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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 March 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-19271
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IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 01-0393723
(State of incorporation) (I.R.S. Employer Identification No.)
ONE IDEXX DRIVE, WESTBROOK, MAINE 04092
(Address of principal executive offices) (Zip Code)
(207) 856-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 1999, 39,156,893 shares of the registrant's Common Stock, $.10
par value, were outstanding.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
INDEX
Page
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three Months Ended
March 31, 1999 and March 31, 1998 4
Consolidated Statements of Cash Flows
Three Months Ended
March 31, 1999 and March 31, 1998 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes certain forward-looking statements
about the business of IDEXX Laboratories, Inc. and its subsidiaries (the
"Company") including, without limitation, the belief that the Company's current
cash and short-term investments will be sufficient to fund its on-going
operations for the foreseeable future, and that the Company has meritorious
defenses in certain of its litigation matters. Such forward-looking statements
are subject to risk and uncertainties that could cause the Company's actual
results to vary materially from those indicated in such forward-looking
statements. These risks and uncertainties are discussed in more detail in the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 2 of Part I of this report.
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PART I -- FINANCIAL INFORMATION
Item 1. -- Financial Statements
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Per Share Amounts)
(Unaudited)
ASSETS
March 31, December 31,
1999 1998
--------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 91,291 $109,063
Short-term investments 33,019 29,290
Accounts receivable, less reserves of $5,632
and $5,368 in 1999 and 1998, respectively 57,955 47,947
Inventories 46,842 55,428
Deferred income taxes 13,693 13,965
Other current assets 6,738 7,653
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Total current assets 249,538 263,346
LONG-TERM INVESTMENTS 27,792 17,297
PROPERTY AND EQUIPMENT, AT COST:
Land 1,196 1,197
Buildings and improvements 4,521 4,487
Leasehold improvements 18,061 17,629
Machinery and equipment 31,812 31,917
Office furniture and equipment 27,632 25,423
Construction-in-progress 2,066 1,840
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85,288 82,493
Less - Accumulated depreciation and amortization 43,601 41,013
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41,687 41,480
OTHER ASSETS, Net 68,604 68,409
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$387,621 $390,532
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,026 $ 26,816
Accrued expenses 32,912 32,046
Current portion of long-term debt 5,598 5,190
Deferred revenue 15,093 14,449
-------- --------
Total current liabilities 65,629 78,501
LONG-TERM DEBT, net of current portion 4,202 4,191
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value
Authorized 60,000 shares
Issued and outstanding 39,069 shares in 1999
and 38,831 shares in 1998 3,907 3,883
Additional paid-in capital 279,614 276,296
Retained earnings 38,321 31,041
Accumulated other comprehensive income (loss) (4,052) (3,380)
-------- --------
Total stockholders' equity 317,790 307,840
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$387,621 $390,532
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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
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March 31, March 31,
1999 1998
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Revenue $89,648 $77,793
Cost of revenue 44,774 39,754
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Gross Profit 44,874 38,039
Expenses:
Sales and marketing 15,153 16,107
General and administrative 12,117 12,075
Research and development 7,171 5,267
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Income from operations 10,433 4,590
Interest income, net 1,310 1,576
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Income before provision for
income taxes 11,743 6,166
Provision for income taxes 4,462 2,405
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Net income $ 7,281 $ 3,761
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Net income per common share: Basic $ 0.19 $ 0.10
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Net income per common share: Diluted $ 0.18 $ 0.10
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See accompanying notes to consolidated financial statements.
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IDEXX LABORATORIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Three Months Ended
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March 31, March 31,
1999 1998
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Cash Flows from Operating Activities:
Net income $ 7,281 $ 3,761
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities, net of acquisitions:
Depreciation and amortization 4,346 4,572
Changes in assets and liabilities:
Accounts receivable (10,008) (4,315)
Inventories 8,187 4,230
Other current assets (679) 4,111
Accounts payable (14,790) 490
Accrued expenses 3,296 (3,595)
Deferred revenue 644 (587)
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Net cash provided by (used in) operating activities (1,723) 8,667
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Cash Flows from Investing Activities:
Purchases of property and equipment (2,418) (1,938)
Decrease (increase) in short-term investments (3,729) 6,780
Increase in long-term investments (10,495) (8,955)
Decrease (increase) in other assets 19 (80)
Acquisitions of business, net of cash acquired (1,257) (986)
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Net cash used in investing activities (17,880) (5,179)
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Cash Flows from Financing Activities:
Payment of notes payable (144) (1,530)
Proceeds from the exercise of stock options 2,623 396
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Net cash provided by (used in) financing activities 2,479 (1,134)
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Net effect of Exchange Rate Changes (648) 472
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Net increase (decrease) in Cash and Cash Equivalents (17,772) 1,882
Cash and Cash Equivalents, beginning of period 109,063 106,972
-------- --------
Cash and Cash Equivalents, end of period $ 91,291 $108,854
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Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 21 $ 106
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Income taxes paid during the period $ 704 $ 3,368
======== ========
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, 1998 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 1998 consolidated
financial statements to conform with the current year's presentation.
c. The Company accounts for cash equivalents and marketable securities in
accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities".
Accordingly, the Company's cash equivalent and short-term investments
are classified as held-to-maturity and are recorded at amortized cost
which approximates market value.
Cash Equivalents and Short-term Investments: Cash equivalents are
short-term, highly liquid investments with original maturities of less
than three months. Short-term investments are investment securities
with original maturities of greater than three months but less than one
year and consist of the following (in thousands):
March 31, December 31,
1999 1998
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Municipal bonds $27,102 $21,801
U.S. Treasury bills 3,000 6,000
Commercial paper -- 458
Certificates of deposit 2,917 1,031
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$33,019 $29,290
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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):
March 31, December 31,
1999 1998
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Municipal bonds $19,292 $13,297
Government bonds 8,000 --
Certificates of deposit 500 4,000
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$27,792 $17,297
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d. Inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out) or market. The components of
inventories are as follows (in thousands):
March 31, December 31,
1999 1998
--------- -----------
Raw materials $ 7,810 $11,342
Work-in-process 5,058 5,784
Finished goods 33,974 38,302
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$46,842 $55,428
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e. The Company reports earnings per share in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share." 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 unless the effect is
anti-dilutive and for the addition of shares to be issued in connection
with the acquisition of Blue Ridge Pharmaceuticals, Inc.
The following is a reconciliation of shares outstanding for basic and
diluted earnings per share:
1999 1998
------ ------
Shares outstanding for basic earnings per share:
Weighted average shares outstanding 38,907 38,253
====== ======
Shares outstanding for diluted earnings per share:
Weighted average shares outstanding 38,907 38,253
Dilutive effect of options issued to employees 1,880 1,092
Shares to be issued for the acquisition of Blue Ridge
Pharmaceuticals, Inc. 115 --
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40,902 39,345
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3. NON-RECURRING OPERATING CHARGE
During 1997 the Company recorded a non-recurring operating charge of $34.5
million. The non-recurring operating charge included a $13.2 million
write-off of in-process research and development associated with the
acquisition of two veterinary practice information management software
providers and $21.3 million of the write-downs and write-offs of certain
assets and accrual of costs related to a significant workforce reduction.
As of March 31, 1999, $2.3 million was included in accrued expenses
relating to the non-recurring operating charge. The balance remaining at
March 31, 1999 primarily represents severance payments due to terminated
employees, unpaid charges related to the consolidation and relocation of
distribution functions in Europe and lease payments on unutilized
facilities.
4. COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income."
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. The Company considers the
foreign currency cumulative translation adjustment to be permanently
invested and therefore has not provided income tax on those amounts.
Accordingly, below is a summary of comprehensive income in accordance with
this statement (in thousands):
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March 31, March 31,
1999 1998
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Net income (loss) $ 7,281 $ 3,761
Other comprehensive income:
Foreign currency translation adjustments (672) (472)
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Comprehensive income (loss) $ 6,609 $ 3,289
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5. NOTES PAYABLE
In connection with the acquisition of the business of Consolidated
Veterinary Diagnostics, Inc., the Company issued an unsecured note payable
for $3.0 million, of which $2.0 million and $1.0 million was outstanding at
March 31, 1998 and 1999, respectively. The note bears interest at 8% and is
due in three equal installments in July 1997, 1998 and 1999.
In connection with the Central Veterinary Diagnostic Laboratory
acquisition, the Company issued an unsecured note payable for Australian
Dollars 900,000 (US $587,000) of which Australian Dollars 675,000 (US
$430,700) was outstanding at March 31, 1999. The note bears interest at 6%
and is due in four equal annual installments beginning in December 1998.
In connection with the Blue Ridge Pharmaceuticals, Inc. acquisition (see
Note 7b), the Company issued unsecured notes payable for $7,830,000, which
were outstanding at March 31, 1999. The notes bear interest at 5.5% and are
due in two equal annual installments on October 1, 1999 and 2000.
In connection with the acquisition of a veterinary laboratory business in
Phoenix, Arizona (see Note 7c), the Company issued a non-interest bearing
note payable for $538,935 which was outstanding at March 31, 1999. The note
is due in five monthly installments beginning in April 1999.
6. 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 March 31, 1999 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 12, 1998, 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
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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 1999, 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, et.al. v. DAVID E. SHAW,
ERWIN F. WORKMAN, JR. and IDEXX LABORATORIES, INC. The plaintiffs purport
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.
On December 18, 1997, SA Scientific, Inc. ("SAS") filed suit against the
Company in the State of Texas District Court seeking unspecified damages
resulting from the Company's alleged breach of a development and supply
agreement between SAS and the Company. The Company has filed an answer to
the complaint denying SAS's allegations and asserting counterclaims against
SAS for breach of contract and conversion of the Company's property. SAS
has filed an amended complaint seeking $1,500,000 in actual damages related
to the Company's alleged breach of contract, $5,000,000 in punitive damages
and further unspecified damages from the Company's alleged negligent
misrepresentation, fraud and conversion of SAS's intellectual property, and
attorneys' fees. The Company believes that it has meritorious defenses to
SAS's claims and is contesting the matter vigorously. However, the Company
is unable to assess the likelihood of an adverse result or estimate the
amount of damages the Company might be required to pay. Any adverse outcome
resulting in payment of damages would adversely affect the Company's
results of operations.
7. ACQUISITIONS
1998 ACQUISITIONS
(a) Agri-West Laboratory
On March 1, 1998, the Company, through its wholly-owned subsidiary, IDEXX
Food Safety Net Services, Inc., acquired certain assets and assumed
certain liabilities of Agri-West Laboratory ("Agri-West") for $250,000
from Agri-West International, Inc. ("AWI"). Agri-West, located in Dallas
and San Antonio, Texas, performs food contaminant testing for food
processors and research institutions. The Company also entered into
employment, consulting and non-competition agreements with the owners of
AWI for up to five years. The Company has accounted for this acquisition
under the purchase method of accounting and has included the results of
operations in its consolidated results of operations since the date of
acquisition.
(b) Blue Ridge Pharmaceuticals, Inc.
On October 1, 1998, the Company acquired all of the capital stock of Blue
Ridge Pharmaceuticals, Inc. ("Blue Ridge") for approximately $39.1 million
in cash, $7.8 million in notes, 115,000 shares of the Company's Common
Stock and warrants to acquire 806,000 shares of Common Stock at $31.59 per
share which expire on December 31, 2003. In addition, the Company agreed to
issue up to 1.24 million shares of its Common Stock based on the
achievement by the Company's pharmaceutical business (including Blue Ridge)
of net sales and operating profit targets through 2004. All former
shareholders received equal value in the form of cash/notes/stock, warrants
and contingent shares on a per share basis. The notes, which bear interest
at 5.5% annually and are
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due in two equal annual installments on October 1, 1999 and 2000, are due
to certain key employees of Blue Ridge, subject to certain contingencies.
The shares of Common Stock are issuable on October 1, 2001 to a key
employee of Blue Ridge, subject to certain contingencies. Blue Ridge is a
development-stage animal health pharmaceutical company located in
Greensboro, North Carolina. The Company will record the issuance of any of
the 1.24 million shares discussed above as additional goodwill when the
shares are issued. The Company has accounted for this acquisition under the
purchase method of accounting and has included the results of operations in
its consolidated results since the date of acquisition.
1999 ACQUISITIONS
(c) Phoenix Veterinary Laboratory Business
On March 31, 1999, the Company, through its wholly-owned subsidiary, IDEXX
Veterinary Services, Inc., acquired the veterinary laboratory business of
Sonora Quest Laboratories, LLC ("Sonora"), based in Phoenix, Arizona, for
$1.3 million in cash and a $539,000 promissory note. In connection with the
acquisition, Sonora and its parent companies agreed not to compete in the
veterinary reference laboratory business in Arizona and New Mexico for a
period of five years. The note is non-interest bearing and is due in five
monthly installments beginning in April 1999. The Company has accounted for
this acquisition under the purchase method of accounting and has included
the results of operations in its consolidated results since the acquisition
date.
8. SEGMENT REPORTING
The Company reports segment information in accordance with Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise" ("SFAS 131"). SFAS 131 requires disclosures about operating
segments in annual financial statements and requires selected information
about operating segments in interim financial statements. It also requires
related disclosures about products and services and geographic areas.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The Company's chief
operating decision maker is the chief executive officer.
The Company is organized into business units by market and customer group.
The Company's reportable operating segments include the Veterinary
Solutions Group ("VSG"), the Food and Environmental Division ("FED") and
other. The VSG develops, designs, and distributes products and performs
services for veterinarians. The VSG also manufactures certain biology
based test kits for veterinarians. FED develops, designs, manufactures and
distributes products and performs services to detect disease and
contaminants in food animals, food, water and food processing facilities.
Both the VSG and FED distribute products and services worldwide. Other is
primarily comprised of the Company's Blue Ridge Pharmaceuticals, Inc.
subsidiary, which develops products for therapeutic applications in
companion animals and livestock, corporate research and development, and
interest income.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies except that
most interest income and expense are not allocated to individual operating
segments.
The following is the segment information for the period ended March 31
(in thousands):
VSG FED Other Total
--- --- ----- -----
1999
Revenue $71,425 $18,033 $ 190 $89,648
Net income (loss) 8,382 275 (883) 7,281
1998
Revenue 61,717 16,076 -- 77,793
Net income (loss) 3,338 (100) 522 3,761
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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
VETERINARY SOLUTIONS GROUP
Revenue for the Veterinary Solutions Group ("VSG") for the first quarter of 1999
increased 16% to $71.4 million from $61.7 million for the first quarter of 1998.
The increase in revenue in 1999 compared to 1998 is primarily attributable to
increased sales of veterinary consumables, practice information management
systems, and veterinary reference laboratory services. These increases were
offset in part by decreased unit sales of veterinary instruments.
International revenue for VSG increased 4% to $14.7 million, or 21% of total VSG
revenue, in the first quarter of 1999, compared to $14.1 million, or 23% of
total VSG revenue, in the same period for 1998. Revenue increased 14% in Europe
and 1% in Canada and South America, while revenue decreased 16% in the Asia-
Pacific region. In Europe, the increase resulted primarily from increased sales
of veterinary consumables and veterinary laboratory services. In the Asia-
Pacific region, the decrease resulted primarily from a decrease in sales of
veterinary test kits and instruments, which was partially offset by an increase
in sales of veterinary consumables.
Gross profit as a percentage of VSG revenue was 49% for both periods. Higher
sales of lower gross margin practice information management systems offset
efficiencies gained in veterinary laboratory operations and declining sales of
lower gross margin veterinary instruments.
FOOD AND ENVIRONMENTAL DIVISION
Revenue for the Food and Environmental Division ("FED") for the first quarter of
1999 increased 12% to $18.0 million from $16.1 million for the first quarter of
1998. The increase in revenue in 1999 compared to 1998 is primarily attributable
to increased sales of water testing products, food laboratory testing services
partially resulting from the acquisition of Agri-West Laboratory in March 1998,
food residue test products and livestock test kits, partially offset by
decreased sales of poultry test kits and dehydrated culture media.
International revenue for FED increased 6% to $7.6 million, or 42% of total FED
revenue, in the first quarter of 1999, compared to $7.2 million, or 45% of total
FED revenue, for the same period in 1998. Revenue increased 5% in Europe, 4% in
Canada and South America, and 11% in the Asia-Pacific region. In Europe, the
increase in revenue was primarily attributable to increased sales of food
residue testing products and poultry and livestock test kits. The increase in
revenue in the Asia-Pacific region is primarily due to increased sales of
livestock test kits and food residue testing products, partially offset by lower
sales of poultry test kits.
Gross profit as a percentage of FED revenue was 54% for the first quarter of
1999 compared to 50% for the same period in 1998. Increased sales of higher
margin water and livestock test kits were partially offset by a decline in the
average unit prices of hygiene instruments and poultry test kits and increased
revenue in lower margin food laboratory services.
OPERATING EXPENSES
Sales and marketing expenses were 17% of revenue for the three month period
ended March 31, 1999 compared to 21% in the first quarter of 1998. The decrease
as a percentage of revenue and the dollar decrease of $1.0 million were
principally attributable to a decrease in salary and related expenses resulting
from workforce reductions, partially offset by the inclusion of sales and
marketing expenses for the pharmaceutical business acquired in the last quarter
of 1998.
Research and development expenses were 8% of revenue for the three month period
ended March 31, 1999 compared to 7% in the first quarter of 1998. The increase
as a percentage of revenue and the dollar increase of $1.9 million is
principally caused by the
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addition of development expenses associated with the acquisition of Blue Ridge
Pharmaceuticals in the last quarter of 1998 and additional resources and related
overhead to support product development.
General and administrative expenses were 14% of revenue for the three month
period ended March 31, 1999 compared to 16% in the first quarter of 1998. The
dollar increase of $42,000 was primarily attributable to additional amortization
of goodwill associated with the acquisition of Blue Ridge Pharmaceuticals in the
last quarter of 1998, partially offset by a reduction in the provision for bad
debts.
Net interest income was $1.3 million for the three month period ended March 31,
1999 compared to $1.6 million for the same period in 1998. The decrease in
interest income over the prior year is due to the use of previously invested
cash in completing the acquisition of Blue Ridge Pharmaceuticals in the last
quarter of 1998.
The Company's effective tax rate was 38% for the three month period ended March
31, 1999 compared to 39% for the same period in 1998. The decrease in the
effective tax rate was principally attributable to newly available federal and
state credits for research and development activities.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had cash, cash equivalents, and short-term
investments of $124.3 million and $183.9 million of working capital.
The Company believes that current cash and short-term investments and funds
expected to be generated from operations will be sufficient to fund the
Company's operations for the foreseeable future.
FUTURE OPERATING RESULTS
The future operating results of the Company are subject to a number of factors,
including without limitation the following:
The Company's business has grown significantly over the past several years as a
result of both internal growth and acquisitions of products and businesses. The
Company has consummated a number of acquisitions since 1992, including two
acquisitions in 1998 and one acquisition to date in 1999, and plans to make
additional acquisitions. Identifying and pursuing acquisition opportunities,
integrating acquired products and businesses, and managing growth require a
significant amount of management time and skill. There can be no assurance that
the Company will be effective in identifying and effecting attractive
acquisitions, assimilating acquisitions or managing future growth.
The Company has experienced and may experience in the future significant
fluctuations in its quarterly operating results. Factors such as the
introduction and market acceptance of new products and services, the demand for
existing products and services, the mix of products and services sold and the
mix of domestic versus international revenue could contribute to this quarterly
variability. The Company operates with relatively little backlog and has few
long-term customer contracts and substantially all of its product and service
revenue in each quarter results from orders received in that quarter, which
makes the Company's financial performance more susceptible to an unexpected
downturn in business and more unpredictable. In addition, the Company's expense
levels are based in part on expectations of future revenue levels, and a
shortfall in expected revenue could therefore result in a disproportionate
decrease in the Company's net income.
The markets in which the Company competes are subject to rapid and substantial
technological change. The Company encounters, and expects to continue to
encounter, intense competition in the sale of its current and future products
and services. Many of the Company's competitors and potential competitors have
substantially greater capital, manufacturing, marketing, and research and
development resources than the Company.
The Company's future success will depend in part on its ability to continue to
develop new products and services both for its existing markets and for any new
markets the Company may enter in the future. The Company believes that it has
established a leading position in many of the markets for its animal health
diagnostic products and services, and the maintenance and any future growth of
its position in these markets is dependent upon the successful development and
introduction of new products and services. The Company also plans to devote
significant resources to the growth of its veterinary laboratory business,
veterinary practice information management software business, animal health
pharmaceuticals business and its business in the food, hygiene and
environmental markets, as well as to the development of an internet portal for
the provision of animal healthcare information and services. The Company's
operating experience and product and technology base in
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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 existing and
new businesses.
The Company's success is heavily dependent upon its proprietary technologies.
The Company relies on a combination of patent, trade secret, trademark and
copyright law to protect its proprietary rights. There can be no assurance that
patent applications filed by the Company will result in patents being issued,
that any patents of the Company will afford protection against competitors with
similar technologies, or that the Company's non-disclosure agreements will
provide meaningful protection for the Company's trade secrets and other
proprietary information. Moreover, in the absence of patent protection, the
Company's business may be adversely affected by competitors who independently
develop substantially equivalent technologies. In addition, the Company licenses
certain technologies used in its products from third parties, and the Company
may be required to obtain licenses to additional technologies in order to
continue to sell certain products. There can be no assurance that any technology
licenses which the Company desires or is required to obtain will be available on
commercially reasonable terms.
From time to time the Company receives notices alleging that the Company's
products infringe third party proprietary rights. In particular, the Company has
received notices claiming that certain of the Company's immunoassay products
infringe third-party patents. Except as noted in "Notes to Consolidated
Financial Statements" 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, 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.
In the three months ended March 31, 1999, international revenue was $22.3
million, or 25% of total revenue, and the Company expects that its international
business will continue to account for a significant portion of its total
revenue. Foreign regulatory bodies often establish product standards different
from those in the United States, and designing products in compliance with such
foreign standards may be difficult or expensive. Other risks associated with
foreign operations include possible disruptions in transportation of the
Company's products, the differing product and service needs of foreign
customers, difficulties in building and managing foreign operations,
fluctuations in the value of foreign currencies, import/export duties and
quotas, and unexpected regulatory, economic or political changes in foreign
markets.
The development, manufacturing, distribution and marketing of certain of the
Company's products and provision of its services, both in the United States and
abroad, are subject to regulation by various domestic and foreign governmental
agencies. Delays in obtaining, or the failure to obtain, any necessary
regulatory approvals could have a material adverse effect on the Company's
future product and service sales and operations. Any acquisitions of new
products, services and technologies may subject the Company to additional areas
of government regulations.
The development, manufacture, distribution and marketing of the Company's
products and provision of its services involve an inherent risk of product
liability claims and associated adverse publicity. Although the Company
currently maintains liability insurance, there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms or at all.
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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 following discussion first summarizes the Company's efforts to
identify and resolve 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, 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
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 assurances 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. The Company believes that
all of its current product offerings are Year 2000 Ready with the exception of
its VetTest(R) clinical chemistry analyzer. The Company has determined that some
versions of the VetTest instrument, including the current model, will not
properly display or transmit the date and time a sample is tested for dates
beginning January 1, 2000, unless the date and time is reset each time the
instrument is turned on. The Company believes that the accuracy of test results
provided by the VetTest instrument will not be affected. The Company also
believes it will be able to revise the VetTest software, which is routinely
updated and sent to all VetTest users approximately three times per year, to
enable the instrument to properly display and transmit date and time information
from and after January 1, 2000, with little if any inconvenience to users of the
VetTest instrument. For all other products that were identified as needing
updates to address Year 2000 issues, the Company has prepared updates or has
removed such products from its product offerings. Some of the Company's
customers, including users of older practice information management systems, 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
systems, 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 is
currently querying 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) 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.), (ii) corruption of data
contained in the Company's internal information systems, and (iii) hardware
failure. The Company is currently developing a contingency plan in the event
certain internal or external systems, or certain of the Company's suppliers,
vendors or resellers, are not Year 2000 ready. However, 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.
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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
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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 12, 1998, 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 1999, 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, et. al. v. DAVID E. SHAW,
ERWIN F. WORKMAN, JR. and IDEXX LABORATORIES, INC. The plaintiffs purport
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.
On December 18, 1997, SA Scientific, Inc. ("SAS") filed suit against the
Company in the State of Texas District Court seeking unspecified damages
resulting from the Company's alleged breach of a development and supply
agreement between SAS and the Company. The Company has filed an answer to
the complaint denying SAS's allegations and asserting counterclaims against
SAS for breach of contract and conversion of the Company's property. SAS
has filed an amended complaint seeking $1,500,000 in actual damages related
to the Company's alleged breach of contract, $5,000,000 in punitive damages
and further unspecified damages from the Company's alleged negligent
misrepresentation, fraud and conversion of SAS's intellectual property, and
attorneys' fees. The Company believes that it has meritorious defenses to
SAS's claims and is contesting the matter vigorously. However, the Company
is unable to assess the likelihood of an adverse result or estimate the
amount of damages the Company might be required to pay. Any adverse outcome
resulting in payment of damages would adversely affect the Company's
results of operations.
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Item 6. -- Exhibits and Reports on Form 8-K
(a) Exhibits
10. Employment Agreement dated April 1, 1999
between the Company and Jeffrey J. Langan.
27. Financial Data Schedule for the Quarterly Report on
Form 10-Q for the three-month period ended
March 31, 1999.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the fiscal
quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEXX LABORATORIES, INC.
Date: May 17, 1999
/s/ Ralph K. Carlton
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Ralph K. Carlton, Senior Vice President,
Finance and Administration and Chief
Financial Officer (Principal Financial Officer)
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