-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V0CcvbGFwkgQfgAIRvOhs7/ki5r+INlvvOFYfMRrLNyfQMytA9iDZTDpg5sLru8R q0Yt5vBa0V00VupajjTufg== 0001047469-99-029107.txt : 19990730 0001047469-99-029107.hdr.sgml : 19990730 ACCESSION NUMBER: 0001047469-99-029107 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990729 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOSITE DIAGNOSTICS INC CENTRAL INDEX KEY: 0000834306 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 330288606 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21873 FILM NUMBER: 99673381 BUSINESS ADDRESS: STREET 1: 11030 ROSELLE ST CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194554808 MAIL ADDRESS: STREET 1: 11030 ROSELLE ST CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-21873 BIOSITE DIAGNOSTICS INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 33-0288606 [State or other jurisdiction [I.R.S. Employer Identification No.] of incorporation or organization] 11030 Roselle Street San Diego, California 92121 [Address of principal executive offices] [Zip Code] Registrant's telephone number, including area code: (619) 455-4808 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ The number of shares of the Registrant's Common Stock, $0.01 par value, outstanding at July 26, 1999 was 13,054,932 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- BIOSITE DIAGNOSTICS INCORPORATED FORM 10-Q INDEX
PAGE ---- PART I. FINANCIAL INFORMATION.......................................................1 ITEM 1. FINANCIAL STATEMENTS........................................................1 Condensed Balance Sheets..........................................................1 Condensed Statements of Operations (Unaudited)....................................2 Condensed Statements of Cash Flows (Unaudited)....................................3 Notes to Condensed Financial Statements (Unaudited)...............................4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................................................6 ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................10 PART II. OTHER INFORMATION. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................19 SIGNATURES...........................................................................20
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BIOSITE DIAGNOSTICS INCORPORATED CONDENSED BALANCE SHEETS
JUNE 30, DECEMBER 31, 1999 1998 (Unaudited) (Note) ----------- ------------ Assets Current assets: Cash and cash equivalents $ 1,252,448 $ 762,337 Marketable securities, available-for-sale 29,989,228 33,466,841 Accounts receivable 6,795,510 6,573,735 Inventories 4,954,114 4,364,367 Other current assets 3,506,523 3,133,960 ------------ ------------ Total current assets 46,497,823 48,301,240 Property, equipment and leasehold improvements, net 7,418,194 7,313,673 Patents and license rights, net 6,907,225 7,203,433 Other assets 4,747,162 2,990,765 ------------ ------------ $ 65,570,404 $ 65,809,111 ------------ ------------ ------------ ------------ Liabilities and stockholders' equity Current liabilities: Accounts payable $ 1,892,977 $ 1,503,354 Accrued salaries and other 3,265,385 2,493,735 Accrued costs for defense of patent matters - 1,248,191 Accrued contract payable 199,439 205,928 Current portion of long-term obligations 1,784,049 1,636,265 ------------ ------------ Total current liabilities 7,141,850 7,087,473 Long-term obligations 4,357,552 4,038,444 Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued and outstanding at June 30, 1999 and December 31, 1998 - - Common stock, $.01 par value, 25,000,000 shares authorized; 13,044,661 and 12,926,706 shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively 130,447 129,267 Additional paid-in capital 54,636,172 54,250,324 Unrealized net gain (loss) on marketable securities, net of related (58,844) 35,266 tax effect Deferred compensation (153,421) (207,845) Accumulated deficit (483,352) 476,182 ------------ ------------ Total stockholders' equity 54,071,002 54,683,194 ------------ ------------ $ 65,570,404 $ 65,809,111 ------------ ------------ ------------ ------------
Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. -1- BIOSITE DIAGNOSTICS INCORPORATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net sales $10,593,579 $ 8,710,776 $ 20,041,300 $16,594,737 Cost of sales 3,262,624 2,342,185 7,004,541 4,097,246 ----------- ----------- ------------ ----------- Gross profit 7,330,955 6,368,591 13,036,759 12,497,491 Operating Expenses: Selling, general and administrative 4,292,491 3,598,790 9,237,550 7,550,214 Research and development 3,596,798 2,973,609 6,642,033 5,938,311 Defense of patent matters -- 1,153,668 -- 2,002,831 ----------- ----------- ------------ ----------- 7,889,289 7,726,067 15,879,583 15,491,356 ----------- ----------- ------------ ----------- Operating income (loss) (558,334) (1,357,476) (2,842,824) (2,993,865) Other income: Interest and other income 441,742 577,185 940,290 1,189,093 Contract revenue 310,000 470,616 310,000 770,616 ----------- ----------- ------------ ----------- Income (loss) before benefit (provision) for income taxes 193,408 (309,675) (1,592,534) (1,034,156) Benefit (provision) for income taxes (96,000) (64,000) 633,000 160,000 ----------- ----------- ------------ ----------- Net income (loss) $ 97,408 $ (373,675) $ (959,534) $ (874,156) ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Net income (loss) per share - Basic $ 0.01 $ (0.03) $ (0.07) $ (0.07) ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- - Diluted $ 0.01 $ (0.03) $ (0.07) $ (0.07) ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Shares used in calculating per share amounts - Basic 13,015,000 12,938,000 12,994,000 12,922,000 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- - Diluted 13,624,000 12,938,000 12,994,000 12,922,000 ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
See accompanying notes -2- BIOSITE DIAGNOSTICS INCORPORATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 1998 ------------ ------------- OPERATING ACTIVITIES Net cash provided by (used in) operating activities $ 166,651 $ (570,768) INVESTING ACTIVITIES Proceeds from sales and maturities of marketable securities 14,607,103 21,716,132 Purchase of marketable securities (11,286,339) (21,147,529) Purchase of property, equipment and leasehold improvements (1,545,827) (1,817,116) Patents, license rights, deposits and other assets (2,305,397) 315,966 ------------ ------------ Net cash used in investing activities (530,460) (932,547) FINANCING ACTIVITIES Proceeds from issuance of financing obligations 1,342,520 1,132,492 Principal payments under financing obligations (875,628) (681,052) Proceeds from issuance of convertible debenture -- 500,000 Repurchase and retirement of common stock (350,641) -- Proceeds from issuance of common stock, net 737,669 439,280 ------------ ------------ Net cash provided by financing activities 853,920 1,390,720 ------------ ------------ Increase (decrease) in cash and cash equivalents 490,111 (112,595) Cash and cash equivalents at beginning of period 762,337 2,330,274 ------------ ------------ Cash and cash equivalents at end of period $ 1,252,448 $ 2,217,679 ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 220,095 $ 210,114 ------------ ------------ ------------ ------------ Income taxes paid $ -- $ 4,800 ------------ ------------ ------------ ------------ SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Conversion of convertible debenture into common stock $ -- $ 499,992 ------------ ------------ ------------ ------------
See accompanying notes. -3- BIOSITE DIAGNOSTICS INCORPORATED NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with both generally accepted accounting principles for interim financial information, and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in sales, expenses and net income or losses will continue. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 2. EARNINGS PER SHARE Earnings per Share is computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share ("Statement No. 128"). Statement No. 128 replaces APB Opinion 15, Earnings per Share ("EPS"). Statement No. 128 requires dual presentation of basic and diluted earnings per share. Basic EPS includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company such as common stock which may be issuable upon exercise of outstanding common stock options. Shares used in calculating basic and diluted earnings per share were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- -------------------- 1999 1998 1999 1998 ---------------------- -------------------- Weighted average common shares outstanding 13,015 12,938 12,994 12,922 Effect of the assumed conversion of preferred shares - - - - Effect of the assumed conversion of convertible debenture - - - - ------- ------ ------ ------ Shares used in calculating per share amounts - Basic 13,015 12,938 12,994 12,922 Net effect of dilutive common share equivalents using the treasury stock method 609 - - - ------- ------ ------ ------ Shares used in calculating per share amounts - Diluted 13,624 12,938 12,994 12,922 ------- ------ ------ ------ ------- ------ ------ ------
-4- 3. BALANCE SHEET INFORMATION Inventories consist of the following:
JUNE 30, DECEMBER 31, 1999 1998 ---------- ------------ Raw materials $1,821,830 $1,405,176 Work-in-process 2,492,834 2,938,548 Finished goods 639,450 20,643 ---------- ---------- $4,954,114 $4,364,367 ---------- ---------- ---------- ----------
4. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement No. 130, Comprehensive Income, ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires the change in net unrealized gains or losses on marketable securities be included in comprehensive income. As adjusted for this item, comprehensive income is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------- --------------------------------- 1999 1998 1999 1998 ----------- ------------ ----------- ----------- Net income (loss) $ 97,408 $ (373,675) $ (959,534) $ (874,156) Change in unrealized net gain (loss) on marketable securities, net of tax (66,683) 10,878 (94,110) (9,296) ----------- ------------ ----------- ----------- Comprehensive income (loss) $ 30,725 $ (362,797) $(1,053,644) $ (883,452) ----------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
-5- PART I. FINANCIAL INFORMATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements that involve risks and uncertainties, including the timely development, introduction and acceptance of new products, manufacturing scale-up and efficiency issues, dependence on others, the impact of competitive products, third party reimbursement issues, changing market conditions and the other risks detailed under "Factors that May Affect Results" and throughout the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Actual results may differ materially from those projected. These forward-looking statements represent the Company's judgment as of the date of the filing of this Form 10-Q and its Form 10-K, respectively. The Company disclaims any intent or obligation to update these forward-looking statements. OVERVIEW Biosite Diagnostics Incorporated (the "Company") was established in 1988. The Company has been primarily involved in the research, development, manufacturing and marketing of rapid diagnostic tests. In 1992, the Company began commercial sales of the Company's primary product, the Triage Panel for Drugs of Abuse ("Triage DOA Panel"). In 1998, the Company began selling three additional products, the Triage C. DIFFICILE Panel, the Triage Parasite Panel and the Triage Cardiac System. The Company markets the products worldwide primarily through distributors supported by the Company's direct sales force. The Company's principal markets are hospital laboratories and emergency departments. In addition to focusing its attention on commercial activities associated with these products, the Company continues to invest in the research and development of additional rapid tests designed to aid in the diagnosis of several critical diseases or conditions, including congestive heart failure and certain bacterial infections. The Company is also developing a diagnostic test to aid in the dosing of immunosuppressant drugs. The Company incurred an operating loss during the last seven quarters. The Company may not return to operating profitability on a quarterly or annual basis in the future. The Company anticipates that its results of operations may fluctuate for the foreseeable future due to several factors, including whether and when new products are successfully developed and introduced by the Company, market acceptance of current or new products, manufacturing scale-up issues, manufacturing inefficiencies or delays, regulatory delays, product recalls, shipment problems, seasonal customer demand, the timing or cancellation of significant orders, changes in reimbursement policies, competitive pressures on average selling prices and changes in the mix of products sold. Because the Company is continuing to increase its operating expenses, primarily for personnel and activities supporting newly-introduced products and new product development, the Company's operating results would be adversely affected if its sales or gross profit did not correspondingly increase or if its product development efforts were unsuccessful or are subject to delays. The Company's limited operating history makes accurate prediction of future operating results difficult or impossible. The Company may not sustain revenue growth or return to profitability on a quarterly or annual basis and its operating results may not be consistent with predictions made by securities analysts. -6- RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of net sales:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1999 1998 1999 1998 -------------------------- ------------------------- Net sales................................. 100% 100% 100% 100% Cost of sales............................. 31 27 35 25 ----------- ---------- ---------- --------- Gross profit.............................. 69 73 65 75 Operating Expenses: Research and development................. 34 34 33 36 Selling, general and administrative...... 40 41 46 45 Defense of patent matters................ 0 13 0 12 ----------- ---------- ---------- --------- Total operating expenses.................. 74 88 79 93 Income (loss) from operations............. (5) (15) (14) (18) Interest and other income, net............ 7 12 6 12 ----------- ---------- ---------- --------- Income (loss) before benefit (provision) for income taxes........................ 2 (3) (8) (6) Benefit (provision) for income taxes...... (1) (1) 3 1 ----------- ---------- ---------- --------- Net income (loss)......................... 1% (4)% (5)% (5)% ----------- ---------- ---------- --------- ----------- ---------- ---------- ---------
NET SALES. Net sales for the three and six months ended June 30, 1999 were $10.6 million and $20.0 million, respectively, representing increases of 22% and 21%, respectively, compared to the same periods of 1998. The increases in net sales were primarily attributable to the introduction of new products. The Triage C. DIFFICILE Panel and Triage Parasite Panel were launched in March 1998 and October 1998, respectively. The Triage Cardiac System was introduced in May 1998. New product sales for the three and six months ended June 30, 1999 were approximately $2.1 million and $3.7 million, respectively, as compared to $379,000 and $432,000, respectively, for the same periods of 1998. Net sales of the Triage DOA Panel for the second quarter and first half of 1999 were consistent with net sales of the product for the same periods in 1998. The Company believes that the growth in sales of the Triage DOA Panel products has slowed and may begin to decline as the available U.S. market becomes saturated and competitive pressures become more prominent in a maturing market. GROSS PROFIT. Gross profit for the three and six months ended June 30, 1999 was $7.3 million and $13.0 million, respectively, representing an increases of 15% and 4%, respectively, over the comparable periods of 1998. The overall gross margin decreased to 69% for the second quarter and to 65% for the first half of 1999 from 73% and 75% for the same periods in 1998. Gross margins decreased primarily as a result of the introduction of the Triage C. DIFFICILE and Parasite Panels and the Triage Cardiac System, which experienced lower gross margins than the Triage DOA Panel. During the first quarter of 1999, the Company experienced significant inefficiencies related to the production of the Triage Cardiac System, resulting in negative gross profits related to this product. Gross margins increased during the second quarter, primarily as a result of efficiencies achieved from the reorganization of our manufacturing operations. Also, as a result of efficiencies achieved, the Company was able to utilize some of its manufacturing resources for new product scale-up and validation activities related to the Triage BNP and Triage LBP systems, two products under development. The costs of new product scale-up and validation activities were charged to research and development expenses, which also contributed to higher gross margins during the second quarter. The Company expects its overall gross margins to continue to decrease as compared to 1998 as a result of a greater proportion of its net sales representing new products and competitive pricing pressures related to the maturing Triage DOA product line. The Company's new products are expected to continue to realize lower or negative gross margins during the early stages of their commercialization as incremental manufacturing costs are spread over smaller sales volumes and efficiency issues are addressed. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three and six months ended June 30, 1999 were $4.3 million and $ 9.2 million, respectively, representing increases of 19% and 22%, respectively, from the comparable periods of 1998. Increases in expenses were primarily associated with additional marketing activities relating to new products, the expanded sales activities related to the Company's broader product lines and the increased administrative costs to support the Company's expanded operations and business development activities. Additionally, expenses for the first half of 1999 included administrative costs associated with the reorganization of the Company's manufacturing operations totaling approximately $300,000 and approximately -7- $425,000 related to a business development opportunity that the Company decided to forego. The Company expects selling, general and administrative costs in 1999 to be significantly higher than in 1998, as the Company continues to expand its overall operations, including sales and marketing activities for the Company's new products, business development activities and administrative support functions. The timing of such increased expenditures and their magnitude are primarily dependent on the commercial success and sales growth of the Company's new products, the progress of business development activities, and domestic and international marketing and distribution strategies. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for the three months and six months ended June 30, 1999 were $3.6 million and $6.6 million, respectively, representing increases of 21% and 12%, respectively, from the comparable periods of 1998. During the second quarter of 1999, the Company's research and development resources were focused primarily on the development, clinical studies, manufacturing scale-up and validation of the Triage BNP System and Triage LBP System, development of the Triage Enteric Panel, potential improvements to the Triage Cardiac System and Triage Micro Panel products and research activities associated with the Biosite Discovery Program. Significant activities in the second quarter of 1998 related to manufacturing scale-up activities for the Triage Cardiac System and Triage C. DIFFICILE Panel. The Company expects that its research and development expenses will increase in 1999, as compared to 1998 levels. The increased expenditures are expected to primarily relate to pre-clinical and clinical studies, product development efforts, the Biosite Discovery program and manufacturing scale-up activities. The Company initiated clinical trials for its Triage BNP System and Triage LBP System in late December and expects such clinical trials to extend into the fourth quarter of 1999. The costs associated with such clinical trials are expected to be significant. These potential products are subject to more complex regulatory approval requirements than the Company's previous products. The Company also may resume clinical trials for its NeoralChek System during the second half of 1999. The timing of the increased expenditures and their magnitude are primarily dependent on the progress and success of the research and development and the timing of potential product launches. DEFENSE OF PATENT MATTERS. Legal expenses associated with the Dade Behring and Spectral litigation totaled $1.2 million and $2.0 million for the second quarter and first half of 1998. In February 1999, a settlement agreement was executed that resolved all disputes between Spectral Diagnostics and the Company without a material adverse financial impact to Biosite. In March 1999, to avoid protracted litigation and continued significant legal defense costs, the Company and Dade Behring executed a settlement agreement that resolved all disputes outstanding between the companies. Accordingly, all settlement costs were known prior to filing the Company's 10-K and therefore were accrued as of December 31, 1998. INTEREST AND OTHER INCOME. Interest income decreased 23% and 21%, respectively, for the three months and six months ended June 30, 1999 from the same periods in 1998. The decrease resulted primarily from the lower average balance of cash and marketable securities during the second quarter of 1999 as compared to the same period in 1998. Contract revenues recognized during the second quarter of 1999 related to activities associated with a research and development feasibility study being performed by the Company. Contract revenue was recognized in the second quarter of 1998 consisted primarily of $400,000 from Novartis Pharma AG related to the development of the NeoralChek System. BENEFIT (PROVISION) FOR INCOME TAXES. For the three months ended June 30, 1999, the Company recorded a provision for income taxes of $96,000 and for the same period in 1998, the Company recorded a provision for income taxes of $64,000. At June 30, 1999, the Company has net deferred tax assets of $4,593,000; however, due to the fact that the Company has incurred pre-tax losses in 1998 and through the first half of 1999, the Company will continue to evaluate the realizability of its net deferred tax assets. If realization becomes uncertain, a valuation allowance will be established against previously recognized deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations through revenues from operations, private and public placements of equity securities, debt and capital lease financing and interest income earned on the net proceeds from the equity placements. Since its inception, the Company has raised over $21.7 million in net cash proceeds from the private placement of equity securities and $1.5 million from the issuance of convertible debentures. In February 1997, the Company raised approximately $29.8 million in net cash proceeds from its initial public offering of common stock. At June 30, 1999, the Company had cash, cash equivalents and marketable securities of approximately $31.2 million compared to $34.2 million at December 31, 1998. -8- The decrease in cash, cash equivalents and marketable securities during the six months ended June 30, 1999 is largely attributable to the net payment of $1,050,000 made to Dade Behring as part of the settlement of litigation between Dade Behring and Biosite in March 1999. Cash generated from operating activities totaled $167,000 for the six months ended June 30, 1999 compared to net cash used in operating activities of $571,000 for the six months ended June 30, 1998. Significant sources of cash for the six months ended June 30, 1999 included the receipt of $3.3 million from the sale of marketable securities that were not reinvested in other marketable securities and the receipt of $1.3 million in proceeds from equipment financing. These proceeds were used to meet cash requirements of the Company in the first half of 1999. Significant uses of cash during the six months ended 1999 included deposits and purchases of equipment and leasehold improvements totaling approximately $2.8 million. Significant sources of cash for the six months ended June 30, 1998 included the receipt of $1.1 million in proceeds from equipment financing and $939,000 in proceeds from the issuance of a convertible debenture and common stock. Significant uses of cash for the six months ended June 30, 1998 included expenditures of $2.0 million for expenses associated with the defense of patent matters and $1.8 million for the purchase of capital equipment and leasehold improvements. The Company's primary short-term needs for capital, which are subject to change, are for the support of its commercialization efforts related to new products, potential licensing of certain technologies patented by others, potential procurement and enforcement of patents, expansion of its manufacturing capacity and efficiency for new products, potential repurchase of the Company's common stock and the continued advancement of research and development efforts. The Company executed agreements to license technologies patented by others which call for cash payments and future royalties based on product sales utilizing the licensed technologies. The Company may enter into additional licensing agreements which may include cash payments and future royalties based on product sales utilizing the licensed technologies. The Company has utilized and may continue to utilizes credit arrangements with financial institutions to finance the purchase of capital equipment. Additionally, the Company may utilize cash generated from operating activities, if any, to meet its capital requirements. The Company is evaluating various alternatives in addressing its future facilities expansion needs. The alternatives being evaluated include negotiations with various parties for the leasing of additional facility space and potentially a new campus corporate facility to be constructed in San Diego, which would be adequate for the Company's foreseeable future needs. If a new campus corporate facility is constructed to meet future needs, the Company would not anticipate relocating its operations to the new facility prior to January 2001. Relocation to a new facility or leasing of additional facility space would be expected to result in an increase in rent upon occupancy. The Company believes that its available cash, cash from operations and funds from existing credit arrangements will be sufficient to satisfy its funding needs for at least the next 24 months. Thereafter, if cash generated from operations is insufficient to satisfy the Company's working capital and capital expenditure requirements, the Company may be required to sell additional equity or debt securities or obtain additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. The Company's future liquidity and capital funding requirements will depend on numerous factors, including the extent to which the Company's new products and products under development are successfully developed, gain market acceptance and become and remain competitive, the timing and results of clinical studies and regulatory actions regarding the Company's potential products, the costs and timing of further expansion of sales, marketing and manufacturing activities, facilities expansion needs, changes in third party reimbursement policies, and the costs and timing associated with business development activities, including potential licensing of certain technologies patented by others. The failure by the Company to raise capital on acceptable terms, when needed, could have a material adverse effect on the Company's business, financial condition and results of operations. -9- IMPACT OF YEAR 2000 ("Y2K") ISSUE The Company has implemented a plan to ensure its system, software and facilities infrastructure will function properly with respect to dates in the year 2000 and thereafter. All key financial, information and operational systems have been assessed and verified as being compliant. All key suppliers, distributors, financial institutions and others with whom it does business have been contacted by the Company to assess their Y2K readiness, and approximately 90% have certified compliance, or their plans have been reviewed and assessed as being at minimal risk of significant Y2K problems. The remaining 10% have stated that they will be compliant before December 31, 1999. The Company is continuing to communicate with suppliers, distributors, financial institutions and others and believes that their readiness will not pose significant operational problems for the Company, nor have a material adverse effect on the Company's business. To date the Company has expended less than $35,000 addressing the Y2K Issue and estimates the total cost of the project and contingency plans, if necessary, to be under $40,000. The Company is also preparing contingency plans as an extra precaution in case key suppliers have unanticipated Y2K problems in supplying goods or services. The Company anticipates that it will be in compliance with Y2K requirements by the end of December 1999. The Company assesses that there is minimal risk of a material adverse impact on the operations of the Company. However, the systems of other companies on which Biosite's systems rely may not be timely converted and may have an adverse effect on the Company's operations. The most likely worst case scenario is that customers would be unable to order products or pay invoices or suppliers would be unable to manufacture or deliver product. This would result in reduced orders of products and the inability of the Company to manufacture product. The Triage Meter and related software is the only product that the Company currently sells which needs evaluation for Y2K readiness, as the other products do not process or store any date and time data. The Triage Meter and related software has been tested and shown to properly process and store date and time data between the 20th and 21st centuries, and the years 1999 and 2000. This processing and storage included calculating, comparing, displaying and recording sequence operations involving date and time data. Correct processing of the leap year date and time data has also been demonstrated. The software functions as intended or expected, regardless of the date. ITEM 2A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to changes in interest rates, primarily from its variable-rate long-term debt arrangements and, to a lesser extent, its investments in certain available-for-sale marketable securities. Under its current policies, the Company does not use interest rate derivatives instruments to manage this exposure to interest rate changes. The Company does have the option to convert its variable-rate long-term debt arrangements to fixed-rate debt arrangements for a nominal transaction fee. At June 30, 1999, the Company had variable-rate debt totaling $1.8 million. A hypothetical 1% adverse move in interest rates along the entire interest rate yield curve would not materially effect the fair value of the Company's financial instruments that are exposed to changes in interest rates. Additionally, the Company's purchases of Triage Meters from LRE Technology Partner GmbH ("LRE") are denominated in German Deutsche Marks (DM) and sales of certain products to some international customers are denominated in the local currency of customers. The Company has on occasion purchased forward exchange contracts to manage this exposure to exchange rate changes. As of June 30, 1999, the Company had no outstanding forward exchange contracts. Total receivables and payables denominated in foreign currencies at June 30, 1999 were not material. -10- FACTORS THAT MAY AFFECT RESULTS This report includes forward-looking statements about the Company's business and results of operations which are subject to risks and uncertainties that could cause the Company's actual results to vary materially from that indicated from such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in the Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. The factors discussed below should be read in conjunction with the risk factors discussed in the Company's Annual Report on Form 10-K, which are incorporated by reference. LIMITED HISTORY OF PROFITABILITY; POTENTIAL QUARTERLY FLUCTUATIONS IN FUTURE OPERATING RESULTS The Company incurred an operating loss during the last seven quarters. The Company may not return to operating profitability on a quarterly or annual basis in the future. The Company believes that future operating results will be subject to quarterly fluctuations due to a variety of factors, including whether and when new products are successfully developed and introduced by the Company, market acceptance of current or new products, regulatory delays, product recalls, manufacturing delays or inefficiencies, shipment problems, seasonal customer demand, the timing of significant orders, changes in reimbursement policies, competitive pressures on average selling prices, changes in the mix of products sold and possible defense and resolution of patent matters.. Operating results would also be adversely affected by a downturn in the market for the Company's current and future products, if there are any. Because the Company is continuing to increase its operating expenses to support its expanded sales and marketing activities, manufacturing operations and new product development, the Company's operating results would be adversely affected if its sales and gross profits did not correspondingly increase or if its product development efforts are unsuccessful or subject to delays. The Company's limited operating history makes accurate prediction of future operating results difficult or impossible. The Company may not sustain revenue growth or become profitable on a quarterly or annual basis and its growth or operating results may not be consistent with predictions made by securities analysts. DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS FOR REVENUE GROWTH AND PROFITABILITY Except for the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac System, all of the Company's products are still under development and may not be successfully developed or commercialized on a timely basis, or at all. If the Company is unable, for technological or other reasons, to complete the development, introduction or scale-up of manufacturing for any new product or if any new product is not approved for marketing or does not achieve a significant level of market acceptance, the Company's business, financial condition and results of operations would be materially and adversely affected. The Company believes that its revenue growth and profitability will substantially depend upon its ability to complete development of and successfully introduce these new products. In addition, the successful development of some of these new products will depend on the development of new technologies. The Company will be required to undertake time-consuming and costly development activities and seek regulatory approval for these new products. The Company may experience difficulties that could delay or prevent the successful development, introduction and marketing of these new products. Regulatory clearance or approval of any new products may not be granted by the U.S. Food and Drug Administration or foreign regulatory authorities on a timely basis, or at all, and the new products may not be successfully commercialized. The Company has limited resources to devote to the development of its potential products and consequently a delay in the development of one product may delay the development of other products. In order to successfully commercialize any new products, the Company will be required to establish and maintain reliable, cost-efficient, high-volume manufacturing capacity, a cost-effective sales force and administrative infrastructure and an effective product distribution system for its products. -11- LIMITED MANUFACTURING EXPERIENCE; POTENTIAL INABILITY TO SCALE-UP MANUFACTURING To be successful, the Company must manufacture its current and future products in compliance with regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. The Company has limited experience manufacturing products other than the Triage DOA Panel products. To achieve the level of production necessary for commercialization of Biosite's new products and products under development, the Company will need to scale-up current manufacturing capabilities. Significant additional work will be required for the scaling-up of each new Biosite product prior to commercialization, and this work may not be completed successfully. In addition, although the Company expects some of its new products and products under development to share production attributes with the Company's existing products, production of these products may require the development of new manufacturing technologies and expertise. These products may not be able to be manufactured by the Company or any other party at a cost or in quantities to make these products commercially viable. If the Company is unable to develop or contract for manufacturing capabilities on acceptable terms for its products under development, the Company's ability to conduct pre-clinical and clinical testing will be adversely affected, resulting in the delay of submission of products for regulatory clearance or approval and initiation of new development programs, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company anticipates making significant expenditures to develop high volume manufacturing capabilities required for each of its new products and products currently under development, if the products are successfully developed. Manufacturing and quality control problems have arisen and may arise as the Company attempts to scale-up its manufacturing and such scale-up may not be achieved in a timely manner or at a commercially reasonable cost, or at all. The Company's manufacturing facilities and those of its contract manufacturers are or will be subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies and these facilities are subject to Quality System Regulations ("QSR") requirements of the FDA. The Company or its contractors may not satisfy such regulatory requirements, and any failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON SOLE-SOURCE SUPPLIERS Key components and raw materials used in the manufacture of the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac System are currently provided by single-source vendors. Although the Company believes that alternative sources for such components and raw materials are available, any supply interruption in a sole-sourced component of raw material would have a material adverse effect on the Company's ability to manufacture these products until a new source of supply is qualified and, as a result, would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, an uncorrected impurity or supplier's variation in a raw material, either unknown to the Company or incompatible with the Company's Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac System manufacturing processes, could have a material adverse effect on the Company's ability to manufacture products. The Company has under development products other than the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac System which, if developed, may require that the Company enter into additional supplier arrangements. The Company may not be able to enter into additional supplier arrangements on commercially reasonable terms, or at all. Failure to obtain a supplier for the manufacture of its future products, if any, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects to rely upon LRE for production of the fluorescent meter to be used in connection with its Triage Meter System platform products, including the Triage Cardiac System and others currently under development. The Company's dependence upon LRE for the manufacture of the meter may adversely affect the Company's profit margins, its ability to develop and manufacture products on a timely and competitive basis, the timing of market introductions and subsequent sales of products incorporating the LRE meter. NEAR-TERM DEPENDENCE OF THE COMPANY ON THE TRIAGE DOA PANEL To date, sales of the Triage DOA Panel products have accounted for almost all of the Company's sales. The Company expects its revenue and profitability to substantially depend on the sale of the Triage DOA Panel products for the foreseeable future. A reduction in demand for the Triage DOA Panel products would have a material adverse effect -12- on the Company's business, financial condition and results of operations. The Company believes that growth in sales of the Triage DOA Panel products is slowing as the available U.S. market becomes saturated. Competitive pressures could also erode the Company's profit margins for the Triage DOA Panel products. The Company's continued growth will depend on its ability to successfully commercialize its new products (the Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac System), develop and commercialize other products, and to gain additional acceptance of the Triage DOA Panel products in new market segments, such as the occupational health sector and international market segments. During 1998, the Company received FDA approval to market the Triage C. DIFFICILE Panel, Triage Parasite Panel and the Triage Cardiac System and began selling each of the products in March, October and May, respectively. Sales of these new products represented less than 19% of net sales during the first half of 1999. The Company may not be able to successfully commercialize new products, including the Triage C. DIFFICILE Panel, Triage Parasite Panel, and Triage Cardiac System, and the Company may not be able to maintain or expand its share of the drug-testing market. Technological change or the development of new or improved diagnostic technologies could result in the Company's products becoming obsolete or noncompetitive. DEPENDENCE ON KEY DISTRIBUTORS; LIMITED DIRECT SALES EXPERIENCE The Company relies upon key distributor alliances, such as with Fisher HealthCare, to distribute the Triage DOA Panel products, Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac System and may rely upon distributors to distribute products under development. The Triage DOA Panel products are currently marketed pursuant to exclusive distribution agreements in the U.S. hospital market segment by Fisher (which accounted for 86% of product sales in 1998) and internationally by country-specific and regional distributors. The loss or termination of one or more of these distributors could have a material adverse effect on the Company's sales unless suitable alternatives can be arranged. If any of the Company's distribution or marketing agreements are terminated and the Company is unable to enter into alternative agreements or if the Company elects to distribute new products directly, the Company would have to invest in additional sales and marketing resources, including additional field sales personnel, which would significantly increase future selling, general and administrative expenses. The Company has limited experience in direct sales, marketing and distribution of its products. The Company's direct sales, marketing and distribution efforts may not be successful. Further, Biosite may not be able to enter into new distribution or marketing agreements on satisfactory terms, or at all. A failure to enter into acceptable distribution agreements or a failure of the Company to successfully market its products would have a material and adverse effect on the Company. INTENSELY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE The market in which the Company competes is intensely competitive. Biosite's competitors include health care companies that manufacture rapid tests, laboratory-based tests and analyzers, as well as clinical reference laboratories. Currently, the majority of diagnostic tests used by physicians and other health care providers are performed by independent clinical reference laboratories and hospital-based laboratories. The Company expects that these laboratories will compete vigorously to maintain their dominance of the testing market. In order to achieve market acceptance for its products, the Company will be required to demonstrate that its products provide cost-effective and time saving alternatives to tests performed by clinical reference laboratories or traditional hospital-based laboratory procedures. This will require physicians to change their established means of having such tests performed. The Company's products may not be able to compete with the testing services provided by traditional laboratory services. In addition, companies with a significant presence in the diagnostic market, such as Abbott Laboratories, Roche Boehringer Mannheim Corporation, Bayer Diagnostics, Ortho Clinical Diagnostics, a division of Johnson & Johnson, and Dade Behring, have developed or are developing diagnostic products that do or will compete with the Company's products. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than the Company. Moreover, these competitors offer broader product lines and have greater name recognition than the Company, and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete with or will compete with those of the Company. The Company's competitors may succeed in developing or marketing technologies or products that are more effective or commercially attractive than the Company's current or future products, or that would render the Company's technologies and products obsolete. Moreover, the Company may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. In addition, competitors, many of which have made substantial investments in competing -13- technologies, may be more effective than the Company or may prevent, limit or interfere with the Company's ability to make, use or sell its products either in the United States or in international markets. UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT AND POTENTIAL COST CONSTRAINTS In the United States, health care providers that purchase the Triage DOA Panel and other diagnostic products, such as hospitals and physicians, generally rely on third party payors, principally private health insurance plans, federal Medicare and state Medicaid, to reimburse all or part of the cost of the procedure. Such third party payors can affect the pricing or the relative attractiveness of the Company's products by regulating the maximum amount of reimbursement provided by such payors for testing services. In addition, the tests performed by public health departments, corporate wellness programs and other large volume users in the drug screening market are generally not subject to reimbursement. Further, certain health care providers are moving towards a managed care system in which such providers contract to provide comprehensive health care for a fixed cost per patient. The Company is unable to predict what changes will be made in the reimbursement methods utilized by third party payors. The Company could be adversely affected by changes in reimbursement policies of governmental or private health care payors, particularly to the extent any such changes affect reimbursement for procedures in which the Company's products are used. Third party payors are increasingly scrutinizing and challenging the prices charged for medical products and services. Decreases in reimbursement amounts for tests performed using the Company's products may decrease amounts physicians and other practitioners are able to charge patients, which in turn may adversely affect the Company's ability to sell its products on a profitable basis. Failure by physicians and other users to obtain reimbursement from third party payors, or changes in government and private third party payors' policies toward reimbursement of tests utilizing the Company's products could have a material adverse effect on the Company's business, financial condition or results of operation. Given the efforts to control and reduce health care costs in the United States in recent years, there can be no assurance that currently available levels of reimbursement will continue to be available in the future for the Company's existing products or products under development. In addition, market acceptance of the Company's products in international markets is dependent, in part, upon the availability of reimbursement within prevailing health care payment systems. Reimbursement and health care payment systems in international markets vary significantly by country, and include both government sponsored health care and private insurance. The Company believes that the overall escalating cost of medical products and services has led to and will continue to lead to increased pressures on the health care industry, both foreign and domestic, to reduce the cost of products and services, including products offered by the Company. Third party reimbursement and coverage may not be available or adequate in either U.S. or foreign markets, current reimbursement amounts may be decreased in the future and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for the Company's products or its ability to sell its products on a profitable basis. UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; POTENTIAL INABILITY TO LICENSE TECHNOLOGY FROM THIRD PARTIES The Company's ability to compete effectively will depend in part on its ability to develop and maintain proprietary aspects of its technology, and to operate without infringing the proprietary rights of others or to obtain licenses to such proprietary rights. Biosite has U.S. and foreign issued patents and is currently prosecuting patent applications in the United States and with certain foreign patent offices. The Company's pending patent applications may not result in the issuance of any patents. Additionally, the Company's patent applications may not have priority over others' applications, or, if issued, the Company's patents may not offer protection against competitors with similar technology. Any patents issued to the Company may be challenged, invalidated or circumvented in the future and the rights created thereunder may not provide a competitive advantage. The Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel, Triage Cardiac System and products under development may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. The Company has obtained licenses for some technologies and may negotiate to obtain other licenses for technologies patented by others. However, the Company may not be able to obtain licenses for technology patented by others on commercially reasonable terms, or at all. The Company may not be able to develop alternative approaches if it is unable to obtain licenses and the Company's current and future licenses may not be adequate for the operation of it's business. The failure to obtain necessary licenses or to identify and implement alternative approaches would prevent the Company from commercializing certain of its products under development and would have a material adverse effect on the Company's business, financial condition and results of operations. -14- Litigation may be necessary to enforce any patents issued to the Company, to protect trade secrets or know-how owned by the Company or to determine the enforceability, scope and validity of the proprietary rights of others. In March 1996, the Company settled a potential patent infringement claim by obtaining a license to the contested patent in return for a one-time payment of $2.2 million. In September 1996, the Company settled a patent infringement claim filed by Abbott Laboratories and obtained a license to the contested patent in return for the payment of $5.5 million and the agreement to pay certain royalties. In September 1997, Behring Diagnostics, Inc. and Behring Diagnostics, GmbH filed a patent infringement action against the Company in the U.S. District Court for the District of Delaware. The patent infringement action alleged that the Company's Triage DOA Panel products infringed a patent held by the plaintiffs, which expires in August 2000. The plaintiffs sought to recover damages of an unspecified amount and to enjoin future sales of the Triage DOA Panel products by the Company. Biosite answered the complaint, denying infringement and asserting affirmative defenses that the patent is invalid and unenforceable. Because of a merger, the identity of the plaintiffs changed to Dade Behring Inc., Dade Behring Marburg GmbH and Syva Company (collectively "Dade Behring"). To avoid protracted litigation and continued significant legal defense costs, the Company and Dade Behring executed a settlement agreement in March 1999 that resolved all disputes outstanding between the companies. Under the terms of the settlement agreement, the Company obtained a license to the patent and will provide Dade Behring the option to evaluate certain proprietary technology, resulting in a net payment of $1,050,000 to Dade Behring by Biosite. The Company has charged to defense of patent matters in the accompanying statements of income the applicable license costs related to years prior to 1998. On April 28, 1998, Spectral Diagnostics, Inc. ("Spectral") filed a patent infringement action against the Company in the U.S. District Court for the Western District of Wisconsin, alleging that the Company's Triage Cardiac Panel infringed U.S. patent 5,744,358 which was issued on the date the suit was filed. Spectral sought a permanent injunction and damages. Spectral also sought a preliminary injunction that would enjoin the Company from selling the Triage Cardiac Panel. On July 16, 1998, the Court issued an opinion denying the motion for a preliminary injunction. Spectral also moved for partial summary judgment on the issue of infringement. That motion was denied on July 20, 1998. The established trial date of August 31, 1998 was set aside while the two companies engaged in negotiations in an attempt to arrive at a settlement in regards to all disputes outstanding between Biosite and Spectral. In February 1999, a settlement agreement was executed that resolved all disputes between the companies without a material adverse financial impact to Biosite. The Company may become subject to additional patent infringement claims and litigation or interference proceedings conducted in the U.S. Patent and Trademark Office ("USPTO") to determine the priority of inventions. The Company also has received correspondence from other parties calling to the Company's attention the existence of patents that they believe cover technology which is or may be incorporated in Biosite's products and products under development. Some of this correspondence has included offers to negotiate the licensing of the patented technologies. There can be no assurance that these matters will not result in litigation to determine the enforceability, scope, and validity of the patents. Litigation, if initiated, could seek to recover damages as a result of any sales of the products and to enjoin further sales of such products. Litigation that could be brought forth by other parties may result in material expenses to the Company and significant diversion of effort by the Company's technical and management personnel, regardless of the outcome. The outcome of litigation is inherently uncertain and there can be no assurance that a court would not find the third-party claims valid and that the Company had no successful defense to such claims. An adverse outcome in litigation or the failure to obtain a necessary license could subject the Company to significant liability and could prevent the Company from selling the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel, the Triage Cardiac System or other products it may develop, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company also relies upon trade secrets, technical know-how and continuing invention to develop and maintain its competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, and the Company may not be able to protect its trade secrets or its rights to its trade secrets. Others may have filed and in the future are likely to file patent applications that are similar or identical to those of the Company. To determine the priority of inventions, the Company may have to participate in interference proceedings declared by the USPTO that could result in substantial cost to the Company. Patent applications of others may have priority over patent applications filed by the Company. -15- The commercial success of the Company also depends in part on the Company neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to the Company's technologies and products. The Company is aware of several third-party patents that may relate to the Company's technology. There can be no assurance that the Company does not or will not infringe these patents, or other patents or proprietary rights of third parties. In addition, the Company has received and may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third party patents. Any legal action against the Company or its collaborative partners claiming damages and seeking to enjoin commercial activities relating to the Company's products and processes affected by third party rights, in addition to subjecting the Company to potential liability for damages, may require the Company or its collaborative partner to obtain a license in order to continue to manufacture or market the affected products and processes. The Company or its collaborative partners may not prevail in any such action and any license (including licenses proposed by third parties) required under any such patent may not be made available on commercially acceptable terms, or at all. There are a significant number of U.S. and foreign patents and patent applications in the Company's areas of interest, and the Company believes that there may be significant litigation in the industry regarding patent and other intellectual property rights. Litigation concerning patent and other intellectual property rights could consume a substantial portion of the Company's managerial and financial resources, which would have a material adverse effect on the Company's business, financial condition and results of operations. POSSIBLE FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING The Company believes that its available cash, cash from operations and funds from existing credit arrangements will be sufficient to satisfy its funding needs for at least the next 24 months. Thereafter, if cash generated from operations is insufficient to satisfy the Company's working capital and capital expenditure requirements, the Company may be required to sell additional equity or debt securities or obtain additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. The Company's future liquidity and capital funding requirements will depend on numerous factors, including the extent to which the Company's new products and products under development are successfully developed, gain market acceptance and become and remain competitive, the timing and results of clinical studies and regulatory actions regarding the Company's potential products, the costs and timing of further expansion of sales, marketing and manufacturing activities, facilities expansion needs, changes in third party reimbursement policies and the costs and timing associated with the enforcement, defense and resolution of patent matters, including potential licensing of certain technologies patented by others. The failure by the Company to raise capital on acceptable terms when needed could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING REGULATORY APPROVALS The testing, manufacture and sale of the Company's products are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. Pursuant to the Federal Food, Drug and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. The Company will not be able to commence marketing or commercial sales in the United States of new products under development until it receives clearance or approval from the FDA, which can be a lengthy, expensive and uncertain process. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or premarket approval for devices, withdrawal of marketing clearances or approvals, and criminal prosecution. The FDA also has the authority to request recall, repair, replacement or refund of the cost of any device manufactured or distributed by the Company. Any devices manufactured or distributed by the Company pursuant to FDA clearance or approvals are subject to pervasive and continuing regulation by the FDA and certain state agencies. Before a new device can be introduced in the market, the manufacturer must generally obtain FDA clearance of a 510(k) notification or FDA approval of a PMA application. The PMA approval process is more expensive, uncertain and lengthy than the 510(k) clearance process. The Company is uncertain of the regulatory path to market that the FDA will ultimately apply to the Company's products currently in development. Although the Triage DOA Panel, Triage C. difficile Panel, Triage Parasite Panel and Triage Cardiac System received 510(k) clearance, a PMA may be required for the NeoralChek System, the Triage BNP System and Triage LBP System now in development. With respect to any of the Company's products in development, the FDA may determine that the Company must adhere to the more costly, lengthy and uncertain PMA approval -16- process. Modifications to a device that is the subject of an approved PMA application, its labeling or manufacturing process may require approval by the FDA of a PMA supplement or a new PMA application. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a major change in the intended use of the device, will require new 510(k) submissions. The Company may not be able to obtain necessary regulatory approvals or clearances for its products on a timely basis, if at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, limitations on intended use imposed as a condition of such approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. Before the manufacturer of a device can submit the device for FDA clearance or approval, it generally must conduct a clinical investigation of the device. Although clinical investigations of most devices are subject to the Investigational Device Exemption ("IDE") requirements, clinical investigations of In-vitro Diagnostic tests ("IVD"), such as all of the Company's products and products under development, are exempt from the IDE requirements, including the need to obtain the FDA's prior approval, provided the testing is noninvasive, does not require an invasive sampling procedure that presents a significant risk, does not intentionally introduce energy into the subject, and is not used as a diagnostic procedure without confirmation by another medically established test or procedure. In addition, the IVD must be labeled for "research use only" ("RUO") or "investigational use only" ("IUO"), and distribution controls must be established to assure that IVDs distributed for research or clinical investigation are used only for those purposes. The Company intends to conduct clinical investigations of its products under development, which will entail distributing them in the United States on an IUO basis. There can be no assurance that the FDA would agree that the Company's IUO distribution of its IVD products under development will meet the requirements for IDE exemption. Furthermore, failure by the Company or the recipients of its products under development to maintain compliance with the IDE exemption requirements could result in enforcement action by the FDA, including, among other things, the loss of the IDE exemption or the imposition of other restrictions on the Company's distribution of its products under development, which would adversely affect the Company's ability to conduct the clinical investigations necessary to support marketing clearance or approval. Manufacturers of medical devices for marketing in the United States are required to adhere to QSR, which includes testing, control, documentation and other quality assurance requirements. Manufacturers must also comply with Medical Device Report ("MDR") requirements that a manufacturer report to the FDA any incident in which its product may have caused or contributed to a death or serious injury, or in which its product malfunctioned and would be likely to cause or contribute to a death or serious injury upon recurrence. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. The Company is subject to routine inspection by the FDA and certain state agencies for compliance with QSR requirements, MDR requirements and other applicable regulations. The QSR requirements include the addition of design controls, that will likely increase the cost of compliance. There can be no assurance that the Company will not incur significant costs to comply with laws and regulations in the future or that such laws and regulations will not have a material adverse effect upon the Company's business, financial condition and results of operation. The use of Biosite's products is also affected by the Clinical Laboratory Improvement Amendments ("CLIA") and related federal and state regulations which provide for regulation of laboratory testing. The scope of these regulations includes quality control, proficiency testing, personnel standards and federal inspections. CLIA categorizes tests as "waived," "moderately complex" or "highly complex," on the basis of specific criteria. There can be no assurance that any future amendment of CLIA or the promulgation of additional regulations impacting laboratory testing would not have a material adverse effect on the Company's ability to market its products or on its business, financial condition and results of operations. DEPENDENCE ON OTHERS FOR THE DEVELOPMENT OF NEW PRODUCTS Biosite's strategy for the research, development, commercialization and distribution of certain of its products entails entering into various arrangements with corporate partners, licensors, licensees and others, and is dependent upon the success of these parties in performing their responsibilities. These parties may not perform their obligations as expected and no revenue may be derived from these arrangements. -17- Biosite has entered into agreements with, among others, Novartis, Scios, and Xoma for the development and marketing of products. The agreements are subject to rights of termination and may be terminated. The Company's collaborators may not abide by their contractual obligations and may discontinue or sell their current lines of business. The research for which the Company receives or provides funding may not lead to the development of products. The Company intends to enter into additional development and marketing agreements. The Company may not be able to enter into agreements on acceptable terms, or at all. The Company is continuing to enhance, with LRE, a hand-held point-of-care fluorescent meter for use in Triage Meter System products. The meter can be programmed to run a specific test through the use of changeable proprietary software that is also under further development by LRE. LRE may not develop the hardware or software on schedule, or at all, and new software may not be developed to permit the meter to be used for another Triage Meter System product. POTENTIAL INABILITY TO MANAGE GROWTH; DEPENDENCE ON KEY PERSONNEL The Company anticipates increased growth in the number of its employees, the scope of its operating and financial systems and the geographic area of its operations as new products are developed and commercialized. This growth will result in an increase in responsibilities for both existing and new management personnel. The Company's ability to manage growth effectively will require it to continue to implement and improve its operational, financial and management information systems and to train, motivate and manage its employees. The Company may not be able to manage its expansion, and a failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success depends in part on the continued service of its key technical, sales, marketing and executive personnel, and its ability to identify, hire and retain qualified personnel. Competition for such personnel is intense and the Company may not be able to retain existing personnel or identify or hire additional personnel. PRODUCT LIABILITY EXPOSURE; INADEQUACY OR UNAVAILABILITY OF INSURANCE COVERAGE The testing, manufacturing and marketing of medical diagnostic devices such as the Triage DOA Panel, Triage C. DIFFICILE Panel, Triage Parasite Panel and Triage Cardiac System, as well as the Company's products currently under development, entail an inherent risk of product liability claims. To date, the Company has not experienced any material product liability claims, but any such claims arising in the future could have a material adverse effect on the Company's business, financial condition and results of operations. Potential product liability claims may exceed the amount of the Company's insurance coverage or may be excluded from coverage under the terms of the policy. The Company's existing insurance may not be renewed at a cost and level of coverage comparable to that presently in effect, or at all. In the event that the Company is held liable for a claim against which it is not indemnified or for damages exceeding the limits of its insurance coverage, that claim could have a material adverse effect on the Company's business, financial condition and result of operations. IMPACT OF YEAR 2000 ISSUE The Y2K Issue could have a material adverse impact on the operations of the Company. Additionally, the systems of other companies on which Biosite's systems rely may not be timely converted, which may have an adverse effect on the Company's systems. For example, to the extent that customers would be unable to order products or pay invoices or suppliers would be unable to manufacture or deliver product, the Company's operations would be adversely affected. -18- PART II. OTHER INFORMATION. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 9, 1999, the Company held its Annual Meeting of Stockholders. The following actions were taken at the annual meeting. As of April 12, 1998, the record date, 13,002,373 shares were entitled to vote at the Annual Meeting. Of these 13,002,373 shares, 1,025,956 were not voted. 1. The following Class II Directors were elected: a. Anthony DeMaria. 11,946,006 shares voted in favor of the nominee, 30,411 shares withheld their vote; b. Howard E. Greene, Jr. 11,949,761 shares voted in favor of the nominee, 26,656 shares withheld their vote; c. The following directors continue in office for their existing terms: Lonnie M. Smith Timothy J. Wollaeger Kim D. Blickenstaff Gunars E. Valkirs 2. A proposal to amend and restate the 1996 Stock Incentive Plan of Biosite Diagnostics Incorporated, among other things, increase the number of shares of Common Stock authorized for issuance thereunder by 1,000,000 shares. 7,212,619 shares were voted in favor of the proposal, 693,730 shares were voted against the proposal, 38,605 shares abstained and 4,031,463 shares were not voted (includes broker non-votes); 3. The selection of Ernst & Young LLP as the Company's independent auditor was ratified. 11,955,588 shares were voted in favor of the proposal, 5,094 shares were voted against the proposal, 15,735 shares abstained and 0 shares were not voted (includes broker non-votes); ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K. None -19- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: July 29, 1999 BIOSITE DIAGNOSTICS INCORPORATED By: /s/ CHRISTOPHER J. TWOMEY ------------------------------- Christopher J. Twomey Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) -20- EXHIBIT INDEX ------------- EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule -21- EX-27.1 2 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FINANCIAL STATEMENTS AS OF AND FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S 1998 ANNUAL REPORT ON FORM 10-K. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 APR-01-1999 JUN-30-1999 1. 1,252 29,989 6,796 0 4,954 46,498 18,695 (11,276) 65,570 7,142 4,358 0 0 130 53,941 65,570 10,594 11,345 3,263 7,889 0 0 0 193 96 97 0 0 0 97 .01 .01 Earnings per share is calculated on the basis described in Note 2 of Notes to Financial Statements. Earnings per share is calculated on the basis described in Note 2 of Notes to Financial Statements.
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