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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2002
or

For the transition period from                              to                             

Commission File Number: 0-10961

QUIDEL CORPORATION

(Exact name of Registrant as specified in its charter)

10165 McKellar Court, San Diego, California 92121
(Address of principal executive offices)

(858) 552-1100
(Registrant's telephone number, including area code)

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/    No / /

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        As of October 31, 2002, 28,888,804 shares of common stock were outstanding.

QUIDEL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
September 30, 2002

INDEX

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PART I—FINANCIAL INFORMATION

ITEM 1. Financial Statements

QUIDEL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

See accompanying notes to condensed consolidated financial statements.

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QUIDEL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data, unaudited)

See accompanying notes to condensed consolidated financial statements.

4

QUIDEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

See accompanying notes to condensed consolidated financial statements.

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Quidel Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements of Quidel Corporation (the "Company") have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with 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 accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. The information at September 30, 2002, and for the three and nine months ended September 30, 2002 and 2001, is unaudited. Operating results for the nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2001 included in the Company's 2001 Annual Report on Form 10-K.

        Reclassifications—Certain prior period amounts have been reclassified to conform with the current period presentation.

        The Company's first, second and third fiscal quarters end on the Sunday closest to March 31, June 30 and September 30, respectively. For ease of reference, such quarter end date is used herein.

Note 2. Comprehensive Gain (Loss)

        The components of comprehensive gain (loss) are as follows (in thousands, unaudited):

Note 3. 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 per share reflects the potential dilution that could occur if the income were divided by the weighted-average number of common shares and potentially dilutive common shares from outstanding stock options and warrants. Potential dilutive common shares were calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company's outstanding options and warrants. Potentially dilutive shares have not been included for the three months ended September 30, 2002 and 2001, and nine months ended September 30, 2001, as their inclusion would be antidilutive.

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Note 4. Inventories

        Inventories are recorded at the lower of cost (first-in, first-out) or market and consist of the following (in thousands):

Note 5. Stockholders' Equity

        During the nine months ended September 30, 2002, 178,892 shares of common stock were issued for the exercise of common stock options and 28,320 shares of common stock were issued in connection with the Company's Employee Stock Purchase Plan (the "ESPP"), resulting in proceeds to the Company of approximately $0.8 million.

Note 6. Accounting Changes

        In June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses the accounting for acquisitions of businesses and is effective for acquisitions occurring on or after July 1, 2001. SFAS No. 142 addresses the method of identifying and measuring goodwill and other intangible assets acquired in a business combination, eliminates further amortization of goodwill, and requires periodic evaluations of impairment of goodwill balances. In addition, the useful lives of recognized intangible assets acquired in transactions completed before July 1, 2001 are to be reassessed and the remaining amortization periods adjusted accordingly. SFAS No. 142 is effective January 1, 2002.

        Effective January 1, 2002, the Company has adopted SFAS No. 142. With this adoption, we have reclassified the net book value assigned to the assembled workforce intangible at December 31, 2001 to goodwill, which totaled approximately $0.1 million, and then ceased to amortize approximately $13.3 million of goodwill. Based on the current values assigned to goodwill and assembled workforce, the elimination of goodwill amortization had a positive impact on reported net earnings of approximately $1.8 million for the nine months ended September 30, 2002 as compared to the results reported for the nine months ended September 30, 2001; and the Company expects the positive impact to be approximately $2.5 million for the year ended December 31, 2002 as compared to the year ended December 31, 2001. We completed our review for impairment of goodwill during the first quarter of 2002 and no such impairment existed.

        In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of. The FASB issued SFAS No. 144 to establish a single accounting model, based on the framework established in SFAS 121, as SFAS No. 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under Accounting

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Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions. SFAS No. 144 also resolves significant implementation issues related to SFAS No. 121. Companies are required to adopt SFAS No. 144 for fiscal years beginning after December 15, 2001, but early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's results of operations and financial position.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). The principal difference between SFAS No. 146 and EITF 94-3 relates to SFAS No. 146's requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as generally defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company does not expect that the adoption of SFAS No. 146 will have a material impact on the financial statements.

Note 7. Industry and Geographic Information

        The Company operates in one reportable segment. Sales to customers outside the United States (primarily Asia and Europe) represented 28% and 23% for the nine months ended September 30, 2002 and September 30, 2001, respectively. As of September 30, 2002 and December 31, 2001, balances due from foreign customers were $6.0 million and $6.4 million, respectively.

        The Company had sales to individual customers in excess of 10% of net sales, as follows:

        As of September 30, 2002, accounts receivable from three customers with balances due in excess of 10% of total accounts receivable totaled $5.8 million while at December 31, 2001, accounts receivable from three customers with balances due in excess of 10% of total accounts receivable totaled $7.0 million.

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        The following presents net sales for the nine months ended September 30, 2002 and 2001 and long-lived assets as of September 30, 2002 and December 31, 2001 by geographic territory:

Note 8. Restructuring

        In the first quarter of 2001, the Company implemented an expense reduction plan (the "Reduction Plan") of certain of its operations. The Reduction Plan included a workforce reduction of approximately 15 employees and closure of the Company's facilities in the United Kingdom ("U.K."). In the first quarter of 2001, the Company recorded a restructuring charge of approximately $0.6 million related to the Reduction Plan. The significant components of the Reduction Plan were $0.4 million for employee severance costs and $0.2 million in closing costs related to the U.K. facility. As of September 30, 2002 all amounts had been paid.

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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

        In this quarterly report, all references to "we," "our" and "us" refer to Quidel Corporation and its subsidiaries.

Future Uncertainties

        This discussion contains forward-looking statements within the meaning of the federal securities laws that involve material risks and uncertainties. Many possible events or factors could affect our future financial results and performance, such that our actual results and performance may differ materially. As such, no forward-looking statement can be guaranteed. Differences in operating results may arise as a result of a number of factors, including, without limitation, seasonality, adverse changes in the competitive and economic conditions in domestic and international markets, actions of our major distributors, manufacturing and production delays or difficulties, adverse actions or delays in product reviews by the United States Food and Drug Administration ("FDA"), and the lower acceptance of our new products than forecast. Forward-looking statements typically are identified by the use of terms such as "may," "will," "should," "might," "believe," "expect," "anticipate," "estimate" and similar words, although some forward-looking statements are expressed differently. The risks described in this report and in other reports and registration statements filed with the SEC from time to time should be carefully considered. The following should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q.

Overview

        We commenced our operations in 1979 and launched our first products, dipstick-based pregnancy tests, in 1984. The product base has expanded through internal development and acquisitions of other products. Our primary product areas are pregnancy and ovulation, infectious diseases, autoimmune diseases, osteoporosis and urinalysis. We discover, develop, manufacture and market rapid diagnostic products for point-of-care ("POC") detection. These products provide simple, accurate and cost-effective diagnoses for acute and chronic medical conditions. Products are sold worldwide to professionals in the physician's office and clinical laboratories, and to consumers through organizations that provide private label, store brand products.

Results of Operations

Net Sales

        Net sales decreased 12% to $14.1 million for the three months ended September 30, 2002 from $16.1 million for the three months ended September 30, 2001 and increased 2% to $52.3 million for the nine months ended September 30, 2002 from $51.2 million for the nine months ended September 30, 2001. The decrease for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001 was primarily due to certain distributors not making expected quarter-end purchases and changes in distributors' inventory management practices, which primarily impacted our pregnancy, Group A Strep and H.pylori products, partially offset by an increase in our influenza products. The increase for the nine months ended September 30, 2002 was primarily due to an increase in our influenza products, offset by a smaller decrease in pregnancy, Group A Strep and H.pylori product sales.

Research Contracts, License Fees and Royalty Income

        Research contracts, license fees and royalty income decreased to $0.4 million for the three months ended September 30, 2002 from $0.5 million for the three months ended September 30, 2001 and was constant at $1.3 million for both the nine months ended September 30, 2002 and September 30, 2001.

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The revenue for all periods is primarily related to royalties received on our patented technologies utilized by third-parties.

Cost of Sales and Gross Profit From Net Sales

        Gross profit decreased to $6.2 million for the three months ended September 30, 2002 from $8.0 million for the three months ended September 30, 2001 and decreased to $25.2 million for the nine months ended September 30, 2002 from $25.9 million for the nine months ended September 30, 2001. Gross profit as a percentage of net sales decreased to 44% for the three months ended September 30, 2002 from 50% for the three months ended September 30, 2001, and decreased to 48% for the nine months ended September 30, 2002 from 51% for the nine months ended September 30, 2001. The decrease in the gross margin percentage for the three and nine months ended September 30, 2002 as compared to the three and nine months ended September 30, 2001 is primarily attributable to a decrease in net sales volume for the three months ended September 30, 2002, underutilization of manufacturing capacity and costs resulting from lower production volumes in our Marburg, Germany facility, higher royalties associated with increased influenza product sales, pricing pressures related to our core products and charges related to outsourcing our packaging line, as well as a write-off of certain expired urinalysis products in the first quarter of 2002.

Research and Development Expense

        Research and development expense increased to $1.6 million for the three months ended September 30, 2002 from $1.5 million for the three months ended September 30, 2001 and decreased to $4.7 million for the nine months ended September 30, 2002 from $4.8 million for the nine months ended September 30, 2001. Research and development expense as a percentage of net sales, increased to 12% for the three months ended September 30, 2002 from 9% for the three months ended September 30, 2001 and remained constant at 9% for both the nine months ended September 30, 2002 and September 30, 2001. While research and development costs have been constant for the three and nine months ended September 30, 2002 as compared to the three and nine months ended September 30, 2001, we have increased our costs related to the development of new products for the layered thin film platform ("LTF"), offset by efficiencies of integrating our resources in our northern California operations. 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 $4.4 million for the three months ended September 30, 2002 from $3.4 million for the three months ended September 30, 2001 and to $12.2 million for the nine months ended September 30, 2002 from $10.8 million for the nine months ended September 30, 2001. Sales and marketing expense as a percentage of net sales increased to 31% for the three months ended September 30, 2002 from 21% for the three months ended September 30, 2001 and increased to 23% for the nine months ended September 30, 2002 from 21% for the nine months ended September 30, 2001. The increases for the three and nine months ended September 30, 2002 as compared to the three and nine months ended September 30, 2001 relate primarily to costs associated with the launch of our infectious vaginitis products, bone ultrasonometer and urinalysis instrument, including infrastructure, public relations, advertising and consulting fees.

General and Administrative Expense

        General and administrative expense increased to $2.0 million for the three months ended September 30, 2002 from $1.9 million for the three months ended September 30, 2001 and decreased to $6.4 million for the nine months ended September 30, 2002 from $6.5 million for the nine months ended September 30, 2001.

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Restructuring Charge

        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 the closure of our facilities in the U.K. In the first quarter of 2001, we recorded a restructuring charge of approximately $0.6 million. The significant components of the Reduction Plan were $0.4 million for employee severance costs and $0.2 million in closing costs related to the U.K. facility. As of September 30, 2001 all amounts had been paid.

Amortization of Intangibles

        Amortization of intangibles decreased to $0.5 million for the three months ended September 30, 2002 from $1.1 million for the three months ended September 30, 2001 and to $1.5 million for the nine months ended September 30, 2002 from $3.2 million for the nine months ended September 30, 2001. This decrease was primarily due to the adoption of Statement of Financial and Accounting Standards No. 142 ("SFAS No. 142") in January 2002 and the resulting elimination of goodwill amortization.

Interest Expense

        Interest expense decreased to $0.2 million for the three months ended September 30, 2002 from $0.3 million for the three months ended September 30, 2001 and to $0.7 million for the nine months ended September 30, 2002 from $1.0 million for the nine months ended September 30, 2001. These decreases relate primarily to a decrease in the average borrowing outstanding under our line of credit.

Income Taxes

        Income tax benefit was $0.8 million for the three months ended September 30, 2002 compared to an income tax provision of $0.4 million for the three months ended September 30, 2001 and an income tax provision of $0.5 million for the nine months ended September 30, 2002 compared to $1.2 million for the nine months ended September 30, 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.

        Cash provided by operating activities was $6.2 million and $5.0 million for the nine months ended September 30, 2002 and 2001, respectively and consisted of funding our working capital, less non-cash amortization and depreciation of $4.5 million and $6.4 million for the nine months ended September 30, 2002 and 2001, respectively, a decrease in receivables of $3.2 million for the nine months ended September 30, 2002 compared to an increase of $0.7 million for the nine months ended September 30, 2001, an increase in inventories of $0.2 million for the nine months ended September 30, 2002 compared to a decrease of $1.0 million for the nine months ended September 30, 2001, an increase in prepaid and other assets of $0.2 million and $0.9 million for the nine months ended September 30, 2002 and 2001, respectively, a decrease in accounts payable of $1.1 million and $1.4 million for the nine months ended September 30, 2002 and 2001, respectively, an increase in accrued payroll and related expenses of $0.3 million for the nine months ended September 30, 2002 compared to a decrease of $0.2 million for the nine months ended September 30, 2001, a decrease in accrued royalties of $0.5 million for the nine months ended September 30, 2002 compared to an increase of $0.1 million for the nine months ended September 30, 2001, and a decrease in other accrued liabilities of $1.0 million for the nine months ended September 30, 2002 compared to an increase of $0.5 million in other accrued liabilities for the nine months ended September 30, 2001.

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        Cash used for investing activities was $3.0 million for the nine months ended September 30, 2002 and $4.1 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2002 and 2001, the amount consisted primarily of cash used in connection with purchases of property and equipment of $2.9 million and $4.1 million, respectively. The amount consisted primarily of cash used in connection with purchases of property and equipment offset by proceeds from sale of certain assets of $0.6 million for the nine months ended September 30, 2001. Cash used for financing activities was $2.2 million for the nine months ended September 30, 2002 and $0.2 million for the nine months ended September 30, 2001. For the nine months ended September 30, 2002 the amount consisted primarily of net payments under our line of credit of $2.7 million, offset by proceeds from issuance of common stock of $0.8 million. For the nine months ended September 30, 2001 the amount consisted of the net payments on our line of credit of $0.8 million, offset by proceeds from issuance of common stock of $1.0 million.

        As of September 30, 2002, our outstanding indebtedness included $10.8 million under capital leases (primarily our San Diego facility). 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 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 September 30, 2002 there were no borrowings outstanding under either the line of credit or the term loan and we believe we were in compliance with all material covenants.

        We plan approximately $1.0 million in capital expenditures for the remainder of the year. The primary purpose for our capital expenditures is procuring manufacturing equipment, facilities improvements and information technology. We plan to fund these capital expenditures with cash flow from operations and borrowings under our existing credit facilities. We have no material commitments with respect to such planned expenditures as of the date of this filing.

        We also intend to continue searching for acquisition and technology licensing candidates. As such, we may need to incur additional debt or sell additional equity to fund these acquisitions. Cash requirements fluctuate as a result of numerous factors, such as the extent to which we generate cash in operations, progress in research and development projects, competition and technological developments and the time and expenditures required to obtain governmental approval of our products. Based on the current cash position and the current assessment of future operating results, we believe that our existing sources of liquidity will be adequate to meet operating needs during the next twelve months.

Critical Accounting Policies and Estimates

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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.

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        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 estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, price protection, promotions and other volume-based incentives. While we have increased customer incentive programs for the nine months ended September 30, 2002 and 2001, if market conditions were to decline, we may take actions to further increase customer incentive offerings, possibly resulting in an incremental reduction of revenue and gross margin at the time the incentive is offered. We record revenues from product sales, net of related rebates and discounts at the time the sale is recognized. We recognize an allowance for pricing rebates based upon the estimated amounts of rebates that will be claimed by the customers. 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 free on board ("FOB") destination and at the time of shipment when the sales terms are FOB shipping point. We also earn income for performing services under joint development agreements and licensing of technology. Milestone payments are considered to be payments received for the accomplishment of a discrete, substantive earnings event. The non-refundable payment arising from the achievement of a defined milestone is recognized as revenue when the performance criteria for that milestone have been met when substantive effort is required to achieve the milestone, the amount of the milestone payments appears reasonable and commensurate with the effort expended and collection of the payment is reasonably assured. Income from the grant of distribution rights is recorded when the event triggering payment to us has occurred as specified by the terms of the related distribution agreements and collectibility is reasonably assured.

        We maintain allowances for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

        We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

        We periodically assess the impairment of goodwill, intangible and other long-lived assets, which requires us to make assumptions and judgments regarding the carrying value of these assets. The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances:

•

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 the asset;



•

significant changes in our strategic business objectives and utilization of the asset(s); or



•

the impact of significant negative industry or economic trends.

        If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by us. 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.

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        In 2002, SFAS No. 142, "Goodwill and Other Intangible Assets," became effective and, as a result, we ceased to amortize goodwill and indefinite-lived intangible assets. We currently expect that the elimination of goodwill and indefinite-lived amortization will have a positive impact on net earnings for the year ended December 31, 2002 of approximately $2.5 million. In lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. We completed our review during the first quarter of 2002 and concluded there was no impairment of our goodwill. In a future review, we cannot assure you a material impairment charge will not be recorded.

        We record a valuation allowance to reduce our deferred tax asset to the amount that we believe is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase earnings in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net 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.

ITEM 3. 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. Therefore, 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 loss component of stockholders' equity reported by us, and such effect may be material in any individual reporting period. We currently are not a party to derivative contracts or other arrangements that may reduce exchange rate risk.

        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. Based on our market risk sensitive instruments outstanding at September 30, 2002 and December 31, 2001, we believe that there was no material market risk exposure to our consolidated financial position, results of operations or cash flows as of such dates.

Risk Factors

Our operating results may fluctuate as a result of factors that are outside our control, and this could have a negative effect on the price of our common stock.

        Fluctuations in our operating results, for any reason, that decrease sales or profitability could cause our growth or operating results to fall below the expectations of investors and securities analysts, and this could cause our stock price to decline. The market price of our common stock has fluctuated substantially in the past. Between September 30, 2001 and September 30, 2002, the price of our common stock, as reported on the Nasdaq National Market, has ranged from a low of $3.33 to a high of $8.75. We expect the market price of our common stock to continue to experience significant fluctuations in the future in response to a variety of factors, including fluctuation in our operating results.

        For the nine months ended September 30, 2002, total revenues increased 2% to $52.3 million from $51.2 million for the nine months ended September 30, 2001. We had net earnings of $0.7 million for the nine months ended September 30, 2002 compared to a net loss of $0.5 million for the nine months ended September 30, 2001. The increase in earnings for the nine months ended September 30, 2002 is primarily due to an increase in our influenza products, as well as the elimination of goodwill amortization in 2002 offset by decreases in some our core products due to certain distributors not making expected quarter-end purchases and changes in distributors' inventory management practices

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during the three months ended September 30, 2002. We may not continue our revenue growth or continue to achieve profitability. Operating results may continue to fluctuate, in a given quarter or annual period, or from prior periods as a result of a number of factors, many of which are outside of our control.

        Other factors that are beyond our control and that could affect our operating results in the future include:

•

seasonal fluctuations in our sales of Group A Strep and influenza tests, which are generally highest in fall and winter, thus resulting in generally lower operating results in the second and third calendar quarter and higher operating results in the first and fourth calendar quarters;



•

changes in the level of competition, such as would occur if one of our larger and better financed competitors introduced a new product to compete with one of our products;



•

changes in economic conditions in our domestic and international markets, such as economic downturns, reduced consumer demand, inflation and currency fluctuations, particularly as we expand into markets outside Western Europe where economic conditions may differ from those prevailing at given times among developed nations;



•

delays in shipments of our products to customers or from suppliers which could result in manufacturing difficulties or from unexpected large customer orders which could strain our manufacturing resources; and



•

changes in sales levels, since a significant portion of our costs are fixed costs with the result that relatively higher sales could likely increase profitability but relatively lower sales would reduce revenue but would not reduce costs by the same proportion, and hence coul