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 September 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 October 31, 1998, 38,664,108 shares of the registrant's Common Stock, $.10
par value, were outstanding.
2
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1998
and September 30, 1997 4
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and September 30, 1997 5
Notes to Consolidated Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 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)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 138,690 $ 106,972
Short-term investments 33,735 35,502
Accounts receivable, less reserves of
$5,580 and $5,082 in 1998 and 1997,
respectively 43,933 47,341
Inventories 42,979 60,174
Deferred income taxes 11,941 15,396
Other current assets 6,384 10,423
--------- ---------
Total current assets 277,662 275,808
LONG-TERM INVESTMENTS 17,501 11,134
PROPERTY AND EQUIPMENT, AT COST:
Construction in Progress 1,379 1,390
Leasehold improvements 16,968 16,596
Land 1,200 1,193
Buildings 4,494 4,462
Machinery and equipment 31,452 26,359
Office furniture and equipment 23,171 22,804
--------- ---------
78,664 72,804
Less-- Accumulated depreciation & amortization 38,605 30,387
--------- ---------
40,059 42,417
OTHER ASSETS, NET 45,129 47,689
--------- ---------
$ 380,351 $ 377,048
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 7,486 $ 12,472
Accrued expenses 35,363 42,147
Notes payable 1,536 4,087
Deferred revenue 13,941 15,609
--------- ---------
Total current liabilities 58,326 74,315
COMMITMENTS AND CONTINGENCIES (Note 5) -- --
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value
Authorized 60,000 shares
Issued and outstanding 38,642 shares
in 1998 and 38,169 shares in 1997 3,864 3,817
Additional paid-in capital 261,009 257,275
Retained earnings 61,111 46,256
Cumulative translation adjustment (3,959) (4,615)
--------- ---------
Total stockholders' equity 322,025 302,733
--------- ---------
$ 380,351 $ 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 NINE MONTHS ENDED
--------------------------- --------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
Revenue $78,487 $ 71,728 $237,166 $191,151
Cost of revenue 38,547 37,702 117,283 99,512
------- -------- -------- --------
Gross Profit 39,940 34,026 119,883 91,639
Expenses:
Sales and marketing 15,493 16,746 47,426 50,765
General and administrative 11,410 10,621 38,281 32,397
Research and development 5,174 4,645 15,084 11,971
Non-recurring operating charge - 28,000 - 28,000
------- -------- -------- --------
Income (loss) from operations 7,863 (25,986) 19,092 (31,494)
Interest income, net 1,967 1,641 5,260 5,092
------- -------- -------- --------
Net income (loss) before provision
for income taxes 9,830 (24,345) 24,352 (26,402)
Provision for (benefit of) income taxes 3,834 (7,491) 9,497 (8,374)
------- -------- -------- --------
Net income (loss) $ 5,996 $(16,854) $ 14,855 $(18,028)
------- -------- -------- --------
Net income (loss) per share: Basic $ 0.16 $ (0.44) $ 0.39 $ (0.48)
------- -------- -------- --------
Net income (loss) per share: Diluted $ 0.15 $ (0.44) $ 0.37 $ (0.48)
------- -------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
Cash Flows from Operating Activities:
Net income (loss) $ 14,855 $ (18,028)
Adjustments to reconcile net income (loss)
to net cash provided by
operating activities
Depreciation and amortization 11,724 10,470
Non-cash portion of non-recurring operating charge -- 11,000
Changes in assets and liabilities
Accounts receivable 3,408 22,481
Inventories 16,868 (13,681)
Other current assets 7,494 (7,314)
Accounts payable (4,986) (9,751)
Accrued expenses (6,245) 14,746
Deferred revenue (1,668) (56)
--------- ---------
Net cash provided by operating activities 41,450 9,867
--------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment (5,302) (11,356)
Decrease (increase) in investments, net (4,602) 4,363
Increase in other assets (181) (706)
Acquisitions (see Note 6) (986) (22,284)
--------- ---------
Net cash used in investing activities (11,071) (29,983)
--------- ---------
Cash Flows from Financing Activities:
Repayment of notes payable (2,580) (1,509)
Proceeds from the exercise of stock options 3,263 2,004
--------- ---------
Net cash provided by financing activities 683 495
--------- ---------
Net Effect of Foreign Currency Translation 656 (2,599)
--------- ---------
Net increase (decrease) in Cash and Cash Equivalents 31,718 (22,220)
Cash and Cash Equivalents, beginning of period 106,972 127,741
--------- ---------
Cash and Cash Equivalents, end of period $ 138,690 $ 105,521
========= =========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 245 $ 352
========= =========
Income taxes paid during the period $ 10,562 $ 6,852
========= =========
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):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
U.S. government and government backed securities $12,000 $20,047
Municipal bonds 18,725 6,140
Time deposits 2,000 6,749
Commercial paper 458 2,016
Other short-term investments 552 550
------- -------
$33,735 $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):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Municipal bonds $17,001 $10,165
Other long term investments 500 969
------- -------
$17,501 $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):
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Raw materials $ 9,490 $ 9,235
Work-in-process 6,952 8,421
Finished goods 26,537 42,518
------- -------
$42,979 $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.
The following is a reconciliation of shares outstanding for basic and diluted
earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------ -------------
Shares outstanding for basic earnings per share:
Weighted average shares outstanding 38,616 38,036 38,451 37,939
====== ====== ====== ======
Shares outstanding for diluted earnings per share:
Weighted average shares outstanding 38,616 38,036 38,451 37,939
Dilutive effect of options issued to employees 1,768 -- 1,581 --
------ ------ ------ ------
40,384 38,036 40,032 37,939
====== ====== ====== ======
The Company incurred a loss for the three and nine months ended September 30,
1997 and as a result excluded the dilutive effect of options from the
determination of shares outstanding for dilutive earnings per share. If the
options were included, the number of shares outstanding would have increased by
1.1 million and 1.5 million, respectively.
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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, of which $28 million was
recognized in the third quarter. 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 September 30, 1998, $4.2 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 September 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.
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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):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net income $ 5,996 $ (16,854) $14,855 $ (18,028)
Other comprehensive income, net of tax
Foreign currency translation adjustments 844 (365) 400 (1,559)
------- ---------- ------- ---------
Comprehensive income (loss) $ 6,840 $ (17,219) $15,255 $ (19,587)
======= ========= ======= =========
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
September 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.
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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 may 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.
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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.
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.
7. SUBSEQUENT EVENTS
On October 1, 1998, the Company acquired all of the shares of capital stock of
Blue Ridge Pharmaceuticals, Inc. ("Blue Ridge"), located in Greensboro, North
Carolina, in consideration for $39.1 million in cash, promissory notes in the
aggregate principal amount of $7.8 million, 114,894 shares of the Company's
common stock and warrants to purchase 805,519 shares of the Company's common
stock. In addition, the Company agreed to issue up to 1,240,875 additional
shares of its common stock based on the achievement of certain operating targets
through 2004.
The notes, which bear interest at a rate of 5.5% annually and mature October 1,
2000, were issued to certain key employees of Blue Ridge. The Company's
obligations to repay the notes are contingent, with certain exceptions, upon
such employees continuing to be employed by Blue Ridge or the Company on the
maturity date. The 114,894 shares are issuable by the Company on October 1, 2001
to a key employee of Blue Ridge, and the Company's obligation to issue the
shares is contingent, with certain exceptions, on such employee continuing to be
employed by Blue Ridge or the Company on that date.
The company will account for this acquisition under the purchase method of
accounting.
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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 third quarter of 1998 increased 9% to $78.5 million from
$71.7 million for the third quarter of 1997. Total revenue for the nine months
ended September 30, 1998 increased 24% to $237.2 million from $191.2 million for
the first nine months of 1997.
The increase in total revenue for the quarter ended September 30, 1998 compared
to the same period in 1997 was principally attributable to increased sales of
veterinary test kits and consumables, increased sales of products for use in
food and water testing, increased sales of veterinary reference laboratory
services, and increased revenue in the Company's practice management software
division. These increases were partially offset by lower sales of veterinary
instruments. The increase in revenue for the nine-month period ended September
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 for the nine months
ended September 30, 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 9% to $21.1 million in the third quarter of
1998, and 6% to $65.6 million for the nine months ended September 30, 1998,
compared to $19.3 million and $61.7 million, respectively, for the prior year
periods. Revenues increased by 10% to $12.8 million and 2% to $38.9 million in
Europe for the three- and nine-month periods ended September 30, 1998,
respectively, compared to the same periods in the prior year. Revenues from the
Company's European subsidiaries, transacted in local currencies, increased
approximately 8% and 4% for the three- and nine-month periods ended September
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 decreased by 1%
to $4.5 million and increased 16% to $15.7 million in the Pacific Rim region
(Japan, Australia, Taiwan and other Asia) for the three- and nine-month periods
ended September 30, 1998, respectively, compared to the same periods in 1997.
Revenue from the Company's Pacific Rim region, transacted in local currencies,
increased approximately 17% and 30% for the three- and nine-month periods ended
September 30, 1998, respectively, as compared to the same periods in 1997. The
decrease in revenues in the Pacific Rim for the three-month period ended
September 30, 1998 is primarily due to lower sales of veterinary instruments
partially offset by higher sales of products for use in food testing, veterinary
test kits and laboratory services resulting from the December 1997 acquisition
of a veterinary reference laboratory in Australia. The increase in revenues in
the Pacific Rim for the nine-month period ended September 30, 1998 is primarily
due to increased sales of veterinary test kits and consumables and the inclusion
of sales from the Australian laboratory, 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% for the three- and nine-month
periods ended September 30, 1998, respectively, and 47% 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 partially 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 nine-month
periods ended September 30, 1998, respectively, compared to 23% and 27%
respectively, for the same periods in 1997. The decrease as a percentage of
revenue and the dollar decreases of $1.3 million and $3.3 million, respectively,
are principally attributable to a decrease in salary and related expenses
resulting from workforce reductions.
Research and development expenses were 7% and 6% of revenue for the three- and
nine-month periods ended September 30, 1998 compared to 6% for the same periods
in 1997. In dollars, such expenses increased 11% and 26% for the three- and
nine-month periods ended September 30, 1998, respectively, as compared to the
same period in 1997, reflecting additional resources and related overhead
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to support product development, partially offset by the closure of the Company's
research facility in Sunnyvale, California.
General and administrative expenses were 15% and 16% of revenue for the three
and nine-month periods ended September 30, 1998, respectively, compared to 15%
and 17%, respectively, for the same periods in the prior year. The dollar
increase of $0.8 million for the three-month period ended September 30, 1998 is
principally attributable to an increase in management incentive compensation,
additional legal expense and additional costs associated with management
training, partially offset by lower salaries and related costs as a result of
workforce reductions and favorable foreign currency exchange gains. Legal
expenses incurred in connection with the settlement of patent litigation with
Barnes-Jewish Hospital in September 1997 were included in the non-recurring
operating charge taken during that period. The dollar increase of $5.9 million
for the nine-month period ended September 30, 1998 in comparison to the same
period in 1997 is principally attributable to an increase in management
incentive compensation, additional costs associated with veterinary
laboratories, an increase in consulting expenses associated with business
restructuring, and additional costs associated with management training and
recruiting, partially offset by a lower provision for uncollectible accounts.
Net interest income was $2.0 million and $5.3 million for the three- and
nine-month periods ended September 30, 1998 as compared to $1.6 million and
$5.1 million for the same periods in 1997. The increases are due to an increase
in the average balance of cash and investments.
The Company's effective tax rate was 39% for the three- and nine-month periods
ended September 30, 1998 compared to 31% and 32% for the same periods in 1997.
The 1997 tax rate reflects the write-off of non-deductible goodwill included in
the non-recurring charge.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had cash, cash equivalents, and short-term
investments of $172.4 million and $219.3 million of working capital. On
October 1, 1998, the Company used $39.1 million in cash in connection with the
acquisition of Blue Ridge Pharmaceuticals, Inc. ("Blue Ridge"). See Note 7 to
Consolidated Financial Statements.
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 two acquisitions 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
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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, however, 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 newer
businesses, including the Blue Ridge veterinary pharmaceutical business, the
Company's food, hygiene and environmental business and its veterinary laboratory
business. The Company's operating experience and product and technology base in
these businesses 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 these and
other new businesses. While Blue Ridge has a number of veterinary pharmaceutical
products under development, the Company will not derive material revenues from
the sale of veterinary pharmaceutical products until one or more of such
products is commercialized. The Company expects that Blue Ridge will incur
losses at least through 1999, although the Company believes that these losses
will not have a material adverse effect on the Company's results of operations.
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 nine months ended September 30, 1998, international revenue was $65.6
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.
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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.
YEAR 2000
Historically, certain computer programs have been written using two digits,
rather than four digits, to define the applicable year. This could lead, in many
cases, to a computer's recognizing a date using "00" as 1900 rather than the
year 2000. This phenomenon could result in major computer system failures or
miscalculations, and is generally referred to as the "Year 2000" problem or
issue. The Company is in the process of identifying and resolving Year 2000
issues associated with the Company's information technology ("IT") and non-IT
internal systems, the products and services sold by the Company, and the
products and services supplied by outside vendors. The following discussion
first summarizes the Company's efforts to identify and resolve Year 2000 issues
and then addresses total costs, most reasonably likely worst case scenarios,
contingency plans, and the basis for current estimates relating to such efforts.
The Company's worldwide accounting system is Year 2000 ready, and throughout
1998 and 1999 the Company expects to complete implementation of any needed Year
2000 related modifications to its other IT systems. The Company is also
currently assessing its internal non-IT systems and expects to complete testing
and any needed modifications to these systems prior to 2000. Although the
Company does not believe that it will incur material costs or experience
material disruptions in its business associated with preparing its internal
systems for the Year 2000, there can be no assurance that the Company will not
experience serious unanticipated negative consequences and/or material costs
caused by undetected errors or defects in the technology used in its internal
systems, which are composed of third party software, third party hardware that
contains embedded software and the Company's own software products.
The Company's Year 2000 effort has included testing products currently or
recently offered by the Company for Year 2000 issues. 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 ready. The Company expects that by the end of
1998 all practice management systems offered by the Company will be Year 2000
ready. For products that were identified as needing updates to address Year 2000
issues, the Company has prepared or is preparing updates, or has removed or
plans to remove such products from its product offerings. Some of the Company's
customers are using product versions that the Company will not support for Year
2000 issues; the Company is encouraging these customers to migrate to current
product versions that are Year 2000 ready. Notwithstanding these efforts, there
can be no guarantee that one or more current Company products do not contain
Year 2000 issues that may result in material costs to the Company.
Because a portion of the Company's business involves the sale of software
products, the Company's risk of being subjected to lawsuits relating to Year
2000 issues with its software products is likely to be greater than that of
companies that do not sell software products. Because computer systems may
involve different hardware, firmware and software components from different
manufacturers, it may be difficult to determine which component in a computer
system may cause a Year 2000 issue. As a result, the Company may be subjected to
Year 2000 related lawsuits independent of whether its products and services are
Year 2000 ready. The outcomes of any such lawsuits and the impact on the Company
cannot be determined at this time.
The Company has queried its important suppliers and vendors to assess their Year
2000 readiness. To date, the Company is not aware of any problems that would
materially impact results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that these suppliers and vendors
will be Year 2000 ready. The inability of those parties to complete their Year
2000 resolution process could materially impact the Company. The Company also
intends during 1999 to query key resellers of Company products regarding Year
2000 readiness. No assurances can be given regarding the state of readiness of
such resellers.
The Company's total cost relating to Year 2000 related activities has not been
and is not expected to be material to the Company's financial position, results
of operations, or cash flows. The Company believes that necessary modifications
will be made on a timely basis. However, there can be no assurance that there
will not be a delay in, or increased costs associated with, the implementation
of such modifications, or that the Company's suppliers, resellers and customers
will adequately prepare for the Year 2000 issue. It is possible that any such
delays, increased costs, or supplier, reseller or customer failures could have a
material adverse impact on the Company's operations and financial results.
The most reasonable likely worst case Year 2000 scenarios for the Company would
include: (i) corruption of data contained in the Company's internal information
systems, (ii) hardware failure, and (iii) the failure of infrastructure services
provided by government agencies and other third parties (e.g., electricity,
phone service, water transport, material delivery, security systems, etc.). The
Company currently does not have a contingency plan in the event of a particular
system not being Year 2000 ready. Such a plan will be developed if it becomes
clear that the Company is not going to achieve its scheduled compliance
objectives. If the Company does not become Year 2000 ready in a timely manner,
the Year 2000 issue could have a material adverse impact on the Company's
operations by, for example, impacting the Company's ability to deliver products
or services to its customers.
Current estimates of the costs of the project and the information on which the
Company believes it will complete the Year 2000 modifications are based on
certain assumptions regarding future events, including the continued
availability of certain resources, assurances received from third parties, and
other factors. However, there can be no guarantee that these estimates will be
achieved or that this information is accurate, and therefore the actual results
could differ materially from those anticipated. Specific factors might include,
but are not limited to, the availability and cost of personnel trained in this
area, the degree of cooperation and preparedness of third parties, the ability
to locate and correct all relevant computer codes, and other uncertainties.
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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 5. -- OTHER INFORMATION
Proposals of stockholders submitted pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934 for inclusion in the Company's proxy materials for its 1999
Annual Meeting of Stockholders must be received by the Secretary of the Company
at its principal office in Westbrook, Maine, not later than December 14, 1998.
In addition, the Company's by-laws require that the Company be given advance
notice of matters which stockholders wish to present for action at an annual
meeting of stockholders (other than matters included in the Company's proxy
statement in accordance with Rule 14a-8). The required notice must be received
by the Secretary of the Company, at the principal offices of the Company no
later than March 14, 1999 or 60 days before the date of the 1999 Annual Meeting,
whichever is later.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule for the Quarterly Report on Form 10-Q for
the nine month period ended September 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: November 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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