-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S5egWEAptjS0pKqEdcOVFaD7m5X2/809PUNErPkHJJMoqnJATyQmu4AgO11vcwx+ MSa6HXcXuTTH1vfbchcL3w== 0000874716-00-000003.txt : 20000515 0000874716-00-000003.hdr.sgml : 20000515 ACCESSION NUMBER: 0000874716-00-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDEXX LABORATORIES INC /DE CENTRAL INDEX KEY: 0000874716 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 010393723 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19271 FILM NUMBER: 629891 BUSINESS ADDRESS: STREET 1: ONE IDEXX DR CITY: WESTBROOK STATE: ME ZIP: 04092 BUSINESS PHONE: 2078560300 MAIL ADDRESS: STREET 1: ONE IDEXX DR CITY: WESTBROOK STATE: ME ZIP: 04092 FORMER COMPANY: FORMER CONFORMED NAME: IDEXX CORP / DE DATE OF NAME CHANGE: 19600201 10-Q 1 IDEXX LABORATORIES, INC. 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 March 31, 2000 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 (Zip Code) offices) (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 28, 2000, 35,460,107 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 March 31, 2000 and December 31, 1999 3 Consolidated Statements of Operations Three Months Ended March 31, 2000 and March 31, 1999 4 Consolidated Statements of Cash Flows Three Months Ended March 31, 2000 and March 31, 1999 5 Notes to Consolidated Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-14 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 FORWARD LOOKING INFORMATION This Quarterly Report on Form 10-Q includes certain forward-looking statements about the business of IDEXX Laboratories, Inc. and its subsidiaries (the "Company") including, without limitation, the belief that the Company's current cash and short-term investments will be sufficient to fund its on-going operations for the foreseeable future, and that the Company has meritorious defenses in certain of its litigation matters. Such forward-looking statements are subject to risks 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. 3 PART I -- FINANCIAL INFORMATION Item 1. -- FINANCIAL STATEMENTS IDEXX LABORATORIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In Thousands, Except Per Share Amounts) (Unaudited)
ASSETS MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ CURRENT ASSETS: Cash and cash equivalents $68,369 $58,576 Short-term investments 41,981 46,835 Accounts receivable, less reserves of $5,117 and $4,828 in 2000 and 1999, respectively 62,686 58,353 Inventories 47,187 47,488 Deferred income taxes 14,363 14,679 Other current assets 7,259 6,484 ------- ------ Total current assets 241,845 232,415 LONG-TERM INVESTMENTS 21,865 25,517 PROPERTY AND EQUIPMENT, AT COST: Land 1,195 1,196 Buildings and improvements 4,550 4,528 Leasehold improvements 18,170 18,522 Machinery and equipment 34,145 34,630 Office furniture and equipment 30,144 28,630 Construction-in-progress 2,226 1,152 ------ ------ 90,430 88,658 Less - Accumulated depreciation and amortization 51,108 49,108 ------ ------ 39,322 39,550 OTHER ASSETS, Net 58,770 62,676 -------- -------- $361,802 $360,158 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $16,399 $19,647 Accrued expenses 41,708 40,183 Notes payable 3,519 3,543 Deferred revenue 11,363 12,444 ------- ------- Total current liabilities 72,989 75,817 COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS' EQUITY: Common stock, $0.10 par value Authorized 60,000 shares Issued and outstanding 39,860 shares in 2000 and 39,584 shares in 1999 3,986 3,958 Additional paid-in capital 289,526 284,459 Retained earnings 71,653 63,619 Accumulated other comprehensive income(loss) (4,105) (3,473) Treasury stock (4,424 shares in 2000 and 3,899 shares in 1999), at cost (72,247) (64,222) --------- -------- Total stockholders' equity 288,813 284,341 --------- --------- $361,802 $360,158 ======== ========
See accompanying notes to consolidated financial statements. 4 IDEXX LABORATORIES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In Thousands, Except Per Share Amounts) (Unaudited)
THREE MONTHS ENDED -------------------- MARCH 31, MARCH 31, 2000 1999 --------- --------- Revenue $90,878 $89,648 Cost of revenue 46,274 44,774 ------ ------ Gross Profit 44,604 44,874 Expenses: Sales and marketing 15,724 15,153 General and administrative 10,578 12,117 Research and development 6,794 7,171 ------ ------ Income from operations 11,508 10,433 Interest income, net 1,346 1,310 ------ ------ Income before provision for income taxes 12,854 11,743 Provision for income taxes 4,820 4,462 ------ ------ Net income $8,034 $7,281 ====== ====== Net income per common share: Basic $0.23 $0.19 ===== ===== Net income per common share: Diluted $0.22 $0.18 ===== =====
See accompanying notes to consolidated financial statements. 5 IDEXX LABORATORIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In Thousands) (Unaudited)
THREE MONTHS ENDED -------------------- MARCH 31, MARCH 31, 2000 1999 -------- --------- Cash Flows from Operating Activities: Net income $8,034 $7,281 Adjustments to reconcile net income to net cash used in operating activities, net of acquisitions: Depreciation and amortization 4,530 4,346 Provision for (benefit of) deferred income taxes (364) 147 Changes in assets and liabilities: Accounts receivable (5,242) (10,008) Inventories (4,538) 8,187 Other current assets (465) (679) Accounts payable (3,248) (14,790) Accrued expenses 1,137 3,149 Deferred revenue (6) 644 ------ ----- Net cash used in operating activities (162) (1,723) ------ ------- Cash Flows from Investing Activities: Purchases of property and equipment (3,393) (2,418) Decrease (increase) in short-term investments 4,853 (3,729) Decrease (increase) in long-term investments 3,652 (10,495) (Increase) decrease in other assets (835) 19 Acquisitions of business, net of cash acquired (178) (1,257) Sale of businesses 10,400 -- ------ ------ Net cash provided by (used in) investing activities 14,499 (17,880) ------ -------- Cash Flows from Financing Activities: Payment of notes payable -- (144) Proceeds from the exercise of stock options 4,135 2,623 Purchase of treasury stock (8,024) -- ------- ----- Net cash (used in) provided by financing activities (3,889) 2,479 Net effect of Exchange Rate Changes (655) (648) ------ ------ Net increase (decrease) in Cash and Cash Equivalents 9,793 (17,772) Cash and Cash Equivalents, beginning of period 58,576 109,063 ------- -------- Cash and Cash Equivalents, end of period $68,369 $91,291 ======= ======= Supplemental Disclosure of Cash Flow Information: Interest paid during the period $ -- $ 21 ======== ======= Income taxes paid during the period $ 2,055 $ 704 ======== =======
See accompanying notes to consolidated financial statements. 6 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, 1999 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 1999 consolidated financial statements to conform with the current year's presentation. c. The Company accounts for investments in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Except for preferred stock, the Company has the intent and ability to hold short-term and long-term investments to maturity and records these investments at amortized cost which approximates market value. The Company classifies its investment in preferred stock as available-for-sale and values it at fair 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, 2000 1999 -------- ------------ Municipal bonds $21,037 $24,785 Preferred stock 10,262 9,120 U.S. Governmental obligations 5,000 8,000 Certificates of deposit 5,682 4,930 ------- ------- $41,981 $46,835 ======= ======= 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, 2000 1999 -------- ----------- Municipal bonds $19,865 $23,517 U.S. Government obligations 2,000 2,000 -------- -------- $21,865 $25,517 ======== ======== 7 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, 2000 1999 -------- ------------ Raw materials $7,498 $6,385 Work-in-process 4,193 4,190 Finished goods 35,496 36,913 ------- ------- $47,187 $47,488 ======= ======= 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:
2000 1999 ------ ------ Shares outstanding for basic earnings per share: Weighted average shares outstanding 35,288 38,907 ====== ====== Shares outstanding for diluted earnings per share: Weighted average shares outstanding 35,288 38,907 Dilutive effect of options issued to employees 1,218 1,880 Shares to be issued for the acquisition of Blue Ridge Pharmaceuticals, Inc. 115 115 ------ ------ 36,621 40,902 ====== ======
3. COMPREHENSIVE INCOME (LOSS) 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):
MARCH 31, MARCH 31, 2000 1999 -------- -------- Net income $8,034 $7,281 Other comprehensive income (loss): Foreign currency translation adjustments (632) (672) ------- ------ Comprehensive income $7,402 $6,609 ======= =======
8 4. 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 bore interest at 8% and was due in three equal installments in July 1997, 1998 and 1999. The final installment was paid in July 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 450,000 (US $277,000) was outstanding at March 31, 2000. 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, the Company issued unsecured notes payable for $7,830,000. The notes bear interest at 5.5% and are due in two installments on October 1, 1999 and 2000. As of March 31, 2000, $3.1 million was outstanding. In connection with the acquisition of a veterinary laboratory business in Phoenix, Arizona (see Note 6(a)), the Company issued a non-interest bearing note payable for $539,000 which was outstanding at March 31, 1999. The note was due in five monthly installments beginning in April 1999 and was repaid in full during 1999. 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. 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. In January 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. In July 1999, the U.S. District Court granted the Company's motion to dismiss the case for failure to state a claim. However in August 1999, the plaintiffs appealed that ruling to the U.S. Court of Appeals for the First Circuit. In February 2000, the Company entered into a Memorandum of Understanding (the "MOU") with the plaintiffs pursuant to which the parties have agreed to settle the suit. Pursuant to the MOU, the Company and the plaintiffs have filed a Stipulation of Settlement (the "Stipulation") with the U.S. District Court. Subject to certain conditions, the Stipulation will become effective following approval by the District Court and expiration of the time for any appeal. No assurance can be given that the District Court will approve the Stipulation or otherwise that the suit will be finally settled on the terms contained in the MOU. The proposed settlement (in excess of the portion reimbursed through insurance) will not affect results of operations in 2000. In the event that the suit is not settled, 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, in excess of the amount agreed to in the MOU, would adversely affect the Company's results of operations. In December 1997, SA Scientific, Inc. ("SAS") filed suit against the Company in the State of Texas District Court. SAS has alleged breach of a development and supply agreement between SAS and the Company, negligent misrepresentation, fraud and conversion of SAS's intellectual property, and is seeking $8,000,000 in actual damages, $24,000,000 in punitive damages, further unspecified damages and attorneys' fees. The Company has filed an answer to the complaint denying SAS's allegations and has asserted counterclaims against SAS for breach of contract, fraud and conversion of the Company's property. The trial is scheduled for July 2000. 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. 9 6. ACQUISITIONS 1999 ACQUISITIONS (a) 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 was non-interest bearing and was paid 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. (b) Tufts University Laboratory Business On December 1, 1999, the Company, through its wholly-owned subsidiary, IDEXX Veterinary Services, Inc., acquired the veterinary laboratory business of Tufts University School of Veterinary Medicine ("Tufts"), based in Massachusetts, for $2.8 million in cash. In connection with the acquisition, Tufts agreed not to compete in the veterinary reference laboratory business for a period of ten 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 since the acquisition date. 2000 ACQUISITIONS (c) Sierra Laboratories On March 10, 2000 the Company, through its wholly-owned subsidiary, IDEXX Veterinary Services, Inc., acquired the veterinary laboratory business of Sierra Veterinary Laboratory LLC ("Sierra"), based in Los Angeles, California, for $178,000 in cash. In addition, the Company agreed to make future payments in each of the next four years based on the results of operations, which will be treated as additional purchase price. 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. 7. DIVESTITURES Through a series of transactions in December 1999 and February 2000 the Company sold certain assets and subsidiaries of its Food and Environmental Division. As a result of these transactions, the Company recorded an immaterial loss in 1999 and an immaterial gain in 2000. The results of operations of these businesses have been included in the consolidated results of operations through the respective sale dates. Pro forma information has not been presented because of immateriality. (a) IDEXX Food Safety Net Services, Inc. On December 21, 1999, the Company sold substantially all the assets and the business of IDEXX Food Safety Net Services, Inc. to Food Safety Net Services Ltd. for $350,000 in cash, a $195,000 note payable and the assumption of certain liabilities. The note bears interest at 6% and is due in twelve quarterly installments. In addition, the Company entered into a non-compete agreement for five years. (b) Food Products and Acumedia Manufacturers, Inc. During February 2000, the Company sold certain assets and the rights to its Lightning(R), Simplate(R) and Bind(R) product lines and its subsidiary Acumedia Manufacturers, Inc. ("Acumedia") for aggregate consideration of $10.4 million in cash, a $450,000 note payable, and the assumption of certain liabilities. The Company also will receive up to an additional $1.0 million based on revenue of the Acumedia business between the sale date and February 16, 2001. The note bears interest at 7% and is due on February 16, 2001. In addition, the Company entered into non-compete agreements for up to five years. 10 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 Companion Animal Group ("CAG"), the Food and Environmental Division ("FED") and other. The CAG develops, designs and distributes products and performs services for veterinarians. The CAG also manufactures certain biology based test kits for veterinarians. FED develops, designs, manufactures and distributes products to detect disease and contaminants in food animals, dairy products and water. Both the CAG and FED distribute products and services worldwide. Other is primarily comprised of 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):
CAG FED OTHER TOTAL ----- ----- ----- ------ 2000 Revenue $73,940 $16,938 $-- $90,878 Net income 5,074 2,368 592 8,034 1999 Revenue 71,615 18,033 -- 89,648 Net income 6,493 273 515 7,281
9. STOCK REPURCHASE PROGRAM During 1999, the Board of Directors authorized the purchase of up to six million shares of the Company's Common Stock in the open market or in negotiated transactions. During the three months ended March 31, 2000, the Company repurchased 525,000 shares for $8.0 million. As of March 31, 2000, approximately 4.4 million shares of Common Stock were repurchased under this program for an aggregate of $72.2 million. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company operates primarily through two business units: the Companion Animal Group ("CAG") and Food and Environmental Division ("FED"). CAG comprises the Company's veterinary diagnostic products and services, its animal health pharmaceuticals business, and its veterinary informatics and internet business. FED comprises the Company's services and products for food and environmental testing. Through a series of transactions completed in late 1999 and the first quarter of 2000, the Company disposed of substantially all of its businesses related to food microbiology testing. FED now comprises the Company's water and dairy testing business and its production animal services business. COMPANION ANIMAL GROUP Revenue for the Companion Animal Group ("CAG") for the first quarter of 2000 increased 3% to $73.9 million from $71.6 million for the first quarter of 1999. The increase in revenue in 2000 compared to 1999 is primarily attributable to increased sales of veterinary reference laboratory services, pharmaceutical products, and feline test kits. Increased sales of laboratory services were partially as a result of the acquisition of the veterinary reference laboratory business of Tufts University School of Veterinary Medicine and other smaller acquisitions. These increases were offset in part by decreased sales of veterinary practice information management products and services and canine test kits. International revenue for CAG increased 10% to $16.4 million, or 22% of total CAG revenue, in the first quarter of 2000, compared to $14.9 million, or 21% of total CAG revenue, in the same period for 1999. The increase in revenue in 2000 compared to 1999 is primarily attributable to higher sales of consumables used in the Company's veterinary instruments and veterinary reference laboratory services. Gross profit as a percentage of CAG revenue was 47% for the first quarter of 2000 compared to 49% for the same period in 1999. The reduction in the gross margin percentage was due primarily to increased sales of lower gross margin veterinary reference laboratory services, higher cost of veterinary instrument service, unabsorbed fixed costs associated with decreased sales of practice information management products and services and lower average unit prices on certain canine test kits. FOOD AND ENVIRONMENTAL DIVISION Revenue for the Food and Environmental Division ("FED") for the first quarter of 2000 decreased 6% to $16.9 million from $18.0 million for the first quarter of 1999. The decrease in revenue in 2000 compared to 1999 is the result of a decline of $2.6 million attributable to divestiture of the food microbiology testing product lines discussed above, partially offset by higher sales of the Company's water testing products. International revenue for FED decreased 8% to $7.0 million, or 41% of total FED revenue, in the first quarter of 2000, compared to $7.6 million, or 42% of total FED revenue, for the same period in 1999. The decrease in revenue in 2000 compared to 1999 is attributable to the divestiture of the food microbiology testing product lines discussed above and lower sales of the Company's livestock products. These decreases were partially offset by higher sales of the Company's dairy residue test products. Gross profit as a percentage of FED revenue was 59% for the first quarter of 2000 compared to 54% for the same period in 1999. The increase in the gross margin percentage was primarily due to decreased sales of lower gross margin food microbiology products and services and increased sales of higher gross margin water test products. 12 OPERATING EXPENSES Sales and marketing expenses were 17% of revenue for the three-month period ended March 31, 2000 and 1999. The increase of $0.6 million was principally attributable to additional expenses associated with the Company's pharmaceutical product line, partially offset by lower expenses associated with the divestiture of the food microbiology testing product lines discussed above. Research and development expenses were 7% of revenue for the three-month period ended March 31, 2000 compared to 8% in the first quarter of 1999. The decrease results from the divestiture of the food microbiology testing product lines discussed above, partially offset by increased development costs associated with VetConnect(TM), the Company's Internet portal/application service provider for animal health professionals. General and administrative expenses were 12% of revenue for the three-month period ended March 31, 2000 compared to 14% in the first quarter of 1999. The $1.5 million decrease was primarily attributable to lower expenses as a result of the divestiture of the food microbiology testing product lines discussed above, a gain on the sale of the food microbiology assets and lower amortization expense due to the complete amortization of certain intangible assets associated with the acquisitions of the veterinary practice information management business. These decreases were partially offset by increased expenses associated with the acquisition and business expansion of veterinary reference laboratory businesses and increased expenses associated with the establishment of VetConnect. Net interest income was $1.3 million for the three-month periods ended March 31, 2000 and 1999. Higher effective interest rates in 2000 were offset by lower invested cash balances due to the use of cash for the Company's share repurchase program. The Company's effective tax rate was 37.5% for the three-month period ended March 31, 2000 compared to 38.0% for the same period in 1999. The decrease in the effective tax rate was principally attributable to a reduction in the foreign tax rates and utilization of previously reserved foreign net operating loss carryforwards. 13 LIQUIDITY AND CAPITAL RESOURCES As of March 31, 1999, the Company had cash, cash equivalents, and short-term investments of $110.4 million and $168.9 million of working capital. During the quarter ended March 31, 2000 the Company repurchased 525,000 shares of the Company's common stock for $8.0 million. The Company has repurchased 4.4 million shares for $72.2 million since August 13, 1999. 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 five acquisitions in 1997, two acquisitions in 1998, two acquisitions in 1999 and one in the first quarter of 2000, 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'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. In recent years sales of the Company's chemistry and hematology analyzers have declined as the Company has achieved increasing market penetration. Future growth in sales of the Company's analyzers and associated consumables will depend in part on the Company's ability to introduce new systems with new features and capabilities. The Company is currently devoting significant resources to the development of such systems. The Company also plans to devote significant resources to the growth of many of its other businesses, including its animal health pharmaceuticals business and VetConnect, an Internet portal/application services provider for the provision of animal health-care information and services to veterinarians. There can be no assurance that the Company will successfully complete the development and commercialization of products and services for existing and new businesses or that such products and services, if commercialized, will meet revenue and profit expectations. 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. In particular, the Company has encountered increasing competition in the market for canine heartworm diagnostics. Many of the Company's competitors and potential competitors, including large pharmaceutical companies, have substantially greater capital, manufacturing, marketing, and research and development resources than the Company. 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 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 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 owned or licensed by 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 may be required to obtain licenses to additional technologies from third parties 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. Patent litigation frequently is complex and 14 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 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. 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, including the U.S. Department of Agriculture, U.S. Food and Drug Administration ("FDA") and U.S. Environmental Protection Agency. Commercialization of animal health pharmaceuticals requires submission of substantial clinical, manufacturing and other data to the FDA and regulatory approval can take several years. 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. 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 only 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, including its chemistry and hematology analyzers and associated consumables, from single sources. Failure of such sources to supply product to the Company would have a material adverse effect on the Company's business. For the three months ended March 31, 2000, international revenue was $23.4 million and accounted for 26% 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, 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's market risk consists primarily of foreign currency exchange risk. The Company operates subsidiaries in 13 foreign countries and transacts business in local currencies. The Company hedges its cash flows on intercompany sales to minimize foreign currency exposure. The primary purpose of the Company's foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. Corporate policy prescribes the range of allowable hedging activity. The Company primarily utilizes forward exchange contracts and options with a duration of less than 12 months. Gains and losses related to qualifying hedges of foreign currency from commitments or anticipated transactions are deferred in prepaid expenses and are included in the basis of the underlying transaction. Based on the Company's overall currency rate exposure at December 31, 1999, including derivative and other foreign currency sensitive instruments, the effect of a 5% change in exchange rates on balances denominated in foreign currencies that are not the functional currencies would not be material to the results of operations. However, the effects of a 5% change in exchange rates, if not offset by hedge contracts or related price adjustments, would have a material impact on the results of operations. 15 PART II -- OTHER INFORMATION Item 1. -- LEGAL PROCEEDINGS In January 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. In July 1999, the U.S. District Court granted the Company's motion to dismiss the case for failure to state a claim. However in August 1999, the plaintiffs appealed that ruling to the U.S. Court of Appeals for the First Circuit. In February 2000, the Company entered into a Memorandum of Understanding (the "MOU") with the plaintiffs pursuant to which the parties have agreed to settle the suit. Pursuant to the MOU, the Company and the plaintiffs have filed a Stipulation of Settlement (the "Stipulation") with the U.S. District Court. Subject to certain conditions, the Stipulation will become effective following approval by the District Court and expiration of the time for any appeal. No assurance can be given that the District Court will approve the Stipulation or otherwise that the suit will be finally settled on the terms contained in the MOU. The proposed settlement (in excess of the portion reimbursed through insurance) will not affect results of operations in 2000. In the event that the suit is not settled, 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. In December 1997, SA Scientific, Inc. ("SAS") filed suit against the Company in the State of Texas District Court. SAS has alleged breach of a development and supply agreement between SAS and the Company, negligent misrepresentation, fraud and conversion of SAS's intellectual property, and is seeking $8,000,000 in actual damages, $24,000,000 in punitive damages, further unspecified damages and attorneys' fees. The Company has filed an answer to the complaint denying SAS's allegations and has asserted counterclaims against SAS for breach of contract, fraud and conversion of the Company's property. Trial is scheduled for July 2000. 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. 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 three-month period ended March 31, 2000. (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. 16 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 12, 2000 /s/ MERILEE RAINES ------------------ Merilee Raines Vice President, Finance and Treasurer (Principal Financial Officer) EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE IDEXX LABORATORIES, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 0000874716 IDEXX LABORATORIES, INC. 1,000 U.S. DOLLARS 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1 68,369 41,981 67,803 5,117 47,187 241,845 90,430 51,108 361,802 72,989 0 0 0 3,986 284,827 361,802 69,826 90,878 28,757 46,274 32,542 554 47 12,854 4,820 8,034 0 0 0 8,034 .23 .22
-----END PRIVACY-ENHANCED MESSAGE-----