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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 SEPTEMBER 30, 2000
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: 0-10961
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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 organization) Identification 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 October 27, 2000, 24,835,003 shares of common stock were outstanding.
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QUIDEL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
SEPTEMBER 30, 2000
INDEX
PAGE
--------
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30,
2000 and December 31, 1999.............................. 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and
1999.................................................... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999........... 5
Notes to Unaudited Condensed Consolidated Financial
Statements.............................................. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk............................................... 13
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings................................... 17
ITEM 4. Submission of Matters to a Vote of Security
Holders................................................... 18
ITEM 6. Exhibits and Reports on Form 8-K.................... 18
Signatures.................................................. 20
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUIDEL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,902 $ 4,672
Accounts receivable, net.................................. 7,833 10,822
Inventories............................................... 9,138 8,327
Prepaid expenses and other................................ 1,321 1,518
------- -------
Total current assets.................................... 22,194 25,339
Property and equipment, net................................. 20,766 21,207
Intangible assets, net...................................... 9,199 11,096
Deferred tax assets......................................... 9,083 9,083
Other assets................................................ 1,499 1,315
------- -------
Total assets............................................ $62,741 $68,040
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,492 $ 3,560
Line of credit............................................ -- 3,769
Current portion of long-term debt and obligations under
capital leases.......................................... 1,222 553
Other accrued liabilities................................. 4,579 4,974
------- -------
Total current liabilities............................... 9,293 12,856
Long-term debt and obligations under capital leases......... 10,376 11,429
Stockholders' equity:
Common stock.............................................. 25 24
Additional paid-in capital................................ 120,274 117,386
Accumulated other comprehensive loss...................... (354) (81)
Accumulated deficit....................................... (76,873) (73,574)
------- -------
Total stockholders' equity.............................. 43,072 43,755
------- -------
Total liabilities and stockholders' equity............ $62,741 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net sales............................................... $10,465 $11,584 $49,497 $35,454
Cost of sales........................................... 6,954 6,374 25,976 18,909
------- ------- ------- -------
Gross profit........................................ 3,511 5,210 23,521 16,545
Operating expenses:
Research and development.............................. 2,583 2,250 5,872 5,514
Sales and marketing................................... 4,009 3,685 13,152 9,175
General and administrative............................ 1,807 1,612 5,944 4,231
Acquired in process research and development.......... -- 820 -- 820
Amortization of intangibles........................... 433 228 1,498 474
------- ------- ------- -------
Total operating expenses............................ 8,832 8,595 26,466 20,214
------- ------- ------- -------
Loss from operations.................................... (5,321) (3,385) (2,945) (3,669)
Other expense (income), net:
Research contract, royalty and license income......... (201) (619) (840) (2,599)
Interest expense...................................... 301 107 899 422
Interest income....................................... (58) (132) (69) (397)
Other................................................. 4 -- 364 --
------- ------- ------- -------
Total other expense (income), net....................... 46 (644) 354 (2,574)
------- ------- ------- -------
Loss before income taxes................................ (5,367) (2,741) (3,299) (1,095)
Income tax benefit...................................... (827) (323) -- (6,575)
------- ------- ------- -------
Net earnings (loss)..................................... $(4,540) $(2,418) $(3,299) $ 5,480
======= ======= ======= =======
Net earnings (loss) per share--basic and diluted........ $ (0.18) $ (0.10) $ (0.13) $ 0.23
======= ======= ======= =======
Weighted shares used in basic per share calculation..... 24,775 23,840 24,613 23,823
======= ======= ======= =======
Weighted shares used in diluted per share calculation... 24,775 23,840 24,613 23,959
======= ======= ======= =======
See accompanying notes to unaudited condensed consolidated financial statements.
4
QUIDEL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net cash provided by operating activities................. $ 2,965 $ 2,171
INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (2,593) (2,823)
Payment for purchase of Metra, net of cash acquired....... -- (5,233)
Other..................................................... 396 (288)
-------- --------
Net cash used for investing activities.................. (2,197) (8,344)
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and warrants... 2,888 140
Line of credit, net....................................... (3,769) 7,500
Payments on obligations under capital leases.............. (384) (303)
-------- --------
Net cash provided by (used for) financing activities.... (1,265) 7,337
Effect of exchange rate fluctuations on cash and cash
equivalents............................................... (273) (44)
-------- --------
Net increase (decrease) in cash and cash equivalents........ (770) 1,120
Cash and cash equivalents, beginning of period.............. 4,672 6,012
-------- --------
Cash and cash equivalents, end of period.................... $ 3,902 $ 7,132
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ 946 $ 274
======== ========
Cash paid during the period for income taxes.............. $ -- $ 315
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
5
QUIDEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE L. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Quidel Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included.
Operating results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 1999 included
in the Company's 1999 Annual Report on Form 10-K.
Reclassifications--Certain prior period amounts have been reclassified to
conform with the current period presentation.
NOTE 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.
NOTE 3. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows (in thousands,
unaudited):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net earnings (loss)....................... $(4,540) $(2,418) $(3,299) $5,480
Foreign currency translation adjustment... (399) (44) (273) (44)
------- ------- ------- ------
Comprehensive income (loss)............... $(4,939) $(2,462) $(3,572) $5,436
======= ======= ======= ======
NOTE 4. COMPUTATION OF EARNINGS PER SHARE
Basic earnings (loss) per share was computed by dividing net earnings (loss)
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. Potentially dilutive shares have not been
included for the three month periods ended September 30, 2000 and 1999, or the
nine months ended September 30, 2000 as their inclusion would be antidilutive.
6
QUIDEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INVENTORIES
Inventories are recorded at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
Raw materials....................................... $3,875 $3,835
Work-in-process..................................... 2,767 2,692
Finished goods...................................... 2,496 1,800
------ ------
$9,138 $8,327
====== ======
NOTE 6. STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2000, 486,650 shares of common
stock were issued due to the exercise of common stock options, 250,621 shares
from the exercise of common stock warrants, and 67,279 shares relating to the
employee stock purchase plan, resulting in proceeds to the Company of
$2,887,633.
NOTE 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.
In April 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation Number ("FIN") 44, "Accounting for Certain Transactions Involving
Stock Compensation: an Interpretation of FASB Opinion No. 25." FIN 44 affects
awards and modifications made after December 15, 1998. Management believes that
their accounting policies comply with the applicable provisions of FIN 44.
In July 2000, Emerging Issues Task Force ("EITF") issued EITF No. 00-14,
"Accounting for Certain Sales Incentives." EITF No. 00-14 addresses the
recognition, measurement, and income statement classification for sales
incentives offered voluntarily by a vendor without charge to customers that can
be used in, or that are exercisable by a customer as a result of, a single
exchange transaction. Sales incentives within the scope of EITF No. 00-14
include offers that can be used by a customer to receive a reduction in the
price of a product or service at the point of sale. EITF No. 00-14 also
addresses vendor offers that entitle a customer to receive a reduction in the
price of a product or service by submitting a form or claim for a refund or
rebate of a specified amount of the purchase price charged to the customer at
the point of sale. EITF No. 00-14 also covers offers by a vendor for a free
product or service when the customer purchases another specified item if the
vendor will deliver that free product or service to the customer at the point of
sale of the specified item. EITF No. 00-14 also addresses sales incentives
offered by manufacturers to customers of retailers or other distributors.
7
QUIDEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Management believes that their accounting policies comply with the applicable
provisions of EITF No. 00-14.
NOTE 8. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment. Sales to customers outside
the United States (primarily Europe) totaled 22% and 21% of net sales for the
nine months ended September 30, 2000 and 1999, respectively. As of September 30,
2000 and December 31, 1999, balances due from foreign customers were $4.1
million and $4.3 million, respectively.
The Company had sales to individual customers in excess of 10% of net sales,
as follows:
NINE MONTHS
ENDED
SEPTEMBER 30
-------------------
2000 1999
-------- --------
Customer:
A................................................ 15% --
B................................................ 11% --
As of September 30, 2000 and December 31, 1999, accounts receivable from
individual customers with balances due in excess of 10% of total accounts
receivable totaled $1.2 million and $2.9 million, respectively.
For the nine months ended September 30, 2000, the Company recorded revenue
from domestic and foreign customers. The following presents net sales for the
nine months ended September 30, 2000 and 1999 and long-lived assets as of
September 30, 2000 and December 31, 1999 by geographic territory:
NET SALES
-------------------
NINE MONTHS
LONG-LIVED ASSETS ENDED
---------------------------- SEPTEMBER 30,
SEPTEMBER 30, DECEMBER 31, -------------------
2000 1999 2000 1999
------------- ------------ -------- --------
United States Operations:
Domestic........................ $40,224 $42,469 $38,840 $28,022
Foreign......................... -- -- 5,771 4,219
Foreign Operations................ 323 232 4,886 3,213
------- ------- ------- -------
Total............................. $40,547 $42,701 $49,497 $35,454
======= ======= ======= =======
NOTE 9. SUBSEQUENT EVENT
On October 30, 2000, the Company entered into a definitive agreement to
acquire Litmus Concepts, Inc. ("Litmus"), a privately held in-vitro diagnostics
company focused on the development and manufacture of diagnostic products for
the women's health market. The Company will issue approximately
3,250,000 shares of Company common stock to Litmus shareholders to acquire
Litmus. The aggregate number of shares of Company common stock issued as
consideration may be adjusted downward if the average closing price of Company
common stock for the 30 consecutive day period
8
QUIDEL CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. SUBSEQUENT EVENT (CONTINUED)
ending on the business day preceding the closing date of the acquisition is
greater than $6.41 per share, so as not to exceed a total purchase price of
approximately $20,832,500. If no adjustment is necessary, the purchase price
will be approximately $17,500,000, which is based on a value of $5.375 per share
of Company common stock. In addition, the Company entered into an operating
agreement and related working capital promissory note arrangement with Litmus,
which will be in effect between the execution date of the definitive agreement
and the date of closing. As part of the promissory note and during the term of
the operating agreement, the Company may make periodic advances to Litmus to
support Litmus' working capital needs not to exceed $500,000 in the aggregate.
As of November 13, 2000, the Company has advanced Litmus $187,500. Also, in
conjunction with the aforementioned transaction, the Company has agreed to pay
$1 million to one of the preferred shareholders of Litmus, for the rights to
co-exclusively license Litmus products within the United States and Canada.
Assuming certain conditions are met, it is anticipated that the acquisition will
be completed in the fourth quarter of 2000. The transaction will be accounted
for as a purchase. Accordingly, the Company will allocate the purchase price to
the net assets acquired, including acquired in-process research and development,
which will be charged to operations.
9
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 SEC 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.
RECENT EVENT
On October 30, 2000, we entered into a definitive agreement to acquire
Litmus, a privately held in-vitro diagnostics company focused on the development
and manufacture of diagnostic products for the women's health market. We will
issue approximately 3,250,000 shares of our common stock to Litmus shareholders
to acquire Litmus. The aggregate number of shares of our common stock issued as
consideration may be adjusted downward if the average closing price of our
common stock for the 30 consecutive day period ending on the business day
preceding the closing date of the acquisition is greater than $6.41 per share,
so as not to exceed a total purchase price of approximately $20,832,500. If no
adjustment is necessary, the purchase price will be approximately $17,500,000,
which is based on a value of $5.375 per share of our common stock. In addition,
we entered into an operating agreement and related working capital promissory
note arrangement with Litmus, which will be in effect between the execution date
of the definitive agreement and the date of closing. As part of the promissory
note and during the term of the operating agreement, we may make periodic
advances to Litmus to support Litmus' working capital needs not to exceed
$500,000 in the aggregate. As of November 13, 2000, we have advanced Litmus
$187,500. Also, in conjunction with the aforementioned transaction, we have
agreed to pay $1 million to one of the preferred shareholders of Litmus, for the
rights to co-exclusively license Litmus products within the United States and
Canada. Assuming certain conditions are met, it is anticipated that the
acquisition will be completed in the fourth quarter of 2000. The transaction
will be accounted for as a purchase. Accordingly, we will allocate a purchase
price to the net assets acquired, including acquired in-process research and
development, which will be charged to operations.
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.
10
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
NET SALES
Net sales decreased 10% to $10.5 million for the third quarter of 2000 from
$11.6 million for the third quarter of 1999 and increased 40% to $49.5 million
for the nine months ended September 30, 2000 from $35.5 million for the nine
months ended September 30, 1999. The decrease for the third quarter of 2000 as
compared to the third quarter of 1999 was primarily due to a reduction of
distributor orders after satisfying a substantial manufacturing backlog in the
second quarter of 2000. The increase for the nine months ended September 30,
2000 was primarily due to an increase in demand for the Company's core products,
new products recently launched, and products acquired through acquisition.
GROSS PROFIT
Gross profit decreased to $3.5 million for the third quarter of 2000 from
$5.2 million for the third quarter of 1999 and increased to $23.5 million for
the nine months ended September 30, 2000 from $16.5 million for the nine months
ended September 30, 1999. Gross profit as a percentage of net sales ("gross
margin") decreased to 34% for the third quarter of 2000 from 45% for the third
quarter of 1999, and increased to 48% for the nine months ended September 30,
2000 from 47% for the nine months ended September 30, 1999. The changes for the
third quarter of 2000 as compared to the third quarter of 1999 were primarily
due to higher unit costs resulting from lower production volumes and
underutilization of manufacturing capacity, and an inventory write down of $0.3
million in the third quarter of 2000. The changes for the nine months ended
September 30, 2000 as compared to the nine months ended September 30, 1999 were
primarily due to to an increase in demand for our core products and new products
recently launched or acquired , partially offset by higher unit costs resulting
from lower production volumes and underutilization of manufacturing capacity,
and an inventory write down of $0.3 million in the third quarter of 2000.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased to $2.6 million for the third
quarter of 2000 from $2.3 million for the third quarter of 1999 and to $5.9
million for the nine months ended September 30, 2000 from $5.5 million for the
nine months ended September 30, 1999. Research and development expense as a
percentage of net sales, increased to 25% for the third quarter of 2000 from 19%
for the third quarter of 1999 and decreased to 12% for the nine months ended
September 30, 2000 from 16% for the nine months ended September 30, 1999. The
dollar increases are primarily attributable to certain contract costs, including
an estimated charge for costs to be incurred in excess of amounts expected to be
realized, related to the development of two diagnostic tests to detect herpes
simplex virus. We anticipate that we will continue to devote a significant
amount of financial resources to research and development for the foreseeable
future.
SALES AND MARKETING EXPENSE
Sales and marketing expense increased to $4.0 million for the third quarter
of 2000 from $3.7 million for the third quarter of 1999 and to $13.2 million for
the nine months ended September 30, 2000 from $9.2 million for the nine months
ended September 30, 1999. Sales and marketing expense as a percentage of net
sales increased to 38% for the third quarter of 2000 from 32% for the third
quarter of 1999 and to 27% for the nine months ended September 30, 2000 from 26%
for the nine
11
months ended September 30, 1999. These increases were primarily due to increased
investment in sales and marketing infrastructure, costs associated with the
domestic launch of the urinalysis product line and the contract sales force
employed to assist with the launch of the influenza products in the fourth
quarter of 1999 and first and second quarters of 2000.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased to $1.8 million for the third
quarter of 2000 from $1.6 million for the third quarter of 1999 and to $5.9
million for the nine months ended September 30, 2000 from $4.2 million for the
nine months ended September 30, 1999. General and administrative expense as a
percentage of net sales increased to 17% for the third quarter of 2000 from 14%
for the third quarter of 1999. For the nine months ended September 30, 2000 and
September 30, 1999, general and administrative expense as a percentage of net
sales was 12%. These increases were primarily due to increases in
infrastructure, including business development and information technology.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased to $0.4 million for the third quarter
of 2000 from $0.2 million for the third quarter of 1999 and to $1.5 million for
the nine months ended September 30, 2000 from $0.5 million for the nine months
ended September 30, 1999. These increases were due to an increase in intangible
assets related to the acquisitions of Metra and the Dade Behring urine test
strip business in 1999.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
In connection with the Company's acquisition of Metra in 1999, the Company
acquired research and development projects that had not reached technical
feasibility and had no probable alternative future uses. The amount allocated to
purchased in-process research and development for the acquisition of Metra was
based on an independent third party valuation, and was expensed as of the date
of acquisition. Purchased in-process research and development expense related to
the Company's acquisition of Metra was $0.8 million for 1999.
RESEARCH CONTRACT, ROYALTY AND LICENSE REVENUE
Research contract, royalty and license revenue decreased to $0.2 million for
the third quarter of 2000 from $0.6 million for the third quarter of 1999 and to
$0.8 million for the nine months ended September 30, 2000 from $2.6 million for
the nine months ended September 30, 1999. The decreases were principally related
to revenue declines in 2000, compared to those recorded in 1999 due to the
completion of a multi-year rapid diagnostic test development program for
influenza A and B.
INTEREST EXPENSE
Interest expense for the third quarters of 2000 and 1999 and the nine months
ended September 30, 2000 and 1999 relates primarily to interest incurred on the
line of credit and obligations under capital leases.
INCOME TAXES
Income tax benefit was $0.8 million for the third quarter of 2000 and $0.3
million for the third quarter of 1999. There was no income tax benefit for the
nine months ended September 30, 2000 and the income tax benefit was $6.6 million
for the nine months ended September 30, 1999. The tax benefit in 1999 was
associated with our assessment of the likelihood of its ability to realize its
net tax operating loss carryforwards. No income taxes were due or payable for
the third quarter ended September 30, 2000.
12
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through cash provided by operating
activities, and debt and capital lease financing. At September 30, 2000, we had
cash and cash equivalents of approximately $3.9 million compared to $4.7 million
at December 31, 1999.
The decrease in cash and cash equivalents for the nine months ended
September 30, 2000 is primarily attributable to cash generated from operating
activities of $3.0 million and net proceeds of $2.9 from the issuance of common
stock and warrants, offset by $2.6 million for the acquisition of property and
equipment and the repayment of our line of credit of $3.8 million.
The increase in cash and cash equivalents for the nine months ended
September 30, 1999 is primarily due to cash generated from operating activities
of $2.2 million and net borrowings from our line of credit of $7.5 million,
offset by $2.8 million for the acquisition of property and equipment and $5.2
million used for the acquisition of Metra.
In connection with the definitive agreement to acquire Litmus, we have
advanced $187,500 as of November 13, 2000 under the existing working capital
promissory note and operating agreement. We expect to advance an additional
$300,000 through the transaction closing date. Additionally, as part of the
definitive agreement to acquire Litmus, we will pay $1 million to one of the
preferred shareholders of Litmus for the rights to co-exclusively license Litmus
products within the United States and Canada.
We believe that our available cash, cash generated from operations and our
ability to borrow funds from our existing credit arrangements will be adequate
to fund our operations for the foreseeable future, and for at least the next 12
months. While operating activities may provide cash in certain periods, we may
require additional sources of financing. We may also from time to time consider
additional acquisitions of complementary businesses, products, technologies and
licenses, which may require additional financing. Additional sources of funding
could include additional debt and/or equity financings. There can be no
assurance that we will be able to obtain alternative sources of financing on
favorable terms, if at all, at such time or times as we may require such
capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We did not invest in market risk sensitive instruments during the first nine
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.
13
RISK FACTORS
You should consider carefully the following risks in your evaluation of us.
The risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties may also adversely impact and impair
our business. If any of the following risks actually occurs, our business,
operating results or financial conditions would likely suffer.
OUR OPERATING RESULTS MAY FLUCTUATE, WHICH COULD HAVE A NEGATIVE EFFECT ON THE
PRICE OF OUR COMMON STOCK
Fluctuations in our operating results, for any reason that decrease sales or
profitability, could cause our growth or operating results to fall below the
expectations of investors and securities analysts, and this could cause our
stock price to decline. We have only been profitable for a limited time and 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 our domestic and international
markets;
- delays in shipments of our products to customers or from 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;
- changes in the mix of products we sell; and
- costs, timing and the level of acceptance of new products.
OUR PRODUCTS AND MARKETS REQUIRE CONSIDERABLE RESOURCES TO DEVELOP, AND THIS
COULD HAVE A NEGATIVE EFFECT ON OUR PROFITS
The development, manufacture and sale of diagnostic products requires 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 earnings 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 are not available, we may be required to delay or
scale back market developments.
DELAYS IN MANUFACTURING OUR PRODUCTS COULD REQUIRE US TO SPEND CONSIDERABLE
RESOURCES, AND THIS COULD HARM CUSTOMER RELATIONSHIPS
If we experience significant demand for our products, we may require
additional capital resources to meet these demands. If we are unable to develop
necessary manufacturing capabilities, our sales could be adversely affected.
Failure to increase production volumes, if required, in a cost-effective manner,
or lower than anticipated yields or production problems encountered as a result
of changes in the manufacturing process, could result in shipment delays as well
as increased manufacturing costs, which could also have a material adverse
effect on our sales. The majority of raw materials and purchased components used
to manufacture our products are readily available. However, some 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 raw materials and components and reduced control
over pricing, quality and timely delivery. Although we attempt to minimize our
supply
14
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 sales or cost of sales.
THE LOSS OF KEY DISTRIBUTORS OR AN UNSUCCESSFUL EFFORT TO DIRECTLY DISTRIBUTE
OUR PRODUCTS COULD LEAD TO REDUCED SALES
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
our industry's competitive environment. Another suitable distributor may not be
found on satisfactory terms. We could expand our efforts to distribute and
market our products directly; however, 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.
WE MAY NOT ACHIEVE EXPECTED MARKET ACCEPTANCE OF OUR PRODUCTS AMONG PHYSICIANS
AND OTHER HEALTH CARE PROVIDERS, AND THIS WILL HAVE A NEGATIVE EFFECT ON FUTURE
SALES GROWTH
Clinical reference laboratories and hospital-based laboratories are
significant competitors for our products and provide the majority of diagnostic
tests used by physicians and other health-care providers. Our future sales
depend on, among other matters, the capture of sales from these laboratories,
and if we do not capture sales as expected, our sales may not grow as much as we
hope. 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 these tests.
INTENSE COMPETITION IN THE DIAGNOSTIC MARKET MAY REDUCE OUR SALES
The diagnostic test market is highly competitive. We have a large number of
multinational and regional competitors making investments in competing
technologies. 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. If our competitors'
products are more effective or more commercially attractive than ours, our sales
could be adversely affected. Competition also has a negative effect on our
product prices and, as a result, our profit margins.
TO REMAIN COMPETITIVE WE MUST CONTINUE TO DEVELOP OR OBTAIN PROPRIETARY
TECHNOLOGY RIGHTS; OTHERWISE, OTHER COMPANIES MAY INCREASE THEIR MARKET SHARE BY
SELLING PRODUCTS THAT COMPETE WITH OUR PRODUCTS
Our competitive position is heavily dependent upon obtaining and protecting
our proprietary technology or obtaining licenses from others. Our sales and
profits 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 upon continued development and introduction of new proprietary
technology and the improvement of existing technology. If we cannot continue to
obtain and protect proprietary technology, our sales and profits 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.
15
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 sales because:
- it consumes a substantial portion of managerial and financial resources;
- 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
NEGATIVE EFFECT ON OUR PROFITABILITY
Our sales may be negatively 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. 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 future performance depends 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. We are also subject to numerous laws
relating to such markers 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 effect 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 sales and profitability could be negatively
affected.
OUR SALES COULD BE AFFECTED BY THIRD-PARTY REIMBURSEMENT POLICIES AND POTENTIAL
COST CONSTRAINTS
Our sales could be adversely affected by changes in reimbursement policies
of governmental or private health care payers. 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. 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 reduce 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 EARNINGS MAY BE REDUCED
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.
16
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 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 our sales and earnings could be adversely affected.
OUR BUSINESS COULD BE NEGATIVELY AFFECTED BY THE LOSS OF KEY PERSONNEL OR OUR
INABILITY TO HIRE QUALIFIED PERSONNEL
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 these 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 PROFITS
There is a risk of product liability claims 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. Also, 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 negative effect on
our results of operations.
OUR EARNINGS MAY BE REDUCED IF WE EXPERIENCE DIFFICULTIES INTEGRATING ACQUIRED
COMPANIES OR TECHNOLOGIES AFTER THE ACQUISITION
We may experience difficulties integrating our own operations with those of
companies or technologies that we may acquire, including Litmus, and there can
be no assurance that we will realize the benefits and cost savings that we
believe the acquisition will provide or that these benefits will be achieved
within the time frame we anticipate. The 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. These costs could have a negative effect on profits.
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
17
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
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NUMBER EXHIBIT
- -------------- -------
3.1 Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to the Registrant's Current Report
on Form 8-K dated February 26, 1991.)
3.2 Amended and Restated Bylaws. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Current Report on Form 8-K
dated November 8, 2000.)
10.1* 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 February 26,
1991.)
10.2 Form of Indemnification Agreement--Corporate Officer and/or
Director. (Incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on 10-Q for the quarter ended
June 30, 2000.)
10.3 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 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.)
10.5* 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 September 30,
1990.)
10.6* 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 filed on December 20, 1990.)
10.7 Form of Registration Rights Agreement of the Registrant.
(Incorporated by 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
Statement No. 33-38324 on Form S-4 filed on January 4,
1991.)
10.8 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, 1991.)
10.9 Trademark License Agreement dated October 1, 1994 between
the Registrant and Becton Dickinson and Company regarding
the Q-Test trademark. (Incorporated by reference to Exhibit
10.15 to the Registrant's Form 10-K dated March 31, 1995.)
10.10 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 January 5, 1995.)
18
EXHIBIT NUMBER EXHIBIT
- -------------- -------
10.11 Settlement Agreement effective April 1, 1997 between the
Registrant and Becton Dickinson and Company. (Incorporated
by reference to Exhibit 10.18 to the Registrant's Form 10-K
dated March 31, 1997.)
10.12 Campbell License Agreement effective April 1, 1997 between
the Registrant and Becton Dickinson and Company.
(Incorporated by reference to Exhibit 10.19 to the
Registrant's Form 10-K dated March 31, 1997.)
10.13 Rosenstein License Agreement effective April 1, 1997 between
the Registrant and Becton Dickinson and Company.
(Incorporated by reference to Exhibit 10.20 to the
Registrant's Form 10-K dated March 31, 1997.)
10.14* 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 June 30,
1998.)
10.15 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 June 30,
1998.)
10.16* 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
dated December 31, 1998.)
10.17 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 Schedule 14D-1 dated June 9, 1999.)
10.18 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
reference to Exhibit 10.1 to the Registrant's Form 8-K dated
July 12, 1999.)
10.19 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 Form 8-K dated July 12, 1999.)
10.20 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 Form 8-K dated July 12, 1999.)
10.21 Cash Collateral Agreement, dated as of July 12, 1999, by and
between Bank of America National Trust and Savings
Association and Pacific Biotech, Inc. (Incorporated by
reference to Exhibit 10.4 to the Registrant's Form 8-K dated
July 12, 1999.)
10.22 Form of Asset Sale Agreement--Rapignost(R)Urine Test Strip
Business. Incorporated by reference to Exhibit 10.5 to the
Registrant's Form 8-K dated December 7, 1999.)
10.23 Form of Purchase and Sale Agreement and Escrow Instructions.
(Incorporated by reference to Exhibit 10.6 to the
Registrant's Form 8-K dated December 20, 1999.)
10.24 Form of Single Tenant Absolute Net Lease. (Incorporated by
reference to 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 September 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: November 13, 2000
/s/ Charles J. Cashion
--------------------------------------
Senior Vice President,
Corporate Operations,
Chief Financial Officer and
Secretary and authorized signatory