1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File Number: 0-19271
IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 01-0393723
(State of incorporation) (I.R.S. Employer Identification No.)
ONE IDEXX DRIVE, WESTBROOK, MAINE 04092
(Address of principal executive offices) (Zip Code)
(207) 856-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 1998, 38,612,146 shares of the registrant's Common Stock, $.10
par value, were outstanding.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets June 30, 1998 and December 31, 3
1997
Consolidated Statements of Operations 4
Three and Six Months Ended June 30, 1998 and June 30, 1997
Consolidated Statements of Cash Flows 5
Six Months Ended June 30, 1998 and June 30, 1997
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition 12-15
and Results of Operations
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security-Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART II -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $129,637 $106,972
Short-term investments 35,677 35,502
Accounts receivable, less reserves of $5,187 and $5,082 in 1998 and
1997, respectively 49,246 47,341
Inventories 51,049 60,174
Deferred income taxes 15,396 15,396
Other current assets 4,088 8,832
-------- --------
Total current assets 285,093 274,217
LONG-TERM INVESTMENTS 12,530 11,134
PROPERTY AND EQUIPMENT, AT COST:
Construction in Progress 1,257 1,390
Leasehold improvements 16,852 16,596
Land 1,198 1,193
Buildings 4,485 4,462
Machinery and equipment 29,514 26,359
Office furniture and equipment 22,798 22,804
-------- --------
76,104 72,804
Less-- Accumulated depreciation & amortization 35,727 30,387
-------- --------
40,377 42,417
OTHER ASSETS, NET 47,564 49,280
-------- --------
$385,564 $377,048
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 15,686 $ 12,472
Accrued expenses 39,014 42,147
Notes payable 2,547 4,087
Deferred revenue 14,341 15,609
-------- --------
Total current liabilities 71,588 74,315
COMMITMENTS AND CONTINGENCIES (Note 5) -- --
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value
Authorized 60,000 shares
Issued and outstanding 38,599 shares in 1998 and 38,169
shares in 1997 3,860 3,817
Additional paid-in capital 260,344 257,275
Retained earnings 55,115 46,256
Cumulative translation adjustment (5,343) (4,615)
-------- --------
Total stockholders' equity 313,976 302,733
-------- --------
$385,564 $377,048
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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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,
------------------------ --------------------------
1998 1997 1998 1997
------- ------- -------- --------
Revenue $80,886 $58,890 $158,679 $119,424
Cost of revenue 39,884 31,713 78,736 61,811
------- ------- -------- --------
Gross Profit 41,002 27,177 79,943 57,613
Expenses:
Sales and marketing 16,094 16,921 31,932 34,019
General and administrative 13,334 11,642 26,871 21,777
Research and development 4,933 3,849 9,909 7,326
------- ------- -------- --------
Income (loss) from operations 6,641 (5,235) 11,231 (5,509)
Interest income, net 1,716 1,687 3,292 3,452
------- ------- -------- --------
Net income (loss) before provision for income
taxes 8,357 (3,548) 14,523 (2,057)
Provision for (benefit of) income taxes 3,259 (1,480) 5,664 (883)
------- ------- -------- --------
Net income (loss) $ 5,098 $(2,068) $ 8,859 $ (1,174)
------- ------- -------- --------
Net income (loss) per share: Basic $ 0.13 $ (0.05) $ 0.23 $ (0.03)
------- ------- -------- --------
Net income (loss) per share: Diluted $ 0.13 $ (0.05) $ 0.22 $ (0.03)
------- ------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
1998 1997
-------- --------
Cash Flows from Operating Activities:
Net income (loss) $ 8,859 $ (1,174)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities -
Depreciation and amortization 7,908 6,799
Changes in assets and liabilities -
Accounts receivable (1,904) 21,650
Inventories 9,026 (23,133)
Other current assets 4,744 4,142
Accounts payable 3,214 4,806
Accrued expenses (2,686) (5,520)
Deferred revenue (1,268) 325
-------- --------
Net cash provided by operating activities 27,893 7,895
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment (2,971) (8,852)
Decrease (increase) in investments, net (1,571) 2,109
(Increase) decrease in other assets (88) (34)
Acquisitions (see Note 5) (986) (9,027)
-------- --------
Net cash used in investing activities (5,616) (15,804)
-------- --------
Cash Flows from Financing Activities:
Repayment of notes payable (1,569) (509)
Proceeds from the exercise of stock options 2,685 1,819
-------- --------
Net cash provided by financing activities 1,116 1,310
-------- --------
Net Effect of Foreign Currency Translation (728) (1,990)
-------- --------
Net increase (decrease) in Cash and Cash Equivalents 22,665 (8,589)
Cash and Cash Equivalents, beginning of period 106,972 127,741
-------- --------
Cash and Cash Equivalents, end of period $129,637 $119,152
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 140 $ 96
======== ========
Income taxes paid during the period $ 5,635 $ 4,606
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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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, 1997 Balance Sheet was
derived from the audited Consolidated Balance Sheets contained in the Company's
latest stockholders' annual report. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto which are
contained in the Company's latest stockholders' annual report. The results for
the interim periods presented are not necessarily indicative of results to be
expected for the full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
certain accounting policies described in this and other notes to the
consolidated financial statements.
a. Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany transactions and balances have
been eliminated in consolidation.
b. Certain reclassifications have been made in the 1997 consolidated
financial statements to conform with the current years presentation.
c. The Company accounts for cash equivalents and short-term investments
in accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). Accordingly, the Company's cash equivalents and
short-term investments are classified as held-to-maturity and are
recorded at amortized cost which approximates market value.
Cash Equivalents and Short-term Investments: Cash equivalents are
short-term, highly liquid investments with original maturities of less
than three months. Short-term investments are investment securities
with original maturities of greater than three months but less than
one year and consist of the following (in thousands):
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
Government bonds $16,000 $ --
Municipal bonds 15,975 6,140
U.S. Treasury bills -- 20,047
Time deposits 1,500 6,749
Commercial paper 458 2,016
Other short-term investments 1,744 550
------- -------
$35,677 $35,502
======= =======
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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,
1998 1997
-------- ------------
Municipal bonds $12,530 $10,165
Other long term investments -- 969
------- -------
$12,530 $11,134
======= =======
d. Inventories include material, labor and overhead, and are stated at
the lower of cost (first-in, first-out) or market. The components of
inventories are as follows (in thousands):
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
Raw materials $10,171 $ 9,235
Work-in-process 7,384 8,421
Finished goods 33,494 42,518
------- -------
$51,049 $60,174
======= =======
e. During 1997 the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). All prior
earnings per share amounts have been retroactively restated.
Basic earnings per common share is computed by dividing net income by
the weighted average number of shares of common stock outstanding
during the quarter. The computation of diluted earnings per common
share is similar to the computation of basic earnings per common share
except that the denominator is increased for the assumed exercise of
dilutive options using the treasury stock method. Shares outstanding
for purposes of calculating diluted earnings (loss) per share for the
six months ended June 30, 1997 is derived from the arithmetic average
of the weighted average shares outstanding for (i) the three months
ended March 31, 1997 plus options issued to employees and (ii) the
three months ended June 30, 1997, because the Company incurred a loss
for the six months ended June 30, 1997.
The following is a reconciliation of shares outstanding for basic and
diluted earnings per share:
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------- -------------- -------------
Shares outstanding for basic earnings per share:
Weighted average shares outstanding 38,480 37,953 38,367 37,889
====== ====== ====== ======
Shares outstanding for diluted earnings per share:
Weighted average shares outstanding 38,480 37,953 38,367 37,889
Dilutive effect of options issued to employees 1,803 -- 1,460 943
------ ------ ------ ------
40,283 37,953 39,827 38,832
====== ====== ====== ======
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3. NON-RECURRING OPERATING CHARGE
During the third and fourth quarters of 1997 the Company recorded a
non-recurring operating charge of $34.5 million. The non-recurring operating
charge included the write-downs and write-offs of certain assets and accrual of
costs related to a significant workforce reduction. The charge consisted of the
following (in thousands):
Write-off of in-process research and development $13,200
Legal settlement and related costs 8,000
Severance, benefits and related costs 9,000
Idle capacity and lease termination costs 2,700
Asset impairment 1,600
-------
$34,500
=======
As of June 30, 1998, $4.7 million was included in accrued expense relating to
the non-recurring operating charge.
During 1997 the Company acquired two veterinary practice management software
companies (see Note 6). To assist in the allocation of purchase price associated
with these acquisitions, the Company obtained an independent appraisal. That
appraisal identified approximately $13.2 million as in-process research and
development, which was charged to operations in accordance with FASB
Interpretation No. 4 "Applicability of FASB Statement No. 2 to Business
Combinations Accounted for by the Purchase Method."
In September 1997, the Company settled a patent infringement suit brought by
Barnes-Jewish Hospital ("BJH") regarding IDEXX's heartworm diagnostic products.
The total costs of the settlement, including certain legal fees, were included
in the non-recurring operating charge. Under the settlement, the Company agreed
to pay BJH $5.5 million, a portion of which payment will be creditable against
earned royalties on certain products.
The Company has terminated the employment of a total of 228 employees. Of this
total, 79 employees are associated with the consolidation of the veterinary
practice management software business into the Eau Claire, Wisconsin facility,
57 employees are associated with the consolidation of sales, marketing and
distribution operations in Europe, 33 employees are associated with reductions
in domestic sales and marketing operations, 18 employees are associated with
reductions in sales and marketing operations in the Pacific Rim region, 16
employees are associated with the closure of the Sunnyvale, California research
and development facility and 25 employees are associated with a reduction in
positions in management and financial operations. As of June 30, 1998, the
severance program was essentially complete except for the consolidation of the
European facilities scheduled to occur in the fourth quarter of 1998.
As discussed above, the Company is consolidating certain veterinary practice
management software operations into the Eau Claire, Wisconsin facility and has
closed the leased Sunnyvale, California research and development facility. As a
result of these consolidations, the Company has leased facilities which have
become excess until the end of their respective lease terms. Additionally, the
Company has determined that it will not pursue certain immunoassay technology
with respect to which it has invested a total of $1.6 million in fixed assets
and license fees.
4. COMPREHENSIVE INCOME
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 must be adopted for fiscal years beginning after December 15,
1997 and all prior periods must be retroactively restated.
SFAS 130 also requires application of this statement as of the beginning of the
Company's fiscal year. Other comprehensive income for the Company consists of
foreign currency translation adjustments resulting from the translation of the
financial statements of the Company's foreign subsidiaries. Accordingly, below
is a summary of comprehensive income in accordance with this statement (in
thousands):
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Three Months Ended Six Months Ended
-------------------- --------------------
June 30 June 30 June 30 June 30
1998 1997 1998 1997
------- ------- ------- -------
Net income $5,098 $(2,068) $8,859 $(1,174)
Other comprehensive income, net of tax
Foreign currency translation adjustments (156) 56 (444) (1,194)
------ ------- ------ -------
Comprehensive income (loss) $4,942 $(2,012) $8,415 $(2,368)
====== ======== ====== ========
5. COMMITMENTS AND CONTINGENCIES
From time to time the Company has received notices alleging that the Company's
products infringe third-party proprietary rights. In particular, the Company has
received notices claiming that certain of the Company's immunoassay products
infringe third-party patents. Except as noted below with respect to the patent
infringement suit filed by Synbiotics Corporation, the Company is not aware of
any pending litigation with respect to such claims. Patent litigation frequently
is complex and expensive, and the outcome of patent litigation can be difficult
to predict. There can be no assurance that the Company will prevail in any
infringement proceedings that have been or may be commenced against the Company.
A significant portion of the Company's revenue in the three month period ended
June 30, 1998 was attributable to products incorporating certain immunoassay
technologies and products relating to the diagnosis of canine heartworm
infection. If the Company were to be precluded from selling such products or
required to pay damages or make additional royalty or other payments with
respect to such sales, the Company's business and results of operations could be
materially and adversely affected.
On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed suit
against the Company in the U.S. District Court for the District of Connecticut.
In its complaint, CDC Technologies alleges that the Company's conduct in, and
its relationships with its distributors in connection with, the distribution of
the Company's hematology products (i) violate federal and state antitrust
statutes, (ii) violate Connecticut statutes regarding unfair trade practices,
and (iii) constitute a civil conspiracy and interfere with CDC Technologies'
business relations. The relief sought by CDC Technologies includes treble
damages for antitrust violations as well as compensatory and punitive damages,
and an injunction to prevent the Company from interfering with CDC Technologies'
relations with distributors. The Company has filed an answer denying the
allegations in CDC's complaint. In March 1998, the court granted the Company's
motion for summary judgment in the case, however CDC is appealing that ruling.
The Company is unable to assess the likelihood of an adverse result or estimate
the amount of any damages which the Company may be required to pay. Any adverse
outcome resulting in the payment of damages would adversely affect the Company's
results of operations.
On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit against
the Company in the U.S. District Court for the Southern District of California
for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988 (the "`631
Patent"). The `631 Patent, which is owned by Synbiotics, claims certain assays,
methods and compositions for the diagnosis of canine heartworm infection. The
primary relief sought by Synbiotics is an injunction against the Company which
would prevent the Company from selling canine heartworm diagnostic products
which infringe the `631 Patent, as well as treble damages for past infringement.
This suit was not served on the Company within the time period specified under
applicable court rules and was dismissed without prejudice in April 1998,
however Synbiotics is not precluded from filing a new suit in the future. While
the Company believes that it has meritorious defenses against claims of
infringement of the `631 Patent, the Company is unable to assess the likelihood
of an adverse result or estimate the amount of any damages the Company may be
required to pay. If the Company is precluded from selling canine heartworm
diagnostic products or required to pay damages or make additional royalty or
other payments with respect to such sales, the Company's business and results of
operations could be materially and adversely affected.
On January 9, 1998, a complaint was filed in the U.S. District Court for the
District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F. WORKMAN,
JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff purports to
represent a class of purchasers of the common stock of the Company from July 19,
1996 through March 24, 1997. The complaint claims that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange
Commission Rule 10b-5 promulgated pursuant thereto, by virtue of false or
misleading statements made during the class period. The complaint also claims
that the individual defendants are liable as "control persons" under Section
20(a) of that Act. In addition, the complaint claims that the individual
defendants sold some of their own common stock of the Company, during the class
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period, at times when the market price for the stock allegedly was inflated.
While the Company and other defendants deny the allegations and will defend this
suit vigorously, the Company is unable to assess the likelihood of an adverse
result or estimate the amount of damages which the Company may be required to
pay. Any adverse outcome resulting in the payment of damages would adversely
affect the Company's results of operations.
6. ACQUISITIONS
1997 ACQUISITIONS
The Company's consolidated results of operations include the results of
operations of a manufacturing company, a foreign distribution company, a foreign
veterinary reference laboratory, and two veterinary practice management
companies acquired in 1997. These businesses were acquired for aggregate
purchase prices equaling approximately $24.3 million in cash, the issuance of
notes payable for $2.1 million and the assumption of certain liabilities. In
1998, the Company has paid a total of approximately $750,000 in additional
purchase price based on the results of operations of certain acquired businesses
described above. The additional payments were recorded as additional goodwill
and are being amortized over the remaining life of the respective goodwill.
In connection with the acquisition of the businesses described above, the
Company entered into non-compete agreements for periods of up to three years
with certain of the former stockholders, and may become obligated to pay
additional amounts to management of these companies based on achieving certain
operating results. The Company has accounted for these acquisitions under the
purchase method of accounting. The results of operations of each of these
businesses has been included in the Company's consolidated results of operations
since each of their dates of acquisition. The purchase prices have been
allocated to the net assets acquired on a preliminary basis and are subject to
revision. Approximately $13.2 million, identified through independent valuation,
of the purchase price related to the acquisition of the software companies has
been charged to operations as "in process research and development" in
accordance with Financial Accounting Standards Board Interpretation No. 4
"Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method." The Company has not presented pro forma financial
information relating to any of these acquisitions because of immateriality.
These acquisitions are as follows:
- On January 30, 1997, the Company acquired all of the capital stock
of Acumedia Manufacturers, Inc., located in Baltimore, Maryland,
which specializes in the manufacture of dehydrated cultured media.
- On March 13, 1997, the Company acquired all of the capital stock
of National Information Systems Corporation, located in Eau
Claire, Wisconsin, which supplies practice management computer
systems to veterinarians under the trade name Advanced Veterinary
Systems.
- On July 1, 1997, the Company, through its wholly-owned subsidiary,
IDEXX Laboratories (Taiwan), Inc., acquired certain assets and
business rights of Wintek Bio-Science Inc., located in Taipei,
Taiwan, which distributed diagnostic products to veterinarians and
hospitals in Taiwan.
- On July 18, 1997, the Company acquired all of the capital stock of
Professionals' Software, Inc., located in Effingham, Illinois,
which supplies practice management computer systems to
veterinarians.
- On December 1, 1997, the Company, through its wholly-owned
subsidiary IDEXX Laboratories Pty. Ltd., acquired certain assets
and assumed certain liabilities of Lording & Friend Pty. Ltd. and
Clinpath Pty. Ltd. (operating under the name Central Veterinary
Diagnostic Laboratory), which operated a veterinary reference
laboratory in Australia.
1998 ACQUISITION
The Company's consolidated results of operations include the results of
operations of Agri-West Laboratory, a food testing laboratory located in Texas,
which was acquired on March 1, 1998. The Company acquired certain assets and
assumed certain liabilities of Agri-West Laboratory through its wholly-owned
subsidiary IDEXX Food Safety Net Services, Inc. for approximately $250,000 in
cash.
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In connection with the acquisition of this business, the Company entered into
non-compete agreements for five years with the former owners, and may become
obligated to pay additional amounts to management of the business based on
achieving certain operating results. The Company has accounted for this
acquisition under the purchase method of accounting. The results of operations
of this business have been included in the Company's consolidated results of
operations since the date of acquisition. The Company has not presented pro
forma financial information relating to this acquisition because of
immateriality.
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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 1998 increased 37% to $80.9 million from
$58.9 million for the second quarter of 1997. Total revenue for the six months
ended June 30, 1998 increased 33% to $158.7 million from $119.4 million for the
first six months of 1997.
The increase in total revenue for the quarter ended June 30, 1998 compared to
the same period in 1997 was principally attributable to increased sales of
veterinary test kits and consumables, increased sales in the Company's practice
management software division partially resulting from the acquisition of
Professionals' Software, Inc. in July 1997, increased sales of veterinary
reference laboratory services, and increased sales of products for use in food
and water testing. These increases were partially offset by lower sales of
veterinary instruments. The increase in revenue for the six-month period ended
June 30, 1998 as compared to the same period in the prior year was principally
attributable to the same factors noted for the three-month period. Reduced sales
levels of the Company's veterinary test kits and consumables in 1997 were
principally a result of a program to reduce U.S. distributor inventories of
these products. This program was substantially completed by the end of the
quarter ended June 30, 1997. Sales of test kits and consumables resumed growth
following this one-time reduction in distributor inventories. Unit sales of
instruments have continued to decline primarily as a result of high market
penetration, a restructuring of sales channels and a shift in sales emphasis
toward consumables.
International revenue increased 12% to $23.3 million in the second quarter of
1998, and 5% to $44.5 million for the six months ended June 30, 1998, compared
to $20.9 million and $42.4 million, respectively, for the prior year periods.
Revenues of $13.2 million and $26.1 million for the three- and six-month periods
ended June 30, 1998, respectively, remained relatively constant in Europe
compared to the same periods in the prior year. Revenue from the Company's
European subsidiaries, transacted in local currencies, increased approximately
3% and 2% for the three- and six-month periods ended June 30, 1998,
respectively, as compared to the same periods in 1997. Increased sales of
veterinary consumables and food and water testing products were largely offset
by decreases in the number of instruments sold. Revenues increased by 46% to
$6.3 million and 24% to $11.3 million in the Pacific Rim region (Japan, Asia,
Australia, Taiwan) for the three- and six-month periods ended June 30, 1998,
respectively, compared to the same periods in 1997. Revenue from the Company's
Pacific Rim region, transacted in local currencies, increased approximately 67%
and 37% for the three- and six-month periods ended June 30, 1998, respectively,
as compared to the same periods in 1997. Revenues in the Pacific Rim increased
for the three- and six-month periods ended June 30, 1998 primarily due to
increased sales of veterinary test kits and consumables and the inclusion of
revenues from the acquisition of Wintek Bio-Science Inc. in July 1997, partially
offset by a decline in instrument sales. Increases in revenue in South America
were partially offset by decreases in Canada.
Gross profit as a percentage of revenue was 51% and 50% for the three- and
six-month periods ended June 30, 1998, respectively, and 46% and 48% for the
same periods in 1997. Higher sales of higher gross margin veterinary test kits
and consumables and lower sales of lower margin instruments were offset by
increased sales of lower margin veterinary practice management software products
and services and veterinary laboratory services. In the accompanying financial
statements, the Company has reclassified certain 1997 courier costs in its
veterinary laboratory business from sales and marketing into cost of sales to
conform to 1998 presentation.
Sales and marketing expenses were 20% of revenue for the three- and six-month
periods ended June 30, 1998, respectively, compared to 29% and 28% respectively,
for the same periods in 1997. The decrease as a percentage of revenue and the
dollar decreases of $827,000 and $2.1 million, respectively, are principally
attributable to a decrease in salary and related expenses resulting from
workforce reductions.
Research and development expenses were 6% of revenue for the three- and
six-month periods ended June 30, 1998 compared to 7% and 6% for the same periods
in 1997. In dollars, such expenses increased 28% and 35% for the three- and
six-month periods ended June 30, 1998, respectively, as compared to the same
period in 1997, reflecting additional resources and related overhead to support
product development, partially offset by the closure of the Company's research
facility in Sunnyvale, California.
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General and administrative expenses were 16% and 17% of revenue for the three
and six-month periods ended June 30, 1998, respectively, compared to 20% and
18%, respectively, for the same periods in the prior year. The dollar increases
of $1.7 million and $5.1 million for the three- and six-month periods ended June
30, 1998 in comparison to the same periods in 1997 are principally attributable
to an increase in management incentive compensation, an increase in consulting
expenses associated with business restructuring and additional costs associated
with veterinary laboratories and management training and recruiting, partially
offset by a reduction in legal expenses and lower provision for uncollectible
accounts.
Net interest income was $1.7 million and $3.3 million for the three- and
six-month periods ended June 30, 1998 as compared to $1.7 million and $3.5
million for the same periods in 1997. The decrease for the six-month period
ended June 30, 1998 compared to the same period in 1997 is due to a decline in
interest rates offset by a slight increase in the average balance of cash and
investments.
The Company's effective tax rate was 39% for the three- and six-month periods
ended June 30, 1998 compared to 42% and 43% for the same periods in 1997. The
decrease in the effective tax rate results from the return to higher
profitability, which decreases the relative impact of net non-deductible
expenses and net non-taxable income on the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash, cash equivalents, and short-term
investments of $165.3 million and $213.5 million of working capital.
The Company believes that current cash and short-term investments and funds
expected to be generated from operations will be sufficient to fund the
Company's current operations for the foreseeable future.
FUTURE OPERATING RESULTS
The future operating results of the Company are subject to a number of factors,
including without limitation, the following:
The Company's business has grown significantly over the past several years as a
result of both internal growth and acquisitions of products and businesses. The
Company has consummated a number of acquisitions since 1992, including five
acquisitions in 1997 and one acquisition to date in 1998, and may make
additional acquisitions. Identifying and pursuing acquisition opportunities,
integrating acquired products and businesses, and managing growth requires a
significant amount of management time and skill. There can be no assurances that
the Company will be effective in identifying and effecting attractive
acquisitions, assimilating acquisitions or managing future growth.
The Company has experienced and may experience in the future significant
fluctuations in its quarterly operating results. Factors such as the
introduction and market acceptance of new products and services, the demand for
existing products and services, the mix of products and services sold and the
mix of domestic versus international revenue could contribute to this quarterly
variability. The Company operates with relatively little backlog and has few
long-term customer contracts and substantially all of its product and service
revenue in each quarter results from orders received in that quarter, which
makes the Company's financial performance more susceptible to an unexpected
downturn in business and more unpredictable. In addition, the Company's expense
levels are based in part on expectations of future revenue levels, and a
shortfall in expected revenue could therefore result in a disproportionate
decrease in the Company's net income.
The markets in which the Company competes are subject to rapid and substantial
technological change. The Company encounters, and expects to continue to
encounter, intense competition in the sale of its current and future products
and services. Many of the Company's competitors and potential competitors have
substantially greater capital, manufacturing, marketing, and research and
development resources than the Company.
The Company's future success will depend in part on its ability to continue to
develop new products and services both for its existing markets and for any new
markets the Company may enter in the future. The Company believes that it has
established a leading position in many of the markets for its animal health
diagnostic products and services, and the maintenance and any future growth of
its position in these markets is dependent upon the successful development and
introduction of new products and services. The Company also plans to devote
significant resources to the growth of its veterinary laboratory business and
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its business in the food, hygiene and environmental markets and to the
development of an animal pharmaceutical product business, where the Company's
operating experience and product and technology base are more limited than in
its animal health diagnostic product markets. There can be no assurance that the
Company will successfully complete the development and commercialization of
products and services for existing and new businesses.
The Company's success is heavily dependent upon its proprietary technologies.
The Company relies on a combination of patent, trade secret, trademark and
copyright law to protect its proprietary rights. There can be no assurance that
the patent applications filed by the Company will result in patents being
issued, that any patents of the Company will afford protection against
competitors with similar technologies, or that the Company's non-disclosure
agreements will provide meaningful protection for the Company's trade secrets
and other proprietary information. Moreover, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technologies. In addition, the
Company licenses certain technologies used in its products from third parties,
and the Company may be required to obtain licenses to additional technologies in
order to continue to sell certain products. There can be no assurance that any
technology licenses which the Company desires or is required to obtain will be
available on commercially reasonable terms.
From time to time the Company receives notice alleging that the Company's
products infringe third party proprietary rights. Patent litigation frequently
is complex and expensive and the outcome of patent litigation can be difficult
to predict. There can be no assurance that the Company will prevail in any
infringement proceedings that have been or may be commenced against the Company,
and an adverse outcome may preclude the Company from selling certain products or
require the Company to pay damages or make additional royalty or other payments
with respect to such sales. In addition, from time to time other types of
lawsuits are brought against the Company, wherein an adverse outcome could
adversely affect the Company's results of operations.
Certain components used in the Company's products are currently available from
only one source and others are available from only a limited number of sources.
The Company's inability to develop alternative sources if and as required in the
future, or to obtain sufficient sole or limited source components as required,
could result in cost increases or reductions or delays in product shipments.
Certain technologies licensed by the Company and incorporated into its products
are also available from a single source, and the Company's business may be
adversely affected by the expiration or termination of any such licenses or any
challenges to the technology rights underlying such licenses. In addition, the
Company currently purchases or is contractually required to purchase certain of
the products that it sells from one source. Failure of such sources to supply
product to the Company may have a material adverse effect on the Company's
business.
For the six months ended June 30, 1998, international revenue was $44.5 million,
or 28% or total revenue, and the Company expects that its international business
will continue to account for a significant portion of its total revenue. Foreign
regulatory bodies often establish product standards that my be different from
those in the United States, and designing products in compliance with such
foreign standards may be difficult or expensive. Other risks associated with
foreign operations include possible disruptions in transportation of the
Company's products, the differing product and service needs of foreign
customers, difficulties in building and managing foreign operations,
fluctuations in the value of foreign currencies, import/export duties and
quotas, and unexpected regulatory, economic or political changes in foreign
markets.
The development, manufacturing, distribution and marketing of certain of the
Company's products and provision of its services, both in the United States and
abroad, are subject to regulation by various domestic and foreign governmental
agencies. Delays in obtaining, or the failure to obtain, any necessary
regulatory approvals could have a material adverse effect on the Company's
future product and service sales and operations. Any acquisitions of new
products, services and technologies may subject the Company to additional areas
of government regulations.
The Company is conducting an evaluation of its information technology systems
and its products for Year 2000 compliance. The Company's worldwide accounting
system is Year 2000 compliant, and Year 2000 issues related to its other
information technology systems will be addressed through planned upgrades prior
to 2000. A substantial majority of the Company's products, including its
instrument-based diagnostic systems and a majority of its installed base of
veterinary practice management software systems, already are Year 2000
compliant. The Company expects that by the end of 1998 all practice management
systems offered by the Company will be Year 2000 compliant. The cost of
upgrading the Company's information technology systems and its practice
management systems are not expected to be material to the Company's financial
condition or results of operations. The Company has commenced an evaluation of
the Year 2000 compliance of its vendors, but at this time cannot predict the
extent to which its vendors will have Year 2000 problems and the impact of any
such problems on the Company.
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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 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed suit
against the Company in the U.S. District Court for the District of Connecticut.
In its complaint, CDC Technologies alleges that the Company's conduct in, and
its relationships with its distributors in connection with, the distribution of
the Company's hematology products (i) violate federal and state antitrust
statutes, (ii) violate Connecticut statutes regarding unfair trade practices,
and (iii) constitute a civil conspiracy and interfere with CDC Technologies'
business relations. The relief sought by CDC Technologies includes treble
damages for antitrust violations, as well as compensatory and punitive damages,
and an injunction to prevent the Company from interfering with CDC Technologies'
relations with distributors. The Company has filed an answer denying the
allegations in CDC Technologies' complaint. In March 1998, the court granted the
Company's motion for summary judgment in the case, however CDC is appealing that
ruling. The Company is unable to assess the likelihood of an adverse result or
estimate the amount of any damages which the Company may be required to pay. Any
adverse outcome resulting in the payment of damages would adversely affect the
Company's results of operations.
On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit against
the Company in the U.S. District Court for the Southern District of California
for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988 (the "`631
Patent"). The `631 Patent, which is owned by Synbiotics, claims certain assays,
methods and compositions for the diagnosis of canine heartworm infection. The
primary relief sought by Synbiotics is an injunction against the Company which
would prevent the Company from selling canine heartworm diagnostic products
which infringe the `631 Patent, as well as treble damages for past infringement.
This suit was not served on the Company within the time period specified under
applicable court rules and was dismissed without prejudice in April 1998,
however Synbiotics is not precluded from filing a new suit in the future. While
the Company believes that it has meritorious defenses against claims of
infringement of the `631 Patent, the Company is unable to assess the likelihood
of an adverse result or estimate the amount of any damages the Company may be
required to pay. If the Company is precluded from selling canine heartworm
diagnostic products or required to pay damages or make additional royalty or
other payments with respect to such sales, the Company's business and results of
operations could be materially and adversely affected.
On January 9, 1998, a complaint was filed in the U.S. District Court for the
District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F. WORKMAN,
JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff purports to
represent a class of purchasers of the common stock of the Company from July 19,
1996 through March 24, 1997. The complaint claims that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange
Commission Rule 10b-5 promulgated pursuant thereto, by virtue of false or
misleading statements made during the class period. The complaint also claims
that the individual defendants are liable as "control persons" under Section
20(a) of that Act. In addition, the complaint claims that the individual
defendants sold some of their own common stock of the Company, during the class
period, at times when the market price for the stock allegedly was inflated.
While the Company and other defendants deny the allegations and will defend this
suit vigorously, the Company is unable to assess the likelihood of an adverse
result or estimate the amount of damages which the Company may be required to
pay. Any adverse outcome resulting in the payment of damages would adversely
affect the Company's results of operations.
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ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the Company's Annual Meeting of Stockholders held on May 15, 1998, the
following proposals were adopted by the votes specified below:
BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
- ----------------------------------------------------- ------------------------------------------------------
1. Election of three Class III Directors:
E. Robert Kinney 34,574,004 216,463 0 0
James L. Moody, Jr. 34,580,164 210,303 0 0
Erwin F. Workman, Jr., Ph.D. 34,578,151 212,316 0 0
2. Approval of the Company's 1998 Stock Incentive
Plan covering 1,800,000 shares of Common
Stock authorized for issuance under the plan 19,335,095 15,331,785 123,587 0
3. Ratification of Arthur Andersen LLP as auditors 34,687,067 56,917 46,483 0
The following Class II Directors of the Company were not up for re-election in
1998 and have three-year terms that expire in 1999: John R. Hesse, Kenneth
Paigen, Ph.D. and Jeffrey J. Langan. The following Class I Directors of the
Company were not up for re-election in 1998 and have three-year terms that
expire in 2000: David E. Shaw, William F. Pounds and Mary L. Good, Ph.D.
ITEM 5. -- OTHER INFORMATION
Proposals of stockholders intended to be presented at the Company's 1999 Annual
Meeting of Stockholders must be received by the Company at its principal office
in Westbrook, Maine, not later than December 14, 1998 for inclusion in the
proxy statement for that meeting. With respect to any stockholder proposal that
is not included in the proxy statement, proxies may use discretionary voting
authority to vote on such proposal unless the Company receives notice of such
proposal at its principal office in Westbrook, Maine, not later than February
27, 1999.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 1998 Stock Incentive Plan of the Company.
27 Financial Data Schedule for the Quarterly Report on Form
10-Q for the six month period ended June 30, 1998.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fiscal
quarter for which this report is filed.
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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 12, 1998
/s/ Ralph K. Carlton
----------------------------------------
Ralph K. Carlton, Senior Vice President,
Finance and Administration and Chief
Financial Officer
(Principal Financial Officer)
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