SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From ___________ to _____________
Commission File Number 0-68440
STRATEGIC DIAGNOSTICS INC.
(Exact name of Registrant as specified in its charter)
----------------------------
Delaware 56-1581761
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
111 Pencader Drive
Newark, Delaware 19702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 456-6789
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report: None
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 March 31, 2000 there were 16,552,621 outstanding shares of the
Registrant's common stock, par value $.01 per share.
STRATEGIC DIAGNOSTICS INC.
INDEX
Item Page
- ---- ----
PART I
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 2
Consolidated Statements of Operations - Three months ended
March 31, 2000 and 1999 3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the three months ended
March 31, 2000 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and 1999 5
Notes to Consolidated Interim Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PART I
ITEM 1. FINANCIAL STATEMENTS
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
March 31, December 31,
2000 1999
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $2,375 $2,491
Receivables, net 5,748 6,021
Inventories 6,089 5,524
Other current assets 486 281
------- -------
Total current assets 14,698 14,317
Property and equipment, net 3,192 3,289
Other assets 422 431
Deferred tax asset 6,884 7,071
Intangible assets, net 4,125 4,564
------- -------
Total assets $29,321 $29,672
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,368 $1,375
Accrued expenses 394 697
Taxes payable 4 55
Deferred revenue 162 162
Current portion of long-term debt 1,899 1,898
------- -------
Total current liabilities 3,827 4,187
Long-term debt 5,802 6,275
Stockholders' Equity
Preferred stock, $.01 par value, 17,500,000 shares authorized,
no shares issued or outstanding - -
Series A preferred stock, $.01 par value, 2,164,362
authorized, no shares issued or outstanding - -
Series B preferred stock, $.01 par value, 556,286
authorized, no shares issued or outstanding - -
Common stock, $.01 par value, 35,000,000 authorized,
16,552,621 and 16,470,106 issued and outstanding
at March 31, 2000 and December 31, 1999, respectively 166 164
Additional paid-in capital 26,417 26,241
Accumulated deficit (6,866) (7,170)
Cumulative translation adjustments (25) (25)
------- -------
Total stockholders' equity 19,692 19,210
------- -------
Total liabilities and stockholders' equity $29,321 $29,672
======= =======
The accompanying notes are an integral part of these statements.
2
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
Three Months
Ended March 31,
---------------------
2000 1999
---- ----
NET REVENUES:
Product related $5,332 $3,571
Contract and other 444 348
---------- ----------
Total net revenues 5,776 3,919
---------- ----------
OPERATING EXPENSES:
Manufacturing 2,500 1,568
Research and development 729 565
Selling, general and administrative 2,212 1,630
Acquired research and development - 3,500
---------- ----------
Total operating expenses 5,441 7,263
---------- ----------
Operating income (loss) 335 (3,344)
Interest income (expense) net (127) 34
Gain on sale of assets 283 -
---------- ----------
Income (loss) before taxes 491 (3,310)
Income tax 187 -
---------- ----------
Net income (loss) 304 (3,310)
Preferred stock dividends - (8)
---------- ----------
Net income (loss) applicable to common
stockholders 304 (3,318)
---------- ----------
Basic income (loss) per share applicable to
common stockholders $0.02 $(0.25)
Shares used in computing basic net income (loss)
per share applicable to common stockholders 16,511,000 13,266,000
---------- ----------
Diluted income (loss) per share applicable to common
stockholders $0.02 $(0.25)
===== ======
Shares used in computing diluted net income (loss)
per share applicable to common stockholders 17,583,000 13,266,000
========== ==========
The accompanying notes are an integral part of these statements.
3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Three Months Ended March 31, 2000
----------------------------------------------------------------------------------------------
Series A Series B Additional Cumulative
Preferred Preferred Common Paid-In Accumulated Translation
Stock Stock Stock Capital Deficit Adjustments Total
----------- --------- -------- ------------ ----------- ------------- --------
Balance December 31, 1999 $ - - 164 26,241 (7,170) (25) $19,210
------ ---- --- ------ ------ --- -------
Exercises of stock options,
warrants and other - - 2 176 - - 178
Net income and comprehensive
income - - - - 304 - 304
------ ---- --- ------ ------ --- -------
Balance March 31, 2000 $ - - 166 26,417 (6,866) (25) $19,692
====== ==== === ====== ====== === =======
The accompanying notes are an integral part of these statements.
4
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months
Ended March 31,
--------------------
2000 1999
---- ----
Cash Flows from Operating Activities:
Net income (loss) $304 $(3,318)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities :
Depreciation and amortization 213 186
Deferred income tax provision 187 -
Gain on sale of intangible assets (283) -
Acquired in-process research and development - 3,500
(Increase) decrease in:
Receivables 273 (294)
Inventories (565) (92)
Other current assets (205) (16)
Note receivable and other assets 9 344
Increase (decrease) in:
Accounts payable (58) (133)
Accrued expenses (303) (397)
Deferred revenue - 4
------ -------
Net cash provided by (used in) operating activities (428) (216)
------ -------
Cash Flows from Investing Activities:
Purchase of property and equipment (57) (47)
Proceeds from sale of intangible assets 663 -
Short-term investment activity - 3,990
Cash used in acquisition of HTI, net of cash acquired - (8,072)
Restricted cash - (1,400)
------ -------
Net cash used in investing activities 606 (5,529)
------ -------
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 178 112
Proceeds from issuance of long term debt - 6,000
Repayments on financing obligations (472) (17)
------ -------
Net cash provided by (used in) financing activities (294) 6,095
------ -------
Net increase (decrease) in Cash and Cash Equivalents (116) 350
Cash and Cash Equivalents, Beginning of Period 2,491 1,864
------ -------
Cash and Cash Equivalents, End of Period $2,375 $ 2,214
====== =======
Supplemental Cash Flow Disclosure:
Cash paid for interest 170 50
Non-cash investing and financing activity:
Series B Preferred Stock issued for the acquisition of
HTI Bio-Products, Inc. - 1,067
The accompanying notes are an integral part of these statements
5
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(unaudited)
1. BACKGROUND:
Business
Strategic Diagnostics Inc. (the "Company") develops, manufactures and
markets immunoassay-based test kits for rapid and inexpensive detection
of a wide variety of substances in the agricultural, water quality and
industrial market segments.
Business Risks
The Company is subject to certain risks of entities in similar stages
of development. These risks include the Company's ability to
successfully develop, produce and market its products and its
dependence on its key collaborative partners and management personnel.
Basis of Presentation and Interim Financial Statements
The accompanying balance sheets at December 31, 1999 and March 31,
2000, and the statements of operations for the three months ended March
31, 1999 and 2000, and cash flows for the three months ended March 31,
1999 and 2000 include the consolidated financial statements of the
Company. All intercompany balances and transactions have been
eliminated in consolidation.
The accompanying unaudited consolidated interim financial statements of
the Company have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission regarding
financial reporting. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in
conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999. In the opinion of management, the
accompanying financial statements include all adjustments (all of which
are of a normal recurring nature) necessary for a fair presentation.
The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results expected for the full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may differ
from those estimates.
2. BASIC AND DILUTED INCOME PER SHARE:
Basic EPS is computed by dividing net income or loss by the
weighted-average number of common shares outstanding during the period.
Diluted EPS is similar to basic EPS except that the effect of
converting or exercising all potentially dilutive securities is also
included in the denominator. The Company's calculation of diluted EPS
includes the effect of converting or exercising stock options and
warrants into common shares.
6
Three months ended Three months ended
March 31, 2000 March 31, 1999
Average common shares outstanding 16,511,363 13,265,772
Shares used in computing basic
net income (loss) per share 16,511,363 13,265,772
Stock options 1,070,113 -
Warrants 1,040 -
Shares used in computing diluted
net income (loss) per share 17,582,516 13,265,772
The impact of approximately 2.8 million shares of preferred stock,
options and warrants for the three months ended March 31, 1999, was
excluded from the diluted net loss per share calculations because it
was antidilutive.
3. SALE OF TECHNOLOGY:
In July 1998, the Company entered into an exclusive agreement to sell
its analytical test to detect concentrations of lipoprotein (a) to a
biotechnology company. The purchaser has an extensive portfolio of
diagnostic assays and an established sales and distribution network
targeted to physicians and clinical laboratories.
At December 31, 1999, pursuant to the terms of the July 1998 agreement,
the Company and the purchaser were to determine the purchase price to
be paid to the Company for its right, title and interest in the
product. Such purchase price was based on a multiple of sales volumes
achieved during the second half of 1999.
The Company recorded proceeds of $663,000 from the sale of the asset
during the first quarter of 2000, after the sales price was determined,
and reported a net gain of $283,000.
4. ACQUISITIONS:
On February 26, 1999, the Company completed the acquisition of HTI
Bio-Products Inc. (HTI), a privately held manufacturer of custom and
proprietary antibody products and services located near San Diego,
California. The acquisition was accounted for using the purchase method
of accounting. Under the terms of the agreement to acquire HTI, the
Company paid approximately $8.4 million in cash and issued 556,286
shares of Series B preferred stock, with a fair market value of
approximately $1.1 million. Under the terms of the agreement, on June
16, 1999, such shares were converted into the Company's common stock on
a 1 to 1 basis. The Company is also obligated to pay a percentage of
net sales of certain products over the next three years, not to exceed
$3 million. To date no amounts have been paid under this provision.
Approximately $6 million of acquisition financing was provided by a
commercial bank under a term loan, with the balance coming from
existing cash on hand.
7
The acquisition financing consists of a five-year term loan (the Term
Loan) with monthly amortization of equal principal payments plus
interest. Interest on $3 million of original principal amount is at a
fixed rate of interest of 8.96% per annum, and the remaining principal
bears interest at a variable rate of 3% over the published London
Interbank Offered Rate ("LIBOR"). Also under the terms of the
financing, the Company is required to meet certain financial covenants
including debt to net worth, minimum cash flows and no dividends or
distributions may be paid on account of the Company's common stock. At
March 31, 2000, the Company is in compliance with all such covenants.
The financing is secured by substantially all of the Company's assets.
(See Note 7, Subsequent Events.)
The Company recorded expenses of $3.5 million of in-process research
and development in the quarter ended March 31, 1999. This amount
represents an allocation of the purchase price of HTI to projects that
are currently under development but have not yet been launched
commercially because the development is not complete. Because
technological feasibility had not been established and no alternative
use determined, the entire amount of in-process research and
development has been expensed. The identified research and development
consists of in process projects for the development of eleven
antibodies, as listed below:
Troponin I Fatty Acid Binding Protein Cystatin C
Human Red Blood Cell cAMP Brain Natriuretic Peptide
Serum Amyloid A cGMP Phosphorylated Amino Acids
Phosphorylated Tau APE
At this time, management believes that Troponin I and Cystatin C have
the greatest immediate potential as commercial products. Troponin I has
potential use as a diagnostic marker for the coronary care market.
Cystatin C has potential use as a diagnostic marker for kidney
malfunction. In future years, others of the in-process research and
development assets, such as Human Red Blood Cell, may prove to have
even greater potential as commercial products.
There is no guarantee that any of these markers will be commercially
viable, or that the customers who assist in the development will
succeed in the marker being diagnostically significant.
8
The Company commissioned an appraisal of these in-process research and
development projects by an independent firm familiar with such appraisals. This
independent appraisal valued the in-process research and development projects at
$3.5 million by considering the nature and history of HTI's business, a
description of the in-process research and development assets, the general
economic outlook, the outlook for the antibody production industry, the expected
future cash flows of the products and usage of a discounted cash flow analysis.
The average completion stage of the products was estimated at 93% and a 20%
discount rate was used in computing the present value of the future cash flows
of the products.
On May 11, 1999, the Company completed the acquisition of the operating
assets of the OEM business of Atlantic Antibodies of Windham, Maine, one of the
first suppliers of custom and high-volume, bulk polyclonal antibodies for use in
diagnostic test kits and research. The acquisition was accounted for using the
purchase method of accounting. This unit serves a wide range of customers
including pharmaceutical, biotechnology, diagnostic companies and major research
centers in the United States and the Pacific Rim. Under the terms of the
agreement to acquire the operating assets of the OEM business of Atlantic
Antibodies, the Company paid $3 million in cash, and has agreed to a deferred
payment of $150,000, upon the earlier of the sale of certain real estate or
November 11, 2000. A commercial bank provided $3 million of long-term
acquisition financing under the Term Loan. (See Note 7, Subsequent Events.)
The following unaudited pro forma statement of operations data gives effect
to the HTI transaction, which was accounted for using the purchase method of
accounting, as if the HTI purchase had occurred on January 1, 1998, and includes
certain adjustments, including amortization of goodwill, increased interest
expense and preferred stock dividends related to the HTI purchase. The 1999 pro
forma results exclude $3.5 million of in-process research and development
expenses incurred in connection with the HTI transaction.
Unaudited Pro Froma Combined Results of Operations
(unaudited in thousands)
Three Months Ended
March 31,
2000 1999
---- ----
Revenues $5,776 $4,702
Income before non-recurring charges directly
attributable to the HTI acquisition $304 $(164)
Basic net income per share before non-recurring
charges directly attributable to HTI acquisition $0.02 $(0.01)
Diluted net income per share before non-recurring
harges directly attributable to HTI acquisition $0.02 $(0.01)
9
The purchase price of HTI Bio-Products and the operating assets of the OEM
business of Atlantic Antibodies Inc. was allocated as follows (in
thousands):
HTI ATAB
Cash $249 Land $360
Other Assets 1,562 Fixed Assets 1,215
Fixed Assets 1,004 Inventory 1,575
------
Liabilities (863)
In-process research & development 3,500 Cash Paid $3,150
Goodwill 4,044 ======
-----
Total fair value $9,496
======
Cash Paid $8,429
Series B Preferred Stock Issued $1,067
Goodwill is being amortized over its estimated useful life of 20 years.
5. SEGMENT INFORMATION:
The Test Kit segment develops, manufactures and markets immunoassay-based
test kits for rapid, cost-effective detection of a wide variety of different
analytes in three primary market categories: agriculture, water quality and
industrial testing.
The Antibody Segment, Strategic BioSolutions (SBS), includes TSD
BioServices, HTI and the acquired operating assets of the OEM business of
Atlantic Antibodies. These companies provide fully integrated polyclonal and
monoclonal antibody development and large scale manufacturing services to
pharmaceutical and medical diagnostic companies.
For reporting purposes a "pro-rata" share of common costs is charged to the
Antibody segment. Segment profit is based on income before income taxes
excluding the $3.5 million one-time non-cash charge for in-process research and
development in connection with the acquisition of HTI.
Segment Information:
For the three months ended March 31, Test Kits Antibody Total
--------- -------- -------
2000 Revenues $3,113 $2,663 $5,776
Segment Profit 270 221 491
Segment Assets 23,866 5,455 29,321
Depreciation and amortization 89 124 213
Capital expenditures 57 - 57
1999 Revenues $2,947 $972 $3,919
Segment Profit (loss) 237 (47) 190
Segment Assets 15,284 4,053 19,337
Depreciation and amortization 161 25 186
Capital expenditures 47 - 47
10
6. INVENTORIES:
At March 31, 2000 and December 31, 1999, inventories consisted of the
following (in thousands):
March 31, 2000 December 31, 1999
-------------- -----------------
Raw Materials $ 2,358 $ 2,258
Work in progress 1,496 804
Finished goods 2,235 2,462
-------- --------
$ 6,089 $ 5,524
======== ========
7. SUBSEQUENT EVENTS:
The Company completed an asset purchase agreement with Envirol, Inc., a
private company located in Logan, Utah in April 2000. Pursuant to the terms of
the agreement, the Company acquired Envirol's TCE and PCP test kit product lines
for consideration consisting of (i) a cash payment (ii) the issuance of shares
of common stock and (iii) the payment of a continuing royalty to Envirol. TCE is
a compound used predominately in dry-cleaning solvents and is believed to be
carcinogenic. Several states have recently established environmental funds for
the cleanup and monitoring of TCE in groundwater and soil. TCE testing is also
required at most Superfund, RCRA and Department of Energy sites for soil and
groundwater contamination.
On May 5, 2000, the Company entered into a financing agreement with a
commercial bank. This agreement provides for a $4 million term loan, repayable
over three years, and for a $5 million revolving line of credit. Proceeds from
this financing retired substantially all of the Company's previous indebtedness,
incurred in connection with the acquisitions described above. (See Note 4,
Acquisitions.)
The term loan bears a variable interest rate of between 2% and 3% over the
London Interbank Offered Rate ("LIBOR"), depending upon the ratio of the
Company's funded debt to EBITDA (earnings before interest expense, income taxes,
depreciation and amortization). Payments are due monthly, with equal
amortization of principal payments plus interest.
The revolving line of credit bears a variable interest rate of between
1.75% and 2.75% over LIBOR, depending upon the ratio of the Company's funded
debt to EBITDA, and is subject to a borrowing base determined by the Company's
eligible accounts receivable.
Under the terms of the financing, the Company is required to meet certain
financial covenants including funded debt to EBITDA and EBITDA to current
maturities of debt plus interest and taxes. At May 5, 2000, the Company is in
compliance with all such covenants. The financing is secured by substantially
all of the Company's assets.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The information included in this report on Form 10-Q contains certain
forward-looking statements reflecting the current expectations of Strategic
Diagnostics Inc. and its subsidiaries (the "Company"). When used in this report,
the words "anticipate," "enable," "expect," "intend," "believe," "estimate,"
"potential," "promising," "will" and similar expressions as they relate to SDI
are intended to identify such forward-looking statements. Investors are
cautioned that all forward-looking statements involve risks and uncertainties,
which may cause actual results to differ from those anticipated at this time.
Such risks and uncertainties include, without limitation, changes in demand for
products, delays in product development, delays in market acceptance of new
products, adequate supply of raw materials, inability to obtain required
domestic and foreign government regulatory approvals, modifications to
regulatory requirements, modifications to development and sales relationships,
the ability to achieve anticipated growth, competition, seasonality, and other
factors more fully described in the Company's filings with the Securities and
Exchange Commission.
Background
The Company is the entity resulting from the combination of EnSys
Environmental Products, Inc. ("EnSys"), Ohmicron Corporation ("Ohmicron"), TSD
BioServices ("TSD"), HTI Bio-Products Inc. ("HTI"), Atlantic Antibodies Inc.
("ATAB") and Strategic Diagnostics Inc. ("SDI").
Since inception, the Company and its predecessors have in addition to
conducting internal research and development of new products, entered into
research and development agreements with multiple corporate partners that have
led to the introduction of various products to the agricultural, water quality,
environmental testing and other markets. These agreements generally provide that
sales and marketing costs associated with a new product are borne by the
corporate partner, and the Company has the manufacturing rights. In addition,
the Company currently sells directly other products that it has developed or
acquired.
Results of Operations
Three Months Ended March 31, 2000 vs. March 31, 1999
Total net revenues increased by $1.9 million or 47% during the three
month period ended March 31, 2000 versus the three month period ended March 31,
1999. Product related revenues increased by $1.8 million or 49% over the product
related revenues recorded in the first quarter of 1999. The increase in product
related revenues was primarily attributable to increases in sales of the
Company's agricultural products, particularly seed and crop test kits, which
increased 67% over the first quarter of 1999 and sales of the Company's antibody
products which increased 173% over the comparable 1999 period.
The increased demand for the Company's agricultural products was
attributable to higher rates of testing to detect the presence of genetically
modified traits in seeds and grain, particularly in Brazil and Argentina where,
for the first time on a commercial scale, GMO testing and field analysis was
utilized to identify GMO/non-GMO grain during the 2000 harvest season. These
testing protocols began to be integrated into systems to identify GMO/non-GMO
production in the largest soybean producing regions after the United States.
Such systems, commonly referred to as "Identity Preservation" or IP systems, are
evolving rapidly as participants throughout the agricultural complex devise ways
to meet increasing consumer demands for GMO/non-GMO products. The Company's
analytical test kits for seed and crops are an integral part of such IP systems.
The increase in antibody revenues was primarily attributable to the
inclusion of the revenue from the 1999 acquisitions and to cross-selling
synergies realized from the complementary lines of the integrated businesses.
12
These increases offset decreases in Macra sales and food testing as
anticipated. The Company's Macra product line was was sold in the third quarter
of 1999, and first quarter 1999 food testing sales included a large order
associated with the launch of a new product. Product sales in the agricultural
category and the antibody business are expected to continue to grow, although at
a slightly more moderate rate.
Total operating expenses for the period ended March 31, 2000 increased
by $1.7 million or 45% exclusive of the charge taken during the first quarter of
1999 for in-process research and development, over the three-month period ended
March 31, 1999. A $3.5 million charge for in-process research and development
was recorded during the 1999 quarter as part of the Company's acquisition of
HTI.
Manufacturing costs increased $932,000 or 59% in the first quarter of
2000 versus the first quarter of 1999. This increase reflects the increased
volume in product related sales during the 2000 first quarter for both the Test
Kit and Antibody business segments. The Antibody business has a somewhat higher
ratio of manufacturing expenses to product revenues, and thus a lower gross
margin than the kit business. As a result of the change of mix of product
revenues among the Test Kit and Antibody segments, the Company's product gross
margins decreased from 56% in the first quarter of 1999 to 53% in the first
quarter of 2000.
Research and development expenses increased $164,000 or 29% in the
first quarter of 2000 versus the first quarter of 1999. This increase is due to
a larger volume of product development expenses associated with new test kits
being developed primarily for the agricultural market.
Selling, general and administrative costs increased $582,000 or 36% in
the first quarter of 2000 versus the first quarter of 1999. This increase is
primarily the result of the increased expenses of the businesses acquired in
1999 and the higher level of business activity of the Company.
Interest expense was $127,000 in the first quarter of 2000 versus
interest income of $34,000 in the first quarter of 1999. This increase is due to
the financing associated with the 1999 acquisitions.
In the first quarter of 2000, the Company accrued approximately
$187,000 of income tax expense, a non-cash charge related to the utilization of
the Company's net operating tax-loss carryforwards, which have been previously
recognized for financial reporting purposes. There was no income tax expense or
benefit in the first quarter of 1999.
13
Net income was $304,000 during the first quarter of 2000 versus a net
loss of $3.3 million in the first quarter of 1999. Net income included $283,000
of other income attributable to a gain on sale of assets the Company recorded in
connection with the sale of its Macra product line in the third quarter of 1999,
and represents the amount the Company received in excess of its investment in
the product. Exclusive of the $3.5 million non-cash charge for in-process
research and development included in the first quarter of 1999, net income
increased to $304,000 in the first quarter of 2000 from the $190,000 recorded in
the first quarter of 1999.
Earnings before interest expense, income taxes, depreciation and
amortization (EBITDA) increased 126% to $831,000 in the first quarter of 2000
all as described above.
Liquidity and Capital Resources
The Company's working capital was $10.9 million at March 31, 2000, an
increase of $741,000 or 7.3% from December 31, 1999. Cash and cash equivalents
decreased $116,000 to $2.4 million at March 31, 2000. This decrease was
primarily attributable to the use of internal Company funds for the repayment of
debt on the Company's term loan obligations. On May 5, 2000, the Company entered
into a financing agreement with a commercial bank which provides for a $4
million term loan, repayable over three years, and a $5 million revolving line
of credit. Proceeds from this financing retired substantially all of the
Company's previous indebtedness.
The Company believes that it has, or has access to, sufficient
resources to meet its operating requirements for the foreseeable future. The
Company's ability to meet its long-term working capital and capital expenditure
requirements will depend on a number of factors, including the success of the
Company's current and future products, the focus and direction of the Company's
research and development programs, competitive and technological advances,
future relationships with corporate partners, government regulation, the
Company's marketing and distribution strategy and the success of the Company's
plans to make future acquisitions. Accordingly, no assurance can be given that
the Company will be able to meet the future liquidity requirements that may
arise from these inherent uncertainties.
New Accounting Pronouncements
On December 3, 1999, the staff of the Securities and Exchange
Commission, or SEC, issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," or SAB No. 101. SAB No. 101 provides the
SEC staff's views on the recognition of revenue including nonrefundable
technology access fees received by biotechnology companies in connection with
research collaborations with third parties. SAB No. 101 states that in certain
circumstances the SEC staff believes that up-front fees, even if nonrefundable,
should be deferred and recognized systematically over the term of the research
agreement. SAB No. 101, as amended, requires registrants to adopt the accounting
guidance contained therein by no later than the second fiscal quarter of the
fiscal year beginning after December 15, 1999. The adoption of this standard is
not expected to have a material impact on the Company's financial position or
results of operations.
14
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement 133"). Statement 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. Statement 133 requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure the instrument at fair value. The
accounting changes in the fair value of a derivative depend on the intended use
of the derivative and the resulting designation. This Statement, as amended, is
effective for the first fiscal quarter beginning after December 31, 2000. The
adoption of this standard will not have a material impact on the Company's
earnings or financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to changing interest rates, and is currently
not engaged in hedging activities. Interest on $3 million of outstanding
indebtedness is at a fixed rate of 8.96% per annum, and the remaining principal
bears interest at a variable rate of 3% over the published London Interbank
Offered Rate.
The Company conducts operations in Great Britain. The consolidated
financial statements of the Company are denominated in U.S. Dollars and changes
in exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company's consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.
15
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In April 2000, the Company issued 10,000 shares of common stock to
Envirol, Inc. ("Envirol") in connection with the acquisition of certain assets
of Envirol pursuant to the terms of an asset purchase agreement. The Company
acquired Envirol's TCE and PCP test kit product lines. The Company is
anticipating sales of over $200,000 for these products in the year 2000. The
issuance of these shares was completed in accordance with Section 4(2) of the
Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
The Company completed an asset purchase agreement with Envirol, Inc., a
private company located in Logan, Utah in April 2000. Pursuant to the terms of
the agreement, the Company acquired Envirol's TCE and PCP test kit product lines
for consideration consisting of (i) a cash payment (ii) the issuance of shares
of common stock and (iii) the payment of a continuing royalty to Envirol. TCE is
a compound used predominately in dry-cleaning solvents and is believed to be
carcinogenic. Several states have recently established environmental funds for
the cleanup and monitoring of TCE in groundwater and soil. TCE testing is also
required at most Superfund, RCRA and Department of Energy sites for soil and
groundwater contamination.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule (in electronic format only).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
STRATEGIC DIAGNOSTICS INC
-------------------------
(Registrant)
Signature Title Date
--------- ----- ----
/s/ RICHARD C. BIRKMEYER President and Chief Executive Officer May 12, 2000
- ------------------------ (Principal Executive Officer)
Richard C. Birkmeyer
/s/ ARTHUR A. KOCH, JR. Vice President and Chief Operating Officer May 12, 2000
- ----------------------- (Principal Financial Officer)
Arthur A. Koch, Jr.
17