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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 JUNE 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 August 6, 1999, 23,822,491 shares of common stock were outstanding.
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QUIDEL C0RPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations for the Three Months Ended
June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
June 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 7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 6. Exhibits and Reports on Form 8-K 15
Signature 16
</TABLE>
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QUIDEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30,
1999 March 31,
(unaudited) 1999
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,135 $ 6,622
Accounts receivable, net 5,582 8,388
Inventories 5,838 5,811
Prepaid expenses and other 616 798
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Total current assets 20,171 21,619
Property and equipment, net 18,853 18,219
Intangible assets, net 2,967 3,084
Deferred tax asset 8,760 9,083
Other assets 637 601
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$ 51,388 $ 52,606
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,120 $ 2,283
Accrued payroll and related expenses 1,377 1,013
Current portion of long-term debt and obligations
under capital leases 178 174
Deferred contract research revenue -- 592
Accrued royalties 541 659
Other current liabilities 199 351
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Total current liabilities 3,415 5,072
Long-term debt and obligations under capital leases 2,782 2,828
Stockholders' equity:
Common stock 24 24
Additional paid-in capital 116,720 116,720
Accumulated deficit (71,553) (72,038)
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Total stockholders' equity 45,191 44,706
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$ 51,388 $ 52,606
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</TABLE>
See accompanying notes.
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QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------------
1999 1998
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<S> <C> <C>
REVENUES
Net sales $ 10,500 $ 9,803
Research contract, license fees
and royalties 972 1,068
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Total revenues 11,572 10,871
COSTS AND EXPENSES
Cost of sales 5,435 4,962
Sales and marketing 2,655 2,285
General and administrative 1,057 1,205
Research and development 1,584 2,047
Write down and closure of European
subsidiaries - 420
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Total costs and expenses 10,731 10,919
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Operating income (loss) 841 (48)
OTHER INCOME AND EXPENSE
Interest and other income 97 154
Interest and other expense (130) (88)
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Net income before provision for income taxes 808 18
Provision for income taxes (323) --
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Net income $ 485 $ 18
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--------------- --------------
Earnings per share - basic and diluted $ .02 $ .00
--------------- --------------
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Shares used in basic per share calculation 23,822 23,754
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Shares used in diluted per share calculation 23,856 23,825
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</TABLE>
See accompanying notes.
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QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 485 $ 18
Adjustments to reconcile net income to net cash flows provided
by operating activities:
Depreciation and amortization 866 746
Deferred tax provision 323 --
Changes in operating assets and liabilities
Accounts receivable 2,806 2,235
Inventories (27) (838)
Prepaid expenses and other current assets 182 166
Accounts payable (1,163) (1,075)
Accrued payroll and related expenses 364 (97)
Deferred contract research revenue (592) (26)
Accrued royalties (118) (126)
Other current liabilities (152) 191
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Net cash flows provided by operating activities 2,974 1,194
INVESTING ACTIVITIES
Additions to equipment and improvements (975) (1,007)
Increase in intangibles and other assets (444) (161)
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Net cash flows used for investing activities (1,419) (1,168)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 14
Payments on notes payable, long term debt and
obligations under capital leases (42) (48)
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Net cash flows used for financing activities (42) (34)
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Net decrease in cash and cash equivalents 1,513 (8)
Cash and cash equivalents at beginning of period 6,622 9,720
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Cash and cash equivalents at end of period $ 8,135 $ 9,712
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Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 72 $ 78
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Cash paid during the period for income taxes $ -- $ 69
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</TABLE>
See accompanying notes.
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Quidel Corporation
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(unaudited)
1. 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 June
30, 1999, and the consolidated results of operations for the three months
ended June 30, 1999 and 1998. The results of operations for the three
months ended June 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. EARNINGS PER SHARE
Earnings per share are computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share". Basic earnings per
share are computed using the weighted average number of common shares
outstanding during each period. Diluted earnings per share include the
dilutive effect of common shares issuable upon the exercise of stock
options.
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>
June 30, March 31,
1999 1999
--------------- ----------------
<S> <C> <C>
Raw materials $ 2,903 $ 2,935
Work-in-process 2,128 1,935
Finished goods 807 941
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$ 5,838 $ 5,811
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</TABLE>
5 . SUBSEQUENT EVENT
Subsequent to June 30, 1999, the Company announced that it acquired Metra
Biosystems, Inc. ("Metra") for approximately $22.9 million, or $1.78 per
share based upon 12,852,248 shares outstanding, including vested options,
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
will be approximately $8 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.
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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. Our
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
The Company is implementing a sophisticated enterprise-wide 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.
RESULTS OF OPERATIONS
NET INCOME For the three months ended June 30, 1999, net income was $485,000,
or $.02 per share, compared to a net income of $18,000 for the three months
ended June 30, 1998. The most significant difference in net income for the
three months ended June 30, 1999 compared to the three months ended June
30,1998 was an increase in net sales by $797,000, or 8%.
NET SALES TRENDS BY MAJOR SALES CHANNELS
<TABLE>
<CAPTION>
Three months ended June 30,
----------------------------
(IN THOUSANDS) 1999 1998
---------- --------
<S> <C> <C>
Domestic sales
Professional sales $ 6,115 $ 6,327
OTC, OEM and Clinical lab sales 2,111 662
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Total domestic sales 8,226 6,989
Percent of total sales 78% 71%
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International sales
Export sales 1,576 1,698
European subsidiary sales 797 1,116
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Total international sales 2,373 2,814
Percent of total sales 22% 29%
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Total net sales $ 10,600 $ 9,803
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</TABLE>
U.S. professional sales continue to account for the majority of the sales
growth as sales in the Company's core product areas of pregnancy, Strep A and
H. pylori continue to increase. Over the counter ("OTC"), original equipment
manufacture ("OEM") and clinical lab sales grew by 226% due to increased
distribution of our veterinary products and a new partnered retail store
brand program for distribution of pregnancy tests launched in the second
quarter of fiscal 1999. International sales decreased 20% over the prior year
period.
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In fiscal 1999, the Company completed the closure of European subsidiaries
located in France, the Netherlands and Spain, which resulted in a decrease in
European sales; however, this was offset in part by our German subsidiary,
which increased its sales by 17% to $797,000 in the first quarter of fiscal
2000.
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 Food and Drug Administration ("FDA") for
marketing clearance of the influenza A and B point-of-care test. 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.
COST OF SALES AND GROSS PROFIT
<TABLE>
<CAPTION>
Three months ended June 30,
------------------------------------------
Percent Percent
of Net of Net
(IN THOUSANDS) 1999 Sales 1998 Sales
----------- -------- --------- -------
<S> <C> <C> <C> <C>
Net sales $ 10,600 $ 9,803
Direct Costs - material, labor and other variable cost 3,236 30 2,924 30
Royalty Expense - patent licenses 529 5 471 5
----------- ---------
Total direct cost 3,765 35 3,395 35
Direct Margin - contribution per sales dollar 65% 65%
Manufacturing overhead cost 1,670 16 1,567 16
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Total cost of sales 5,435 51 4,962 51
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Gross profit $ 5,165 49 $ 4,841 49
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</TABLE>
Gross profit as a percentage of sales remained constant at 49% of sales. The
Company is in the process of 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.
8
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OPERATING EXPENSES
<TABLE>
<CAPTION>
Three months ended June 30,
--------------------------------------------
Percent Percent
of Net of Net
(IN THOUSANDS) 1999 Sales 1998 Sales
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Sales and marketing
Domestic professional sales and marketing $ 2,138 $ 1,566
Domestic OTC sales and marketing 25 56
International sales and marketing 492 663
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Total sales and marketing 2,655 25 2,285 23
General and administrative 1,057 10 1,205 12
Research and development
Quidel research projects 909 1,158
Contract research - direct costs 675 889
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Total research and development 1,584 15 2,047 21
Write down and closure of European subsidiaries -- -- 420 4
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Total operating expenses $ 5,296 50 $ 5,894 60
-------- ----------
-------- ----------
Total operating expenses, excluding contract
research and restructuring cost $ 4,621 44 $ 4,585 47
-------- ----------
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</TABLE>
Operating expenses decreased to $5.3 million for the three months ended June
30, 1999 from $5.9 million in the prior year due to costs incurred in 1998
related to the closure of European subsidiaries, and also a decrease in
research and development costs which more than offset an increase in sales
and marketing costs.
Sales and marketing expenses increased to 25% of net sales. Domestic sales
and marketing expense increased due to a new infrastructure that was not
present in the prior year. International sales and marketing expenses
declined due to the closure of our European subsidiaries and now represent
approximately 21% of total international sales.
Research and development expenses declined to 15% of net sales due to costs
associated with the launch of an OEM pregnancy test in fiscal 1999 not being
incurred in fiscal 2000, contract research programs being completed in fiscal
1999, as well as the research program related to a potential influenza A and
B diagnostic kit nearing completion and thus incurring less costs in fiscal
2000.
General and administrative expenses decreased by 12% in the current quarter
as compared to the prior year primarily as a result of decreased recruiting
and consulting costs.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of $8.1 million
compared to $6.6 million at March 31, 1999. Cash and cash equivalents
declined in fiscal 1999 primarily due to our investments in implementing an
enterprise-wide computer system to assist in operating our business more
efficiently, as well as to investments in improved technology to increase
efficiencies in manufacturing operations.
The principal requirements for cash are for working capital, including
capital equipment additions and the costs to implement an enterprise-wide
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, a portion of which will be used to repay the $3.0 million real
estate loan balance and the line of credit associated with the acquisition of
Metra Biosystems, Inc. (see Subsequent Event below). 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.
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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.
We presently believe that the Year 2000 issue can be mitigated through
testing designed to confirm readiness. However, if such testing refutes
readiness, the Year 2000 issue could have a material impact on the operations
of the Company.
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 system, and we are now in
the process of converting our business enterprise software. We anticipate
that conversion and testing of the enterprise software will be completed and
that we will be operating on this system by the end of the third quarter of
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-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 October 1999. Completion of the
testing phase for all significant systems is expected by December 1999. To
date, approximately 80% 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 will utilize 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
materially 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
10
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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
We have developed 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 July 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.
SUBSEQUENT EVENT
Subsequent to June 30, 1999, Quidel announced that it acquired Metra
Biosystems, Inc. ("Metra") for approximately $22.9 million, or $1.78 per
share based upon 12,852,248 shares outstanding, including vested options, 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 will
be approximately $8 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quidel does not and did not invest in market risk sensitive instruments in
fiscal 1999. 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.
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
Quidel has only been profitable for a limited time and we may not continue
our revenue growth or profitability. Operating results may continue to
fluctuate, in a given quarter or annual period, from prior periods as a
result of a number of factors, many of which are outside of our control,
including:
- - seasonal fluctuations in our sales of strep throat 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,
11
<PAGE>
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.
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;
12
<PAGE>
- - 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 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.
13
<PAGE>
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.
14
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on July 27, 1999. The
stockholders re-elected Quidel's entire Board of Directors. The individuals
elected and the shares cast with respect to each individual were as follows:
Elected as director:
<TABLE>
<CAPTION>
For Against
--- -------
<S> <C> <C>
Richard C.E. Morgan 18,917,259 48,178
Andre de Bruin 18,917,037 48,400
John D. Diekman 18,917,259 48,178
Thomas A. Glaze 18,916,259 49,178
Margaret G. McGlynn 18,917,159 48,278
Mary Lake Polan 18,913,059 52,378
Faye Wattleton 18,915,431 50,006
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
-------- -------
<S> <C>
27* Financial Data Schedule
* Attached hereto.
</TABLE>
(b) Reports on Form 8-K filed in the first 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.
15
<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: August 13, 1999 /s/ Charles J. Cashion
----------------------------------
Charles J. Cashion
Senior Vice President,
Corporate Operations,
Chief Financial Officer and
Secretary
16
<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 JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,135
<SECURITIES> 0
<RECEIVABLES> 6,192
<ALLOWANCES> 610
<INVENTORY> 5,838
<CURRENT-ASSETS> 20,171
<PP&E> 30,796
<DEPRECIATION> 11,943
<TOTAL-ASSETS> 51,388
<CURRENT-LIABILITIES> 3,415
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 45,167
<TOTAL-LIABILITY-AND-EQUITY> 51,388
<SALES> 10,600
<TOTAL-REVENUES> 11,572
<CGS> 5,435
<TOTAL-COSTS> 10,731
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> 808
<INCOME-TAX> 323
<INCOME-CONTINUING> 485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 485
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
