10-Q: Quarterly report [Sections 13 or 15(d)]
Published on July 26, 1996
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1996
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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
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IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 01-0393723
(State of incorporation) (I.R.S. Employer Identification No.)
ONE IDEXX DRIVE, WESTBROOK, MAINE 04092
(Address of principal executive offices) (Zip Code)
(207) 856-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 24, 1996, 37,138,878 shares of the registrant's Common Stock, $.10
par value, were outstanding.
Page 1
IDEXX LABORATORIES, INC. AND SUBSIDIARIES
INDEX
Page
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
Consolidated Statements of Operations 4
Three and Six Months Ended
June 30, 1996 and June 30, 1995
Consolidated Statements of Cash Flows 5
Six Months Ended
June 30, 1996 and June 30, 1995
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial 10-11
Condition and Results of Operations
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 12-13
Item 4. Submission of Matters to a Vote of Security-Holders 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
Page 2
PART I -- FINANCIAL INFORMATION
Item 1. -- Financial Statements
--------------------
See accompanying notes to consolidated financial statements.
Page 3
See accompanying notes to consolidated financial statements.
Page 4
See accompanying notes to consolidated financial statements.
Page 5
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, 1995 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 1995 consolidated
financial statements to conform with the current years presentation.
c. The Company adopted Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115) effective January 1, 1994. 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.
Page 6
3. NET INCOME PER SHARE
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent 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.
4. 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 The Jewish Hospital
of St. Louis, 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 June 30, 1996 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 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.
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
(which have been consolidated for trial), the Company anticipates that the
Colilert product would encounter increased competition, which could
adversely affect sales of the Colilert product.
Page 7
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. Since discovery in this litigation is ongoing, 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, The Jewish Hospital of St. Louis (the "Hospital") brought
a suit against the Company which is currently pending 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. The primary relief sought by the
Hospital is an injunction against the Company which would prevent the
Company from selling canine heartworm diagnostic products which infringe
the '275 Patent, as well as treble damages for past infringement. While the
Company believes that it has meritorious defenses in this matter, since
discovery is ongoing, 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. 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 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 allege that the Company has breached promises and made
negligent misrepresentations, and has breached fiduciary and other duties.
The plaintiffs are seeking damages in excess of $50,000,000. The Company
purchased a 15% equity interest in Purisys in August 1994 for $616,000, and
the Company subsequently advanced additional amounts to Purisys to purchase
certain international distribution rights. In March 1995, the Company
ceased advancing funds to Purisys, which filed for protection under Chapter
11 of the Bankruptcy Code in July 1995. In May 1996, the court granted
IDEXX's motion to dismiss the plaintiffs' suit, however the plaintiffs have
requested the court to reconsider the dismissal and permit the plaintiffs
to amend their complaint. While the Company believes it has meritorious
defenses, since discovery has not yet commenced, 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.
5. ACQUISITIONS
The Company's consolidated results of operations include the results of
operations of three veterinary reference laboratory businesses recently
acquired by the Company for an aggregate purchase price of approximately
$2.6 million in cash and the assumption of certain liabilities. In
connection with these acquisitions, the Company entered into non-compete
agreements for a period up to five years with certain of the entities,
shareholders or former shareholders, and may become obligated to pay
additional compensation 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 the laboratories has been included in the Company's consolidated results
of operations of the Company 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:
Page 8
- On March 29, 1996, the Company acquired all of the capital stock
of VetLab, Inc., which operates two veterinary reference
laboratories in Texas.
- On April 2, 1996, the Company, through its wholly-owned U.K.
subsidiary, acquired substantially all of the assets and assumed
certain of the liabilities of Grange Laboratories Ltd. Grange
Laboratories' business, which includes three 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., which operates veterinary reference
laboratories in Colorado, Illinois and Oklahoma.
6. SUBSEQUENT EVENTS
On July 12, 1996, the Company acquired substantially all of the assets and
assumed certain of the liabilities of Consolidated Veterinary Diagnostics,
Inc. ("CVD") for approximately $17 million in cash and notes. In addition,
the Company may be required to make further payments to CVD of up to $3.0
million based on operating results for the year ended July 31, 1997. As a
result of the CVD acquisition, the Company is now operating CVD's
veterinary reference laboratories in Northern California, Oregon and
Nevada. In connection with the acquisition, the Company entered into
five-year non-compete agreements with CVD and the shareholders of CVD. The
Company will account for this acquisition under the purchase method of
accounting.
On July 18, 1996, the Company acquired all of the capital stock of Ubitech
Aktiebolag ("Ubitech") for approximately $400,000 in cash. Ubitech, located
in Uppsala, Sweden manufactures and distributes diagnostic kits for the
livestock industry. The Company will account for this acquisition under the
purchase method of accounting.
On July 17, 1996 the Company signed a definitive merger agreement to
acquire Idetek, Inc. ("Idetek") for IDEXX common stock valued at
approximately $20 million, less certain adjustments. Idetek, located in
Sunnyvale, California, manufactures and distributes diagnostic tests for
food, agricultural and environmental industries. The exact number of shares
of IDEXX stock to be issued will be determined at the closing. Completion
of this acquisition is subject to various conditions, including approval by
Idetek's shareholders. The Company intends to treat this merger as a
pooling-of-interests transaction.
page 9
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 second quarter of 1996 increased 42% to $65.9 million from
$46.5 million for the second quarter of 1995. Total revenue for the six months
ended June 30, 1996 increased 44% to $123.3 million from $85.7 million for the
first six months of 1995.
The increase in total revenue for the quarter ended June 30, 1996 compared to
the same period in 1995 was principally attributable to increased unit sales of
veterinary clinical chemistry and hematology consumables and instruments, test
kits for feline viruses, and sales of veterinary laboratory services resulting
from recent acquisitions of veterinary reference laboratories. The increase in
revenue for the six-month period ended June 30, 1996 as compared to the same
period in the prior year was attributable to increases in the products noted
above, canine test products, and the introduction of a quantitative thyroid
instrument. Other important contributors to revenue growth in the first half of
1996 compared to the same period in 1995 included an instrument system to test
cleaning effectiveness in food processing plants. Price increases in certain
veterinary clinical products also contributed to the increase in revenue.
International revenue increased 40% to $23.2 million in the second quarter of
1996, and 47% to $43.3 million for the six months ended June 30, 1996, compared
to $16.5 million and $29.5 million, respectively, for the prior year periods.
Increased revenue in Europe, which included revenues of Grange Laboratories
acquired in the current quarter, accounted for 34% and 52%, and increased
revenue in Japan accounted for 48% and 31%, of the increase in international
revenues for the three- and six-month periods ended June 30, 1996, respectively,
compared to the same periods in 1995. The remaining increase is primarily
attributable to increased revenues in Canada, Australia, and Asia. Revenue from
the Company's European subsidiaries, transacted in local currencies, increased
approximately 25% and 37% for the three- and six-month periods ended June 30,
1996, respectively, as compared to the same periods in 1995. In U.S. dollars,
the revenue increase was 18% to $14.8 million for the current three-month period
and 32% to $29.6 million for current six-month period.
Gross profit as a percentage of revenue was 57% for the three- and six-month
periods ended June 30, 1996 and 58% for the same periods in 1995. Higher selling
prices for certain veterinary clinical products were offset by product mix, as
revenue growth of lower margin consumables exceeded the revenue growth in higher
margin diagnostic kit products, and by the impact of lower margins generated by
the recently acquired veterinary reference laboratories.
Sales and marketing expenses were 24% and 26% of revenue for the three- and
six-month periods ended June 30, 1996, respectively, compared to 26% for the
same periods in 1995. The decrease as a percentage of revenue for the three
months ended June 30, 1996 in comparison to the same period in 1995 was
principally attributable to the current quarter sales growth in Japan and the
acquisition of veterinary reference laboratories, which have lower sales and
marketing expenses as a percentage of revenue. The increases of $4.1 million and
$9.4 million for the three- and six-month periods ended June 30, 1996,
respectively, over the same periods in the prior year were principally
attributable to additional personnel in sales functions worldwide.
Research and development expenses were 5% of revenue for the three- and
six-month periods ended June 30, 1996 compared to 6% for the same periods in
1995. In dollars, such expenses increased 14% for the three- and six-month
periods ended June 30, 1996, respectively, as compared to the same period in
1995, reflecting additional resources and related overhead to support product
development.
General and administrative expenses were 11% and 10% of revenue for the three-
and six-month periods ended June 30, 1996, respectively, compared to 9% and 10%,
respectively, for the same periods in the prior year. The increase as a
percentage of revenue for the three months ended June 30, 1996 in comparison to
the same period in 1995 is principally attributable to higher legal expenses,
acquisition costs and the acquisition of veterinary reference laboratories which
have higher general and administrative costs as a percent of revenue.
Page 10
Net interest income was $2.3 million and $4.6 million for the three- and
six-month periods ended June 30, 1996 as compared to $579,000 and $1,160,000 for
the same periods in 1995. The increase in interest income is due to higher
invested cash balances, due in large part to a public stock offering in
September 1995 that generated approximately $153.0 million in net proceeds.
The Company's effective tax rate was 41% for the three- and six-month periods
ended June 30, 1996 compared to 42% for the same periods in 1995. The decrease
in the effective tax rate is principally attributable to lower state income
taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had cash, cash equivalents, and short-term
investments of $187.4 million and $245.8 million of working capital.
The Company's consolidated results of operations include the results of
operations of three veterinary reference laboratory businesses recently acquired
by the Company for an aggregate purchase price of approximately $2.6 million in
cash and the assumption of certain liabilities. The Company has accounted for
these acquisitions under the purchase method of accounting. The results of
operations have been included in the Company's consolidated results of
operations since each of their dates of acquisition. The Company has not
presented pro forma financial information relating to any of these acquisitions
because of immateriality.
The Company believes that current cash and short-term investments, which include
net proceeds from the offering of the Company's Common Stock in 1995, and funds
expected to be generated from operations, will be sufficient to fund the
Company's operations for the foreseeable future.
Page 11
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.
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
(which have been consolidated for trial), 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. Since discovery in this litigation is ongoing, 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, The Jewish Hospital of St. Louis (the "Hospital") brought
a suit against the Company which is currently pending 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. The primary relief sought by the
Hospital is an injunction against the Company which would prevent the
Company from selling canine heartworm diagnostic products which infringe
the '275 Patent, as well as treble damages for past infringement. While the
Company believes that it has meritorious defenses in this matter, since
discovery is ongoing, 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. If the Company is precluded from selling canine
heartworm diagnostic products or required to pay damages or make additional
royalty or other payments with respect to such sales, the Company's
business and results of operations could be materially and adversely
affected.
Page 12
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 allege that the Company has breached promises and made
negligent misrepresentations, and has breached fiduciary and other duties.
The plaintiffs are seeking damages in excess of $50,000,000. The Company
purchased a 15% equity interest in Purisys in August 1994 for $616,000, and
the Company subsequently advanced additional amounts to Purisys to purchase
certain international distribution rights. In March 1995, the Company
ceased advancing funds to Purisys, which filed for protection under Chapter
11 of the Bankruptcy Code in July 1995. In May 1996, the court granted
IDEXX's motion to dismiss the plaintiffs' suit, however the plaintiffs have
requested the court to reconsider the dismissal and permit the plaintiffs
to amend their complaint. While the Company believes it has meritorious
defenses, since discovery has not yet commenced, 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.
Item 4 -- Submission of Matters to a Vote of Security-Holders
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Page 13
page 14
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: July 26, 1996
/s/ Merilee Raines
---------------------------------------
Merilee Raines, Vice President of Finance
(Principal Financial Officer and Principal
Accounting Officer)
Page 15