-----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, E7p2eRDWZajOhxNawd8015Aa2SO3YZYzZVKhlwO9AZlqcvYQ2USEOt2LduZnpxQZ UYovvjnziguIcjlwikg3GQ== 0000950135-98-005837.txt : 19981113 0000950135-98-005837.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950135-98-005837 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: 98745284 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 LABRATORIES, 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 September 30, 1998 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number: 0-19271 IDEXX LABORATORIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 01-0393723 (State of incorporation) (I.R.S. Employer Identification No.) ONE IDEXX DRIVE, WESTBROOK, MAINE 04092 (Address of principal executive offices) (Zip Code) (207) 856-0300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of October 31, 1998, 38,664,108 shares of the registrant's Common Stock, $.10 par value, were outstanding. 2 IDEXX LABORATORIES, INC. AND SUBSIDIARIES INDEX PAGE ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets September 30, 1998 and December 31, 1997 3 Consolidated Statements of Operations Three and Nine Months Ended September 30, 1998 and September 30, 1997 4 Consolidated Statements of Cash Flows Nine Months Ended September 30, 1998 and September 30, 1997 5 Notes to Consolidated Financial Statements 6-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-15 PART II -- OTHER INFORMATION Item 1. Legal Proceedings 16 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 Page 2 3 PART I -- FINANCIAL INFORMATION ITEM 1. -- FINANCIAL STATEMENTS IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 138,690 $ 106,972 Short-term investments 33,735 35,502 Accounts receivable, less reserves of $5,580 and $5,082 in 1998 and 1997, respectively 43,933 47,341 Inventories 42,979 60,174 Deferred income taxes 11,941 15,396 Other current assets 6,384 10,423 --------- --------- Total current assets 277,662 275,808 LONG-TERM INVESTMENTS 17,501 11,134 PROPERTY AND EQUIPMENT, AT COST: Construction in Progress 1,379 1,390 Leasehold improvements 16,968 16,596 Land 1,200 1,193 Buildings 4,494 4,462 Machinery and equipment 31,452 26,359 Office furniture and equipment 23,171 22,804 --------- --------- 78,664 72,804 Less-- Accumulated depreciation & amortization 38,605 30,387 --------- --------- 40,059 42,417 OTHER ASSETS, NET 45,129 47,689 --------- --------- $ 380,351 $ 377,048 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 7,486 $ 12,472 Accrued expenses 35,363 42,147 Notes payable 1,536 4,087 Deferred revenue 13,941 15,609 --------- --------- Total current liabilities 58,326 74,315 COMMITMENTS AND CONTINGENCIES (Note 5) -- -- STOCKHOLDERS' EQUITY: Common stock, $0.10 par value Authorized 60,000 shares Issued and outstanding 38,642 shares in 1998 and 38,169 shares in 1997 3,864 3,817 Additional paid-in capital 261,009 257,275 Retained earnings 61,111 46,256 Cumulative translation adjustment (3,959) (4,615) --------- --------- Total stockholders' equity 322,025 302,733 --------- --------- $ 380,351 $ 377,048 ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 3 4 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- -------------------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Revenue $78,487 $ 71,728 $237,166 $191,151 Cost of revenue 38,547 37,702 117,283 99,512 ------- -------- -------- -------- Gross Profit 39,940 34,026 119,883 91,639 Expenses: Sales and marketing 15,493 16,746 47,426 50,765 General and administrative 11,410 10,621 38,281 32,397 Research and development 5,174 4,645 15,084 11,971 Non-recurring operating charge - 28,000 - 28,000 ------- -------- -------- -------- Income (loss) from operations 7,863 (25,986) 19,092 (31,494) Interest income, net 1,967 1,641 5,260 5,092 ------- -------- -------- -------- Net income (loss) before provision for income taxes 9,830 (24,345) 24,352 (26,402) Provision for (benefit of) income taxes 3,834 (7,491) 9,497 (8,374) ------- -------- -------- -------- Net income (loss) $ 5,996 $(16,854) $ 14,855 $(18,028) ------- -------- -------- -------- Net income (loss) per share: Basic $ 0.16 $ (0.44) $ 0.39 $ (0.48) ------- -------- -------- -------- Net income (loss) per share: Diluted $ 0.15 $ (0.44) $ 0.37 $ (0.48) ------- -------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 4 5 IDEXX LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED ------------------------------ SEPTEMBER 30, SEPTEMBER 30, 1998 1997 ------------- ------------- Cash Flows from Operating Activities: Net income (loss) $ 14,855 $ (18,028) Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation and amortization 11,724 10,470 Non-cash portion of non-recurring operating charge -- 11,000 Changes in assets and liabilities Accounts receivable 3,408 22,481 Inventories 16,868 (13,681) Other current assets 7,494 (7,314) Accounts payable (4,986) (9,751) Accrued expenses (6,245) 14,746 Deferred revenue (1,668) (56) --------- --------- Net cash provided by operating activities 41,450 9,867 --------- --------- Cash Flows from Investing Activities: Purchases of property and equipment (5,302) (11,356) Decrease (increase) in investments, net (4,602) 4,363 Increase in other assets (181) (706) Acquisitions (see Note 6) (986) (22,284) --------- --------- Net cash used in investing activities (11,071) (29,983) --------- --------- Cash Flows from Financing Activities: Repayment of notes payable (2,580) (1,509) Proceeds from the exercise of stock options 3,263 2,004 --------- --------- Net cash provided by financing activities 683 495 --------- --------- Net Effect of Foreign Currency Translation 656 (2,599) --------- --------- Net increase (decrease) in Cash and Cash Equivalents 31,718 (22,220) Cash and Cash Equivalents, beginning of period 106,972 127,741 --------- --------- Cash and Cash Equivalents, end of period $ 138,690 $ 105,521 ========= ========= Supplemental Disclosure of Cash Flow Information: Interest paid during the period $ 245 $ 352 ========= ========= Income taxes paid during the period $ 10,562 $ 6,852 ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Page 5 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, 1997 Balance Sheet was derived from the audited Consolidated Balance Sheets contained in the Company's latest stockholders' annual report. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto which are contained in the Company's latest stockholders' annual report. The results for the interim periods presented are not necessarily indicative of results to be expected for the full fiscal year. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements reflect the application of certain accounting policies described in this and other notes to the consolidated financial statements. a. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. b. Certain reclassifications have been made in the 1997 consolidated financial statements to conform with the current years presentation. c. The Company accounts for cash equivalents and short-term investments in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). Accordingly, the Company's cash equivalents and short-term investments are classified as held-to-maturity and are recorded at amortized cost which approximates market value. Cash Equivalents and Short-term Investments: Cash equivalents are short-term, highly liquid investments with original maturities of less than three months. Short-term investments are investment securities with original maturities of greater than three months but less than one year and consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ U.S. government and government backed securities $12,000 $20,047 Municipal bonds 18,725 6,140 Time deposits 2,000 6,749 Commercial paper 458 2,016 Other short-term investments 552 550 ------- ------- $33,735 $35,502 ======= =======
Page 6 7 Long-term investments are investment securities with original maturities of greater than one year and consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Municipal bonds $17,001 $10,165 Other long term investments 500 969 ------- ------- $17,501 $11,134 ======= =======
d. Inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out) or market. The components of inventories are as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Raw materials $ 9,490 $ 9,235 Work-in-process 6,952 8,421 Finished goods 26,537 42,518 ------- ------- $42,979 $60,174 ======= =======
e. During 1997 the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128). All prior earnings per share amounts have been retroactively restated. Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the quarter. The computation of diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased for the assumed exercise of dilutive options using the treasury stock method. The following is a reconciliation of shares outstanding for basic and diluted earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------------- ------------- ------------ ------------- Shares outstanding for basic earnings per share: Weighted average shares outstanding 38,616 38,036 38,451 37,939 ====== ====== ====== ====== Shares outstanding for diluted earnings per share: Weighted average shares outstanding 38,616 38,036 38,451 37,939 Dilutive effect of options issued to employees 1,768 -- 1,581 -- ------ ------ ------ ------ 40,384 38,036 40,032 37,939 ====== ====== ====== ======
The Company incurred a loss for the three and nine months ended September 30, 1997 and as a result excluded the dilutive effect of options from the determination of shares outstanding for dilutive earnings per share. If the options were included, the number of shares outstanding would have increased by 1.1 million and 1.5 million, respectively. Page 7 8 3. NON-RECURRING OPERATING CHARGE During the third and fourth quarters of 1997 the Company recorded a non-recurring operating charge of $34.5 million, of which $28 million was recognized in the third quarter. The non-recurring operating charge included the write-downs and write-offs of certain assets and accrual of costs related to a significant workforce reduction. The charge consisted of the following (in thousands):
Write-off of in-process research and development $13,200 Legal settlement and related costs 8,000 Severance, benefits and related costs 9,000 Idle capacity and lease termination costs 2,700 Asset impairment 1,600 ------- $34,500 =======
As of September 30, 1998, $4.2 million was included in accrued expense relating to the non-recurring operating charge. During 1997 the Company acquired two veterinary practice management software companies (see Note 6). To assist in the allocation of purchase price associated with these acquisitions, the Company obtained an independent appraisal. That appraisal identified approximately $13.2 million as in-process research and development, which was charged to operations in accordance with FASB Interpretation No. 4 "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method." In September 1997, the Company settled a patent infringement suit brought by Barnes-Jewish Hospital ("BJH") regarding IDEXX's heartworm diagnostic products. The total costs of the settlement, including certain legal fees, were included in the non-recurring operating charge. Under the settlement, the Company agreed to pay BJH $5.5 million, a portion of which payment will be creditable against earned royalties on certain products. The Company has terminated the employment of a total of 228 employees. Of this total, 79 employees are associated with the consolidation of the veterinary practice management software business into the Eau Claire, Wisconsin facility, 57 employees are associated with the consolidation of sales, marketing and distribution operations in Europe, 33 employees are associated with reductions in domestic sales and marketing operations, 18 employees are associated with reductions in sales and marketing operations in the Pacific Rim region, 16 employees are associated with the closure of the Sunnyvale, California research and development facility and 25 employees are associated with a reduction in positions in management and financial operations. As of September 30, 1998, the severance program was essentially complete except for the consolidation of the European facilities scheduled to occur in the fourth quarter of 1998. As discussed above, the Company is consolidating certain veterinary practice management software operations into the Eau Claire, Wisconsin facility and has closed the leased Sunnyvale, California research and development facility. As a result of these consolidations, the Company has leased facilities which have become excess until the end of their respective lease terms. Additionally, the Company has determined that it will not pursue certain immunoassay technology with respect to which it has invested a total of $1.6 million in fixed assets and license fees. 4. COMPREHENSIVE INCOME In June 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 must be adopted for fiscal years beginning after December 15, 1997 and all prior periods must be retroactively restated. Page 8 9 SFAS 130 also requires application of this statement as of the beginning of the Company's fiscal year. Other comprehensive income for the Company consists of foreign currency translation adjustments resulting from the translation of the financial statements of the Company's foreign subsidiaries. Accordingly, below is a summary of comprehensive income in accordance with this statement (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net income $ 5,996 $ (16,854) $14,855 $ (18,028) Other comprehensive income, net of tax Foreign currency translation adjustments 844 (365) 400 (1,559) ------- ---------- ------- --------- Comprehensive income (loss) $ 6,840 $ (17,219) $15,255 $ (19,587) ======= ========= ======= =========
5. COMMITMENTS AND CONTINGENCIES From time to time the Company has received notices alleging that the Company's products infringe third-party proprietary rights. In particular, the Company has received notices claiming that certain of the Company's immunoassay products infringe third-party patents. Except as noted below with respect to the patent infringement suit filed by Synbiotics Corporation, the Company is not aware of any pending litigation with respect to such claims. Patent litigation frequently is complex and expensive, and the outcome of patent litigation can be difficult to predict. There can be no assurance that the Company will prevail in any infringement proceedings that have been or may be commenced against the Company. A significant portion of the Company's revenue in the three month period ended September 30, 1998 was attributable to products incorporating certain immunoassay technologies and products relating to the diagnosis of canine heartworm infection. If the Company were to be precluded from selling such products or required to pay damages or make additional royalty or other payments with respect to such sales, the Company's business and results of operations could be materially and adversely affected. On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed suit against the Company in the U.S. District Court for the District of Connecticut. In its complaint, CDC Technologies alleges that the Company's conduct in, and its relationships with its distributors in connection with, the distribution of the Company's hematology products (i) violate federal and state antitrust statutes, (ii) violate Connecticut statutes regarding unfair trade practices, and (iii) constitute a civil conspiracy and interfere with CDC Technologies' business relations. The relief sought by CDC Technologies includes treble damages for antitrust violations as well as compensatory and punitive damages, and an injunction to prevent the Company from interfering with CDC Technologies' relations with distributors. The Company has filed an answer denying the allegations in CDC's complaint. In March 1998, the court granted the Company's motion for summary judgment in the case, however CDC is appealing that ruling. The Company is unable to assess the likelihood of an adverse result or estimate the amount of any damages which the Company may be required to pay. Any adverse outcome resulting in the payment of damages would adversely affect the Company's results of operations. On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit against the Company in the U.S. District Court for the Southern District of California for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988 (the "`631 Patent"). The `631 Patent, which is owned by Synbiotics, claims certain assays, methods and compositions for the diagnosis of canine heartworm infection. The primary relief sought by Synbiotics is an injunction against the Company which would prevent the Company from selling canine heartworm diagnostic products which infringe the `631 Patent, as well as treble damages for past infringement. This suit was not served on the Company within the time period specified under applicable court rules and was dismissed without prejudice in April 1998, however Synbiotics is not precluded from filing a new suit in the future. While the Company believes that it has meritorious defenses against claims of infringement of the `631 Patent, the Company is unable to assess the likelihood of an adverse result or estimate the amount of any damages the Company may be required to pay. If the Company is precluded from selling canine heartworm diagnostic products or required to pay damages or make additional royalty or other payments with respect to such sales, the Company's business and results of operations could be materially and adversely affected. Page 9 10 On January 9, 1998, a complaint was filed in the U.S. District Court for the District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F. WORKMAN, JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff purports to represent a class of purchasers of the common stock of the Company from July 19, 1996 through March 24, 1997. The complaint claims that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 promulgated pursuant thereto, by virtue of false or misleading statements made during the class period. The complaint also claims that the individual defendants are liable as "control persons" under Section 20(a) of that Act. In addition, the complaint claims that the individual defendants sold some of their own common stock of the Company, during the class period, at times when the market price for the stock allegedly was inflated. While the Company and other defendants deny the allegations and will defend this suit vigorously, the Company is unable to assess the likelihood of an adverse result or estimate the amount of damages which the Company may be required to pay. Any adverse outcome resulting in the payment of damages may adversely affect the Company's results of operations. 6. ACQUISITIONS 1997 ACQUISITIONS The Company's consolidated results of operations include the results of operations of a manufacturing company, a foreign distribution company, a foreign veterinary reference laboratory, and two veterinary practice management companies acquired in 1997. These businesses were acquired for aggregate purchase prices equaling approximately $24.3 million in cash, the issuance of notes payable for $2.1 million and the assumption of certain liabilities. In 1998, the Company has paid a total of approximately $750,000 in additional purchase price based on the results of operations of certain acquired businesses described above. The additional payments were recorded as additional goodwill and are being amortized over the remaining life of the respective goodwill. In connection with the acquisition of the businesses described above, the Company entered into non-compete agreements for periods of up to three years with certain of the former stockholders, and may become obligated to pay additional amounts to management of these companies based on achieving certain operating results. The Company has accounted for these acquisitions under the purchase method of accounting. The results of operations of each of these businesses has been included in the Company's consolidated results of operations since each of their dates of acquisition. The purchase prices have been allocated to the net assets acquired on a preliminary basis and are subject to revision. Approximately $13.2 million, identified through independent valuation, of the purchase price related to the acquisition of the software companies has been charged to operations as "in process research and development" in accordance with Financial Accounting Standards Board Interpretation No. 4 "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method." The Company has not presented pro forma financial information relating to any of these acquisitions because of immateriality. These acquisitions are as follows: On January 30, 1997, the Company acquired all of the capital stock of Acumedia Manufacturers, Inc., located in Baltimore, Maryland, which specializes in the manufacture of dehydrated cultured media. On March 13, 1997, the Company acquired all of the capital stock of National Information Systems Corporation, located in Eau Claire, Wisconsin, which supplies practice management computer systems to veterinarians under the trade name Advanced Veterinary Systems. On July 1, 1997, the Company, through its wholly-owned subsidiary, IDEXX Laboratories (Taiwan), Inc., acquired certain assets and business rights of Wintek Bio-Science Inc., located in Taipei, Taiwan, which distributed diagnostic products to veterinarians and hospitals in Taiwan. On July 18, 1997, the Company acquired all of the capital stock of Professionals' Software, Inc., located in Effingham, Illinois, which supplies practice management computer systems to veterinarians. On December 1, 1997, the Company, through its wholly-owned subsidiary IDEXX Laboratories Pty. Ltd., acquired certain assets and assumed certain liabilities of Lording & Friend Pty. Ltd. and Clinpath Pty. Ltd. (operating under the name Central Veterinary Diagnostic Laboratory), which operated a veterinary reference laboratory in Australia. Page 10 11 1998 ACQUISITION The Company's consolidated results of operations include the results of operations of Agri-West Laboratory, a food testing laboratory located in Texas, which was acquired on March 1, 1998. The Company acquired certain assets and assumed certain liabilities of Agri-West Laboratory through its wholly-owned subsidiary IDEXX Food Safety Net Services, Inc. for approximately $250,000 in cash. In connection with the acquisition of this business, the Company entered into non-compete agreements for five years with the former owners, and may become obligated to pay additional amounts to management of the business based on achieving certain operating results. The Company has accounted for this acquisition under the purchase method of accounting. The results of operations of this business have been included in the Company's consolidated results of operations since the date of acquisition. The Company has not presented pro forma financial information relating to this acquisition because of immateriality. 7. SUBSEQUENT EVENTS On October 1, 1998, the Company acquired all of the shares of capital stock of Blue Ridge Pharmaceuticals, Inc. ("Blue Ridge"), located in Greensboro, North Carolina, in consideration for $39.1 million in cash, promissory notes in the aggregate principal amount of $7.8 million, 114,894 shares of the Company's common stock and warrants to purchase 805,519 shares of the Company's common stock. In addition, the Company agreed to issue up to 1,240,875 additional shares of its common stock based on the achievement of certain operating targets through 2004. The notes, which bear interest at a rate of 5.5% annually and mature October 1, 2000, were issued to certain key employees of Blue Ridge. The Company's obligations to repay the notes are contingent, with certain exceptions, upon such employees continuing to be employed by Blue Ridge or the Company on the maturity date. The 114,894 shares are issuable by the Company on October 1, 2001 to a key employee of Blue Ridge, and the Company's obligation to issue the shares is contingent, with certain exceptions, on such employee continuing to be employed by Blue Ridge or the Company on that date. The company will account for this acquisition under the purchase method of accounting. Page 11 12 ITEM 2. IDEXX LABORATORIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Total revenue for the third quarter of 1998 increased 9% to $78.5 million from $71.7 million for the third quarter of 1997. Total revenue for the nine months ended September 30, 1998 increased 24% to $237.2 million from $191.2 million for the first nine months of 1997. The increase in total revenue for the quarter ended September 30, 1998 compared to the same period in 1997 was principally attributable to increased sales of veterinary test kits and consumables, increased sales of products for use in food and water testing, increased sales of veterinary reference laboratory services, and increased revenue in the Company's practice management software division. These increases were partially offset by lower sales of veterinary instruments. The increase in revenue for the nine-month period ended September 30, 1998 as compared to the same period in the prior year was principally attributable to the same factors noted for the three-month period. Reduced sales levels of the Company's veterinary test kits and consumables for the nine months ended September 30, 1997 were principally a result of a program to reduce U.S. distributor inventories of these products. This program was substantially completed by the end of the quarter ended June 30, 1997. Sales of test kits and consumables resumed growth following this one-time reduction in distributor inventories. Unit sales of instruments have continued to decline primarily as a result of high market penetration, a restructuring of sales channels and a shift in sales emphasis toward consumables. International revenue increased 9% to $21.1 million in the third quarter of 1998, and 6% to $65.6 million for the nine months ended September 30, 1998, compared to $19.3 million and $61.7 million, respectively, for the prior year periods. Revenues increased by 10% to $12.8 million and 2% to $38.9 million in Europe for the three- and nine-month periods ended September 30, 1998, respectively, compared to the same periods in the prior year. Revenues from the Company's European subsidiaries, transacted in local currencies, increased approximately 8% and 4% for the three- and nine-month periods ended September 30, 1998, respectively, as compared to the same periods in 1997. Increased sales of veterinary consumables and food and water testing products were largely offset by decreases in the number of instruments sold. Revenues decreased by 1% to $4.5 million and increased 16% to $15.7 million in the Pacific Rim region (Japan, Australia, Taiwan and other Asia) for the three- and nine-month periods ended September 30, 1998, respectively, compared to the same periods in 1997. Revenue from the Company's Pacific Rim region, transacted in local currencies, increased approximately 17% and 30% for the three- and nine-month periods ended September 30, 1998, respectively, as compared to the same periods in 1997. The decrease in revenues in the Pacific Rim for the three-month period ended September 30, 1998 is primarily due to lower sales of veterinary instruments partially offset by higher sales of products for use in food testing, veterinary test kits and laboratory services resulting from the December 1997 acquisition of a veterinary reference laboratory in Australia. The increase in revenues in the Pacific Rim for the nine-month period ended September 30, 1998 is primarily due to increased sales of veterinary test kits and consumables and the inclusion of sales from the Australian laboratory, partially offset by a decline in instrument sales. Increases in revenue in South America were partially offset by decreases in Canada. Gross profit as a percentage of revenue was 51% for the three- and nine-month periods ended September 30, 1998, respectively, and 47% and 48% for the same periods in 1997. Higher sales of higher gross margin veterinary test kits and consumables and lower sales of lower margin instruments were partially offset by increased sales of lower margin veterinary practice management software products and services and veterinary laboratory services. In the accompanying financial statements, the Company has reclassified certain 1997 courier costs in its veterinary laboratory business from sales and marketing into cost of sales to conform to 1998 presentation. Sales and marketing expenses were 20% of revenue for the three- and nine-month periods ended September 30, 1998, respectively, compared to 23% and 27% respectively, for the same periods in 1997. The decrease as a percentage of revenue and the dollar decreases of $1.3 million and $3.3 million, respectively, are principally attributable to a decrease in salary and related expenses resulting from workforce reductions. Research and development expenses were 7% and 6% of revenue for the three- and nine-month periods ended September 30, 1998 compared to 6% for the same periods in 1997. In dollars, such expenses increased 11% and 26% for the three- and nine-month periods ended September 30, 1998, respectively, as compared to the same period in 1997, reflecting additional resources and related overhead Page 12 13 to support product development, partially offset by the closure of the Company's research facility in Sunnyvale, California. General and administrative expenses were 15% and 16% of revenue for the three and nine-month periods ended September 30, 1998, respectively, compared to 15% and 17%, respectively, for the same periods in the prior year. The dollar increase of $0.8 million for the three-month period ended September 30, 1998 is principally attributable to an increase in management incentive compensation, additional legal expense and additional costs associated with management training, partially offset by lower salaries and related costs as a result of workforce reductions and favorable foreign currency exchange gains. Legal expenses incurred in connection with the settlement of patent litigation with Barnes-Jewish Hospital in September 1997 were included in the non-recurring operating charge taken during that period. The dollar increase of $5.9 million for the nine-month period ended September 30, 1998 in comparison to the same period in 1997 is principally attributable to an increase in management incentive compensation, additional costs associated with veterinary laboratories, an increase in consulting expenses associated with business restructuring, and additional costs associated with management training and recruiting, partially offset by a lower provision for uncollectible accounts. Net interest income was $2.0 million and $5.3 million for the three- and nine-month periods ended September 30, 1998 as compared to $1.6 million and $5.1 million for the same periods in 1997. The increases are due to an increase in the average balance of cash and investments. The Company's effective tax rate was 39% for the three- and nine-month periods ended September 30, 1998 compared to 31% and 32% for the same periods in 1997. The 1997 tax rate reflects the write-off of non-deductible goodwill included in the non-recurring charge. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company had cash, cash equivalents, and short-term investments of $172.4 million and $219.3 million of working capital. On October 1, 1998, the Company used $39.1 million in cash in connection with the acquisition of Blue Ridge Pharmaceuticals, Inc. ("Blue Ridge"). See Note 7 to Consolidated Financial Statements. The Company believes that current cash and short-term investments and funds expected to be generated from operations will be sufficient to fund the Company's current operations for the foreseeable future. FUTURE OPERATING RESULTS The future operating results of the Company are subject to a number of factors, including without limitation, the following: The Company's business has grown significantly over the past several years as a result of both internal growth and acquisitions of products and businesses. The Company has consummated a number of acquisitions since 1992, including five acquisitions in 1997 and two acquisitions to date in 1998, and may make additional acquisitions. Identifying and pursuing acquisition opportunities, integrating acquired products and businesses, and managing growth requires a significant amount of management time and skill. There can be no assurances that the Company will be effective in identifying and effecting attractive acquisitions, assimilating acquisitions or managing future growth. The Company has experienced and may experience in the future significant fluctuations in its quarterly operating results. Factors such as the introduction and market acceptance of new products and services, the demand for existing products and services, the mix of products and services sold and the mix of domestic versus international revenue could contribute to this quarterly variability. The Company operates with relatively little backlog and has few long-term customer contracts and substantially all of its product and service revenue in each quarter results from orders received in that quarter, which makes the Company's financial performance more susceptible to an unexpected downturn in business and more unpredictable. In addition, the Company's expense levels are based in part on expectations of future revenue levels, and a shortfall in expected revenue could therefore result in a disproportionate decrease in the Company's net income. The markets in which the Company competes are subject to rapid and substantial technological change. The Company encounters, and expects to continue to encounter, intense competition in the sale of its current and future products and services. Many of the Company's competitors and potential competitors have substantially greater capital, manufacturing, marketing, and research and development resources than the Company. The Company's future success will depend in part on its ability to continue to develop new products and services both for its existing Page 13 14 markets and for any new markets the Company may enter in the future. The Company believes that it has established a leading position in many of the markets for its animal health diagnostic products and services, however, the maintenance and any future growth of its position in these markets is dependent upon the successful development and introduction of new products and services. The Company also plans to devote significant resources to the growth of its newer businesses, including the Blue Ridge veterinary pharmaceutical business, the Company's food, hygiene and environmental business and its veterinary laboratory business. The Company's operating experience and product and technology base in these businesses are more limited than in its animal health diagnostic product markets. There can be no assurance that the Company will successfully complete the development and commercialization of products and services for these and other new businesses. While Blue Ridge has a number of veterinary pharmaceutical products under development, the Company will not derive material revenues from the sale of veterinary pharmaceutical products until one or more of such products is commercialized. The Company expects that Blue Ridge will incur losses at least through 1999, although the Company believes that these losses will not have a material adverse effect on the Company's results of operations. The Company's success is heavily dependent upon its proprietary technologies. The Company relies on a combination of patent, trade secret, trademark and copyright law to protect its proprietary rights. There can be no assurance that the patent applications filed by the Company will result in patents being issued, that any patents of the Company will afford protection against competitors with similar technologies, or that the Company's non-disclosure agreements will provide meaningful protection for the Company's trade secrets and other proprietary information. Moreover, in the absence of patent protection, the Company's business may be adversely affected by competitors who independently develop substantially equivalent technologies. In addition, the Company licenses certain technologies used in its products from third parties, and the Company may be required to obtain licenses to additional technologies in order to continue to sell certain products. There can be no assurance that any technology licenses which the Company desires or is required to obtain will be available on commercially reasonable terms. From time to time the Company receives notice alleging that the Company's products infringe third party proprietary rights. Patent litigation frequently is complex and expensive and the outcome of patent litigation can be difficult to predict. There can be no assurance that the Company will prevail in any infringement proceedings that have been or may be commenced against the Company, and an adverse outcome may preclude the Company from selling certain products or require the Company to pay damages or make additional royalty or other payments with respect to such sales. In addition, from time to time other types of lawsuits are brought against the Company, wherein an adverse outcome could adversely affect the Company's results of operations. Certain components used in the Company's products are currently available from only one source and others are available from only a limited number of sources. The Company's inability to develop alternative sources if and as required in the future, or to obtain sufficient sole or limited source components as required, could result in cost increases or reductions or delays in product shipments. Certain technologies licensed by the Company and incorporated into its products are also available from a single source, and the Company's business may be adversely affected by the expiration or termination of any such licenses or any challenges to the technology rights underlying such licenses. In addition, the Company currently purchases or is contractually required to purchase certain of the products that it sells from one source. Failure of such sources to supply product to the Company may have a material adverse effect on the Company's business. For the nine months ended September 30, 1998, international revenue was $65.6 million, or 28% or total revenue, and the Company expects that its international business will continue to account for a significant portion of its total revenue. Foreign regulatory bodies often establish product standards that my be different from those in the United States, and designing products in compliance with such foreign standards may be difficult or expensive. Other risks associated with foreign operations include possible disruptions in transportation of the Company's products, the differing product and service needs of foreign customers, difficulties in building and managing foreign operations, fluctuations in the value of foreign currencies, import/export duties and quotas, and unexpected regulatory, economic or political changes in foreign markets. The development, manufacturing, distribution and marketing of certain of the Company's products and provision of its services, both in the United States and abroad, are subject to regulation by various domestic and foreign governmental agencies. Delays in obtaining, or the failure to obtain, any necessary regulatory approvals could have a material adverse effect on the Company's future product and service sales and operations. Any acquisitions of new products, services and technologies may subject the Company to additional areas of government regulations. Page 14 15 The development, manufacture, distribution and marketing of the Company's products and provision of its services involve an inherent risk of product liability claims and associated adverse publicity. Although the Company currently maintains liability insurance, there can be no assurance that the coverage limits of the Company's insurance policies will be adequate. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. YEAR 2000 Historically, certain computer programs have been written using two digits, rather than four digits, to define the applicable year. This could lead, in many cases, to a computer's recognizing a date using "00" as 1900 rather than the year 2000. This phenomenon could result in major computer system failures or miscalculations, and is generally referred to as the "Year 2000" problem or issue. The Company is in the process of identifying and resolving Year 2000 issues associated with the Company's information technology ("IT") and non-IT internal systems, the products and services sold by the Company, and the products and services supplied by outside vendors. The following discussion first summarizes the Company's efforts to identify and resolve Year 2000 issues and then addresses total costs, most reasonably likely worst case scenarios, contingency plans, and the basis for current estimates relating to such efforts. The Company's worldwide accounting system is Year 2000 ready, and throughout 1998 and 1999 the Company expects to complete implementation of any needed Year 2000 related modifications to its other IT systems. The Company is also currently assessing its internal non-IT systems and expects to complete testing and any needed modifications to these systems prior to 2000. Although the Company does not believe that it will incur material costs or experience material disruptions in its business associated with preparing its internal systems for the Year 2000, there can be no assurance that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in the technology used in its internal systems, which are composed of third party software, third party hardware that contains embedded software and the Company's own software products. The Company's Year 2000 effort has included testing products currently or recently offered by the Company for Year 2000 issues. A substantial majority of the Company's products, including its instrument-based diagnostic systems and a majority of its installed base of veterinary practice management software systems, already are Year 2000 ready. The Company expects that by the end of 1998 all practice management systems offered by the Company will be Year 2000 ready. For products that were identified as needing updates to address Year 2000 issues, the Company has prepared or is preparing updates, or has removed or plans to remove such products from its product offerings. Some of the Company's customers are using product versions that the Company will not support for Year 2000 issues; the Company is encouraging these customers to migrate to current product versions that are Year 2000 ready. Notwithstanding these efforts, there can be no guarantee that one or more current Company products do not contain Year 2000 issues that may result in material costs to the Company. Because a portion of the Company's business involves the sale of software products, the Company's risk of being subjected to lawsuits relating to Year 2000 issues with its software products is likely to be greater than that of companies that do not sell software products. Because computer systems may involve different hardware, firmware and software components from different manufacturers, it may be difficult to determine which component in a computer system may cause a Year 2000 issue. As a result, the Company may be subjected to Year 2000 related lawsuits independent of whether its products and services are Year 2000 ready. The outcomes of any such lawsuits and the impact on the Company cannot be determined at this time. The Company has queried its important suppliers and vendors to assess their Year 2000 readiness. To date, the Company is not aware of any problems that would materially impact results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that these suppliers and vendors will be Year 2000 ready. The inability of those parties to complete their Year 2000 resolution process could materially impact the Company. The Company also intends during 1999 to query key resellers of Company products regarding Year 2000 readiness. No assurances can be given regarding the state of readiness of such resellers. The Company's total cost relating to Year 2000 related activities has not been and is not expected to be material to the Company's financial position, results of operations, or cash flows. The Company believes that necessary modifications will be made on a timely basis. However, there can be no assurance that there will not be a delay in, or increased costs associated with, the implementation of such modifications, or that the Company's suppliers, resellers and customers will adequately prepare for the Year 2000 issue. It is possible that any such delays, increased costs, or supplier, reseller or customer failures could have a material adverse impact on the Company's operations and financial results. The most reasonable likely worst case Year 2000 scenarios for the Company would include: (i) corruption of data contained in the Company's internal information systems, (ii) hardware failure, and (iii) the failure of infrastructure services provided by government agencies and other third parties (e.g., electricity, phone service, water transport, material delivery, security systems, etc.). The Company currently does not have a contingency plan in the event of a particular system not being Year 2000 ready. Such a plan will be developed if it becomes clear that the Company is not going to achieve its scheduled compliance objectives. If the Company does not become Year 2000 ready in a timely manner, the Year 2000 issue could have a material adverse impact on the Company's operations by, for example, impacting the Company's ability to deliver products or services to its customers. Current estimates of the costs of the project and the information on which the Company believes it will complete the Year 2000 modifications are based on certain assumptions regarding future events, including the continued availability of certain resources, assurances received from third parties, and other factors. However, there can be no guarantee that these estimates will be achieved or that this information is accurate, and therefore the actual results could differ materially from those anticipated. Specific factors might include, but are not limited to, the availability and cost of personnel trained in this area, the degree of cooperation and preparedness of third parties, the ability to locate and correct all relevant computer codes, and other uncertainties. Page 15 16 PART II -- OTHER INFORMATION ITEM 1. -- LEGAL PROCEEDINGS On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed suit against the Company in the U.S. District Court for the District of Connecticut. In its complaint, CDC Technologies alleges that the Company's conduct in, and its relationships with its distributors in connection with, the distribution of the Company's hematology products (i) violate federal and state antitrust statutes, (ii) violate Connecticut statutes regarding unfair trade practices, and (iii) constitute a civil conspiracy and interfere with CDC Technologies' business relations. The relief sought by CDC Technologies includes treble damages for antitrust violations, as well as compensatory and punitive damages, and an injunction to prevent the Company from interfering with CDC Technologies' relations with distributors. The Company has filed an answer denying the allegations in CDC Technologies' complaint. In March 1998, the court granted the Company's motion for summary judgment in the case, however CDC is appealing that ruling. The Company is unable to assess the likelihood of an adverse result or estimate the amount of any damages which the Company may be required to pay. Any adverse outcome resulting in the payment of damages would adversely affect the Company's results of operations. On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit against the Company in the U.S. District Court for the Southern District of California for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988 (the "`631 Patent"). The `631 Patent, which is owned by Synbiotics, claims certain assays, methods and compositions for the diagnosis of canine heartworm infection. The primary relief sought by Synbiotics is an injunction against the Company which would prevent the Company from selling canine heartworm diagnostic products which infringe the `631 Patent, as well as treble damages for past infringement. This suit was not served on the Company within the time period specified under applicable court rules and was dismissed without prejudice in April 1998, however Synbiotics is not precluded from filing a new suit in the future. While the Company believes that it has meritorious defenses against claims of infringement of the `631 Patent, the Company is unable to assess the likelihood of an adverse result or estimate the amount of any damages the Company may be required to pay. If the Company is precluded from selling canine heartworm diagnostic products or required to pay damages or make additional royalty or other payments with respect to such sales, the Company's business and results of operations could be materially and adversely affected. On January 9, 1998, a complaint was filed in the U.S. District Court for the District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F. WORKMAN, JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff purports to represent a class of purchasers of the common stock of the Company from July 19, 1996 through March 24, 1997. The complaint claims that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5 promulgated pursuant thereto, by virtue of false or misleading statements made during the class period. The complaint also claims that the individual defendants are liable as "control persons" under Section 20(a) of that Act. In addition, the complaint claims that the individual defendants sold some of their own common stock of the Company, during the class period, at times when the market price for the stock allegedly was inflated. While the Company and other defendants deny the allegations and will defend this suit vigorously, the Company is unable to assess the likelihood of an adverse result or estimate the amount of damages which the Company may be required to pay. Any adverse outcome resulting in the payment of damages would adversely affect the Company's results of operations. Page 16 17 ITEM 5. -- OTHER INFORMATION Proposals of stockholders submitted pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 for inclusion in the Company's proxy materials for its 1999 Annual Meeting of Stockholders must be received by the Secretary of the Company at its principal office in Westbrook, Maine, not later than December 14, 1998. In addition, the Company's by-laws require that the Company be given advance notice of matters which stockholders wish to present for action at an annual meeting of stockholders (other than matters included in the Company's proxy statement in accordance with Rule 14a-8). The required notice must be received by the Secretary of the Company, at the principal offices of the Company no later than March 14, 1999 or 60 days before the date of the 1999 Annual Meeting, whichever is later. ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule for the Quarterly Report on Form 10-Q for the nine month period ended September 30, 1998. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the fiscal quarter for which this report is filed. Page 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IDEXX LABORATORIES, INC. Date: November 12, 1998 /s/ Ralph K. Carlton ----------------------------------------------------- Ralph K. Carlton, Senior Vice President, Finance and Administration and Chief Financial Officer (Principal Financial Officer) Page 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE IDEXX LABORATORIES, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000874716 IDEXX LABORATORIES, INC. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 138,690 33,735 49,513 5,580 42,979 277,662 78,664 38,605 380,351 58,326 0 0 0 3,864 318,161 380,351 190,561 237,166 83,732 117,283 99,433 1,358 135 24,352 9,497 14,855 0 0 0 14,855 .39 .37
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