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.
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.
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
"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
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.
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
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.
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.
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
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.
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.
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.
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.
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
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5.
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.
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.
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.
Item 6.
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.
*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)
Item 7.
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.
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
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
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
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.
REVENUE FROM RESEARCH CONTRACTS, LICENSE FEES AND ROYALTIES
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
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
OPERATING EXPENSES (CONTINUED)
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
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
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
Contract research and development revenue principally related to funding provided by Glaxo Wellcome as noted previously.
COST OF SALES AND GROSS PROFIT
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
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.
Item 7A.
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.
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.
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.
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
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.
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.
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.
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.
PART IV
Item 14.
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 of this report.
(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.
(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.)
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
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
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
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
QUIDEL CORPORATION
CONSOLIDATED BALANCE SHEETS
SEE ACCOMPANYING NOTES.
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
SEE ACCOMPANYING NOTES.
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SEE ACCOMPANYING NOTES.
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
SEE ACCOMPANYING NOTES.
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.
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.
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:
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.
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible assets consist of the following:
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.
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:
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:
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:
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:
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.
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:
Future principal debt payments for years ended after December 31, 1999 are as follows (in thousands):
NOTE 6. STOCKHOLDERS' EQUITY
COMMON STOCK WARRANTS. Outstanding warrants to purchase shares of common stock at December 31, 1999, are as follows:
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.
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:
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.
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:
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.
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.
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.
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:
Significant components of the provision for income taxes attributable to continuing operations are as follows:
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.
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:
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.
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.
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
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)
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.