10-Q 1 0001.txt 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 June 30, 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 offices) (Zip Code) (207) 856-0300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of July 31, 2000, 34,636,275 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 June 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations Three and Six Months Ended June 30, 2000 and June 30, 1999 4 Consolidated Statements of Cash Flows Six Months Ended June 30, 2000 and June 30, 1999 5 Notes to Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17
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 JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 73,654 $ 58,576 Short-term investments 50,763 46,835 Accounts receivable, less reserves of $4,542 and $4,828 in 2000 and 1999, respectively 63,294 58,353 Inventories 56,747 47,488 Deferred income taxes 14,594 14,679 Other current assets 6,696 6,484 -------- -------- Total current assets 265,748 232,415 LONG-TERM INVESTMENTS 13,980 25,517 PROPERTY AND EQUIPMENT, AT COST: Land 1,191 1,196 Buildings and improvements 4,554 4,528 Leasehold improvements 18,634 18,522 Machinery and equipment 35,195 34,630 Office furniture and equipment 31,256 28,630 Construction-in-progress 2,662 1,152 -------- -------- 93,492 88,658 Less - Accumulated depreciation and amortization 53,988 49,108 -------- -------- 39,504 39,550 OTHER ASSETS, Net 56,857 60,500 -------- -------- $376,089 $357,982 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $18,908 $21,819 Accrued expenses 55,043 38,011 Notes Payable 3,376 3,543 Deferred revenue 9,712 10,268 -------- -------- Total current liabilities 87,039 73,641 STOCKHOLDERS' EQUITY: Common stock, $0.10 par value Authorized 60,000 shares Issued and outstanding 40,007 shares in 2000 and 39,584 shares in 1999 4,001 3,958 Additional paid-in capital 291,792 284,459 Retained earnings 81,181 63,619 Accumulated other comprehensive income (loss) (4,351) (3,473) Treasury Stock (4,939 shares in 2000 and 3,899 shares in 1999), at cost (83,573) (64,222) -------- -------- Total stockholders' equity 289,050 284,341 -------- -------- $376,089 $357,982 ======== ========
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 SIX MONTHS ENDED -------------------- ------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ---------- --------- --------- --------- Revenue $93,552 $91,524 $184,430 $181,172 Cost of revenue 46,852 46,910 93,127 91,684 -------- ------- -------- -------- Gross Profit 46,700 44,614 91,303 89,488 Expenses: Sales and marketing 15,369 14,411 31,093 29,564 General and administrative 10,259 11,084 20,837 23,201 Research and development 7,193 7,509 13,987 14,680 -------- -------- -------- -------- Income from operations 13,879 11,610 25,386 22,043 Interest income, net 1,366 1,334 2,713 2,644 -------- -------- -------- -------- Income before provision for income taxes 15,245 12,944 28,099 24,687 Provision for income taxes 5,717 4,919 10,537 9,381 -------- -------- -------- -------- Net income $9,528 $8,025 $17,562 $15,306 ======== ======== ======== ======== Net income per common share: Basic $0.27 $0.20 $0.50 $0.39 ======== ======== ======== ======== Net income per common share: Diluted $0.26 $0.20 $0.48 $0.37 ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 5 IDEXX LABORATORIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In Thousands) (Unaudited)
SIX MONTHS ENDED ---------------------- JUNE 30, JUNE 30, 2000 1999 -------------- ------------- Cash Flows from Operating Activities: Net income $17,562 $15,306 Adjustments to reconcile net income to net cash Provided by operating activities, net of acquisitions: Depreciation and amortization 9,375 8,456 Provision for (benefit of) deferred income taxes 240 (1,996) Changes in assets and liabilities: Accounts receivable (5,849) (9,973) Inventories (14,983) 7,529 Other current assets (133) 2,604 Accounts payable (739) (13,127) Accrued expenses 4,390 13,675 Deferred revenue (556) (154) -------- --------- Net cash provided by operating activities 9,307 22,320 -------- --------- Cash Flows from Investing Activities: Purchases of property and equipment (6,632) (4,398) Decrease (increase) in investments, net 7,609 (22,816) Increase in other assets (1,033) (241) Acquisition of businesses, net of cash acquired (178) (1,257) Disposition of businesses 10,400 -- -------- -------- Net cash provided by (used in) investing activities 10,166 (28,712) -------- --------- Cash Flows from Financing Activities: Payment of notes payable (129) (413) Proceeds from the exercise of stock options 6,203 5,822 Purchase of treasury stock (9,561) -- --------- -------- Net cash provided by (used in) financing activities (3,487) 5,409 --------- -------- Net effect of Exchange Rate Changes (908) (1,004) --------- --------- Net increase (decrease) in Cash and Cash Equivalents 15,078 (1,987) Cash and Cash Equivalents, beginning of period 58,576 109,063 -------- -------- Cash and Cash Equivalents, end of period $73,654 $107,076 ======== ======== Supplemental Disclosure of Cash Flow Information: Interest paid during the period $-- $39 ======== ======== Income taxes paid during the period $2,979 $3,171 ======== ========
See accompanying notes to consolidated financial statements. 6 IDEXX LABORATORIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying unaudited, consolidated financial statements of IDEXX Laboratories, Inc. ("IDEXX" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the requirements of Form 10-Q. The accompanying interim consolidated financial statements reflect, in the opinion of the Company's management, all adjustments necessary for a fair presentation of the financial position and results of operations. The results of operations for the six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's 1999 Annual Report to the Shareholders, as filed on Form 10-K with the Securities and Exchange Commission. 2. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instrument and Hedging Activities" ("Statement No. 133"), which establishes accounting and reporting standards for hedging activities. Statement No. 133 establishes special accounting for the following three types of hedges: fair value hedges, cash flow hedges, and hedges of foreign currency exposures. This statement is effective for fiscal years beginning after June 15, 2000. The Company does not believe that implementation of this statement will have a material impact on the financial statements. 3. Inventories Inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out) or market. The components of inventories are as follows (in thousands): JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ Raw materials $11,526 $6,385 Work-in-process 3,317 4,190 Finished goods 41,904 36,913 -------- -------- $56,747 $47,488 ======== ======== 4. Comprehensive income
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 -------- -------- -------- -------- Net income $9,528 $8,025 $17,562 $15,306 Other comprehensive income(loss): Foreign currency translation adjustments (246) (369) (878) (1,041) -------- -------- -------- -------- Comprehensive income $9,282 $7,656 $16,684 $14,265 ======== ======== ======== ========
7 5. Earnings per share The following is a reconciliation of shares outstanding for basic and diluted earnings per share (in thousands): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 -------- -------- -------- -------- Basic: Weighted average shares outstanding 35,408 39,321 35,349 39,115 ======== ======== ======== ======== Diluted: Weighted average shares outstanding 35,408 39,321 35,349 39,115 Dilutive effect of stock options issued to employees 1,549 1,548 1,398 1,711 Shares assumed issued for the acquisition of Blue Ridge Pharmaceuticals,Inc. 115 115 115 115 -------- -------- -------- -------- 37,072 40,984 36,862 40,941 ======== ======== ======== ======== 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, although 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 purported to represent a class of purchasers of the common stock of the Company from July 19, 1996 through March 24, 1997. The complaint claimed 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 claimed that the individual defendants were liable as "control persons" under Section 20(a) of that Act. In addition, the complaint claimed 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 agreed to settle the suit. Pursuant to the MOU, the Company and the plaintiffs filed a Stipulation of Settlement (the "Stipulation") with the U.S. District Court. The Stipulation was approved by the District Court on June 20, 2000 and the complaint was dismissed with prejudice. The settlement (in excess of the portion reimbursed through insurance) will not affect results of operations in 2000. In December 1997, SA Scientific, Inc. ("SAS") filed suit against the Company in the State of Texas District Court. SAS alleged breach of a development and supply agreement between SAS and the Company, negligent misrepresentation, fraud and conversion of SAS's intellectual property, and sought $8,000,000 in actual damages, $24,000,000 in punitive damages, further unspecified damages and attorneys' fees. The Company filed an answer to the complaint denying SAS's allegations and asserted counterclaims against SAS for breach of contract, fraud and conversion of the Company's property. On May 23, 2000, SAS and the Company entered into an agreement (the "Settlement Agreement") settling the lawsuit and on June 12, 2000, the Court dismissed the suit with prejudice. Under the Settlement Agreement the Company made a payment to SAS that was not material to the Company's financial position or results of operations. 8 7. Acquisitions and Divestitures Acquisitions Sierra Laboratories On March 9, 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. Divestitures 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. As a result of these transactions, the Company recorded an immaterial loss in 1999 and an immaterial gain in 2000. Pro forma information has not been presented because of immateriality. IDEXX Food Safety Net Services, Inc. On December 21, 1999, the Company sold substantially all the assets in the business of IDEXX Food Safety Net Services, Inc. to Food Safety Net Services, Ltd. for $350,000 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. 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 $10,400,000 in cash, a $450,000 note payable, and the assumption of certain liabilities. The Company also will receive up to an additional $1,000,000 based on revenue realized from the Acumedia business between the sale date and February 17, 2001. The note bears interest at 7% and is due on February 17, 2001. In addition, the company entered into non-compete agreements for up to five years. 8. Segment Reporting The Company conducts business principally in three major operating segments. The Company's operating segments include the Companion Animal Group ("CAG"), the Food and Environmental Division ("FED") and other. The separate financial information of each segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance. 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 and performs services to detect disease and contaminants in food animals, food 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. 9 The following is the segment information in accordance with this statement (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenue: CAG $76,344 $71,007 $150,284 $142,970 FED 17,208 20,517 34,146 38,202 Other -- -- -- -- -------- -------- -------- -------- Total revenue $93,552 $91,524 $184,430 $181,172 ======== ======== ======== ======== Net income: CAG $5,385 $4,859 $10,398 $11,193 FED 3,199 2,142 5,402 2,258 Other 944 1,024 1,762 1,855 -------- -------- -------- -------- Total net income $9,528 $8,025 $17,562 $15,306 ======== ======== ======== ========
9. Stock Repurchase Program On July 21, 2000, the Company's Board of Directors approved an increase in the number of shares of its Common Stock that the Company was authorized to repurchase from 6.0 million shares to 10.0 million shares. The Company may make such purchases in the open market or in negotiated transactions. During the six months ended June 30, 2000, the Company repurchased approximately 1.0 million shares for $19.4 million. Between August 19, 1999 and June 30, 2000, approximately 4.9 million shares had been repurchased under this program for an aggregate of $83.6 million. 10. Subsequent Events Veterinary Professional Services On July 1, 2000, the Company, through its wholly-owned subsidiary, IDEXX Laboratories Pty. Ltd., acquired Veterinary Pathology Services Pty. Ltd., a veterinary laboratory business with locations in Adelaide, Brisbane and Sydney, Australia for approximately Australian Dollars 6.1 million (US $3.7 million) in cash. The Company will account for this acquisition under the purchase method of accounting. Genera Technologies Limited On August 11, 2000, the Company acquired Genera Technologies Limited, a U.K. based provider of products that test for Cryptosporidium in water, for approximatley $15.5 million in cash and notes. The Company also agreed to make additional payments based upon performance of the business after the acquisition. The Company will account for this acquisition under the purchase method of accounting. 10 Item 2. IDEXX LABORATORIES, INC. AND SUBSIDIARIES 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 the 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 products and services for food animal, food and water 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 diagnostic animal services business. COMPANION ANIMAL GROUP QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999 Revenue for CAG increased $5.3 million, or 8% to $76.3 million during the second quarter of 2000 from $71.0 million in the same periodof the prior year. The increase is primarily attributable to an increase in sales of consumables used in the Company's veterinary instruments, veterinary reference laboratory services and canine test kits. The increase in consumables was attributable primarily to an increase in instrument placements, including through the Company's rental program, and to a lesser degree to increased customer utilization per instrument. The increase in veterinary reference laboratory services was partially attributable to incremental revenues from laboratories acquired after June 1999, including the laboratory business of Tufts University School of Veterinary Medicine acquired on December 1, 1999. These increases were partially offset by a decrease in sales of veterinary practice information management systems. International revenue increased $.4 million, or 2% compared to the same quarter of 1999. This increase is attributable primarily to increased sales of veterinary consumables and veterinary reference laboratory services partially offset by lower unit prices oninstruments and unfavorable foreign exchange rates. International sales declined to 21% of total CAG sales compared to 25% in the second quarter of 1999. CAG's gross margin increased from 47% to 48% due to increased sales of higher margin veterinary consumables, which were partially offset by increased sales of lower margin veterinary reference laboratory services and unabsorbed fixed costs associated with decreased sales of practice information management systems. Operating expenses during the second quarter increased $1.8 million, or 7% over the same period in 1999. The increase is attributable primarily to an increase in sales and marketing expenses associated with the pharmaceutical product line, increased marketing programs related to veterinary consumables and research and development expenses related to the Company's Internet portal/application service provider for animal health professionals. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Revenue for CAG increased $7.3 million, or 5% to $150.3 million during the first six months of 2000 from $143.0 million in the same period of the prior year. The increase is attributable primarily to an increase in sales of veterinary reference laboratory services, veterinary consumables and feline diagnostic kits. The increase in veterinary reference laboratory services is attributable partially to incremental revenues generated from acquisitions discussed above. These increases were partially offset by a decrease in sales of veterinary practice information management systems. International revenue increased $1.9 million, or 6% compared to the same period of 1999. The increase is attributable to increased sales of veterinary consumables, veterinary reference laboratory services and canine test kits. CAG's gross margin decreased from 48% to 47%. The reduction in the gross margin percentage is due primarily to increased sales of lower gross margin veterinary reference laboratory services, higher cost of veterinary instrument service and unabsorbed fixed costs associated with decreased sales of veterinary practice information management systems, partially offset by increased sales of higher margin veterinary consumables. 11 Operating expenses during the six months ended June 30, 2000 increased $3.5 million, or 7% over the same period in 1999. The increase is attributable primarily to an increase in sales and marketing expenses associated with the pharmaceutical product line, increased marketing programs related to veterinary consumables and research and development expenses related to the Company's Internet portal/application service provider for animal health professionals. FOOD AND ENVIRONMENTAL DIVISION QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999 Revenue for FED decreased $3.3 million, or 16% to $17.2 million during the second quarter of 2000 from $20.5 million for the same period in the prior year. The decrease is primarily attributable to the divestiture of the food microbiology testing product lines discussed above, partially offset by an increase in sales of water testing products. International revenue decreased $1.4 million, or 16% compared to the same quarter of 1999. The decrease is attributable primarily to the divestiture of the food microbiology testing product lines discussed above, partially offset by increased sales of dairy residue testing products and water testing products in the European market. FED gross margin increased to 59% from 53% due to the divestiture of lower gross margin food microbiology testing product lines and increased sales of higher gross margin water testing products. Operating expenses during the second quarter decreased $2.1 million, or 28% over the same period in 1999 primarily due to the elimination of operating expenses associated with the divested food microbiology testing products business. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Revenue for FED decreased $4.1 million, or 11% to $34.1 million during the second quarter of 2000 from the same period in the prior year. The decrease is attributable primarily to the divestiture of the food microbiology testing product lines, which was partially offset by an increase in sales of water testing products. International revenue decreased $1.6 million, or 10% from the same period in 1999. The decrease is attributable primarily to the divestiture of the food microbiology testing product lines and lower sales of livestock products, partially offset by increases in dairy residue testing products and water testing products. FED's gross margin increased to 59% from 53% due to the divestiture of the lower gross margin food microbiology testing product lines and increased sales of higher gross margin water testing products. Operating expenses during the first six months of 2000 decreased $5.1 million, or 31% from the same period in the prior year, due primarily to the elimination of operating expenses associated with the food microbiology testing products business and to an immaterial gain on the sale. INTEREST INCOME, NET Net interest income was $1.4 million for the quarter ended June 30, 2000 compared with $1.3 million for the same period in the prior year. The increase in interest income was principally the result of higher effective interest rates, partially offset by lower invested cash balances due to the use of cash for the Company's share repurchase program. Net interest income was $2.7 million for the six months ended June 30, 2000 compared with $2.6 million for the same period in the prior year. The increase in interest income was principally the result of higher effective interest rates, partially offset by lower invested cash balances due to the use of cash for the Company's share repurchase program. PROVISION FOR INCOME TAXES The Company's effective tax rate was 37.5% for the three- and six-month periods ended June 30, 2000 compared with 38% for the same periods in 1999. The reduction in the effective tax rate is the result of continued realization of tax benefit resulting from business operations in jurisdictions with lower effective income tax rates. 12 LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, the Company had cash, cash equivalents, and short-term investments of $124.4 million and $178.7 million of working capital. During the quarter ended June 30, 2000 the Company repurchased 515,000 shares of the Company's common stock for $11.4 million, of which transactions representing 445,000 shares have not settled as of June 30, 2000 and the $9.8 million purchase price is reflected as a current liability. For the six months ended June 30, 2000 the Company repurchased approximately 1.0 million shares for $19.4 million. 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 acquisition during the first six months 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 the Company's Internet portal/application service provider for animal health professionals. 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. In addition, because many of the Company's products are sold through distributors, fluctuations may occur due to distributor purchasing patterns, which may be beyond the Company's control. 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 13 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 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 six months ended June 30, 2000, international revenue was $47.4 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. 14 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 June 30, 2000, 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 purported to represent a class of purchasers of the common stock of the Company from July 19, 1996 through March 24, 1997. The complaint claimed 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 claimed that the individual defendants were liable as "control persons" under Section 20(a) of that Act. In addition, the complaint claimed 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 agreed to settle the suit. Pursuant to the MOU, the Company and the plaintiffs filed a Stipulation of Settlement (the "Stipulation") with the U.S. District Court. The Stipulation was approved by the District Court on June 20, 2000 and the complaint was dismissed with prejudice. The settlement (in excess of the portion reimbursed through insurance) will not affect results of operations in 2000. In December 1997, SA Scientific, Inc. ("SAS") filed suit against the Company in the State of Texas District Court. SAS alleged breach of a development and supply agreement between SAS and the Company, negligent misrepresentation, fraud and conversion of SAS's intellectual property, and sought $8,000,000 in actual damages, $24,000,000 in punitive damages, further unspecified damages and attorneys' fees. The Company filed an answer to the complaint denying SAS's allegations and asserted counterclaims against SAS for breach of contract, fraud and conversion of the Company's property. On May 23, 2000, SAS and the Company entered into an agreement (the "Settlement Agreement") settling the lawsuit and on June 12, 2000 the Court dismissed the suit with prejudice. Under the Settlement Agreement the Company made a payment to SAS that was not material to the Company's financial position or results of operations. Item 4. --Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Stockholders held on May 17, 2000, the following proposals were adopted by the votes specified below:
Broker Proposal For Against Abstain Non-Votes 1. Election of three Class I Directors: David E. Shaw 30,414,711 1,495,020 0 0 William F. Pounds 31,613,239 296,492 0 0 Mary L. Good 31,618,534 291,197 0 0 2. Approval of the Company's 2000 Director Option Plan covering 200,000 shares of the Company's Common Stock authorized for issuance under the Plan. 26,008,499 5,817,736 83,496 0 3. Approval of an amendment to the Company's 1998 Stock Incentive Plan increasing from 2,500,000 to 3,500,000 the number of shares of the Company's Common Stock authorized for issuance under the Plan. 25,288,359 6,539,486 81,886 0 4. Ratification of Arthur Andersen LLP as the Company's independent auditors for the current year. 31,859,123 33,902 16,706 0
16 The following Class III Directors of the Company were not up for re-election in 2000 and have three-year terms that expire in 2001: James L. Moody, Jr., Gabriel Schmergel and Erwin F. Workman, Jr., Ph.D. The following Class II Directors of the Company were not up for re-election in 2000 and have three-year terms that expire in 2002: Thomas Craig, John R. Hesse and Kenneth Paigen, Ph.D. William End was elected as a Class I Director in July 2000 and will stand for re-election in 2003. Item 6. -- Exhibits and Reports on Form 8-K (a) Exhibits 10.1 2000 Director Option Plan 10.2 1998 Stock Incentive Plan, as amended 27 Financial Data Schedule for the Quarterly Report on Form 10-Q for the six-month period ended June 30, 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. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IDEXX LABORATORIES, INC. Date: August 14, 2000 /s/ Merilee Raines --------------------- Merilee Raines Vice President, Finance and Treasurer (Principal Financial Officer)