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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period April 1, 1999 to December 31,1999
Commission File Number: 0-10961
QUIDEL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 325900 94-2573850
(State or other jurisdiction (Standard Industrial (I.R.S. Employer
or incorporation or organization) Classification) Identification No.)
10165 McKellar Court
San Diego, California 92121
(Address of principal (zip code)
executive offices)
Registrant's telephone number, including area code (858) 552-1100
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based upon the last sale price of the Common Stock reported on the
National Association of Securities Dealers Automated Quotation National Market
System on March 17, 2000, was $32,786,632.
As of March 17, 2000, 24,566,339 shares of the registrant's common stock were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
(To the Extent Indicated Herein)
Registrant's Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the solicitation of proxies for the Registrant's
2000 Annual Meeting of Stockholders to be held on May 24, 2000 is incorporated
by reference in Part III, Items 11, 12 and 13 of this Form 10-K.
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PART I
Item 1. BUSINESS
Quidel (the "Company") is a worldwide leader in developing, manufacturing and
marketing of point-of-care ("POC") rapid diagnostic tests for the detection and
management of a variety of medical conditions and illnesses. These products
provide health care professionals with accurate and cost-effective information
to quickly diagnose the patient's condition and determine proper treatment
before the patient leaves the office. Quidel's technology platform and core
competencies address the diagnostic categories of women's health and infectious
diseases. Quidel's products are sold to professionals for use in physician's
offices, hospitals, clinical laboratories, and wellness screening centers.
Quidel also manufactures a line of products sold to consumers through
organizations that provide store branded products.
Quidel commenced its operations in 1979 and launched its first products,
dipstick-based pregnancy tests, in 1984. The product base has expanded through
internal development and acquisitions of other products in the areas of
pregnancy and ovulation, infectious disease, allergy, autoimmune diseases,
osteoporosis and urinalysis for professional, research and home use.
Quidel's strategy is to become a major health management solutions provider for
women, as women continue to play a greater role in health care decisions for
themselves and their families. From pregnancy to osteoporosis, Quidel intends to
create a life-long link with women by providing diagnostic products and health
care information that spans the course of their lives.
Quidel markets its products in the United States through a network of national
and regional distributors, supported by a direct sales force and, when
strategically appropriate, niche focused contract sales organizations. In Europe
and the rest of the world, Quidel sells and markets from regionally based
subsidiaries in the United Kingdom, Italy and Germany, and through a sales
management team in Australia (encompassing the Pacific Rim) and Latin America by
channeling products through distributor organizations and sales agents.
The Company's executive offices are located at 10165 McKellar Court, San Diego,
California 92121, and its telephone number is (858) 552-1100.
RECENT DEVELOPMENTS
During late 1998, Quidel developed a new strategic plan. This plan included
provisions for improving the financial performance of the existing operations,
as well as identifying licensing and acquisition opportunities, and forming
additional collaborations with pharmaceutical and other health care companies.
Quidel acted upon this new plan during the second half of 1999 by way of
acquiring Metra Biosystems, Inc. ("Metra"), a leader in the diagnosis and
management of metabolic bone diseases and disorders. Metra, now globally
integrated into Quidel, offers two key product categories that provide critical
information in determining bone health. In addition, Quidel acquired a POC urine
test strip business from Dade Behring Marburg GmbH ("Dade Behring").
During the quarter ended September 30, 1999, Quidel began daily operations with
a sophisticated enterprise resource planning computerized 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, in manufacturing,
planning and financial reporting, many of which previously were performed
manually. The information to be provided from this system will assist management
with day-to-day operating decisions.
Finally, during December 1999, the Company closed a sale and leaseback
transaction of its corporate headquarters facility and real estate. The facility
and real estate was sold for $15 million. The Company will lease the 73,000
square foot facility for fifteen years, with options to extend the lease for up
to two additional five-year periods. The sale was an all cash transaction,
netting the Company approximately $7 million. The Company is a limited partner
holding approximately 25% interest in the limited partnership that acquired the
facility and real estate.
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DIAGNOSTIC TEST KIT INDUSTRY OVERVIEW
THE OVERALL MARKET FOR IN-VITRO DIAGNOSTICS
The worldwide market for IN-VITRO Diagnostic ("IVD") products, of approximately
$18 billion for the year ended December 31, 1998, is segmented by the particular
technology platform used in the utilization of the test. The largest segments
are instrument-based clinical chemistry and immunodiagnostics testing, which
account for approximately 25% and 30% of the total IVD market, respectively.
Geographically, approximately 40% of the IVD revenues are generated in the
United States, while Europe, Japan and the rest of the world account for
approximately 33%, 13% and 14% respectively.
Customers for IVD products are dominated by large centralized laboratories,
either independent reference laboratories or hospital-based facilities. In the
U.S., these central laboratories represent less than 10% of total number of
testing facilities, but account for 70% of test volume and 80% of revenues.
The diagnostic testing process typically involves obtaining a specimen sample of
blood, urine or other fluid from the patient and sending the sample from the
health care provider's office to a central laboratory. The patient is sent home
and typically receives the results several hours or days later. The result of
this process is that the patient leaves the physician without confirmation of
the diagnosis and the ability to begin immediate care.
Three basic factors have driven the market for central laboratory testing: 1)
technical requirements for accurate testing often require sophisticated and
expensive equipment; 2) the cost to run a test on large scale instruments is
low; and 3) the Clinical Laboratory Improvement Act of 1988 ("CLIA") and
subsequent Health Care Financing Administration regulations subject all
laboratories, regardless of size, to strict standards and licensing
requirements. Many physicians and smaller laboratories found these regulations
prohibitively expensive and reduced testing in-house. Although this trend is
slowly reversing, these factors have led to the current dominance of centralized
laboratories in diagnostic testing.
The over-the-counter ("OTC") market for IVD self-testing has not been affected
by these trends. The United States OTC market was estimated to be approximately
$1.9 billion in 1998 and is estimated to grow to $3.5 billion in five years. Two
test categories, pregnancy and glucose monitoring for diabetes, dominate this
market.
THE POINT-OF-CARE MARKET
Point-of-care testing for certain diagnostic parameters has become an accepted
adjunct to central laboratory and self-testing. The POC market is comprised of
two general segments: hospital testing (Emergency Rooms and bedside) and
decentralized testing in non-institutional settings. Hospital POC testing is
accepted and growing, and is generally an extension of the hospital's central
laboratory and is generally instrument-based. The largest segments of rapid
turnaround POC diagnostics include tests for urinalysis, strep throat and
pregnancy.
Decentralized testing sites consist of physician's office laboratories, nursing
homes, pharmacies and other non-institutional, ambulatory settings in which
health care providers perform diagnostic tests. The decentralized POC market
encompasses a large variety of IVD products ranging from moderate sized
instrumented diagnostic systems serving larger group practices to single-use,
disposable tests for smaller practice physicians' offices. POC testing in both
the hospital and decentralized segments are increasing in popularity due to
their clinical benefit and cost-effectiveness.
Overall, the POC market worldwide was estimated to be about $900 million in
1998, with 60% of the market in the United States, 25% in Europe and 15% in the
rest of the world including Asia and Japan. The segment where Quidel currently
participates, the rapid non-instrument-based POC market, is estimated to have
manufacturers realized revenue of approximately $345 million. The growth in POC
testing is in part the result of evolving technological improvements creating
easy-to-use, high quality tests capable of being excluded from CLIA regulations
("waived"), and thereby available to the estimated over 80,000 office
laboratories approved to conduct CLIA-waived tests. In 1998, 93% of family
practice physicians reported providing some level of POC tests in their offices
and the number of physicians using the CLIA-waived POC tests is increasing by
approximately 500 laboratories a year.
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BUSINESS STRATEGY
Quidel believes that the trend among health care providers to adopt POC testing
is increasing, and demographic changes, reimbursement policies and manageable
regulations, and the availability of clinically valuable tests will increase
growth in this diagnostic category. More and more employers, health plans, and
payers are recognizing that POC is the most cost-effective means for improving
the quality of care and patient satisfaction. Continuous improvements in
technology are resulting in a growing number of new diagnostic tests that
combine high levels of accuracy with rapid, easy-to-use product formats. It is
Quidel's mission to establish a significant global leadership position in POC
rapid diagnostics. In order to accomplish this mission, Quidel has defined the
following strategic goals:
- - Improve profit margins through improved product pricing and operational
efficiencies,
- - Secure a stronger new product pipeline from internal research and
development,
- - Pursue licensing and acquisitions opportunities, when financially and
strategically attractive, such as the acquisition of Metra and the
acquisition of the urine test strip business from Dade Behring,
- - Launch the urine test strip business under the QuickVue brand by leveraging
marketing and distribution strength in the United States, and maximize
worldwide sales through current and newly identified sales channels in
Europe and rest of world,
- - Gain worldwide market share leadership position with its QuickVue Influenza
test,
- - Launch a new and improved CLIA waived H. pylori test worldwide,
- - Launch two herpes simplex virus ("HSV") POC rapid diagnostic tests on a
worldwide basis in conjunction with our development partner, Glaxo Group,
Ltd., ("Glaxo Wellcome") a wholly owned subsidiary of Glaxo Wellcome, plc,
- - Launch the QUS-2 ultrasonometer worldwide for the measurement of bone
mineral density,
- - Expand development and marketing collaborations with large pharmaceutical
and other health care companies,
- - Identify business development opportunities in the form of product or
company acquisitions to enhance product portfolio and further leverage
distribution channels worldwide,
- - Expand international sales through external alliances, collaborations and
sales focus.
TECHNOLOGY
Quidel incorporates antibody-antigen (immunoassay) technology and biochemistry
combined into uniquely designed and engineered rapid diagnostic products. Quidel
has developed or licensed four primary delivery system formats: test strips,
flow-through cassettes, microwell plate tests and a one-step lateral flow
delivery system. Although each is based on the general principal of
antibody-antigen based reactions, the four formats differ in terms of speed,
ease-of-use and sensitivity. As a result, each of these formats addresses a
particular need of a Quidel end-use customer. The general antibody-antigen based
approach uses commercially produced protein molecules, or antibodies, which
react with or bind to specific antigens, such as viruses, bacteria, hormones,
drugs, and other antibodies. The antibodies, produced in response to particular
antigens, bind specifically to that antigen. This characteristic allows
antibodies to be used in a wide range of diagnostic applications.
The ability to detect the binding of antibodies to target antigens forms the
basis for immunoassay testing used in Quidel's products. In immunoassays,
antibodies or antigens are typically deposited onto a particle or solid surface.
A chemical label is then either incorporated onto the solid substrate or added
separately once the solid substrate has been exposed to the test sample. If the
target antigen or antibody is present in the test sample, the chemical label
produces a visually identifiable color change in response to the resulting
reaction. This provides a clear color endpoint for easy visual verification of
the test results without the need for instrumentation.
PRODUCTS
Quidel provides rapid point-of-care diagnostic tests under the following brand
names: Q-TEST-Registered Trademark-, QUICKVUE-Registered Trademark-,
OVUQUICK-Registered Trademark-, CONCEIVE-Registered Trademark-, CARDS-Registered
Trademark-, OVUKIT-Registered Trademark-, RAPIDVUE-Registered Trademark-,
BLUETEST HCG-Registered Trademark-, METRA-Registered Trademark-,
PYRILINKS-Registered Trademark-, QUS-Registered Trademark--2,
ALKPHASE-B-Registered Trademark-, NOVOCALCIN-Registered Trademark-,
CHONDREX-Registered Trademark-, RAPIGNOST-Registered Trademark-, and RAPIDMAT
- -Registered Trademark-. Quidel's rapid POC diagnostic tests and the Metra
biochemical bone markers and ultrasonometer participate in the following medical
and wellness categories:
- - PREGNANCY TESTS. The early detection of pregnancy allows the physician and
patient to institute proper care, helping to ensure the health of both the
woman and the developing embryo. Pregnancy tests are also used to
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"rule out" pregnancy before conducting certain clinical procedures or
administering certain medications. Pregnancy test sales, including tests
sold to physicians, other health care organizations and through private
store brand labels, represented approximately 39% of the Company's total
net sales for the nine months ended December 31, 1999.
- - OVULATION PREDICTION. Tests in this category are for women affected by
infertility or the desire to control the timing of their pregnancies. These
tests predict or confirm the occurrence of ovulation and are used by
primary care physicians, fertility specialists and the consumer. Ovulation
prediction test sales, including tests sold OTC, to physicians, and to
other health care organizations, represented approximately 4% of the
Company's net sales for the nine months ended December 31, 1999.
- - GROUP A STREPTOCOCCUS. Each year millions of people in the United States
are tested for Group A streptococcal infections, commonly referred to as
"strep throat." Group A streptococci are bacterium that typically cause
illnesses such as tonsillitis, pharyngitis and scarlet fever which, if left
untreated, can progress to complications such as rheumatic fever. Sales of
strep A products represented approximately 24% of the Company's net sales
for the nine months ended December 31, 1999.
- - INFLUENZA A/B. This diagnostic test was developed through a fully funded
collaboration with Glaxo Wellcome for the diagnosis and treatment of
influenza at the POC. The test is a rapid, single step, diagnostic test for
the detection of influenza A and B, the two most common types of the virus.
The test received United States Food and Drug Administration ("FDA")
clearance in September 1999 and began selling in December 1999. Influenza
test sales represented approximately 2% of the Company's net sales for the
nine months ended December 31, 1999.
- - H. PYLORI. HELICOBACTER PYLORI ("H. PYLORI") is the bacterium believed to
be associated with 80% of the five million peptic ulcers in the United
States. H. PYLORI is implicated in chronic gastritis and is recognized by
the World Health Organization as a Class 1 carcinogen that may increase a
person's risk of developing stomach cancer. Once the H. PYLORI infection is
detected, antibiotic therapy is administered to kill the organism and
promote a cure of the ulcer condition. Quidel's rapid test utilizes whole
blood samples from a finger prick. It is a serological test that measures
antibodies circulating in the blood caused by the H. PYLORI infection.
Quidel's H. PYLORI test, which was the first to receive CLIA-waived status,
has progressively increased in sales and accounted for approximately 9% of
the Company's net sales for the nine months ended December 31, 1999. Quidel
will launch a new and improved H.PYLORI test mid year 2000.
- - OTHER INFECTIOUS DISEASE PRODUCTS, INCLUDING CHLAMYDIA AND MONONUCLEOSIS.
The chlamydia organism is responsible for the most widespread sexually
transmitted disease in the United States. Over one-half of infected women
do not have symptoms, and if left untreated, chlamydia can cause sterility.
Infectious mononucleosis can be severely debilitating to immune-suppressed
groups, including the elderly, if not diagnosed and treated promptly.
Quidel's other infectious disease products represented approximately 5% of
the Company's net sales for the nine months ended December 31, 1999.
- - METABOLIC BONE MARKERS. According to the National Osteoporosis Foundation,
osteoporosis afflicts over 28 million Americans and over 200 million people
worldwide. Osteoporosis is a disorder characterized by a decrease in bone
mass that leads to increased susceptibility to fracture. One parameter for
diagnosing and monitoring bone health is to measure the metabolic process
of bone turnover (resorption and formation) or "rate" of change. Metabolic
bone markers are used by physicians to monitor the effectiveness of therapy
and are extensively used in pharmaceutical research. Sales of metabolic
bone markers since the acquisition of Metra represented approximately 9% of
the Company's net sales for the nine months ended December 31, 1999.
- - QUS-2. The second parameter critical to assessing bone health is the
measurement of the density of bone. Imaging technologies provides this
information referred to as the "state" of bone health. The QUS-2 is a
portable ultrasonometer that scans the heel of the foot to accurately
determine the health of the bone. The "state and rate" assessment provides
the most complete picture of bone health. Over 100 systems have been placed
outside the United States. The United States launch is expected mid-year
2000. Sales of the QUS-2 since the acquisition of Metra represented
approximately 1% of the Company's net sales for the nine months ended
December 31, 1999.
- - URINE TEST STRIP PRODUCTS. Urinalysis testing using chemical test strips is
the single most widely ordered diagnostic test in the world. The total
worldwide market is over $500 million and used by nearly every health care
provider customer segment. Initially, Quidel will aggressively launch into
the visual-read segment (non-instrument based) which represents a $70
million opportunity in the United States. A secondary strategy includes the
identification of a replacement instrument for the existing Dade Behring
RapiMat instrument. The Dade Behring brand of test strips, Rapignost, and
the RapiMat instrument will be retained in certain countries and
transitioned over time to Quidel QuickVue branded products and instruments.
Sales of the urine test strip
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products since the acquisition of this product line represented 1% of the
Company's net sales for the nine months ended December 31, 1999.
- - OTHER PRODUCTS. The remaining 6% of net sales for the nine months ended
December 31, 1999, include allergy screening tests, clinical laboratory
tests used in the measurement of circulating immune complexes and
veterinary products produced under outside contracts and collaborations.
PRODUCTS UNDER DEVELOPMENT
- - HERPES SIMPLEX VIRUS ("HSV") ANTIGEN AND ANTIBODY 1 AND 2. The HSV 1 and 2
antibody and antigen tests, being developed under a funded research
collaboration with Glaxo Wellcome, will detect the presence or absence of
the HSV antibody in the blood, and the presence of the antigen directly
from a genital or oral lesion. HSV is epidemic, spreading at an estimated
rate of a half million people per year. One in six people in the United
States between the ages of 15 and 74 is infected with HSV type 2, the virus
commonly associated with genital herpes. The HSV diagnostic tests are
designed to be used in conjunction with a Glaxo Wellcome therapeutic
product, and applications for FDA clearance for both the antibody and
antigen tests are expected to be filed in 2001. In return for funding this
development, Glaxo Wellcome will receive royalties on the sales of these
products.
- - HELICAL PEPTIDE. A microassay to measure urinary helical peptide, a
possible new marker of bone resorption is being developed at the Company's
Mountain View facility. The release of this for-research-use-only version
of the marker is expected to be in late 2000.
PRODUCT LIFE CYCLES
Quidel's 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 timing
and success of new product introductions. The ability to compete successfully in
the rapid diagnostics market depends on the continual development and
introduction of new products and the improvement of existing products.
SEASONALITY
Sales levels for several products are affected by seasonal demand trends. Group
A strep and Influenza tests, for example, are used primarily in the fall and
winter. As a result of these demand trends, Quidel generally achieves lower
operating results in the second and third quarters of a calendar year, and have
higher operating results in the first and fourth quarters of the calendar year.
RESEARCH AND DEVELOPMENT
Quidel is focusing its research and development efforts on two areas: 1) the
creation of improved products and new products for its existing markets and 2)
products developed under pharmaceutical company sponsorship and other
collaborations for new markets. These collaborations are being undertaken with
the goal of creating differential diagnostics for use in identifying patients
most likely to benefit from the relevant therapeutic products. With this
approach, it is believed that costs related to inappropriate therapy can be
avoided, while increasing the effectiveness of patient treatment.
MARKETING AND DISTRIBUTION
In contrast to the central laboratory market, the United States POC market is
highly fragmented, with many small or medium-sized customers. Quidel has
designed its business strategy around serving the needs of this market segment.
To reach these customers, a network of national and regional distributors, along
with a focused contract sales organization, is utilized and supported by
Quidel's sales force. In 2000, Quidel will begin sales of certain products to
niche professionals and small distributors on the Internet as a component of its
e-commerce initiative.
Quidel has developed priority status with many of the major distributors in the
United States, resulting in many of its products being the preferred products
offered by these distributors.
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Internationally, the use of rapid POC diagnostic tests, the acceptance of
testing outside the central laboratory and the consumer interest in OTC and
self-test products differ considerably. Quidel's international sales are
substantially lower than domestic sales as a percentage of its total business.
Some of this difference is due the POC market being more developed in the United
States relative to the overall IVD market in other countries. Also, Quidel's
ability to address the international markets is reduced due to limited resources
and capital.
MANUFACTURING
Quidel's manufacturing facility, located in San Diego, California, consists of
laboratories devoted to tissue culture, cell culture, protein purification and
immunochemistry, and production areas dedicated to assembly and packaging. In
the manufacturing process, biological, chemical and packaging supplies and
equipment are used, which are generally available from several competing
suppliers.
Quidel's manufacturing is conducted in compliance with the Quality System
Requirements ("QSR") (formerly Good Manufacturing Practices) of the FDA
governing the manufacture of medical devices. The manufacturing facility has
been registered with the FDA and the Department of Health Services of the State
of California, and has passed routine federal and state inspections confirming
compliance with the QSR regulatory requirements for IVD products. The
manufacture of medical diagnostic products is difficult, particularly with
respect to the stability and consistency of complex biological components.
Because of these complexities, manufacturing difficulties occasionally occur
that delay the introduction of products, result in excess manufacturing costs or
require the replacement of products already introduced into the distribution
channel.
Quidel has an additional manufacturing operation, located in Mountain View,
California, consisting of fully integrated systems of antibody production,
reagent purification, reagent and microtiter plate processing, filling,
labeling, packaging and distribution. In September 1996, this site received ISO
9001 certification for its quality management systems. ISO 9001 certification is
officially recognized by European and North American authorities and is accepted
worldwide, and will become a requirement for doing business in some countries in
the future.
Quidel is in the process of preparing its San Diego manufacturing facility for
ISO 9001 certification, which is expected by the end of 2000.
GOVERNMENT REGULATION
The testing, manufacture and sale of Quidel's products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. Pursuant to the Federal Food, Drug, and
Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the
preclinical and clinical testing, manufacture, labeling, distribution and
promotion of medical devices. A company will not be able to commence marketing
or commercial sales in the United States of new products under development until
it receives clearance or approval from the FDA, which can be a lengthy,
expensive and uncertain process. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
FDA to grant premarket clearance or premarket approval for devices, withdrawal
of marketing clearances or approvals and criminal prosecution. The FDA also has
the authority to request a recall, repair, replacement or refund of the cost of
any device manufactured or distributed in the United States.
In the United States, medical devices are classified into one of three classes
(Class I, II or III) on the basis of the controls deemed necessary by the FDA to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling, premarket notification and adherence to the
QSR); Class II devices are subject to special controls (e.g., performance
standards, premarket notification, postmarket surveillance, and adherence to the
QSR); and, generally, Class III devices are those which must receive premarket
approval by the FDA to ensure their safety and effectiveness (e.g., life
sustaining, life supporting and implantable devices or new devices which have
been found not to be substantially equivalent to legally marketed devices).
Before a device can be introduced in the U.S. market, the manufacturer must
obtain FDA clearance through a premarket notification ("510(k)") submission or
FDA approval of a premarket approval ("PMA") application. A PMA application must
be filed if a device is a new device not substantially equivalent to a legally
marketed Class I or Class II device, or if it is a pre-amendment Class III
device for which the FDA has called for a PMA, or if the device raises new
questions of safety and effectiveness. A 510(k) premarket clearance will be
granted if a device
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establishes "substantially equivalent" to a legally marketed Class I or Class II
medical device or to a pre-amendment Class III medical device for which the FDA
has not called for a PMA.
The FDA has been requiring more rigorous demonstration of substantial
equivalence as part of the 510(k) process, including submission of extensive
clinical data. It generally takes from three to twelve months from 510(k)
submission to obtain clearance, but may take longer. The FDA may determine that
a proposed device is not substantially equivalent to a legally marketed device
or that additional information is needed before a substantial equivalence
determination can be made. A "not substantially equivalent" determination, or a
request for additional information, could prevent or delay the market
introduction of new products that fall into this category. For any devices that
are cleared through the 510(k) process, modifications or enhancements that could
significantly affect safety or effectiveness, or constitute a major change in
the intended use of the device, will require new 510(k) submissions, although
there can be no assurance that the FDA will grant clearance. A PMA application
must be supported by valid scientific evidence to demonstrate the safety and
effectiveness of the device, typically including the results of clinical
investigations, bench tests, laboratory and animal studies. The PMA approval
process can be expensive, uncertain and lengthy, and a number of devices for
which FDA approval has been sought by other companies have never been granted
approval.
The Company may not be able to obtain the necessary regulatory approvals or
clearances for its products on a timely basis, if at all. Delays in receipt of
or failure to receive such approvals or clearances, or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on the business, financial condition and results of operations.
Before the manufacturer of a device can submit the device for FDA approval or
clearance, it generally must conduct a clinical investigation of the device.
Although clinical investigations of Class III devices are subject to the
investigational device exemption ("IDE") requirements, clinical investigations
of Class I and Class II IVD tests, such as many of the Company's products under
development, are exempt from the IDE requirements, provided the testing is
noninvasive, does not require an invasive sampling procedure that presents a
significant risk, does not intentionally introduce energy into the subject, and
is not used as a diagnostic procedure without confirmation by another medically
established test or procedure.
Any devices manufactured or distributed by Quidel pursuant to FDA clearance or
approvals are subject to pervasive and continuing regulation by FDA and certain
state agencies. Manufacturers of medical devices for marketing in the United
States are required to adhere to QSR, which includes testing, control,
documentation, and other quality assurance requirements. Manufacturers must also
comply with Medical Device Reporting ("MDR") requirements that a manufacturer
report to the FDA any incident in which its product may have caused or
contributed to a death or serious injury, or in which its product malfunctioned
and, if the malfunction were to recur, it would be likely to cause or contribute
to a death or serious injury. Labeling and promotional activities are subject to
scrutiny by the FDA and, in certain circumstances, by the Federal Trade
Commission. Current FDA enforcement policy prohibits the marketing of approved
medical devices for unapproved uses.
Quidel is subject to routine inspection by the FDA and certain state agencies
for compliance with QSR requirements, MDR requirements and other applicable
regulations. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on Quidel's business, financial condition
and results of operations. Quidel may incur significant costs to comply with
laws and regulations in the future, and the laws and regulations may have a
material adverse effect upon the business, financial condition and results of
operations.
Quidel also is subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. Quidel may incur significant costs to comply with laws and
regulations in the future, and such laws or regulations may have a material
adverse effect upon the business, financial condition and results of operations.
Quidel's products are also subject to CLIA and related federal and state
regulations which provide for regulation of laboratory testing. The scope of
these regulations includes quality control, proficiency testing, personnel
standards and federal inspections. CLIA categorizes tests as "waived,"
"moderately complex" or "highly complex," on the basis of specific criteria.
Future amendment of CLIA or the promulgation of additional regulations impacting
laboratory testing may have a material adverse effect on the ability to market
products and may have a material adverse effect upon Quidel's business,
financial condition or results of operations.
9
<PAGE>
PATENTS AND TRADE SECRETS
The healthcare industry has traditionally placed considerable importance on
obtaining and maintaining patent and trade secret protection for significant new
technologies, products and processes. Quidel and other companies engaged in
research and development of new diagnostic products using advanced biomedical
technologies are actively pursuing patents for their technologies, which they
consider novel and patentable. However, important legal issues remain to be
resolved as to the extent and scope of available patent protection in the United
States and in other important markets worldwide. The resolution of these issues
and their effect upon the long-term success of Quidel and other biotechnology
firms cannot be determined.
It has been Quidel's policy to file for patent protection in the United States
and other countries with significant markets, such as Western European countries
and Japan, if the economics are deemed to justify such filing and Quidel's
patent counsel determines that a strong patent position can be obtained. No
assurance can be given that patents will be issued to Quidel pursuant to its
patent applications in the United States and abroad or that patent portfolio
will provide Quidel with a meaningful level of commercial protection.
A large number of individuals and commercial enterprises seek patent protection
for technologies, products and processes in fields related to Quidel's areas of
product development. To the extent such efforts are successful, Quidel may be
required to obtain licenses in order to exploit certain of its product
strategies. Licenses may not be available to Quidel at all, or if so, on
acceptable terms.
Quidel is aware of certain issued and filed patents, issued to various
developers of diagnostic products with potential applicability to Quidel's
diagnostic technology. Quidel has licensed certain rights from companies such as
Syntex and Becton Dickinson to assist with the manufacturing of certain
products. There can be no assurance that Quidel would prevail if a patent
infringement claim were to be asserted against Quidel.
Quidel currently has certain licenses from third parties and in the future may
require additional licenses from other parties in order to refine its products
further and to allow its collaborators to develop, manufacture and market
commercially viable products effectively. There can be no assurance that such
licenses will be obtainable on commercially reasonable terms, if at all, that
any patents underlying such licenses will be valid and enforceable, or that the
proprietary nature of any patented technology underlying such licenses will
remain proprietary.
Quidel seeks to protect its trade secrets and nonproprietary technology by
entering into confidentiality agreements with employees and third parties (such
as potential licensees, customers, joint ventures and consultants). In addition,
Quidel has taken certain security measures in its laboratories and offices.
Despite such efforts, no assurance can be given that the confidentiality of
Quidel's proprietary information can be maintained. Also, to the extent that
consultants or contracting parties apply technical or scientific information
independently developed by them to Quidel projects, disputes may arise as to the
proprietary rights to such data.
Under certain of its distribution agreements, Quidel has agreed to indemnify the
distributor against costs and liabilities arising out of any patent infringement
claim by a third party relating to products sold under those agreements. In some
cases, the distributor has agreed to share the costs of defending such a claim
and will be reimbursed for the amount of its contribution if the infringement
claim is found to be valid.
COMPETITION
Competition in the development and marketing of diagnostic products is intense,
and diagnostic technologies have been subject to rapid change. Quidel believes
that the competitive factors in the rapid diagnostic market include convenience,
price and product performance as well as the distribution, advertising,
promotion and brand name recognition of the marketer. Quidel's success will
depend on its ability to remain abreast of technological advances, to introduce
technologically advanced products, and to attract and retain experienced
technical personnel, who are in great demand. The majority of diagnostic tests
used by physicians and other health care providers are performed by independent
clinical reference laboratories. Quidel expects that these laboratories will
continue to compete vigorously to maintain their dominance of the testing
market. In order to achieve market acceptance for its products, Quidel will be
required to demonstrate that its products provide cost-effective and time saving
alternatives to tests performed by clinical reference laboratory procedures.
This will require physicians to change their established means of having these
tests performed.
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<PAGE>
Many of Quidel's current and prospective competitors, including several large
pharmaceutical and diversified health care companies, have substantially greater
financial, marketing and other resources than Quidel. These competitors include
Abbott Laboratories, Beckman Coulter Primary Care, and Becton Dickinson.
Quidel's competitors may succeed in developing or marketing technologies or
products that are more effective or commercially attractive than Quidel current
or future products, or that would render Quidel's technologies and products
obsolete. Moreover, Quidel may not have the financial resources, technical
expertise or marketing, distribution or support capabilities to compete
successfully in the future. In addition, competitors, many of which have made
substantial investments in competing technologies, may be more effective than
Quidel's technologies, or may prevent, limit or interfere with Quidel's ability
to make, use or sell its products either in the United States or in
international markets.
HUMAN RESOURCES
As of December 31, 1999, Quidel had 333 employees, none of whom are represented
by a labor union. Quidel has experienced no work stoppages and believes that
employee relations are good.
BUSINESS RISKS
In this section, all reference to "we," "our," and "us" refer to Quidel.
OPERATING RESULTS MAY FLUCTUATE, WHICH WOULD 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 and influenza tests
which are generally highest in fall and winter,
- - changes in the level of competition,
- - changes in the economic conditions in both our domestic and international
markets,
- - delays in shipments of our products to customers or from our suppliers,
- - manufacturing difficulties and fluctuations in our manufacturing output,
including those arising from constraints in our manufacturing capacity,
- - actions of our major distributors,
- - adverse product reviews or delays in product reviews by regulatory
agencies,
- - the timing of significant orders,
- - changes in the mix of products we sell; and
- - costs, timing and the level of acceptance of new products.
Fluctuations for any reason that decrease sales or profitability, including
those listed, could cause our growth or operating results to fall below the
expectations of investors and securities analysts, and our stock price to
decline.
OUR PRODUCTS AND MARKETS REQUIRE CONSIDERABLE RESOURCES TO DEVELOP, WHICH
RESOURCES MUST BE RECOUPED IN ADDITIONAL SALES
The development, manufacture and sale of diagnostic products requires a
significant investment of resources. Our increased investment in sales and
marketing activities, manufacturing scale-up and new product development is
continuing to increase our operating expenses, and our operating results would
be adversely affected if our sales and gross profits do not correspondingly
increase, or if our product development efforts are unsuccessful or delayed.
Development of new markets also requires a substantial investment of resources
and, if adequate resources, including funds, are not available, we may be
required to delay or scale back market developments.
DELAYS IN PRODUCT MANUFACTURING COULD REQUIRE CONSIDERABLE RESOURCES AND HARM
CUSTOMER RELATIONSHIPS
If we experience significant demand for our products, we may require additional
capital resources to meet such demands. If we are unable to develop necessary
manufacturing capabilities, our competitive position and financial condition
could be adversely affected. Failure to increase production volumes, if
required, in a cost-effective
11
<PAGE>
manner, or lower than anticipated yields or production constraints encountered
as a result of changes in the manufacturing process, could result in shipment
delays as well as increased manufacturing costs, which could have a material
adverse effect on our business, financial condition and results of operations.
The majority of raw materials and purchased components used to manufacture our
products are readily available. However, certain of these materials are obtained
from a sole supplier or a limited group of suppliers. The reliance on sole or
limited suppliers and the failure to maintain long-term agreements with other
suppliers involves several risks, including the inability to obtain an adequate
supply of required raw materials and components and reduced control over
pricing, quality and timely delivery. Although we attempt to minimize our supply
risks by maintaining an inventory of raw materials and continuously evaluating
other sources, any interruption in supply could have a material adverse effect
on our business, financial condition and results of operations.
THE LOSS OF KEY DISTRIBUTORS OR AN UNSUCCESSFUL EFFORT TO DIRECTLY DISTRIBUTE
OUR PRODUCTS COULD SIGNIFICANTLY DISRUPT OUR BUSINESS
We rely primarily on a small number of key distributors to distribute our
products. The loss or termination of our relationship with any of these key
distributors could significantly disrupt our business unless suitable
alternatives can be found. Finding a suitable alternative may pose challenges in
the industry's competitive environment. Another suitable distributor, with whom
we can negotiate a new distribution or marketing agreement on satisfactory
terms, may not be found. We could expand our efforts to distribute and market
our products directly, 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. We have a large number of
multinational and regional competitors making investments in competing
technologies. If our competitors' products are more effective or more
commercially attractive than ours our business and financial results could be
adversely affected. Competition also negatively impacts our product prices and
profit margins.
A number of our competitors have a potential competitive advantage because they
have substantially greater financial, technical, research and other resources,
and larger, more established marketing, sales, distribution and service
organizations than ours. Moreover, some competitors offer broader product lines
and have greater name recognition than 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.
12
<PAGE>
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 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.
13
<PAGE>
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH STRATEGY OUR BUSINESS AND RESULTS OF
OPERATIONS MAY BE ADVERSELY IMPACTED
We anticipate increased growth in the number of employees, the scope of
operating and financial systems and the geographic area of our operations as new
products are developed and commercialized. This growth may divert management's
attention from other aspects of our business, and will place a strain on
existing management, and operational, financial and management information
systems. To 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 RISKS OF SIGNIFICANT PRODUCT LIABILITY, WHICH IF NOT COVERED
BY INSURANCE COULD HAVE AN ADVERSE EFFECT ON OUR PROFITABILITY
There is a risk of product liability claims against us arising from our testing,
manufacturing and marketing of medical diagnostic devices, both those currently
being marketed, as well as those under development. Potential product liability
claims may exceed the amount of our insurance coverage or may be excluded from
coverage under the terms of our policy. Furthermore, if we are held liable, our
existing insurance may not be renewed at the same cost and level of coverage as
presently in effect, or may not be renewed at all. If we are held liable for a
claim against which we are not indemnified or for damages exceeding the limits
of our insurance coverage, that claim could have a material adverse effect on
our business, financial condition and result of operations.
WE MAY EXPERIENCE DIFFICULTIES INTEGRATING ACQUIRED COMPANIES OR TECHNOLOGIES
AFTER THE ACQUISITION
We may experience difficulties integrating our operations with those of
companies or technologies we may acquire, and there can be no assurance that we
will realize the benefits and cost savings that we believe the acquisition will
provide or that such benefits will be achieved within the time frame we
anticipate. The acquisitions may distract management from day-to-day business
and may require other substantial resources. We may incur restructuring and
integration costs from combining other operations or technologies with ours.
These costs may be substantial and may include costs for employee severance,
relocation and disposition of excess assets and other acquisition related costs.
Item 2. PROPERTIES
Quidel's executive, administrative, manufacturing and research and development
facility is located in San Diego, California. Quidel leases the 73,000
square-foot facility. Quidel also leases an approximately 17,000 square-foot
administrative facility in San Diego, California, which it will occupy in March
2000. The Company also leases space in the United Kingdom, Italy and Germany
under operating leases which expire at various times.
Metra currently leases approximately 30,600 square feet of laboratory and office
space at two facilities in Mountain View, California. The Company leases these
facilities under operating leases which last through May 2001, each with a
renewal option that, if exercised, should extend the term of the lease through
May 2003. Currently, one of the facilities is being subleased such that the rent
being received offsets a portion of the rent being paid by Metra for these two
facilities.
Item 3. 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
14
<PAGE>
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
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK PRICE RANGE
Quidel's common stock is traded on the Nasdaq National Market System under the
symbol "QDEL". The following table sets forth the range of high and low closing
prices for the Company's common stock for the periods indicated since January 1,
1998.
<TABLE>
<CAPTION>
Quarter Ended Low High
- ----------------------------------------------------- ----------- ----------
<S> <C> <C>
December 31, 1999 $ 3.63 $ 7.03
September 30, 1999 2.75 4.38
June 30, 1999 1.81 3.19
March 31, 1999 1.75 3.06
December 31, 1998 1.88 2.84
September 30, 1998 2.50 3.59
June 30, 1998 2.94 3.63
March 31, 1998 2.81 3.59
</TABLE>
In addition, Quidel has 950,000 warrants that are traded on the Nasdaq National
Market System under the symbol "QDELW". These warrants were issued in April 1992
and expire April 30, 2002. The common stock underlying the warrants is in the
process of being registered, pursuant to registration rights in the Warrant
Agreement, to allow warrantholders the ability to exercise such warrants. The
following table sets forth the range of high and low closing prices for the
Company's warrants for the periods indicated since January 1, 1998.
<TABLE>
<CAPTION>
Quarter Ended Low High
- ----------------------------------------------------- ----------- ----------
<S> <C> <C>
December 31, 1999 $ .91 $ 2.56
September 30, 1999 .34 1.19
June 30, 1999 .31 .63
March 31, 1999 .22 .53
December 31, 1998 .06 .87
September 30, 1998 .44 1.13
June 30, 1998 .69 1.25
March 31, 1998 .75 1.22
</TABLE>
No cash dividends have been paid on the common stock and Quidel does not
anticipate paying any dividends in the foreseeable future. As of December 31,
1999, the Company had 935 common stockholders of record and 739 warrantholders
of record.
15
<PAGE>
Item 6. SELECTED FINANCIAL DATA
During October 1999, the Company changed its fiscal year from a March 31 fiscal
year-end to a December 31 fiscal year-end. In addition, during the nine month
period ended December 31, 1999, the Company was involved in three major
financial transactions; the acquisition of Metra Biosystems, Inc., the
acquisition of a urine test strip business from Dade Behring Marburg GmbH, and
the sale and leaseback of the corporate headquarters facility. The following
selected financial data are derived from the financial statements of Quidel
Corporation and should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein.
<TABLE>
<CAPTION>
STATEMENT OF
OPERATIONS DATA
Nine months
ended December 31, Year ended March 31,
-------------------------- -------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998 1999 1998 1997 1996
- -------------------------------------- -------------------------- -------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net sales $ 38,934 $ 33,893 $ 47,163 $ 45,721 $ 41,919 $ 34,481
Other revenues 3,307 3,325 4,333 3,758 2,803 572
-------------------------- ------------------------------------------------------
Total revenues 42,241 37,218 51,496 49,479 44,722 35,053
Expenses:
Cost of sales 19,959 19,006 26,106 24,248 19,669 16,033
Sales and marketing 11,555 6,866 9,701 10,625 10,744 10,451
Research and development 5,636 6,016 7,942 7,940 6,700 4,130
General and administrative 4,725 4,553 6,115 5,107 3,534 3,483
Write down and closure of
European subsidiaries -- 440 440 3,058 -- --
Acquired in-process research
and development* 820 -- -- -- -- --
-------------------------- ------------------------------------------------------
Total costs and expenses 42,695 36,881 50,304 50,978 40,647 34,097
Other income (expense) (191) 219 202 (22) (403) (377)
Income (loss) before benefit
(provision) for income
taxes and extraordinary item (645) 556 1,394 (1,521) 3,672 579
Benefit (provision) for income
taxes -- (308) 6,267 2,631 (123) --
Extraordinary item** (891) -- -- -- -- --
-------------------------- -------------------------------------------------------
Net income (loss) $ (1,536) $ 248 $ 7,661 $ 1,110 $ 3,549 $ 579
========================== =======================================================
Net income (loss) per share -
basic and diluted $ (.06) $ .01 $ .32 $ .05 $ .16 $ .03
========================== =======================================================
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 31, March 31,
-------------------------- -------------------------------------------------
1999 1998 1999 1998 1997 1996
-------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 4,672 $ 6,012 $ 6,622 $ 9,720 $ 10,096 $ 2,538
Working capital $ 12,483 $ 15,495 $ 16,546 $ 16,790 $ 19,444 $ 10,060
Total assets $ 68,040 $ 46,091 $ 52,606 $ 47,782 $ 42,261 $ 33,334
Long-term obligations $ 11,429 $ 2,873 $ 2,828 $ 3,002 $ 3,203 $ 3,490
Stockholders' equity $ 43,755 $ 37,221 $ 44,705 $ 36,889 $ 35,158 $ 25,718
Common shares outstanding 24,029 23,793 23,822 23,749 23,546 21,550
</TABLE>
*RESULTING FROM THE ACQUISITION OF METRA BIOSYSTEMS, INC. (SEE NOTE 6 OF NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS)
**RESULTING FROM THE PREPAYMENT OF DEBT ON CORPORATE HEADQUARTERS. (SEE NOTE 8
OF NOTES TO CONSOLIDATED FINANCIALS STATEMENTS)
16
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FUTURE UNCERTAINTIES
This discussion contains forward-looking statements within the meaning of the
federal securities laws that involve material risks and uncertainties. Many
possible events or factors could affect our future financial results and
performance, such that our actual results and performance may differ materially.
As such, no forward-looking statement can be guaranteed. Differences in
operating results may arise as a result of a number of factors, including,
without limitation, seasonality, adverse changes in the competitive and economic
conditions in domestic and international markets, actions of our major
distributors, manufacturing and production delays or difficulties, adverse
actions or delays in product reviews by the Food and Drug Administration
("FDA"), and the lower acceptance of our new products than forecast.
Forward-looking statements typically are identified by the use of terms such as
"may", "will", "should", "might", "expect", "anticipate", "estimate" and similar
words, although some forward-looking statements are expressed differently. The
risks described under "Business Risks" and in other sections of this report and
in other reports and registration statements of the Company filed with the
Securities and Exchange Commission from time to time should be carefully
considered. The following should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
OVERVIEW
Quidel Corporation ("the Company") discovers, develops, manufactures and markets
rapid diagnostic products for point-of-care detection. 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.
There were many significant events that occurred during the nine month period
ending December 31, 1999, including, the acquisition of Metra Biosystems, Inc.
("Metra"), a leader in the diagnosis and detection of bone loss for the
management of osteoporosis and other bone diseases, and the acquisition of a
urine test strip business from Dade Behring Marburg GmbH ("Dade Behring"). In
addition, the Company launched the QuickVue(R) Influenza point-of-care
diagnostic test to assist physicians in diagnosing influenza types A and B
within ten minutes. Also, the Company implemented a new enterprise resource
planning business operating system to allow operations of the business to become
more efficient. Finally, the Company completed a sale and leaseback of its
corporate headquarters to provide cash to assist with the acquisitions
previously noted. During the quarter ended December 31, 1999, the Company also
experienced a significant increase in the order rate of several core products
which resulted in the Company moving to a 24 hour, 7 days a week, three shift
manufacturing operation to meet increased product demand. Based on these events,
Quidel completed this abbreviated fiscal year optimistic that the operating
tasks accomplished and strategic investments made will significantly benefit the
Company in the years ahead.
CHANGE IN FISCAL YEAR END
During October 1999, the Company changed its fiscal year from a March 31 fiscal
year-end to a December 31 fiscal year-end.
ENTERPRISE COMPUTING SYSTEM
During September 1999, the Company began daily operations with a sophisticated
enterprise resource planning business 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 were being performed
manually. The information to be provided from this system will assist management
with day-to-day operating decisions. During the start-up of the system, the
Company encountered difficulties that led to additional manufacturing costs and
production backlog at December 31, 1999. These issues are expected to be
resolved during 2000. Costs incurred during the application development stage
were approximately $l.8 million and have been capitalized since the inception of
this project. These costs will be depreciated over the software's estimated
useful life.
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<PAGE>
INFLUENZA DIAGNOSTIC TEST
During September 1999, the Company received clearance from the FDA to market a
rapid, point-of-care diagnostic test to detect influenza A and B. The
QuickVue(R) Influenza 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 Group, Ltd., ("Glaxo Wellcome"), a wholly owned
subsidiary of Glaxo Wellcome, plc. The Company is marketing the test worldwide,
and began to ship the product in the United States during December 1999.
ACQUISITION OF METRA BIOSYSTEMS, INC.
During the quarter ended September 30, 1999, Quidel acquired 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 leader in the diagnosis and detection of bone loss for the management of
osteoporosis and other bone diseases. The total cost of the transaction to the
Company was approximately $7.1 million, net of cash acquired from Metra 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 cash acquired from Metra.
ACQUISITION OF DADE BEHRING ASSETS
During November 1999, the Company entered into an Asset Sale Agreement with Dade
Behring, a German corporation, for the purchase of Dade Behring's Rapignost(R)
urine test strip business.
The purchase price for the assets was $5.75 million. Of that amount, $5 million
was paid at closing, $500,000 will be paid in December 2000 and $250,000 will be
paid in December 2001 upon successful completion of certain milestones. In
addition to the aggregate purchase price for the assets, the Company agreed to
pay Dade Behring a royalty on the combined global sales of Rapignost for five
years after the closing, up to a maximum of $3 million. The funds used to
complete the purchase came from the Company's existing bank line of credit. The
Company was subsequently credited approximately $200,000 due to the inventory on
hand at Dade Behring at the closing being less than the negotiated amount.
The acquired assets include: Dade Behring's inventory of Rapignost urine test
strips, product manufacturing equipment, information and know-how, trademarks,
vendor and customer contracts, distributor agreements, and assignments of
certain license agreements. Dade Behring will continue to manufacture urine test
strips for the Company for up to two years on a contract basis.
SALE AND LEASEBACK OF FACILITY
During December 1999, the Company completed a sale and leaseback transaction of
its corporate headquarters facility and real estate. The facility and real
estate was sold for $15 million, of which $3.75 million was capital contributed
by the Company. As a part of this transaction, the Company paid off the mortgage
on the facility of approximately $3 million and was assessed a pre-payment
penalty of approximately $891,000. The Company will lease the 73,000 square foot
facility for fifteen years, with options to extend the lease for up to two
additional five-year periods. The sale was an all cash transaction, netting the
Company approximately $7 million. The Company is a 25% limited partner in the
partnership that acquired the facility and real estate.
The transaction was deemed a financing transaction under Statement of Financial
Accounting Standards No. 98 "Accounting for Sales of Real Estate". As such, the
assets sold remain on the books of the Company and will continue to be
depreciated over the estimated useful life. The Company recorded $11.25 million
as the present value of the net lease payments as a capital lease obligation.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1999 AND
1998
Net income for the three months ended December 31, 1999 was $397,000, or $.02
per share, compared to net income of $946,000, or $.04 per share, for the
quarter ended December 31, 1998. The Company's results for this period in 1999
were impacted by investment decisions made to capitalize on the expected growth
in the coming years. These changes included the market launch of the QuickVue
Influenza Test, the acquisition of a urinalysis
18
<PAGE>
business from Dade Behring, and the increase in staffing associated with the
ramp up of production to a 24 hour, 7 days per week, three shift operation to
meet increased product demand. In addition, the Company incurred a one-time
mortgage prepayment penalty of $891,000 associated with the sale and leaseback
of its corporate facility.
For the nine months ended December 31, 1999, the Company incurred a net loss of
$1.5 million, or $.06 per share, compared to a net income of $248,000, or $.01
per share, for the same period in 1998. In addition to the items noted above for
the three month period in 1999, the Company also had a one-time charge of
$820,000 during the quarter ended September 30, 1999, related to the write off
of acquired in-process research and development as a part of the acquisition of
Metra.
NET SALES TRENDS BY MAJOR SALES CHANNELS
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------------- -------------------------
(IN THOUSANDS) 1999 1998 1999 1998
------------ ------------ ---------- ----------
Domestic sales (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Professional sales $ 10,819 $ 8,160 $ 24,740 $ 21,226
OTC, OEM and clinical lab sales 2,432 2,745 5,826 4,586
------------ ------------ ---------- ----------
Total domestic sales 13,251 10,905 30,566 25,812
Percent of total sales 79% 79% 78% 76%
------------ ------------ ---------- ----------
International sales
Export sales 1,747 2,186 4,401 5,299
European subsidiary sales 1,752 655 3,967 2,782
------------ ------------ ---------- ----------
Total international sales 3,499 2,841 8,368 8,081
Percent of total sales 21% 21% 22% 24%
------------ ------------ ---------- ----------
Total net sales $ 16,750 $ 13,746 $ 38,934 $ 33,893
============ ============ ========== ==========
</TABLE>
Net sales increased 22% for the quarter and 15% for the nine months ended
December 31, 1999 compared to the same periods in 1998. Professional sales for
the three months ended December 31, 1999 increased 33% in the Company's core
products and also include Metra's domestic bone marker sales of $1.1 million, or
8% of net sales. Professional sales for the nine months ended December 31, 1999
increased 16% over the prior year and include Metra's domestic bone marker sales
of $2 million, or 5% of net sales.
Over the counter ("OTC"), original equipment manufacture ("OEM") and clinical
lab sales decreased by 1% for the quarter, but grew by 27% for the nine months
ended December 31, 1999 compared to the same periods in 1998. The decrease for
the quarter was due to the loss of an OTC contract during 1999. The change for
the nine month period was also due to the loss of the OTC contract, but the loss
was offset by sales of a partnered retail store brand program for distribution
of pregnancy tests that commenced late 1998 and was in place for the full nine
month period ended December 31, 1999.
International sales increased by 23% for the quarter and 4% for the nine months
ended December 31, 1999 over the same periods in 1998. This increase in
international sales is primarily due to the acquisition of Metra and its three
European subsidiaries.
19
<PAGE>
REVENUE FROM RESEARCH CONTRACTS, LICENSE FEES AND ROYALTIES
<TABLE>
<CAPTION>
Nine months ended
(IN THOUSANDS) December 31, Year ended March 31,
--------------------------------- ---------------------------
1999 1998 1999 1998
--------------- ----------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Contract research and development $ 1,768 $ 3,090 $ 4,070 $ 3,483
License fee income 1,129 200 166 100
Royalty income 411 35 97 175
--------------- ----------- ---------- ----------
Total $ 3,307 $ 3,325 $ 4,333 $ 3,758
=============== ============ =========== ==========
</TABLE>
Contract research and development revenue is principally related to funding
provided by Glaxo Wellcome for two separate multi-year, development programs for
a rapid, point-of-care influenza A and B diagnostic test, which commenced in
March 1996, and two rapid, 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 Company anticipates filing a 510(k) application for clearance for the HSV
tests in 2001.
License fee income for the nine months ended December 31, 1999 included a $1
million milestone payment Metra earned from Sumitomo Pharmaceuticals Co., Ltd.
due to the Metra bone markers becoming eligible for reimbursement in Japan.
COST OF SALES AND GROSS PROFIT
<TABLE>
<CAPTION>
Three months ended December 31,
---------------------------------------------------------------
Percent of Percent of
(IN THOUSANDS) 1999 Net Sales 1998 Net Sales
---------- ------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ 16,750 $ 13,746
Direct Costs - material,
labor and other variable cost 4,497 27% 5,485 40%
Royalty Expense -
patent licenses 982 6 687 5
---------- ------------
Total direct cost 5,479 33 6,172 45
Direct Margin -
contribution per sales dollar 67% 55%
Manufacturing overhead cost 2,671 16 1,798 13
---------- ------------
Total cost of sales 8,150 49 7,970 58
---------- ------------
Gross profit $ 8,600 51 $ 5,776 42
========== ============
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Nine months ended December 31,
---------------------------------------------------------------
Percent of Percent of
(IN THOUSANDS) 1999 Net Sales 1998 Net Sales
---------- ------------- ------------- ------------
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ 38,934 $ 33,893
Direct Costs - material,
labor and other variable cost 11,134 29% 12,425 37%
Royalty Expense -
patent licenses 2,081 5 1,662 5
---------- -------------
Total direct cost 13,215 34 14,087 42
Direct Margin -
contribution per sales dollar 66% 58%
Manufacturing overhead cost 6,744 17 4,919 14
---------- -------------
Total cost of sales 19,959 51 19,006 56
---------- -------------
Gross profit $ 18,975 49 $ 14,887 44
========== =============
</TABLE>
Gross profit as a percentage of sales for the three and nine months ended
December 31, 1999 increased as a percent of sales from the same periods in 1998.
This increase in profit margin is due to the Company improving its procedures
for the procurement of raw materials and other initiatives intended to increase
manufacturing efficiency and to reduce overall product costs. In addition, the
Company is also reviewing its credit and rebate policies to identify potential
increases in product sale profitability.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Three months ended December 31,
---------------------------------------------------------
Percent Percent
of Net of Net
(IN THOUSANDS) 1999 Sales 1998 Sales
---------- ------------ --------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Sales and marketing
Domestic $ 3,483 $ 1,771
International 1,732 559
---------- ---------
Total sales and marketing 5,215 31% 2,330 17%
Research and development
Quidel research projects 1,293 943
Contract research - direct costs 386 959
---------- ---------
Total research and development 1,679 10 1,902 14
General and administrative 1,951 12 1,550 11
---------- ---------
Total operating expenses $ 8,845 53 $ 5,782 42
========== ==========
Total operating expenses, excluding contract
research direct costs $ 8,459 51 $ 4,823 35
========== ==========
</TABLE>
21
<PAGE>
OPERATING EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
Nine months ended December 31,
---------------------------------------------------------
Percent Percent
of Net of Net
(IN THOUSANDS) 1999 Sales 1998 Sales
---------- ------------ ----------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Sales and marketing
Domestic $ 8,191 $ 4,888
International 3,364 1,978
---------- -----------
Total sales and marketing 11,555 30% 6,866 20%
Research and development
Quidel research projects 3,791 3,245
Contract research - direct costs 1,845 2,771
---------- -----------
Total research and development 5,636 14 6,016 18
General and administrative 4,725 12 4,553 14
Write down and closure of European subsidiaries -- -- 440 1
Acquired in-process research and development 820 2 -- --
---------- -----------
Total operating expenses $ 22,736 58 $ 17,875 53
========== ===========
Total operating expenses, excluding contract
research direct costs, acquired in-process
research and development and write down
and closure of European subsidiaries $ 20,891 54 $ 14,061 43
========== ===========
</TABLE>
Operating expenses increased to $22.7 million for the period ended December 31,
1999 from $17.8 million for the same period in 1998. This increase includes a
write-off of acquired in-process research and development of $820,000, and a
recurring goodwill amortization charge of $267,000, both relating to the
acquisition of Metra. The recurring annual amortization of goodwill acquired
from Metra and technology purchased from Dade Behring is expected to be
approximately $1.2 million. The balance of the increase in operating expenses is
due to the reorganization of the sales and marketing teams at both the Company
and Metra.
Sales and marketing expenses increased to 30% of net sales for the period ended
December 31, 1999. Both international and domestic sales and marketing expenses
increased due to new personnel and programs that were not present for the same
period in 1998, consisting of an extensive worldwide sales and marketing
function, including subsidiaries in the United Kingdom, Germany and Italy
acquired through the acquisition of Metra.
Research and development expenses decreased to 14% of net sales for the period
ended December 31, 1999 as efforts in several collaborative product development
programs declined or were completed. The Glaxo Wellcome influenza A and B and
HSV programs, previously discussed, are the largest of these projects. Contract
research direct costs represented 33% of the Company's total research and
development investment in the period ended December 31, 1999.
General and administrative expenses decreased to 12% of sales for the period
ended December 31, 1999 as compared to the same period in 1998 primarily as a
result of decreased outside consulting costs.
RESULTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 1999 AND 1998
For the year ended March 31, 1999, net income was $7.7 million, or $.32 per
share, compared to a net income of $1.1 million, or $.05 per share, for the year
ended March 31, 1998. The most significant difference in net income for the year
ended March 31, 1999 compared to the year ended March 31, 1998 was a deferred
tax benefit of $6.4 million recorded in the fourth quarter of fiscal 1999
associated with the accumulated tax benefit of prior operating losses. A similar
tax benefit of $2.7 million was recorded in fiscal 1998. The amount of the net
deferred tax asset
22
<PAGE>
estimated to be recoverable was based on our assessment of the likelihood of
near-term operating income and that the realization of net operating loss
carryforward was more likely than not.
Operating income for the year ended March 31, 1999 was approximately $1.2
million, or $.05 per share, compared to an operating loss of approximately $1.5
million, or $.06 per share, for fiscal 1998. Included in the results of
operations for fiscal 1999 and 1998 were charges of $440,000 and $3.1 million,
respectively, associated with the write down and closure of certain European
subsidiaries.
NET SALES TRENDS BY MAJOR SALES CHANNELS
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------
(IN THOUSANDS) 1999 1998
------------- ------------
<S> <C> <C>
Domestic sales
Professional sales $ 29,221 $ 30,418
OTC, OEM and clinical lab sales 7,484 3,982
------------- ------------
Total domestic sales 36,705 34,400
Percent of total sales 78% 75%
------------- ------------
International sales
Export sales 6,864 6,774
European subsidiary sales 3,594 4,547
------------- ------------
Total international sales 10,458 11,321
Percent of total sales 22% 25%
------------- ------------
Total net sales $ 47,163 $ 45,721
============= ============
</TABLE>
OEM product sales increased dramatically in the year ended March 31, 1999 due to
the distribution of veterinary products for the full year compared to only a few
months in fiscal 1998, as well as to the launch of a new partnered retail store
brand program for distribution of pregnancy tests.
In the year ended March 31, 1998, we reassessed our international sales strategy
and in the year ended March 31, 1999, completed the closure of European
subsidiaries located in France, the Netherlands and Spain. As a result,
international sales declined, except sales in the German subsidiary increased
$983,000 for the year ended March 31, 1999 to approximately $2.7 million due to
new distributor programs in Europe.
REVENUE FROM RESEARCH CONTRACTS, LICENSE FEES AND ROYALTIES
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------
(IN THOUSANDS) 1999 1998
------------- ------------
<S> <C> <C>
Contract research and development $ 4,070 $ 3,483
License fee income 166 100
Royalty income 97 175
------------- ------------
Total $ 4,333 $ 3,758
============= ============
</TABLE>
Contract research and development revenue principally related to funding
provided by Glaxo Wellcome as noted previously.
23
<PAGE>
COST OF SALES AND GROSS PROFIT
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------------------------------
Percent -- Percent
of Net of Net
(IN THOUSANDS) 1999 Sales 1998 Sales
---------- ------------ --------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 47,163 $ 45,721
Direct Costs - material,
labor and other variable cost 17,156 36% 16,876 37%
Royalty Expense -
patent licenses 2,304 5 2,067 4
---------- ---------
Total direct cost 19,460 41 18,943 41
Direct Margin -
contribution per sales dollar 59% 59%
Manufacturing overhead cost 6,646 14 5,305 12
---------- ---------
Total cost of sales 26,106 55 24,248 53
---------- ---------
Gross profit $ 21,057 45 $ 21,473 47
========== =========
</TABLE>
Gross profit declined approximately two percentage points to 45% of sales for
the year ended March 31, 1999 from the prior year level. The shift in product
mix toward sales of our OEM pregnancy tests, which provide a lower direct margin
contribution, increased direct costs as a percent of sales. Manufacturing
overhead cost increases for the year ended March 31, 1999 related to increased
production capacity, the purchase of automation equipment, and the addition of
purchasing and engineering support staff.
OPERATING EXPENSES
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------------------------------
Percent Percent
of Net of Net
(IN THOUSANDS) 1999 Sales 1998 Sales
---------- ------------ --------- ---------------
<S> <C> <C> <C> <C>
Sales and marketing
Domestic $ 6,904 $ 7,097
International 2,797 3,528
---------- ---------
Total sales and marketing 9,701 20% 10,625 23%
Research and development
Quidel research projects 4,137 4,903
Contract research - direct costs 3,805 3,037
---------- ---------
Total research and development 7,942 17 7,940 17
General and administrative 6,115 13 5,107 11
Write down and closure of European subsidiaries 440 1 3,058 7
---------- ---------
Total operating expenses $ 24,198 51 $ 26,730 58
========== =========
Total operating expenses, excluding contract
research direct costs and write down and
closure of European subsidiaries $ 19,953 42 $ 20,635 45
========== =========
</TABLE>
24
<PAGE>
Sales and marketing efficiencies improved for the year ended March 31, 1999 as
the overall cost declined to 20% of sales. Domestic OTC and OEM sales and
marketing expenses continued to decline as these expenses were assumed by
outside distributors. These savings partially offset the lower margin on
domestic OTC/OEM products from reduced sales prices under these distribution
agreements. International sales and marketing expenses declined due to the
closure of our European subsidiaries and represented approximately 27% of total
international sales.
Research and development remained constant for the year ended March 31, 1999
compared to the year ended March 31, 1998 as we continued our efforts in several
collaborative product development programs. The Glaxo Wellcome influenza A and B
and HSV programs, previously discussed, are the largest of these projects.
Contract research expense represented 48% of the Company's total research and
development investment for the year ended March 31, 1999.
General and administrative expenses increased significantly for the year ended
March 31, 1999. This increase contained $1.3 million of non-recurring
restructuring costs, including employee severance costs, legal fees and
consulting costs. Without these non-recurring costs, general and administrative
costs would have decreased by approximately $300,000 from the year ended March
31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of approximately
$4.7 million compared to $6.6 million at March 31, 1999. The change in cash and
cash equivalents from March 31, 1999 was significantly impacted by the receipt
of cash from the sale and leaseback of the corporate headquarter facility being
offset by acquisition costs relating to the purchase of Metra, the purchase of
the Dade Behring urine test strip business, the payoff of a $3.0 million real
estate loan balance, the $891,000 pre-payment penalty related to the loan, the
acquisition and implementation of the enterprise business operating system, and
the purchase of manufacturing and other equipment.
As a part of the acquisition of Metra, the Company entered into a $10 million
bank line of credit to assist with the financing of the transaction. The line
was increased twice during the year up to $14.5 million to assist with the
acquisition of the urine test strip business from Dade Behring and the sale and
leaseback of the corporate headquarters facility. Upon the completion of those
two transactions, and using the proceeds from the facility sale to repay a
portion of the line of credit, the outstanding balance on the line of credit was
reduced to $3.8 million as of December 31, 1999. The total available line of
credit was also reduced to $7.5 million at December 31, 1999. Certain of the
Company's assets collateralize the line of credit.
The principal requirements for cash are for working capital, including capital
equipment additions, and the costs to continue implementation of the Company's
new computer operating system. Cash requirements are expected to be funded by
the results of operations. The Company also intends to continue searching for
acquisition and technology licensing candidates. As such, the Company may need
to incur additional debt, or sell additional equity, to successfully complete
these acquisitions. Cash requirements fluctuate as a result of numerous factors,
such as the extent to which the Company generates cash in operations, progress
in research and development projects, competition and technological developments
and the time and expenditures required to obtain governmental approval of 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.
RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." SAB No. 101 summarized the SEC's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB No. 101 is effective for all registrants during the
first quarter of fiscal 2000. Management has reviewed the impact of SAB No. 101
on the Company's financial statements, and expects to record a cumulative effect
pre-tax charge of approximately $1 million when the Company adopts the
provisions of SAB No. 101 in January 2000.
25
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quidel does not and did not invest in market risk sensitive instruments in 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data of the Company
required by this item are set forth at the pages indicated in Item 14(a)(1).
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In July 1999, Quidel changed certifying accountants, with the firm of Arthur
Andersen LLP replacing the firm of Ernst & Young LLP. There were no
disagreements with Ernst & Young at the time of the change.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item (with respect to Directors) is
incorporated by reference from the information under the captions "Election of
Directors" and "Other Matters" contained in the Company's Proxy Statement to be
filed with the Securities and Exchange Commission.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of all executive officers of Quidel as of December
31, 1999 are listed below, followed by a brief account of their business
experience during the past five years. Officers are normally appointed annually
by the Board of Directors at a meeting of the Board of Directors immediately
following the Annual Meeting of Stockholders. There are no family relationships
among these officers, nor any arrangements or understandings between any officer
and any other person pursuant to which an officer was selected. None of these
officers has been involved in any court or administrative proceeding within the
past five years adversely reflecting on the officer's ability or integrity.
Andre de Bruin, 53, was appointed President and Chief Executive Officer of
Quidel in June 1998. Since June 1997, Mr. de Bruin has been Vice Chairman of the
Board and a part-time employee of the Company. Prior to joining Quidel, Mr. de
Bruin was President and Chief Executive Officer of Somatogen, Inc.
("Somatogen"), a biopharmaceutical company, since July 1994. He was elected
Chairman of the Board of Somatogen in January 1996. Baxter International, Inc.,
acquired Somatogen in May 1998. Prior to joining Somatogen, Mr. de Bruin was
Chairman, President and Chief Executive Officer of Boehringer Mannheim
Corporation, a U.S. subsidiary of Corange Ltd., a private, global health care
corporation. He held that position since 1989. Mr. de Bruin serves on the Board
of Directors of Diametrics Medical, Inc., a public company that manufactures and
markets proprietary critical care blood and tissue analysis systems, and
Metabolex, Inc., a privately held company founded to develop therapeutics for
diabetes and related metabolic diseases. He has been involved in the global
health care industry for more than twenty-eight years in pharmaceuticals,
devices and diagnostics.
Charles J. Cashion, 49, Senior Vice President, Corporate Operations, Chief
Financial Officer and Secretary, joined Quidel in December 1998. Mr. Cashion has
more than twenty years of general management experience in the health care
industry and was most recently Senior Vice President, Finance, Secretary,
Treasurer and Chief Financial Officer of The Immune Response Corporation, a
biopharmaceutical company. Mr. Cashion previously held positions at Smith
Laboratories, Inc., Baxter International, Inc., and Motorola, Inc. Mr. Cashion
received his M.B.A. and B.S. from Northern Illinois University.
Mark E. Paiz, 38, is Senior Vice President, Product Development and Supply
Operations. From June 1998 to August 1999, Mr. Paiz was Vice President,
Operations. Mr. Paiz joined Quidel in December 1997 as Senior Director,
Manufacturing. Mr. Paiz has fifteen years experience in manufacturing, quality
assurance and product development. From 1995 to 1997, Mr. Paiz served as
Director of Research and Development and Project Manager at Medtronic
Interventional Vascular, responsible for the development and manufacture of
catheter and coronary
26
<PAGE>
stent delivery devices. From 1992 to 1995, he served as a manager at Hybritech,
Inc. with various responsibilities including quality engineering, materials
management, supplier development and inspection. Mr. Paiz received his B.S.
degree in Engineering from the University of Colorado and his M.B.A. from West
Coast University.
John D. Tamerius, Ph.D., 54, is Vice President, Autoimmune and Complement and
General Manager, Metra Operations. From August 1998 to August 1999, Dr. Tamerius
was Vice President, Research & Development. Dr. Tamerius joined Quidel in August
1989 as Vice President of Clinical and Regulatory Affairs. In 1994, Dr. Tamerius
assumed responsibility as Vice President of Quidel's Clinical Laboratory
Business (including research and development, manufacturing and sales). Dr.
Tamerius received his M.S. and Ph.D. degrees in Microbiology and Immunology from
the University of Washington.
Robin G. Weiner, 44, Vice President, Clinical Development and Regulatory
Affairs, joined Quidel in March 1982. Ms. Weiner has over fifteen years
experience in regulatory affairs and has held numerous management positions at
Quidel in operations, clinical/regulatory and quality assurance. From December
1992 to July 1995, Ms. Weiner was Senior Director of Clinical, Regulatory and
Quality Systems. Ms. Weiner received her B.A. degree in Biochemistry from the
University of California, San Diego and her M.B.A. from National University.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information and under the caption "Compensation of Executive Officers and
Directors" contained in the Company's Proxy Statement to be filed with the
Securities and Exchange Commission.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement to be filed with the Securities and
Exchange Commission.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in the Proxy
Statement to be filed with the Securities and Exchange Commission.
27
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) Financial Statements
The consolidated financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS OF QUIDEL CORPORATION
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants F-1
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets at December 31, 1999 and
March 31, 1999 F-3
Consolidated Statements of Operations for the nine
months ended December 31, 1999 and 1998 (unaudited)
and the years ended March 31, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity
for the period March 31, 1997 through December 31, 1999 F-5
Consolidated Statements of Cash Flows for the nine
months ended December 31, 1999 and 1998 and the years
ended March 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of conditions under which
they are required or because the required information is included in the
financial statements or the notes thereto.
(3) Exhibits with each management contract or compensatory plan or
arrangement required to be filed identified. See paragraph (c) below.
(b) Reports on Form 8-K
Reports on Form 8-K filed by the Company during the quarter ended December 31,
1999.
On October 26, 1999, Quidel filed a Form 8-K to report a change in fiscal year
from a March 31 fiscal year-end to a December 31 fiscal year-end.
On November 12, 1999, Quidel filed a Form 8-K to report that it entered into a
Letter of Intent with Dade Behring Marburg GmbH for the acquisition of the Dade
Behring Urine Test Strip business.
On December 7, 1999, Quidel filed a Form 8-K to report that it entered into an
Asset Sale Agreement dated as of November 26, 1999 with Dade Behring Marburg
GmbH for the purchase of Dade Behring's Urine Test Strip business. The asset
purchase closed on December 7, 1999, and was effective as of November 30, 1999.
On December 20, 1999, Quidel filed a Form 8-K to report it had completed the
sale and leaseback of its corporate headquarters facility and real estate.
28
<PAGE>
(c) Exhibits
3.1 Certificate of Incorporation, as amended. (Incorporated by reference to
Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated
February 26, 1991.)
3.2 Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2
to the Registrant's Current Report on Form 8-K dated June 16, 1995.)
10.1 Registrant's 1983 Employee Stock Purchase Plan, as amended.
(Incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated February 26, 1991.)
10.2 Form of Indemnification Agreement - Corporate Officer. (Incorporated by
reference to Exhibit 10.2 to the Registrant's Form 10-K dated March 31,
1995.)
10.2.1 Form of Indemnification Agreement - Corporate Director. (Incorporated
by reference to Exhibit 10.2.1 to the Registrant's Form 10-K dated
March 31, 1995.)
10.3 Form of Warrant Agreement between Registrant and American Stock
Transfer & Trust Company. (Incorporated by reference to Exhibit 10.3 to
the Registrant's Form 10-K dated March 31, 1995.)
10.4 Registrant's 1990 Employee Stock Option Plan. (Incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1990.)
10.5 Registrant's 1990 Director Option Plan. (Incorporated by reference to
Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1990.)
10.6 Registrant's Amended and Restated 1982 Incentive and Nonstatutory Stock
Option Plans, including Form of Option Agreement. (Incorporated by
reference to Exhibit 10.28 to the Registrant's Registration Statement
No. 33-38324 on Form S-4 filed on December 20, 1990.)
10.7 Form of Registration Rights Agreement of the Registrant. (Incorporated
by reference to Appendix C to the final Joint Proxy
Statement/Prospectus dated January 4, 1991 included within Amendment
No. 2 to the Registrant's Registration Statement No. 33-38324 on Form
S-4 filed on January 4, 1991.)
10.8 Assumption Agreement dated January 31, 1991. (Incorporated by reference
to Exhibit 10.52.1 to the Registrant's Current Report on Form 8-K dated
February 26, 1991.)
10.9 Trademark License Agreement dated October 1, 1994 between the
Registrant and Becton Dickinson and Company regarding the Q-Test
trademark. (Incorporated by reference to Exhibit 10.15 to the
Registrant's Form 10-K dated March 31, 1995.)
10.10 Stock Purchase Agreement dated January 5, 1995 between Registrant and
Eli Lilly & Company for the sale of all the outstanding capital stock
of Pacific Biotech, Inc. (Incorporated by reference to Exhibit 2.1 to
the Registrant's Form 8-K dated January 5, 1995.)
10.11 Settlement Agreement effective April 1, 1997 between the Registrant and
Becton Dickinson and Company. (Incorporated by reference to Exhibit
10.18 to the Registrant's Form 10-K dated March 31, 1997)
10.12 Campbell License Agreement effective April 1, 1997 between the
Registrant and Becton Dickinson and Company. (Incorporated by reference
to Exhibit 10.19 to the Registrant's Form 10-K dated March 31, 1997)
10.13 Rosenstein License Agreement effective April 1, 1997 between the
Registrant and Becton Dickinson and Company. (Incorporated by reference
to Exhibit 10.20 to the Registrant's Form 10-K dated March 31, 1997)
10.14 Employment agreement dated June 9, 1998 between the Registrant and
Andre de Bruin. (Incorporated by reference to Exhibit 10.23 to the
Registrant's Form 10-Q dated June 30, 1998.)
29
<PAGE>
10.15 Stock option agreement dated June 9, 1998 between the Registrant and
Andre de Bruin. (Incorporated by reference to Exhibit 10.24 to the
Registrant's Form 10-Q dated June 30, 1998.)
10.16 Employment agreement dated December 14, 1998 between the Registrant and
Charles J. Cashion. (Incorporated by reference to Exhibit 10.28 to the
Registrants Form 10-Q dated December 31, 1998.)
10.17 Offer to Purchase for Cash all outstanding shares of common stock of
Metra Biosystems, Inc. by MBS Acquisition Corporation, a wholly-owned
subsidiary of Quidel Corporation at $1.78 net per share. (Incorporated
by reference to Metra's Schedule 14D-1 dated June 9, 1999.)
10.18 Business Loan Agreement, dated as of July 12, 1999, by and between Bank
of America National Trust and Savings Association and Quidel
Corporation. (Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 8-K dated July 12, 1999.)
10.19 Security Agreement, dated as of July 12, 1999, by and among Bank of
America National Trust and Savings Association, Quidel Corporation, MBS
Acquisition Corporation, and Pacific Biotech, Inc. (Incorporated by
reference to Exhibit 10.2 to the Registrant's Form 8-K dated July 12,
1999.)
10.20 Subsidiary Guaranty, dated as of July 12, 1999, by MBS Acquisition
Corporation and Pacific Biotech, Inc. (Incorporated by reference to
Exhibit 10.3 to the Registrant's Form 8-K dated July 12, 1999.)
10.21 Cash Collateral Agreement, dated as of July 12, 1999, by and between
Bank of America National Trust and Savings Association and Pacific
Biotech, Inc. (Incorporated by reference to Exhibit 10.4 to the
Registrant's Form 8-K dated July 12, 1999.)
10.22 Form of Asset Sale Agreement - Rapignost(R)Urine Test Strip Business.
(Incorporated by reference to Exhibit 10.5 to the Registrant's Form 8-K
dated December 7, 1999.)
10.23 Form of Purchase and Sale Agreement and Escrow Instructions.
(Incorporated by reference to Exhibit 10.6 to the Registrant's Form 8-K
dated December 20, 1999.)
10.24 Form of Single Tenant Absolute Net Lease. (Incorporated by reference to
Exhibit 10.7 to the Registrant's Form 8-K dated December 20, 1999.)
21.1* Subsidiaries of the Registrant
23.1* Consent of Arthur Andersen LLP, Independent Public Accountants
23.2* Consent of Ernst & Young LLP, Independent Auditors
27* Financial Data Schedule
* Filed Herewith
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
QUIDEL CORPORATION
<TABLE>
<S> <C>
Date: March 23, 2000 By /s/ Charles J. Cashion
--------------------------------------------
Charles J. Cashion
Senior Vice President, Corporate Operations,
Chief Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Date: March 23, 2000
/s/ Andre de Bruin /s/ Charles J. Cashion
- -------------------------------------- --------------------------------------------
Andre de Bruin Charles J. Cashion
President and Chief Executive Officer Senior Vice President
(Principal Executive Officer); Corporate Operations
Vice Chairman of the Board Chief Financial Officer and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Richard C. E. Morgan /s/ John D. Diekman
- -------------------------------------- --------------------------------------------
Richard C. E. Morgan John D. Diekman, Director
Chairman of the Board
/s/ George Dunbar /s/ Thomas A. Glaze
- -------------------------------------- --------------------------------------------
George Dunbar, Director Thomas A. Glaze, Director
/s/ Margaret G. McGlynn /s/ Mary Lake Polan
- -------------------------------------- --------------------------------------------
Margaret G. McGlynn, Director Mary Lake Polan, Director
/s/ Faye Wattleton
- --------------------------------------
Faye Wattleton, Director
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quidel Corporation:
We have audited the accompanying consolidated balance sheet of Quidel
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the nine months then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quidel Corporation
and subsidiaries as of December 31, 1999, and the results of their operations
and their cash flows for the nine months then ended in conformity with generally
accepted accounting principles in the United States.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
February 11, 2000
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Quidel Corporation
We have audited the accompanying consolidated balance sheet of Quidel
Corporation as of March 31, 1999, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the two years in
the period ended March 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Quidel Corporation
at March 31, 1999, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended March 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
San Diego, California
May 14, 1999
F-2
<PAGE>
QUIDEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS) 1999 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,672 $ 6,622
Accounts receivable, net 10,822 8,388
Other receivables 1,053 --
Inventories 8,327 5,811
Prepaid expenses and other current assets 465 798
-------------- --------------
Total current assets 25,339 21,619
Property and equipment, net 21,207 18,219
Intangible assets, net 11,096 3,084
Deferred tax asset 9,083 9,083
Other assets 1,315 601
-------------- --------------
$ 68,040 $ 52,606
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,560 $ 2,283
Accrued payroll and related expenses 750 1,013
Accrued royalties 888 659
Deferred contract research revenue -- 592
Line of credit 3,769 --
Current portion of long-term debt and obligations under capital leases 553 174
Other current liabilities 3,336 352
-------------- --------------
Total current liabilities 12,856 5,073
Long-term debt and obligations under capital leases 11,429 2,828
Commitments
Stockholders' equity:
Preferred stock, $.001 par value; 5,000 shares authorized, none issued
or outstanding
Common stock, $.001 par value; 50,000 shares authorized, 24,029 and 23,822
shares issued and outstanding at December 31, 1999 and March 31, 1999,
respectively 24 24
Additional paid-in capital 117,386 116,720
Other comprehensive income (loss) (81) (1)
Accumulated deficit (73,574) (72,038)
-------------- --------------
Total stockholders' equity 43,755 44,705
-------------- --------------
$ 68,040 $ 52,606
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months ended
December 31, Year ended March 31,
-------------------------------- ---------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
-------------- -------------- ------------- ----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 38,934 $ 33,893 $ 47,163 $ 45,721
Research contracts, license fees and royalties 3,307 3,325 4,333 3,758
-------------- -------------- ------------- ----------
Total revenues 42,241 37,218 51,496 49,479
COSTS AND EXPENSES
Cost of sales 19,959 19,006 26,106 24,248
Sales and marketing 11,555 6,866 9,701 10,625
Research and development 5,636 6,016 7,942 7,940
General and administrative 4,725 4,553 6,115 5,107
Write down and closure of European subsidiaries -- 440 440 3,058
Acquired in-process research and development 820 -- -- --
-------------- -------------- ------------- ----------
Total costs and expenses 42,695 36,881 50,304 50,978
-------------- -------------- ------------- ----------
Operating income (loss) (454) 337 1,192 (1,499)
OTHER INCOME AND EXPENSE
Interest and other income 368 358 526 474
Interest and other expense (559) (139) (324) (496)
-------------- -------------- ------------- ----------
Total other income (expense) (191) 219 202 (22)
-------------- -------------- ------------- ----------
Income (loss) before benefit (provision) for income
taxes and extraordinary item (645) 556 1,394 (1,521)
Benefit (provision) for income taxes -- (308) 6,267 2,631
-------------- -------------- ------------- ----------
Income (loss) before extraordinary item (645) 248 7,661 1,110
Extraordinary item, early extinguishment of debt (891) -- -- --
-------------- -------------- ------------- ----------
Net income (loss) $ (1,536) $ 248 $ 7,661 $ 1,110
============= ============= ============ ==========
Basic and diluted earnings (loss) per share on income
(loss) before extraordinary item $ (.03) $ .01 $ .32 $ .05
============= ============= ============ ==========
Basic and diluted loss per share for
extraordinary item $ (.03) $ -- $ -- $ --
============= ============= ============ =========
Basic and diluted earnings (loss) per share $ (.06) $ .01 $ .32 $ .05
============= ============= ============ ==========
Shares used in basic per share calculation 23,853 23,780 23,782 23,649
============= ============= ============ ==========
Shares used in diluted per share calculation 23,853 23,800 23,804 23,857
============= ============= ============ ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(IN THOUSANDS) Common stock Additional Other Total Total
------------------ paid-in comprehensive Accumulated stockholders' comprehensive
Shares Amount capital income (loss) deficit equity income (loss)
-------- --------- ----------- --------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 23,546 $ 24 $ 115,943 $ 102 $ (80,809) $ 35,260 $
Issuance of common stock
for cash under stock
option and stock
purchase plans 203 -- 621 -- -- 621
Translation adjustment -- -- -- (116) -- (116) $ (116)
Net income -- -- -- -- 1,110 1,110 1,110
--------------------------------------------------------------------------------------------------
Balance at March 31, 1998 23,749 24 116,564 (14) (79,699) 36,875 $ 994
==============
Issuance of common stock
for cash under stock
option and stock
purchase plans 73 -- 156 -- -- 156
Translation adjustment -- -- -- 13 -- 13 13
Net income -- -- -- -- 7,661 7,661 7,661
--------------------------------------------------------------------------------------------------
Balance at March 31, 1999 23,822 24 116,720 (1) (72,038) 44,705 $ 7,674
==============
Issuance of common stock
for cash under stock option,
stock warrant and stock
purchase plans 207 -- 666 -- -- 666
Translation adjustment -- -- -- (80) -- (80) $ (80)
Net loss -- -- -- -- (1,536) (1,536) (1,536)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1999
4,029 $ 24 $ 117,386 $ (81) $ (73,574) $ 43,755 $ (1,616)
==================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
December 31, Year ended March 31,
------------------------------- ----------------------------
(IN THOUSANDS) 1999 1998 1999 1998
---------------- ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,536) 248 $ 7,661 $ 1,110
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Extraordinary loss 891 -- -- --
Depreciation and amortization 3,535 2,482 3,296 3,135
Loss on disposal of assets 98 -- -- --
Other miscellaneous income (162) -- -- --
Charge for acquired in-process research and
development 820 -- -- --
Write down of investment in European subsidiaries -- -- -- 3,058
Deferred tax asset -- -- (6,376) (2,707)
Changes in assets and liabilities:
Accounts receivable (635) (81) 136 (140)
Other receivables (898) -- -- --
Inventories (906) (211) 86 (2,113)
Prepaid expenses and other current assets 910 (227) (258) 540
Accounts payable 606 (1,406) (963) 1,114
Accrued payroll and related expenses (1,414) (536) (248) 138
Accrued royalties 229 101 37 538
Deferred contract research revenue (592) (217) (1,098) 1,690
Other current liabilities (175) 186 (535) 461
---------------- ----------- ------------ ------------
Net cash flows provided by operating activities 771 339 1,738 6,824
INVESTING ACTIVITIES
Additions to property and equipment (3,150) (3,904) (4,202) (5,082)
Proceeds from sale of fixed assets 13 -- -- --
Increase in other assets and intangibles (181) (76) (604) (2,438)
Payment for acquisition of Metra Biosystems, Inc., net of
cash acquired (5,233) -- -- --
Payment for purchase of assets from Dade Behring (5,09l) -- -- --
---------------- ----------- ------------ -----------
Net cash flows used for investing activities (13,642) (3,980) (4,806) (7,520)
</TABLE>
F-6
<PAGE>
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Nine months ended
December 31, Year ended March 31,
------------------------------- ----------------------------
(IN THOUSANDS) 1999 1998 1999 1998
---------------- ----------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net proceeds from issuance of common stock and
warrants $ 666 $ 84 $ 156 $ 621
Payments on debt and obligations under capital leases (3,464) (151) (199) (185)
Proceeds from sale and leaseback of facility 11,250 -- -- --
Proceeds from bank line of credit 14,500 -- -- --
Payments on line of credit (10,731) -- -- --
Proceeds from bank term loan 18,046 -- -- --
Payment on bank term loan (18,046) -- -- --
Mortgage pre-payment fee (891) -- -- --
Payment of deferred financing costs (329) -- -- --
---------------- ----------- ------------ -----------
Net cash flows provided by (used for)
financing activities 11,001 (67) (43) 436
Effect of exchange rate changes on cash (80) (40) 13 (116)
---------------- ----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents (1,950) (3,708) (3,098) (376)
Cash and cash equivalents at beginning of period 6,622 9,720 9,720 10,096
---------------- ----------- ------------ -----------
Cash and cash equivalents at end of period $ 4,672 $ 6,012 $ 6,622 $ 9,720
================ =========== ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for interest $ 1,104 $ 231 $ 330 $ 333
Cash paid during the year for income taxes 32 86 332 16
NON CASH INVESTING AND FINANCING ACTIVITIES
Note payable for purchase of Dade Behring assets $ (250) -- -- --
Assets acquired through acquisitions 7,133 -- -- --
Liabilities assumed through acquisitions (6,176) -- -- --
Goodwill acquired through acquisitions 3,150 -- -- --
In-process research and development acquired through
acquisitions 820 -- -- --
Technology purchased through acquisition 5,397 -- -- --
---------------- ----------- ------------ -----------
10,324 -- -- --
Cash paid for acquisition of Metra, net (5,233) -- -- --
Cash paid for purchase of assets from Dade Behring (5,091) -- -- --
---------------- ----------- ------------ -----------
$ -- -- -- --
================== =========== ============ ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATING TO THE NINE MONTHS ENDED DECEMBER 31, 1998 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Quidel Corporation (the "Company") commenced operations in 1979. The Company
operates in one business segment which develops, manufactures and markets
point-of-care ("POC") rapid diagnostics for detection of human medical
conditions and illnesses. These products provide simple, accurate and
cost-effective diagnoses for acute and chronic conditions in the areas of
women's health and infectious diseases. The Company's products are sold to
professionals for use in the physician's office and clinical laboratory through
a network of national and regional distributors, and to consumers through
organizations that provide store brand products. In July 1999, the Company
acquired substantially all of the assets and liabilities of Metra Biosystems,
Inc. ("Metra") in an effort to broaden its diagnostic product line and customer
base (see note 6). Metra develops and manufactures diagnostics for bone loss
detection for the management of osteoporosis and other bone diseases. Also, in
December 1999, the Company acquired the Rapignost(R) urine test strip business
of Dade Behring Marburg GmbH ("Dade Behring") (see note 7).
CONSOLIDATION The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
CHANGE IN FISCAL YEAR During October 1999, the Company changed its fiscal year
from a March 31 fiscal year-end to a December 31 fiscal year-end. The Company is
reporting the nine months ended December 31, 1999 as a transition to its new
fiscal year-end of December 31. Results of operations for the nine months ended
December 31, 1999 are not necessarily indicative of the results to be expected
for the Company's fiscal year ending December 31, 2000.
INTERIM FINANCIAL INFORMATION (UNAUDITED) The unaudited interim statements of
operations and cash flows and related notes for the nine months ended December
31, 1998 have been prepared on the same basis as the audited financial
statements and, in the opinion of management, include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations in accordance
with generally accepted accounting principles. Results for the interim period
are not necessarily indicative of results to be expected for the full fiscal
year.
REVENUE RECOGNITION Revenue from product sales are recorded net of estimated
returns at the time the product is shipped. Revenues from contracts to perform
research and development and license fees are recorded as earned based on the
performance requirements of the agreements. Revenue from the licensing of
distribution rights is recorded when earned under the terms of the related
license agreements.
CASH AND CASH EQUIVALENTS The Company considers cash equivalents to be highly
liquid investments with an original maturity of three months or less.
ACCOUNTS RECEIVABLE The balance of accounts receivable is net of allowances of
$1.6 million at December 31, 1999 and $587,000 at March 31, 1999.
OTHER RECEIVABLES The balance in other receivables is primarily related to a $1
million payment owed to Metra from Sumitomo Pharmaceuticals Co., Ltd. due to the
Metra bone markers becoming eligible for reimbursement in Japan. Metra received
this payment in January 2000.
F-8
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES Inventories are stated at lower of cost (first-in, first-out method)
or market. The Company reviews the components of its inventory on an annual
basis for excess, obsolete and impaired inventory and makes appropriate
dispositions as obsolete stock is identified.
<TABLE>
<CAPTION>
December 31, March 31,
(IN THOUSANDS) 1999 1999
---------------- ---------------
<S> <C> <C>
Raw materials $ 3,835 $ 2,935
Work-in-process 2,692 1,935
Finished goods 1,800 941
---------------- ---------------
$ 8,327 $ 5,811
================ ===============
</TABLE>
PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciated
over the estimated useful lives of the assets (3 to 15 years) using the
straight-line method. Amortization of leasehold improvements is computed on the
straight-line method over the shorter of the lease term or the estimated useful
lives of the assets. Maintenance and repairs are charged to operations as
incurred. When assets are sold, or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in the statements of operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires companies to
capitalize qualifying computer software costs that are incurred during the
application development stage and amortize such costs over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company adopted SOP 98-1 effective January 1, 1999 and
capitalized software costs for a total of $1.8 million and $697,000 for the nine
months ended December 31, 1999 and the year ended March 31, 1999, respectively.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
(IN THOUSANDS) 1999 1999
---------------- ---------------
<S> <C> <C>
Equipment, furniture and fixtures $ 25,315 $ 17,343
Building and improvements 12,125 10,996
Land 1,080 1,080
---------------- ---------------
38,520 29,419
Less: Accumulated depreciation and amortization (17,313) (11,200)
---------------- ---------------
$ 21,207 $ 18,219
=============== ==============
</TABLE>
INTANGIBLE ASSETS Intangible assets, representing primarily patents, trademarks
and license agreements, are recorded at cost and amortized on a straight-line
basis over estimated useful lives of 5 to 15 years. The excess of cost over the
fair value of the net tangible assets purchased arose from the Company's 1999
acquisition of its wholly-owned subsidiary, Metra, as well as the purchase of
technology from Dade Behring. The goodwill acquired from Metra is being
amortized over five years, while the technology purchased from Dade Behring is
being amortized over ten years. Patent filing costs are capitalized and
amortized upon the issuance of the related patent.
F-9
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
(IN THOUSANDS) 1999 1999
---------------- ---------------
<S> <C> <C>
Purchased Technology $ 5,397 $ --
Goodwill 3,150 --
Patent and Trademark Costs 2,455 2,358
License Agreements 2,300 2,300
---------------- ---------------
13,302 4,658
Less: Accumulated amortization (2,206) (1,574)
---------------- ---------------
$ 11,096 $ 3,084
================== =============
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS Periodically, the Company reviews for possible
impairment of its long-lived assets and certain identifiable intangibles to be
held and used by comparing the carrying value of an asset to its estimated
undiscounted future cash flows. Whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable,
asset values are adjusted accordingly.
In April 1998, the Company's Board of Directors approved a plan under which the
operations of certain of the Company's foreign subsidiaries would be disposed of
through abandonment. In accordance with SFAS No. 121, management assessed the
recoverability of those assets by comparing the expected cash flows to be
generated by those assets to their carrying amounts. This analysis concluded
that the carrying amounts of the assets were not recoverable. Accordingly, in
1998, the Company wrote down the assets to their fair value, which was
determined to be minimal.
RESEARCH AND DEVELOPMENT COSTS All research and development costs are charged to
operations as incurred.
INCOME TAXES Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION The consolidated balance sheet accounts of the
Company's foreign operations are translated from their respective foreign
currencies into U.S. dollars at the exchange rate in effect at the balance sheet
date, and revenue and expense accounts are translated using an average exchange
rate during the period of recognition. The effects of translation are recorded
as a separate component of stockholders' equity. Exchange gains and losses
arising from transactions denominated in foreign currencies are recorded using
the actual exchange differences on the date of the transaction and are included
in the consolidated statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's
financial instruments, including cash, receivables, accounts payable, accrued
liabilities and the line of credit approximate their fair values due to their
short term nature. The Company's long-term debt approximates fair value as it
carries a fair market rate of interest. Financial instruments which potentially
subject the Company to concentrations of credit risk consist primarily of trade
accounts receivable. The Company believes it is not exposed to any significant
credit risk on its accounts receivable.
COMPUTATION OF EARNINGS PER SHARE Basic earnings per share was computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if the income were divided by the weighted-average
number of common shares and potentially dilutive common shares from outstanding
stock options and warrants. Potential dilutive common shares were calculated
using the treasury stock method and represent incremental shares issuable upon
exercise of the Company's outstanding options and warrants. Potentially dilutive
securities are not considered in the calculation of net loss per share as their
impact would be antidilutive.
F-10
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table reconciles the shares used in computing basic and diluted
earnings per share in the respective periods:
<TABLE>
<CAPTION>
Nine months ended
December 31, Year ended March 31,
------------------------------ -------------------------
(IN THOUSANDS) 1999 1998 1999 1998
------------ ------------- ----------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Shares used in basic earnings per share
(weighted average common shares outstanding) 23,853 23,780 23,782 23,649
Effect of dilutive stock options and warrants -- 20 22 208
------------ ------------- ----------- ---------
Shares used in diluted earnings per share calculation 23,853 23,800 23,804 23,857
============ ============ ========== ========
</TABLE>
COMPREHENSIVE INCOME Comprehensive income represents the impact of any
fluctuations in the Company's foreign currency translation adjustments.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION Certain amounts from the prior year have been reclassified to
conform to the December 31, 1999 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition in Financial Statements." SAB No. 101 summarized the SEC's view in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB No. 101 is effective for all registrants during the
first quarter of fiscal 2000. Management has reviewed the impact of SAB No. 101
on the Company's financial statements, and expects to record a cumulative effect
pre-tax charge of approximately $1 million when the Company adopts the
provisions of SAB No. 101 in January 2000.
NOTE 2. EXPORT SALES, FOREIGN OPERATIONS AND PRODUCT LINE INFORMATION
Export sales were as follows:
<TABLE>
<CAPTION>
Nine months ended
December 31, Year ended March 31,
-------------------------------- ------------------------------------
(IN THOUSANDS) 1999 1998 1999 1998
----------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Europe $ 2,430 $ 3,705 $ 4,757 $ 4,309
Asia 1,156 637 964 1,637
Other international 815 957 1,143 828
----------- ----------- --------------- -----------
$ 4,401 $ 5,299 $ 6,864 $ 6,774
=========== =========== =============== ===========
</TABLE>
F-11
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sales and operating income (loss) for the nine months ended December 31, 1999
and 1998, and the years ended March 31, 1999 and 1998, and identifiable assets
at the end of each of those years, classified by geographic area, were as
follows:
<TABLE>
<CAPTION>
Nine months ended
December 31, Year ended March 31,
------------------------------- -----------------------------------
(IN THOUSANDS) 1999 1998 1999 1998
---------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers from:
United States $ 34,967 $ 31,111 $ 43,569 $ 41,174
Europe 3,967 2,782 3,594 4,547
---------- ----------- -------------- -----------
$ 38,934 $ 33,893 $ 47,163 $ 45,721
========== =========== =============== ===========
Operating income (loss):
United States $ 52 $ 434 $ 914 $ 1,066
Europe (506) (186) 278 (2,565)
---------- ----------- -------------- -----------
$ (454) $ 248 $ 1,192 $ (1,499)
========== =========== ============== ===========
Long-lived assets:
United States $ 42,469 $ 24,547 $ 30,940 $ 22,945
Europe 232 52 47 156
---------- ----------- -------------- -----------
$ 42,701 $ 24,599 $ 30,987 $ 23,101
========== =========== ============== ===========
</TABLE>
Intercompany sales to affiliates totaled approximately $1.6 million, $1.4
million and $2.4 million for the nine months ended December 31, 1999 and the two
years ended March 31, 1999 and 1998, respectively. Intercompany sales prices are
established with consideration of each entity's contribution to the overall
gross profit generated. Intercompany revenue and gross profit in inventory are
eliminated upon consolidation.
The products that contributed at least 10 percent to consolidated net sales for
the nine months ended December 31, 1999 and 1998, and the years ended March 31,
1999 and 1998 were:
<TABLE>
<CAPTION>
Nine months ended
December 31, Year ended March 31,
------------------------------ ---------------------------------
(IN THOUSANDS) 1999 1998 1999 1998
----------- ------------- -------------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Pregnancy tests $ 15,286 $ 15,101 $ 20,606 $ 17,610
Group A Streptococcus 9,266 11,012 13,267 14,543
</TABLE>
NOTE 3. LINE OF CREDIT As a part of the acquisition of Metra, the Company
entered into a $10 million bank line of credit to assist with the financing of
the transaction. The line was increased twice during the year up to $14.5
million to assist with the acquisition of the urine test strip business from
Dade Behring and the sale and leaseback of the corporate headquarters facility.
Upon the completion of those two transactions, and using the proceeds from the
facility sale to repay a portion of the line of credit, the outstanding balance
on the line of credit was reduced to $3.8 million as of December 31, 1999. The
total available line of credit was also reduced to $7.5 million at December 31,
1999. Certain of the Company's assets collateralize the line of credit.
NOTE 4. LEASE COMMITMENTS
Rent expense under operating leases totaled $243,000, $294,000 and $247,000 for
the nine months ended December 31, 1999 and the two years ended March 31, 1999
and 1998, respectively.
F-12
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cost and accumulated depreciation of equipment under capital leases in the
accompanying consolidated balance sheets at December 31, 1999 are $18.6 million
and $7.1 million, respectively, and at March 31, 1999 are $181,000 and $124,000,
respectively. Depreciation of equipment under capital lease agreements is
included in depreciation expense in the accompanying consolidated statements of
operations.
NOTE 5. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
(IN THOUSANDS) 1999 1999
------------------ ------------------
<S> <C> <C>
9.4% note secured by deed of trust on San Diego facility $ -- $ 3,002
Payable to Dade Behring 250 --
Obligations under capital leases (see note 9) 11,732 --
------------------ ------------------
11,982 3,002
Less current portion of long-term debt and obligations under
capital leases (553) (174)
------------------ ------------------
$ 11,429 $ 2,828
================== ==================
</TABLE>
Future principal debt payments for years ended after December 31, 1999 are as
follows (in thousands):
<TABLE>
<S> <C>
2000 $ 553
2001 543
2002 334
2003 390
2004 452
Thereafter 9,710
-------------
$ 11,982
=============
</TABLE>
NOTE 6. STOCKHOLDERS' EQUITY
COMMON STOCK WARRANTS. Outstanding warrants to purchase shares of common stock
at December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Exercise Number
Issue Date Term Price of Shares
- ------------------------------------------- -------------- --------------- ----------------
<S> <C> <C> <C>
April 1992 10 years $7.50 950,000
January 1995 5 years $3.00 12,500
April 1995 4 yrs, 9 mos $4.50 200,621
May 1995 5 years $ 4.75 - $8.50 50,000
----------------
1,213,121
</TABLE>
During December 1999, 124,379 warrants were exercised, resulting in proceeds to
the Company of approximately $460,000. Subsequent to December 31, 1999, 213,121
warrants were exercised, resulting in proceeds to the Company of approximately
$940,000.
F-13
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's 950,000 publicly traded warrants (QDELW) were issued in April 1992
and expire April 30, 2002. The common stock underlying the warrants is in the
process of being registered pursuant to registration rights in the Warrant
Agreement to allow the warrantholders the ability to exercise such warrants.
STOCK OPTIONS The Company has stock options outstanding which were issued under
various stock option plans to certain employees, consultants and directors. The
options have terms ranging up to ten years, have exercise prices ranging from
$1.81 to $6.56, and generally vest over four years. All options are issued at
100% of fair market value.
In July 1998, the Company's stockholders authorized the establishment of the
1998 Stock Incentive Plan which provides for the grant of options to purchase up
to 3,000,000 shares of common stock. In addition, the stockholders also
authorized an amendment to the Company's 1996 Non-Employee Directors Stock
Option Plan which increased the total number of shares reserved for issuance
under the plan by 80,000 shares to bring the total shares authorized under this
plan to 400,000 shares.
The following table summarizes option activity in terms of thousands of shares
and the weighted average exercise per share:
<TABLE>
<CAPTION>
Year Ended March 31,
Nine months ended ------------------------------------------------
December 31, 1999 1999 1998
---------------------- ------------------------------------------------
(IN THOUSANDS) Shares Price Shares Price Shares Price
-------- ---------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,848 $ 3.34 2,710 $ 3.81 2,131 $ 3.94
Granted 1,577 3.09 2,560 3.01 850 3.25
Exercised (49) 2.91 (21) .73 (165) 2.48
Cancelled (654) 3.70 (1,401) 3.70 (106) 3.88
-------- ---------- --------
Outstanding at end of year 4,722 3.21 3,848 3.34 2,710 3.81
======== ========== =========
</TABLE>
At December 31, 1999, there were 1,291,386 shares exercisable, with a weighted
average remaining contractual life of 8.13 years. At December 31, 1999,
1,311,343 shares remained available for grant under the plans.
The Company has elected to follow Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees", and related Interpretations,
in accounting for its employee stock options. Under APB No. 25, because the
exercise price of the Company's employee stock options equals the estimated
market price of the underlying stock on the date of grant, no compensation has
been recognized.
The estimated weighted average fair value of options granted during the nine
months ended December 31, 1999 and the years ended March 31, 1999 and 1998 was
$2.12, $2.16 and $2.01, respectively. The fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants for the nine months
ended December 31, 1999 and the years ended March 31, 1999 and 1998,
respectively: risk-free interest rate of 6.3%, 5.0% and 6.0%; expected option
life of 5.6, 5.8 and 5.0 years; expected volatility of .78, .72 and .75; and a
dividend rate of zero for all three periods.
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. Because the Company's employee stock option plans have
characteristics significantly different from those of traded options, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
F-14
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Had compensation cost for the Company's stock option plans been determined based
on the fair value at the grant date for awards for the nine months ended
December 31, 1999 and the years ended March 31, 1999 and 1998 consistent with
the provisions of SFAS No. 123, the Company's net income (loss) and income
(loss) per share would have been as indicated below:
<TABLE>
<CAPTION>
For the nine
months ended Year ended March 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) December 31, 1999 1999 1998
--------------------- ------------- ----------
<S> <C> <C> <C>
Net income (loss) - as reported $ (1,536) $ 7,661 $ 1,110
Net income (loss) - pro forma (2,872) 6,223 219
Basic and diluted earnings (loss)
per share - as reported (.06) .32 05
Basic and diluted earnings (loss)
per share - pro forma (.12) .26 .01
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN In fiscal 1998, the number of shares authorized to
be issued under the Employee Stock Purchase Plan ("the Plan") was increased by
100,000 to a total of 600,000 shares of common stock. Under the Plan, full-time
employees are allowed to purchase common stock through payroll deductions (which
cannot exceed 10% of the employee's compensation) at the lower of 85% of fair
market value at the beginning or end of each six-month option period. As of
December 31, 1999, 504,270 shares had been sold under the Plan, leaving 95,730
shares available for future issuance.
At December 31, 1999, approximately 7.3 million shares of common stock were
reserved for the exercise of stock options and warrants, and purchases under the
Employee Stock Purchase Plan.
NOTE 7. ACQUISITION OF METRA BIOSYSTEMS, INC.
During the quarter ended September 30, 1999, the Company completed the
acquisition of all 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's business activities consist of the diagnosis and
detection of bone loss for the management of osteoporosis and other bone
diseases. The total cost of the transaction to the Company was approximately
$7.1 million, net of cash acquired from Metra 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 cash acquired from Metra.
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 fair values at the date of acquisition. The results of
operations of Metra 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 million. The $820,000
allocated to acquired in-process research and development was written off at the
time of the acquisition. In addition, approximately $3.1 million of intangible
assets were capitalized and are being amortized over five years.
The value of the acquired in-process research and development 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 research and
development was determined by estimating the costs to develop the acquired
in-process research and development 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
research and development, the calculations of value were adjusted to reflect the
value creation efforts of Metra prior to the close of the acquisition.
F-15
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The nature of the efforts required to develop acquired in-process research and
development 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 (UNAUDITED) The following table presents the
unaudited pro forma results assuming the Company had acquired Metra as of April
1, 1999 and 1998, respectively. Net loss and basic and diluted loss per share
amounts have been adjusted to exclude the acquired in-process research and
development write-off of $820,000 and net interest income of $357,000 and $1
million for the nine months ended December 31, 1999 and 1998, respectively, and
to include additional goodwill amortization of $208,000 and $468,000 for the
nine months ended December 31, 1999 and 1998, respectively. This information may
not necessarily be indicative of the future combined results of the Company.
<TABLE>
<CAPTION>
Pro forma
For the nine months ended December 31,
-------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998
-------------- ----------------
<S> <C> <C>
Revenues $ 44,251 $ 41,840
Net loss $ (3,071) $ (9,500)
Basic and diluted loss per share $ (.13) $ (.40)
</TABLE>
NOTE 8. ACQUISITION OF DADE BEHRING ASSETS
During November 1999, the Company entered into an Asset Sale Agreement with Dade
Behring for the purchase of Dade Behring's Rapignost(R) urine test strip
business.
The purchase price for the assets was $5.75 million. Of that amount, $5 million
was paid at closing, $500,000 will be paid in December 2000 and $250,000 will be
paid in December 2001, upon successful completion of certain milestones. The
Company believes that the $250,000 payable upon successful completion of certain
milestones is determinable beyond a reasonable doubt and have therefore
accounted for the $250,000 as a long-term liability as of December 31, 1999. In
addition to the aggregate purchase price for the assets, the Company agreed to
pay Dade Behring a royalty on the combined global sales of the urine test strips
for five years after the closing, up to a maximum of $3 million. The funds used
to complete the purchase came from the Company's existing bank line of credit.
The Company was subsequently credited approximately $200,000 due to the
inventory on hand at Dade Behring at the closing being less than the negotiated
amount.
F-16
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The acquired assets include Dade Behring's inventory of urine test strips,
valued at $170,000, product manufacturing equipment, valued at $100,000, and
information and know-how, trademarks, vendor and customer contracts, distributor
agreements, and assignments of certain license agreements, valued at
approximately $5.4 million. Dade Behring will continue to manufacture the urine
test strips for the Company for up to two years on a contract basis.
NOTE 9. SALE AND LEASEBACK OF FACILITY
During December 1999, the Company completed a sale and leaseback transaction of
its corporate headquarters facility and real estate. The facility and real
estate was sold for $15 million, of which $3.75 million was capital contributed
by the Company. As a part of this transaction, the Company paid off the mortgage
on the facility of approximately $3 million and was assessed a pre-payment
penalty of approximately $891,000. The Company will lease the 73,000 square foot
facility for fifteen years, with options to extend the lease for up to two
additional five-year periods. The sale was an all cash transaction, netting the
Company approximately $7 million. The Company is a 25% limited partner in the
partnership that acquired the facility and real estate.
The transaction was deemed a financing transaction under SFAS No. 98 "Accounting
for Sales of Real Estate". As such, the assets sold remain on the books of the
Company and will continue to be depreciated over the estimated useful life. The
Company recorded $11.25 million as the present value of the net lease payments
as a capital lease obligation.
NOTE 10. INCOME TAXES
For financial reporting purposes, income before income taxes and extraordinary
item includes the following components:
<TABLE>
<CAPTION>
Year Ended March 31,
Nine months ended -----------------------------------
(IN THOUSANDS) December 31, 1999 1999 1998
--------------------- -----------------------------------
<S> <C> <C> <C>
Pre tax income:
United States $ (199) $ 1,356 $ (1,170)
Foreign (446) 38 (351)
--------------------- --------------- ---------------
$ (645) $ 1,394 $ (1,521)
===================== =============== ================
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
Nine months ended -----------------------------------
(IN THOUSANDS) December 31, 1999 1999 1998
--------------------- -----------------------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ 100 $ 51
Foreign -- (6) 5
State -- 15 20
--------------------- --------------- ------------
-- 109 76
Benefit of operating loss
carryforwards -- (6,376) (2,707)
--------------------- --------------- ------------
Benefit for income taxes $ -- $ (6,267) $ 2,631
===================== =============== ============
</TABLE>
F-17
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's deferred tax assets as of December 31,
1999 and March 31, 1999 are shown below. During the year ended March 31, 1999,
the Company decreased the valuation allowance for deferred tax assets by
approximately $11.8 million. Of this amount, approximately $6.4 million resulted
from the determination that the realization of net operating loss carryforwards
was more likely than not and the remainder related to other decreases in
deferred tax assets.
<TABLE>
<CAPTION>
(IN THOUSANDS) December 31, March 31, 1999
------------ --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 22,397 $ 22,113
Tax credit carryforwards 1,407 1,407
Other, net 1,139 859
------------ --------------
Total deferred tax assets 24,943 24,379
Valuation allowance for deferred tax assets (15,860) (15,296)
------------ --------------
Net deferred tax assets $ 9,083 $ 9,083
============ ==============
</TABLE>
At December 31, 1999, the Company had Federal income tax net operating loss
carryforwards of approximately $66.0 million. The Federal income tax net
operating loss carryforwards began to expire in 1999.
The Company also has federal investment tax, research and development and
alternative minimum tax credit carryforwards of approximately $1.1 million and
California research and development, manufacturers' investment and alternative
minimum tax credit carryforwards of $439,000 which began to expire in 1999.
The reconciliation of income tax computed at the Federal statutory rate to the
provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
Nine months ended ----------------------------------
(IN THOUSANDS) December 31, 1999 1999 1998
---------------------- ------------- ---------------
<S> <C> <C> <C>
Tax at statutory tax $ (513) $ 474 $ (517)
rate
Utilization of valuation allowance -- (617) 508
Increase (reduction) in valuation allowance 564 (6,376) (2,707)
State taxes net of federal benefit (91) 15 12
Other 40 237 73
---------------------- ------------- ---------------
$ -- $ (6,267) $ (2,631)
====================== ============= ===============
</TABLE>
NOTE 11. COMMITMENTS
RESEARCH AND DEVELOPMENT AGREEMENTS
During 1998 and 1997, the Company entered into agreements to perform research
and development with Glaxo Wellcome plc ("Glaxo Wellcome"). Under these
agreements, specified costs related to the performance of research and
development for certain diagnostic test products are reimbursed by Glaxo
Wellcome. The agreements provide for total funding up to approximately $12.1
million. The Company recorded revenue equal to the sum of the direct costs
incurred under the agreements, plus a permitted overhead surcharge, of
approximately $1.8 million in the nine months ended December 31, 1999, and $4.0
million and $3.2 million for the years ended March 31, 1999 and 1998,
respectively. In exchange for the funding provided by Glaxo Wellcome under these
agreements, upon successful completion of the planned products, the Company will
be required to pay royalties on sales of the developed products to Glaxo
Wellcome.
F-18
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) plan (the "Plan") covering all
employees who are eligible to join the Plan upon employment. Employees may
contribute up to 20% of their compensation per year (subject to a maximum limit
by federal law). The Company began matching contributions to the Plan during the
nine months ended December 31, 1999, and such contribution amounted to $125,000.
NOTE 13. BECTON DICKINSON LICENSE AGREEMENT
In June 1997, the Company entered into a license agreement with Becton Dickinson
and Co. ("BD") in exchange for a cash license fee, a royalty on net sales of
certain of its pregnancy and ovulation products, and a license of the Company's
Q-Laboratory technology back to BD (with a royalty on future net sales). The
license fee paid of $2.3 million was capitalized and is being amortized over 7.5
years, the term of the agreement. Royalty expense applicable to this agreement
totaled approximately $1.7 million and $1.6 million for the nine months ended
December 31, 1999 and 1998, respectively, and approximately $1.9 million and
$1.7 million for the years ended March 31, 1999 and 1998, respectively.
F-19
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. PRO FORMA STATEMENTS OF OPERATIONS (UNAUDITED)
As noted in note 1, the Company changed its fiscal year to a December 31
year-end. The following is a pro forma statements of operations showing the
results of operations of the Company as if the Company was on a December 31
year-end for each of the three years ended December 31, 1999. The pro forma
financial information is based on the actual information for the nine months
ended December 31, plus the actual information for the three months ended March
31.
Quidel Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) Pro forma year ended December 31,
-----------------------------------------------------
1999 1998 1997
---------------- --------------- -------------
<S> <C> <C> <C>
REVENUES
Net sales $ 52,204 $ 47,166 $ 44,691
Research contracts, license fees and royalties 4,315 4,733 3,012
---------------- --------------- -------------
Total revenues 56,519 51,899 47,703
COSTS AND EXPENSES
Cost of sales 27,059 26,438 22,615
Sales and marketing 14,390 9,858 10,697
Research and development 7,562 8,284 4,211
General and administrative 6,287 6,292 7,328
Write down and closure of European subsidiaries -- 3,498 --
Acquired in-process research and development 820 -- --
---------------- --------------- -------------
Total costs and expenses 56,118 54,370 44,851
---------------- --------------- -------------
Operating income (loss) 401 (2,471) 2,852
OTHER INCOME AND EXPENSE
Interest and other income 536 489 424
Interest and other expense (744) (251) (625)
---------------- --------------- -------------
Total other income (expense) (208) 238 (201)
---------------- --------------- -------------
Income (loss) before benefit (provision) for income taxes
and extraordinary item 193 (2,233) 2,651
Benefit (provision) for income taxes 6,575 2,374 (91)
---------------- --------------- -------------
Income before extraordinary item 6,768 141 2,560
Extraordinary item, early extinguishment of debt (891) -- --
---------------- --------------- -------------
Net income $ 5,877 $ 141 $ 2,560
=============== =============== ============
Basic and diluted earnings per share on income
before extraordinary item $ .28 $ .01 $ .11
=============== ============== ============
Basic and diluted earnings per share for extraordinary item $ (.03) $ -- --
=============== ============== ============
Basic and diluted earnings per share $ .25 $ .01 $ .11
=============== ============== ============
Shares used in basic earnings per share calculation 23,841 23,768 23,596
=============== ============== ============
Shares used in diluted earnings per share calculation 24,167 23,794 23,846
=============== ============== ============
</TABLE>
F-20
<PAGE>
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly results for the twelve months
ended December 31, 1999 and 1998.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Net income
Twelve months ended Gross Net income (loss)
December 31, 1999 Revenues profit (loss) per share
- --------------------------------- ---------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
December 31 $ 18,466 $ 8,600 $ 397 $ .02
September 30 12,203 5,210 (2,418) (.10)
June 30 11,572 5,165 485 (.02)
March 31 14,278 6,233 7,413 .31
</TABLE>
<TABLE>
<CAPTION>
Net income
Twelve months ended Gross Net income (loss)
December 31, 1998 Revenues profit (loss) per share
- --------------------------------- ---------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
December 31 $ 14,927 $ 5,776 $ 946 $ .04
September 30 11,420 4,270 (716) .03
June 30 10,871 4,778 18 --
March 31 14,681 5,841 (107) --
</TABLE>
Basic and diluted net income per share are the same for all quarterly periods.
The net income (loss) for the quarters ended March 31, 1999 and 1998, included
an income tax benefit of approximately $6.6 million and $2.7 million,
respectively.
F-21
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Pacific Biotech, Inc., a Delaware corporation
Metra Biosystems, Inc., a California corporation
Osteo Sciences Corporation, an Oregon corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the previously filed Registration Statement on Form S-8 (No.
333-72603) pertaining to the Employee Stock Plan of Quidel Corporation of our
report dated February 11, 2000, with respect to the consolidated financial
statements of Quidel Corporation, included in the Quidel Corporation Annual
Report to Stockholders (Form 10-K) as of December 31, 1999 and for the nine
month period then ended.
/s/ ARTHUR ANDERSEN LLP
San Diego, California
March 21, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-72603) pertaining to the Employee Stock Plan of Quidel
Corporation of our report dated May 14, 1999, with respect to the consolidated
financial statements of Quidel Corporation included in the Annual Report (Form
10-K) of Quidel Corporation for the nine months ended December 31, 1999.
/s/ ERNST & YOUNG LLP
San Diego, California
March 21, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES F2 AND F3 OF QUIDEL'S FORM
10-K FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,672
<SECURITIES> 0
<RECEIVABLES> 13,479
<ALLOWANCES> 1,604
<INVENTORY> 8,327
<CURRENT-ASSETS> 25,339
<PP&E> 21,207
<DEPRECIATION> 11,096
<TOTAL-ASSETS> 68,040
<CURRENT-LIABILITIES> 12,856
<BONDS> 0
0
0
<COMMON> 24
<OTHER-SE> 43,731
<TOTAL-LIABILITY-AND-EQUITY> 68,040
<SALES> 38,934
<TOTAL-REVENUES> 42,241
<CGS> 19,959
<TOTAL-COSTS> 42,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 213
<INCOME-PRETAX> (645)
<INCOME-TAX> 0
<INCOME-CONTINUING> (645)
<DISCONTINUED> 0
<EXTRAORDINARY> (891)
<CHANGES> 0
<NET-INCOME> (1,536)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
