<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-10961
QUIDEL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2573850
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10165 MCKELLAR COURT, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices)
(858) 552-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of November 5, 1999, 23,857,285 shares of common stock were outstanding.
<PAGE>
QUIDEL CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations for the Six Months Ended
September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 6. Exhibits and Reports on Form 8-K 17
Signature 18
</TABLE>
2
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QUIDEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 MARCH 31,
(UNAUDITED) 1999
------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,132 $6,622
Accounts receivable, net 7,603 8,388
Inventories 6,642 5,811
Prepaid expenses and other 750 798
------- -------
Total current assets 22,127 21,619
Property and equipment, net 21,029 18,219
Intangible assets, net 5,892 3,084
Deferred tax asset 8,760 9,083
Other assets 1,399 601
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$59,207 $52,606
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,036 $2,283
Accrued payroll and related expenses 934 1,013
Current portion of long-term debt and obligations
under capital leases 777 174
Bank line of credit 7,500 -
Deferred contract research revenue - 592
Accrued royalties 492 659
Other current liabilities 2,713 351
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Total current liabilities 13,452 5,072
Long-term debt and obligations under capital leases 2,914 2,828
Stockholders' equity:
Common stock, $.001 par value; 50,000 shares authorized,
23,857 and 23,822 shares issued and outstanding at
September 30, 1999, and March 31, 1999, respectively 24 24
Additional paid-in capital 116,788 116,720
Accumulated deficit (73,971) (72,038)
------- -------
Total stockholders' equity 42,841 44,706
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$59,207 $52,606
------- -------
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</TABLE>
See accompanying notes.
3
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QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
REVENUES -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 11,584 $ 10,344 $ 22,184 $ 20,147
Research contract, license fees and royalties 619 1,076 1,591 2,144
-------- -------- -------- --------
Total revenues 12,203 11,420 23,775 22,291
COSTS AND EXPENSES
Cost of sales 6,374 6,074 11,809 11,099
Sales and marketing 3,685 2,251 6,340 4,473
General and administrative 1,717 1,798 2,774 3,003
Research and development 2,373 2,067 3,957 4,114
Write down and closure of European subsidiaries - 20 - 440
Acquired in process research and development 820 - 820 -
-------- -------- -------- --------
Total costs and expenses 14,969 12,210 25,700 23,129
-------- -------- -------- --------
Operating income (loss) (2,766) (790) (1,925) (838)
Other income (expense) 25 74 (8) 140
-------- -------- -------- --------
Income (loss) before provision for income taxes (2,741) (716) (1,933) (698)
Provision for income taxes 323 - - -
-------- -------- -------- --------
Net loss $ (2,418) $ (716) $ (1,933) $ (698)
-------- -------- -------- --------
Loss per share - basic and diluted $ (.10) $ (.03) $ (.08) $ (.03)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in basic and diluted per share calculation 23,840 23,780 23,831 23,767
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes.
<PAGE>
QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended September 30,
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,933) $ (698)
Adjustments to reconcile net loss to net cash
flows, excluding effect of acquisition,
provided by operating activities:
Depreciation and amortization 2,236 1,588
Charge for acquired in-process research and development 820 -
Changes in operating assets and liabilities
Accounts receivable 2,386 1,752
Inventories 609 (550)
Prepaid expenses and other current assets 780 172
Accounts payable (1,918) (615)
Accrued payroll and related expenses (79) (329)
Deferred contract research revenue (592) 6
Accrued royalties (167) (93)
Other current liabilities (1,383) 309
------------ -------------
Net cash flows provided by operating activities 759 1,542
INVESTING ACTIVITIES
Additions to equipment and improvements (2,525) (2,570)
Increase (decrease) in intangibles and other assets 240 (58)
Payment for purchase of Metra, net of cash acquired (5,233) -
------------ -------------
Net cash flows used for investing activities (7,518) (2,628)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 68 80
Payments on notes payable, long term debt and
obligations under capital leases (255) (99)
Proceeds from bank line of credit 7,500 -
Proceeds from bank term loan 18,046 -
Payment of bank term loan (18,046) -
------------ -------------
Net cash flows provided by (used for) financing
activities 7,313 (19)
Effect of exchange rate changes on cash (44) -
------------ -------------
Net increase in cash and cash equivalents 510 (1,105)
Cash and cash equivalents at beginning of period 6,622 9,720
------------ -------------
Cash and cash equivalents at end of period $ 7,132 $ 8,615
------------ -------------
------------ -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 164 $ 175
------------ -------------
------------ -------------
Cash paid during the period for income taxes $ - $ 69
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</TABLE>
See accompanying notes.
5
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QUIDEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
l. BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission and, therefore, do not include all information and
footnote disclosures normally included in audited financial statements. We
are responsible for the unaudited financial statements included in this
report. These financial statements reflect all adjustments, consisting of
only normal recurring adjustments which, in the opinion of management are
necessary to fairly present the consolidated financial position as of
September 30, 1999, and the consolidated results of operations for the
three and six months ended September 30, 1999 and 1998. The results of
operations for the six months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the year ended March 31, 2000.
For more complete financial information, these financial statements, and
the notes thereto, should be read in conjunction with the consolidated
audited financial statements for the year ended March 31, 1999, included in
the Company's Form 10-K filed with the Securities and Exchange Commission.
2. RECLASSIFICATION
Certain amounts from the prior year have been reclassified to conform to
the current year's presentation.
3. LOSS PER SHARE
Loss per share is computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share". Basic and diluted
earnings per share are computed using the weighted average number of common
shares outstanding during each period. Common equivalent shares are
excluded as the effect would be antidilutive.
4. BALANCE SHEET INFORMATION
Inventories are recorded at the lower of cost (first-in, first-out) or
market and consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
------------ --------
<S> <C> <C>
Raw materials $ 3,414 $ 2,935
Work-in-process 2,133 1,935
Finished goods 1,095 941
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$ 6,642 $ 5,811
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</TABLE>
5. ACQUISITION OF METRA BIOSYSTEMS, INC.
During the quarter ended September 30, 1999, the Company completed the
acquisition of all the outstanding stock of Metra Biosystems, Inc.
("Metra") for approximately $22.7 million, or $1.78 per share, based upon
12,732,826 shares outstanding, in an all cash tender offer. Metra is a
world leader in the diagnosis and detection of bone loss for the management
of osteoporosis and other bone diseases. The total consolidation and
transaction costs to the Company were approximately $7.1 million, net of
Metra's estimated cash of approximately $19 million. The tender offer was
financed from cash reserves, proceeds from a short-term bank loan and
proceeds from a revolving line of credit. The short-term bank loan was
repaid with the Metra cash acquired.
-Accounting Treatment of Acquisition
The transaction was accounted for under the purchase method of accounting
and, accordingly, the assets and liabilities were recorded based on their
par values at the date of acquisition, and the result of operations have
been included in the financial statements for the periods subsequent to
acquisition.
The Company allocated the fair values of the net assets acquired between
acquired in-process research and development of $820,000 and the purchase
price in excess of identifiable assets of approximately $3.1 milllion. The
$820,000 allocated to acquired in-process research and development was
written off as a one-time charge.
6
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In addition, approximately $3.1 million of intangible assets were
capitalized and will be amortized over five years.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the
related product sales. The value assigned to acquired in-process technology
was determined by estimating the costs to develop the purchased in-process
technology into commercially viable products, estimating the resulting net
cash flows from the projects and discounting the net cash flows to their
present value. With respect to the acquired in-process technology, the
calculations of value were adjusted to reflect the value creation efforts
of Metra prior to the close of the acquisition.
The nature of the efforts required to develop acquired in-process
technology into commercially viable products principally relates to the
completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet their
design requirements, including functions, features and technical
performance requirements. If the research and development project and
technologies are not completed as planned, they will neither satisfy the
technical requirements of a changing market nor be cost effective. No
assurance can be given, however, that the underlying assumptions used to
estimate expected product sales, development costs or profitability, or the
events associated with such projects, will transpire as estimated.
The Company continues to work toward the completion of the research and
development of the projects acquired. The majority of the projects are on
schedule, but delays may occur due to changes in technological and market
requirements for the Company's products. The risks associated with these
efforts are still considered high and no assurance can be made that any
upcoming products will meet with market acceptance. Delays in the
introduction of certain products may adversely affect the Company's
revenues and earnings in future quarters.
-Pro Forma Financial Information
The following table presents the unaudited pro forma results assuming the
Company had acquired Metra at the beginning of fiscal years 1999 and 2000,
respectively. Net loss and basic and diluted loss per share amounts have
been adjusted to exclude an acquired in-process research and development
write-off of $820,000 and net interest income of $522,000 and $154,000 for
the six months ended September 30, 1998 and 1999, respectively, and to
include goodwill amortization of $312,000 and $208,000 for the six months
ended September 30, 1998 and 1999, respectively. This information may not
necessarily be indicative of the future combined results of the Company.
In thousands, except per share data
<TABLE>
<CAPTION>
PROFORMA
FOR THE SIX MONTHS ENDED SEPTEMER 30
(unaudited)
------------------------------------
1998 1999
------------- --------------
<S> <C> <C>
Revenues $ 25,270 $ 25,785
Net loss $ (7,959) $ (3,939)
Basic and diluted loss per share $ (.33) $ (.17)
</TABLE>
6. SUBSEQUENT EVENT
During October 1999, the Company announced that it is changing its fiscal
year end from a March 31 fiscal year to a December 31 fiscal year. The
Company will report the transition period on a Form 10-K for the nine
months ended December 31, 1999. In addition, the Company will also report
on Form 10-K the financial statements for the twelve months ended December
31, 1999.
7
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
Quidel Corporation ("the Company") discovers, develops, manufactures and markets
rapid diagnostic products for point-of-care detection in the areas of women's
health and infectious diseases. These products provide simple, accurate and
cost-effective diagnoses for acute and chronic conditions. Products are sold
worldwide to professionals in the physician's office and clinical laboratories,
and to consumers through organizations that provide private label, store brand
products.
This discussion contains forward-looking statements within the meaning of the
federal securities laws that involve material risks and uncertainties. Many
possible events or factors could affect our future financial results and
performance, such that our actual results and performance may differ materially.
Difference in operating results may arise as a result of a number of factors,
including, without limitation, seasonality, adverse changes in the competitive
and economic conditions in domestic and international markets, actions of our
major distributors, manufacturing and production delays or difficulties, adverse
actions or delays in product reviews by the FDA, and the lower acceptance of our
new products than forecast. Forward-looking statements typically are identified
by the use of terms such as "may", "will", "should", "might", "expect",
"anticipate", "estimate" and similar words, although some forward-looking
statements are expressed differently. The risks described under "Business Risks"
and in other sections of this report and in other reports and registration
statements of Quidel filed with the Securities and Exchange Commission from time
to time should be carefully considered. No forward-looking statement can be
guaranteed and actual future results may vary materially. The following should
be read in conjunction with the Condensed Consolidated Financial Statements and
Notes thereto included elsewhere in this Form 10-Q.
ENTERPRISE COMPUTING SYSTEM
During the quarter ended September 30, 1999, the Company began daily
operations with a sophisticated enterprise resource planning computer
operating system. With this new system, the operations of the business are
expected to become more efficient due to the streamlining of processes and
procedures, many of which are being performed manually. The information to be
provided from this system will assist management with day-to-day operating
decisions. Costs of approximately $1.8 million were capitalized since the
inception of this project. These costs will be depreciated over a five year
life.
INFLUENZA DIAGNOSTIC TEST
During September 1999, the Company received clearance from the Food and Drug
Administration ("FDA") to market a rapid, point-of-care diagnostic test to
detect influenza A and B. This diagnostic test is designed to assist health
care providers in identifying patients infected with influenza who would
benefit from immediate diagnosis and intervention. The test was developed
through a product development collaboration with Glaxo Wellcome, plc. The
Company expects to market the test worldwide, and to begin shipping the
product during November 1999.
RESULTS OF OPERATIONS
For the three months ended September 30, 1999, the net loss was $2,418,000 or
$.10 per share, compared to a net loss of $716,000, or $.03 per share, for
the three months ended September 30, 1998. The primary reason for the
increase in net loss relates to the consolidation of Metra Biosystems, Inc.
("Metra"), which was acquired during the quarter. Metra had a net loss of
$892,000 for the quarter, and an additional $820,000 was written-off for
in-process research and development acquired from Metra. In addition, the net
loss also increased due to the conversion and implementation of our new
computer system. Production was delayed as training and implementation
occurred, resulting in a backlog of product shipments of approximately
$700,000 at quarter end. Had these costs and delays not occurred, the net
loss would have been approximately the same as the prior year.
8
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NET SALES TRENDS BY MAJOR SALES CHANNELS
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
-------------------- ------------------
(IN THOUSANDS) 1999 1998 1999 1998
------- ------- ------- -------
<C> <C> <C> <C>
Domestic sales
Professional sales $ 7,619 $ 6,735 $13,735 $13,066
OTC, OEM and Clinical lab sales 1,283 1,183 3,394 1,841
------- ------- ------- -------
Total domestic sales 8,902 7,918 17,129 14,907
Percent of total sales 77% 77% 77% 74%
------- ------- ------- -------
International sales
Export sales 1,078 1,415 2,654 3,113
European subsidiary sales 1,604 1,011 2,401 2,127
------- ------- ------- -------
Total international sales 2,682 2,426 5,055 5,240
Percent of total sales 23% 23% 23% 26%
------- ------- ------- -------
Total net sales $11,584 $10,344 $22,184 $20,147
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Net sales for the quarter increased by 12% compared to the prior year.
Professional sales for the three months ended September 30,1999 in the Company's
core product areas of pregnancy, Strep A and H. pylori remained flat compared to
the prior year due to a backlog of sales orders of approximately $700,000 at
September 30, 1999, caused by delays during the implementation and training
related to the new enterprise-wide computer system. Had the backlog not
occurred, Quidel's net sales would have been approximately 3% above the prior
year's net sales. Metra's domestic bone marker sales were $934,000, or 8% of net
sales. Over the counter ("OTC"), original equipment manufacture ("OEM") and
clinical lab sales grew by 8% primarily due to our partnered retail store brand
program for distribution of pregnancy tests being launched during the same
period in the prior year.
International sales increased by 10% over the prior year. This increase in sales
is due to the acquisition of Metra and their three European subsidiaries.
Contract research and development revenue is principally related to funding
provided by Glaxo Wellcome for two separate multi-year rapid diagnostic test
development programs for influenza A and B, which commenced in March 1996,
and the development of two point-of-care diagnostic tests to detect herpes
simplex virus ("HSV"), which commenced in October 1997. In May 1999, a 510(k)
application was filed with the FDA for marketing clearance of the influenza A
and B point-of-care test. The 510(k) clearance was received in September
1999. The anticipated filing of a 510(k) application for clearance for the
HSV tests is expected to be during 2000. The revenue recognized under the
Glaxo Wellcome programs is equal to the sum of the program direct research
costs (see Operating Expenses, below) and allocated support service costs.
License fee income generally relates to one-time fees received for the right
to distribute our products.
9
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COST OF SALES AND GROSS PROFIT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
PERCENT OF PERCENT OF
(IN THOUSANDS) 1999 NET SALES 1998 NET SALES
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Net sales $11,584 $10,344
Direct Costs - material,
labor and other variable cost 3,764 32 3,953 38
Royalty Expense -
patent licenses 571 5 504 5
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Total direct cost 4,335 37 4,457 43
Direct Margin -
contribution per sales dollar 63% 57%
Manufacturing overhead cost 2,039 18 1,617 16
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Total cost of sales 6,374 55 6,074 59
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Gross profit $5,210 45 $4,270 41
------- -------
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</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
PERCENT OF PERCENT OF
(IN THOUSANDS) 1999 NET SALES 1998 NET SALES
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Net sales $22,184 $20,147
Direct Costs - material,
labor and other variable cost 7,012 32 6,940 34
Royalty Expense -
patent licenses 1,100 5 975 5
------- -------
Total direct cost 8,112 37 7,915 39
Direct Margin -
contribution per sales dollar 63% 61%
Manufacturing overhead cost 3,697 17 3,184 16
------- -------
Total cost of sales 11,809 53 11,099 55
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Gross profit $10,375 47 $9,048 45
------- -------
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</TABLE>
Gross profit as a percentage of sales for the three and six months ended
September 30, 1999 increased as a percent of sales from the prior year. This
increase in profit margin is due to the Company improving its procedures for the
procurement of raw materials in order to reduce overall product costs. In
addition, the Company is also reviewing its credit and rebate policy to identify
potential increases in product sale profitability.
10
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OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
PERCENT OF PERCENT OF
(IN THOUSANDS) 1999 NET SALES 1998 NET SALES
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Sales and marketing
Domestic professional sales and marketing $2,458 $1,492
International sales and marketing 1,226 759
------- -------
Total sales and marketing 3,684 32 2,251 22
General and administrative 1,716 15 1,798 17
Research and development
Quidel research projects 1,589 1,144
Contract research - direct costs 785 923
------- -------
Total research and development 2,374 20 2,067 20
Purchased in Process R & D 820 7 - -
Write down and closure of European subsidiaries - - 20 -
------- -------
Total operating expenses $8,594 74 $6,136 59
------- -------
------- -------
Total operating expenses, excluding contract
research and restructuring cost $7,809 67 $4,946 48
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------
PERCENT OF PERCENT OF
(IN THOUSANDS) 1999 NET SALES 1998 NET SALES
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Sales and marketing
Domestic professional sales and marketing $4,662 2,923
International sales and marketing 1,678 1,419
------- -------
Total sales and marketing 6,340 29 4,473 22
General and administrative 2,774 13 3,003 15
Research and development
Quidel research projects 2,498 2,302
Contract research - direct costs 1,459 1,812
------- -------
Total research and development 3,957 18 4,114 20
Purchased in Process R & D 820 4 - -
Write down and closure of European subsidiaries - - 440 2
------- -------
Total operating expenses $13,891 63 $12.030 60
------- -------
------- -------
Total operating expenses, excluding contract
research and restructuring cost $12,432 56 $ 9,778 49
------- -------
------- -------
</TABLE>
Operating expenses increased to $8.6 million for the three months ended
September 30, 1999 from $6.1 million in the prior year. This increase includes a
non-recurring write off of purchased in process research and development of
$820,000, and a recurring goodwill amortization charge of $105,000, both
relating to the acquisition of Metra. The balance of the increase in operating
expenses is due to the reorganization of the sales and marketing teams at both
Quidel and Metra.
Sales and marketing expenses increased to 32% of net sales. Both international
and domestic sales and marketing expense increased due to a new infrastructure
that was not present in the prior year, consisting of an extensive
11
<PAGE>
worldwide sales and marketing function, including subsidiaries in the UK,
Germany and Italy purchased as part of the acquisition of Metra.
Research and development expenses remained constant at 20% of net sales for the
three months ended September 30, 1999. There was a decrease in costs at Quidel
due to contract research programs being completed in fiscal 1999, as well as the
research program related to the influenza A and B diagnostic kit being completed
during the quarter. These decreases were offset by an increase in costs incurred
by research programs currently in place at Metra.
General and administrative expenses decreased to 15% of sales in the current
quarter as compared to the prior year primarily as a result of decreased outside
consulting costs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of $7.1
million compared to $6.6 million at March 31, 1999. Cash and cash equivalents
increased at September 30, 1999 due to the receipt of a bank line of credit
of $7.5 million which was used in the acquisition of Metra. These funds were
offset in part by outflows relating to our investment in implementing an
enterprise resource planning computer system to assist in operating our
business more efficiently, investments in improved technology to increase
efficiencies in manufacturing operations, as well as to support the
operations at Metra.
The principal requirements for cash are for working capital, including
capital equipment additions, and the costs to continue implementation of the
computer operating system. Cash requirements are expected to be funded by the
results of operations. In addition, cash is anticipated to be raised during
fiscal 2000 through the sale and leaseback of the corporate headquarters
facility. Such cash will be used to repay the $3.0 million real estate loan
balance and a portion of the line of credit associated with the acquisition
of Metra. Additional working capital will be required to pay the remaining
balance of the line of credit at the time of the sale. The Company also
intends to continue searching for acquisition and technology licensing
candidates. As such, the Company may need to incur additional debt to
successfully complete the acquisition. Cash requirements fluctuate as a
result of numerous factors, such as the extent to which we use or generate
cash in operations, progress in research and development projects,
competition and technological developments and the time and expenditures
required to obtain governmental approval of our products. Based on the
current cash position and the current assessment of future operating results,
we believe that the existing sources of liquidity should be adequate to meet
operating needs during fiscal 2000.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
- - Our Program - We established a Year 2000 Compliance Team in 1998. This team
consists of members from each functional area of the Company. The implementation
of a full Year 2000 Compliance Program is ongoing. Our Chief Financial Officer
is the officer responsible for the Year 2000 Compliance Program, and the
individual who leads the Year 2000 Compliance Team reports directly to the Chief
Financial Officer. Our Audit Committee and Board of Directors provides
supervisorial oversight of our efforts relating to Year 2000 readiness.
Our plan to resolve the Year 2000 issue involves the following four phases:
assessment, renovation, validation and implementation. To date, we have fully
completed assessment of all systems that could be significantly affected by the
Year 2000. The completed assessment indicated that most of our significant
systems are ready for the Year 2000. Accordingly, we do not believe that the
Year 2000 presents a material exposure as it relates to our operations. In
addition, we have gathered information about the Year 2000 compliance status of
our significant suppliers and subcontractors and we continue to monitor their
compliance.
We have completed the assessment phase of all of our operations and business
activities. We have determined that our products are Year 2000 ready. During the
assessment phase, we identified several business systems which were not Year
2000 compliant. We have since converted some of those business systems to be
fully Year 2000 ready, such as our telephone and security systems. We have also
converted our business enterprise software and began operations with it during
September, 1999.
Furthermore, as a result of our assessment of other, less critical systems which
are not year 2000 compliant, we believe we have identified adequate remedies to
make those systems Year 2000 ready. Specific examples of "non-
12
<PAGE>
compliant" systems we have identified include certain desktop personal
computers and applications software where compliant versions are readily
available from current suppliers as well as others. We expect to complete
renovation of our less critical systems by November 1999. Completion of the
testing phase for all significant systems is expected by November 1999. To
date, approximately 90% of our systems have been tested and found to be
compliant.
- - Third Parties and the Year 2000 - We have queried our significant suppliers
and subcontractors that do not share information systems with us (external
agents). To date, we have not become aware of any external agent with a Year
2000 issue that would materially impact our results of operations, liquidity, or
capital resources. However, we have no means of ensuring that external agents
will be Year 2000 ready. To further assess the stability of our supply chain, we
are continuing to communicate with suppliers regarding their programs. The
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially impact us. The effect of non-compliance by
external agents is not determinable.
- - Year 2000 Renovation Costs - We have utilized both internal and external
resources to reprogram or replace, test, and implement the software and
operating equipment for Year 2000 modifications. The total cost of the Year 2000
project is estimated at $400,000 and is being funded through operating cash
flows primarily to be incurred in the second half of 1999. The actual amount we
spend may differ from our estimates due to a variety of factors including the
availability of trained personnel and other resources, and our ability to
identify, assess and test all relevant systems.
- - Risks - Management believes it has an effective program in place to test and
confirm Year 2000 readiness in a timely manner. The final phases of the Year
2000 program have not yet been completed. In the event that we do not complete
the testing phase to confirm readiness, and if the systems believed to be ready
are not, we may be unable to manufacture and distribute products and may be
unable to use our financial and operating systems. Such a scenario could result
in loss of revenues which could cause a material adverse impact to our
operations, liquidity, capital resources or financial results. In addition,
disruptions in the economy generally resulting from Year 2000 issues could also
materially adversely affect us. We could be subject to litigation for computer
systems product failure, for example, equipment shutdown or failure to properly
date business records. We cannot reasonably estimate the amount of potential
liability and lost revenue we could experience in that event.
- - Contingency Plans - Contingency plans to address failure of renovation
activities as applied to internal systems and external agents. We have
identified specific contingency plan options related to our supply chain
management process. For example, in assessing our critical suppliers, we have
prioritized these business relationships and are developing plans to provide for
the continuance of product availability through accelerated purchasing should
adequate assurances regarding a specific entity's ability to become ready for
the Year 2000 not be obtained. We expect that our contingency plans will be
developed by November 1999. However, there can be no guarantee that the plans or
the implementation of the plans will be adequate to protect against adverse
impacts to our operations, liquidity, capital resources or financial results.
ACQUISITION OF METRA BIOSYSTEMS, INC.
During the quarter ended September 30, 1999, Quidel completed the acquisition of
all of the outstanding stock of Metra for approximately $22.7 million, or $1.78
per share, based upon 12,732,826 shares outstanding, in an all cash tender
offer. Metra is a world leader in the diagnosis and detection of bone loss for
the management of osteoporosis and other bone diseases. The total consolidation
and transaction costs to the Company were approximately $7.1 million, net of
Metra's estimated cash of approximately $19 million. The tender offer was
financed from cash reserves, proceeds from a short-term bank loan and proceeds
from a revolving line of credit. The short-term bank loan was repaid with the
Metra cash acquired.
CHANGE IN FISCAL YEAR END
During October 1999, the Company announced that it is changing its fiscal year
end from a March 31 fiscal year to a December 31 fiscal year. The Company will
report the transition period on a Form 10-K for the nine months ended December
31, 1999. In addition, the Company will also report on Form 10-K the financial
statements for the twelve months ended December 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quidel does not and did not invest in market risk sensitive instruments in this
fiscal year or the prior year. Quidel had and has no exposure to market risk
with regard to changes in interest rates. Quidel does not and has not used
derivative financial instruments for any purposes, including hedging or
mitigating interest rate risk.
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<PAGE>
BUSINESS RISKS THAT MAY AFFECT RESULTS
In this section, all reference to "we," "our," and "us" refer to Quidel.
OPERATING RESULTS MAY FLUCTUATE WHICH COULD HAVE A NEGATIVE EFFECT ON THE PRICE
OF OUR COMMON STOCK
Operating results may continue to fluctuate, in a given quarter or annual
period, from prior periods as a result of a number of factors, many of which
are outside of our control, including:
- - seasonal fluctuations in our sales of strep throat and influenza
diagnostic tests which are generally highest in fall and winter,
- - changes in the level of competition,
- - changes in the economic conditions in both our domestic and international
markets,
- - delays in shipments of our products to customers or from our
suppliers,
- - manufacturing difficulties and fluctuations in our manufacturing
output, including those arising from constraints in our manufacturing
capacity,
- - actions of our major distributors,
- - adverse product reviews or delays in product reviews by regulatory
agencies,
- - the timing of significant orders,
- - changes in the mix of products we sell; and
- - costs, timing and the level of acceptance of new products.
Fluctuations for any reason that decrease sales or profitability, including
those listed, could cause our growth or operating results to fall below the
expectations of investors and securities analysts, and our stock price to
decline.
OUR PRODUCTS AND MARKETS REQUIRE CONSIDERABLE RESOURCES TO DEVELOP WHICH MUST BE
RECOUPED IN ADDITIONAL SALES
The development, manufacture and sale of diagnostic products requires a
significant investment of resources. Our increased investment in sales and
marketing activities, manufacturing scale-up and new product development and
testing is continuing to increase our operating expenses, and our operating
results would be adversely affected if our sales and gross profits do not
correspondingly increase, or if our product development efforts are
unsuccessful or delayed.
Development of new markets also requires a substantial investment of resources
and, if adequate resources, including funds, are not available, we may be
required to delay or scale back market developments.
THE LOSS OF KEY DISTRIBUTORS OR AN UNSUCCESSFUL EFFORT TO DIRECTLY DISTRIBUTE
OUR PRODUCTS COULD SIGNIFICANTLY DISRUPT OUR BUSINESS
We rely primarily on a small number of key distributors to distribute our
products. The loss or termination of our relationship with any of these key
distributors could significantly disrupt our business unless suitable
alternatives can be found. Finding a suitable alternative may pose challenges
in the industry's competitive environment. Another suitable distributor, with
whom we can negotiate a new distribution or marketing agreement on
satisfactory terms may not be found. We could expand our efforts to
distribute and market our products directly, however, this would require an
investment in additional sales and marketing resources, including hiring
additional field sales personnel, which would significantly increase our
future selling, general and administrative expenses. In addition, our direct
sales, marketing and distribution efforts may not be successful.
WE MAY NOT ACHIEVE EXPECTED MARKET ACCEPTANCE OF OUR PRODUCTS AMONG PHYSICIANS
AND OTHER HEALTH CARE PROVIDERS
Significant competitors for our products are clinical reference laboratories
and hospital-based laboratories, which provide the majority of diagnostic
tests used by physicians and other health-care providers. Our estimates of
future sales depend on, among other matters, the capture of sales from these
laboratories, and if we do not capture sales as expected our operating
results may fall below expectations. We expect that these laboratories will
compete vigorously to maintain their dominance of the testing market.
Moreover, even if we can demonstrate that our products are more
cost-effective or save time, physicians and other health care providers may
resist changing their established source for such tests.
INTENSE COMPETITION IN THE DIAGNOSTIC MARKET POSES CHALLENGES TO OUR
PROFITABILITY
The diagnostic test market is highly competitive and we have a large number of
multinational and regional competitors making investments in competing
technologies. Such competition is expected to continue and if our competitors
products are more effective or more commercially attractive than ours, our
business and financial results could be adversely affected. Competition also
negatively impacts our product prices and profit margins.
14
<PAGE>
A number of our competitors have a potential competitive advantage because they
have substantially greater financial, technical, research and other resources,
and larger, more established marketing, sales, distribution and service
organizations than ours. Moreover, some competitors offer broader product lines
and have greater name recognition than Quidel.
TO REMAIN COMPETITIVE WE MUST CONTINUE TO DEVELOP OR OBTAIN PROPRIETARY
TECHNOLOGY RIGHTS
Our operating results can be significantly affected by the phase out of older
products near the end of their product life cycles, as well as the success of
new product introduction. Our ability to compete successfully in the
diagnostic market depends upon continued development and introduction of new
proprietary technology and the improvement of existing technology.
Our competitive position is heavily dependent upon obtaining and protecting our
proprietary technology or obtaining licenses from others. If we cannot continue
to obtain and protect such proprietary technology our competitive position could
be adversely affected. Moreover, our current and future licenses may not be
adequate for the operation of our business.
Our ability to obtain patents and licenses, and their benefits, are uncertain.
We have a number of issued patents and additional applications are pending.
However, our pending patent applications may not result in the issuance of any
patents, or if issued, the patents may not have priority over others'
applications, or, may not offer protection against competitors with similar
technology. Moreover, any patents issued to us may be challenged, invalidated or
circumvented in the future. Also, we may not be able to obtain licenses for
technology patented by others or on commercially reasonable terms. A failure to
obtain necessary licenses could prevent us from commercializing some of our
products under development.
WE MAY BE INVOLVED IN INTELLECTUAL PROPERTY INFRINGEMENT DISPUTES, WHICH ARE
COSTLY AND COULD LIMIT OUR ABILITY TO USE SOME TECHNOLOGIES IN THE FUTURE
There are a large number of patents and patent applications in our product
areas, and we believe that there may be significant litigation in our industry
regarding patent and other intellectual property rights. Our involvement in
litigation to determine rights in proprietary technology could adversely effect
our business and financial results because:
- - it consumes a substantial portion of managerial and financial resources;
- - its outcome is inherently uncertain and a court may find the third-party
claims valid and that we have no successful defense to such claims;
- - an adverse outcome could subject us to significant liability;
- - failure to obtain a necessary license upon an adverse outcome could prevent
us from selling our current products or other products we may develop; and
- - protection of our rights may not be available under the law or may be
inadequate.
THE UNCERTAINTY AND COST OF REGULATORY APPROVAL FOR OUR PRODUCTS MAY HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATIONS
The testing, manufacture and sale of our products are subject to regulation by
numerous governmental authorities, principally the FDA and corresponding state
and foreign regulatory agencies. Our estimates of future performance depend on,
among other matters, our estimates as to when and at what cost we will receive
regulatory approval for new products. However, complying with laws and
regulations of these regulatory agencies can be a lengthy, expensive and
uncertain process making the timing and costs of approvals difficult to predict.
Our operating results may be adversely affected by unexpected actions of
regulatory agencies, including delays in the receipt of or failure to receive
approvals or clearances, the loss of previously received approvals or
clearances, and the placement of limits on the use of the products.
We are also subject to numerous laws relating to such markers as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. It is
also impossible to reliably predict the full nature and impact of future
legislation or regulatory developments relating to our industry. To the extent
the costs and procedures associated with meeting new requirements are
substantial, our business and results of operations could be adversely affected.
UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT AND POTENTIAL COST CONSTRAINTS
In the United States, health care providers that purchase diagnostic products,
such as hospitals and physicians, generally rely on third party payors,
principally private health insurance plans, federal Medicare and state Medicaid,
to reimburse all or part of the cost of the procedure. We believe that the
overall escalating cost of medical products and services has led to and will
continue to lead to increased pressures on the health care industry, both
foreign and
15
<PAGE>
domestic, to reduce the cost of products and services, including our
products. Given the efforts to control and reduce health care costs in the
United States in recent years, there can be no assurance that currently
available levels of reimbursement will continue to be available in the future
for Quidel's existing products or products under development. Quidel could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors, particularly to the extent any such changes
affect reimbursement for procedures in which Quidel's products are used.
Third party reimbursement and coverage may not be available or adequate in
either U.S. or foreign markets, current reimbursement amounts may be
decreased in the future and future legislation, regulation or reimbursement
policies of third-party payors may adversely affect the demand for Quidel's
products or its ability to sell its products on a profitable basis.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH STRATEGY OUR BUSINESS AND RESULTS OF
OPERATIONS MAY BE ADVERSELY IMPACTED
We anticipate increased growth in the number of employees, the scope of
operating and financial systems and the geographic area of our operations
with the acquisition of Metra, and as new products are developed and
commercialized. This growth may divert management's attention from other
aspects of our business, and will place a strain on existing management, and
operational, financial and management information systems. To manage this
growth, we must continue to implement and improve our operational and
financial systems and to train, motivate, retain and manage our employees.
Furthermore, we may expand into markets in which we have less experience or
incur higher costs. Should we encounter difficulties in managing these tasks,
our growth strategy may suffer and anticipated sales could be adversely
effected.
LOSS OF KEY PERSONNEL OR OUR INABILITY TO HIRE QUALIFIED PERSONNEL COULD
NEGATIVELY IMPACT OUR BUSINESS
Our future success depends in part on our ability to retain our key
technical, sales, marketing and executive personnel, and our ability to
identify and hire additional qualified personnel. Competition for such
personnel is intense and if we are not able to retain existing key personnel,
or identify and hire additional qualified personnel, our business could be
negatively impacted.
WE ARE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY, WHICH IF NOT COVERED BY
INSURANCE COULD HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY
There is a risk of product liability claims against us arising from our
testing, manufacturing and marketing of medical diagnostic devices, both
those currently being marketed, as well as those under development. Potential
product liability claims may exceed the amount of our insurance coverage or
may be excluded from coverage under the terms of our policy. Furthermore, if
we are held liable, our existing insurance may not be renewed at the same
cost and level of coverage as presently in effect, or may not be renewed at
all. If we are held liable for a claim against which we are not indemnified
or for damages exceeding the limits of our insurance coverage, that claim
could have a material adverse effect on our business, financial condition and
result of operations.
WE MAY EXPERIENCE DIFFICULTIES INTEGRATING METRA AFTER THE ACQUISITION
We may experience difficulties integrating our operations with those of Metra,
and there can be no assurance that we will realize the benefits and cost savings
that we believe the acquisition will provide or that such benefits will be
achieved within the time frame we currently anticipate. The acquisition may
distract management from day-to-day business of the combined company and require
other substantial resources. We expect to incur restructuring and integration
costs from combining Metra's operations with ours. These costs may be
substantial and may include costs for employee severance, relocation and
disposition of excess assets and other acquisition related costs.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Quidel received a letter dated April 24, 1992 from the United States
Environmental Protection Agency (the "EPA") notifying Quidel 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 Quidel 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, Quidel 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 Quidel for damages that may be awarded.
Quidel 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 Quidel. Quidel maintains
insurance, including coverage for product liability claims, in amounts which
management believes appropriate given the nature of Quidel's business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- --------------------------------------------------------------
<S> <C>
10.1* Business Loan Agreement, dated as of July 12, 1999, by and
between Bank of America National Trust and Savings
Association and Quidel Corporation
10.2* Security Agreement, dated as of July 12, 1999, by and among
Bank of America National Trust and Savings Association,
Quidel Corporation, MBS Acquisition Corporation, and Pacific
Biotech, Inc.
10.3* Subsidiary Guaranty, dated as of July 12, 1999, by MBS
Acquisition Corporation and Pacific Biotech, Inc.
10.4* Cash Collateral Agreement, dated as of July 12, 1999, by and
between Bank of America National Trust and Savings Association
and Pacific Biotech, Inc.
27** Financial Data Schedule
</TABLE>
*Previously filed with Quidel's Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 26, 1999.
** Attached hereto
(b) Reports on Form 8-K filed in the second quarter of fiscal 1999
On July 1, 1999, Quidel filed a Form 8-K to report a change of certifying
accountants, with the firm of Ernst & Young L.L.P. being replaced by Arthur
Andersen L.L.P., effective June 29, 1999.
On July 26, 1999, Quidel filed a Form 8-K to report that its wholly owned
subsidiary, MBS Acquisition Corporation ("MBS"), purchased all of the shares
tendered of Metra Biosystems, Inc., ("Metra"), according to the terms of a
tender offer, representing 93 percent of the outstanding Metra common stock.
Because MBS owned at least 90 percent of the outstanding common stock of Metra
at the completion of the tender offer, MBS was able to effect a "short-form"
merger under California and Delaware law.
On August 13, 1999, Quidel filed a Form 8-K/A to report the completion of the
tender offer for Metra Biosystems, Inc. ("Metra") and the purchase of the
remaining seven percent of Metra common stock.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUIDEL CORPORATION
Date: NOVEMBER 15, 1999 /s/ Charles J. Cashion
----------------- ----------------------------
Charles J. Cashion
Senior Vice President,
Corporate Operations,
Chief Financial Officer and
Secretary
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF QUIDEL'S FORM 10-Q FOR THE PERIOD
ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,132
<SECURITIES> 0
<RECEIVABLES> 8,888
<ALLOWANCES> (1,285)
<INVENTORY> 6,642
<CURRENT-ASSETS> 22,127
<PP&E> 38,795
<DEPRECIATION> (17,766)
<TOTAL-ASSETS> 59,207
<CURRENT-LIABILITIES> 13,452
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 42,817
<TOTAL-LIABILITY-AND-EQUITY> 42,841
<SALES> 22,184
<TOTAL-REVENUES> 23,775
<CGS> 11,809
<TOTAL-COSTS> 25,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8
<INCOME-PRETAX> (1,933)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,933)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,933)
<EPS-BASIC> (.08)
<EPS-DILUTED> (.08)
</TABLE>
