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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-10961
QUIDEL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2573850
(State or other jurisdiction (I.R.S. Employer
or incorporation or organization) Identification No.)
10165 McKellar Court, 92121
San Diego, California
(Address of (zip code)
principal executive offices)
Registrant's telephone number, including area code (619) 552-1100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $0.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant as of June 10, 1998 was approximately $80,953,000. For the
purposes of this calculation, shares owned by officers, directors and 5%
stockholders known to the Registrant have been deemed to be owned by affiliates.
The number of shares outstanding of the Registrant's Common Stock as of
June 10, 1998 was 23,767,616.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the Annual Meeting of
Stockholders scheduled to be held on July 28, 1998 (the "Proxy Statement"),
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the Registrant's fiscal year ended March 31, 1998
("Fiscal 98"), are incorporated herein as provided in Part III, and portions of
the Registrant's Annual Report to Stockholders for fiscal 1998 (the "1998 Annual
Report"), are incorporated herein as provided in Parts I, II and IV.
Except for the historical information contained herein, the matters
discussed in this report are by their nature forward-looking. For the reasons
stated in this report or in the Company's Securities and Exchange Commission
filings, or for various unanticipated reasons, actual results may differ
materially. The Company's operating results may continue to fluctuate on a
quarter-to-quarter basis as a result of a number of factors, including
seasonality, the competitive and economic factors affecting the Company's
domestic and international markets, actions of our major distributors,
manufacturing and production delays or difficulties, adverse actions or delays
in product reviews by United States Food and Drug Administration, and the degree
of acceptance that our new products achieve during the year.
PART I
Item 1. BUSINESS
Quidel Corporation discovers, develops, manufactures and markets rapid
immunodiagnostic products for point-of-care detection of human medical
conditions and illnesses. These products provide simple, accurate and
cost-effective diagnoses of acute and chronic conditions in the areas of
reproductive and women's health, infectious diseases, gastrointestinal and
autoimmune disorders. Quidel's products are sold to professionals for use in the
physician's office and clinical laboratory, and to consumers through retail drug
stores. When used in this Report, "Quidel," the "Company" and the "Registrant"
refer to Quidel Corporation.
Quidel commenced its operations in 1979 and launched its first products,
dipstick-based pregnancy tests, in 1984. The Company has expanded its product
base through internal development and acquisition in the areas of pregnancy and
ovulation, infectious disease, gastrointestinal and autoimmune products for
professional and home use. Quidel markets its products in the United States and
in over 60 other countries worldwide through a broad network of national and
regional distributors, supported by the Company's direct sales force.
Fiscal 1998 was a year of significant developments at the Company. In
March of 1998, Steven T. Frankel, President and Chief Executive Officer,
resigned. On June 10, 1998, the Board of Directors announced that Andre de
Bruin, Vice Chairman of the Board and then a part-time employee, had been
appointed President and Chief Executive Officer.
In June of 1997, the Company settled a lawsuit filed against it by
Becton Dickinson and Co. which alleged that the Company's strep and chlamydia
products and certain of its pregnancy and ovulation products (the "Products")
infringed two patents held by Becton Dickinson. As part of the
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settlement agreement, the Company received a license from the plaintiff under
both patents in exchange for a cash license fee, a royalty on net sales of the
Products as of April 1, 1997, and a royalty-bearing license back to Becton
Dickinson for the Company's Q-Label technology. While the Company denied the
allegations in the complaint and admitted no liability as part of the lawsuit's
resolution, the Company believed the settlement was warranted when balanced
against the anticipated defense costs, the uncertainties of patent litigation in
general, and the expected diversion of management's time and attention over an
extended period of time.
Declining international subsidiary profitability led management to
decide to discontinue the operations of certain European subsidiaries. It is the
Company's intention to continue the sales in these areas through distributors.
As a result of the Company's decision to discontinue certain European
subsidiaries, a non-cash charge of approximately $3,058,000 was recorded in the
fourth quarter.
In the second half of the fiscal year, the Company developed a new
strategic plan. In the near term, the company will focus on two priorities: 1)
to substantially improve the Company's base of operations to improve performance
and increase predictability and consistency of operations; and 2) to rationalize
existing product lines while expanding the Company's overall new product and
technology portfolio. The Company estimates that additional charges of up to
$1.5 million will be incurred as restructuring plans for domestic and foreign
operations are implemented during the first half of fiscal 1999. The mission for
fiscal 1999 and beyond is to establish the Company as a leader in rapid in-vitro
diagnostics for the decentralized point-of-care market.
The Company's executive offices are located at 10165 McKellar Court, San
Diego, California 92121 and its telephone number is (619) 552-1100.
INDUSTRY OVERVIEW
The Overall Market for In-Vitro Diagnostics:
The worldwide market for In-Vitro Diagnostic ("IVD") products is
estimated to have been about $18 billion in 1997. Typically, the market is
segmented by the underlying technology involved in a test, with the largest
segments being clinical chemistry and immunodiagnostics, accounting for about
40% and 25% of the total IVD market respectively. Geographically, North America
accounts for about 40% of the market, Europe 33%, Japan 13% and the rest of the
world 14%. Total IVD revenues are growing approximately 5% per year while
underlying testing volume is growing closer to 10% which illustrates the
maturity of the market in aggregate.
The customers for IVD products are quite varied, but are dominated by
large centralized laboratories, either freestanding or in the hospital. In the
U.S., central labs represent only 10% of total number of testing facilities, but
account for 70% of test volume and 80% of revenues.
From a healthcare provider's standpoint, the testing process typically
involves sending a patient to a facility, which draws the blood and sends to a
central lab. The lab then tests the sample in a large batch and sends the
results to the provider. Typically the healthcare provider receives the results
several days after seeing the patient, although in some cases it may only be
several hours, particularly in a hospital setting. In any event, the result of
this process is that diagnostic tests
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generally are disconnected from the routine care and dialogue that is the
substance of a visit between a healthcare provider and his/her patient.
Three basic forces have driven the market for central lab testing: 1)
technical requirements for accurate testing often require large, sophisticated
pieces of equipment; 2) the cost to run a test on these large scale instruments
is very low; and 3) the Clinical Laboratory Improvement Amendments ("CLIA") of
1988 and subsequent Health Care Financing Administration regulations subject all
labs, regardless of size, to set standards. Most physicians and smaller labs
found these regulations prohibitive and largely stopped testing in the 1990's.
Together, these factors have led to the current dominance of centralized labs in
diagnostic testing.
The over-the-counter ("OTC")/self-test market has not been as affected
by these trends. The U.S. OTC test market was estimated to be approximately $1
billion in 1997 and growing at approximately 10% annually. Two test categories,
pregnancy and glucose (for diabetes), dominate this market.
The Point-of-Care ("POC") Market and Rapid/Waived Tests:
POC testing is the alternative to central lab and self-testing. The POC
market is comprised of two general segments: hospital testing and decentralized
testing . Hospital POC testing is a growing practice and is generally an
extension of the hospital's central lab. A number of diagnostic tests done in
the hospital are much more effectively done at the bedside, stat-lab or in the
Emergency Room ("ER"). For example, stat-labs provide rapid turnaround of
critical measures like blood gasses in real time to physicians and nurses
treating critically ill patients. Other examples include drug screens or
pregnancy tests in the ER. Overall, the U.S. hospital POC market was estimated
to be about $400MM in sales in 1996 and growing at a rate of about 15% per year.
The second segment is the "decentralized" POC market, which consists of
physician's office labs, nursing homes, pharmacies and other non-institutional
settings in which healthcare providers perform diagnostic tests. This market
segment was estimated to be about $550MM in sales in 1996 and growing at about
6% annually. The decentralized POC market encompasses a large variety of IVD
products ranging from sophisticated instrumented diagnostic systems serving
larger group practices to very simple, single-use, disposable tests for
physician's office. POC testing in both the hospital and decentralized segments
are increasing in popularity.
This POC testing growth is in part the result of technological
improvements creating easy-to-use, high quality tests capable of being waived
from CLIA regulations, and thereby available to the 36,000 or so office labs
approved to conduct CLIA waived tests.
BUSINESS STRATEGY
The Company believes that the increasing trend among health care
providers to adopt POC testing is important and lasting. More and more
employers, health plans, and payors are recognizing that the point-of-care is a
primary focal point for improving the quality, patient satisfaction and cost
effectiveness of healthcare delivery. Further, improvements in technology are
making diagnostic tests that combine clinical lab accuracy with OTC ease-of-use
for a growing number of types of tests. It is Quidel's mission to establish a
significant leadership position in rapid in-vitro diagnostics
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for the decentralized POC market. In order to accomplish this mission the
Company has defined the following strategic goals:
- - Focus on the U.S. Professional market and establish an undisputed
leadership position in rapid IVD products
- - Establish international sales distribution through major corporate
partners
- - When financially attractive in the short term (within a one to two year
period), expand into other business segments primarily through
collaborations
- - Build/strengthen the Company's infrastructure and operations to reliably
and efficiently support planned growth
- - Actively collaborate with others to accelerate expansion and to provide
complementary products, technologies, market positions, and expertise
TECHNOLOGY
Immunoassays utilize commercially produced protein molecules called
antibodies, which react with or bind to specific antigens, such as other
antibodies, viruses, bacteria, hormones and drugs. The antibodies produced in
response to a particular antigen bind specifically to that antigen. This
characteristic allows antibodies to be used in a wide range of diagnostic
applications.
The ability to detect the binding of antibodies to target antigens forms
the basis for immunoassay testing. In immunoassays, antibodies are typically
deposited onto a solid substrate. A chemical label is then either incorporated
onto the solid substrate or added separately once the solid substrate has been
exposed to the test sample. If the target antigen is present in the test sample,
the chemical label produces a visually identifiable color change in response to
the resulting antibody reaction with the antigen. This provides a clear color
endpoint for easy visual verification of the test results.
Quidel incorporates antibody technology and biochemistry into uniquely
designed and engineered products. Quidel has developed four primary delivery
system formats: dipsticks, flow-through cassettes, microwell tests and a
one-step lateral flow delivery system. Although each is based on the same
general antibody-antigen based approach, the four formats differ in terms of
speed, ease-of-use and sensitivity, and, as a result, address the particular
needs of different end-user markets.
PRODUCTS
The Company provides rapid point-of-care diagnostic tests under brand
names such as Q-Test(R), QuickVue(R), OvuQuick(R), Conceive(R), and
Concise(R),which are directed at the following medical conditions:
- Pregnancy Tests. This is one of the largest rapid testing market
segments. The early detection of pregnancy allows the physician
and patient to institute proper prenatal care, helping to ensure
the health of both the developing embryo and the mother.
Pregnancy test sales represented 37% of the Company's total net
sales in fiscal 1998.
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- Group A Streptococci. Each year millions of people in the United
States are tested for Group A streptococcal infections,
commonly referred to as strep throat. Group A streptococci are
organisms that typically cause illnesses such as tonsillitis,
pharyngitis and scarlet fever which, if left untreated, can
progress to complications such as rheumatic fever. Sales of the
Company's products have increased significantly, principally as
a result of receiving CLIA waived status in March 1996 for the
Quidel QuickVue(R) In-Line One-Step Strep A Test, which
represented 31% of the Company's fiscal 1998 net sales.
- Ovulation Prediction. Tests in this category are for couples
affected by infertility or the desire to control the timing of
their pregnancies. These tests predict or confirm the occurrence
of ovulation and are important tests for both the fertility
specialist and the consumer. This product category represented
11% of fiscal 1998 net sales.
- H. pylori. Helicobacter pylori (H. pylori) is the bacterium
responsible for 80% of the five million ulcers in the U.S. It is
implicated in chronic gastritis and is recognized by the World
Health Organization as a Class 1 carcinogen that increases a
person's risk of developing stomach cancer. Once the H. pylori
infection is detected, antibiotic therapy is administered to
kill the organism and promote a cure of the ulcer condition. The
Company's rapid test utilizes whole blood samples from a finger
prick. It is a serological test, a test that measures antibodies
circulating in the blood caused by the H. pylori infection.
Quidel's test, which was the first to receive CLIA waived
status, has progressively increased in sales and accounted for
8% of the Company's total net sales in fiscal 1998.
- Other Products. The balance of the Company's sales include rapid
infectious disease tests to detect chlamydia and mononucleosis,
allergy screening tests and clinical laboratory tests used in
the measurement of circulating immune complexes.
For further sales information, please see pages 3, 11 and 12 of
the Company's 1998 Annual Report.
PRODUCT LIFE CYCLES
The Company's results can be significantly affected by the phase-out of
older products near the end of their product life cycles, as well as the timing
and success of new product introductions. A successful new product launch can
result in strong initial sales as inventories are built up during the pipeline
fill period, followed by a decline in sales before reaching normalized levels.
The ability of the Company to compete successfully in the rapid diagnostics
market depends on the continual development and introduction of new products and
the improvement of existing products. There can be no assurance that the Company
will be able to develop sufficient new product entries to replace older products
in a timely manner, or that its new products will gain significant market
acceptance.
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VARIABILITY IN DEMAND
Sales levels for several of the Company's products are affected by
seasonal demand trends. Group A strep tests, for example, which currently
account for approximately 31% of the Company's total annual sales, are used
primarily in the fall and winter and tend to benefit the third and fourth fiscal
quarters. As a result of these demand trends, the Company generally may achieve
lower results in the first and second quarters and higher results in the third
and fourth quarters of the fiscal year.
RESEARCH AND DEVELOPMENT
The Company is focusing its development efforts on two areas: 1) the
creation of new and improved products for its existing product markets; and 2)
products for new markets developed under pharmaceutical company collaborations.
For further information about these specific investments, see pages 4 and 5 of
the Company's 1998 Annual Report.
These pharmaceutical collaborations were undertaken with the goal of
creating differential diagnostics for use in identifying patients most likely to
benefit from the therapeutic product provided by the pharmaceutical company.
With this "test and treat" approach, it is believed that costs related to
inappropriate therapy can be avoided, while increasing the efficiency of therapy
among those patients most in need.
The most significant effort of the Company's research collaborations are
focused on the development of an influenza A and B diagnostic test and two tests
to detect genital herpes, both of which are multi-year programs funded under an
agreement with Glaxo Group, Ltd., a wholly-owned subsidiary of Glaxo Wellcome.
If these programs are successful the resulting diagnostics tests will be sold by
Quidel under the Quidel brand name. In return for funding this development,
Glaxo will receive royalties on the sales of the related product. For further
information about these agreements, see note 8 "Commitments" on page 15 of the
Company's 1998 Annual Report.
The collaboration with Bayer Corporation's Business Group Diagnostics is
continuing however, no assurance can be given as to the sustainability of the
current agreements.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries to represent years. For example, the year "1998"
would be represented by "98". These systems and products will need to be able to
accept four digit entries to distinguish years beginning with 2000 from prior
years. As a result, systems and products that do not accept four digit year
entries will need to be upgraded or replaced to comply with such "Year 2000"
requirements. The Company believes that its internal systems are Year 2000
compliant or will be upgraded or replaced in connection with previously planned
changes to information systems prior to the need to comply with Year 2000
requirements without material cost or expense. The anticipated costs of any Year
2000 modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources and
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other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to the availability or cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes and similar
uncertainties. In addition, there can be no assurance that Year 2000 compliance
problems will not be revealed in the future which could have a material adverse
affect on the Company's business, financial condition and results of operations.
Many of the Company's customers and suppliers may be affected by Year 2000
issues that may require them to expend significant resources to modify or
replace their existing systems. This may result in those customers having
reduced funds to purchase the Company's products or in those suppliers
experiencing difficulties in producing or shipping key components to the Company
on a timely basis or at all.
MARKETING AND DISTRIBUTION
In contrast to the central lab market, the domestic decentralized POC
market is highly fragmented, consisting of tens of thousands of small customers,
rather than a few large customers. Quidel has designed its business around
serving the unique needs of this market segment. To reach these customers the
Company utilizes a network of national and region distributors, which are
supported by the Company's sales force.
The Company has developed priority status with many of the major
distributors in the U.S., causing the Company's products to be the sole
preferred products these distributors offer in Quidel's core product areas.
Internationally, markets vary considerably country by country. The
extent of rapid IVD product penetration, the acceptance of testing outside the
central lab and the importance of the OTC and self-test markets differ markedly.
Overall, Quidel's international presence is substantially lower as a percentage
of its total business than is generally characteristic of the IVD market. Some
of this difference is due to the fact that the POC market is more developed in
the U.S. relative to the overall IVD market in other countries. Also, Quidel's
ability to address the international markets is reduced due to limited resources
and capital.
The Company generally ships products to its customers within 15 days of
receipt of purchase orders. Shipments to international distributors are made
under purchase orders received from 30 to 90 days in advance of shipment.
Because the amounts ordered and the lead times specified vary widely from
order-to-order and period-to-period, the Company does not consider backlog to be
a meaningful indicator of future revenues.
MANUFACTURING
Quidel's manufacturing facilities, located in San Diego, California,
consist of laboratories devoted to tissue culture and immunochemistry, and
production areas dedicated to packaging and filling. In the manufacturing
process, the Company uses biological, chemical and packaging supplies and
equipment, which are generally available from several competing suppliers.
The Company believes that its manufacturing is conducted in compliance
with the "Good Manufacturing Practices" ("GMP") regulations of the FDA governing
the manufacture of medical
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devices. Quidel has registered its facility with the FDA and with the Department
of Health Services of the State of California and has passed routine federal and
state inspections confirming the Company's compliance with the GMP regulatory
requirements for in vitro diagnostic products.
The manufacture of medical diagnostic products is difficult,
particularly with respect to the stability and consistency of complex biological
components. Because of these complexities, manufacturing difficulties
occasionally occur that delay the introduction of products, result in excess
manufacturing costs or require the replacement of products already introduced
into the distribution channel.
GOVERNMENT REGULATION
The manufacture and marketing of medical devices, including in vitro
diagnostic test kits, are regulated under the 1976 Medical Device Amendments to
the Federal Food, Drug and Cosmetic Act and its amended and/or new provisions
under the Safe Medical Act of 1990. These regulations are administered by the
FDA. While these regulations are demanding, they are considerably less
burdensome than those applicable to the manufacture and marketing of drugs or
monoclonal antibodies for in vivo (within the living body) applications. In
addition to the foregoing, the Company's present and future operations or
products may be subject to regulation under the Occupational Safety and Health
Act, Environmental Protection Act, Resource Conversion and Recovery Act, Toxic
Substances Control Act, Clinical Laboratory Improvement Act and other present or
possible future legislation and regulations, as well as by governmental agencies
with regulatory authority relating to the Company's business.
PATENTS AND TRADE SECRETS
Because of the length of time and the expense associated with bringing
healthcare products through development and government approval to the
marketplace, the healthcare industry has traditionally placed considerable
importance on obtaining and maintaining patent and trade secret protection for
significant new technologies, products and processes. Quidel and other companies
engaged in research and development of new diagnostic products using advanced
biomedical technologies are actively pursuing patents for their technologies,
which they consider novel and patentable. However, important legal issues remain
to be resolved as to the extent and scope of available patent protection in the
United States and in other important markets worldwide. The resolution of these
issues and their effect upon the long-term success of Quidel and other
biotechnology firms cannot be determined.
It has been Quidel's policy to file for patent protection in the United
States and other countries with significant markets, such as Western European
countries and Japan, if the economics are deemed to justify such filing and
Quidel's patent counsel determines that a strong patent position can be
obtained. No assurance can be given that patents will be issued to Quidel
pursuant to its patent applications in the United States and abroad or that
Quidel's patent portfolio will provide Quidel with a meaningful level of
commercial protection.
A large number of individuals and commercial enterprises seek patent
protection for technologies, products and processes in fields related to
Quidel's areas of product development. To the extent such efforts are
successful, Quidel may be required to obtain licenses in order to exploit
certain of its product strategies. There can be no assurance that such licenses
will be available to
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Quidel at all or if so, on acceptable terms.
Quidel is aware of certain issued and filed patents, issued to various
developers of diagnostic products with potential applicability to Quidel's
diagnostic technology. The Company has licensed certain rights from companies
such as Syntex and Becton Dickinson. For more information concerning the Becton
Dickinson license, see Note 10, "Legal Proceeding" on page 15 of the Company's
Annual Report. There can be no assurance that Quidel would prevail if a patent
infringement claim were to be asserted against Quidel.
Quidel seeks to protect its trade secrets and nonproprietary technology
by entering into confidentiality agreements with employees and third parties
(such as potential licensees, customers, joint ventures and consultants). In
addition, Quidel has taken certain security measures in its laboratories and
offices. Despite such efforts, no assurance can be given that the
confidentiality of Quidel's proprietary information can be maintained. Also, to
the extent that consultants or contracting parties apply technical or scientific
information independently developed by them to Quidel projects, disputes may
arise as to the proprietary rights to such data.
Under certain of its distribution agreements, Quidel has agreed to
indemnify the distributor against costs and liabilities arising out of any
patent infringement claim by a third party relating to products sold under those
agreements. In some cases, the distributor has agreed to share the costs of
defending such a claim and will be reimbursed for the amount of its contribution
if the infringement claim is found to be valid.
COMPETITION
The Company believes that the competitive factors in the rapid
diagnostic market include convenience, price and product performance as well as
the distribution, advertising, promotion and brand name recognition of the
marketer. Competition in the development and marketing of diagnostic products is
intense and diagnostic technologies have been subject to rapid change.
Management believes that Quidel's success will depend on its ability to remain
abreast of technological advances, to introduce technologically advanced
products, and to attract and retain experienced technical personnel, who are in
great demand. Many of the Company's current and prospective competitors,
including several large pharmaceutical and diversified health care companies,
have substantially greater financial, marketing and other resources than Quidel.
These competitors include Abbott Laboratories, SmithKline Diagnostics, and
Becton Dickinson. There can be no assurance that technological advances by
competitors will not render the Company's products obsolete, or that it will be
able to compete successfully in the marketing of products.
HUMAN RESOURCES
As of March 31, 1998, the Company had 312 employees, none of whom are
represented by a labor union. The Company has experienced no work stoppages and
believes that its employee relations are good.
Item 2. PROPERTIES
The Company's executive, administrative, manufacturing and research and
development facilities are located in San Diego, California. On February 8,
1994, the Company purchased the
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land underlying such facilities and the 65,000 square-foot building located
thereon for approximately $7,700,000. Effective September 1, 1997, the Company
entered into a lease of a 7,245 square-foot research facility located in San
Diego, California. The lease provides for an initial term of two years and
options to renew for three consecutive one-year periods. The Company believes
that its current facilities are adequate for its present needs.
Item 3. LEGAL PROCEEDINGS
The Company received a letter dated April 24, 1992 from the United
States Environmental Protection Agency (the "EPA") notifying the Company that it
is 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 the Company sent a
small amount of hazardous waste to facilities in Illinois. It is possible that
subsequently, such waste could have been transshipped 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, the Company does not know how much
of its 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 the Company for damages that may be awarded.
In April 1997, Becton Dickinson and Co. (the "plaintiff") filed a
lawsuit against the Company alleging that the Company's strep and chlamydia
products and certain of its pregnancy and ovulation products (collectively, the
"Products") infringe two patents of the plaintiff. The Products in issue
represent a substantial majority of the Company's current revenues. In June
1997, the Company entered into a settlement agreement with the plaintiff. As a
part of that agreement, the Company received a license from the plaintiff under
both patents in exchange for a cash license fee, a royalty on net sales of the
Products after April 1, 1997, and a license of the Company's Q-Label technology
back to plaintiff (with a royalty on future net sales). The Company currently
estimates that the annual amortization of the license fee and royalty payments
(based on current sales levels of the Products) will result in an annual expense
of approximately $2,000,000 per year. While the Company denied the allegations
in the complaint and admitted no liability as part of the suit's resolution, the
Company believed the settlement was warranted when balanced against the
anticipated defense costs, the uncertainties of litigation in general, and the
expected diversion of management's time and attention over an extended period.
The Company is 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 the Company. The
Company maintains insurance, including coverage for product liability claims, in
amounts which management believes appropriate given the nature of the Company's
business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all executive officers of the Company
as of June 10, 1998 are listed below, followed by a brief account of their
business experience during the past five years. Officers are normally appointed
annually by the Board of Directors at a meeting of the directors immediately
following the Annual Meeting of Stockholders. There are no family relationships
among these officers, nor any arrangements or understandings between any officer
and any other person pursuant to which an officer was selected. None of these
officers has been involved in any court or administrative proceeding within the
past five years adversely reflecting on the officer's ability or integrity.
Andre de Bruin, 51, was appointed President and Chief Executive officer
of the Company on June 10, 1998. Since June 23, 1997, Mr. de Bruin has been Vice
Chairman of the Board and a part-time employee of the Company. Mr. de Bruin was
appointed President and Chief Executive Officer of Somatogen, Inc. of Boulder,
Colorado, in July 1994, and was elected as Chairman in January 1996. Baxter
International acquired Somatogen in May 1998. Immediately prior to joining
Somatogen, he was Chairman, President and Chief Executive Officer of Boehringer
Mannheim Corporation, Indianapolis, Indiana, a U.S. subsidiary of Cornage Ltd.,
a private, global health care corporation with sales exceeding $3 billion. He
held that position since 1989. Mr. de Bruin serves on the Board of Directors of
Diametrics Medical, Inc., a public company that manufactures and markets
proprietary critical blood and tissue analysis systems, and Metabolex, Inc., a
privately held company founded to develop therapeutics for diabetes and related
metabolic diseases. He has been involved in the global health care industry for
more than twenty-seven years in pharmaceuticals, devices and diagnostics.
Steven C. Burke, 53, Vice President - Finance and Administration and
Chief Financial Officer, joined Quidel in 1986. From May 1984 until August 1986,
he was Vice President, Controller of American Bentley, a subsidiary of American
Hospital Supply. Mr. Burke is a Certified Public Accountant.
Darryll J. Getzlaff, 47, Vice President - Human Resources, joined Quidel
in April 1987 with 10 years of personnel management experience, with special
expertise in recruiting, management development and equal opportunity. Mr.
Getzlaff was Personnel Director, Corporate Marketing, for the Ernest & Julio
Gallo Winery from December 1984 until March 1987.
Glenn Holmes, 49, Vice President - Sales and Marketing, joined Quidel in
July 1997. Mr. Holmes has over twenty years of health care experience. Prior to
joining Quidel, Glenn was Director of Sales and Marketing with MDS AutoLab,
Canada's largest health and life sciences corporation. From 1981 to 1995, Glenn
was employed by Abbott Laboratories in various management positions.
Lauren G. Otsuki, 45, Vice President and Business Manager,
International, joined Quidel in May 1983 and held numerous positions in
Operations from 1983 to 1989, including Manager of Quality Control, Manager of
Process Development and Director of Manufacturing. From November 1989 to January
1992 she was the Director of Business Development and from January 1992 to June
1998 was the Vice President of Operations.
12
<PAGE> 13
Mark E. Paiz, 36, Vice President - Operations, joined Quidel in December
1997. He has 13 years experience in manufacturing, quality assurance, and
product development. From 1995 to 1997, Mr. Paiz served as Director of Research
and Development and Project Manager at Medtronic Interventional Vascular,
responsible for the development and manufacture of catheter and coronary stent
delivery devices. From 1992 to 1995, he served as a manager at Hybritech, Inc.
with various responsibilities including quality engineering, materials
management, supplier development and inspection.
John D. Tamerius, Ph.D., 52, Vice President - Clinical Laboratory
Business since March 1998; Interim Vice President - Research & Development,
joined Quidel in August 1989 and assumed responsibility for quality assurance
and clinical and regulatory affairs. In April 1994, Dr. Tamerius became
responsible for the research and development, manufacture and sales and
marketing activities for the Company's clinical laboratory business. From 1983
to 1989, Dr. Tamerius served as Vice President of Research and Development for
Cytotech, Inc. where he was in charge of Corporate Research Programs and
Clinical and Regulatory Affairs. Before co-founding Cytotech, Inc., Dr. Tamerius
was a Research Associate in the Department of Molecular Immunology at the
Research Institute of Scripps Clinic in San Diego, California from 1978 to 1983
and a postdoctoral fellow at the Fred Hutchinson Research Center in Seattle,
Washington from 1976 to 1978 and. Dr. Tamerius received his M.S. and Ph.D.
degrees in Microbiology and Immunology from the University of Washington in
1976.
Robin G. Weiner, 42, Vice President - Clinical Development and
Regulatory Affairs, joined Quidel in March 1982. She has over thirteen years
experience in regulatory affairs and has held numerous management positions at
Quidel in Operations and Clinical/Regulatory, and Quality Assurance. From
December 1992 to July 1995 she was Senior Director of Clinical, Regulatory and
Quality Systems and in July 1995 was promoted to Vice President.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is included on page 16 of the
Registrant's 1998 Annual Report and is incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
The information required by this item is included on the inside front
cover of the Registrant's 1998 Annual Report and is incorporated herein by
reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included on pages 3 - 6 of the
Registrant's 1998 Annual Report and is incorporated herein by reference.
The Company does not and did not invest in market risk sensitive
instruments in fiscal
13
<PAGE> 14
1998. The Company had and has no exposure to market risk with regard to changes
in interest rates. The Company does not and has not used derivative financial
instruments for any purpose, including hedging or mitigating interest rate risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included on pages 7 - 15 of the
Registrant's 1998 Annual Report and is incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included in the sections
entitled "Election of Directors" and "Executive Compensation and Other
Information - Compliance with Section 16(a) of the Exchange Act" of the Proxy
Statement which will be filed with the Securities and Exchange Commission no
later than 120 days after the close of the fiscal 1997 year and is incorporated
herein by reference and is included in the section entitled "Executive Officers
of the Registrant" in Part I of this Report.
Item 11. EXECUTIVE COMPENSATION
The Company maintains certain employee benefit plans and programs in
which its executive officers are participants. Copies of these plans and
programs are set forth or incorporated by reference as Exhibits 10.1, 10.4,
10.5, 10.6, and 10.8 to this report. The additional information required by this
item is included in the section entitled "Executive Compensation and Other
Information" of the Proxy Statement which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal 1997
year and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the sections
entitled "Security Ownership of Certain Beneficial Owners" and "Security
Ownership of Management" of the Proxy Statement which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal 1998 year and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
14
<PAGE> 15
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and
Exhibits
I. Financial Statements. The following Financial
Statements of the Registrant listed below are incorporated herein by reference
from the following pages of the 1998 Annual Report:
<TABLE>
<CAPTION>
PAGE IN
ANNUAL REPORT
-------------
<S> <C>
1. Report of Ernst & Young LLP, Independent Auditors 16
2. Consolidated Balance Sheets --
March 31, 1998 and 1997 7
3. Consolidated Statements of Operations --
Years ended March 31, 1998, 1997 and 1996 9
4. Consolidated Statements of Stockholders' Equity --
Years Ended March 31, 1998, 1997 and 1996 9
5. Consolidated Statements of Cash Flows --
Years Ended March 31, 1998, 1997 and 1996 8
6. Notes to Consolidated Financial Statements 11 - 15
</TABLE>
II. Financial Schedules. All schedules for which provision
is made in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are inapplicable
and therefore have been omitted.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal
1998:
Form 8K filed March 5, 1998 concerning the resignation of Steven
T. Frankel as President, Chief Executive Officer and Director of the Company
effective March 2, 1998.
(c) Exhibits:
15
<PAGE> 16
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C>
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
June 16, 1995.)
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.
(Incorporated by reference to Exhibit 10.2 to the Registrant's
Form 10-K dated March 31, 1995.)
10.2.1 Form of Indemnification Agreement - Corporate Director.
(Incorporated by reference to Exhibit 10.2.1 to the Registrant's
Form 10-K dated March 31, 1995.)
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 1981 Stock Option Plan, as revised.
(Incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1990.)
10.8 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.)
10.9 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.)
10.11 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.)
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit
Number
- ------
<S> <C>
10.13 Warrant to Purchase Common Stock issued to Imperial Bank. Issued
February 8, 1994, 117,871 shares with an initial exercise price
of $5.94 per share. Warrant expires February 8, 1999.
(Incorporated by reference to Exhibit 10.43 to the Registrant's
Form 10-Q dated December 31, 1993.)
10.14 Consulting Agreement, dated May 12, 1994, between the Registrant
and Scott L. Glenn and SR Associates. (Incorporated by reference
to Exhibit 10.45 to the Registrant's Form 10-K dated March 31,
1994.)
10.15 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.)
10.16 Warrant to Purchase 275,000 Shares of Common Stock issued to
Genesis Merchant Group Securities on May 16, 1995 at an initial
exercise price of $4.50 per share. Warrant expires January 15,
2000. (Incorporated by reference to Exhibit 10.17 to the
Registrant's Form 10-K dated March 31, 1995.)
10.17 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.)
10.18 Settlement Agreement effective April 1, 1997 between the
Registrant and Becton Dickinson and Company.
10.19 Campbell License Agreement effective April 1, 1997 between the
Registrant and Becton Dickinson and Company
10.20 Rosenstein License Agreement effective April 1, 1997 between the
Registrant and Becton Dickinson and Company.
10.21 Employment Agreement dated June 23, 1997 between the Registrant
and Andre de Bruin.
10.22 Stock Option Agreement dated June 23, 1997 between the
Registrant and Andre de Bruin to purchase 300,000 shares issued
under the Registrant's General Nonstatutory Stock Option Plan.
13.1* Certain portions of the 1998 Annual Report to Stockholders for
the fiscal year ended March 31, 1998 which have been
incorporated herein by reference.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
27* Financial Data Schedule.
* Filed herewith
</TABLE>
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: June 29, 1998 By: /S/ STEVEN C. BURKE
--------------------------------
Steven C. Burke
Vice Pres. - Finance and
Administration
(Chief Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Date: June 29, 1998
/S/ ANDRE DE BRUIN
- ------------------------------------
Andre de Bruin, President and
Chief Executive Officer (Principal /S/ MARGARET G. McGLYNN
Executive Officer); Vice Chairman -----------------------------------
Margaret G. McGlynn, Director
of the Board
/S/ RICHARD C.E. MORGAN
/S/ STEVEN C. BURKE -----------------------------------
- ------------------------------------ Richard C.E. Morgan
Steven C. Burke Chairman of the Board
Vice Pres. - Finance and Administration
(Principal Financial Officer and
Principal Accounting Officer)
/S/ MARY LAKE POLAN
-----------------------------------
Mary Lake Polan, Director
/S/ JOHN D. DIEKMAN
- ------------------------------------
John D. Diekman, Director
/S/ FAYE WATTLETON
-----------------------------------
Faye Wattleton, Director
/S/ THOMAS A. GLAZE
- ------------------------------------
Thomas A. Glaze, Director
18
<PAGE> 1
Exhibit 13.1
37
SELECTED FINANCIAL DATA
The following selected financial data are derived from the financial statements
of Quidel Corporation and should be read in conjunction with the consolidated
financial statements, related notes and other financial information included
herein.
<TABLE>
<CAPTION>
Years ended March 31, (in thousands,
except per share data) 1998 1997 1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Quidel branded sales*........................$ 44,910 $ 41,086 $ 33,532 $ 28,782 $ 19,932
OEM sales (U.S. marketing partners).......... 811 833 949 2,285 8,450
------------------------------------------------------------------------------
Total net sales................... 45,721 41,919 34,481 31,067 28,382
Other revenues............................... 3,758 2,803 572 470 1,090
------------------------------------------------------------------------------
Total revenues........................ 49,479 44,722 35,053 31,537 29,472
Gross profit ................................ 21,473 22,250 18,448 14,925 13,045
Research and development..................... 7,940 6,700 4,130 3,728 3,830
Purchased in-process research
and development**..................... -- -- -- 1,423 --
Sales and marketing.......................... 10,625 10,744 10,451 10,470 9,097
Write down of investment
in European Subsidiaries.............. 3,058 -- -- -- --
General and administrative................... 5,107 3,534 3,483 3,271 3,148
Provision for income taxes................... 76 123 -- -- --
Tax benefit from
net operating loss carryforward....... (2,707) -- -- -- --
Net income (loss)............................$ 1,110 $ 3,549 $ 579 $ (4,035) $ (1,931)
Net income (loss) diluted per share..........$ 0.05 $ 0.16 $ 0.03 $ (0.21) $ (0.11)
BALANCE SHEET DATA
Cash and cash equivalents....................$ 9,720 $ 10,096 $ 2,538 $ 3,878 $ 3,173
Working capital.............................. 16,790 19,444 10,060 9,757 8,390
Total assets...................... 47,782 42,261 33,334 34,524 32,933
Long-term obligations........................ 3,002 3,203 3,490 4,145 4,725
Stockholders' equity......................... 36,889 35,158 25,718 23,938 22,301
Stockholders' equity per share...............$ 1.55 $ 1.49 $ 1.19 $ 1.14 $ 1.20
Common shares outstanding.................... 23,749 23,546 21,550 20,983 18,459
</TABLE>
*Quidel branded and international sales
**Resulting from the acquisition of Pacific Biotech, Inc.
(Inside Front Cover of the 1998 Annual Report)
19
<PAGE> 2
Exhibit 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
Except for the historical information contained herein, the matters discussed in
this report are by their nature forward-looking. For the reasons stated in this
report or in the Company's Securities and Exchange Commission filings, or for
various unanticipated reasons, actual results may differ materially. The
Company's operating results may continue to fluctuate on a quarter-to-quarter
basis as a result of a number of factors, including seasonality, the competitive
and economic factors affecting the Company's domestic and international markets,
actions of our major distributors, manufacturing and production delays or
difficulties, adverse actions or delays in product reviews by United States Food
and Drug Administration ("FDA"), and the degree of acceptance that our new
products achieve during the year.
The Company has a new president and chief executive officer, Andre de Bruin. In
March 1998, Steven T. Frankel, president and chief executive officer, resigned.
One June 10, 1998 the board of directors announced that Andre de Bruin, vice
chairman of the board, had been appointed president and chief executive officer.
The Company believes that Mr. de Bruin will provide a fresh vision and valuable
leadership in the years ahead.
Fiscal 1998 sales established a new record high for the Company
increasing 9% over the prior year level. Net income for the year declined to
$1,110,000 or $.05 per share from $3,549,000 or $.16 per share in fiscal 1997.
NET SALES TRENDS BY MAJOR PRODUCT BRANDS
<TABLE>
<CAPTION>
Percent increase (decrease)
Years ended March 31, (in thousands) 1998 1997 1996 1998 1997
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
DOMESTIC SALES
Professional sales ........... $30,418 $25,891 $16,132 17% 60%
OTC sales .................... 1,900 1,383 2,876 37% (52%)
Clinical lab sales ........... 1,271 1,295 1,288 (2%) 1%
OEM sales .................... 811 833 949 (3%) (12%)
---------------------------------------------------------------------------------
Total domestic sales .... 34,400 29,402 21,245 17% 38%
---------------------------------------------------------------------------------
INTERNATIONAL SALES
Export sales ................. 6,774 8,060 9,059 (16%) (11%)
European subsidiary sales .... 4,547 4,457 4,177 2% 7%
---------------------------------------------------------------------------------
Total international sales 11,321 12,517 13,236 (10%) (5%)
---------------------------------------------------------------------------------
Total net sales ................... $45,721 $41,919 $34,481 9% 22%
==============================================================================================================================
</TABLE>
Domestic professional sales growth for both fiscal 1998 and fiscal 1997 is
primarily related to an increase in sales of the Company's infectious disease
products. This category includes the products which were the first to receive
CDC waived categorization status, the QuickVue(R) In-Line One-Step Strep A Test
and the QuickVue(R) H. Pylori Test, and the introduction of the CARDS(R) QS(R)
and Concise(R) Performance Plus(TM) strep tests, not present in fiscal 1996.
Quidel's domestic OTC home testing product sales improved in fiscal 1998, which
represented the second full year of distribution through Ansell Consumer
Products ("Ansell"). The conversion to distribution through Ansell has allowed
the Company to reduce its level of OTC sales and marketing expenses (see
Operating Expenses, below).
International sales have declined over the past two years. Declining export
sales levels reflect the expiration of distribution agreements in Japan and
Korea and the reduction in European allergy test sales due to a change in
reimbursement level. European subsidiary sales, although not significant in
total, grew 27% in fiscal 1998 to $1,739,000 in Germany.
The Company is in the process of defining its strategic objectives to increase
profitability. As part of this process, the Company has reassessed its
international sales strategy and has decided to change the management structure
responsible for international sales and to discontinue the operations of certain
European subsidiaries. The Company plans to continue this business through
distribution partners.
(Beginning on Page 3 of the 1998 Annual Report)
20
<PAGE> 3
Exhibit 13.1
REVENUE FROM RESEARCH CONTRACTS, LICENSE FEES AND ROYALTIES
<TABLE>
<CAPTION>
Percent increase (decrease)
Years ended March 31, (in thousands) 1998 1997 1996 1998 1997
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Contract research and development..................... $ 3,483 $2,654 $ 13 31% N/M
License fee income ................................... 100 25 381 300% (93%)
Royalty income ....................................... 175 124 178 41% (30%)
---------------------------------------------------------------------------
Total .......................................... $ 3,758 $2,803 $ 572 34% 390%
===================================================================================================================================
</TABLE>
Contract research and development revenue is principally related to funding
provided by Glaxo Wellcome ("Glaxo") for two multi-year rapid diagnostic test
development programs, influenza A and B, which commenced in March 1996, and the
development of two point-of-care diagnostic tests to detect genital herpes,
which commenced in October 1997. Both of these programs are expected to be
completed and, if successful, submitted to the FDA for marketing approval during
the first half of fiscal 1999. The revenue recognized under the Glaxo programs
is equal to the sum of the program direct research cost (see Operating Expenses,
below) and allocated support service cost. License fee income generally relates
to one-time fees received for the right to distribute the Company's products.
COST OF SALES AND GROSS PROFIT
<TABLE>
<CAPTION>
Percent increase (decrease)
Years ended March 31, (in thousands) 1998 1997 1996 1998 1997
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Direct Cost - material labor and
other variable costs .................. $ 16,876 $ 14,955 $ 11,555 13% 29%
as a percentage of sales .................... 36.9% 35.7% 33.5%
Royalty expense-patent licenses ............. 2,067 291 426 610% (32%)
as a percentage of sales .................... 4.5% 0.7% 1.2%
Total direct cost ........................... 18,943 15,246 11,981 24% 27%
as a percentage of sales .................... 41.4% 36.4% 34.7%
Direct Margin - contribution per sales dollar 58.6% 63.6% 65.3%
Manufacturing overhead cost ................. 5,305 4,423 4,052 20% 9%
as a percentage of sales .................... 11.6% 10.6% 11.8%
-----------------------------------------------------------------------------------
Total cost of sales .............. 24,248 19,669 16,033 23% 23%
-----------------------------------------------------------------------------------
Gross profit ................................ $ 21,473 $ 22,250 $ 18,448 (3%) 21%
as a percentage of sales .................... 47.0% 53.0% 53.5%
====================================================================================================================================
</TABLE>
Gross profit declined six percentage points to 47% of sales in fiscal 1998 from
the prior year level. The most significant component of this change relates to
an increased royalty expense, which commenced April 1, 1997, resulting from the
settlement of the Becton Dickenson patent litigation. In addition, the fiscal
1998 and 1997 shift in product mix toward sales of the Company's strep throat
tests, which provide a slightly lower direct margin contribution, has increased
direct cost as a percent of sales. Manufacturing overhead cost increases in
fiscal 1998 related to increased production capacity, purchase of automation
equipment, production supervision to cover multiple shift operations and the
addition of purchasing and engineering support staff.
21
<PAGE> 4
Exhibit 13.1
OPERATING EXPENSES
<TABLE>
<CAPTION>
Percent increase (decrease)
Years ended March 31, (in thousands) 1998 1997 1996 1998 1997
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT
Quidel research projects ..................... $ 4,903 $ 4,539 $ 4,117 8% 10%
As a percentage of sales ..................... 11% 11% 12%
Contract research - direct costs ............. 3,037 2,161 13 41% N/M
As a percentage of sales ..................... 6% 5% --
------------------------------------------------------------------
Total research and development .......... 7,940 6,700 4,130 19% 62%
As a percentage of sales ................ 17% 16% 12%
------------------------------------------------------------------
SALES AND MARKETING
Domestic professional sales and marketing .... 6,793 6,322 4,941 7%28%
Domestic OTC sales and marketing ............. 304 519 1,378 (41%) (62%)
International sales and marketing ............ 3,528 3,903 4,132 (10%) (6%)
------------------------------------------------------------------
Total sales and marketing ............... 10,625 10,744 10,451 (1%) 3%
As a percentage of sales ................ 23% 26% 30%
Write down of investment in
European Subsidiaries ........................ 3,058 -- -- N/M N/M
as a percentage of sales ................ 7%
GENERAL AND ADMINISTRATIVE ......................... 5,107 3,534 3,483 45% 1%
As a percentage of sales ..................... 11% 8% 10%
------------------------------------------------------------------
Total operating expenses ........................... $26,730 $20,978 $18,064 27% 16%
As a percentage of sales ........................... 58% 50% 52%
Total operating expenses excluding contract research
and write down of subsidiary investment ...... $20,635 $18,817 $18,051 10% 4%
as a percentage of sales ................ 45% 45% 52%
===========================================================================================================================
</TABLE>
Research and development effort was substantially increased in fiscal 1998 and
1997 as the Company entered into several collaborative product development
programs. The Glaxo Wellcome influenza A and B and herpes programs, discussed
above, are the largest of these projects. Contract research expense represented
38% of the Company's total research and development investment in fiscal 1998.
Sales and marketing efficiencies continued to improve in fiscal 1998 as the
overall cost declined to 23% of sales. Fiscal 1998 professional sales and
marketing expenses increased 7% related to an increase in professional sales
volume of 17%. In Fiscal 1997 these expenses grew 28% in support of a 60%
increase in sales volume. Domestic OTC sales and marketing expenses continue to
decline as these expenses are assumed by Ansell. This savings partially offsets
the lower margin on domestic OTC products from reduced sales prices under this
distribution agreement.
International sales and marketing expenses continued to represent approximately
31% of total international sales. These expenses are expected to be reduced in
the second half of fiscal 1999 as the operations of all but one of the Company's
European sales subsidiaries are discontinued.
As a result of the Company's strategic decision to discontinue the operations of
certain European subsidiaries, a noncash charge of $3,058,000, representing a
write-down of the investment in such subsidiaries, was recorded in the fourth
quarter of fiscal 1998. Additionally, the Company intends to further evaluate
other organizational and operational matters regarding the restructuring of
domestic operations. The Company currently estimates that additional charges up
to $1.5 million will be recorded as restructuring plans for domestic and foreign
operations are finalized. These costs will be recorded in the period that the
restructuring plans are implemented during fiscal 1999, the majority of which
are expected to occur in the first half of the year.
General and administrative expenses increased significantly in fiscal 1998
related to employee severance costs, legal fees and consulting costs.
22
<PAGE> 5
Exhibit 13.1
OTHER INCOME AND EXPENSE Other income, consisting primarily of interest income,
increased in fiscal 1998 as a result of the Company's higher average cash
balances.
PROVISION (BENEFIT) FOR INCOME TAXES In the fourth quarter of fiscal 1998 the
Company recorded a partial benefit of its net operating loss ("NOL)
carryforwards through a reduction in the valuation allowance of deferred tax
assets as the realization of such assets became probable. The recognition of
this asset provided a tax credit, which increased net income by $2,707,000. The
amount of the net deferred tax asset estimated to be recoverable was based on
the Company's assessment of near-term operations.
In previous periods the Company recognized the tax benefit of its NOL
carryforward only as income was earned, the impact of which reduced the
effective income tax rate to be equivalent to the alternative minimum tax rate
of approximately three percent. In future periods, commencing in fiscal 1999,
the Company will record an income tax provision at the normal statutory tax rate
currently amounting to approximately forty percent of pre-income tax.
The recognition of this deferred tax asset has the effect of increasing current
fiscal year net income and reducing future periods' net income as a result of
the timing of the NOL benefit recognition. However, it will not affect the
Company's cash flow as the NOL will continue to offset the income tax payable on
a year-by-year- basis.
NET INCOME Fiscal 1998 net income of $1,110,000 declined $2,439,000 from the
prior year. The significant changes in the current year included an increase in
royalty expense of $1,776,000, a one-time write-down of investment in certain
European subsidiaries of $3,058,000 and increased general and administration
costs of $1,573,000 which were in part offset by the recognition of the deferred
tax asset of $2,707,000.
The Company's operating results may continue to fluctuate on a
quarter-to-quarter basis as a result of a number of factors, including the
seasonal nature (fall and winter sales) of the Company's strep throat tests
which accounted for approximately 31% of fiscal 1998 total sales, the
competitive and economic factors affecting the Company's domestic and
international markets, manufacturing and production delays or difficulties,
actions of our major distributors, adverse actions or delays in product reviews
by the United States Food and Drug Administration and the degree of acceptance
that our new products achieve during the year.
In April 1997, Becton Dickinson and Co. (the "plaintiff") filed a lawsuit
against the Company alleging that the Company's strep and chlamydia products and
certain of its pregnancy and ovulation products (collectively, the "Products")
infringe on two patents of the plaintiff. The Products in issue represent a
substantial majority of the Company's revenues. In June 1997, the Company
entered into a settlement agreement with the plaintiff. As a part of that
agreement, the Company received a license from the plaintiff under both patents
in exchange for a cash license fee, a royalty on net sales of the Products after
April 1, 1997, and a license of the Company's Q-Label technology back to
plaintiff (with a royalty on future net sales). While the Company denied the
allegations in the complaint and admitted no liability as part of the suit's
resolution, the Company believed the settlement was warranted when balanced
against the anticipated defense costs, the uncertainties of litigation in
general, and the expected diversion of management's time and attention over an
extended period.
LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had cash and cash
equivalents of $9,720,000 compared to $10,096,000 at March 31, 1997. During
fiscal 1998 the Company generated $6,708,000 in cash from operating activities.
Cash flow provided by profitable operations (excluding the non-cash impact of
depreciation, amortization, effect of asset write-down and an increase in
deferred tax asset) amounted to $4,596,000. In addition, a net $2,112,000 in
cash was provided by changes in other operating asset and liability accounts,
principally due to increases in accounts payable and deferred contract research
revenue, offsetting increased inventory levels.
Cash used for investment activities totaled $7,520,000. Of this amount,
$5,082,000 related to capital expenditures to increase production capacity and
provide additional scientific research and development equipment. An additional
$2,438,000 was expended on other assets and intangibles, the majority of which
related to the license fee associated with the settlement of the Becton
Dickenson lawsuit discussed above.
Cash generated from financing activities totaled $436,000 which was principally
related to $621,000 in proceeds from the issuance of common stock from employee
stock option and stock purchase plan exercises, offset by the repayment of debt
and capital lease obligations, totaling $185,000.
23
<PAGE> 6
Exhibit 13.1
The Company has a $3,000,000 (maximum) accounts receivable-based bank line of
credit which provides for interest at the bank's prime rate plus two percent.
The line of credit expires August 5, 1998. As of March 31, 1998, there were no
outstanding borrowings under the line of credit.
Inflation and any other changes in price have not had a material effect during
the last three fiscal years.
Quidel's principal capital requirements are for working capital. These
requirements fluctuate as a result of numerous factors, such as the extent to
which the Company uses or generates cash in operations, progress in research and
development projects, competition and technological developments and the time
and expenditures required to obtain governmental approval of its products. Based
on the Company's current cash position and its current assessment of future
operating results, management believes that its existing sources of liquidity
should be adequate to meet the Company's operating needs during fiscal 1999.
YEAR 2000 COMPLIANCE Many currently installed computer systems and software
products are coded to accept only two digit entries to represent years. For
example, the year "1998" would be represented by "98". These systems and
products will need to be able to accept four digit entries to distinguish years
beginning with 2000 from prior years. As a result, systems and products that do
not accept four digit year entries will need to be upgraded or replaced to
comply with such "Year 2000" requirements. The Company believes that its
internal systems are Year 2000 compliant or will be upgraded or replaced in
connection with previously planned changes to information systems prior to the
need to comply with Year 2000 requirements without material cost or expense. The
anticipated costs of any Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to the
availability or cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and similar uncertainties. In addition,
there can be no assurance that Year 2000 compliance problems will not be
revealed in the future which could have a material adverse affect on the
Company's business, financial condition and results of operations. Many of the
Company's customers and suppliers may be affected by Year 2000 issues that may
require them to expend significant resources to modify or replace their existing
systems. This may result in those customers having reduced funds to purchase the
Company's products or in those suppliers experiencing difficulties in producing
or shipping key components to the Company on a timely basis or at all.
OTHER INFORMATION Except for the historical information contained herein, the
matters discussed in this annual report are, by their nature, forward-looking.
For the reasons stated in this annual report or in the Company's Securities and
Exchange Commission filings, or for various unanticipated reasons, actual
results may differ materially.
24
<PAGE> 7
Exhibit 13.1
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, (in thousands) 1998 1997
=============================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...............................................................$ 9,720 $ 10,096
Accounts receivable, net of allowances of $802 ($800 in 1997)............................ 8,524 8,384
Inventories, at lower of cost (first-in, first-out) or market:
Raw materials........................................................................ 3,190 1,842
Work in process...................................................................... 1,420 1,216
Finished goods....................................................................... 1,287 726
---------------------------------
5,897 3,784
Prepaid expenses and other current assets................................................ 540 1,080
---------------------------------
Total current assets............................................................. 24,681 23,344
Property and equipment, at cost
Land ................................................................................. 1,080 1,080
Building and improvements................................................................ 10,162 8,976
Equipment, furniture and fixtures........................................................ 14,002 10,857
---------------------------------
25,244 20,913
Less accumulated depreciation and amortization....................................... (8,447) (7,027)
---------------------------------
Net property and equipment....................................................... 16,797 13,886
Intangible assets, net of accumulated amortization
of $6,332 ($2,502 in 1997)........................................................... 3,466 4,854
Deferred tax asset........................................................................... 2,707 --
Other assets................................................................................. 131 177
---------------------------------
$ 47,782 $ 42,261
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.........................................................................$ 3,246 $ 2,132
Accrued payroll and related expenses..................................................... 1,261 1,123
Current portion of long-term debt and obligations under capital leases................... 199 183
Deferred contract research revenue....................................................... 1,690 --
Accrued royalties........................................................................ 622 84
Other current liabilities ............................................................... 873 378
---------------------------------
Total current liabilities..................................................... 7,891 3,900
Long-term debt and obligations under capital leases.......................................... 3,002 3,203
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000 shares authorized, none issued or outstanding.... -- --
Common stock, $.001 par value; 50,000 shares authorized, 23,749
shares issued and outstanding (23,546 in 1997)....................................... 24 24
Additional paid-in capital............................................................... 116,564 115,943
Accumulated deficit...................................................................... (79,699) (80,809)
---------------------------------
Total stockholders' equity.................................................... 36,889 35,158
---------------------------------
$ 47,782 $ 42,261
================================
</TABLE>
See accompanying notes.
(Beginning on Page 7 of the 1998 Annual Report)
25
<PAGE> 8
Exhibit 13.1
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended March 31, (in thousands) 1998 1997 1996
===================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................... $1,110 $ 3,549 $ 579
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation ................................................. 2,052 1,719 1,356
Amortization ................................................. 1,083 814 703
Write down of investment in European subsidiaries ............ 3,058 -- --
Deferred tax asset ........................................... (2,707) -- --
Changes in assets and liabilities:
Accounts receivable ...................................... (140) (782) (780)
Inventories .............................................. (2,113) (293) 1,374
Prepaid expenses and other current assets ................ 540 (525) 78
Accounts payable ......................................... 1,114 771 (815)
Accrued payroll and related expenses ..................... 138 351 (108)
Accrued acquisition expenses ............................. -- -- (621)
Deferred contract research revenue ....................... 1,690 (337) 337
Accrued royalties ........................................ 538 (1) 84
Other current liabilities ................................ 345 (69) (1,235)
------------------------------------
Net cash flows provided by operating activities ...... 6,708 5,197 952
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment ............................. (5,082) (1,878) (2,489)
Increase in other assets and intangibles ........................ (2,438) (424) (319)
------------------------------------
Net cash flows used for investing activities ......... (7,520) (2,302) (2,808)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock and warrants ......... 621 5,891 1,201
Payments on obligations under capital leases .................... (42) (43) (117)
Repayments of debt .............................................. (143) (744) (335)
Repayments of line of credit .................................... -- (441) (233)
------------------------------------
Net cash flows provided by financing activities ...... 436 4,663 516
------------------------------------
Net increase (decrease) in cash and cash equivalents .................. (376) 7,558 (1,340)
Cash and cash equivalents at beginning of year ........................ 10,096 2,538 3,878
------------------------------------
Cash and cash equivalents at end of year .............................. $ 9,720 $ 10,096 $ 2,538
====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for interest..........................$ 333 $ 415 $ 506
Cash paid during the year for income taxes ...................... 16 122 --
Purchase of equipment under capital lease ....................... -- -- 123
</TABLE>
See accompanying notes.
26
<PAGE> 9
Exhibit 13.1
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years ended March 31, (in thousands, except per share data) 1998 1997 1996
=====================================================================================================
<S> <C> <C> <C>
REVENUES
Net sales ........................................ $ 45,721 $ 41,919 $ 34,481
Research contracts, license fees and royalties ... 3,758 2,803 572
--------------------------------------
Total revenues ........................... 49,479 44,722 35,053
COSTS AND EXPENSES
Cost of sales .................................... 24,248 19,669 16,033
Research and development ......................... 7,940 6,700 4,130
Sales and marketing .............................. 10,625 10,744 10,451
Write down of investment in European subsidiaries 3,058 -- --
General and administrative ....................... 5,107 3,534 3,483
--------------------------------------
Total costs and expenses ................. 50,978 40,647 34,097
Operating income (loss) ................................. (1,499) 4,075 956
OTHER INCOME AND EXPENSE
Interest and other income ........................ 474 191 164
Interest and other expense ....................... (496) (594) (541)
--------------------------------------
Income (loss) before provision (benefit) for income taxes (1,521) 3,672 579
Provision (benefit) for income taxes .................... (2,631) 123 --
--------------------------------------
Net income .............................................. $ 1,110 $ 3,549 $ 579
======================================
Basic and diluted earnings per share .................... $ .05 $ .16 $ .03
======================================
Shares used in basic per share calculation .............. 23,649 21,976 21,238
======================================
Shares used in diluted per share calculation ............ 23,857 22,791 22,684
======================================
</TABLE>
See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Stock paid-in Accumulated
(in thousands) Shares Amount capital deficit Total
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995 .............................. 20,983 $ 21 $108,854 $(84,937) $ 23,938
Issuance of common stock for cash under
stock options and stock purchase plans ...... 567 1 1,200 -- 1,201
Net income ....................................... -- -- -- 579 579
----------------------------------------------------------------
Balance at March 31, 1996 .............................. 21,550 $ 22 $110,054 $(84,358) $ 25,718
Issuance of common stock for cash under
stock options and stock purchase plans ...... 134 -- 391 -- 391
Issuance of common stock upon exercise of warrants 1,862 2 5,498 -- 5,500
Net income ....................................... -- -- -- 3,549 3,549
----------------------------------------------------------------
Balance at March 31, 1997 .............................. 23,546 $ 24 $115,943 $(80,809) $ 35,158
Issuance of common stock for cash under
stock options and stock purchase plans ...... 203 -- 621 -- 621
Net income ....................................... -- -- -- 1,110 1,110
----------------------------------------------------------------
Balance at March 31, 1998 .............................. 23,749 $ 24 $116,564 $(79,699) $ 36,889
================================================================
</TABLE>
See accompanying notes.
27
<PAGE> 10
Exhibit 13.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quidel Corporation (the "Company") develops, manufactures and markets diagnostic
products for human healthcare. The following is a summary of the Company's
significant accounting policies.
CONSOLIDATION The consolidated financial statements include the accounts of the
Company and its subsidiaries after elimination of all significant intercompany
accounts and transactions.
CASH AND CASH EQUIVALENTS Cash equivalents consist of short-term highly liquid
investments which include certificates of deposit, commercial paper, bankers
acceptances with original maturities of three months or less, and money market
fund investments, all of which are stated at cost, which approximates market.
The Company has established practices relative to diversification and maturities
for safety and liquidity purposes. These practices are periodically reviewed and
modified to take advantage of trends in yields and interest rates. The Company
has not experienced any losses on its cash equivalents and short-term
investments.
The Company accounts for its investments in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires companies to
record certain debt and equity security investments at market value.
CONCENTRATION OF CREDIT RISK The Company sells its products to medical product
distribution companies and physicians worldwide. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
The Company has established provisions for potential credit losses that are
expected to be incurred.
DEPRECIATION AND AMORTIZATION Depreciation and amortization of building and
equipment are provided on the straight-line method over the following estimated
useful lives: building - 40 years; equipment - 3 to 10 years; building
improvements - life of asset; furniture and fixtures - 3 to 10 years.
Amortization of trademarks and distribution agreements is provided on the
straight-line method over 10 years. Capitalized patent costs and patent license
agreements are amortized on the straight-line method over the useful life of the
patent.
REVENUE RECOGNITION Revenue from product sales are recorded net of estimated
returns at the time the product is shipped. Revenues from contracts to perform
research and development and license fees are recorded as earned based on the
performance requirements of the agreements. Payments in excess of amounts earned
are deferred. Revenue from the licensing of distribution rights is recorded when
earned under the terms of the related license agreements.
NET INCOME (LOSS) PER SHARE Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128. "Earnings per Share". In
accordance with this statement, the Company has changed the method used to
calculate earnings per share for the current and prior periods. The new
requirements include a calculation of basic earnings per share, from which the
dilutive effect of stock options are excluded, and the calculation of diluted
earnings per share, both of which did not differ from the previous primary
earnings per share calculation.
The following table reconciles the shares used in computing basic and diluted
earnings per share in the respective years:
<TABLE>
<CAPTION>
Years ended March 31, (in thousands) 1998 1997 1996
========================================================================================================================
<S> <C> <C> <C>
Shares used in basic earnings per share
(weighted average common shares outstanding)................. 23,649 21,976 21,238
Effect of dilutive stock options and warrants................... 208 815 1,446
-------------------------------------------
Shares used in diluted earnings per share calculation........... 23,857 22,791 22,684
===========================================
</TABLE>
(Beginning on Page 10 of the 1998 Annual Report)
28
<PAGE> 11
Exhibit 13.1
FOREIGN OPERATIONS Foreign currency transaction gains and losses were not
significant in the periods presented.
IMPAIRMENT OF LONG-LIVED ASSETS Effective April 1, 1996, the Company adopted
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the estimated undiscounted cash flows to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. At
March 31, 1998 the long-lived assets of the foreign subsidiaries, including
certain related identified intangibles were classified by management as held for
use. However, in April 1998 the Company's Board of Directors approved a plan
under which such foreign subsidiaries' operations would be disposed of through
abandonment. As such, those assets were reclassified as assets to be held for
disposal. This reclassification is considered an indicator of impairment of
those assets as of March 31, 1998. In accordance with FAS 121, management
assessed the recoverability of those assets by comparing the expected cash flows
to be generated by those assets (which are expected to be negative) to their
carrying amounts. This analysis concluded that the carrying amounts of the
assets were not recoverable. Accordingly, management wrote down the assets to
their fair value, which was determined to be minimal.
STOCK OPTIONS The Company has elected to follow Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123 "Accounting
for Stock-Based Compensation" requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income (SFAS 130), which
the Company is required to adopt for fiscal 1999. This statement will require
the Company to report in the financial statements, in addition to net income,
comprehensive income and its components including foreign currency items and
unrealized gains and losses on certain investments in debt and equity
securities. Upon adoption of SFAS 130, the Company is also required to
reclassify financial statements for earlier periods provided for comparative
purposes. Management believes that the adoption of SFAS 130 will not have a
significant impact on the Company's consolidated financial statement
disclosures.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information (SFAS
131), which the Company is required to adopt for fiscal 1999 annual financial
statements. This statement establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Under SFAS 131,
operating segments are to be determined consistent with the way that management
organizes and evaluates financial information internally for making operating
decisions and assessing performance. The Company has not determined the impact
of the adoption of this new accounting standard on its consolidated financial
statement disclosures.
29
<PAGE> 12
Exhibit 13.1
NOTE 2. INTANGIBLE ASSETS
Intangible assets consistof the following:
<TABLE>
<CAPTION>
March 31, (in thousands) 1998 1997
====================================================================================================
<S> <C> <C>
Distribution agreement with European subsidiary.................$ 4,461 $ 4,461
License agreements.............................................. 2,300 --
Patent costs and trademarks..................................... 2,257 2,115
Other investment in European subsidiaries....................... 780 780
-----------------------------------
9,798 7,356
Less accumulated amortization................................... (6,332) (2,502)
------------------------------------
$ 3,466 $ 4,854
====================================================================================================
</TABLE>
The fiscal 1998 increase in accumulated amortization includes a $2,789,000
write-off of the remaining net book value of the Company's long-lived assets
related to European subsidiaries shown above. This expense is included within
the total write-down of investment in European subsidiaries of
$3,058,000 shown in the Consolidated Statements of Income
Certain patent filing costs are capitalized and amortized upon the issuance
of the related patent.
NOTE 3. EXPORT SALES AND FOREIGN OPERATIONS
The Company's export sales were as follows:
<TABLE>
<CAPTION>
Years ended March 31, (in thousands) 1998 1997 1996
=============================================================================================================
<S> <C> <C> <C>
Europe................................................$ 4,309 $ 4,275 $ 4,572
Asia.................................................. 1,637 3,047 3,805
Other international................................... 828 738 682
-------------------------------------------------------
$ 6,774 $ 8,060 $ 9,059
=============================================================================================================
</TABLE>
Sales and operating income (loss) for the three years ended March 31, 1998 and
identifiable assets at the end of each of those years, classified by geographic
area, were as follows:
<TABLE>
<CAPTION>
Years Ended March 31, (in thousands) 1998 1997 1996
==============================================================================================================
<S> <C> <C> <C>
Sales to unaffiliated customers from:
United States....................................$ 41,174 $ 37,462 $ 30,304
Europe........................................... 4,547 4,457 4,177
-------------------------------------------------------
$ 45,721 $ 41,919 $ 34,481
Operating income (loss):
United States....................................$ 1,066 $ 3,679 $ 865
Europe........................................... (2,565) 396 91
-------------------------------------------------------
$ (1,499) $ 4,075 $ 956
Identifiable assets:
United States....................................$ 45,773 $ 36,308 $ 27,117
Europe........................................... 2,009 5,953 6,217
-------------------------------------------------------
$ 47,782 $ 42,261 $ 33,334
==============================================================================================================
</TABLE>
Intersegment sales to affiliates totaled $2,365,000, $2,301,000 and $1,613,000
in the three years ended March 31, 1998, 1997 and 1996, respectively.
Intercompany sales prices are established with consideration of each entity's
contribution to the overall gross profit generated, intercompany gross profit in
inventory is eliminated upon consolidation.
30
<PAGE> 13
Exhibit 13.1
NOTE 4. LEASE COMMITMENTS
Rent expense under operating leases totaled $247,000, $152,000 and $128,000 for
the years ended March 31, 1998, 1997 and 1996, respectively.
Effective September 1, 1997, the Company entered into the lease of a 7,245
square foot research facility. The lease provides for an initial term of two
years and options to renew for three consecutive one-year periods. The remaining
minimum lease payments under the initial term total $225,316 at March 31, 1998.
The Company leases equipment under capital lease agreements. Cost and
accumulated amortization of equipment under capital leases in the accompanying
balance sheets at March 31, 1998 are $181,000 and $95,000, respectively, and at
March 31, 1997 are $181,000 and $64,000, respectively. Amortization of equipment
under capital lease agreements is included in depreciation in the accompanying
financial statements.
NOTE 5. LONG-TERM DEBT, CAPITAL LEASES AND CREDIT FACILITY
Long-term debt and capital leases consist of the following:
<TABLE>
<CAPTION>
March 31, (in thousands) 1998 1997
========================================================================================================================
<S> <C> <C>
9.4% note secured by deed of trust on the Company's San Diego facility,
principal and interest of $37 payable monthly through November 2009...........$ 3,160 $ 3,303
Obligations under capital leases..................................................... 41 83
-----------------------------------
3,201 3,386
Less current portion of long-term debt and obligations under capital leases.......... 199 183
-----------------------------------
$ 3,002 $ 3,203
========================================================================================================================
</TABLE>
The Company has an accounts receivable-based bank line of credit in an amount up
to $3,000,000, which provides for interest at prime plus two percent (10.5% at
March 31, 1998). The line of credit expires August 5, 1998. As of March 31,
1998, there were no outstanding borrowings under the line of credit.
Future principal debt and capital lease payments for fiscal years ended after
March 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 199
2000 174
2001 191
2002 209
2003 230
Thereafter 2,198
-----------------------------------
$ 3,201
-----------------------------------
</TABLE>
NOTE 6. STOCKHOLDERS' EQUITY
COMMON STOCK WARRANTS The Company has outstanding warrants to purchase shares of
its common stock as follows:
<TABLE>
<CAPTION>
Exercise Number
Issue Date Term Price of Shares
====================================================================================================
<S> <C> <C> <C>
April 1992..................................10 years $7.50 950,000
February 1994................................5 years $5.94 117,871
January 1995.................................5 years $3.00 12,500
January 1995.................................5 years $2.50 50,000
April 1995..............................4 yrs, 9 mos $4.50 275,000
May 1995.....................................5 years $4.75 - $8.50 50,000
------------
1,455,371
============
</TABLE>
At March 31, 1998 1,430,371 warrant shares were exercisable.
31
<PAGE> 14
Exhibit 13.1
STOCK OPTIONS The Company has stock options outstanding which were issued under
stock option plans to certain employees, paid consultants and directors. The
options have terms ranging up to ten years and generally vest over four to five
years. In fiscal 1997 the number of shares authorized to be issued under the
Company's 1990 Employee Stock Plan was increased by 750,000 to a total of
2,500,000 shares of common stock, under incentive stock rights, stock options,
stock appreciation rights and stock purchase rights. Also in fiscal 1997, the
Company's stockholders authorized the establishment of the 1996 Non-Employee
Directors Stock Option Plan ("1996 Plan") which provides for the grant of
options to purchase up to 400,000 shares of common stock.
As of March 31, 1998, 320,000 shares have been granted under the 1996
Non-Employee Director Plan. Options for 131,625 shares of common stock
previously granted under the 1990 Director Option Plan remain outstanding.
In June 1997, the Company established a special 300,000 share nonstatutory stock
option plan. This plan was created in order to grant a 300,000 share option to
an executive individual entering into employment with the Company.
The following table summarizes option activity in terms of thousands of shares
and the weighted average exercise per share:
<TABLE>
<CAPTION>
1998 1997 1996
For the years ended March 31, Shares Price Shares Price Shares Price
===========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,131 $ 3.94 1,748 $ 4.03 1,905 $ 3.57
Granted ........................ 850 3.25 818 3.77 440 3.74
Exercised ...................... (165) 2.48 (87) 2.41 (497) 2.05
Canceled ....................... (106) 3.88 (348) 4.33 (100) 4.15
--------------------------------------------------------------------
Outstanding at end of year ..... 2,710 $ 3.81 2,131 $ 3.94 1,748 $ 4.03
===========================================================================================================
</TABLE>
At March 31, 1998, 459,129 shares remained available for grant under the plans.
Following is a further breakdown of the options outstanding as of March 31,
1998:
<TABLE>
<CAPTION>
Contractual Weighted
Weighted Weighted Average
Options Average Average Options Exercise Price
Range of Outstanding Remaining Exercise Exercisable of Options
Exercise Prices (000's) Life in Years Price (000's) Exercisable
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
$0.72 - $3.50 522 8.58 $2.862 51 $1.976
$3.625 936 7.68 3.625 216 3.625
$3.688-$4.375 690 6.70 3.969 275 4.162
$4.50-$6.625 562 4.51 4.826 542 4.823
===============================================================================================================================
$0.72-$6.625 2,710 6.94 $ 3.815 1,084 $ 4.283
</TABLE>
The weighted average fair value of options granted during 1998 and 1997 was
$2.01 and $2.53, respectively.
Pro forma information regarding net income and net income per share is required
by SFAS No. 123 and has been determined as if the Company has accounted for its
employee stock options under the fair value method of that Statement. The fair
value of these options was established at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997, respectively: risk-free interest rates of 6.0%
and 6.6%; dividend yields of 0%; volatility factor of the expected market price
of the Company's common stock of 75% in 1998 and 65% in 1997, and a
weighted-average life of the options of 5.0 years in 1998 and 5.7 years in 1997.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
32
<PAGE> 15
Exhibit 13.1
For purposes of pro forma disclosures, the estimated fair value of the options
and the shares granted under the employee stock purchase plan is amortized to
expense over their respective vesting or option periods. The effects of applying
SFAS No. 123 for pro forma disclosure purposes are not likely to be
representative of the effects on pro forma net income in future years because
they do not take into consideration pro forma compensation expense related to
grants made prior to 1996. The Company's pro forma information follows:
<TABLE>
<CAPTION>
Years ended March 31, (in thousands) 1998 1997
==========================================================================================
<S> <C> <C>
Net income as reported.................................$ 1,110 $ 3,549
Adjusted pro forma net income..........................$ 219 $ 3,135
Net income per share as reported.......................$ .05 $ .16
Adjusted pro forma net income per share................$ .01 $ .14
==========================================================================================
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN In fiscal 1997, the number of shares authorized to
be issued under The Employee Stock Purchase Plan ("the Plan") was increased by
100,000 to a total of 500,000 shares of common stock. Under the Plan, full-time
employees are allowed to purchase common stock through payroll deductions (which
cannot exceed 10% of the employee's compensation) at the lower of 85% of fair
market value at the beginning or end of each six-month option period. As of
March 31, 1998, 412,753 shares had been sold under the Plan, leaving 87,247
shares available for future issuance.
NOTE 7. INCOME TAXES
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
Years ended March 31, (in thousands) 1998 1997
============================================================================================
<S> <C> <C>
Pre tax income:
United States....................................$ (1,170) $ 4,154
Foreign........................................ (351) (482)
---------------------------------
$ (1,521) $ 3,672
============================================================================================
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Years ended March 31, (in thousands) 1998 1997
==================================================================================================
<S> <C> <C>
Current:
Federal................................................$ 51 $ 93
Foreign................................................ 5 --
State................................................ 20 30
--------------------------------
76 123
Benefit of operating loss
carryforwards........................................ (2,707) --
---------------------------------
Provision for income taxes....................................$ (2,631) $ 123
==================================================================================================
</TABLE>
Significant components of the Company's deferred tax assets as of March 31 are
shown below. During the year ended March 31, 1998 the Company decreased the
valuation allowance for deferred tax assets by $2,277,000 ($2,707,000 reduction
in the valuation allowance for net operating losses and $430,000 increase on new
deferred tax assets) as the realization of such assets become more likely than
not based on expected future earnings.
<TABLE>
<CAPTION>
($March 31, (in thousands) 1998 1997
=====================================================================================================
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................$ 24,589 $ 25,244
Tax on credit carryforwards............................. 1,841 1,841
Other-net............................................... 3,343 2,258
-----------------------------------
Total deferred tax assets..................................... 29,773 29,343
Valuation allowance for deferred tax assets................... (27,066) (29,343)
-----------------------------------
Net deferred tax assets $ 2,707 $ --
=====================================================================================================
</TABLE>
33
<PAGE> 16
Exhibit 13.1
At March 31, 1998, the Company had Federal and California income tax net
operating loss carryforwards of approximately $69,971,000 and $1,656,000,
respectively, which will begin to expire in fiscal 1999 if not utilized to
offset taxable income. The difference between the Federal and California tax
loss carryforwards is primarily attributable to the capitalization of research
and development expenses for California tax purposes and 50% limitation on
California loss carryforwards as well as the shorter five year carryforward
period allowed by California (the Federal carryforward period is 15 years). The
Company also has federal investment tax, research and development and
alternative minimum tax credit carryforwards of $1,438,000 and California
research and development, manufacturers' investment and alternative minimum tax
credit carryforwards of $586,000 which will begin to expire in fiscal 1999 if
not utilized to offset taxable income.
A reconciliation between the amount of tax computed by multiplying income before
taxes by the applicable statutory rate and the effective tax rate is as follows:
<TABLE>
Years Ended March 31, 1998 1997 1996
==========================================================================================================
<S> <C> <C> <C>
Statutory tax rate............................... 34.0% 34.0% 34.0%
Utilization of valuation allowance............... (33.4) (31.2) (34.0)
Reduction in valuation allowance ................ (178.0) -- --
State taxes net of federal benefit............... 0.8 0.6 --
Other............................................ 3.6 0.1 --
---------------------------------------------------------
Effective rate (173.0%) 3.5% --
==========================================================================================================
</TABLE>
In accordance with Internal Revenue Code Section 382, a change in ownership of
greater than 50% of a corporation within a three year period may limit the
Company's ability to utilize its existing net operating losses and tax credit
carryforwards. As a result of the 1991 merger with Monoclonal Antibodies, Inc.,
the Company succeeded to the tax carryforwards, which were generated by
Monoclonal and Quidel prior to the merger. Such loss carryforwards totaled
approximately $76,000,000 and $8,000,000 for Federal and California purposes,
respectively. The Company believes that, as a result of the merger, such a
change in ownership has occurred. However, the Company does not believe
application of Section 382 will materially impact the utilization of the
Company's net operating losses and tax credits.
NOTE 8. COMMITMENTS
RESEARCH AND DEVELOPMENT AGREEMENTS During 1998 and 1997 the Company entered
into agreements to perform research and development with Glaxo Wellcome
("Glaxo"). Under these agreements, specified costs related to the performance of
research and development for certain diagnostic test products are reimbursed by
Glaxo. The agreements provide for total funding up to $12,144,000. The Company
recorded revenue equal to the sum of the direct costs incurred under the
agreements plus a permitted overhead surcharge of $3,183,000 and $2,491,000 in
fiscal 1998 and 1997, respectively. In exchange for the funding provided by
Glaxo under these agreements, upon successful completion of the planned
products, the Company will be required to pay royalties on sales of the
developed products to Glaxo, as defined in the agreements.
NOTE 9. EMPLOYEE BENEFIT PLAN
The Company has defined contribution 401K plan (the "Plan") covering all
employees who are eligible to join the Plan upon employment. Employees may
contribute up to 20% of their compensation per year (subject to a maximum limit
by federal law). The Company does not match contributions to the Plan.
34
<PAGE> 17
Exhibit 13.1
NOTE 10. LEGAL PROCEEDINGS
In April 1997, Becton Dickinson and Co. (the "plaintiff") filed a lawsuit
against the Company alleging that the Company's strep and chlamydia products and
certain of its pregnancy and ovulation products (collectively, the "Products")
infringe on two patents of the plaintiff. The Products in issue represent a
substantial majority of the Company's revenues. In June 1997, the Company
entered into a settlement agreement with the plaintiff. As a part of that
agreement, the Company received a license from the plaintiff under both patents
in exchange for a cash license fee, a royalty on net sales of the Products after
April 1, 1997, and a license of the Company's Q-Label technology back to
plaintiff (with a royalty on future net sales). The license fee paid of
$2,300,000 was capitalized and is being amortized over 7.5 years. Royalty
expense applicable to this agreement totaled $1,692,000 in fiscal 1998.
NOTE 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly results for the years ended
March 31, 1998 and 1997.
<TABLE>
<CAPTION>
(In thousands, except per share data) Net Income
Gross Net Income
(Loss)
Year ended March 31, 1998 Revenues Profit (Loss) Per Share
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31.................................$ 14,681 $ 5,841 $ (107) $ --
December 31............................... 13,442 6,256 1,704 .07
September 30.............................. 11,987 5,346 304 .01
June 30................................... 9,369 4,030 (791) (.03)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year ended March 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31..................................$ 12,905 $ 6,444 $ 1,343 $ .06
December 31................................ 12,437 6,369 1,805 .08
September 30............................... 9,668 4,660 208 .01
June 30.................................... 9,712 4,777 193 .01
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Basic and diluted net income per share are the same for all quarterly periods.
The net loss for the quarter ended March 31, 1998 included expense of $3,058,000
associated with the write-down of investment in European subsidiaries offset by
an income tax credit of $2,707,000.
35
<PAGE> 18
Exhibit 13.1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Quidel Corporation
We have audited the accompanying consolidated balance sheets of Quidel
Corporation as of March 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended March 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quidel Corporation
at March 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended March 31, 1998,
in conformity with generally accepted accounting principles.
San Diego, California /s/ ERNST & YOUNG LLP
May 11, 1998 ------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCK PRICE RANGE
The Company's common stock is traded on the NASDAQ National Market System under
the symbol QDEL. The following table sets forth the range of high and low
closing prices for the Company's common stock.
<TABLE>
<CAPTION>
Quarter Ended Low High
===========================================================================================
<S> <C> <C>
March 31, 1998............................. 2.81 3.59
December 31, 1997.......................... 3.06 4.93
September 30, 1997......................... 3.12 5.12
June 30, 1997.............................. 2.62 4.37
March 31, 1997............................. 3.87 5.06
December 31, 1996.......................... 3.50 4.81
September 30, 1996......................... 3.37 5.25
June 30, 1996.............................. 4.75 6.19
</TABLE>
No cash dividends have been paid on the common stock and the Company does not
anticipate paying any dividends in the foreseeable future. As of March 31, 1998,
the Company had approximately 1,139 stockholders of record.
FORM 10-K A copy of Quidel's annual report on form 10-K is available without
charge to shareholders upon written request to the Quidel Investor Relations
Department at the Company's headquarters in San Diego, California.
(Page 16 of the 1998 Annual Report)
36
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Quidel Corporation of our report dated May 11, 1998, included in the 1998
Annual Report to Shareholders of Quidel Corporation.
We also consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 333-35355, 333-10503) and Form S-3 (No. 333-00667) of Quidel
Corporation of our report dated May 11, 1998, with respect to the consolidated
financial statements of Quidel Corporation incorporated by reference in the
Annual Report (Form 10-K) of Quidel Corporation for the year ended March 31,
1998.
ERNST & YOUNG LLP
San Diego, California
June 29, 1998
37
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 9,720
<SECURITIES> 0
<RECEIVABLES> 8,524
<ALLOWANCES> 802
<INVENTORY> 5,897
<CURRENT-ASSETS> 24,681
<PP&E> 25,244
<DEPRECIATION> 8,447
<TOTAL-ASSETS> 47,782
<CURRENT-LIABILITIES> 7,891
<BONDS> 3,002
0
0
<COMMON> 24
<OTHER-SE> 36,865
<TOTAL-LIABILITY-AND-EQUITY> 47,782
<SALES> 45,721
<TOTAL-REVENUES> 49,479
<CGS> 24,248
<TOTAL-COSTS> 50,978
<OTHER-EXPENSES> (474)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 496
<INCOME-PRETAX> (1,521)
<INCOME-TAX> (2,631)
<INCOME-CONTINUING> 1,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,110
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
