-----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, MZjtiUirrFse6yLpIkM4lBATtm5lZkO6VvdkD4rUCB+Hidz63aPttkAzB8kCY9qp VtbW4SwuVw6kGJiHIqOo7w== 0000950135-97-004594.txt : 19971117 0000950135-97-004594.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950135-97-004594 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD 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: 97718652 BUSINESS ADDRESS: STREET 1: ONE IDEXX DR CITY: WESTBROOK STATE: ME ZIP: 04092 BUSINESS PHONE: 2078560300 MAIL ADDRESS: STREET 1: ONE IDEXX DR CITY: WESTBROOK STATE: ME ZIP: 04092 FORMER COMPANY: FORMER CONFORMED NAME: IDEXX CORP / DE DATE OF NAME CHANGE: 19600201 10-Q 1 IDEXX LABORATORIES, INC. FORM 10-Q 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, 1997 ------------------ 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, 1997, 38,066,047 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: 3 Consolidated Balance Sheets September 30, 1997 and December 31, 1996 Consolidated Statements of Operations 4 Three and Nine Months Ended September 30, 1997 and September 30, 1996 Consolidated Statements of Cash Flows 5 Nine Months Ended September 30, 1997 and September 30, 1996 Notes to Consolidated Financial Statements 6-11 Item 2. Management's Discussion and Analysis of 12-14 Financial Condition and Results of Operations PART II -- OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2 Changes in Securities and Use of Proceeds 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17 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) ASSETS
September 30, December 31, 1997 1996 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 105,521 $ 127,741 Short-term investments 37,027 45,896 Accounts receivable, less reserves of $4,929 and $4,001 in 1997 and 1996, respectively 48,730 66,633 Inventories 63,044 48,402 Other current assets 16,781 13,045 --------- --------- Total current assets 271,103 301,717 LONG-TERM INVESTMENTS 11,760 7,255 PROPERTY AND EQUIPMENT, AT COST: Leasehold improvements 16,597 15,150 Land 1,162 890 Building 4,397 4,202 Machinery and equipment 26,628 21,667 Office furniture and equipment 23,390 17,348 --------- --------- 72,174 59,257 Less -- Accumulated depreciation & amortization 29,707 22,863 --------- --------- 42,467 36,394 OTHER ASSETS 49,623 28,486 --------- --------- $ 374,953 $ 373,852 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 9,922 $ 18,692 Accrued expenses 40,864 23,872 Notes payable 3,500 3,000 Deferred revenue 15,667 5,563 --------- --------- Total current liabilities 69,953 51,127 COMMITMENTS AND CONTINGENCIES (Note 5) STOCKHOLDERS' EQUITY: Common stock, $0.10 par value Authorized 60,000 shares Issued and outstanding 38,059 shares in 1997 3,806 3,777 and 37,774 shares in 1996 Additional paid-in capital 255,991 253,118 Retained earnings 49,348 67,376 Cumulative translation adjustment (4,145) (1,546) --------- --------- Total stockholders' equity 305,000 322,725 --------- --------- $ 374,953 $ 373,852 ========= =========
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, 1997 1996 1997 1996 -------- ------- --------- -------- Revenue $ 71,728 $69,837 $ 191,151 $193,113 Cost of revenue 35,788 29,362 94,632 82,449 -------- ------- --------- -------- Gross Profit 35,940 40,475 96,519 110,664 Expenses: Sales and marketing 18,599 17,531 55,352 49,261 General and administrative 10,682 7,102 32,690 19,042 Research and development 4,645 3,140 11,971 9,041 Non-recurring operating charge 28,000 -- 28,000 -- -------- ------- --------- -------- Income (loss) from operations (25,986) 12,702 (31,494) 33,320 Interest income, net 1,641 1,791 5,092 6,348 -------- ------- --------- -------- Net income (loss) before provision for income taxes (24,345) 14,493 (26,402) 39,668 Provision for (benefit of) income taxes (7,491) 5,942 (8,374) 16,264 -------- ------- --------- -------- Net income (loss) $(16,854) $ 8,551 $ (18,028) $ 23,404 ======== ======= ========= ======== Net income (loss) per common and common equivalent share $ (0.44) $ 0.22 $ (0.47) $ 0.59 ======== ======= ========= ======== Weighted average number of common and common equivalent shares outstanding 38,036 39,510 38,567 39,438 ======== ======= ========= ========
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, 1997 1996 ---- ---- Cash Flows from Operating Activities: Net income $ (18,028) $ 23,404 Adjustments to reconcile net income to net cash provided by operating activities - 7,041 Depreciation and amortization 10,470 -- Non-cash portion of non-recurring operating charge 11,000 Changes in assets and liabilities - Accounts receivable 22,481 (15,413) Inventories (13,681) (11,879) Other current assets (7,314) (4,755) Accounts payable (9,751) 1,472 Accrued expenses 14,746 3,204 Deferred revenue (56) 1,185 --------- --------- Net cash provided by operating activities 9,867 4,259 --------- --------- Cash Flows from Investing Activities: Purchases of property and equipment (11,356) (8,878) Decrease (increase) in investments, net 4,363 (3,553) Decrease in other assets (706) (473) Acquisitions (see Note 6) (22,284) (19,709) --------- --------- Net cash used in investing activities (29,983) (32,613) --------- --------- Cash Flows from Financing Activities: Repayment of notes payable (1,509) (1,887) Proceeds from the exercise of stock options 2,004 7,107 --------- --------- Net cash provided by financing activities 495 5,220 --------- --------- Net Effect of Foreign Currency Translation (2,599) (645) --------- --------- Net Increase (decrease) in Cash and Cash Equivalents (22,220) (23,779) Cash and Cash Equivalents, beginning of period 127,741 149,252 --------- --------- Cash and Cash Equivalents, end of period $ 105,521 $ 125,473 ========= ========= Supplemental Disclosure of Cash Flow Information: Interest paid during the period $ 352 $ 220 ========= ========= Income taxes paid during the period $ 6,852 $ 9,690 ========= =========
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, 1996 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 1996 consolidated financial statements to conform with the current years presentation. c. 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, in accordance with Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). 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, 1997 1996 ---- ---- Municipal bonds $ 6,740 $15,040 U.S. Treasury bills 20,047 30,856 Commercial paper 3,302 -- Foreign securities 2,371 -- Time deposits 4,567 -- ------- ------- $37,027 $45,896 ======= =======
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, 1997 1996 ---- ---- Municipal bonds $11,305 $3,255 Foreign securities 455 -- U.S. Treasury note -- 4,000 ------- ------ $11,760 $7,255 ======= ======
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, 1997 1996 ---- ---- Raw materials $10,513 $10,081 Work-in-process 9,761 6,605 Finished goods 42,770 31,716 ------- ------- $63,044 $48,402
3. NET INCOME(LOSS) PER SHARE Net income(loss) per common and common equivalent share is based on the weighted average number of common and common equivalent (if dilutive) shares outstanding during each period, computed in accordance with the treasury stock method. Fully diluted net income per common and common equivalent share has not been presented as it is not significantly different. In February 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128 must be adopted as of December 31, 1997 and all prior earnings per share amounts must be retroactively restated. In accordance with Staff Accounting Bulletin No. 74, the Company is disclosing the effect this statement would have on the three and nine month periods ended September 30, 1997 and 1996 on a pro forma basis. The following table summarizes the pro forma earnings per share amounts under SFAS No. 128:
Pro Forma Net income (loss) ----------------------------------- per common and Basic earnings Diluted earnings common equivalent (loss) per (loss) per share share share 3 months ended September 30, 1997 $ (0.44) $ (0.44) $ (0.44) 3 months ended September 30, 1996 0.22 0.23 0.22 9 months ended September 30, 1997 (0.47) (0.48) (0.47) 9 months ended September 30, 1996 0.59 0.63 0.59
Page 7 8 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. 4. NON-RECURRING CHARGE On September 29, 1997, the Company announced that the third quarter results would include a non-recurring pre-tax charge to operations of approximately $28 million. The charge includes approximately $11 million to write off in-process research and development costs associated with the acquisitions of Professionals' Software, Inc. and National Information Systems Corporation (see Note 6 - Acquisitions), approximately $8 million to settle a patent infringement lawsuit brought by Barnes-Jewish Hospital including associated legal costs (see Note 5), and approximately $9 million related to a plan to close certain European facilities, reduce the workforce in European operations and US veterinary operations, and other related costs. Included in accrued expenses in the accompanying balance sheet iS approximately $16.6 million related to the non-recurring charge. 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 brought by Barnes-Jewish Hospital of St. Louis, Missouri, no litigation has been brought against the Company 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 during the three month period ended September 30, 1997 was attributable to products incorporating certain immunoassay technologies. 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. Page 8 9 On February 4, 1993, the Company acquired Environetics, Inc. ("Environetics"), which brought a patent infringement suit with Stephen Edberg, Ph.D. against Millipore Corporation ("Millipore") in the U.S. District Court for the District of Connecticut on September 30, 1992 (the "Millipore I suit"). The complaint in the Millipore I suit was subsequently amended to add as additional plaintiffs Access Medical Systems, Inc., a subsidiary of the Company ("Access"), and Stephen C. Wardlaw, M.D. The primary relief sought by the plaintiffs is an injunction against Millipore which would prevent Millipore from selling a competitive product that the plaintiffs believe infringes U.S. Patent No. 4,925,789 (the "'789 Patent") covering the Company's Colilert(R) product, under which Access and Environetics have an exclusive license from Drs. Edberg and Wardlaw. Millipore has filed a counterclaim alleging that the '789 Patent is invalid or not infringed. The Millipore I suit is scheduled for trial beginning in December 1997. In addition, on July 26, 1995, the Company, Environetics, Access and Drs. Edberg and Wardlaw brought a second patent infringement suit against Millipore in the U.S. District Court for the District of Connecticut (the "Millipore II suit"). The principal relief sought by the plaintiffs in the Millipore II suit is an injunction against Millipore which would prevent Millipore from selling a product which the plaintiffs believe infringes U.S. Patent No. 5,429,933 (the " '933 Patent"), which also covers the Colilert product. The '933 Patent, which is related to the '789 Patent, was issued in July 1995 to Dr. Edberg. Access and Environetics have an exclusive license under the '933 Patent from Drs. Edberg and Wardlaw. Millipore has filed a counterclaim alleging that the '933 Patent is invalid or not infringed. If the plaintiffs do not prevail in the Millipore I and Millipore II suits, the Company anticipates that the Colilert product would encounter increased competition, which could adversely affect sales of the Colilert product. 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. 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 May 26, 1995, Barnes-Jewish Hospital of St. Louis, Missouri (the "Hospital") brought a suit against the Company which was litigated in the U.S. District Court for the District of Maine for infringement of U.S. Patent No. 4,839,275 issued June 13, 1989 (the "'275 Patent"). The '275 Patent, which is owned by the Hospital, claims certain methods and compositions for the diagnosis of canine heartworm infection. On September 27, 1997, the Company and the Hospital entered into a settlement agreement in the litigation which included, among other things, the grant of a license under the '275 Patent to the Company, and which required the Company to pay $5.5 million to the Hospital, a portion of which payment will be creditable against earned royalties on certain products. (See Note 4.) On September 18, 1995, Purisys Inc. ("Purisys"), a producer of home pollution test kits, and certain of its employees filed suit against the Company in the Supreme Court of the state of New York. In their complaint, the plaintiffs alleged that the Company had breached promises and made negligent misrepresentations, and had breached fiduciary and other duties. The plaintiffs sought damages in excess of $50,000,000. In May 1996, the court granted the Company's motion to dismiss the plaintiffs' suit, and the plaintiffs' appeal was dismissed by the court in July 1997. Page 9 10 6. ACQUISITIONS 1996 ACQUISITIONS The Company's consolidated results of operations include the results of operations of four veterinary reference laboratory businesses and two manufacturers of detection and diagnostic tests acquired in 1996. These businesses were acquired by the Company for aggregate purchase prices equaling approximately $21.7 million in cash, the issuance of a note payable for $3.0 million, the assumption of certain liabilities and the issuance of the Company's Common Stock and options exercisable for Common Stock totaling approximately $20 million. In connection with the acquisition of the veterinary reference laboratory businesses and one of the manufacturing businesses, the Company entered into non-compete agreements for a period of up to five years with certain of the entities, stockholders or 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 respective dates of acquisition. The Company has not presented pro forma financial information relating to any of these acquisitions because of immateriality. These acquisitions are as follows: - On March 29, 1996, the Company acquired all of the capital stock of VetLab, Inc. ("VetLab), which operated two veterinary reference laboratories in Texas. - On April 2, 1996, the Company, through its wholly-owned subsidiary, IDEXX Laboratories, Limited, acquired substantially all of the assets and assumed certain of the liabilities of Grange Laboratories Ltd. ("Grange Laboratories"). Grange Laboratories' business, which includes veterinary reference laboratories in the United Kingdom, is now operated as a division of IDEXX Laboratories, Limited. - On May 15, 1996, the Company acquired all of the capital stock of Veterinary Services, Inc. ("VSI"), which operated veterinary reference laboratories in Colorado, Illinois and Oklahoma. - On July 12, 1996, the Company acquired substantially all of the assets and assumed certain of the liabilities of Consolidated Veterinary Diagnostics, Inc. ("CVD"). As a result of the CVD acquisition, the Company is operating CVD's veterinary reference laboratories in Northern California, Oregon and Nevada. - On July 18, 1996, the Company acquired all of the capital stock of Ubitech Aktiebolag, located in Uppsala, Sweden, which manufactures and distributes diagnostic test kits for the livestock industry. The VetLab, VSI and CVD businesses are a part of IDEXX Veterinary Services, Inc., a wholly-owned subsidiary of the Company. In connection with the Company's acquisition by merger of Idetek, Inc. ("Idetek") on August 29, 1996, the Company issued 436,804 shares of its Common Stock, of which approximately 10% are held in escrow, in exchange for all of the outstanding capital stock of Idetek. In addition, outstanding options to purchase shares of Idetek capital stock became options to acquire 110,191 shares of the Company's Common Stock at prices ranging from $3.13 to $78.14. The value of the shares of the Company's Common Stock issued or reserved for issuance as a result of the merger totaled approximately $20 million. Idetek, located in Sunnyvale, California, manufactured and distributed detection tests for the food, agricultural and environmental industries. The Company has accounted for this acquisition by merger as a "pooling-of-interests". The results of operations of Idetek have been included in the Company's consolidated results of operations since the date of the merger. The Company has not restated its financial statements because of immateriality. 1997 ACQUISITIONS The Company's consolidated results of operations include the results of operations of a manufacturing company, a foreign distribution company, and two software companies acquired in 1997. These businesses were acquired for aggregate purchase prices equaling approximately $23.5 million in cash, the issuance of a note payable for $1.5 million and the assumption of certain liabilities. Page 10 11 In connection with the acquisition of the businesses described above, the Company entered into non-compete agreements for a period of up to five 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 respective dates of acquisition. The purchase prices have been allocated to the net assets acquired on a preliminary basis and are subject to revision. Approximately $11.0 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 culture media. - On March 13, 1997, the Company acquired all of the capital stock of National Information Systems Corporation, located in Eau Claire, Wisconsin, which supplied practice management computer systems to veterinarians under the trade name Advanced Veterinary Systems. - On July 1, 1997, the Company 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. 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 1997 increased 3% to $71.7 million from $69.8 million for the third quarter of 1996. Total revenue for the nine months ended September 30, 1997 decreased 1% to $191.2 million from $193.1 million for the first nine months of 1996. The increase in total revenue for the quarter ended September 30, 1997 compared to the same period in 1996 was principally attributable to inclusion of sales of veterinary practice management software and equipment, which resulted from the acquisitions of National Information Systems Corporation and Professionals' Software, Inc. in the first and third quarters of 1997, respectively, and to increased sales of veterinary laboratory services, veterinary consumables, and food and environmental products. These increases were offset by decreased sales of veterinary instruments and test kits. The decrease in revenue for the nine-month period ended September 30, 1997 as compared to the same period in the prior year was principally attributable to decreased sales of veterinary instruments and test kits, offset by increased sales of veterinary laboratory services, food and environmental products, and veterinary practice management software and equipment. The decrease in sales of veterinary test kits was principally a result of a program to reduce U.S. distributor inventories of these products. This program was completed during the third quarter of 1997. Decreased sales of instruments were caused by declines in units sold and, to a lesser extent, average unit selling prices. The Company expects that instrument sales will continue to decline as the Company's market penetration increases. International revenue decreased 18% to $19.3 million in the third quarter of 1997, and 8% to $61.7 million for the nine months ended September 30, 1997, compared to $23.5 million and $66.8 million, respectively, for the prior year periods. Revenues decreased by 19% and 13% in Europe, and decreased by 27% and 9% in the Pacific Rim region (Japan, Asia, Taiwan, Australia) for the three- and nine-month periods ended September 30, 1997, respectively, compared to the same periods in 1996. These decreases were offset by increases in revenue in Canada and South America. Revenue from the Company's European subsidiaries, transacted in local currencies, decreased approximately 9% and 6% for the three- and nine-month periods ended September 30, 1997, respectively, as compared to the same periods in 1996. In U.S. dollars, the revenue decrease was 19% to $11.6 million for the current three-month period and 13% to $38.1 million for the current nine-month period. Revenue from the Company's Pacific Rim region, transacted in local currencies, decreased approximately 4% for the three month period ended September 30, 1997, and increased 2% for the nine-month period ended September 30, 1997, as compared to the same periods in 1996. In U.S. dollars, the revenue decrease was 27% to $4.5 million for the current three-month period and 9% to $13.6 million for the current nine-month period. Revenues in Europe for the three- and nine-month periods decreased primarily due to a decline in the number of instruments sold. For the nine months ended September 30, 1997, the revenue decreases in Europe were offset by increased veterinary laboratory services resulting from the acquisition of Grange Laboratories in the second quarter of 1996. Revenues in the Pacific Rim for the three- and nine-month periods decreased primarily due to a decline in sales of veterinary kits and a decline in the number of veterinary instruments sold. Gross profit as a percentage of revenue was 50% for the three- and nine-month periods ended September 30, 1997, respectively, and 58% and 57% for the same periods in 1996. The decrease in gross profit as a percentage of revenue was principally attributable to a decline in sales of the Company's higher margin veterinary test kits and a decline in the average unit price of the instruments sold. Gross margin was also adversely affected by the inclusion of lower margin veterinary laboratory service revenues as a result of acquisitions completed in 1996. Sales and marketing expenses were 26% and 29% of revenue for the three- and nine-month periods ended September 30, 1997, respectively, compared to 25% and 26% for the same periods in 1996. The increase as a percentage of revenue for the three- and nine-month periods ended September 30, 1997 in comparison to the same periods in 1996 was principally attributable to certain fixed costs remaining constant while sales of veterinary test kits and instruments declined. The increases of $1.1 million and $6.1 million for the three- and nine-month periods ended September 30, 1997, respectively, over the same periods in the prior year were principally attributable to the additional sales and marketing expenses resulting from the acquisition of the veterinary laboratory businesses in 1996 and the veterinary practice management software businesses in 1997, offset by lower variable costs, such as commissions and promotional expenses. Research and development expenses were 6% of revenue for the three- and nine-month periods ended September 30, 1997 compared to 4% and 5% for the same periods in 1996. In dollars, such expenses increased 48% and 32% for the three- and nine-month periods ended September 30, 1997, respectively, as compared to the same period in 1996, reflecting additional resources and related overhead to support product development. Page 12 13 General and administrative expenses were 15% and 17% of revenue for the three- and nine-month periods ended September 30, 1997, respectively, compared to 10%, respectively, for the same periods in the prior year. The increase as a percentage of sales and the dollar increase of $3.6 million for the three-month period ended September 30, 1997 in comparison to the same period in 1996 is principally attributable to additional operating expense and acquisition costs associated with the acquisition of the practice management software businesses and the distributor in Taiwan, as well as additional operating expenses associated with business development. The increase as a percentage of sales and the dollar increase of $13.6 million for the nine-month period ended September 30, 1997 is principally attributable to additional operating expense and acquisition costs associated with the acquisitions of the veterinary laboratory businesses, the practice management software businesses, and the distributor in Taiwan, higher provision for uncollectible accounts, and additional operating expenses associated with business development. The third quarter results of operations include a non-recurring operating charge of approximately $28 million. The charge includes approximately $11 million to write off in-process research and development costs associated with the acquisition of Professionals' Software, Inc. and National Information Systems Corporation, approximately $8 million to settle a patent infringement lawsuit brought by Barnes-Jewish Hospital including associated legal costs, and approximately $9 million related to a plan to close certain European facilities, reduce the workforce in European operations and US veterinary operations and other related costs. Net interest income was $1.6 million and $5.1 million for the three- and nine-month periods ended September 30, 1997 as compared to $1.8 million and $6.3 million for the same periods in 1996. The decrease in interest income from the same periods in the prior year is due to the use of previously invested cash in acquiring the veterinary practice management software businesses, veterinary laboratory businesses and other businesses since the first quarter of 1996. The Company's effective tax rate was 31% and 32% for the three- and nine-month periods ended September 30, 1997 compared to 41% for the same periods in 1996. The decrease in the effective tax rate results from the write off of certain in-process research and development costs that was not deductible for tax purposes. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1997, the Company had cash, cash equivalents, and short-term investments of $142.5 million and $201.2 million of working capital. The Company believes that current cash and short-term investments and funds expected to be generated from operations will be sufficient to fund the Company's operations for the foreseeable future. FUTURE OPERATING RESULTS The future operating results of the Company are subject to a number of factors, including without limitation, the following: The Company's business has grown significantly over the past several years as a result of both internal growth and acquisitions of products and businesses. The Company has consummated a number of acquisitions since 1992, including six acquisitions in 1996 and four acquisitions to date in 1997, 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. Page 13 14 The Company's future success will depend in part on its ability to continue to develop new products and services both for its existing markets and for any new markets the Company may enter in the future. The Company believes that it has established a leading position in many of the markets for its animal health diagnostic products and services, and the maintenance and any future growth of its position in these markets is dependent upon the successful development and introduction of new products and services. The Company also plans to devote significant resources to the growth of its veterinary laboratory business and its business in the food, hygiene and environmental markets and to the development of an animal pharmaceutical product business, where the Company's operating experience and product and technology base are more limited than in its animal health diagnostic product markets. There can be no assurance that the Company will successfully complete the development and commercialization of products and services for existing and new businesses. The Company's success is heavily dependent upon its proprietary technologies. The Company relies on a combination of patent, trade secret, trademark and copyright law to protect its proprietary rights. There can be no assurance that 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 notices 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, 1997, international revenue was $61.7 million, or 32% 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 that may 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. 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. Page 14 15 PART II -- OTHER INFORMATION Item 1. -- Legal Proceedings On February 4, 1993, the Company acquired Environetics, Inc. ("Environetics"), which brought a patent infringement suit with Stephen Edberg, Ph.D. against Millipore Corporation ("Millipore") in the U.S. District Court for the District of Connecticut on September 30, 1992 (the "Millipore I suit"). The complaint in the Millipore I suit was subsequently amended to add as additional plaintiffs Access Medical Systems, Inc., a subsidiary of the Company ("Access"), and Stephen C. Wardlaw, M.D. The primary relief sought by the plaintiffs is an injunction against Millipore which would prevent Millipore from selling a competitive product that the plaintiffs believe infringes U.S. Patent No. 4,925,789 (the "'789 Patent") covering the Company's Colilert product, under which Access and Environetics have an exclusive license from Drs. Edberg and Wardlaw. Millipore has filed a counterclaim alleging that the '789 Patent is invalid or not infringed. The Millipore I suit is scheduled for trial beginning in December 1997. In addition, on July 26, 1995, the Company, Environetics, Access and Drs. Edberg and Wardlaw brought a second patent infringement suit against Millipore in the U.S. District Court for the District of Connecticut (the "Millipore II suit"). The principal relief sought by the plaintiffs in the Millipore II suit is an injunction against Millipore which would prevent Millipore from selling a product which the plaintiffs believe infringes U.S. Patent No. 5,429,933 (the "'933 Patent"), which also covers the Colilert product. The '933 Patent, which is related to the '789 Patent, was issued in July 1995 to Dr. Edberg. Access and Environetics have an exclusive license under the '933 Patent from Drs. Edberg and Wardlaw. Millipore has filed a counterclaim alleging that the '933 Patent is invalid or not infringed. If the plaintiffs do not prevail in the Millipore I and Millipore II suits, the Company anticipates that the Colilert product would encounter increased competition, which could adversely affect sales of the Colilert product. 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. 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 May 26, 1995, Barnes-Jewish Hospital of St. Louis, Missouri (the "Hospital") brought a suit against the Company which was litigated in the U.S. District Court for the District of Maine for infringement of U.S. Patent No. 4,839,275 issued June 13, 1989 (the "'275 Patent"). The '275 Patent, which is owned by the Hospital, claims certain methods and compositions for the diagnosis of canine heartworm infection. On September 27, 1997, the Company and the Hospital entered into a settlement agreement in the litigation which included, among other things, the grant of a license under the '275 Patent to the Company, and which required the Company to pay $5.5 million to the Hospital, a portion of which payment will be creditable against earned royalties on certain products. On September 18, 1995, Purisys Inc. ("Purisys"), a producer of home pollution test kits, and certain of its employees filed suit against the Company in the Supreme Court of the state of New York. In their complaint, the plaintiffs alleged that the Company had breached promises and made negligent misrepresentations, and had breached fiduciary and other duties. The plaintiffs sought damages in excess of $50,000,000. In May 1996, the court granted the Company's motion to dismiss the plaintiffs' suit, and the plaintiffs' appeal was dismissed by the court in July 1997. Page 15 16 Item 2. Changes in Securities and Use of Proceeds On September 15, 1997, the Company issued 5,894 shares of Common Stock (the "Shares") to Industrial Innovation Management Company, Inc. ("IIM"). The Shares were issued as supplemental purchase price under an Asset Purchase Agreement dated as of January 15, 1992 among the Company, IIM, IDEXX Laboratories Limited, VetTest S.A., VetTest Marketing Services Limited and Industrial Innovation Management S.A. (the "Agreement"). The number of Shares issued was determined pursuant to a formula contained in the Agreement based on the Company's sales of certain product lines acquired pursuant to the Agreement. The Shares were issued in reliance upon the exemption from registration provided under Section 4(2) of the Securities Act of 1933. Item 6. -- Exhibits and Reports on Form 8-K Page (a) Exhibits 2.1 Agreement dated as of August 22, 1997 by and among IDEXX Laboratories, Inc., IDEXX Laboratories Limited, VetTest S.A., Industrial Innovation Management S.A., VetTest Marketing Services Limited, and Industrial Innovation Management Company, Inc. (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 16 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: November 14, 1997 /s/ Ralph K. Carlton ------------------------------------- Ralph K. Carlton, Senior Vice President, Finance and Administration and Chief Financial Officer (Principal Financial Officer) Page 17 EX-2.1 2 AGREEMENT DATED 8/22/97 1 Exhibit 2.1 AGREEMENT This Agreement is made as of the day of August 22, 1997 by and among IDEXX Laboratories, Inc., a Delaware corporation ("IDEXX"), IDEXX Laboratories Limited, an English limited liability company ("Sub"), VetTest S.A., a Swiss societe anonyme ("VetTest"), Industrial Innovation Management S.A., a Swiss societe anonyme ("IIM S.A."), VetTest Marketing Services Limited, an English limited liability company ("VMSL"), and Industrial Innovation Management Company, Inc., a Delaware corporation ("IIM Inc."). VetTest, IIM S.A., VMSL and IIM Inc. are sometimes referred to collectively herein as the "Sellers," and IDEXX and Sub are sometimes collectively referred to herein as the "Buyers." WHEREAS, the Buyers and the Sellers are parties to an Asset Purchase Agreement dated as of January 15, 1992 (the "Asset Purchase Agreement"); WHEREAS, Section 1.8 of the Asset Purchase Agreement provides for the issuance by IDEXX of shares of its common stock, $.10 par value ("Common Stock") as supplemental purchase price to the Sellers; and WHEREAS, the Buyers and the Sellers have been negotiating potential alternatives to the issuance of shares of Common Stock under said section 1.8 but have determined to proceed as provided in Section 1.8 with such modifications as are provided herein; NOW, THEREFORE, for valuable consideration, receipt and sufficiency of which is hereby acknowledged, the Buyers and the Sellers hereby agree as follows: 1. 5,894 shares of Common Stock shall be issued to the Sellers as Supplemental Shares under Section 1.8 of the Asset Purchase Agreement. 2. The Supplemental Shares shall be issued in the name and delivered to the address described on Exhibit A hereto. 3. Upon issuance and delivery of the Supplemental Shares as provided in paragraph 2 above, and without any further action by the Sellers, the Sellers shall have irrevocably waived any and all claims, liabilities, losses, costs and damages relating to the issuance of the Supplemental Shares or the payment of the Supplemental Purchase Price, including, without limitation, any claims, liabilities, losses, costs or damages relating to any actual or alleged delay by the Buyers in issuing the Supplemental Shares or any decline in the market value of the Common Stock occurring at any time. 4. Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Asset Purchase Agreement. 5. Except as modified or amended hereby, the Asset Purchase Agreement shall remain in full force and effect. 2 IDEXX LABORATORIES, INC. By: /s/ David E. Shaw ------------------------------------- Name: David E. Shaw Title: Chairman and Chief Executive Officer IDEXX LABORATORIES LIMITED By: /s/ David E. Shaw ------------------------------------- Name: David E. Shaw Title: Director VETTEST S. A. By: /s/ William M. Trust, Jr. ------------------------------------- William M. Trust, Jr. Attorney-in-fact INDUSTRIAL INNOVATION MANAGEMENT S.A. By: /s/ William M. Trust, Jr. ------------------------------------- William M. Trust, Jr. Attorney-in-fact INDUSTRIAL INNOVATION MANAGEMENT COMPANY, INC. By: /s/ William M. Trust, Jr. ------------------------------------- William M. Trust, Jr. President and Chief Executive Officer 3 VETTEST MARKETING SERVICES LIMITED By: /s/ William M. Trust ------------------------------------- William M. Trust, Jr. Attorney-in-fact 4 EXHIBIT A Issue shares in the name of: Smith Barney Inc. For the Account of (FAO) Industrial Innovation Management Co., Inc. Deliverable to : William M. Trust, Jr. Industrial Innovation Management Co., Inc. 7 East Frederick Place Cedar Knolls, NJ 07927 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE IDEXX LABORATORIES, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BE REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000874716 IDEXX LABORATORIES, INC. 1,000 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 105,121 37,027 53,659 4,929 63,044 271,103 72,174 29,707 374,953 69,953 0 0 0 3,806 301,194 374,953 191,151 191,151 94,632 94,632 0 2,087 0 (26,402) (8,374) (18,028) 0 0 0 (18,028) (0.47) (0.47)
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