<PAGE> 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.
<PAGE> 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
<PAGE> 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
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE> 4
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
-------- ------- --------- --------
<S> <C> <C> <C> <C>
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
======== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE> 5
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1997 1996
---- ----
<S> <C> <C>
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
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE> 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):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
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
======= =======
</TABLE>
Page 6
<PAGE> 7
Long-term investments are investment securities with original
maturities of greater than one year and consist of the following (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Municipal bonds $11,305 $3,255
Foreign securities 455 --
U.S. Treasury note -- 4,000
------- ------
$11,760 $7,255
======= ======
</TABLE>
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):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Raw materials $10,513 $10,081
Work-in-process 9,761 6,605
Finished goods 42,770 31,716
------- -------
$63,044 $48,402
</TABLE>
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:
<TABLE>
<CAPTION>
Pro Forma
Net income (loss) -----------------------------------
per common and Basic earnings Diluted earnings
common equivalent (loss) per (loss) per
share share share
<S> <C> <C> <C>
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
</TABLE>
Page 7
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 3
VETTEST MARKETING SERVICES LIMITED
By: /s/ William M. Trust
-------------------------------------
William M. Trust, Jr.
Attorney-in-fact
<PAGE> 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
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<LEGEND>
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.
</LEGEND>
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<NAME> IDEXX LABORATORIES, INC.
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