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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10--Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
/ / 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: 0-10961
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QUIDEL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2573850
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification
organization) No.)
10165 MCKELLAR COURT, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices)
(858) 552-1100
(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 / /
As of August 11, 2000, 24,728,957 shares of common stock were outstanding.
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QUIDEL CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
-----------
PART I--FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999.......................... 3
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2000 and 1999................................................................................. 4
Condensed Consolidated Statements of cash flows for the six months ended June 30, 2000 and 1999.......... 5
Notes to Condensed Consolidated Financial Statements..................................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 7
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk......................................... 11
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................................. 16
ITEM 4. Submission of Matters to a Vote of Security Holders................................................ 16
ITEM 6. Exhibits and Reports on Form 8-K................................................................... 16
Signature.................................................................................................. 17
2
QUIDEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 5,917 $ 4,672
Accounts receivable, net............................................................ 12,722 10,822
Inventories......................................................................... 8,673 8,327
Prepaid expenses and other.......................................................... 1,580 1,518
--------- ----------
Total current assets.............................................................. 28,892 25,339
Property and equipment, net........................................................... 21,158 21,207
Intangible assets, net................................................................ 10,198 11,096
Deferred tax assets................................................................... 8,256 9,083
Other assets.......................................................................... 1,355 1,315
--------- ----------
Total assets...................................................................... $ 69,859 $ 68,040
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 3,625 $ 3,560
Line of credit...................................................................... 1,508 3,769
Current portion of long-term debt and obligations under capital leases.............. 393 553
Other accrued liabilities........................................................... 5,408 4,974
--------- ----------
Total current liabilities......................................................... 10,934 12,856
Long-term debt and obligations under capital leases................................... 11,300 11,429
Stockholders' equity:
Common stock........................................................................ 25 24
Additional paid-in capital.......................................................... 119,889 117,386
Accumulated other comprehensive income (loss)....................................... 45 (81)
Accumulated deficit................................................................. (72,334) (73,574)
--------- ----------
Total stockholders' equity........................................................ 47,625 43,755
--------- ----------
Total liabilities and stockholders' equity...................................... $ 69,859 $ 68,040
========= ==========
See accompanying notes to unaudited condensed consolidated financial statements.
3
QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales............................................................. $ 16,964 $ 10,600 $ 39,032 $ 23,870
Cost of sales......................................................... 8,331 5,435 19,022 12,535
--------- --------- --------- ---------
Gross profit...................................................... 8,633 5,165 20,010 11,335
Operating Expenses
Sales and marketing................................................. 4,395 2,655 9,143 5,490
Research and development............................................ 1,638 1,584 3,771 3,510
General and administrative.......................................... 2,221 1,057 4,720 2,619
--------- --------- --------- ---------
Total operating expenses.......................................... 8,254 5,296 17,634 11,619
--------- --------- --------- ---------
Operating income (loss)............................................... 379 (131) 2,376 (284)
Other Income and Expense
Research contract and royalties and license fees.................... 325 972 639 1,980
Interest income (expense)........................................... (548) 97 (589) 265
Other expense, net.................................................. (8) (130) (358) (315)
--------- --------- --------- ---------
Total other income (expense).......................................... (231) 939 (308) 1,930
--------- --------- --------- ---------
Income before (provision) benefit for income taxes.................... 148 808 2,068 1,646
(Provision) Benefit for income taxes.................................. (59) (323) (827) 6,252
--------- --------- --------- ---------
Net earnings.......................................................... $ 89 $ 485 $ 1,241 $ 7,898
========= ========= ========= =========
Basic earnings per share.............................................. $ .00 $ .02 $ .05 $ .33
========= ========= ========= =========
Diluted earnings per share............................................ $ .00 $ .02 $ .05 $ .33
========= ========= ========= =========
Shares used in basic earnings per share calculation................... 24,638 23,822 24,518 23,814
========= ========= ========= =========
Shares used in diluted earnings per share calculation................. 26,636 23,856 26,517 23,836
========= ========= ========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
4
QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
--------- ---------
Net cash provided by operating activities.................................................... $ 3,476 $ 4,386
Investing activities
Additions to property and equipment........................................................ (2,101) (1,273)
Increase in intangible assets.............................................................. (170) (972)
Increase in other assets................................................................... (40) --
--------- ---------
Net cash used for investing activities................................................... (2,311) (2,245)
Financing activities
Net proceeds from issuance of common stock and warrants.................................... 2,504 72
Payment on line of credit.................................................................. (2,261) --
Payments on long term debt and obligations under capital leases............................ (289) (90)
--------- ---------
Net cash used for financing activities................................................... (46) (18)
--------- ---------
Effect of exchange rate fluctuations on cash................................................. 126 --
--------- ---------
Net increase in cash and cash equivalents.................................................... 1,245 2,123
Cash and cash equivalents at beginning of period............................................. 4,672 6,012
--------- ---------
Cash and cash equivalents at end of period................................................... $ 5,917 $ 8,135
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest................................................... $ 667 $ 171
Cash paid during the period for income taxes............................................... $ -- 246
========= =========
See accompanying notes to unaudited condensed consolidated financial statements.
5
QUIDEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
L. BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and, therefore, do not include all information and footnote
disclosures normally included in audited financial statements. The Company is
responsible for the unaudited financial statements included in this report.
These financial statements reflect all adjustments, consisting of only normal
recurring adjustments which, in the opinion of management, are necessary to
fairly present the consolidated financial position as of June 30, 2000, and the
consolidated results of operations and cash flows for the three and six months
ended June 30, 2000 and 1999. The results of operations for the six months ended
June 30, 2000 are not necessarily indicative of the results to be expected for
the year ended December 31, 2000. For more complete financial information, these
financial statements, and the notes thereto, should be read in conjunction with
the consolidated audited financial statements for the nine months ended
December 31, 1999, included in the Company's Form 10-K filed with the Securities
and Exchange Commission.
2. CHANGE IN FISCAL YEAR
During October 1999, the Company changed its fiscal year from a March 31
fiscal year-end to a December 31 fiscal year-end.
3. COMPREHENSIVE INCOME
The components of comprehensive income are as follows (in thousands):
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net earnings............................................... $ 89 $ 485 $ 1,241 $ 7,898
Foreign currency translation adjustment.................... (40) -- 126 --
--------- --------- --------- ---------
Comprehensive income....................................... $ 49 $ 485 $ 1,367 $ 7,898
========= ========= ========= =========
4. COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share was computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share reflects the potential dilution that could occur if the income were
divided by the weighted-average number of common shares and potentially dilutive
common shares from outstanding stock options and warrants. Potential dilutive
common shares were calculated using the treasury stock method and represent
incremental shares issuable upon exercise of the Company's outstanding options
and warrants.
6
5. INVENTORIES
Inventories are recorded at the lower of cost (first-in, first-out) or
market and consist of the following (IN THOUSANDS):
JUNE 30, DECEMBER 31,
2000 1999
----------- -------------
(UNAUDITED)
Raw materials..................................................... $ 3,936 $ 3,835
Work-in-process................................................... 2,437 2,692
Finished goods.................................................... 2,300 1,800
--------- ---------
$ 8,673 $ 8,327
========= =========
6. STOCKHOLDERS' EQUITY
During the six months ended June 30, 2000, the Company issued 351,728 shares
of common stock from the exercise of common stock options and 250,621 shares
from the exercise of common stock warrants, resulting in proceeds to the Company
of $2,504,169.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes the SEC's view in applying accounting
principles generally accepted in the United States to revenue recognition in
financial statements. SAB No. 101 must be implemented no later than the fourth
fiscal quarter for all registrants with fiscal years beginning after
December 15, 1999 and before March 15, 2000. Management has reviewed the impact
of SAB No. 101 on the Company's financial statements and expects to record a
cumulative effect pre-tax charge of approximately $900,000 when the Company
adopts the provisions of SAB No. 101 in the fourth quarter of 2000.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this section, all references to "we," "our," and "us" refer to Quidel.
FUTURE UNCERTAINTIES
This discussion contains forward-looking statements within the meaning of
the federal securities laws that involve material risks and uncertainties. Many
possible events or factors could affect our future financial results and
performance, such that our actual results and performance may differ materially.
As such, no forward-looking statement can be guaranteed. Differences in
operating results may arise as a result of a number of factors, including,
without limitation, seasonality, adverse changes in the competitive and economic
conditions in domestic and international markets, actions of our major
distributors, manufacturing and production delays or difficulties, adverse
actions or delays in product reviews by the United States Food and Drug
Administration ("FDA"), and the lower acceptance of our new products than
forecast. Forward-looking statements typically are identified by the use of
terms such as "may", "will", "should", "might", "expect", "anticipate",
"estimate" and similar words, although some forward-looking statements are
expressed differently. The risks described in this report and in other reports
and registration statements filed with the Securities and Exchange Commission
from time to time should be carefully considered. The following should be read
in conjunction with the unaudited condensed consolidated financial statements
and notes thereto included elsewhere in this Form 10-Q.
7
7. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
OVERVIEW
We discover, develop, manufacture and market rapid diagnostic products for
point-of-care detection. These products provide simple, accurate and
cost-effective diagnoses for acute and chronic medical conditions. Products are
sold worldwide to professionals for use in the physician's office and clinical
laboratories, and to consumers through organizations that provide private label,
store brand products.
CHANGE IN FISCAL YEAR-END
During October 1999, we changed our fiscal year from a March 31 fiscal
year-end to a December 31 fiscal year-end.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
For the three months ended June 30, 2000, income before taxes was $148,000,
or $.01 per diluted share, compared to income before taxes of $808,000, or $.03
per diluted share for the three months ended June 30, 1999. The most significant
difference in our operations for the three months ended June 30, 2000 compared
to the three months ended June 30, 1999 was a 60% increase in net sales,
resulting from an increase in the demand for our core products, as well as the
new products recently launched or acquired. However, this increase in sales was
offset by increased expenses related to new product introductions and business
development initiatives, reduced research contract revenue and license fees, as
well as increased interest costs. For the quarter ended June 30, 2000, sales of
new and acquired products was approximately $2.8 million. In addition, gross
margins increased by approximately 2% in the current quarter as compared to the
same period last year.
For the three months ended June 30, 2000, net income was $89,000, or $.00
per diluted share, compared to a net income of $485,000, or $.02 per diluted
share for the three months ended June 30, 1999. No income taxes were due or
payable for the quarter ended June 30, 2000.
NET SALES TRENDS BY MAJOR SALES CHANNELS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
(IN THOUSANDS) 2000 1999 2000 1999
--------- --------- --------- ---------
Domestic sales
Professional sales............................................. $ 11,474 $ 6,116 $ 25,368 $ 14,111
OTC, OEM and Clinical lab sales................................ 2,699 2,111 6,633 5,009
--------- --------- --------- ---------
Total domestic sales......................................... 14,173 8,227 32,001 19,120
Percent of total sales....................................... 84% 78% 82% 80%
--------- --------- --------- ---------
International sales
Export sales................................................... 1,424 1,576 4,198 3,141
European subsidiary sales...................................... 1,367 797 2,833 1,609
--------- --------- --------- ---------
Total international sales.................................... 2,791 2,373 7,031 4,750
Percent of total sales....................................... 16% 22% 18% 20%
--------- --------- --------- ---------
Total net sales.............................................. $ 16,964 $ 10,600 $ 39,032 $ 23,870
========= ========= ========= =========
U.S. professional sales continue to account for the majority of the sales
growth as sales in our core product areas of pregnancy, Strep A and H. pylori
continue to increase. International sales increased
8
7. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
18% over the prior year period due primarily to the acquisition of both Metra
Biosystems Inc., and its European subsidiaries, and Dade Behring's urine test
strip business.
COST OF SALES AND GROSS PROFIT
THREE MONTHS ENDED JUNE 30,
------------------------------------------
PERCENT PERCENT
OF NET OF NET
(IN THOUSANDS) 2000 SALES 1999 SALES
--------- --------- --------- ---------
Net sales............................................................. $ 16,964 100.0% $ 10,600 100.0%
Direct costs--material, labor and other variable cost................. 5,137 30.3% 3,236 30.5%
Royalty expense--patent licenses...................................... 843 5.0% 529 5.0%
--------- ---------
Total direct cost................................................... 5,980 35.3% 3,765 35.5%
Direct margin--contribution per sales dollar.......................... 10,984 64.7% 6,835 64.5%
Manufacturing overhead cost........................................... 2,351 13.8% 1,670 15.7%
--------- ---------
Total cost of sales................................................. 8,331 49.1% 5,435 51.3%
--------- ---------
Gross profit.......................................................... $ 8,633 50.9% $ 5,165 48.7%
========= =========
SIX MONTHS ENDED JUNE 30,
------------------------------------------
PERCENT PERCENT
OF NET OF NET
(IN THOUSANDS) 2000 SALES 1999 SALES
--------- --------- --------- ---------
Net sales............................................................. $ 39,032 100.0% $ 23,870 100.0%
Direct costs--material, labor and other variable cost................. 12,053 30.9% 7,967 33.4%
Royalty expense--patent licenses...................................... 2,095 5.4% 1,171 4.9%
--------- ---------
Total direct cost................................................... 14,148 36.3% 9,138 38.3%
Direct margin--contribution per sales dollar.......................... 24,884 63.7% 14,732 61.7%
Manufacturing overhead cost........................................... 4,874 12.4% 3,397 14.2%
--------- ---------
Total cost of sales................................................. 19,022 48.7% 12,535 52.5%
--------- ---------
Gross profit.......................................................... $ 20,010 51.3% $ 11,335 47.5%
========= =========
Gross profit as a percentage of sales increased approximately 4% over the
prior year six month period due to increased manufacturing efficiencies
experienced by moving to a 24 hour/7 day operating schedule, and from increased
sales of our higher margin products, such as diagnostic tests for influenza A
and B, bone markers, and urinalysis. We are in the process of seeking to improve
our procedures for the procurement of raw materials in order to reduce overall
product costs. In addition, we have reviewed our credit and rebate policy to
identify potential increases in product sale profitability.
9
7. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
OPERATING EXPENSES
THREE MONTHS ENDED JUNE 30,
------------------------------------------
PERCENT PERCENT
OF NET OF NET
(IN THOUSANDS) 2000 SALES 1999 SALES
--------- --------- --------- ---------
Sales and marketing
Domestic............................................................ $ 3,528 20.8% $ 2,163 20.4%
International....................................................... 867 5.1% 492 4.6%
--------- ---------
Total sales and marketing......................................... 4,395 25.9% 2,655 25.0%
Research and development
Quidel research projects............................................ 1,534 9.0% 909 8.6%
Contract research--direct costs..................................... 104 0.6% 675 6.4%
--------- ---------
Total research and development.................................... 1,638 9.6% 1,584 15.0%
General and administrative............................................ 2,221 13.1% 1,057 10.0%
--------- ---------
Total operating expenses........................................ $ 8,254 48.6% $ 5,296 50.0%
========= =========
Total operating expenses, excluding contract research direct
costs......................................................... $ 8,150 48.0% $ 4,621 43.6%
========= =========
SIX MONTHS ENDED JUNE 30,
------------------------------------------
PERCENT PERCENT
OF NET OF NET
(IN THOUSANDS) 2000 SALES 1999 SALES
--------- --------- --------- ---------
Sales and marketing
Domestic............................................................ $ 7,303 18.7% $ 4,180 17.5%
International....................................................... 1,840 4.7% 1,310 5.5%
--------- ---------
Total sales and marketing......................................... 9,143 23.4% 5,490 23.0%
Research and development
Quidel research projects............................................ 3,479 8.9% 1,801 7.5%
Contract research--direct costs..................................... 292 0.8% 1,709 7.2%
--------- ---------
Total research and development.................................... 3,771 9.7% 3,510 14.7%
General and administrative............................................ 4,720 12.1% 2,619 11.0%
--------- ---------
Total operating expenses........................................ $ 17,634 45.2% $ 11,619 48.7%
========= =========
Total operating expenses, excluding contract research direct
costs......................................................... $ 17,342 44.4% $ 9,910 41.5%
========= =========
Operating expenses, excluding cost of goods, increased to $8.3 million for
the three months ended June 30, 2000 from $5.3 million in the prior year. Sales
and marketing expenses increased 66% to $4.4 million, compared to $2.7 million
in the prior year, primarily due to investing in sales and marketing
infrastructure, European sales offices acquired from Metra Biosystems, as well
as costs associated with the domestic launch of the urinalysis product line.
First quarter internally funded research and development expense increased
69% to $1.5 million, compared to $909,000 in the same quarter a year ago,
primarily due to continuing improvements to existing core products.
10
7. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
General and administrative expenses grew 101% to $2.2 million, as compared
to $1.1 million for the prior year, reflecting increased business development
initiatives.
CHANGES IN FISCAL CONDITION
At June 30, 2000, we had cash and cash equivalents of $5.9 million compared
to $4.7 million at December 31, 1999. Cash and cash equivalents increased in
2000, despite a reduction of short-term debt by $2.2 million, primarily due to
increased sales and improved profit margins. The increase in trade accounts
receivable of approximately $1.9 million resulted from an increase in sales
activity during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
The principal requirements for cash are for working capital, capital
equipment, and repayment of our outstanding line of credit. Cash requirements
are expected to be funded by the results of operations. We also intend to
continue to search for acquisition and technology licensing candidates. As such,
we may need to incur additional debt, or sell additional equity, to successfully
complete these acquisitions. Cash requirements fluctuate as a result of numerous
factors, such as progress in research and development projects, competition,
technological developments and the time and expenditures required to obtain
governmental approval of our products. Based on the current cash position and
the current assessment of future operating results, we believe that the existing
sources of liquidity should be adequate to meet operating needs for the next
twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We did not invest in market risk sensitive instruments in during the first
six months of 2000. We had and have no exposure to market risk with regard to
changes in interest rates. We have not used derivative financial instruments for
any purposes, including hedging foreign currency risk or mitigating interest
rate risk, although this policy is currently under review.
OPERATING RESULTS MAY FLUCTUATE, WHICH WOULD HAVE A NEGATIVE EFFECT ON THE PRICE
OF OUR COMMON STOCK
We have only been profitable for a limited time and we may not continue our
revenue growth or profitability. Operating results may continue to fluctuate, in
a given quarter or annual period, from prior periods as a result of a number of
factors, many of which are outside of our control, including:
- seasonal fluctuations in our sales of strep throat and influenza tests
which are generally highest in fall and winter;
- changes in the level of competition;
- changes in the economic conditions in both our domestic and international
markets;
- delays in shipments of our products to customers or from our suppliers;
- manufacturing difficulties and fluctuations in our manufacturing output,
including those arising from constraints in our manufacturing capacity;
- actions of our major distributors;
- adverse product reviews or delays in product reviews by regulatory
agencies;
- the timing of significant orders;
11
- changes in the mix of products we sell; and
- costs, timing and the level of acceptance of new products.
Fluctuations for any reason that decrease sales or profitability, including
those listed, could cause our growth or operating results to fall below the
expectations of investors and securities analysts, and our stock price to
decline.
OUR PRODUCTS AND MARKETS REQUIRE CONSIDERABLE RESOURCES TO DEVELOP, WHICH
RESOURCES MUST BE RECOUPED IN ADDITIONAL SALES
The development, manufacture and sale of diagnostic products require a
significant investment of resources. Our increased investment in sales and
marketing activities, manufacturing scale-up and new product development is
continuing to increase our operating expenses, and our operating results would
be adversely affected if our sales and gross profits do not correspondingly
increase, or if our product development efforts are unsuccessful or delayed.
Development of new markets also requires a substantial investment of
resources and, if adequate resources, including funds, are not available, we may
be required to delay or scale back market developments.
DELAYS IN PRODUCT MANUFACTURING COULD REQUIRE CONSIDERABLE RESOURCES AND HARM
CUSTOMER RELATIONSHIPS
If we experience significant demand for our products, we may require
additional capital resources to meet such demands. If we are unable to develop
necessary manufacturing capabilities, our competitive position and financial
condition could be adversely affected. Failure to increase production volumes,
if required, in a cost-effective manner, or lower than anticipated yields or
production constraints encountered as a result of changes in the manufacturing
process, could result in shipment delays as well as increased manufacturing
costs, which could have a material adverse effect on our business, financial
condition and results of operations.
The majority of raw materials and purchased components used to manufacture
our products are readily available. However, certain of these materials are
obtained from a sole supplier or a limited group of suppliers. The reliance on
sole or limited suppliers and the failure to maintain long-term agreements with
other suppliers involves several risks, including the inability to obtain an
adequate supply of required raw materials and components and reduced control
over pricing, quality and timely delivery. Although we attempt to minimize our
supply risks by maintaining an inventory of raw materials and continuously
evaluating other sources, any interruption in supply could have a material
adverse effect on our business, financial condition and results of operations.
THE LOSS OF KEY DISTRIBUTORS OR AN UNSUCCESSFUL EFFORT TO DIRECTLY DISTRIBUTE
OUR PRODUCTS COULD SIGNIFICANTLY DISRUPT OUR BUSINESS
We rely primarily on a small number of key distributors to distribute our
products. The loss or termination of our relationship with any of these key
distributors could significantly disrupt our business unless suitable
alternatives can be found. Finding a suitable alternative may pose challenges in
the industry's competitive environment. Another suitable distributor, with whom
we can negotiate a new distribution or marketing agreement on satisfactory
terms, may not be found. We could expand our efforts to distribute and market
our products directly, but this would require an investment in additional sales
and marketing resources, including hiring additional field sales personnel,
which would significantly increase our future selling, general and
administrative expenses. In addition, our direct sales, marketing and
distribution efforts may not be successful.
12
WE MAY NOT ACHIEVE EXPECTED MARKET ACCEPTANCE OF OUR PRODUCTS AMONG PHYSICIANS
AND OTHER HEALTH CARE PROVIDERS
Significant competitors for our products are clinical reference laboratories
and hospital-based laboratories, which provide the majority of diagnostic tests
used by physicians and other health-care providers. Our estimates of future
sales depend on, among other matters, the capture of sales from these
laboratories, and if we do not capture sales as expected our operating results
may fall below expectations. We expect that these laboratories will compete
vigorously to maintain their dominance of the testing market. Moreover, even if
we can demonstrate that our products are more cost-effective or save time,
physicians and other health care providers may resist changing their established
source for such tests.
INTENSE COMPETITION IN THE DIAGNOSTIC MARKET POSES CHALLENGES TO OUR
PROFITABILITY
The diagnostic test market is highly competitive. We have a large number of
multinational and regional competitors making investments in competing
technologies. If our competitors' products are more effective or more
commercially attractive than ours, our business and financial results could be
adversely affected. Competition also negatively impacts our product prices and
profit margins.
A number of our competitors have a potential competitive advantage because
they have substantially greater financial, technical, research and other
resources, and larger, more established marketing, sales, distribution and
service organizations than ours. Moreover, some competitors offer broader
product lines and have greater name recognition than we do.
TO REMAIN COMPETITIVE WE MUST CONTINUE TO DEVELOP OR OBTAIN PROPRIETARY
TECHNOLOGY RIGHTS
Our operating results can be significantly affected by the phase out of
older products near the end of their product life cycles, as well as the success
of new product introduction. Our ability to compete successfully in the
diagnostic market depends on continued development and introduction of new
proprietary technology and the improvement of existing technology.
Our competitive position is heavily dependent on obtaining and protecting
our own proprietary technology or obtaining licenses from others. If we cannot
continue to obtain and protect such proprietary technology our competitive
position could be adversely affected. Moreover, our current and future licenses
may not be adequate for the operation of our business.
Our ability to obtain patents and licenses, and their benefits, are
uncertain. We have a number of issued patents and additional applications are
pending. However, our pending patent applications may not result in the issuance
of any patents, or if issued, the patents may not have priority over others'
applications or may not offer protection against competitors with similar
technology. Moreover, any patents issued to us may be challenged, invalidated or
circumvented in the future. Also, we may not be able to obtain licenses for
technology patented by others or on commercially reasonable terms. A failure to
obtain necessary licenses could prevent us from commercializing some of our
products under development.
WE MAY BE INVOLVED IN INTELLECTUAL PROPERTY INFRINGEMENT DISPUTES WHICH ARE
COSTLY AND COULD LIMIT OUR ABILITY TO USE SOME TECHNOLOGIES IN THE FUTURE
There are a large number of patents and patent applications in our product
areas, and we believe that there may be significant litigation in our industry
regarding patent and other intellectual property rights. Our involvement in
litigation to determine rights in proprietary technology could adversely affect
our business and financial results because:
- it consumes a substantial portion of managerial and financial resources;
13
- its outcome is inherently uncertain and a court may find the third-party
claims valid and that we have no successful defense to such claims;
- an adverse outcome could subject us to significant liability;
- failure to obtain a necessary license upon an adverse outcome could
prevent us from selling our current products or other products we may
develop; and
- protection of our rights may not be available under the law or may be
inadequate.
THE UNCERTAINTY AND COST OF REGULATORY APPROVAL FOR OUR PRODUCTS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATIONS
The testing, manufacture and sale of our products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. Our estimates of future performance
depend on, among other matters, our estimates as to when and at what cost we
will receive regulatory approval for new products. However, complying with laws
and regulations of these regulatory agencies can be a lengthy, expensive and
uncertain process making the timing and costs of approvals difficult to predict.
Our operating results may be adversely affected by unexpected actions of
regulatory agencies, including delays in the receipt of or failure to receive
approvals or clearances, the loss of previously received approvals or
clearances, and the placement of limits on the use of the products.
We are also subject to numerous laws relating to such matters as safe
working conditions, manufacturing practices, environmental protection, fire
hazard control and disposal of hazardous or potentially hazardous substances. It
is also impossible to reliably predict the full nature and impact of future
legislation or regulatory developments relating to our industry. To the extent
the costs and procedures associated with meeting new requirements are
substantial, our business and results of operations could be adversely affected.
UNCERTAINTY RELATING TO THIRD-PARTY REIMBURSEMENT AND POTENTIAL COST CONSTRAINTS
In the United States, health care providers that purchase diagnostic
products, such as hospitals and physicians, generally rely on third-party
payers, principally private health insurance plans, federal Medicare and state
Medicaid, to reimburse all or part of the cost of the procedure. We believe that
the overall escalating cost of medical products and services has led to and will
continue to lead to increased pressures on the health care industry, both
foreign and domestic, to reduce the cost of products and services, including our
products. Given the efforts to control and reduce health care costs in the
United States in recent years, there can be no assurance that currently
available levels of reimbursement will continue to be available in the future
for our existing products or products under development. We could be adversely
affected by changes in reimbursement policies of governmental or private health
care payers, particularly to the extent any such changes affect reimbursement
for procedures in which our products are used. Third-party reimbursement and
coverage may not be available or adequate in either U.S. or foreign markets,
current reimbursement amounts may be decreased in the future and future
legislation, regulation or reimbursement policies of third-party payers may
adversely affect the demand for our products or our ability to sell our products
on a profitable basis.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH STRATEGY OUR BUSINESS AND RESULTS OF
OPERATIONS MAY BE ADVERSELY IMPACTED
We anticipate increased growth in the number of employees, the scope of
operating and financial systems and the geographic area of our operations as new
products are developed and commercialized. This growth may divert management's
attention from other aspects of our business, and will place a strain on
existing management, and operational, financial and management information
systems. To
14
manage this growth, we must continue to implement and improve our operational
and financial systems and to train, motivate, retain and manage our employees.
Furthermore, we may expand into markets in which we have less experience or
incur higher costs. Should we encounter difficulties in managing these tasks,
our growth strategy may suffer and anticipated sales could be adversely
affected.
LOSS OF KEY PERSONNEL OR OUR INABILITY TO HIRE QUALIFIED PERSONNEL COULD
NEGATIVELY IMPACT OUR BUSINESS
Our future success depends in part on our ability to retain our key
technical, sales, marketing and executive personnel, and our ability to identify
and hire additional qualified personnel. Competition for such personnel is
intense and if we are not able to retain existing key personnel, or identify and
hire additional qualified personnel, our business could be negatively impacted.
WE ARE EXPOSED TO RISKS OF SIGNIFICANT PRODUCT LIABILITY, WHICH IF NOT COVERED
BY INSURANCE COULD HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY
There is a risk of product liability claims against us arising from our
testing, manufacturing and marketing of medical diagnostic devices, both those
currently being marketed, as well as those under development. Potential product
liability claims may exceed the amount of our insurance coverage or may be
excluded from coverage under the terms of our policy. Furthermore, if we are
held liable, our existing insurance may not be renewed at the same cost and
level of coverage as presently in effect, or may not be renewed at all. If we
are held liable for a claim against which we are not indemnified or for damages
exceeding the limits of our insurance coverage, that claim could have a material
adverse effect on our business, financial condition and result of operations.
WE MAY EXPERIENCE DIFFICULTIES INTEGRATING ACQUIRED COMPANIES OR TECHNOLOGIES
AFTER AN ACQUISITION
We may experience difficulties integrating our operations with those of
companies or technologies we may acquire, and there can be no assurance that we
will realize the benefits and cost savings that we believe a given acquisition
will provide or that such benefits may be achieved within the time frame we
anticipate. The potential acquisitions may distract management from day-to-day
business and may require other substantial resources. We may incur restructuring
and integration costs from combining other operations or technologies with ours.
These costs may be substantial and may include costs for employee severance,
relocation and disposition of excess assets and other acquisition related costs.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We received a letter dated April 24, 1992 from the United States
Environmental Protection Agency (the "EPA") notifying us that we are a
potentially responsible party for cleanup costs at a federal Superfund site, the
Marco of Iota Drum Site (the "Marco Site"), near Iota, Louisiana. Documents
gathered in response to such letter indicate that we sent a small amount of
hazardous waste to facilities in Illinois. It is possible that subsequently,
such waste could have been shipped to the Marco Site. The EPA letter indicates
that a similar notice regarding the Marco Site was sent by the EPA to over 500
other parties. At this time, we do not know how much of our waste may have
reached the Marco Site, the total volume of waste at the Marco Site or the
likely site remediation costs. There is, as in the case of most environmental
litigation, the theoretical possibility of joint and several liability being
imposed upon us for damages that may be awarded.
We are involved in litigation matters from time to time in the ordinary
course of business. Management believes that any and all such actions, in the
aggregate, will not have a material adverse effect on us. We maintain insurance,
including coverage for product liability claims, in amounts which management
believes appropriate given the nature of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on May 24, 2000. The
stockholders re-elected our entire Board of Directors. The individuals elected
and the shares cast with respect to each individual were as follows:
Elected as director:
FOR AGAINST
------------ ---------
Richard C.E. Morgan................................................... 22,599,106 65,115
Andre de Bruin........................................................ 22,598,606 65,615
John D. Diekman....................................................... 22,597,442 66,779
George W. Dunbar, Jr.................................................. 22,597,606 66,615
Thomas A. Glaze....................................................... 22,595,942 68,279
Margaret G. McGlynn................................................... 22,598,806 65,415
Mary Lake Polan....................................................... 22,599,306 64,915
Faye Wattleton........................................................ 22,596,940 67,281
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER EXHIBIT
- ----------- ------------------------------------------------------------------------------------
Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3.1
3.1 to the Registrant's Current Report on Form 8-K dated February 26, 1991.)
Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to the
3.2 Registrant's Current Report on Form 8-K dated June 16, 1995.)
Registrant's 1983 Employee Stock Purchase Plan, as amended. Incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
10.1* February 26, 1991.)
10.2 Form of Indemnification Agreement--Corporate Officer and/or Director.
Form of Warrant Agreement between Registrant and American Stock Transfer & Trust
Company. (Incorporated by reference to Exhibit 10.3 to the Registrant's Form 10-K
10.3 dated March 31, 1995.)
10.4*)
Registrant's
1990
Employee
Stock
Option
Plan.
(Incorporated
by
reference
to
Exhibit 10.3
to the
Registrant's
Quarterly
Report on
Form 10-Q
for the
quarter
ended
September 30,
1990.
Registrant's 1990 Director Option Plan. (Incorporated by reference to Exhibit 10.4
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
10.5* September 30, 1990.)
Registrant's Amended and Restated 1982 Incentive and Nonstatutory Stock Option
Plans, including Form of Option Agreement. (Incorporated by reference to
Exhibit 10.28 to the Registrant's Registration Statement No. 33-38324 on Form S-4
10.6* filed on December 20, 1990.)
Form of Registration Rights Agreement of the Registrant. (Incorporated by
17
EXHIBIT
NUMBER EXHIBIT
--------- ------------------------------------------------------------------------------------
reference to Appendix C to the final Joint Proxy Statement/Prospectus dated
January 4, 1991 included within Amendment No. 2 to the Registrant's Registration
10.7 Statement No. 33-38324 on Form S-4 filed on January 4, 1991.)
Assumption Agreement dated January 31, 1991. (Incorporated by reference to
Exhibit 10.52.1 to the Registrant's Current Report on Form 8-K dated February 26,
10.8 1991.)
Trademark License Agreement dated October 1, 1994 between the Registrant and Becton
Dickinson and Company regarding the Q-Test trademark. (Incorporated by reference to
10.9 Exhibit 10.15 to the Registrant's Form 10-K dated March 31, 1995.)
Stock Purchase Agreement dated January 5, 1995 between Registrant and Eli Lilly &
Company for the sale of all the outstanding capital stock of Pacific Biotech, Inc.
(Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K dated
10.10 January 5, 1995.)
Settlement Agreement effective April 1, 1997 between the Registrant and Becton
Dickinson and Company. (Incorporated by reference to Exhibit 10.18to the
10.11 Registrant's Form 10-K dated March 31, 1997)
Campbell License Agreement effective April 1, 1997 between the Registrant and Becton
Dickinson and Company. (Incorporated by reference to Exhibit 10.19 to the
10.12 Registrant's Form 10-K dated March 31, 1997)
Rosenstein License Agreement effective April 1, 1997 between the Registrant and
Becton Dickinson and Company. (Incorporated by reference to Exhibit 10.20 to the
10.13 Registrant's Form 10-K dated March 31, 1997)
Employment agreement dated June 9, 1998 between the Registrant and Andre de Bruin.
(Incorporated by reference to Exhibit 10.23 to the Registrant's Form 10-Q dated
10.14* June 30, 1998.)
Stock option agreement dated June 9, 1998 between the Registrant and Andre de Bruin.
(Incorporated by reference to Exhibit 10.24 to the Registrant's Form 10-Q dated
10.15 June 30, 1998.)
Employment agreement dated December 14, 1998 between the Registrant and Charles J.
Cashion. (Incorporated by reference to Exhibit 10.28 to the Registrants Form 10-Q
10.16* dated December 31, 1998.)
]Offer to Purchase for Cash all outstanding shares of common stock of Metra
Biosystems, Inc. by MBS Acquisition Corporation, a wholly-owned subsidiary of Quidel
Corporation at $1.78 net per share. (Incorporated by reference to Metra's
10.17 Schedule 14D-1 dated June 9, 1999.)
Business Loan Agreement, dated as of July 12, 1999, by and between Bank of America
National Trust and Savings Association and Quidel Corporation. (Incorporated by
10.18 reference to Exhibit 10.1 to the Registrant's Form 8-K dated July 12, 1999.)
Security Agreement, dated as of July 12, 1999, by and among Bank of America National
Trust and Savings Association, Quidel Corporation, MBS Acquisition Corporation, and
Pacific Biotech, Inc. (Incorporated by reference to Exhibit 10.2 to the Registrant's
10.19 Form 8-K dated July 12, 1999.)
Subsidiary Guaranty, dated as of July 12, 1999, by MBS Acquisition Corporation and
Pacific Biotech, Inc. (Incorporated by reference to Exhibit 10.3 to the Registrant's
10.20 Form 8-K dated July 12, 1999.)
Cash Collateral Agreement, dated as of July 12, 1999, by and between Bank of America
National Trust and Savings Association and Pacific Biotech, Inc.
18
EXHIBIT
NUMBER EXHIBIT
--------- ------------------------------------------------------------------------------------
(Incorporated by reference to Exhibit 10.4 to the Registrant's Form 8-K dated
10.21 July 12, 1999.)
Form of Asset Sale Agreement--Rapignost(R)Urine Test Strip Business. Incorporated by
10.22 reference to Exhibit 10.5 to the Registrant's Form 8-K dated December 7, 1999.)
Form of Purchase and Sale Agreement and Escrow Instructions. (Incorporated by
10.23 reference to Exhibit 10.6 to the Registrant's Form 8-K dated December 20, 1999.)
Form of Single Tenant Absolute Net Lease. (Incorporated by reference to
10.24 Exhibit 10.7 to the Registrant's Form 8-K dated December 20, 1999.)
27 Financial Data Schedule ------------------------* Indicates compensatory plan
(b) Reports on Form 8-K filed in the quarter ended June 30, 2000
None
19
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.
QUIDEL CORPORATION
Date: August 14, 2000 /s/ CHARLES J. CASHION
---------------------------------
Charles J. Cashion
Senior Vice President,
Corporate Operations,
Chief Financial Officer and
Secretary and authorized signatory
17