<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 MARCH 31, 1998
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-19271
-------
IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 01-0393723
(State of incorporation) (I.R.S. Employer Identification No.)
ONE IDEXX DRIVE, WESTBROOK, MAINE 04092
(Address of principal executive offices) (Zip Code)
(207) 856-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 1998, 38,453,688 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:
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Three Months Ended
March 31, 1998 and March 31, 1997 4
Consolidated Statements of Cash Flows
Three Months Ended
March 31, 1998 and March 31, 1997 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes certain forward-looking statements
about the business of IDEXX Laboratories, Inc. and its subsidiaries (the
"Company") including, without limitation, the belief that the Company's current
cash and short-term investments will be sufficient to fund its on-going
operations for the foreseeable future, and that the Company has meritorious
defenses in certain of its litigation matters. Such forward-looking statements
are subject to risk and uncertainties that could cause the Company's actual
results to vary materially from those indicated in such forward-looking
statements. These risks and uncertainties are discussed in more detail in the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 2 of Part I of this report.
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)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $108,854 $106,972
Short-term investments 28,722 35,502
Accounts receivable, less reserves of $5,079
and $5,082 in 1998 and 1997, respectively 51,657 47,341
Inventories 55,845 60,174
Deferred income taxes 15,396 15,396
Other current assets 4,722 8,832
-------- --------
Total current assets 265,196 274,217
LONG-TERM INVESTMENTS 20,089 11,134
PROPERTY AND EQUIPMENT, AT COST:
Land 1,193 1,193
Buildings and improvements 4,486 4,462
Leasehold improvements 16,754 16,596
Machinery and equipment 28,625 26,359
Office furniture and equipment 22,733 22,804
Construction-in-progress 969 1,390
-------- --------
74,760 72,804
Less - Accumulated depreciation and amortization 33,261 30,387
-------- --------
41,499 42,417
OTHER ASSETS, Net 48,738 49,280
-------- --------
$375,522 $377,048
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,963 $ 12,472
Accrued expenses 38,463 42,147
Notes payable 2,597 4,087
Deferred revenue 15,022 15,609
-------- --------
Total current liabilities 69,045 74,315
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Common stock, $0.10 par value
Authorized 60,000 shares
Issued and outstanding 38,403 shares in 1998
and 38,169 shares in 1997 3,840 3,817
Additional paid-in capital 257,707 257,275
Retained earnings 50,017 46,256
Cumulative translation adjustment (5,087) (4,615)
-------- --------
Total stockholders' equity 306,477 302,733
-------- --------
$375,522 $377,048
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Revenue $77,793 $60,534
Cost of revenue 38,852 30,097
------- -------
Gross Profit 38,941 30,437
Expenses:
Sales and marketing 15,839 17,099
General and administrative 13,536 10,135
Research and development 4,976 3,476
------- -------
Income (loss) from operations 4,590 (273)
Interest income, net 1,576 1,764
------- -------
Income before provision for
income taxes 6,166 1,491
Provision for income taxes 2,405 596
------- -------
Net income $ 3,761 $ 895
======= =======
Net income per common share: Basic $ 0.10 $ 0.02
======= =======
Net income per common share: Diluted $ 0.10 $ 0.02
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
March 31, March 31,
1998 1997
--------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 3,761 $ 895
Adjustments to reconcile net income to net cash
provided by (used in) operating activities, net of acquisitions:
Depreciation and amortization 4,572 3,046
Changes in assets and liabilities:
Accounts receivable (4,315) 5,942
Inventories 4,230 (11,519)
Other current assets 4,111 4,763
Accounts payable 490 (1,581)
Accrued expenses (3,595) (4,556)
Deferred revenue (587) 225
-------- --------
Net cash provided by (used in) operating activities 8,667 (2,785)
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment (1,938) (5,237)
Decrease (increase) in short-term investments 6,780 12,258
Increase in long-term investments (8,955) (11,790)
Decrease (increase) in other assets (80) 71
Acquisitions of business, net of cash acquired (986) (9,027)
-------- --------
Net cash used in investing activities (5,179) (13,725)
-------- --------
Cash Flows from Financing Activities:
Payment of notes payable (1,530) (509)
Proceeds from the exercise of stock options 396 1,122
-------- --------
Net cash provided by (used in) financing activities (1,134) 613
-------- --------
Net effect of Exchange Rate Changes 472 (2,085)
-------- --------
Net increase (decrease) in Cash and Cash Equivalents 1,882 (17,982)
Cash and Cash Equivalents, beginning of period 106,972 127,741
======== ========
Cash and Cash Equivalents, end of period $108,854 $109,759
======== ========
Supplemental Disclosure of Cash Flow Information:
Interest paid during the period $ 106 $ 35
======== ========
Income taxes paid during the period $ 3,368 $ 3,927
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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, 1997 Balance Sheet was derived from the audited Consolidated
Balance Sheets contained in the Company's latest stockholders' annual
report. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. These statements should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto which
are contained in the Company's latest stockholders' annual report. The
results for the interim periods presented are not necessarily indicative of
results to be expected for the full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies described in this and other notes to the
consolidated financial statements.
a. Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All material intercompany transactions and balances have
been eliminated in consolidation.
b. Certain reclassifications have been made in the 1997 consolidated
financial statements to conform with the current year's presentation.
c. The Company accounts for cash equivalents and marketable securities in
accordance with Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities".
Accordingly, the Company's cash equivalent and short-term investments
are classified as held-to-maturity and are recorded at amortized cost
which approximates market value.
Cash Equivalents and Short-term Investments: Cash equivalents are
short-term, highly liquid investments with original maturities of less
than three months. Short-term investments are investment securities
with original maturities of greater than three months but less than
one year and consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Government bonds $11,000 --
Municipal bonds 8,175 $ 6,140
U.S. Treasury bills 4,875 20,047
Commercial paper 2,216 2,016
Certificates of deposit -- 6,749
Other short-term investments 2,456 550
------- -------
$28,722 $35,502
======= =======
</TABLE>
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>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Municipal bonds $13,870 $10,165
Government bonds 5,000 --
Other long-term investments 1,219 969
------- -------
$20,089 $11,134
======= =======
</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>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials $ 8,379 $ 9,235
Work-in-process 7,830 8,421
Finished goods 39,636 42,518
------- -------
$55,845 $60,174
</TABLE>
e. In February 1997 the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128 "Earnings per
Share" (SFAS No. 128). SFAS No. 128 was adopted as of December 31,
1997 and all prior earnings per share amounts have been restated.
Basic earnings per common share is computed by dividing net income by
the weighted average number of shares of common stock outstanding
during the quarter. The computation of diluted earnings per common
share is similar to the computation of basic earnings per common share
except that the denominator is increased for the assumed exercise of
dilutive options using the treasury stock method unless the effect is
anti-dilutive.
The following is a reconciliation of shares outstanding for basic and
diluted earnings per share:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Shares outstanding for basic earnings per share:
Weighted average shares outstanding 38,253 37,932
====== ======
Shares outstanding for diluted earnings per share:
Weighted average shares outstanding 38,253 37,932
Diluted effect of options issued to employees 1,092 1,779
------ ------
39,345 39,711
====== ======
</TABLE>
3. NON-RECURRING OPERATING CHARGE
During 1997 the Company recorded a non-recurring operating charge of $34.5
million. The non-recurring operating charge included the write-downs and
write-offs of certain assets and accrual of costs related to a significant
workforce reduction. The charge consisted of the following (in thousands):
<TABLE>
<S> <C>
Write-off of in-process research and development $13,200
Legal settlement and related costs 8,000
Severance, benefits and related costs 9,000
Idle capacity and lease termination costs 2,700
Asset Impairment 1,600
-------
$34,500
=======
</TABLE>
As of March 31, 1998, $7.9 million was included in accrued expense relating
to the non-recurring operating charge.
7
<PAGE> 8
During 1997 The Company acquired two veterinary practice management
software companies (see Note 6). To assist in the allocation of purchase
price associated with these acquisitions, the Company obtained an
independent appraisal. That appraisal identified approximately $13.2
million as in-process research and development, which has been charged to
operations in accordance with FASB Interpretation No. 4 "Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase
Method."
In September 1997, the Company settled a patent infringement suit brought
by Barnes-Jewish Hospital ("BJH") regarding IDEXX's heartworm diagnostic
products. The total costs of the settlement, including certain legal fees,
were charged to the non-recurring operating charge. Under the settlement,
the Company agreed to pay BJH $5.5 million, a portion of which payment will
be creditable against earned royalties on certain products.
The Company has terminated the employment of a total of 228 employees. Of
this total, 79 employees are associated with the consolidation of the
veterinary practice management software business into the Eau Claire,
Wisconsin facility, 57 employees are associated with the consolidation of
sales, marketing and distribution operations in Europe, 33 employees are
associated with reductions in domestic sales and marketing operations, 18
employees are associated with reductions in sales and marketing operations
in the Pacific Rim region, 16 employees are associated with the closure of
the Sunnyvale, California research and development facility and 25
employees are associated with a reduction in positions in management and
financial operations. As of March 31, 1998, approximately 110 employees
have left the employment of the Company, and the Company expects that the
remainder will leave during the second and third quarters of 1998.
As discussed above, the Company is consolidating certain veterinary
practice management software operations into the Eau Claire, Wisconsin
facility and has closed the leased Sunnyvale, California research and
development facility. As a result of these consolidations, the Company has
leased facilities which have become excess until the end of their
respective lease terms. Additionally, the Company has determined that it
will not pursue certain immunoassay technology with respect to which it has
invested a total of $1.6 million in fixed assets and license fees.
4. COMPREHENSIVE INCOME
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 must be adopted for fiscal years beginning after
December 15, 1997 and all prior periods must be retroactively restated.
SFAS 130 also requires application of this statement as the beginning of
the Company's fiscal year. Other comprehensive income for the Company
consists of foreign currency translation adjustments resulting from the
translation of the financial statements of the Company's foreign
subsidiaries. Accordingly, below is a summary of comprehensive income in
accordance with this statement (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Net income $3,761 $ 895
Other comprehensive income,
net of tax
Foreign currency translation
adjustments (288) (1,251)
------ -------
Comprehensive income (loss) $3,473 $ (356)
====== =======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
From time to time the Company has received notices alleging that the
Company's products infringe third-party proprietary rights. In particular,
the Company has received notices claiming that certain of the Company's
immunoassay products infringe third-party patents. Except as noted below
with respect to the patent infringement suit filed by Synbiotics
Corporation, the Company is not aware of any pending
8
<PAGE> 9
litigation with respect to such claims. Patent litigation frequently is
complex and expensive, and the outcome of patent litigation can be
difficult to predict. There can be no assurance that the Company will
prevail in any infringement proceedings that have been or may be commenced
against the Company. A significant portion of the Company's revenue in the
three month period ended March 31, 1998 was attributable to products
incorporating certain immunoassay technologies and products relating to the
diagnosis of canine heartworm infection. If the Company were to be
precluded from selling such products or required to pay damages or make
additional royalty or other payments with respect to such sales, the
Company's business and results of operations could be materially and
adversely affected.
On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed
suit against the Company in the U.S. District Court for the District of
Connecticut. In its complaint, CDC Technologies alleges that the Company's
conduct in, and its relationships with its distributors in connection with,
the distribution of the Company's hematology products (i) violate federal
and state antitrust statutes, (ii) violate Connecticut statutes regarding
unfair trade practices, and (iii) constitute a civil conspiracy and
interfere with CDC Technologies' business relations. The relief sought by
CDC Technologies includes treble damages for antitrust violations as well
as compensatory and punitive damages, and an injunction to prevent the
Company from interfering with CDC Technologies' relations with
distributors. The Company has filed an answer denying the allegations in
CDC's complaint. In March 1998, the court granted the Company's motion for
summary judgment in the case, however CDC is appealing that ruling. The
Company is unable to assess the likelihood of an adverse result or estimate
the amount of any damages which the Company may be required to pay. Any
adverse outcome resulting in the payment of damages would adversely affect
the Company's results of operations.
On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit
against the Company in the U.S. District Court for the Southern District of
California for infringement of U.S. Patent No. 4,789,631 issued December 6,
1988 (the "`631 Patent"). The `631 Patent, which is owned by Synbiotics,
claims certain assays, methods and compositions for the diagnosis of canine
heartworm infection. The primary relief sought by Synbiotics is an
injunction against the Company which would prevent the Company from selling
canine heartworm diagnostic products which infringe the `631 Patent, as
well as treble damages for past infringement. This suit was not served on
the Company within the time period specified under applicable court rules
and was dismissed without prejudice in April 1998, however Synbiotics is
not precluded from filing a new suit in the future. While the Company
believes that it has meritorious defenses against claims of infringement of
the `631 Patent, the Company is unable to assess the likelihood of an
adverse result or estimate the amount of any damages the Company may be
required to pay. If the Company is precluded from selling canine heartworm
diagnostic products or required to pay damages or make additional royalty
or other payments with respect to such sales, the Company's business and
results of operations could be materially and adversely affected.
On January 9, 1998, a complaint was filed in the U.S. District Court for
the District of Maine captioned Robert A. Rose v. David E. Shaw, Erwin F.
Workman, Jr., E. Robert Kinney and IDEXX Laboratories, Inc. The plaintiff
purports to represent a class of purchasers of the common stock of the
Company from July 19, 1996 through March 24, 1997. The complaint claims
that the defendants violated Section 10(b) of the Securities Exchange Act
of 1934 and Securities and Exchange Commission Rule 10b-5 promulgated
pursuant thereto, by virtue of false or misleading statements made during
the class period. The complaint also claims that the individual defendants
are liable as "control persons" under Section 20(a) of that Act. In
addition, the complaint claims that the individual defendants sold some of
their own common stock of the Company, during the class period, at times
when the market price for the stock allegedly was inflated. While the
Company and other defendants deny the allegations and will defend this suit
vigorously, the Company is unable to assess the likelihood of an adverse
result or estimate the amount of damages which the Company may be required
to pay. Any adverse outcome resulting in the payment of damages would
adversely affect the Company's results of operations.
6. ACQUISITIONS
1997 ACQUISITIONS
The Company's consolidated results of operations include the results of
operations of a manufacturing company, a foreign distribution company, a
foreign veterinary reference laboratory, and two veterinary practice
management companies acquired in 1997. These businesses were acquired for
aggregate purchase prices equaling approximately $24.3 million in cash, the
issuance of notes payable for $2.1 million and the
9
<PAGE> 10
assumption of certain liabilities. In 1998, the Company has paid a total of
approximately $750,000 in additional purchase price based on the results of
operations of certain acquired businesses described above. The additional
payments were recorded as additional goodwill and are being amortized over
the remaining life of the respective goodwill.
In connection with the acquisition of the businesses described above, the
Company entered into non-compete agreements for periods of up to three
years with certain of the former stockholders, and may become obligated to
pay additional amounts to management of these companies based on achieving
certain operating results. The Company has accounted for these acquisitions
under the purchase method of accounting. The results of operations of each
of these businesses has been included in the Company's consolidated results
of operations since each of their dates of acquisition. The purchase prices
have been allocated to the net assets acquired on a preliminary basis and
are subject to revision. Approximately $13.2 million, identified through
independent valuation, of the purchase price related to the acquisition of
the software companies has been charged to operations as "in process
research and development" in accordance with Financial Accounting Standards
Board Interpretation No. 4 "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method." The Company
has not presented pro forma financial information relating to any of these
acquisitions because of immateriality. These acquisitions are as follows:
o On January 30, 1997, the Company acquired all of the capital
stock of Acumedia Manufacturers, Inc., located in Baltimore,
Maryland, which specializes in the manufacture of dehydrated
cultured media.
o On March 13, 1997, the Company acquired all of the capital stock
of National Information Systems Corporation, located in Eau
Claire, Wisconsin, which supplies practice management computer
systems to veterinarians under the trade name Advanced Veterinary
Systems.
o On July 1, 1997, the Company, through its wholly-owned
subsidiary, IDEXX Laboratories (Taiwan), Inc., acquired certain
assets and business rights of Wintek Bio-Science Inc., located in
Taipei, Taiwan, which distributed diagnostic products to
veterinarians and hospitals in Taiwan.
o 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.
o On December 1, 1997, the Company, through its wholly-owned
subsidiary IDEXX Laboratories Pty. Ltd., acquired certain assets
and assumed certain liabilities of Lording & Friend Pty. Ltd. and
Clinpath Pty. Ltd. (operating under the name Central Veterinary
Diagnostic Laboratory), which operated a veterinary reference
laboratory in Australia.
1998 ACQUISITION
The Company's consolidated results of operations include the results of
operations of Agri-West Laboratory, a food testing laboratory located in
Texas, which was acquired on March 1, 1998. The Company acquired certain
assets and assumed certain liabilities of Agri-West Laboratory through its
wholly-owned subsidiary IDEXX Food Safety Net Services, Inc. for
approximately $250,000 in cash.
In connection with the acquisition of this business, the Company entered
into non-compete agreements for five years with the former owners, and may
become obligated to pay additional amounts to management of the business
based on achieving certain operating results. The Company has accounted for
this acquisition under the purchase method of accounting. The results of
operations of this business have been included in the Company's
consolidated results of operations since the date of acquisition. The
Company has not presented pro forma financial information relating to this
acquisition because of immateriality.
10
<PAGE> 11
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 first quarter of 1998 increased 29% to $77.8 million from
$60.5 million for the first quarter of 1997. The increase in total revenue was
principally attributable to increases in sales of veterinary test kits and
consumables, the inclusion of sales of veterinary practice management software
systems resulting from the acquisitions of Advanced Veterinary Systems and
Professionals' Software, Inc. in March and July 1997, respectively, and
increased sales of veterinary reference laboratory services. The higher sales of
veterinary test kits and consumables were due in part to a 1997 program to
reduce U.S. distributor inventories of these products. These increases were
offset in part by lower sales of veterinary instruments, principally due to
lower unit sales and, to a lesser extent, lower average sales prices.
International revenue decreased 1% to $21.3 million in the first quarter of 1998
compared to $21.5 million in the first quarter of 1997. Revenues increased by 5%
to $5.0 million in the Pacific Rim region (Japan, Asia, Australia) for the three
months ended March 31, 1998 compared to the same period in 1997. Revenues
decreased 3% to $12.9 million in Europe and decreased 3% to $3.3 million in
Canada and South America for the same period in 1998 versus 1997. Revenue from
the Company's Pacific Rim and European subsidiaries, transacted in local
currencies, increased 11% and 2%, respectively, for the three month period ended
March 31, 1998 as compared to the same period in 1997. The increase in revenues
in the Pacific Rim region is primarily due to increased sales of feline test
kits and consumables, veterinary laboratory services and water test kits. These
increases were offset in part by lower sales of food test products, canine
veterinary test kits and veterinary instruments.
Decreased revenue in Europe was principally due to lower unit sales of
veterinary instruments and, to a lesser degree, veterinary test kits. These
decreases were offset in part by higher sales of veterinary consumables, food
and environmental test products and veterinary laboratory services.
Gross profit as a percentage of revenue was 50% for the three month periods
ended March 31, 1998 and March 31, 1997. Higher sales of higher gross margin
veterinary test kits and consumables were offset by lower average unit prices of
veterinary instruments sold and, to a lesser extent, higher sales of lower gross
margin veterinary practice management software products and veterinary
laboratory services. In the accompanying financial statements, the Company has
reclassified certain 1997 courier costs in its veterinary laboratory business
from sales and marketing into cost of sales to conform to 1998 presentation.
Sales and marketing expenses were 20% of revenue for the three month period
ended March 31, 1998 compared to 28% in the first quarter of 1997. The decrease
as a percentage of revenue and the dollar decrease of $1.3 million were
principally attributable to a decrease in salary and related expenses resulting
from workforce reductions.
Research and development expenses were 6% of revenue for the three month periods
ended March 31, 1998 and March 31, 1997. The dollar increase of $1.5 million
reflected additional resources and related overhead to support product
development and the addition of software development expenses associated with
the acquisition of the veterinary practice management software businesses
discussed above.
General and administrative expenses were 17% of revenue for the three month
periods ended March 31, 1998 and March 31, 1997. The dollar increase of $3.4
million in the first quarter of 1998 compared to the same period in 1997 is
principally attributable to additional operating expenses and amortization of
goodwill and other intangibles associated with the acquisition of the veterinary
practice management software and other businesses, an increase in management
incentive compensation and an increase in consulting expenses associated with
business restructuring.
Net interest income was $1.6 million for the three month period ended March 31,
1998 compared to $1.8 million for the same period in 1997. The decrease in
interest income over the prior year is due to the use of previously invested
cash in completing acquisitions since the first quarter of 1997.
11
<PAGE> 12
The Company's effective tax rate was 39% for the three month period ended March
31, 1998 compared to 40% for the same period in 1997. The decrease in the
effective tax rate was principally attributable to income generated in states
with lower state income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had cash, cash equivalents, and short-term
investments of $137.6 million and $196.2 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 five
acquisitions in 1997 and one acquisition to date in 1998, and may make
additional acquisitions. Identifying and pursuing acquisition opportunities,
integrating acquired products and businesses, and managing growth requires a
significant amount of management time and skill. There can be no assurance that
the Company will be effective in identifying and effecting attractive
acquisitions, assimilating acquisitions or managing future growth.
The Company has experienced and may experience in the future significant
fluctuations in its quarterly operating results. Factors such as the
introduction and market acceptance of new products and services, the demand for
existing products and services, the mix of products and services sold and the
mix of domestic versus international revenue could contribute to this quarterly
variability. The Company operates with relatively little backlog and has few
long-term customer contracts and substantially all of its product and service
revenue in each quarter results from orders received in that quarter, which
makes the Company's financial performance more susceptible to an unexpected
downturn in business and more unpredictable. In addition, the Company's expense
levels are based in part on expectations of future revenue levels, and a
shortfall in expected revenue could therefore result in a disproportionate
decrease in the Company's net income.
The markets in which the Company competes are subject to rapid and substantial
technological change. The Company encounters, and expects to continue to
encounter, intense competition in the sale of its current and future products
and services. Many of the Company's competitors and potential competitors have
substantially greater capital, manufacturing, marketing, and research and
development resources than the Company.
The Company's future success will depend in part on its ability to continue to
develop new products and services both for its existing 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
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.
12
<PAGE> 13
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.
In the three months ended March 31, 1998, international revenue was $21.3
million, or 27% of total revenue, and the Company expects that its international
business will continue to account for a significant portion of its total
revenue. Foreign regulatory bodies often establish product standards different
from those in the United States, and designing products in compliance with such
foreign standards may be difficult or expensive. Other risks associated with
foreign operations include possible disruptions in transportation of the
Company's products, the differing product and service needs of foreign
customers, difficulties in building and managing foreign operations,
fluctuations in the value of foreign currencies, import/export duties and
quotas, and unexpected regulatory, economic or political changes in foreign
markets.
The development, 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 Company is conducting an evaluation of its information technology systems
and its products for Year 2000 compliance. The Company's worldwide accounting
system is Year 2000 compliant, and Year 2000 issues related to its other
information technology systems will be addressed through planned upgrades prior
to 2000. A substantial majority of the Company's products, including its
instrument-based diagnostic systems and a majority of its installed base of
veterinary practice management software systems, already are Year 2000
compliant. The Company expects that by the end of 1998 all practice management
systems offered by the Company will be Year 2000 compliant. The costs of
upgrading the Company's information technology systems and its practice
management systems are not expected to be material to the Company's financial
condition or results of operations. The Company has commenced an evaluation of
the Year 2000 compliance of its vendors, but at this time cannot predict the
extent to which its vendors will have Year 2000 problems and the impact of any
such problems on the Company.
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.
13
<PAGE> 14
PART II -- OTHER INFORMATION
Item 1. -- LEGAL PROCEEDINGS
On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed
suit against the Company in the U.S. District Court for the District of
Connecticut. In its complaint, CDC Technologies alleges that the Company's
conduct in, and its relationships with its distributors in connection with,
the distribution of the Company's hematology products (i) violate federal
and state antitrust statutes, (ii) violate Connecticut statutes regarding
unfair trade practices, and (iii) constitute a civil conspiracy and
interfere with CDC Technologies' business relations. The relief sought by
CDC Technologies includes treble damages for antitrust violations, as well
as compensatory and punitive damages, and an injunction to prevent the
Company from interfering with CDC Technologies' relations with
distributors. The Company has filed an answer denying the allegations in
CDC Technologies' complaint. In March 1998, the court granted the Company's
motion for summary judgment in the case, however CDC is appealing that
ruling. The Company is unable to assess the likelihood of an adverse result
or estimate the amount of any damages which the Company may be required to
pay. Any adverse outcome resulting in the payment of damages would
adversely affect the Company's results of operations.
On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit
against the Company in the U.S. District Court for the Southern District of
California for infringement of U.S. Patent No. 4,789,631 issued December 6,
1988 (the "`631 Patent"). The `631 Patent, which is owned by Synbiotics,
claims certain assays, methods and compositions for the diagnosis of canine
heartworm infection. The primary relief sought by Synbiotics is an
injunction against the Company which would prevent the Company from selling
canine heartworm diagnostic products which infringe the `631 Patent, as
well as treble damages for past infringement. This suit was not served on
the Company within the time period specified under applicable court rules
and was dismissed without prejudice in April 1998, however Synbiotics is
not precluded from filing a new suit in the future. While the Company
believes that it has meritorious defenses against claims of infringement of
the `631 Patent, the Company is unable to assess the likelihood of an
adverse result or estimate the amount of any damages the Company may be
required to pay. If the Company is precluded from selling canine heartworm
diagnostic products or required to pay damages or make additional royalty
or other payments with respect to such sales, the Company's business and
results of operations could be materially and adversely affected.
On January 9, 1998, a complaint was filed in the U.S. District Court for
the District of Maine captioned Robert A. Rose v. David E. Shaw, Erwin F.
Workman, Jr., E. Robert Kinney and IDEXX Laboratories, Inc. The plaintiff
purports to represent a class of purchasers of the common stock of the
Company from July 19, 1996 through March 24, 1997. The complaint claims
that the defendants violated Section 10(b) of the Securities Exchange Act
of 1934 and Securities and Exchange Commission Rule 10b-5 promulgated
pursuant thereto, by virtue of false or misleading statements made during
the class period. The complaint also claims that the individual defendants
are liable as "control persons" under Section 20(a) of that Act. In
addition, the complaint claims that the individual defendants sold some of
their own common stock of the Company, during the class period, at times
when the market price for the stock allegedly was inflated. While the
Company and other defendants deny the allegations and will defend this suit
vigorously, the Company is unable to assess the likelihood of an adverse
result or estimate the amount of damages which the Company may be required
to pay. Any adverse outcome resulting in the payment of damages would
adversely affect the Company's results of operations.
14
<PAGE> 15
Item 6. -- EXHIBITS AND REPORTS ON FORM 8-K
Page
----
(a) Exhibits
27. Financial Data Schedule for the Quarterly Report on Form
10-Q for the three-month period ended March 31, 1998. 17
(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.
15
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEXX LABORATORIES, INC.
Date: May , 1998
/s/ Ralph K. Carlton
-----------------------------------------
Ralph K. Carlton, Senior Vice President,
Finance and Administration and
Chief Financial Officer (Principal
Financial Officer)
16
<TABLE> <S> <C>
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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 THREE
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
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