Item 2. Properties
Our executive, administrative, manufacturing and research and development operation is located in San Diego, California. We lease a 73,000 square-foot facility used primarily for manufacturing and research and development in San Diego, California, which expires in 2014. For our European operations, we have leases for approximately 2,000 square feet in both Marburg and Sterzhausen, Germany, for the manufacturing and storage, respectively, of our urinalysis products, which expire in 2006 and 2004, respectively. In addition, we lease approximately 24,000 square feet of manufacturing, laboratory and office space in Santa Clara, California, which expires in 2009.
We believe that our facilities are adequate for our current and planned level of business, and we currently do not anticipate any material difficulty in renewing any of our leases as they expire or securing replacement facilities, in each case on commercially reasonable terms.
Item 3.
Item 3. Legal Proceedings
On February 20, 2004, we filed the Action in the U.S. District Court, Southern District of California against Inverness, as well as against Armkel LLC, for infringement of our 522 Patent, which relates to lateral-flow technology, and for declaratory relief. We are seeking damages and injunctive relief against Inverness products that infringe our patented technology. Our claim for declaratory relief relates to nine Inverness-owned and Inverness-licensed patents (U.S. Patent Nos. 6,485,982: 5,989,921; 5,714,389; 6,352,862; 6,228,660; 6,187,598; 5,656,503; 5,622,871; and 5,602,040), and requests the Court to conclude that our lateral-flow products do not infringe these patents, and that the patents are invalid and unenforceable.
On March 9, 2004, Inverness and a related party filed, in the U.S. District Court, Southern District of California, denials of our allegations of infringement in the Action, allegations that our "522 Patent is invalid and unenforceable, as well as counterclaims for patent infringement against us. On March 12, 2004, Armkel LLC filed, in the U.S. District Court, Southern District of California, an answer to our request for declaratory relief and counterclaims for patent infringement against us. The counterclaims by Inverness and the related parties and by Armkel LLC allege that our immunoassay test products, including our tests for influenza, pregnancy, strep, and H pylori, infringe eight of the nine Inverness patents that we identified in the Action. In addition, Inverness Medical Switzerland GmbH, Wampole Laboratories, LLC, and Applied BioTech, Inc. filed a separate complaint against us alleging that our immunoassay test devices also infringe a ninth patent owned by Inverness, U.S. Patent No. 6,534,320. The relief requested in these claims and counterclaims against us includes damages and preliminary and permanent injunctive relief to the effect that if this relief is granted, we would be required to cease and desist from manufacturing, selling, marketing, using, and inducing others to use products that represent a substantial majority of our revenues.
On February 17, 2004, our German affiliate Quidel Deutschland GmbH was provided with a copy of a lawsuit that Inverness Medical Switzerland GmbH, another Inverness subsidiary, and Preymed had apparently filed on or about February 4, 2004 in District Court in Düsseldorf, Germany, which names us, Quidel Deutschland GmbH, and our distributor, Progen Biotechnik GmbH, as defendants. The lawsuit alleges that we and the other defendants are infringing two Inverness-owned European patents, EP 0 291 194 and EP 0 560 411, and is directed at our lateral flow test devices, including our tests for pregnancy, strep, H pylori, and Chlamydia. The suit seeks injunctive relief, an accounting, damages and annulment. If the Court grants injunctive relief, we will be required to cease and desist from manufacturing, selling, marketing, using, and importing our lateral flow products in Germany.
We are also involved in other litigation matters from time to time in the ordinary course of business. Management believes that any and all such other actions, in the aggregate, will not have a material adverse effect on us. We also maintain insurance, including coverage for product liability claims, in amounts which management believes appropriate given the nature of our business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the fourth quarter of 2003.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
COMMON STOCK PRICE RANGE
Our 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 our common stock for the periods indicated since January 1, 2002.
We previously had 950,000 warrants that were traded on the Nasdaq National Market System under the symbol "QDELW." These warrants were issued in April 1992 and expired April 30, 2002. The common stock underlying the warrants were registered on August 21, 2000. The following table sets forth the range of high and low closing prices for our warrants for the periods indicated since January 1, 2002.
No cash dividends were declared for our common stock during the fiscal years ended in 2003 or 2002, and we do not anticipate paying any dividends in the foreseeable future. As of December 31, 2003, we had 733 common stockholders of record.
Item 6.
Item 6. Selected Consolidated Financial Data
The following table presents selected consolidated financial data of Quidel Corporation. This historical data should be read in conjunction with the Consolidated Financial Statements and related notes thereto appearing elsewhere in this Annual Report on Form 10-K.
Consolidated Statements of Operations
Balance sheet data
(1)The years ended December 31, 2001 and 2000 and the nine months ended December 31 1999 include $2.5 million, $0.7 million and $0.3 million, respectively, of amortization of goodwill that was not recorded during 2002 or 2003, pursuant to our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). The impact on fully diluted earnings per share for the years ended December 31, 2001 and 2000 and the nine months ended December 31 1999 was $0.09, $0.03 and $0.01, respectively.
(2)We have included $1.6 million of insurance proceeds in "other income" for the year ended December 31, 2001. (See Note 1 to Consolidated Financial Statements).
(3)In December 2000, we acquired Litmus. In conjunction with the acquisition of Litmus, we recorded $2.3 million of acquired in-process research and development.
(4)In the fourth quarter of 2000, we implemented SEC Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements" and, as a result, recorded a cumulative effect of a change in accounting principle of $1.1 million.
(5)In October 1999, we changed our fiscal year end from March 31 to December 31.
(6)In July 1999, we acquired Metra Biosystems, Inc. ("Metra") and in December 1999 we acquired a urine test strip business from Dade. Also during the nine months ended December 31, 1999, we performed a sale and leaseback of our corporate headquarters facility. In conjunction with the acquisition of Metra, we recorded $0.8 million of acquired in-process research and development. 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. This discussion should be read in conjunction with "A Warning About Forward-Looking Statements" on page 3 of this Annual Report.
Overview
We are a worldwide leader in developing, manufacturing and marketing POC rapid diagnostic tests for the detection and management of a variety of medical conditions and illnesses. Our current product areas include pregnancy, infectious diseases, autoimmune diseases, osteoporosis and urinalysis. In the U.S., we lead the market in several POC product categories for sales through medical product distributors. This leadership position includes an estimated 51%, 49% and 45% market share in pregnancy, influenza and Group A Strep products, respectively, as of December 31, 2003. Our products provide healthcare professionals with accurate and cost-effective diagnostic information at the POC. We sell our products to professionals for use in physician offices, hospitals, clinical laboratories and wellness screening centers. We focus our products substantially on women's and family health in areas such as reproduction, infectious diseases, general health screening and diseases associated with the elderly.
We commenced our operations in 1979 and launched our first products, dipstick-based pregnancy tests, in 1984. Our product base and technology platforms have expanded through internal development and acquisitions of other products and technologies. The current product areas are pregnancy, infectious diseases, autoimmune diseases, osteoporosis and urinalysis, for professional and research use.
We market our products in the U.S. through a network of national and regional distributors, supported by a direct sales force. In the rest of the world, we sell and market through distributors in Asia-Pacific, Europe, the Middle East, Africa and Latin America and in other international locations by channeling products through distributor organizations and sales agents.
Product Announcements
In September 2003, our QuickVue Influenza A+B test received regulatory clearance from the FDA, allowing for this test to be sold in the U.S. The test received approval from the Japanese Ministry of Health and Welfare in January 2004. In February 2004, we announced that our new QuickVue(R) Influenza A+B test had been granted a CLIA waiver from the FDA. The test provides physicians with a fast, accurate, easy-to-use method for aiding in the differential diagnosis of acute influenza type A or B. The QuickVue Influenza A+B test is a companion to the currently marketed, CLIA-waived QuickVue Influenza test, which has been available worldwide since 2001.
ISO Certification
In December 2000, our San Diego facility became ISO 9001 certified for our quality management systems. These systems contribute to ensuring that the development, manufacture and supply of products and services are consistent, reliable and valuable in meeting the quality demands of customers. ISO 9001 certification is officially recognized by European and North American authorities and is accepted worldwide, and is a requirement for doing business in the European Union. Additionally, our Santa Clara facility was ISO 9001 certified prior to our acquisition of Litmus and both the San Diego and Santa Clara facilities were successfully recertified during 2001, 2002 and 2003.
Results of Operations
The following table sets forth for the periods indicated certain consolidated statements of operations data expressed as a percentage of revenues:
Consolidated Statements of Operations Data
Net Sales
Net sales increased 25% to $93.5 million for the year ended December 31, 2003 from $74.6 million for the year ended December 31, 2002. The increase was primarily due to an increase in demand for our influenza and Group A Strep products, offset primarily by decreases in our pregnancy products. The significantly greater demand for our influenza products during the third and fourth quarters of 2003 was largely driven by a severe flu season. Our influenza and Group A Strep product sales increased approximately $22.7 million and $0.8 million, respectively, while our pregnancy tests decreased approximately $4.3 million for the year ended December 31, 2003 from the year ended December 31, 2002.
Net sales increased 3% to $74.6 million for the year ended December 31, 2002 from $72.4 million for the year ended December 31, 2001. The increase was primarily due to an increase in demand for our influenza products, offset by decreases in our pregnancy, Group A Strep and H. pylori products. Our influenza product sales increased approximately $7.1 million, while our core products of pregnancy and Group A Strep tests decreased approximately $6.0 million and our H. pylori product sales decreased approximately $1.0 million for the year ended December 31, 2002 from the year ended December 31, 2001.
Distribution Developments and Trends
A significant portion of our U.S. sales is made to distribution partners. We offer various incentives, largely through volume discount programs, to certain of these distributors based on sales objectives developed with the distributor. We also provide incentives from time to time for jointly developed sales and marketing programs.
As a result of a recent marketing strategy developed for our influenza and Group A Strep product lines, we increased sales of these products during the second quarter of 2003 even though sales for influenza and Group A Strep have historically been heavily weighted in the third and fourth calendar quarters. The program was intended to build brand loyalty by incentivizing end-users to purchase our products in advance of the fall and winter months, thereby facilitating repurchases of the same products as usage increases during the year. We do not anticipate this marketing approach to adversely impact expected aggregate sales in any future period.
Our sales estimates for future periods are based on estimated end-user demand for our products. Sales to our distribution partners would fall short of expectations if distributor inventories increase because of less than estimated end-user consumption. With the introduction of low cost pregnancy test products by competitors, we have observed a decline in U.S. sales of our own pregnancy products over the past several quarters. Given current estimates of existing distributor inventories and a shortfall in end-user demand as compared to sales to distributors to date, we believe that our U.S. sales of pregnancy products may decline in the near future. Our estimated future growth, therefore, is based on significant increases in sales of our other products.
As discussed under the "-Restructuring" section below, the transition from direct sales to independent distribution in Germany and Italy was largely completed as of December 31, 2003. We believe that continued market penetration will offset the revenue decline resulting from this distribution change.
Research Contracts, License Fees and Royalty Income
Research contracts, license fees and royalty income remained constant at approximately $1.6 million for the years ended December 31, 2003, 2002 and 2001. The majority of the research contracts, license fees and royalty income relates to royalty payments received on a patented technology of ours utilized by a third-party. The agreement covering the royalty payments extends through November 2009, the expiration date of the patent.
Cost of Sales and Gross Profit from Net Sales
Gross profit from net sales increased to $50.7 million for the year ended December 31, 2003 from $36.4 million for the year ended December 31, 2002. Gross profit from net sales as a percentage of net sales increased to 54% for the year ended December 31, 2003 from 49% for the year ended December 31, 2002. The increases were primarily due to increased sales volume and favorable product mix, offset to a lesser extent by under-utilization of manufacturing capacity at our Marburg, Germany facility, as well as pricing pressures on our pregnancy products.
Gross profit from net sales decreased to $36.4 million for the year ended December 31, 2002 from $36.6 million for the year ended December 31, 2001. Gross profit from net sales as a percentage of net sales decreased to 49% for the year ended December 31, 2002 from 51% for the year ended December 31, 2001. The decreases were primarily due to under-utilization of manufacturing capacity at our Marburg, Germany facility due to the delayed shipment of our UrinQuick® instrument and its related effect on urine test strip sales as well as pricing pressures on our core products, partially offset by increased sales of our higher margin influenza products.
Research and Development Expense
Research and development expense increased to $8.5 million for the year ended December 31, 2003 from $6.7 million for the year ended December 31, 2002. Research and development expense as a percentage of net sales remained constant at 9% for the years ended December 31, 2003 and 2002. The absolute dollar increase is primarily attributable to increased spending for the development of products on our LTF™ technology platform related to personnel and laboratory supplies and increased legal fees associated with patent development and patent protection.
Research and development expense increased to $6.7 million for the year ended December 31, 2002 from $6.2 million for the year ended December 31, 2001. Research and development expense as a percentage of net sales remained constant at 9% for both the years ended December 31, 2002 and 2001. The absolute dollar increase is primarily attributable to increased spending for the development of new products on our LTF™ technology platform related to personnel and laboratory supplies.
We anticipate that we will continue to devote a significant amount of financial resources to research and development for the foreseeable future.
Sales and Marketing Expense
Sales and marketing expense increased to $18.5 million for the year ended December 31, 2003 from $17.0 million for the year ended December 31, 2002. Sales and marketing expense as a percentage of net sales decreased to 20% for the year ended December 31, 2003 from 23% for the year ended December 31, 2002. The absolute dollar increase relates primarily to costs associated with our market analysis and investment in our national outreach and educational promotion of our influenza test, including public relations, marketing and advertising fees.
Sales and marketing expense increased to $17.0 million for the year ended December 31, 2002 from $14.8 million for the year ended December 31, 2001. Sales and marketing expense as a percentage of net sales increased to 23% for the year ended December 31, 2002 from 20% for the year ended December 31, 2001. The increases relate primarily to costs associated with the launch of our infectious vaginitis products, bone ultrasonometer and urinalysis instrument, including infrastructure, public relations, marketing and consulting fees.
General and Administrative Expense
General and administrative expense increased to $10.0 million for the year ended December 31, 2003 from $8.8 million for the year ended December 31, 2002. General and administrative expense as a percentage of net sales decreased to 11% for the year ended December 31, 2003 from 12% for the year ended December 31, 2002. The absolute dollar increase was primarily due to increased professional fees relating to the re-audit of our 2001 financial statements, tax consulting fees and legal and professional fees.
General and administrative expense decreased to $8.8 million for the year ended December 31, 2002 from $9.8 million for the year ended December 31, 2001. General and administrative expense as a percentage of net sales decreased to 12% for the year ended December 31, 2002 from 13% for the year ended December 31, 2001. The decreases were primarily due to a reduction in costs associated with corporate merger and acquisition activity in 2001, partially offset by increased legal and professional fees in 2002.
Restructuring
In April 2003, we announced and implemented the Restructuring Plan. The Restructuring Plan was primarily driven by manufacturing automation in our San Diego facility, completion of certain research and development projects, implementation of our BaaN enterprise resource planning system in our
Santa Clara facility, and the transition of our foreign sales and support offices to independent distributors. The Restructuring Plan included a workforce reduction of 63 positions (18% of our total workforce at such time) and closure of our sales and support offices in Heidelberg, Germany and Milan, Italy. We recorded a restructuring charge of approximately $2.2 million during 2003. The significant components of the restructuring charge were $1.3 million for employee severance costs, $0.5 million for contractual lease and commercial contract terminations, $0.3 million for professional fees, and $0.1 million for impairment charges related to assets that were deemed obsolete due to restructuring activities. As of December 31, 2003, $1.8 million of the restructuring charge had been paid and $0.4 million is included in other accrued liabilities in the accompanying consolidated balance sheet.
In the first quarter of 2001, we implemented an expense reduction plan (the "Reduction Plan"). The Reduction Plan included a workforce reduction of approximately 15 employees and closure of our facilities in the United Kingdom. In the first quarter of 2001, we incurred a restructuring charge of approximately $0.6 million related to the Reduction Plan. The significant components of the Reduction Plan were $0.5 million for employee severance costs and $0.1 million in closing costs related to the United Kingdom facility. The Reduction Plan was completed as of the end of the first quarter March 31, 2001 and no amounts were accrued as of December 31, 2001.
Amortization of Intangibles
On January 1, 2002, we adopted SFAS No. 141, "Business Combinations," ("SFAS No. 141") and SFAS No. 142, which eliminated the amortization of goodwill. Upon adoption, we reclassified the net book value of our assembled workforce intangible at January 1, 2002, which totaled $0.1 million, to goodwill. Amortization expense for goodwill and the assembled workforce intangible for the year ended December 31, 2001 totaled $2.6 million. SFAS No. 142 required a transitional evaluation for impairment of goodwill balances on adoption of the new accounting pronouncement. We completed our transitional review for potential impairment of goodwill that existed at January 1, 2002, and determined that no impairment of goodwill existed as of that date. SFAS No. 142 also requires periodic evaluations for impairment of goodwill balances. We completed our annual evaluation for impairment of goodwill in December 2003, and determined that no impairment of goodwill existed as of December 31, 2003. A significant decline in our projected revenue or earnings growth or cash flows, a significant decline in our stock price or the stock price of comparable companies, loss of legal ownership or title to an asset, and any significant change in our strategic business objectives and utilization of our assets are among many factors that could result in an impairment charge that could have a material negative impact on our operating results. Our other intangible assets, which are being amortized over a period of three to 12 years, include purchased technology, license agreements, patents, trademarks and a favorable lease.
Amortization of intangibles increased to $2.1 million for the year ended December 31, 2003 from $1.9 million for the year ended December 31, 2002.
Amortization of non-goodwill intangibles decreased to $1.9 million for the year ended December 31, 2002 from $4.4 million for the year ended December 31, 2001. This decrease was due to the adoption of SFAS No. 142 in January 2002 and the resulting elimination of goodwill amortization for 2002 and periods thereafter.
Other Income
Other income increased to $0.4 million for the year ended December 31, 2003 from $0.3 million for the year ended December 31, 2002. The increase in 2003 relates primarily to gains recognized on disposal of assets throughout the year.
Other income decreased to $0.3 million for the year ended December 31, 2002 from $2.0 million for the year ended December 31, 2001. This decrease is primarily due to a gain of $1.6 million
recognized in 2001 related to recovery of business interruption insurance proceeds on a freezer malfunction in May 2001. The $1.6 million gain is net of $4.1 million of insurance proceeds, offset by a $1.2 million loss for damaged inventory and $1.3 million of expenses for certain business remedies.
Interest and Other Expense
Interest and other expense remained constant at $1.0 million for both the years ended December 31, 2003 and 2002. Interest expense relates primarily to interest paid on obligations under capital leases, which are primarily related to our San Diego facility.
Interest and other expense decreased to $1.0 million for the year ended December 31, 2002 from $1.3 million for the year ended December 31, 2001. This decrease is primarily due to the decrease in our average borrowings outstanding under our line of credit during 2002.
Income Taxes
We recorded a tax benefit of $9.2 million for the year ended December 31, 2003 versus a tax provision of $1.6 million for the year ended December 31, 2002. This change is due primarily to a decrease of $13.3 million in the deferred tax valuation allowance during the fourth quarter ended December 31, 2003 to recognize deferred tax assets at amounts considered by management, more likely than not, to be realized, and to a lesser extent, foreign operations for both periods. Based on our recent history of profitability and our forecasts for future periods, management has determined it is more likely than not that net operating loss carryforwards and other temporary differences will be realized.
We recorded income tax expense of $1.6 million for the year ended December 31, 2002 and $3.0 million for the year ended December 31, 2001. The effective tax rates differed from the applicable statutory rates due primarily to our foreign operations for both periods and goodwill amortization during 2001.
Liquidity and Capital Resources
Our principal sources of liquidity have historically been cash flow from operations and borrowings under our line of credit. Our principal requirements for cash currently are for the funding of operations and capital expenditures.
At December 31, 2003, we had cash and cash equivalents of approximately $25.6 million compared to $2.9 million at December 31, 2002.
The net increase in cash and cash equivalents for the year ended December 31, 2003 was $22.7 million, the components of which are discussed below. The cash generated from operating activities of $18.8 million is largely comprised of our net earnings of $19.7 million, non-cash expenses of $6.6 million related to depreciation and amortization, a decrease in inventories of $1.4 million and increases in accounts payable and other accrued liabilities of $7.8 million, offset by increases in accounts receivable and our deferred tax asset of $6.0 million and $10.9 million, respectively. Another source of cash during the period was $6.5 million in proceeds from issuance of common stock under our stock option plans. Our primary uses of cash for the year ended December 31, 2003 were acquisitions of manufacturing equipment and assets related to information technology of $2.5 million, as well as payments on obligations under capital leases totaling $0.5 million.
The net decrease in cash and cash equivalents for the year ended December 31, 2002 was $0.5 million, the components of which are discussed below. The cash generated from operating activities of $6.2 million is largely comprised of our net earnings of $1.3 million, non-cash expenses of $6.2 million related to depreciation and amortization and decreases in our deferred tax asset of $1.4 million, offset by increases in accounts receivable and inventories of $1.8 million and $1.0 million,
respectively, and decreases in accounts payable and other accrued liabilities of $0.3 million. Another source of cash during the period was $0.8 million in proceeds from issuance of common stock under our stock option plans. Our primary uses of cash for the year ended December 31, 2002 were acquisitions of manufacturing equipment and assets related to information technology of $4.3 million, as well as payments on our line of credit and obligations under capital leases totaling $3.1 million.
We have a $10 million term loan facility which matures in July 2008 and which bears interest at a rate equal to the lender's base rate minus one quarter of one percent. We also have a $10 million line of credit facility which matures in July 2004 and, at our option, bears interest at a rate equal to the lender's base rate minus one quarter of one percent or at the London InterBank Offering Rate plus two and one quarter percent. The agreements governing our line of credit and term loan facilities contain certain customary covenants restricting our ability to, among other matters, incur additional indebtedness, create liens or other encumbrances, pay dividends or make other restricted payments, make investments, loans and guarantees or sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, another entity. As of December 31, 2003, there were no borrowings outstanding under either the line of credit or the term loan. As of December 31, 2003, we had $10 million of availability both under the line of credit and term loan, and we were in compliance with all covenants.
We plan approximately $5.4 million in capital expenditures during 2004. The primary purpose for our capital expenditures is to acquire manufacturing equipment and information technology. We plan to fund these capital expenditures with cash flow from operations. We have approximately $3.4 million of firm purchase commitments with respect to such planned expenditures as of the date of this filing. These commitments largely related to manufacturing equipment for our LTF™ product line.
We also intend to continue evaluation of acquisition and technology licensing candidates. As such, we 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 we generate cash from 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 our existing sources of liquidity will be adequate to meet operating needs during the next 12 months.
Off-Balance Sheet Arrangements
At December 31, 2003 and 2002, we did not have any other relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Contractual Obligations
Our facilities and certain equipment are leased under noncancelable capital and operating leases. In addition, we have contractual commitments for the purchase of certain manufacturing equipment
with certain vendors during 2004. As of December 31, 2003, the following is a summary of our contractual obligations (in thousands):
(1)Reflects obligations on facilities and equipment under capital leases, including current maturities, in place as of December 31, 2003. Future minimum lease payments are included in the table above.
(2)Reflects obligations on facilities and equipment under operating leases in place as of December 31, 2003. Future minimum lease payments are included in the table above.
(3)Amounts represent our minimum purchase commitments from vendors for manufacturing equipment used in our manufacturing facilities. Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer programs and incentives, bad debts, inventories, intangible assets, income taxes, restructuring and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
We record revenues from product sales. These revenues are recorded net of rebates and other discounts which are estimated at the time of sale, and are largely driven by various customer program offerings, including special pricing agreements, promotions and other volume-based incentives. Revenue from product sales are recorded upon passage of title and risk of loss to the customer. Title to the product and recognition of revenue passes upon delivery to the customer when sales terms are FOB destination and at the time of shipment when the sales terms are FOB shipping point. We also earn income from the licensing of technology and may earn income for performing services under joint development agreements. Royalty income from the grant of license rights is recorded during the period the cash is received from the licensee. Milestone payments, which may arise under joint development agreements, would be recognized when earned, as evidenced by written acknowledgment from the collaborator or other persuasive evidence that the milestone has been achieved, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, and (ii) our performance obligations after the milestone achievement will continue to be funded by the collaborator at a level comparable to before the milestone achievement. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of our
performance obligations under the agreement. Income earned from licensing and distribution activities are classified under revenues in the accompanying consolidated statements of operations. We are not currently performing services under any joint development agreements.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry. If a major customer's credit worthiness deteriorates, or our customers' actual defaults exceed our historical experience, our estimates could change and adversely impact our reported results.
Our policy is to value inventories at the lower of cost or market on a part-by-part basis. This policy requires us to make estimates regarding the market value of our inventories, including an assessment of excess or obsolete inventories. We determine excess and obsolete inventories based on an estimate of the future demand for our products within a specified time horizon, generally 12 months. The estimates we use for demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. If our demand forecast is greater than our actual demand, we may be required to take additional excess inventory charges, which would decrease gross margin and adversely impact net operating results in the future.
Intangible assets with definite lives are amortized over their estimated useful lives. Useful lives are based on the expected number of years the asset will generate revenue or otherwise be used by us. On January 1, 2002, we adopted SFAS No. 142, which requires that goodwill and other intangible assets that have indefinite lives not be amortized but instead be tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that the asset might be impaired. Examples of such events or circumstances include:
•the asset's ability to continue to generate income from operations and positive cash flow in future periods;
•any volatility or significant decline in our stock price and market capitalization compared to our net book value;
•loss of legal ownership or title to an asset;
•significant changes in our strategic business objectives and utilization of our assets; and
•the impact of significant negative industry or economic trends.
If a change were to occur in any of the above mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
For indefinite-lived intangible assets, impairment is tested by comparing the carrying value of the asset to the fair value of the reporting unit to which they are assigned. For goodwill, a two-step test is used to identify the potential impairment and to measure the amount of impairment, if any. The first step is to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit with the carrying amount of goodwill.
Upon adoption of SFAS No. 142 on January 1, 2002, we reclassified the net book value of our assembled workforce intangible, which totaled $0.1 million, to goodwill. Amortization expense for goodwill and the assembled workforce intangible the year ended December 31, 2001 totaled approximately $2.5 million. The elimination of amortization relating to goodwill and indefinite-lived intangibles had a positive impact on net earnings for each of the years ended December 31, 2003 and
of approximately $2.5 million. SFAS No. 142 requires a transitional evaluation for impairment of goodwill balances upon adoption of the new accounting pronouncement. We completed our transitional review for potential impairment of goodwill that existed at January 1, 2002, and determined that no impairment of goodwill existed as of that date. SFAS No. 142 also requires periodic evaluations for impairment of goodwill balances. We completed our annual evaluation for impairment of goodwill in December 2003, and determined that no impairment of goodwill existed as of December 31, 2003.
A valuation allowance of $13.3 million had been established against a portion of our deferred tax assets at December 31, 2002. As of December 31, 2003, we believed it is more likely than not that we will be able to realize the majority of our deferred tax asset through expected future taxable profits, and released a valuation allowance of approximately $13.3 million. As of December 31, 2003, we have recorded a valuation allowance of $1.9 million related to deferred tax assets created by the exercise and/or disposition of employee stock options in recent periods. The deferred tax asset originating from deductions for the exercise and/or disposition of stock options and the related valuation allowance have been recorded against additional paid-in capital and did not affect net earnings for the period. Any tax benefits realized from the reduction of this valuation allowance will be recorded to additional-paid-in-capital. Should we determine that we would not be able to realize all or part of our other components of the deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to earnings in the period such determination were made.
We also reserve for taxes that may become payable as a result of audits in future periods with respect to previously filed tax returns. It is our policy to establish reserves for taxes that may become payable in future years as a result of an examination by tax authorities. We establish the reserves based on our assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to temporary difference adjustments. The tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to the reserve.
Recent Accounting Pronouncements
In November 2002, the FASB reached a consensus regarding EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The guidance provided by EITF 00-21 is effective for contracts entered into on or after July 1, 2003. The adoption of EITF 00-21 did not have a material effect on our financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 are effective for annual periods ending after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have an impact on our consolidated financial statements.
In December 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 is an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides additional disclosures about the method of accounting for stock-based employee compensation. Amendments are effective for our financial statements ended December 31, 2003. We have currently chosen to not adopt the voluntary change to the fair value based method of accounting for stock-based employee compensation. If we should choose to adopt such a method, its implementation pursuant to
SFAS No. 148 could have a material effect on our consolidated financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." This interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. FIN 46 is effective for variable interest entities created after January 31, 2003. FIN 46 is an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 requires a variable interest entity to be consolidated by us if we are subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The adoption of this interpretation did not have an impact on our financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 establishes standards for how to classify and measure certain financial instruments with characteristics of both liabilities and equity. It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this interpretation did not have an impact on our financial condition or results of operations.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the risk of future currency exchange rate fluctuations, which is accounted for as an adjustment to stockholders' equity. Exchange gains and losses arising from transactions denominated in foreign currencies are recorded in operations and have historically not been material. Nonetheless, changes from reporting period to reporting period in the exchange rates between various foreign currencies and the U.S. dollar have had and will continue to have an impact on the accumulated other comprehensive income component of stockholders' equity reported by us, and such effect in the accounts of our foreign subsidiaries may become material in a reporting period.
The fair market value of floating interest rate debt is subject to interest rate risk. Generally, the fair market value of floating interest rate debt will vary as interest rates increase or decrease. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest-sensitive financial instruments at December 31, 2003. Based on our market risk sensitive instruments outstanding at December 31, 2003 and 2002, we have determined that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such dates.
Item 8.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data required by this item are set forth at the pages indicated in Item 15(a)(1).
Part III
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On April 4, 2002, our Board of Directors, upon the recommendation of the Audit Committee, dismissed Arthur Andersen LLP ("Arthur Andersen" or "AA") as our independent auditors and engaged Ernst & Young LLP ("E&Y") to serve as our independent auditors for the year ending December 31, 2002. Arthur Andersen's reports on our consolidated financial statements for the year ended December 31, 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.
In connection with AA's audit for our year ended December 31, 2000 and through April 4, 2002, there were no disagreements between us and Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to AA's satisfaction, would have caused AA to make reference to the subject matter in connection with AA's report on our consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. Our financial statements for the year ended December 31, 2001 were re-audited by E&Y.
We provided Arthur Andersen with a copy of the foregoing disclosures. We filed a copy of AA's letter, dated April 10, 2002, stating its agreement with such statements as an exhibit to our Current Report on Form 8-K and 8-K/A, filed on April 11, 2002, and April 23, 2002 respectively and incorporate it herein by reference.
During the year ended December 31, 2000 and through April 4, 2002, we did not consult E&Y with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matters or reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.
Item 9A.
Item 9A. Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2003. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2003 in timely alerting them to material information relating to us, including our consolidated subsidiaries, required to be included in our periodic SEC reporting. There were no changes in our internal control over financial reporting during the fourth quarter of 2003 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
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 caption "Election of Directors" contained in our Proxy Statement to be filed with the SEC no later than April 29, 2004. Information with respect to executive officers is included on pages 14-15 of this Form 10-K.
The information required by Items 405 and 406 of Regulation S-K is incorporated by reference from the information under the captions "Code of Business Conduct and Ethics" and "Section 16(a) Beneficial Ownership Reporting Compliance," contained in our Proxy Statement to be filed with the SEC no later than April 29, 2004.
Item 11.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from the information under the captions "Director Compensation" and "Executive Compensation" contained in our Proxy Statement to be filed with the SEC no later than April 29, 2004.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Items 201(d) and 403 of Regulation S-K is incorporated by reference from the information under the captions "Equity Compensation Plan Information" and "Security Ownership of Certain Beneficial Owners and Management" contained in our Proxy Statement to be filed with the SEC no later than April 29, 2004.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from the information under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" contained in our Proxy Statement to be filed with the SEC no later than April 29, 2004.
Item 14.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference from the information under the caption "Independent Auditors" contained in our Proxy Statement to be filed with the SEC no later than April 29, 2004.
Part IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as part of this 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.
Consolidated Financial Statements of Quidel Corporation
(2)Financial Statement Schedules
The following Financial Statement Schedule of Quidel Corporation for the years ended December 31, 2003, 2002 and 2001 is filed as part of this Report and should be read in conjunction with the consolidated financial statements of Quidel Corporation.
Schedule II. Valuation and Qualifying Accounts.
Financial Statement Schedules not listed above have been omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated 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 during the fourth quarter of 2003.
On October 30, 2003, we furnished a current report on Form 8-K announcing the issuance of our news release reporting our financial results for the third fiscal quarter of 2003.
(c)Exhibits
The exhibits listed on the accompanying index to exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Form 10-K.
(d)Financial Statements. See Item 15(a) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
QUIDEL CORPORATION
Date: March 15, 2004
By
/s/ S. WAYNE KAY
S. Wayne Kay
President, Chief Executive Officer
(Prinicipal Executive Officer) and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ ANDRÉ DE BRUIN André de Bruin
Chairman of the Board
/s/ PAUL E. LANDERS Paul E. Landers
Senior Vice President, Finance and Administration, Chief Financial Officer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
/s/ MARK A. PULIDO Mark A. Pulido
Director
/s/ THOMAS A. GLAZE Thomas A. Glaze
Director
/s/ S. WAYNE KAY S. Wayne Kay
President, Chief Executive Officer (Principal Executive Officer), and Director
/s/ MARY LAKE POLAN Mary Lake Polan
Director
/s/ FAYE WATTLETON Faye Wattleton
Director
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and the
Board of Directors of Quidel Corporation
We have audited the accompanying consolidated balance sheets of Quidel Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 and its subsidiaries as of December 31, 2003 and 2002 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for purchased goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142 during the first quarter of fiscal 2002.
/s/ ERNST & YOUNG LLP
San Diego, California
January 30, 2004,
except for the seventh through ninth paragraphs of Note 5, as to which the date is
March 12, 2004
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
See accompanying notes.
QUIDEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Company Operations and 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 and management of a variety of medical conditions and illnesses. These products provide healthcare professionals with accurate and cost-effective diagnostic information at POC and are substantially focused on women's and family health. The Company's products are sold to professionals for use in physician offices, hospitals, clinical laboratories, and wellness screening centers through a network of national and regional distributors, supported by a national sales force.
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.
Cash and Cash Equivalents-The Company considers cash equivalents to be highly liquid investments with a maturity at the date of purchase of three months or less.
Accounts Receivable-The Company sells its products primarily to distributors in the U.S., Europe and Japan. The Company periodically assesses the financial strength of these customers and establishes allowances for anticipated losses when necessary. The balance of accounts receivable is net of allowances of $2.0 million and $0.9 million at December 31, 2003 and 2002, respectively.
Inventories-Inventories are stated at the 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. Inventories consisted of the following, net of reserves of $0.3 million and $0.4 million at December 31, 2003 and 2002, respectively:
Property, Plant and Equipment-Property, plant and equipment is recorded at cost and depreciated over the estimated useful lives of the assets (three 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 minor 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 Other Income (Expenses) in the Consolidated Statement of Operations.
Property, plant and equipment consisted of the following at December 31:
Intangible Assets-Intangible assets are recorded at cost and amortized on a straight-line basis over their estimated useful lives. The excess of cost over fair value of the net tangible assets purchased (goodwill) arose from the Company's acquisition of its wholly-owned subsidiaries Litmus and Metra and the purchase of technology from Litmus and Dade. The goodwill related to Litmus and Metra was being amortized over seven and five years for the 2001 period, respectively, while the technology purchased from Litmus and Dade is being amortized over seven and 10 years, respectively. Patent filing costs are capitalized and amortized upon the issuance of the related patent. License and favorable lease arrangements are being amortized over the terms of the related agreements.
Intangible assets consisted of the following at December 31:
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill and other intangible assets that have indefinite lives not be amortized but instead be tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that the asset might be impaired by comparing the carrying value to the fair value of the reporting unit to which they are assigned. For goodwill, a two-step test is used to identify the potential impairment and to measure the amount of goodwill impairment, if any. The first step is to compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two. Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit with the carrying amount of goodwill. SFAS No. 142 requires a transitional evaluation for impairment of goodwill balances upon adoption of the new accounting pronouncement. The Company completed its
transitional review for potential impairment of goodwill that existed at January 1, 2002, and determined that no impairment of goodwill existed as of that date. SFAS No. 142 also requires periodic evaluations for impairment of goodwill balances. The Company completed its annual evaluation for impairment of goodwill in December 2003, and determined that no impairment of goodwill existed as of December 31, 2003. A significant decline in the Company's projected revenue or earnings growth or cash flows, a significant decline in the Company's stock price or the stock price of comparable companies, loss of legal ownership or title to an asset; and any significant change in the Company's strategic business objectives and utilization of the Company's assets are among many factors that could result in an impairment charge that could have a material negative impact on the Company's operating results.
As a result of adopting SFAS No. 142, the following pro forma financial information reflects net earnings and diluted earnings per share as if goodwill and certain intangibles were not subject to amortization for the year ended December 31, 2001.
Impairment of Long-Lived Assets-In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the total book value of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and the eventual disposition are less that its carrying amount. An impairment loss is equal to the excess of the book value of an asset over its determined fair value. Through December 31, 2003, the Company has not experienced any such impairment.
Other accrued liabilities-Other accrued liabilities consist of the following (in thousands):
Revenue Recognition-The Company records revenues from product sales. These revenues are recorded net of rebates and other discounts which are estimated at the time of sale, and are largely driven by various customer program offerings, including special pricing agreements, promotions and other volume-based incentives. Revenue from product sales are recorded upon passage of title and risk of loss to the customer. Title to the product and recognition of revenue passes upon delivery to the customer when sales terms are FOB destination and at the time of shipment when the sales terms are FOB shipping point. The Company also earns income from the licensing of technology and may earn income for performing services under joint development agreements. Royalty income from the grant of license rights is recorded during the period the cash is received from the licensee. Milestone payments, which may arise under joint development agreements, would be recognized when earned, as evidenced by written acknowledgment from the collaborator or other persuasive evidence that the milestone has been achieved, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement, and (ii) the Company's performance obligations after the milestone achievement will continue to be funded by the collaborator at a level comparable to before the milestone achievement. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of the Company's performance obligations under the agreement. Income earned from licensing and distribution activities are classified under revenues in the accompanying consolidated statements of operations. The Company is not currently performing services under any joint development agreements.
Research and Development Costs-All research and development costs are charged to operations as incurred.
Product Shipment Costs-Product shipment costs are included in sales and marketing expense in the accompanying consolidated statements of operations.
Deferred Revenue-The Company is involved in collaborative development efforts with a major consumer products company. In connection with these efforts, the Company has received approximately $1.6 million in cash as of December 31, 2003, which has been recorded as deferred revenue in the accompanying consolidated balance sheet, pending finalization of any agreements.
Deferred Rent-Rent expense is recorded on a straight-line basis over the term of the lease. The difference between rent expense and amounts paid under the lease agreement is recorded as deferred rent.
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 financial statements of the Company's subsidiaries outside the U.S. are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date and revenue and expense accounts are translated using average exchange rates during the periods. The resulting translation adjustments are presented as a separate component of stockholders' equity. Exchange gains and losses arising from transactions denominated in foreign currencies are recorded in operations and have historically not been significant.
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, if any, approximate their fair values due to their short-term nature. The Company's capital lease obligations approximate fair value as the obligations carry a market rate of interest based on the date the obligations were incurred. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company establishes reserves for estimated uncollectible accounts and believes its reserves are adequate.
Stock Compensation-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 or exceeds the estimated market price of the underlying stock on the date of grant, no compensation expense has been recognized.
The estimated weighted average fair value of options granted during the years ended December 31, 2003, 2002 and 2001 was $2.85, $4.75 and $4.10, 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 years ended December 31, 2003, 2002 and 2001:
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.
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 years ended December 31, 2003, 2002 and 2001, consistent
with the provisions of SFAS No. 123, the Company's net earnings (loss) and earnings (loss) per share would have been as indicated below:
Computation of Earnings (Loss) Per Share-Basic earnings (loss) per share was computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) 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. Potentially 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.
The following table reconciles the weighted average shares used in computing basic and diluted earnings per share in the respective periods:
Comprehensive Income-Comprehensive income includes unrealized gains and losses excluded from the Company's Consolidated Statements of Operations. The unrealized gains include foreign currency transaction adjustments. The Company has presented the required information in the consolidated statements of stockholders' equity.
Use of Estimates-The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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.
Insurance Proceeds-In May 2001, the Company experienced damage to its facility and certain inventory in San Diego, California, because of a malfunction of the central circuitry of one of its warehouse freezers. As a result, certain specialized reagents used in the Company's inventory valued at approximately $1.2 million were damaged, and the Company experienced an interruption of some of its
operations. In August 2001, the Company received $4.1 million in insurance proceeds in connection with this event. Among other items, the insurance proceeds were used to replace the damaged inventory of $1.2 million and for certain business interruption remedies of $1.3 million. The remaining $1.6 million of proceeds is included in "other income" in the accompanying 2001 consolidated statement of operations.
Restructuring-In April 2003, the Company announced and implemented a restructuring plan (the "Restructuring Plan"). The Restructuring Plan was primarily driven by manufacturing automation in our San Diego facility, completion of certain research and development projects, implementation of our BaaN enterprise resource planning system in our Santa Clara facility, and the transition of our foreign sales and support offices to independent distributors. The Restructuring Plan included a workforce reduction of 63 positions (18% of our total workforce at such time) and closure of our sales and support offices in Heidelberg, Germany and Milan, Italy. The Company recorded a restructuring charge of approximately $2.2 million during 2003. The significant components of the restructuring charge were $1.3 million for employee severance costs, $0.5 million for contractual lease and commercial contract terminations, $0.3 million for professional fees and $0.1 million for impairment charges related to assets that were deemed obsolete due to restructuring activities. As of December 31, 2003, $1.8 million of the restructuring charge has been paid and $0.4 million is included in other accrued liabilities in the accompanying consolidated balance sheet.
In the first quarter of 2001, the Company implemented an expense reduction plan (the "Reduction Plan"). The Reduction Plan included a workforce reduction of approximately 15 employees and closure of our facilities in the United Kingdom. In the first quarter of 2001, the Company incurred a restructuring charge of approximately $0.6 million related to the Reduction Plan. The significant components of the Reduction Plan were $0.5 million for employee severance costs and $0.1 million in closing costs related to the United Kingdom facility. The Reduction Plan was completed as of the end of the first quarter March 31, 2001.
The following table provides a detailed activity related to our restructuring activity (in thousands):
Recent Accounting Pronouncements-In November 2002, the FASB reached a consensus regarding EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses
accounting for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The guidance provided by EITF 00-21 is effective for contracts entered into on or after July 1, 2003. The adoption of EITF 00-21 did not have a material effect on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 are effective for annual periods ending after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have an impact on the Company's consolidated financial statements.
In December 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 is an amendment to SFAS No. 123 providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and also provides additional disclosures about the method of accounting for stock-based employee compensation. Amendments are effective for our financial statements ended December 31, 2003. The Company has currently chosen to not adopt the voluntary change to the fair value based method of accounting for stock-based employee compensation. If the Company should choose to adopt such a method, its implementation pursuant to SFAS No. 148 could have a material effect on our consolidated financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." This interpretation requires that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. FIN 46 is effective for variable interest entities created after January 31, 2003. FIN 46 is an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The adoption of this interpretation did not have an impact on the Company's financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 establishes standards for how to classify and measure certain financial instruments with characteristics of both liabilities and equity. It is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this interpretation did not have an impact on the Company's financial condition or results of operations.
Accounting Periods-The Company's first, second and third fiscal quarters end on the Sunday closest to March 31, June 30 and September 30, respectively. The Company's fiscal year end is December 31. For ease of reference, the calendar quarter end date is used herein.
Note 2. Line of Credit
The Company has a $10 million term loan facility which matures in July 2008 and which bears interest at a rate equal to the lender's base rate minus one quarter of one percent (3.75% as of December 31, 2003). The Company also has a $10 million line of credit facility which matures in July 2004 and, at our option, bears interest at a rate equal to the lender's base rate minus one quarter of one percent (3.75% as of December 31, 2003) or at the London InterBank Offering Rate plus two and one quarter percent (3.37% as of December 31, 2003). The agreement governing our line of credit and term loan facilities contains certain customary covenants restricting our ability to, among other matters, incur additional indebtedness, create liens or other encumbrances, pay dividends or make other restricted payments, make investments, loans and guarantees or sell or otherwise dispose of a substantial portion of assets to, or merge or consolidate with, another entity. As of December 31, 2003, there were no borrowings outstanding under either the line of credit or the term loan. As of December 31, 2003, the Company had $10 million of availability both under the line of credit and term loan, and the Company was in compliance with all covenants.
Note 3. Income Taxes
The Company's earnings (loss) before benefit (provision) for income taxes, were subject to taxes in the following jurisdictions for the following periods:
Significant components of the income taxes are as follows:
Significant components of the Company's deferred tax assets as of December 31, 2003 and 2002 are shown below.
A valuation allowance of $13.3 million had been established against a portion of the Company's deferred tax assets at December 31, 2002. As of December 31, 2003, the Company believed it is more likely than not that it will be able to realize the majority of its deferred tax asset through expected future taxable profits, and released a valuation allowance of approximately $13.3 million. As of December 31, 2003, the Company recorded a valuation allowance of $1.9 million related to deferred tax assets created by the exercise and/or disposition of employee stock options in recent periods. The deferred tax asset originating from deductions for the exercise and/or disposition of stock options and the related valuation allowance have been recorded against additional paid-in capital and did not affect net earnings for the period. Any tax benefits realized from the reduction of this valuation allowance will be recorded to additional-paid-in-capital. Should the Company determine that it would not be able to realize all or part of its other components of the deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to earnings in the period such determination were made.
The Company also reserves for taxes that may become payable as a result of audits in future periods with respect to previously filed tax returns. It is the Company's policy to establish reserves for taxes that may become payable in future years as a result of an examination by tax authorities. The Company establishes the reserves based upon its assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to temporary difference adjustments. The tax reserves are analyzed periodically and adjustments are made as events occur to warrant adjustment to the reserve.
At December 31, 2003, the Company had federal net operating loss carryforwards of approximately $14.8 million. Approximately, $9.7 million of the tax loss carryforwards are scheduled to expire through December 31, 2005, unless previously utilized. The balance of the carryforwards will expire at various
dates through December 31, 2020, unless previously utilized. At December 31, 2003, the Company had federal alternative minimum tax credit carryforwards of approximately $0.8 million that do not expire.
Pursuant to Internal Revenue Code Section 382, the Company's use of its net operating loss carryforwards may be limited as a result of cumulative changes in ownership of more than 50% over a three year period.
The Company also has acquired net operating losses in conjunction with certain of its acquisitions aggregating approximately $68.6 million, which are not reflected in the components of the deferred tax assets as shown above. The Company's tax loss carryforwards that relate to the acquired companies will be subject to limitations under Internal Revenue Section 382. The tax benefit of these tax loss carryforwards, if and when realized, will result in a reduction of goodwill.
The reconciliation of income tax computed at the federal statutory rate to the (benefit) provision for income taxes is as follows:
Note 4. Stockholders' Equity
Preferred Stock The Company's certificate of incorporation, as amended, authorizes the issuance of up to 5 million preferred shares. The Board of Directors is authorized to fix the number of shares of any series of preferred stock, and to determine the designation of such shares. However, the amended certificate of incorporation specifies the initial series and the rights of that series. No shares of preferred stock were outstanding as of December 31, 2003 and 2002.
Common Stock Warrants On April 30, 2002, warrants to purchase 950,000 shares of common stock at $7.50 per share expired.
Stockholder Rights Plan The Board of Directors of the Company adopted a Stockholder Rights Plan, effective December 31, 1996 and as amended and restated, effective May 24, 2002 (the "Rights Plan") which provides for a dividend of one right (a "Right") to purchase fractions of shares of the Company's Series C Junior Participating Preferred Stock for each share of the Company's common stock. Under certain conditions involving an acquisition by any person or group of 15% or more of the common stock (with a limited exception under certain conditions to permit a certain significant stockholder to acquire up to 20%), the Rights permit the holders (other than the 15% holder) to purchase the Company's common stock at a 50% discount upon payment of an exercise price of $24 per Right. In addition, in the event of certain business combinations, the Rights permit the purchase of
the common stock of an acquiror at a 50% discount. Under certain conditions, the Rights may be redeemed by the Board of Directors in whole, but not in part, at a price of $.005 per Right. The Rights have no voting privileges and are attached to and automatically trade with the Company's common stock. The Rights shall expire on December 30, 2006, unless earlier triggered, redeemed or exchanged.
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 10 years, have exercise prices ranging from $2.25 to $10.34, and generally vest over four years. All options are issued at 100% or more of fair market value at the time of grant.
The Company grants options to employees and non-employee directors under its 2001 Stock Incentive Plan and previously granted options under the 1998 Stock Incentive Plan and the 1996 Non-Employee Directors Stock Option Plan. The 1998 and 1996 Plans were terminated at the time of adoption of 2001 Plan, but the terminated Plans continue to govern outstanding options granted thereunder. At December 31, 2003, 772,016 shares remained available for grant under the 2001 Plan.
The following table summarizes option activity in terms of thousands of shares and the weighted average exercise per share:
The following table summarizes information as of December 31, 2003 concerning options outstanding:
Employee Stock Purchase Plan Under the Employee Stock Purchase Plan (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, 2003, 687,838 shares had been sold under the Plan, leaving 62,162 shares available for future issuance.
Shares Reserved for Future Issuance At December 31, 2003, approximately 5.3 million shares of common stock were reserved for the exercise of stock options and and purchases under the Plan.
Note 5. Commitments and Contingencies
Leases The Company leases its facilities and certain equipment. Commitments for minimum rentals under non-cancellable leases at the end of 2003 are as follows:
At December 31, 2003, assets under capital leases included in property and equipment totaled $12.9 million with accumulated amortization of $5.5 million.
Rent expense under operating leases totaled approximately $1.5 million, $1.7 million and $1.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.
During December 1999, the Company completed a sale and leaseback transaction of one of its facilities. The facility was sold for $15.0 million, of which $3.8 million was capital contributed by the Company. As a part of this transaction, the Company paid off the mortgage on the facility of approximately $3.0 million, and an extraordinary loss of $0.9 million was incurred in connection with the prepayment. The Company plans to lease the 73,000 square foot facility for 15 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 $7.0 million. The Company is a 25% limited partner in the partnership that acquired the facility. 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 $11.3 million as the present value of the net lease payments as a capital lease obligation.
Contracts
The Company has entered into various licensing agreements, which require royalty payments based on specified product sales. These agreements encompass the majority of the Company's products, and range in expiration from 2004 through 2009. Also, in 1997 the Company paid an upfront cash payment of $2.3 million in conjunction with one of its license agreements. This license fee was capitalized and is being amortized over 7.5 years, the term of the agreement. Royalty expenses, which are charged to cost of sales under these licensing agreements, totaled $8.7 million, $5.8 million and $4.8 million for the years ended December 31, 2003, 2002 and 2001, respectively. As of December 31, 2003 and 2002,
$3.3 million and $2.2 million, respectively, were recorded as accrued royalties in the accompanying consolidated balance sheet.
In December 2003, the Company entered into firm commitments of $3.4 million for capital expenditures. These commitments are largely related to manufacturing equipment to be utilized in the production of its Layered Thin Film technology product line. It is expected that this equipment will be operational in the fourth quarter of 2004. The company has no other material commitments for materials or capital expenditures as of December 31, 2003.
Legal
On February 20, 2004, the Company filed a lawsuit (the "Action") in the U.S. District Court, Southern District of California against Inverness Medical Innovations, Inc., Inverness Medical Switzerland GmbH, and Applied Biotech, Inc. (collectively "Inverness"), as well as against Armkel LLC, for infringement of our U.S. Patent No. 4,943,522 (the "522 Patent"), which relates to lateral-flow technology, and for declaratory relief. The Company is seeking damages and injunctive relief against Inverness products that infringe its patented technology. The Company's claim for declaratory relief relates to nine Inverness-owned and Inverness-licensed patents (U.S. Patent Nos. 6,485,982: 5,989,921; 5,714,389; 6,352,862; 6,228,660; 6,187,598; 5,656,503; 5,622,871; and 5,602,040), and requests the Court to conclude that its lateral-flow products do not infringe these patents, and that the patents are invalid and unenforceable.
On March 9, 2004, Inverness and a related party filed, in the U.S. District Court, Southern District of California, denials of the Company's allegations of infringement in the Action, allegations that its 522 Patent is invalid and unenforceable, as well as counterclaims for patent infringement against the Company. On March 12, 2004, Armkel LLC filed, in the U.S. District Court, Southern District of California, an answer to the Company's request for declaratory relief and counterclaims for patent infringement against the Company. The counterclaims by Inverness and the related parties and by Armkel LLC allege that the Company's immunoassay test products, including its tests for influenza, pregnancy, strep, and H pylori, infringe eight of the nine Inverness patents that the Company identified in the Action. In addition, Inverness Medical Switzerland GmbH, Wampole Laboratories, LLC, and Applied BioTech, Inc. filed a separate complaint against the Company alleging that its immunoassay test devices also infringe a ninth patent owned by Inverness, U.S. Patent No. 6,534,320. The relief requested in these claims and counterclaims against the Company includes damages and preliminary and permanent injunctive relief to the effect that if this relief is granted, the Company would be required to cease and desist from manufacturing, selling, marketing, using, and inducing others to use products that represent a substantial majority of its revenues.
On February 17, 2004, the Company's German affiliate Quidel Deutschland GmbH was provided with a copy of a lawsuit that Inverness Medical Switzerland GmbH, another Inverness subsidiary, and Preymed had apparently filed on or about February 4, 2004 in District Court in Düsseldorf, Germany, which names the Company, Quidel Deutschland GmbH, and its distributor, Progen Biotechnik GmbH, as defendants. The lawsuit alleges that the Company and the other defendants are infringing two Inverness-owned European patents, EP 0 291 194 and EP 0 560 411, and is directed at the Company's lateral flow test devices, including its tests for pregnancy, strep, H pylori, and Chlamydia. The suit seeks injunctive relief, an accounting, damages and annulment. If the Court grants injunctive relief, the
Company will be required to cease and desist from manufacturing, selling, marketing, using, and importing its lateral flow products in Germany.
The Company is also involved in other litigation matters from time to time in the ordinary course of business. Management believes that any and all such other actions, in the aggregate, will not have a material adverse effect on the Company. The Company also maintains insurance, including coverage for product liability claims, in amounts which management believes appropriate given the nature of our business.
Note 6. Industry and Geographic Information
The Company operates in one reportable segment. Sales to customers outside the U.S. totaled 42%, 33%, and 26% of net sales for the years ended December 31, 2003, 2002 and 2001, respectively. As of December 31, 2003 and 2002, balances due from foreign customers, in U.S. dollars, were $11.5 million and $9.2 million, respectively.
The Company had sales to individual customers in excess of 10% of net sales, as follows:
As of December 31, 2003 and 2002, accounts receivable from individual customers with balances due in excess of 10% of total accounts receivable totaled $16.2 million and $8.2 million, respectively.
The following present long-lived assets as of December 31, 2003 and 2002 and net sales for the years ended December 31, 2003, 2002 and 2001 by geographic territory:
Consolidated net sales by product are as follows:
Note 7. Employee Benefit Plan
The Company has a defined contribution 401(k) plan (the "401(k) Plan") covering all employees who are eligible to join the 401(k) Plan upon employment. Employees may contribute up to 20% of their compensation per year (subject to a maximum limit by federal law). The Company contributed approximately $0.2 million to the 401(k) Plan during each of the years ended December 31, 2003, 2002 and 2001.
Note 8. Related-Party Transactions
During 2003, 2002 and 2001, the Company made payments to a shareholder of approximately $0.1 million in each of those periods. These payments related to legal advisory and consulting services.
In connection with the acquisition of Litmus Concepts, Inc. ("Litmus"), in December 2000, the Company leases a facility from a partnership, a partner of which was a prior shareholder of Litmus and is now a shareholder of the Company. The lease is for nine years with total rental payments of approximately $8.9 million, of which approximately $0.6 million, $0.4 million and $0.3 million were paid in 2003, 2002 and 2001, respectively.
The Company completed a sales leaseback transaction with a third party in December 1999, which became a related party as a result of the transaction. The Company paid approximately $1.3 million for the years ended December 31, 2003 and 2002, and approximately $1.2 million in 2001. (See Note 5.)
Note 9. Quarterly Financial Information (unaudited)
(1)The second quarter and third quarters of 2003 include restructuring charges of approximately $0.8 million and $1.4 million, respectively. (See Note 1.)
(2)The fourth quarter of 2003 includes a tax benefit of $9.2 million. This tax benefit is primarily due to a decrease in the deferred tax valuation allowance to recognize deferred tax assets at amounts considered by management, more likely than not, to be realized. Based on the Company's recent history of profitability and its forecasts for future periods, management has determined it is more likely than not that net operating loss carryforwards and other temporary differences will be realized.
SCHEDULE II
QUIDEL CORPORATION
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
(1)Represents provisions primarily related to returned goods allowances and defective products, allowances for cash discounts, contract pricing rebates, and bad debts all of which are reductions to sales, as well as for allowances for bad debts. For the year ended December 31, 2003, $0.9 million, $0.6 million, $0.6 million, and $0.1 million were charged to returned goods allowances and defective products, cash discounts, contract pricing rebates and bad debts, respectively.
(2)Represents provisions primarily related to allowances for cash discounts, contract pricing rebates, and bad debts all of which are reductions to sales, as well as for allowances for bad debts. For the year ended December 31, 2002, $0.7 million, $0.6 million, and $0.3 million were charged to cash discounts, contract pricing rebates and bad debts, respectively.
(3)Represents provisions primarily related to allowances for contract pricing rebates, cash discounts, bad debts and to a lesser extent sales returns all of which are reductions to sales, as well as allowances for bad debts. For the year ended December 31, 2001, $0.6 million, $0.5 million, $0.5 million and $0.1 million were charged to contract pricing rebates, cash discounts, bad debts and sales returns, respectively.
EXHIBIT INDEX
Exhibit Number
3.1
Certificate of Incorporation, as amended. (Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on February 26, 1991.)
3.2
Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.2 to the Registrant's Form 8-K dated November 8, 2000.)
4.1
Certificate of Designations of Series C Junior Participating Preferred Stock as filed with the State of Delaware on December 31, 1996 (Incorporated by reference to Exhibit 1(A) to the Registrant's Registration Statement on Form 8-A filed on January 14, 1997.)
4.2
Amended and Restated Rights Agreement dated as of May 24, 2002 between Quidel Corporation and American Stock Transfer and Trust Company, as Rights Agent. (Incorporated by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K filed on May 29, 2002.)
10.1(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(1)
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.)
10.3(1)
Registrant's 1996 Non-Employee's Director Plan. (Incorporated by reference to Registrant's Proxy Statement filed on September 27, 1996.)
10.4(1)
Registrant's 1998 Stock Incentive Plan. (Incorporated by reference to Registrant's Proxy Statement filed on July 8, 1998.)
10.5(1)
Registrant's Amended and Restated 2001 Equity Incentive Plan. (Incorporated by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.)
10.6(1)
Registrant's General Nonstatutory Stock Option Plan, as amended December 11, 2000 (Incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-K filed on March 31, 2003.).
10.7
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 for the year ended March 31, 1995.)
10.8
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 for the year ended March 31, 1997.)
10.9
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 for the year ended March 31, 1997.)
10.10
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 for the year ended March 31, 1997.)
10.11(1)
Employment Agreement dated September 9, 1998 between Registrant and André de Bruin. (Incorporated by reference to Exhibit 10.23 to the Registrant's Form 10-Q for the quarter ended September 30, 1998.)
10.12(1)
Stock Option Agreement dated September 9, 1998 between Registrant and André de Bruin. (Incorporated by reference to Exhibit 10.24 to the Registrant's Form 10-Q for the quarter ended September 30, 1998.)
10.13(1)
Amendment No. 1 to the Employment and Stock Option Agreement effective August 13, 2001 between the Registrant and André de Bruin. (Incorporated by reference to Exhibit 10.12 to the Registrant's Form 10-K for the year ended December 31, 2001.)
10.14(1)
Employment Agreement effective January 1, 2001 between the Registrant and S. Wayne Kay. (Incorporated by reference to Exhibit 10.13 to the Registrant's Form 10-K for the year ended December 31, 2001.)
10.15(1)
Stock Option Agreement effective January 1, 2001 between the Registrant and S. Wayne Kay. (Incorporated by reference to Exhibit 10.14 to the Registrant's Form 10-K for the year ended December 31, 2001.)
10.16(1)
Amended Employment Agreement effective August 13, 2001 between the Registrant and S. Wayne Kay (Incorporated by reference to Exhibit 10.15 to the Registrant's Form 10-K for the year ended December 31, 2001.)
10.17(1)
Stock Option Agreement effective August 13, 2001 between the Registrant and S. Wayne Kay. (Incorporated by reference to Exhibit 10.16 to the Registrant's Form 10-K for the year ended December 31, 2001.)
10.18(1)
Employment Agreement dated as of August 28, 2003 between the Registrant and Matthew T. Heindel. (Incorporated by reference to Exhibit 10.19 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.)
10.19
Master Revolving Note dated August 29, 2002 by Quidel Corporation in favor of Comerica Bank-California. (Incorporated by reference to Exhibit 10.22 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)
10.20
Variable Rate-Single Payment Note dated August 29, 2002 by Registrant in favor of Comerica Bank-California. (Incorporated by reference to Exhibit 10.23 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)
10.21
Security Agreement dated as of August 29, 2002 between Registrant and Comerica Bank-California. (Incorporated by reference to Exhibit 10.24 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)
10.22
Business Loan Agreement dated of August 29, 2002 between Registrant and Comerica Bank-California. (Incorporated by reference to Exhibit 10.25 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)
10.23
Form of Asset Sale Agreement - Rapignost® Urine Test Strip Business. (Incorporated by reference to Exhibit 10.5 to the Registrant's Form 8-K filed on December 15, 1999.)
10.24
Form of Purchase and Sale Agreement and Escrow Instructions. (Incorporated by reference to Exhibit 10.6 to the Registrant's Form 8-K filed on January 4, 2000.)
10.25
Form of Single Tenant Absolute Net Lease. (Incorporated by reference to Exhibit 10.7 to the Registrant's Form 8-K filed on January 4, 2000.)
10.26
Form of Indemnification Agreement-Corporate Officer and/or Director. (Incorporated by reference to Exhibit 10.2 to the Registrant's Form 10-Q for the quarter ended September 30, 2000.)
10.27(1)
Change in Control Agreement dated February 27, 2003 between the Registrant and S. Wayne Kay. (Incorporated by reference to Exhibit 10.32 to the Registrant's Form 10-Q for quarter ended March 31, 2003)
10.28(1)
Change in Control Agreement dated February 28, 2003 between the Registrant and Paul E. Landers. (Incorporated by reference to Exhibit 10.33 to the Registrant's Form 10-Q, period ended March 31, 2003)
10.29(1)
Change in Control Agreement dated April 13, 2003 between the Registrant and Mark E. Paiz. (Incorporated by reference to Exhibit 10.34 to the Registrant's 10-Q, March 31, 2003)
10.30(1)
Change in Control Agreement dated as of September 15, 2003 between the Registrant and Matthew T. Heindel. (Incorporated by reference to Exhibit 10.31 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.)
16.1
Letter from Arthur Andersen (Incorporated by reference to Exhibit 16.1 to the Registrant's Form 8-K filed on April 11, 2003.)
21.1*
Subsidiaries of the Registrant.
23.1*
Consent of Ernst & Young LLP, Independent Auditors.
31.1*
Certification by Chief Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification by Chief Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certifications by Chief Executive Officer and Chief Financial Officer of Registrant pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Filed herewith
(1)Indicates a management plan or compensatory plan or arrangement.
DOCUMENTS INCORPORATED BY REFERENCE (To the Extent Indicated Herein)
Part II
COMMON STOCK PRICE RANGE
Part III
Part IV
Consolidated Financial Statements of Quidel Corporation
SIGNATURES
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
QUIDEL CORPORATION CONSOLIDATED BALANCE SHEETS
QUIDEL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
QUIDEL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
QUIDEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
QUIDEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUIDEL CORPORATION CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS (in thousands)
EXHIBIT INDEX