury bills 23,824 30,856
Time deposits 8,173 --
------- -------
$39,237 $45,896
======= =======
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Long-term investments are investment securities with original
maturities of greater than one year and consist of the following (in
thousands):
June 30, December 31,
1997 1996
---- ----
Municipal bonds $11,805 $3,255
U.S. Treasury note -- 4,000
------- ------
$11,805 $7,255
======= ======
d. Inventories include material, labor and overhead, and are stated at
the lower of cost (first-in, first-out) or market. The components of
inventories are as follows (in thousands):
June 30, December 31,
1997 1996
---- ----
Raw materials $12,061 $10,081
Work-in-process 8,608 6,605
Finished goods 50,657 31,716
------- -------
$71,326 $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 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 and six month
periods ended June 30, 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 June 30, 1997
------------------------------------------
Net loss $(2,068) -- --
Basic earnings (loss) per share:
Loss available to common stockholders (2,068) 37,953 $(0.05)
======
Diluted earnings (loss) per share:
Options issued to employees -- -- --
------
Loss available to common stockholders
plus assumed conversions $(2,068) 37,953 $(0.05)
======= ====== ======
For the three months ended June 30, 1996
------------------------------------------
Net income $7,894 -- --
Basic earnings per share:
Income available to common stockholders 7,894 36,766 $0.21
=====
Diluted earnings per share:
Options issued to employees -- 2,522 --
Income available to common stockholders ------
plus assumed conversions $7,894 39,288 $0.20
====== ====== =====
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Net Per Share
Income Shares Amount
-------- --------- ---------
For the six months ended June 30, 1997
------------------------------------------
Net loss $(1,174) -- --
Basic earnings (loss) per share:
Loss available to common stockholders (1,174) 37,889 $(0.03)
======
Diluted earnings (loss) per share:
Options issued to employees -- 943 --
------
Loss available to common stockholders
plus assumed conversions $(1,174) 38,832 $(0.03)
======= ====== =====
For the six months ended June 30, 1996
------------------------------------------
Net income $14,853 -- --
Basic earnings per share:
Income available to common stockholders 14,853 36,683 $0.40
=====
Diluted earnings per share:
Options issued to employees -- 2,639 --
------
Income available to common stockholders
plus assumed conversions $14,853 39,322 $0.38
======= ====== =====
Basic earnings per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
quarter. The computation of diluted earnings per common share is similar to
the computation of basic earnings per common share except that the
denominator is increased for the assumed exercise of dilutive options using
the treasury stock method. Shares outstanding for purposes of calculating
diluted earnings (loss) per share for the six months ended June 30, 1997
is derived from the arithmetic average of the weighted average shares
outstanding for (i) the three months ended March 31, 1997 plus options
issued to employees and (ii) the three months ended June 30, 1997, because
the Company incurred a loss for the six months ended June 30, 1997.
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 during the three
month period ended June 30, 1996 was attributable to products incorporating
certain immunoassay technologies and to products relating to the diagnosis
of canine heartworm infection which are the subject of the Jewish Hospital
suit. 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
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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(R) 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.
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.
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. In June
1997, the court ruled, in response to a summary judgment motion by the
Jewish Hospital, that five heartworm diagnostic kits formerly sold by
the Company literally infringe two claims of the '275 Patent. 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 plaintiffs are seeking damages in excess of $50,000,000. 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. In May 1996, the court granted the Company's
motion to dismiss the plaintiffs' suit, and the plaintiffs' appeals of
that dismissal were dismissed by the court in July 1997. While the Company
believes it has meritorious defenses, the Company is unable to assess
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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 periods 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 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:
o On March 29, 1996, the Company acquired all of the capital stock
of VetLab, Inc. ("VetLab"), which operated two veterinary
reference laboratories in Texas.
o 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.
o 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.
o 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.
o 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 operated by 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
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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 the respective dates of acquisition. The Company has
not presented pro forma financial information relating to either of these
acquisitions because of immateriality. These acquisitions are as follows:
o 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
culture media.
o 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.
6. SUBSEQUENT EVENTS
Subsequent to June 30, 1997, the Company acquired the following businesses
for approximately $13.5 million in cash and the assumption of certain
liabilities. The Company has accounted for these acquisitions under the
purchase method of accounting. These acquisitions are as follows:
o On July 1, 1997, the Company acquired certain assets and other
rights of Wintek Bio-Science Inc., located in Taipei, Taiwan,
which distributes diagnostic products to veterinarians in
Taiwan.
o On July 18, 1997, the Company acquired all of the capital stock
of Professionals' Software, Inc., located in Effingham,
Illinois, which supplies practice management computer systems to
veterinarians.
The Company has not presented pro forma financial information relating to
either of these acquisitions because of immateriality.
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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 second quarter of 1997 decreased 11% to $58.9 million from
$65.9 million for the second quarter of 1996. Total revenue for the six months
ended June 30, 1997 decreased 3% to $119.4 million from $123.3 million for the
first six months of 1996.
The decrease in total revenue for the quarter ended June 30, 1997 compared to
the same period in 1996 was principally attributable to decreased sales of
veterinary test kits, instruments, and consumables, offset by increased sales
of veterinary laboratory services which resulted from acquisitions of
veterinary reference laboratories in the second and third quarters of 1996,
food and environmental products, and veterinary practice management software
and equipment, which resulted from the acquisition of National Information
Systems Corp. in the first quarter of 1997. The decrease in revenue for the
six-month period ended June 30, 1997 as compared to the same period in the
prior year was principally attributable to the same factors noted for the
three-month period. The decreases in sales of the Company's veterinary test
kits and consumables were principally a result of a program to reduce U.S.
distributor inventories of these products. This program was substantially
completed by the end of the quarter ended June 30, 1997. Decreased sales of
instruments were caused by a decline in units sold and, to a lesser extent, a
decline in average unit prices. The Company expects that instrument sales will
continue to decline as the Company's market penetration increases. The Company
expects, however, that sales of test kits and consumables will resume growth
following the one-time reduction in distributor inventories.
International revenue decreased 10% to $20.9 million in the second quarter of
1997, and 2% to $42.4 million for the six months ended June 30, 1997, compared
to $23.2 million and $43.3 million, respectively, for the prior year periods.
Revenues decreased by 11% and 10% in Europe, and decreased by 23% and increased
by 3% in the Pacific Rim region (Japan, Asia, Australia) for the three- and
six-month periods ended June 30, 1997, respectively, compared to the same
periods in 1996. These decreases were offset in part by increases in revenue in
Canada and South America. Revenue from the Company's European subsidiaries,
transacted in local currencies, decreased approximately 6% and 5% for the
three- and six-month periods ended June 30, 1997, respectively, as compared to
the same periods in 1996. In U.S. dollars, the revenue decrease was 11% to
$13.2 million for the current three-month period and 10% to $26.5 million for
the current six-month period. Revenue from the Company's Pacific Rim region,
transacted in local currencies, decreased approximately 20% for the three month
period ended June 30, 1997 and increased 11% for the six-month period ended
June 30, 1997, as compared to the same periods in 1996. In U.S. dollars, the
revenue decrease was 23% to $4.3 million for the current three-month period and
the revenue increase was 3% to $9.1 million for the current six-month period.
Revenues in Europe for the three- and six-month periods decreased primarily due
to a decline in the number of instruments sold, and a decline in sales of
veterinary test kits resulting primarily from increased competition. Revenues
in the Pacific Rim increased 3% for the six-month period ended June 30, 1997
primarily due to increased sales of veterinary test products in Japan, and
decreased in the three-month period primarily due to lower sales in Japan of
veterinary test products and, to a lesser extent, instruments.
Gross profit as a percentage of revenue was 49% and 51% for the three- and
six-month periods ended June 30, 1997, respectively, and 57% for the same
periods 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 and a decline in the average unit price of the
instruments sold. Gross margin was also adversely affected by the inclusion of
lower margin veterinary laboratory service revenues as a result of acquisitions
completed in 1996.
Sales and marketing expenses were 32% and 31% of revenue for the three- and
six-month periods ended June 30, 1997, respectively, compared to 24% and 26% for
the same periods in 1996. The increase as a percentage of revenue for the three-
and six-month periods ended June 30, 1997 in comparison to the same period in
1996 was principally attributable to certain fixed costs remaining constant
while sales of veterinary test kits, instruments and consumables declined. The
increases of $2.5 million and $5.0 million for the three- and six-month periods
ended June 30, 1997, respectively, over the same periods in the prior year were
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 7% and 6% of revenue for the three- and
six-month periods ended June 30, 1997 compared to 5% for the same periods in
1996. In dollars, such expenses increased 25% and 24% for the three- and
six-month periods ended June 30, 1997, respectively, as compared to the same
period in 1995, reflecting additional resources and related overhead to support
product development.
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General and administrative expenses were 20% and 18% of revenue for the three-
and six-month periods ended June 30, 1997, respectively, compared to 11% and
10%, respectively, for the same periods in the prior year. The dollar increase
of $4.6 million and $10.1 million for the three- and six-month periods ended
June 30, 1997 in comparison to the same period in 1996 are principally
attributable to additional operating expense 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. As a percentage of sales,
general and administrative expenses increased due to these factors and to lower
revenues.
Net interest income was $1.7 million and $3.5 million for the three- and
six-month periods ended June 30, 1997 as compared to $2.3 million and $4.6
million for the same periods in 1996. The decrease in interest income from the
same periods in the prior year is due to the use of previously invested cash in
acquiring the veterinary laboratory businesses and other businesses since the
first quarter of 1996.
The Company's effective tax rate was 42% and 43% for the three- and six-month
periods ended June 30, 1997 compared to 41% for the same periods in 1996. The
increase in the effective tax rates is principally attributable to losses in
countries where effective tax rates exceed 41%.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had cash, cash equivalents, and short-term
investments of $158.4 million and $229.4 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 four 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 assurances that
the Company will be effective in identifying and effecting attractive
acquisitions, assimilating acquisitions or managing future growth.
The Company has experienced and may experience in the future significant
fluctuations in its quarterly operating results. Factors such as the
introduction and market acceptance of new products and services, the demand for
existing products and services, the mix of products and services sold and the
mix of domestic versus international revenue could contribute to this quarterly
variability. The Company operates with relatively little backlog and has few
long-term customer contracts and substantially all of its product and service
revenue in each quarter results from orders received in that quarter, which
makes the Company's financial performance more susceptible to an unexpected
downturn in business and more unpredictable. In addition, the Company's expense
levels are based in part on expectations of future revenue levels, and a
shortfall in expected revenue could therefore result in a disproportionate
decrease in the Company's net income.
The markets in which the Company competes are subject to rapid and substantial
technological change. The Company encounters, and expects to continue to
encounter, intense competition in the sale of its current and future products
and services. Many of the Company's competitors and potential competitors have
substantially greater capital, manufacturing, marketing, and research and
development resources than the Company.
The Company's future success will depend in part on its ability to continue to
develop new products and services both for its existing markets and for any new
markets the Company may enter in the future. The Company believes that it has
established a leading position in many of the markets for its animal health
diagnostic products and services, and the maintenance and any future growth of
its position in these markets is dependent upon the
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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
the patent applications filed by the Company will result in patents being
issued, that any patents of the Company will afford protection against
competitors with similar technologies, or that the Company's non-disclosure
agreements will provide meaningful protection for the Company's trade secrets
and other proprietary information. Moreover, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technologies. In addition, the
Company licenses certain technologies used in its products from third parties,
and the Company may be required to obtain licenses to additional technologies in
order to continue to sell certain products. There can be no assurance that any
technology licenses which the Company desires or is required to obtain will be
available on commercially reasonable terms.
From time to time the Company receives notice alleging that the Company's
products infringe third party proprietary rights. Patent litigation frequently
is complex and expensive and the outcome of patent litigation can be difficult
to predict. There can be no assurance that the Company will prevail in any
infringement proceedings that have been or may be commenced against the Company,
and an adverse outcome may preclude the Company from selling certain products or
require the Company to pay damages or make additional royalty or other payments
with respect to such sales. In addition, from time to time other types of
lawsuits are brought against the Company, wherein an adverse outcome could
adversely affect the Company's results of operations.
Certain components used in the Company's products are currently available from
only one source and others are available from only a limited number of sources.
The Company's inability to develop alternative sources if and as required in the
future, or to obtain sufficient sole or limited source components as required,
could result in cost increases or reductions or delays in product shipments.
Certain technologies licensed by the Company and incorporated into its products
are also available from a single source, and the Company's business may be
adversely affected by the expiration or termination of any such licenses or any
challenges to the technology rights underlying such licenses. In addition, the
Company currently purchases or is contractually required to purchase certain of
the products that it sells from one source. Failure of such sources to supply
product to the Company may have a material adverse effect on the Company's
business.
For the six months ended June 30, 1997, international revenue was $42.4
million, or 35% or total revenue, and the Company expects that its
international business will continue to account for a significant portion of
its total revenue. Foreign regulatory bodies often establish product standards
that my be different from those in the United States, and designing products in
compliance with such foreign standards may be difficult or expensive. Other
risks associated with foreign operations include possible disruptions in
transportation of the Company's products, the differing product and service
needs of foreign customers, difficulties in building and managing foreign
operations, fluctuations in the value of foreign currencies, import/export
duties and quotas, and unexpected regulatory, economic or political changes in
foreign markets.
The development, manufacturing, distribution and marketing of certain of the
Company's products and provision of its services, both in the United States and
abroad, are subject to regulation by various domestic and foreign governmental
agencies. Delays in obtaining, or the failure to obtain, any necessary
regulatory approvals could have a material adverse effect on the Company's
future product and service sales and operations. Any acquisitions of new
products, services and technologies may subject the Company to additional areas
of government regulations.
The 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.
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.
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. In June
1997, the court ruled, in response to a summary judgment motion by the
Jewish Hospital, that five heartworm diagnostic kits formerly sold by IDEXX
literally infringe two claims of the '275 Patent. 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 plaintiffs are seeking damages in excess of $50,000,000. 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. In May 1996, the court granted the Company's
motion to dismiss the plaintiffs' suit, and the plaintiffs' appeals of
that dismissal were dismissed by the court in July 1997. 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 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
---------------------------------------------------
At the Company's Annual Meeting of Stockholders held on May 21, 1997, the
following proposals were adopted by the votes specified below:
BROKER
NON-
PROPOSAL FOR AGAINST ABSTAIN VOTES
- -------------------------------------- ---------- ---------- ---------- ---------
1. Election of two Class I Directors:
David E. Shaw 29,333,728 4,166,393 0 0
William F. Pounds 29,327,915 4,172,206 0 0
2. Approval of the Company's 1997
Director Stock Option Plan
covering 300,000 shares of
Common Stock authorized for
issuance under the plan 32,122,338 1,242,509 135,274 0
3. Approval of the Company's 1997
Employee Stock Purchase Plan covering
420,000 shares, and 1997 International
Employee Stock Purchasse Plan covering
30,000 shares of the Common Stock
authorized for issuance under such
plans. 31,934,920 1,447,732 117,469 0
4. Ratification of Arthur
Andersen LLP as auditors 32,210,756 88,916 200,449 0
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Item 5. -- OTHER INFORMATION
On March 27, 1997, the Compensation Committee of the Company's Board of
Directors approved a stock option exchange program, pursuant to which
employees holding stock options issued in 1995, 1996 and 1997 under the
Company's 1991 Stock Option Plan were given the opportunity to exchange the
unexercised portion of such options (the "Existing Options") for new
options (the "New Options"). The New Options cover between 50% and 100% of
the unexercised portion of an employee's Existing Options and have an
exercise price of $17.35 per share (which is equal to 125% of the fair
market value of the Company's Common Stock on such date). The percentage of
Existing Options covered is based upon the employee's position with the
Company at the time the option grants were made in 1997, and decreases as
employee rank increases. The New Options have terms similar to the Existing
Options, but are not exercisable (except in certain circumstances) until
October 31, 1997.
The Company uses stock options as a significant element of the
compensation of employees, in part because it believes options provide an
incentive to employees to maximize stockholder value. Stock options,
because they become exercisable over time, also serve as a means of
retaining employees. Because the market value of the Company's Common
Stock has fallen below the exercise price of the outstanding options
issued in 1995, 1996 and 1997, the value of such stock options as a means
of motivation and retaining employees has been significantly diminished.
Accordingly, the Compensation Committee of the Company's Board of
Directors concluded that the Company needed to restore the value of the
existing stock options as a means of motivating, retaining and providing
incentive to employees in order to promote the successful implementation
of the Company's growth strategies.
Item 6. -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 1997 Director Option Plan of the Company, with the form of option
agreements granted thereunder attached thereto.
27. Financial Data Schedule for the Quarterly Report on Form 10-Q
for the six month period ended June 30, 1997.
(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: August 13, 1997
/s/ Ralph K. Carlton
----------------------------------------
Ralph K. Carlton, Senior Vice President,
Finance and Administration and Chief
Financial Officer
(Principal Financial Officer)
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