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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE)
<Table>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</Table>
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
<Table>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</Table>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-10961
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QUIDEL CORPORATION
(Exact name of Registrant as specified in its charter)
<Table>
DELAWARE 94-2573850
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</Table>
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 / /
As of July 31, 2001, 28,212,850 shares of common stock were outstanding.
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QUIDEL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 2001
INDEX
<Table>
<Caption>
PAGE
--------
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2001
(unaudited) and December 31, 2000....................... 3
Consolidated Statements of Operations for the three and
six months ended June 30, 2001 and 2000 (unaudited)..... 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2001 and 2000 (unaudited)..... 5
Notes to Condensed Consolidated Financial Statements...... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk............................................... 14
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings................................... 23
ITEM 4. Submission of Matters to a Vote of Security
Holders................................................... 23
ITEM 5. Other Information................................... 23
ITEM 6. Exhibits and Reports on Form 8-K.................... 24
Signature................................................... 27
</Table>
2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUIDEL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,527 $ 1,901
Accounts receivable, net.................................. 10,324 12,065
Inventories............................................... 6,075 8,438
Prepaid expenses and other current assets................. 2,618 616
------- -------
Total current assets.................................... 20,544 23,020
Property and equipment, net................................. 21,291 20,541
Intangible assets, net...................................... 29,040 31,330
Deferred tax asset.......................................... 4,933 5,707
Other assets................................................ 1,217 1,434
------- -------
Total assets............................................ $77,025 $82,032
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,981 $ 4,412
Accrued royalties......................................... 937 1,054
Line of credit............................................ 3,850 3,200
Current portion obligations under capital leases.......... 341 469
Other accrued liabilities................................. 1,738 3,861
------- -------
Total current liabilities............................... 8,847 12,996
Capital lease, net of current portion....................... 10,565 10,729
Stockholders' equity:
Common stock.............................................. 28 28
Additional paid-in capital................................ 138,247 137,768
Accumulated other comprehensive loss...................... (793) (69)
Accumulated deficit....................................... (79,869) (79,420)
------- -------
Total stockholders' equity.............................. 57,613 58,307
------- -------
Total liabilities and stockholders' equity............ $77,025 $82,032
======= =======
</Table>
See accompanying notes to condensed consolidated financial statements.
3
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QUIDEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES
Net sales........................................... $15,524 $16,583 $35,068 $38,247
Cost of sales....................................... 8,184 8,100 17,178 18,614
------- ------- ------- -------
Gross profit.................................... 7,340 8,483 17,890 19,633
------- ------- ------- -------
OPERATING EXPENSES
Research and development............................ 1,751 1,497 3,343 3,289
Sales and marketing................................. 3,289 4,395 7,391 9,143
General and administrative.......................... 2,402 1,929 4,623 4,137
Restructuring charge................................ -- -- 550 --
Amortization of intangibles......................... 1,044 433 2,088 1,065
------- ------- ------- -------
Total operating expenses........................ 8,486 8,254 17,995 17,634
------- ------- ------- -------
Income (loss) from operations........................... (1,146) 229 (105) 1,999
OTHER INCOME (EXPENSE)
Research contracts, license fees and royalty
income............................................ 468 325 866 639
Interest income..................................... 30 1 41 9
Interest expense.................................... (345) (549) (682) (598)
Other............................................... 195 (8) 184 (358)
------- ------- ------- -------
Total other income (expense).................... 348 (231) 409 (308)
------- ------- ------- -------
Income (loss) before provision for income taxes and
cumulative effect of change in accounting
principle......................................... (798) (2) 304 1,691
Provision for income taxes.......................... 68 59 753 827
------- ------- ------- -------
Income (loss) before cumulative effect of change in
accounting principle.............................. (866) (61) (449) 864
Cumulative effect of change in accounting
principle......................................... -- -- -- (1,068)
------- ------- ------- -------
Net loss................................................ $ (866) $ (61) $ (449) $ (204)
======= ======= ======= =======
Basic earnings (loss) per share before cumulative effect
of change in accounting principle..................... $ (.03) $ .00 $ (.02) $ .04
======= ======= ======= =======
Diluted earnings (loss) per share before cumulative
effect of change in accounting principle per share.... $ (.03) $ .00 $ (.02) $ .03
======= ======= ======= =======
Basic and diluted cumulative effect of change in
accounting principle per share........................ $ -- $ -- $ -- $ (.04)
======= ======= ======= =======
Basic and diluted net loss per share.................... $ (.03) $ .00 $ (.02) $ (.01)
======= ======= ======= =======
Weighted shares used in basic per share calculation..... 28,177 24,638 28,151 24,518
======= ======= ======= =======
Weighted shares used in diluted per share calculation... 28,978 26,636 28,952 26,517
======= ======= ======= =======
</Table>
See accompanying notes to consolidated financial statements.
4
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QUIDEL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<Table>
<Caption>
SIX MONTHS
ENDED
JUNE 30,
-------------------
2001 2000
-------- --------
OPERATING ACTIVITIES:
Net cash provided by operating activities................. $ 1,625 $ 3,476
INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (2,827) (2,101)
Proceeds from sale of assets.............................. 550 --
Other..................................................... 165 (210)
------- -------
Net cash used for investing activities.................. (2,112) (2,311)
FINANCING ACTIVITIES:
Line of credit, net....................................... 650 (2,261)
Payments on obligations under capital leases.............. (292) (289)
Net proceeds from issuance of common stock and warrants... 479 2,504
------- -------
Net cash provided by (used for) financing activities.... 837 (46)
Effect of exchange rate fluctuations on cash and cash
equivalents............................................... (724) 126
------- -------
Net increase in cash and cash equivalents................... (374) 1,245
Cash and cash equivalents, beginning of period.............. 1,901 4,672
------- -------
Cash and cash equivalents, end of period.................... $ 1,527 $ 5,917
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ 676 $ 667
======= =======
Cash paid during the period for income taxes.............. $ -- $ --
======= =======
</Table>
See accompanying notes to condensed consolidated financial statements.
5
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QUIDEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE L. 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 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 United States 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 June 30, 2001, and for the three-month periods
and six-month periods ended June 30, 2001 and 2000, is unaudited. Operating
results for the six months ended June 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto for the year ended December 31, 2000 included in the Company's
2000 Annual Report on Form 10-K.
Reclassifications--Certain prior period amounts have been reclassified to
conform with the current period presentation.
NOTE 2. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows (in thousands):
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net loss.................................... $ (866) $ (61) $ (449) $(204)
Foreign currency translation adjustment..... (241) (40) (724) 126
------- ----- ------- -----
Comprehensive loss.......................... $(1,107) $(101) $(1,173) $ (78)
======= ===== ======= =====
</Table>
NOTE 3. COMPUTATION OF EARNINGS 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 and six months ended June 30, 2001 and 2000 as their
inclusion would be antidilutive.
6
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QUIDEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4. INVENTORIES
Inventories are recorded at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
Raw materials........................................ $2,098 $3,293
Work-in-process...................................... 1,192 2,053
Finished goods....................................... 2,785 3,092
------ ------
$6,075 $8,438
====== ======
</Table>
NOTE 5. STOCKHOLDERS' EQUITY
During the six months ended June 30, 2001, 122,722 shares of common stock
were issued for the exercise of common stock options and 19,056 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
$0.5 million.
On March 29, 2001, the Company's Board of Directors authorized the adoption
of the Company 2001 Equity Incentive Plan (the "2001 Plan") and the concurrent
termination of its 1988 Stock Incentive Plan and 1996 Non-Employee Directors
Stock Options Plan (the "Prior Plans"). This was approved by a majority of the
shareholders at the Company's annual shareholder meeting on May 23, 2001.
On April 9, 2001 the Company's Board of Directors authorized an amendment to
the ESPP to increase the number of shares of the Company's common stock
available for issuance under the ESPP from 600,000 to 750,000 shares. This was
approved by a majority of the shareholders at the Company's annual shareholder
meeting on May 23, 2001.
Under the 2001 Plan, 2.7 million shares of common stock (subject to
antidilution adjustments) have been reserved for issuance. Options currently
outstanding under the Prior Plans were unaffected by this approval.
NOTE 6. CHANGE IN ACCOUNTING PRINCIPLE
The Company changed its accounting policies to implement the effects of the
SEC Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements", which resulted in a cumulative effect of a change in
accounting principle of $1.1 million during fiscal 2000. The Company implemented
SAB 101 in its fourth quarter by restating its first three quarters of 2000.
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 changes the
previous accounting definition of a derivative, expanding it to include embedded
derivatives and many commodity contracts. Under SFAS No. 133, every derivative
7
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QUIDEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
instrument is recorded in the consolidated balance sheet at its fair value, and
any changes in the derivative's fair value are recognized currently in earnings,
unless specific hedge accounting criteria are met. As amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," SFAS No. 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
The FASB has issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment of FASB Statement
No. 133." SFAS No. 138 amends certain provisions of SFAS No. 133. SFAS No. 138
is effective concurrently with SFAS No. 133, if SFAS No. 133 is not adopted
prior to June 15, 2000. The adoption of SFAS No. 133, as amended, and SFAS
No. 138 did not have a material effect on the Company's financial statements.
On July 20, 2001, the FASB issued 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 will be reassessed and the remaining amortization periods adjusted
accordingly. SFAS No. 142 is effective January 1, 2002. The Company is currently
assessing the impact of adoption of SFAS No. 142.
NOTE 8. INDUSTRY AND GEOGRAPHIC INFORMATION
The Company operates in one reportable segment. Sales to customers outside
the United States (primarily Europe) totaled 23% for both the six months ended
June 30, 2001 and 2000. As of June 30, 2001 and December 31, 2000, balances due
from foreign customers were $4.7 million (unaudited) and $4.7 million,
respectively.
The Company had sales to individual customers in excess of 10% of net sales,
as follows:
<Table>
<Caption>
SIX MONTHS
ENDED
JUNE 30,
----------------------
2001 2000
-------- --------
Customer:
A...................................................... 18% 17%
B...................................................... 11% 10%
</Table>
As of June 30, 2001, accounts receivable from one customer with a balance
due in excess of 10% of total accounts receivable totaled $1.8 million while at
December 31, 2000, accounts receivable from three customers with balances due in
excess of 10% of total accounts receivable totaled $4.4 million.
8
<Page>
QUIDEL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8. INDUSTRY AND GEOGRAPHIC INFORMATION (CONTINUED)
For the six months ended June 30, 2001, the Company recorded revenue from
domestic and foreign customers. The following presents net sales for the six
months ended June 30, 2001 and 2000 and long-lived assets as of June 30, 2001
and December 31, 2000 by geographic territory:
<Table>
<Caption>
NET SALES
-------------------
SIX MONTHS
LONG-LIVED ASSETS ENDED
-------------------------- JUNE 30,
JUNE 30, DECEMBER 31, -------------------
2001 2000 2001 2000
----------- ------------ -------- --------
(UNAUDITED) (UNAUDITED)
United States Operations:
Domestic......................... $50,151 $51,611 $27,053 $29,428
Foreign.......................... -- -- 4,427 4,856
Foreign Operations................. 191 260 3,588 3,963
------- ------- ------- -------
Total.............................. $50,342 $51,871 $35,068 $38,247
======= ======= ======= =======
</Table>
NOTE 9. RESTRUCTURING
In the first quarter of 2001, the Company implemented a restructuring plan
(the "Restructuring") of certain of its operations. The Restructuring included a
workforce reduction of approximately 15 employees and closure of the Company's
facilities in the United Kingdom ("UK"). In the first quarter of 2001, the
Company recorded a restructuring charge of approximately $0.6 million related to
the Restructuring. The significant components of the Restructuring were
$0.5 million for employee severance costs and $0.1 million in closing costs
related to the UK facility and related asset impairments.
NOTE 10. CASUALTY CLAIM
In May, 2001, the Company experienced damage to its facility and certain
inventory in San Diego, California as a result of a malfunction of the central
circuitry of one of its warehouse freezers. Most significant was the loss of
specialized reagents used in its inventory, valued at approximately
$1.1 million. Insurance was in place to cover damage to the Company's property
and business interruption. On August 8, 2001 the Company and its insurance
company agreed upon a settlement for damages. Subsequently, an amount of
$4.1 million was paid to the Company, of which $1.1 million was recorded as a
receivable as of June 30, 2001, related to the damaged inventory and is included
in "Prepaid expenses and other current assets" in the accompanying June 30, 2001
condensed consolidated balance sheet. The remaining $3.0 million will be
deferred pending final determination of costs of building repair, clean-up and
other related charges and business interruption costs.
NOTE 11. SUBSEQUENT EVENT
On July 27, 2001, the Company renewed its existing line of credit agreement.
The existing terms, covenants and borrowing capacity remain unchanged, while the
maturity date has been extended to June 30, 2002.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this section, all references to "we," "our," and "us" refer to Quidel.
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", "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.
RECENT EVENTS
In the first quarter of 2001, we implemented a restructuring plan (the
"Restructuring") of certain of our operations. The Restructuring included a
workforce reduction of approximately 15 employees and closure of our facilities
in the United Kingdom ("UK"). In the first quarter of 2001, we recorded a
restructuring charge of approximately $0.6 million.
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 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.
CHANGE IN FISCAL YEAR-END
During October 1999, we changed our fiscal year from a March 31 fiscal
year-end to a December 31 fiscal year-end.
RESULTS OF OPERATIONS
NET SALES
Net sales decreased 6% to $15.5 million for the second quarter of 2001 from
$16.6 million for the second quarter of 2000 and decreased 8% to $35.0 million
for the six months ended June 30, 2001 from $38.2 million for the six months
ended June 30, 2000. The decrease for the three and six months ended 2001 as
compared to the three and six months ended 2000 was primarily due to unusually
high sales levels associated with the withdrawal of one of our competitors
products from the market in 2000 offset by an increase of our influenza product
sales which were new to the market in 2000.
10
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GROSS PROFIT
Gross profit increased to $8.2 million for the three months ended June 30,
2001 from $8.1 million for the three months ended June 30, 2000 and decreased to
$17.2 million for the six months ended June 30, 2001 from $18.7 million for the
six months ended June 30, 2000. Gross profit as a percentage of net sales
decreased to 47% for the three months ended June 30, 2001 from 51% for the three
months ended June 30, 2000, and was 51% for both the six months ended June 30,
2001 and the six months ended June 30, 2000. The changes for the three months
ended June 30, 2001 as compared to the three months ended June 30, 2000 were
primarily due to higher unit costs resulting from lower production volumes and
underutilization of manufacturing capacity as well as increased utilities
associated with the California energy crisis.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense increased to $1.8 million for the three
months ended June 30, 2001 from $1.5 million for the three months ended
June 30, 2000 and was $3.3 million for both the six months ended June 30, 2001
and the six months ended June 30, 2000. Research and development expense as a
percentage of net sales, increased to 11% for the three months ended June 30,
2001 from 9% for the three months ended June 30, 2000 and increased to 10% for
the six months ended June 30, 2001 from 9% for the six months ended June 30,
2000. The increase is primarily attributable to costs incurred related to the
Litmus organization, which was acquired in December 2000, offset by certain
contract costs incurred in 2000, related to the development of two diagnostic
tests to detect herpes simplex virus. 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 decreased to $3.3 million for the three months
ended June 30, 2001 from $4.4 million for the three months ended June 30, 2000
and to $7.4 million for the six months ended June 30, 2001 from $9.1 million for
the six months ended June 30, 2000. Sales and marketing expense as a percentage
of net sales decreased to 21% for the three months ended June 30, 2001 from 27%
for the three months ended June 30, 2000 and to 21% for the six months ended
June 30, 2001 from 24% for the six months ended June 30, 2000. The decrease for
both the three and six months ended June 30, 2001 as compared to the three and
six months ended June 30, 2000 is primarily due to costs associated with the
launch of the urinalysis product and the contract sales force employed to assist
with the launch of the influenza products in 2000.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense increased to $2.4 million for the three
months ended June 30, 2001 from $1.9 million for the three months ended
June 30, 2000 and to $4.6 million for the six months ended June 30, 2001 from
$4.1 million for the six months ended June 30, 2000. General and administrative
expense as a percentage of net sales increased to 15% for the three months ended
June 30, 2001 from 12% for the three months ended June 30, 2000 and increased to
13% for the six months ended June 30, 2001 from 11% for the six months ended
June 30, 2000. These increases were primarily due to increases in investor
relations, legal and relocation expense.
RESTRUCTURING CHARGE
In the first quarter of 2001, we implemented the Restructuring. The
Restructuring included a workforce reduction of approximately 15 employees and
closure of our facilities in the UK. In the first quarter of 2001, we recorded a
restructuring charge of approximately $0.6 million. The significant
11
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components of the Restructuring are $0.5 million for employee severance costs
and $0.1 million in closing costs related to the UK facility and related asset
impairments.
AMORTIZATION OF INTANGIBLES
Amortization of intangibles increased to $1.0 million for the three months
ended June 30, 2001 from $0.4 million for the three months ended June 30, 2000
and to $2.1 million for the six months ended June 30, 2001 from $1.1 million for
the six months ended June 30, 2000. These increases were due to an increase in
intangible assets related to the acquisition of Litmus Concepts in December of
2000.
RESEARCH CONTRACTS, LICENSE FEES AND ROYALTY INCOME
Research contracts, license fees and royalty income increased to
$0.5 million for the three months ended June 30, 2001 from $0.3 million for the
three months ended June 30, 2000 and to $0.9 million for the six months ended
June 30, 2001 from $0.6 million for the six months ended June 30, 2000. The
revenue for all periods is principally related to royalties received on a
patented technology of ours utilized by a third-party.
INTEREST EXPENSE
Interest expense for the three months ended June 30, 2001 and 2000 and the
six months ended June 30, 2001 and 2000 relates primarily to interest incurred
on the line of credit and obligations under capital leases.
INCOME TAXES
Income tax provision was $0.1 million for both the three months ended
June 30, 2001 and the three months ended June 30, 2000. The income tax provision
was $0.8 million for both the six months ended June 30, 2001 and the six months
ended June 30, 2000.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
We changed our accounting policies to implement the effects of the SEC Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," which resulted in a cumulative effect of a change in accounting
principle of $1.1 million for the first quarter of 2001. We implemented SAB 101
in the fourth quarter of 2000 by restating our first three quarters of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity have historically been cash flow from
operations and borrowings under our lines of credit. Cash flow from operations
and borrowings under our line of credit are expected to continue to be our
sources of liquidity. Our principal requirements for cash have been repayment of
borrowings under our lines of credit and capital expenditures.
Cash provided by operating activities was $1.6 million for the six months
ended June 30, 2001 and $3.5 million for the six months ended June 30, 2000 and
consisted of funding our net losses, less non-cash amortization and depreciation
of $4.4 million for the six months ended June 30, 2001 and $3.2 million for the
six months ended June 30, 2000, a decrease in receivables of $1.7 million for
the six months ended June 30, 2001 compared to an increase of $1.9 million for
the six months ended June 30, 2000, a decrease in inventories of $2.0 million
for the six months ended June 30, 2001 compared to an increase of $0.3 million
for the six months ended June 30, 2000, an increase in prepaid and other assets
of $2.0 for the six months ended June 30, 2001, compared to an increase of
$0.7 million for the six months ended June 30, 2000, a decrease in accounts
payable of $2.4 million for the six months ended
12
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June 30, 2001 compared to an increase of $0.1 million for the six months ended
June 30, 2000, a decrease in accrued payroll and related expenses of
$0.4 million for the six months ended June 30, 2001 compared to an increase of
$0.1 million for the six months ended June 30, 2000, and a decrease in other
accrued liabilities of $1.7 million for the six months ended June 30, 2001
compared to an increase of $1.1 million for the six months ended June 30, 2000.
Cash used for investing activities was $2.1 million for the six months ended
June 30, 2001 and $2.3 million for the six months ended June 30, 2000. For the
six months ended June 30, 2001, the amount consisted primarily of cash used in
connection with purchases of property and equipment of $2.8 million, offset by
proceeds from sale of inventory and property and equipment of $0.6 million. For
the six months ended June 30, 2000 the amount consisted primarily of cash used
in connection with purchases of property and equipment of $2.1 million. Cash
provided by financing activities was $0.8 million for the six months ended
June 30, 2001 and $0.0 million for the six months ended June 30, 2000. For the
six months ended June 30, 2001 the amount consisted of net borrowings under our
line of credit of $0.7 million, proceeds from issuance of common stock of
$0.5 million, offset by payments on capital leases of $0.3 million. For the six
months ended June 30, 2000 the amount consisted of the net payments on our line
of credit of $2.3 million offset by proceeds from issuance of common stock and
warrants of $2.5 million and payments on capital leases of $0.3 million.
As of June 30, 2001, our outstanding indebtedness included $10.9 million
under capital leases (primarily our San Diego facility) and $3.9 million of
borrowing under lines of credit. Our line of credit provides for a maximum
availability of $7.5 million, bore interest at 9.5% at June 30, 2001, matures in
June 2002 and is secured by our inventory, accounts receivable and fixed assets.
We currently have $3.6 million available to borrow under this line of credit.
This line of credit agreement contains certain customary customary covenants
restricting our ability to, among other things, 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.
We plan approximately $4.0 million in capital expenditures for the next six
months. The primary purpose for our capital expenditures is 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 facility. 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 successfully complete 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 changes the previous accounting definition of a derivative, expanding it
to include embedded derivatives and many commodity contracts. Under SFAS
No. 133, every derivative instrument is recorded in the consolidated balance
sheet at its fair value, and any changes in the derivative's fair value are
recognized currently in earnings, unless specific hedge accounting criteria are
met. As amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement
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No. 133," SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000.
On July 20, 2001, the FASB issued 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 will be reassessed and the remaining amortization periods adjusted
accordingly. SFAS No. 142 is effective January 1, 2002. The Company is currently
assessing the impact of adoption of SFAS No. 142.
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.
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
will vary as interest rates increase or decrease. Based on our market risk
sensitive instruments outstanding at June 30, 2001 and December 31, 2000, we
have determined that there was no material market risk exposure to our
consolidated financial position, results of operations or cash flows as of such
dates.
RISK FACTORS
OUR OPERATING RESULTS MAY FLUCTUATE AS A RESULT OF FACTORS WHICH 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 June 30, 2000 and June 30, 2001, the price of
our common stock, as reported on the Nasdaq National Market, has ranged from a
low of $3.00 to a high of $7.25. 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 six months ended June 30, 2001, revenues decreased $3.1 million to
$35.1 million from $38.2 million for the six months ended June 30, 2000. We had
income before income taxes of $0.3 million for the six months ended June 30,
2001 compared to income before income taxes and certain nonrecurring items of
$1.7 million for the six months ended June 30, 2000. The difference was
primarily due to unusually high sales levels associated with the withdrawal of
one of our competitors products from the market in 2000, as well as increased
amortization expense in 2001 due to our recent acquisitions. Revenues grew in
fiscal 2000 over calendar 1999 from approximately $52.2 million to approximately
$68.4 million. We had a net loss in fiscal 2000, before benefit for income taxes
and certain nonrecurring items, of approximately $4.8 million, versus net income
up to $0.2 million for calendar 1999. The difference was primarily due to a more
significant write-off acquired in-process research and development in 2000, as
compared to 1999, higher revenues associated with the completion of a multi-year
rapid diagnostic test development program in 1999, increased amortization
expense in 2000 due to our recent acquisitions, and increases in interest
expense and decreases in interest income due to increases in our revolving line
of credit to partially finance two acquisitions. We
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may not continue our revenue growth or achieve profitability. Operating results
may continue to fluctuate, in a given quarter or annual period, from prior
periods as a result of a number of factors, many of which are outside of our
control.
Other factors which are beyond our control and which could affect our
results in the future include:
- seasonal fluctuations in our sales of Strep throat 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 such as our unexpected freezer
malfunction 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 could cause
operating losses.
OUR OPERATING RESULTS MAY ALSO FLUCTUATE AS A RESULT OF FACTORS WHICH WE DO
CONTROL, SUCH AS INTRODUCING NEW PRODUCTS OR DEVELOPING NEW MARKETS. WE MAY HAVE
TO EXPEND CONSIDERABLE RESOURCES IN ORDER TO PURSUE THESE STEPS, AND THIS COULD
HAVE A NEGATIVE EFFECT ON OUR PROFITS.
We must change the mix of products we sell from time to time. For example,
while we do not presently have major products that are nearing the end of their
life cycle, we may in the future be required to replace aging products. We also
attempt to focus on products with relatively higher margins. The development,
manufacture and sale of our diagnostic products require a significant investment
of resources. We may incur increased operating expenses as a result of our
increased investment in sales and marketing activities, manufacturing scale-up
and new product development associated with our efforts to:
- expand our business line;
- take advantage of the new platform we obtained when we acquired Litmus
Concepts;
- develop products with higher margins, such as our proposed Herpes Simplex
Virus antibody test, our microassay to measure bone resorption, and our
test for trichomoniasis; and
- expand our business geographically.
The funds for these projects came primarily from our business operations,
and also a small working capital line of credit. If our business slows, as we
become less profitable, and as a result have less money available to fund
research and development, we will have to decide at that time which programs to
cut, and by how much. This decision will be based on a number of factors,
including the amount of the funding shortfall, how promising a particular
project appears to be, and how close the project is to being available
commercially. Our earnings will be adversely affected if our sales and gross
profits do not correspondingly increase, or if our product development efforts
are unsuccessful or delayed. Development of new markets also requires a
substantial investment of resources, such as new
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employees, offices and manufacturing facilities, and if adequate financial,
personnel, equipment or real estate resources are not available we may be
required to delay or scale back market developments.
UNEXPECTED SIGNIFICANT INCREASES IN DEMAND FOR OUR PRODUCTS COULD REQUIRE US TO
SPEND CONSIDERABLE RESOURCES TO MEET THE DEMAND, OR HARM OUR CUSTOMER
RELATIONSHIPS IF WE ARE UNABLE TO MEET DEMAND.
If we experience unexpected significant increases in the demand for our
products, we may be required to expend additional capital resources to meet
these demands. These capital resources could involve the cost of new machinery,
or even the cost of new manufacturing facilities. This would increase our
capital costs, which could affect our earnings. If we are unable to develop
necessary manufacturing capabilities, our sales could be adversely affected.
Failure to increase production volumes, if required, in a cost-effective manner,
or lower than anticipated yields or production problems encountered as a result
of changes we may make in our manufacturing processes to meet increased demand,
could result in shipment delays as well as increased manufacturing costs, which
could also have a material adverse effect on our sales.
Unexpected increases in demand for our products could also require us to
obtain additional raw materials in order to manufacture products to meet the
demand. The majority of raw materials and purchased components used to
manufacture our products are readily available. However, some of these materials
are currently obtained from a sole supplier or a limited group of suppliers. For
example, our nitro cellulose which is part of the Pregnancy and Group A Strep
products, as well as certain plastics, which serve as housings for the majority
of our diagnostic test strips are sole sourced. We have long term supply
agreements with these vendors. The reliance on sole or limited suppliers and the
failure to maintain long-term agreements with other suppliers involve several
risks, including the inability to obtain an adequate supply of raw materials and
components and reduced control over pricing, quality and timely delivery.
Although we attempt to minimize our supply risks by maintaining an inventory of
raw materials and continuously evaluating other sources, any interruption in
supply could have a material adverse effect on our sales or cost of sales.
In November 2001, we plan to begin manufacturing our urinalysis products in
Marburg, Germany. Currently, we contract with a third party to manufacture these
products. Any delays or problems encountered in the integration of this process
could result in shipment delays and increased manufacturing costs and could have
a material adverse effect on our results of operations.
THE LOSS OF KEY DISTRIBUTORS OR AN UNSUCCESSFUL EFFORT TO DIRECTLY DISTRIBUTE
OUR PRODUCTS COULD LEAD TO REDUCED SALES.
Although we have distribution agreements with approximately 80 distributors,
the market is dominated by a small group of these distributors. Five of our
distributors, which are considered to be among the market leaders, accounted for
approximately 46% and 40% of our net sales for the six months ended June 30,
2001 and the year ended December 31, 2000, respectively. While we believe our
relationship with our distributors is good, the loss of a major distributor may
have an adverse effect on our sales. The loss or termination of our relationship
with any of these key distributors could significantly disrupt our business
unless suitable alternatives can be timely found. Finding a suitable alternative
may pose challenges in our industry's competitive environment, and another
suitable distributor may not be found on satisfactory terms. For instance, many
distributors already have exclusive arrangements with our competitors, and
others do not have the same level of penetration into our target markets as our
existing distributors. We could expand our efforts to distribute and market our
products directly; however, this would require an investment in additional sales
and marketing resources, including hiring additional field sales personnel,
which would significantly increase our future selling, general and
administrative expenses. In addition, our direct sales, marketing and
distribution efforts may not be successful.
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WE MAY NOT ACHIEVE MARKET ACCEPTANCE OF OUR PRODUCTS AMONG PHYSICIANS AND OTHER
HEALTH CARE PROVIDERS, AND THIS WILL HAVE A NEGATIVE EFFECT ON FUTURE SALES
GROWTH.
A large part of our business is based on the sale of rapid point-of-case
diagnostic tests that physicians and other health care providers can administer
in their own facilities without sending samples to laboratories. Thus, clinical
reference laboratories and hospital-based laboratories are significant
competitors for our products, and provide many of the diagnostic tests used by
physicians and other healthcare providers. Our market share in fiscal 2000 for
some of our key products was 58% in pregnancy tests, 40% in Strep A tests and
20% for influenza tests. Our future sales depend on, among other matters, the
capture of sales from these laboratories by achieving market acceptance from
physicians and other health care providers. If we do not capture sales at the
levels we have budgeted for, our sales may not grow as much as we hope and the
costs we have incurred will be disproportionate to our sales levels. We expect
that these laboratories will compete vigorously to maintain their dominance of
the testing market. Moreover, even if we can demonstrate that our products are
more cost-effective or save time, physicians and other health care providers may
resist changing their established source for these tests.
INTENSE COMPETITION WITH OTHER MANUFACTURERS OF POINT-OF-CARE DIAGNOSTIC
PRODUCTS MAY REDUCE OUR SALES.
In addition to competition from laboratories, our point-of-care diagnostic
tests compete with similar products made by our competitors. We have a large
number of multinational and regional competitors making investments in competing
technologies, including several large pharmaceutical and diversified health care
companies. These competitors include Abbott Laboratories, Beckman Coulter
Primary Care, and Becton Dickinson. A number of our competitors have a potential
competitive advantage because they have substantially greater financial,
technical, research and other resources, and larger, more established marketing,
sales, distribution and service organizations we have. Moreover, some
competitors offer broader product lines and have greater name recognition than
we have. If our competitors' products are more effective than ours, or are
cheaper, our sales could be adversely affected. Competition also has the effect
of limiting the prices we can charge for our products.
TO REMAIN COMPETITIVE WE MUST CONTINUE TO DEVELOP OR OBTAIN PROPRIETARY
TECHNOLOGY RIGHTS; OTHERWISE, OTHER COMPANIES MAY INCREASE THEIR MARKET SHARE BY
SELLING PRODUCTS THAT COMPETE WITH OUR PRODUCTS.
Our competitive position is heavily dependent on obtaining and protecting
our proprietary technology or obtaining licenses from others. Our ability to
compete successfully in the diagnostic market depends on continued development
and introduction of new proprietary technology and the improvement of existing
technology. If we cannot continue to obtain and protect proprietary technology,
our sales and profits could be adversely affected. Moreover, our current and
future licenses may not be adequate for the operation of our business.
We have a license agreement with Becton Dickinson related to our Pregnancy
and Group Strep A products, which accounted for 35% and 36% and 29% and 25% of
our business for the six months ended June 30, 2001 and the year ended
December 31, 2000, respectively. The license is due to expire in 2004. Our
ability to obtain patents and licenses, and their benefits, are uncertain. We
have 212 issued patents and approximately 60 applications are pending. Our
patents have expiration dates from 2002 to 2017. There are no patents which are
expiring in the near term which we consider material to our business. However,
our pending patent applications may not result in the issuance of any patents,
or if issued, the patents may not have priority over others' applications or may
not offer protection against competitors with similar technology. Moreover, any
patents issued to us may be challenged, invalidated or circumvented in the
future. Further, we have patents issued in Canada, Germany, France, United
Kingdom, Italy, Spain, Australia, Belgium, Korea, Norway, Lithuania, The
Netherlands, Austria, Switzerland, Sweden and South Africa. Therefore, third
parties can make, use, and sell products
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covered by our patents in any country in which we do not have patent protection.
We license the right to use our products to our customers under label licenses
that are for research purposes only. These licenses could be contested and,
because we cannot monitor all potential unauthorized uses of our products around
the world, we might not be aware of an unauthorized use and might not be able to
enforce the license restrictions in a cost-effective manner. Also, we may not be
able to obtain licenses for technology patented by others or on commercially
reasonable terms.
WE MAY BE INVOLVED IN INTELLECTUAL PROPERTY INFRINGEMENT DISPUTES WHICH ARE
COSTLY AND COULD LIMIT OUR ABILITY TO USE SOME TECHNOLOGIES IN THE FUTURE.
There are a large number of patents and patent applications in our product
areas, and we believe, based on experience and published reports, that
litigation in our industry regarding patent and other intellectual property
rights is prevalent. We are not currently involved in any litigation in this
area, but our involvement in litigation to determine rights in proprietary
technology could adversely affect our sales because:
- in common with any major litigation, it would likely consume a substantial
portion of managerial and financial resources;
- because of the developing state of the law in this area in this country
and around the world, its outcome would be uncertain and a court may find
the third-party claims valid and that we have no successful defense to
such claims;
- an adverse outcome could subject us to significant liability in the form
of penalties, special and punitive damages, or future royalty payments
affecting our future earnings;
- failure to obtain a necessary license upon an adverse outcome could
prevent us from selling our current products or other products we may
develop; and
- because of the developing state of the law, protection of our rights may
not be available under the law or may be inadequate.
THE UNCERTAINTY AND COST OF REGULATORY APPROVAL FOR OUR PRODUCTS MAY HAVE A
NEGATIVE EFFECT ON OUR PROFITABILITY.
The testing, manufacture and sale of our products are subject to regulation
by numerous governmental authorities, principally the FDA and corresponding
state and foreign regulatory agencies. The FDA regulates all of our products
except Heska, which is regulated by the U.S. Department of Agriculture. Our
future performance depends on, among other matters, our estimates as to when and
at what cost we will receive regulatory approval for new products. However,
complying with laws and regulations of these regulatory agencies can be a
lengthy, expensive and uncertain process making the timing and costs of
approvals difficult to predict. Our FDA regulated products are categorized as
Class I, II and III medical devices, depending on the level of regulation that
the FDA believes is necessary to establish safety and efficacy. Depending on the
classification of the device, these products need to have either 510(k) or
premarket approval prior to distribution. The 510(k) process requires us to
submit extensive clinical data, and can take at least three to six months before
approval is granted. The premarket approval application must be supported by
valid scientific evidence demonstrating the safety and effectiveness of the
device, typically including the results of clinical investigations, trials, and
laboratory and animal studies. This process can take several years, and is
expensive and uncertain. We currently have one pending 510(K) FDA application,
which was filed May 2001, and no premarket approvals pending. Our products are
also subject to testing under the Clinical Laboratory Improvement Act of 1988,
which regulates laboratories and includes quality control, proficiency testing
of personnel, personnel standards and physical inspections. We have two
applications pending under this statute, which were filed in May 2001 and in
1999, respectively. While we have not to date experienced any
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unexpected action by any governmental regulatory body, our sales would be
negatively affected by delays in the receipt of or failure to receive approvals
or clearances, the loss of previously received approvals or clearances or the
placement of limits on the use of the products.
WE ARE SUBJECT TO NUMEROUS GOVERNMENT REGULATIONS IN ADDITION TO FDA REGULATION,
COMPLIANCE WITH CHANGES IN WHICH COULD INCREASE OUR EXPENSES.
In addition to the FDA and other regulations described in the previous
paragraph, numerous laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances impact our business
operations. If these laws change, are amended, or are added to, the costs of
compliance with these laws could substantially increase our costs. While we
believe we currently are in compliance with these laws, compliance with any
future modifications of these laws or laws regulating the manufacture and
marketing of our products could result in substantial costs and loss of sales or
customers. Because of the number and extent of the laws and regulations
affecting our industry, and the number of governmental agencies whose actions
could affect our operations, it is impossible to reliably predict the full
nature and impact of future legislation or regulatory developments relating to
our industry. To the extent the costs and procedures associated with meeting new
requirements are substantial, our business and results of operations could be
adversely affected.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS THAT MAY RESULT IN UNEXPECTED AND
SUBSTANTIAL CLAIMS AGAINST US RELATING TO HANDLING, STORAGE OR DISPOSAL.
Our research and development and manufacturing activities involve the
controlled use of hazardous materials, including chemicals and biological
materials such as dimethyl sulfate, sodium nitrite, acetaldehyde, acrylamide,
potassium bromate and radionuclides. The risk of accidental contamination or
injury from these materials cannot be completely eliminated. Federal, state and
local laws and regulations govern the use, manufacture, storage, handling and
disposal of hazardous materials. These regulations include federal statutes
popularly known as CERCLA, RCRA and the Clean Water Act. Compliance with these
laws and regulations is expensive. If any governmental authorities were to
impose new environmental regulations requiring compliance in addition to that
required by existing regulations, these future environmental regulations could
impair our research, development or production efforts by imposing substantial
costs on our business. In addition, because of the nature of the penalties
provided for in some of these environmental regulations, we could be required to
pay substantial fines, penalties or damages in the event of noncompliance with
environmental laws or the exposure of individuals to hazardous materials.
Further, any accident could partially or completely shut down our research and
manufacturing facilities and operations.
OUR SALES COULD BE AFFECTED BY THIRD-PARTY REIMBURSEMENT POLICIES AND POTENTIAL
COST CONSTRAINTS.
We sell many of our products to physicians and other health care providers.
They will not use our products if they do not get reimbursed for the cost by
their patients' health care insurers or payors, such as Blue Cross, Blue Shield,
Medicare, or other public or private health care programs. Our sales could be
adversely affected by changes in reimbursement policies of these governmental or
private health care payors. In the U.S., health care providers such as hospitals
and physicians that purchase diagnostic products generally rely on third party
payors, principally private health insurance plans, federal Medicare and state
Medicaid, to reimburse all or part of the cost of the procedure. We believe that
the overall escalating cost of medical products and services has led to and will
continue to lead to increased pressures on the health care industry, both
foreign and domestic, to reduce the cost of products and services, including our
products. Given the efforts to control and reduce health care costs in the U.S.
in recent years, currently available levels of reimbursement may not continue to
be available in the future for our existing products or products under
development. Third-party reimbursement and
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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
reduce the demand for our products or our ability to sell our products on a
profitable basis.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH STRATEGY, AND IF WE EXPERIENCE
DIFFICULTIES INTEGRATING ACQUIRED COMPANIES OR TECHNOLOGIES AFTER THE
ACQUISITION, OUR EARNINGS MAY BE ADVERSELY AFFECTED.
We recently acquired two businesses, Litmus Concepts and a division of Dade
Behring Marburg Gmbh. Our business strategy contemplates further increased
growth in the number of employees, the scope of operating and financial systems
and the geographic area of our operations, including further expansion outside
the United States, as new products are developed and commercialized. We may
experience difficulties integrating our own operations with those of companies
or technologies that we have acquired or we may acquire, and as a result we may
not realize our anticipated benefits and cost savings within our expected time
frame, or at all. Because we do not have a large executive staff, future growth
may also divert management's attention from other aspects of our business, and
will place a strain on existing management, as well as on our operational,
financial and management information systems. Furthermore, we may expand into
markets in which we have less experience or incur higher costs. Should we
encounter difficulties in managing these tasks, our growth strategy may suffer
and our sales and earnings could be adversely affected.
OUR BUSINESS COULD BE NEGATIVELY AFFECTED BY THE LOSS OF KEY PERSONNEL OR OUR
INABILITY TO HIRE QUALIFIED PERSONNEL.
Our future success depends in part on our ability to retain our key
technical, sales, marketing and executive personnel and our ability to identify
and hire additional qualified personnel. Competition for these personnel is
intense, both in the industry in which we operate and also in the geographic
area (Northern San Diego County) where our headquarters and many of our
operations are located. If we are not able to retain existing key personnel, or
identify and hire additional qualified personnel, our business could be
negatively impacted. Although we currently experience relatively low rates of
turnover for our management and key personnel, the rate of turnover may increase
in the future. In addition, we expect to further grow our operations, and our
needs for additional management and other key personnel will increase.
WE ARE EXPOSED TO BUSINESS RISKS WHICH, IF NOT COVERED BY INSURANCE, COULD HAVE
AN ADVERSE EFFECT ON OUR PROFITS.
We maintain insurance which we believe is appropriate to protect us against
the kinds of insurable risks, such as product liability claims or business
interruptions, that companies of our size and companies in our industry
typically insure against. However, there is a risk that claims may be made
against us for types of damages, or for amounts of damages, that are not covered
by our insurance. For example, there is a risk of product liability claims
arising from our testing, manufacturing and marketing of medical diagnostic
devices, both those currently being marketed as well as those under development.
We currently have a product liability policy providing coverage up to $10
million, and our claims to date have not been material. However, it is possible
that potential product liability claims may exceed the amount of our insurance
coverage or may be excluded from coverage under the terms of our policy. Also,
if we are held liable, our existing insurance may not be renewed at the same
cost and level of coverage as presently in effect, or may not be renewed at all.
If we are held liable for a claim against which we are not indemnified or for
damages exceeding the limits of our insurance coverage, whether arising out of
product liability matters or from some other matter, that claim could have a
material negative effect on our results of operations.
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WE FACE RISKS RELATING TO OUR INTERNATIONAL SALES AND FOREIGN OPERATIONS,
INCLUDING THE RISK OF CURRENCY FLUCTUATIONS, WHICH COULD INCREASE OUR COSTS OR
STIFLE OUR GROWTH OPPORTUNITIES.
Our products are sold internationally, primarily at this time to customers
in Western Europe, including Germany and Italy, and also Poland. Sales to
foreign customers accounted for 23% and 25% of our net sales for the six months
ended June 30, 2001 and the year ended December 31, 2000, respectively, and are
expected to continue to account for a significant percentage of our net sales.
For example, our business strategy calls for the launch of a worldwide basis of
our proposed herpes simplex virus antibody rapid diagnostic test, and marketing
our influenza test on a worldwide basis. Moreover, while we do not currently
manufacture any product overseas, we do have our urinalysis product manufactured
for us by a third party in Germany and in November 2001, we will commence
manufacture of these products in Germany ourselves. International sales and
manufacturing operations are subject to inherent risks which could increase our
costs and stifle our growth opportunities. These risks include:
- exposure to currency exchange fluctuations, such as a 7% drop in the value
of the German and Italian currencies against the U.S. dollar during fiscal
2000;
- longer payment cycles and greater difficulty in accounts receivable
collection;
- compliance with multiple foreign laws, tariffs or other barriers as we
continue to expand into new countries and geographic regions;
- difficulties in obtaining export licenses;
- reduced protection for, and enforcement of, intellectual property rights,
particularly as we expand our business beyond Europe;
- political and economic instability in some of the regions that we may
expand into in the future; and
- potentially adverse tax consequences.
Even that portion of our international sales which is negotiated for and
paid in U.S. dollars is subject to currency risks, since changes in the values
of foreign currencies relative to the value of the U.S. dollar can render our
products comparatively more expensive. These exchange rate fluctuations could
negatively impact international sales of our products and our anticipated
foreign operations, as could changes in the general economic conditions in those
markets. In fiscal 2000, for example, the value of the German and Italian
currencies dropped 7% against the U.S. dollar. To date, we have not reflected
that change in currency value in our selling prices. In order to maintain a
competitive price for our products in Europe, however, we may have to provide
discounts or otherwise effectively reduce our prices, resulting in a lower
margin on products sold in Europe. Continued change in the values of European
currencies or changes in the values of other foreign currencies could have a
negative impact on our business, financial condition and results of operations.
Although we do not currently hedge against exchange rate fluctuations, any
measures we take to hedge against exchange rate fluctuations may not adequately
protect us from their potential harm.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and significantly increase our expenses. In the event of an acute
power shortage, that is, when power reserves for the State of California fall
below 1.5%, California has on some occasions implemented, and may in the future
continue to implement, rolling blackouts throughout California. We currently
have a backup generator with limited capacity. We have no alternate source of
power in the event of a blackout, and our current insurance does not provide
coverage for any damages we or our customers may suffer as a
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<Page>
result of any interruption in our power supply. If blackouts interrupt our power
supply, we would be temporarily unable to continue operations at our facilities.
Any such interruption in our ability to continue operations at our facilities
could damage our reputation, harm our ability to retain existing customers and
to obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations. Furthermore, our
utility expenses have increased substantially and could continue to be
negatively impacted by the California energy crisis.
FUTURE SALES BY EXISTING STOCKHOLDERS COULD DEPRESS THE MARKET PRICE OF OUR
COMMON STOCK AND MAKE IT MORE DIFFICULT FOR US TO SELL STOCK IN THE FUTURE.
Sales of our common stock in the public market, or the perception that such
sales could occur, could negatively impact the market price of our securities
and impair our ability to complete equity financings. In addition to the shares
to be sold in this offering, we have outstanding the following shares of common
stock:
- Approximately 25.0 million shares of common stock that have been issued in
registered offerings and are freely tradable in the public markets.
- Approximately 3.2 million shares of common stock currently eligible for
resale in the public market pursuant to Rule 144 under the Securities Act
of 1933, as amended.
- In addition, approximately 5.3 million shares of common stock are issuable
upon exercise of stock options outstanding as of June 30, 2001 under our
various stock option plans at a weighted average exercise price of $4.18
per share.
- We have in effect registration statements under the Securities Act
registering approximately 6.5 million shares of common stock reserved
under our employee stock option and purchase plans.
- We have in effect a registration statement under the Securities Act
registering approximately 1.0 million shares of common stock issuable upon
exercise of warrants, which warrants are themselves freely tradeable.
We are unable to estimate the number of shares of common stock that may
actually be resold in the public market since this will depend upon the market
price for the common stock, the individual circumstances of the sellers and
other factors. We also have a number of individual institutional stockholders
that own significant blocks of our common stock. If these stockholders sell
large portions of their holdings in a relatively short time, for liquidity or
other reasons, the prevailing market price of our common stock could be
negatively affected.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We received a letter dated April 24, 1992 from the United States
Environmental Protection Agency (the "EPA") notifying us that we are a
potentially responsible party for cleanup costs at a federal Superfund site, the
Marco of Iota Drum Site (the "Marco Site"), near Iota, Louisiana. Documents
gathered in response to such letter indicate that we sent a small amount of
hazardous waste to facilities in Illinois. It is possible that subsequently,
such waste could have been shipped to the Marco Site. The EPA letter indicates
that a similar notice regarding the Marco Site was sent by the EPA to over 500
other parties. At this time, we do not know how much of our waste may have
reached the Marco Site, the total volume of waste at the Marco Site or the
likely site remediation costs. There is, as in the case of most environmental
litigation, the theoretical possibility of joint and several liability being
imposed upon us for damages that may be awarded.
We are involved in litigation matters from time to time in the ordinary
course of business. Management believes that any and all such actions, in the
aggregate, will not have a material adverse effect on us. We maintain insurance,
including coverage for product liability claims, in amounts which management
believes appropriate given the nature of our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 23, 2001. All of the
Company's directors nominated for election as stated in the Company's Proxy
Statement were elected as follows:
<Table>
<Caption>
DIRECTOR NOMINEE VOTES IN FAVOR VOTES WITHHELD VOTES ABSTAINING
- ---------------- -------------- -------------- ----------------
Richard C.E. Morgan................. 22,877,196 970,216 --
Andre De Bruin...................... 22,875,696 971,716 --
John D. Diekman..................... 22,877,196 970,216 --
Thomas A. Glaze..................... 22,877,686 969,726 --
S. Wayne Kay........................ 22,876,696 970,716 --
Margaret G. McGlynn................. 22,877,336 970,076 --
Mary Lake Polan..................... 22,877,196 970,216 --
Faye Wattleton...................... 22,874,139 973,093 --
</Table>
All of the Company's proposals as stated in the Company's Proxy Statement
were approved as follows:
<Table>
<Caption>
PROPOSAL DESCRIPTION VOTES IN FAVOR VOTES AGAINST VOTES ABSTAINING
- -------------------- -------------- ------------- ----------------
Amendment to the 1983 Employee Stock Purchase Plan to
increase by 150,000 the number of shares of the
Company's Common Stock available under the Plan.... 14,360,161 456,734 62,969
Proposal to approve the adoption of the Company's
2001 Equity Incentive Plan and the reservation of
2,700,000 shares of the Company's Common Stock for
issuance thereunder................................ 12,200,399 2,599,143 80,322
</Table>
ITEM 5. OTHER INFORMATION
Effective as of August 14, 2001, we have promoted S. Wayne Kay to President
and Chief Executive Officer. Andre de Bruin, who has served as our Vice Chairman
and Chief Executive Officer, will serve as our Executive Chairman succeeding
Richard C.E. Morgan who will continue to serve as a Director.
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<Page>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER
- -------
2.1 Agreement and Plan of Merger, as amended, dated as of
October 30, 2000, among Litmus Concepts, Inc., Quidel
Corporation and Litmus Acquisition Corporation (Incorporated
by reference to Exhibit 2.1 to the Registrant's Form 8-K
filed on December 22, 2000.)
3.1 Certificate of Incorporation, as amended. (Incorporated by
reference to Exhibit 3.1 to the Registrant's Current Report
on Form 8-K filed on February 26, 1991.)
3.2 Amended and Restated Bylaws. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Current Report on Form 8-K
dated November 8, 2000.)
4.1 Certificate of Designations of Series C Junior Participating
Preferred Stock as filed with the State of Delaware on
December 31, 1996. (Incorporated by reference to Exhibit
1(A) to the Company's Registration Statement on Form 8-A
filed on January 14, 1997.)
4.2 Rights Agreement dated as of December 31, 1996 between
Quidel Corporation and American Stock Transfer and Trust
Company, as Rights Agent. (Incorporated by reference to
Exhibit 1 to the Company's Registration Statement on Form
8-A filed on January 14, 1997.)
10.2 Form of Warrant Agreement between Registrant and American
Stock Transfer & Trust Company. (Incorporated by reference
to Exhibit 10.3 to the Registrant's Form 10-K for the year
ended March 31, 1995.)
10.3 Registrant's 1990 Employee Stock Option Plan. (Incorporated
by reference to Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1990.)
10.4 Registrant's 1990 Director Option Plan. (Incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1990.)
10.5 Form of Registration Rights Agreement of the Registrant.
(Incorporated by reference to Appendix C to the final Joint
Proxy Statement/Prospectus dated January 4, 1991 included
within Amendment No. 2 to the Registrant's Registration
Statement No. 33-38324 on Form S-4 filed on January 4,
1991.)
10.6 Assumption Agreement dated January 31, 1991. (Incorporated
by reference to Exhibit 10.52.1 to the Registrant's Current
Report on Form 8-K dated February 26, 1991.)
10.7 Trademark License Agreement dated October 1, 1994 between
the Registrant and Becton Dickinson and Company regarding
the Q-Test trademark. (Incorporated by reference to Exhibit
10.15 to the Registrant's Form 10-K for the year ended March
31, 1995.)
10.8 Stock Purchase Agreement dated January 5, 1995 between
Registrant and Eli Lilly & Company for the sale of all the
outstanding capital stock of Pacific Biotech, Inc.
(Incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K dated January 5, 1995.)
10.9 Settlement Agreement effective April 1, 1997 between the
Registrant and Becton Dickinson and Company. (Incorporated
by reference to Exhibit 10.18 to the Registrant's Form 10-K
for the year ended March 31, 1997.)
10.10 Campbell License Agreement effective April 1, 1997 between
the Registrant and Becton Dickinson and Company.
(Incorporated by reference to Exhibit 10.19 to the
Registrant's Form 10-K for the year ended March 31, 1997.)
</Table>
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<Page>
<Table>
<Caption>
EXHIBIT
NUMBER
- -------
10.11 Rosenstein License Agreement effective April 1, 1997 between
the Registrant and Becton Dickinson and Company.
(Incorporated by reference to Exhibit 10.20 to the
Registrant's Form 10-K for the year ended March 31, 1997.)
10.12 Employment agreement dated June 9, 1998 between the
Registrant and Andre de Bruin. (Incorporated by reference to
Exhibit 10.23 to the Registrant's Form 10-Q for the quarter
ended June 30, 1998.)
10.13 Stock Option Agreement dated June 9, 1998 between the
Registrant and Andre de Bruin. (Incorporated by reference to
Exhibit 10.24 to the Registrant's Form 10-Q for the quarter
ended June 30, 1998.)
10.14 Employment agreement dated December 14, 1998 between the
Registrant and Charles J. Cashion. (Incorporated by
reference to Exhibit 10.28 to the Registrants Form 10-Q for
the quarter ended December 31, 1998.)
10.15 Offer to Purchase for Cash all outstanding shares of common
stock of Metra Biosystems, Inc. by MBS Acquisition
Corporation, a wholly-owned subsidiary of Quidel Corporation
at $1.78 net per share. (Incorporated by reference to
Metra's Schedule 14D-1 dated June 9, 1999.)
10.16 Business Loan Agreement, dated as of July 12, 1999, by and
between Bank of America National Trust and Savings
Association and Quidel Corporation. (Incorporated by
reference to Exhibit 10.1 to the Registrant's Form 8-K filed
on July 26, 1999.)
10.17 Security Agreement, dated as of July 12, 1999, by and among
Bank of America National Trust and Savings Association,
Quidel Corporation, MBS Acquisition Corporation, and Pacific
Biotech, Inc. (Incorporated by reference to Exhibit 10.2 to
the Registrant's Form 8-K filed on July 26, 1999.)
10.18 Subsidiary Guaranty, dated as of July 12, 1999, by MBS
Acquisition Corporation and Pacific Biotech, Inc.
(Incorporated by reference to Exhibit 10.3 to the
Registrant's Form 8-K filed on July 26, 1999.)
10.19 Cash Collateral Agreement, dated as of July 12, 1999, by and
between Bank of America National Trust and Savings
Association and Pacific Biotech, Inc. (Incorporated by
reference to Exhibit 10.4 to the Registrant's Form 8-K filed
on July 26, 1999.)
10.20 Form of Asset Sale Agreement --
Rapignost-Registered Trademark- Urine Test Strip Business.
(Incorporated by reference to Exhibit 10.5 to the
Registrant's Form 8-K filed on December 15, 1999.)
10.21 Form of Purchase and Sale Agreement and Escrow Instructions.
(Incorporated by reference to Exhibit 10.6 to the
Registrant's Form 8-K filed on January 4, 2000.)
10.22 Form of Single Tenant Absolute Net Lease. (Incorporated by
reference to Exhibit 10.7 to the Registrant's Form 8-K filed
on January 4, 2000.)
10.23 Form of Indemnification Agreement -- Corporate Officer
and/or Director. (Incorporated by reference to Exhibit 10.2
to the Registrant's Form 10-Q for the quarter ended
June 30, 2000.)
10.24 Quidel Corporation 1998 Stock Incentive Plan. (Incorporated
by reference to Appendix B to the Registrants Definitive
Proxy Statement for the 1998 Annual Meeting of the
Stockholders filed on July 8, 1998.)
</Table>
25
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER
- -------
10.25 Quidel Corporation 2001 Equity Incentive Plan. (Incorporated
by reference to Appendix B to the Registrants Definitive
Proxy Statement for the 2001 Annual Meeting of the
Stockholders filed on April 17, 2001.)
</Table>
- ------------------------
* Indicates compensatory plan
(b) Reports on Form 8-K filed in the quarter ended March 31, 2001
Current report on Form 8-K/A filed on February 21, 2001
26
<Page>
SIGNATURE
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.
<Table>
QUIDEL CORPORATION
Date: August 14, 2001 /s/ S. Wayne Kay
----------------------------------------
S. Wayne Kay
President and Chief Executive Officer and
Secretary and authorized signatory
/s/ Michael Beck
----------------------------------------
Michael Beck
Corporate Controller
(Principal Accounting Officer)
</Table>
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