SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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)
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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 June 30, 2000 there were 16,568,424 outstanding shares of the
Registrant's common stock, par value $.01 per share.
STRATEGIC DIAGNOSTICS INC.
INDEX
Item Page
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PART I
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 2
Consolidated Statements of Operations - Three months and six months ended
June 30, 2000 and 1999 3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the six months ended
June 30, 2000 4
Consolidated Statements of Cash Flows - Six months ended June 30, 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 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II 18
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
PART I
ITEM 1. FINANCIAL STATEMENTS
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
June 30, December 31,
2000 1999
ASSETS
Current Assets:
Cash and cash equivalents $ 439 $ 2,491
Receivables, net 5,483 6,021
Inventories 7,006 5,524
Other current assets 504 281
Total current assets 13,432 14,317
Property and equipment, net 3,109 3,289
Other assets 375 431
Deferred tax asset 6,727 7,071
Intangible assets, net 4,128 4,564
Total assets $27,771 $29,672
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities :
Accounts payable $800 $1,375
Accrued expenses 574 697
Taxes payable - 55
Deferred revenue 162 162
Revolving line of credit 2,307 -
Current portion of long term debt 1,340 1,898
Total current liabilities 5,183 4,187
Long-term debt 2,558 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,
16,568,424 and 16,470,106 issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 166 164
Additional paid-in capital 26,490 26,241
Accumulated deficit (6,601) (7,170)
Cumulative translation adjustments (25) (25)
Total stockholders' equity 20,030 19,210
Total liabilities and stockholders' equity $27,771 $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 Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
NET REVENUES:
Product related $ 5,478 $ 5,218 $ 10,810 $ 8,789
Contract and other 310 257 754 605
Total net revenues 5,788 5,475 11,564 9,394
OPERATING EXPENSES:
Manufacturing 2,319 2,445 4,819 4,013
Research and development 706 571 1,435 1,136
Selling, general and administrative 2,231 2,031 4,443 3,661
Acquired research and development - - - 3,500
Total operating expenses 5,256 5,047 10,697 12,310
Operating income (loss) 532 428 867 (2,916)
Interest expense, net (87) (123) (214) (89)
Gain on sale of assets - - 283 -
Income (loss) before taxes 445 305 936 (3,005)
Income tax 180 - 367 -
Net income (loss) 265 305 569 (3,005)
Preferred stock dividends - (24) - (32)
Net income (loss)
applicable to common stockholders 265 281 569 (3,037)
Basic income (loss) per share
applicable to common stockholders $0.02 $0.02 $0.03 $(0.23)
Shares used in computing basic net income (loss)
per share applicable to common stockholders 16,561,000 13,305,000 16,511,000 13,274,000
Diluted income (loss) per share
applicable to common stockholders $ 0.02 $ 0.02 $ 0.03 $ (0.23)
Shares used in computing diluted net income (loss)
per share applicable to common stockholders 17,560,000 16,956,000 17,590,000 13,274,000
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)
Six Months Ended June 30, 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 - - 2 206 - - 208
Acquisition of Envirol Product Line - - - 43 - - 43
Net income and comprehensive income - - - - 569 - 569
Balance
June 30, 2000 $- - 166 26,490 (6,601) (25) $20,030
The accompanying notes are an integral part of these statements.
4
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months
Ended June 30,
2000 1999
Cash Flows from Operating Activities :
Net income (loss) $ 569 $(3,037)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities :
Depreciation and amortization 421 459
Deferred income tax provision 367 -
Gain on sale of intangible assets (283) -
Acquired in-process research and development - 3,500
(Increase) decrease in :
Receivables 538 (618)
Inventories (1,447) (352)
Other current assets (223) 193
Note receivable and other assets 56 360
Increase (decrease) in :
Accounts payable (575) (332)
Taxes payable (55) -
Accrued expenses (123) (485)
Deferred revenue - (4)
Net cash used in operating activities (755) (316)
Cash Flows from Investing Activities :
Purchase of property and equipment (120) (179)
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)
Cash used in acquisition of ATAB - (3,150)
Cash used in acquisition of Envirol assets (35) -
Restricted cash - (1,400)
Net cash provided by (used in) investing activities 508 (8,811)
Cash Flows from Financing Activities :
Proceeds from exercise of incentive stock options 208 116
Proceeds from issuance of debt 6,356 9,000
Repayments on financing obligations (8,369) (338)
Net cash provided by (used in) financing activities (1,805) 8,778
Net decrease in Cash and Cash Equivalents (2,052) (349)
Cash and Cash Equivalents, Beginning of Period 2,491 1,864
Cash and Cash Equivalents, End of Period $ 439 $ 1,515
Supplemental Cash Flow Disclosure :
Cash paid for interest 281 216
Non-cash investing and financing activity:
Series B Preferred Stock issued for the acquisition of
HTI Bio-Products, Inc. - 1,067
Common Stock issued for the acquisition for Envirol assets 43 -
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 antibody, agriculture, food and water quality
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 June 30, 2000, and
the statements of operations for the three months and six months ended June
30, 1999 and 2000, and cash flows for the six months ended June 30, 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 and six months
ended June 30, 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
6
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.
Three months ended Six months ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
Average common shares outstanding 16,560,523 13,304,585
Shares used in computing basic net income
(loss) per share 16,560,523 13,304,585 16,511,363 13,274,166
Series A preferred stock - 2,164,362 - -
Series B preferred stock - 556,286 - -
Stock options 936,877 692,453 1,010,691 -
Warrants 62,765 238,054 67,518 -
Shares used in computing diluted net income
(loss) per share 17,560,164 16,955,740 17,589,572 13,274,166
The impact of approximately 3.3 million shares of preferred stock, options
and warrants for the six months ended June 30, 1999, was excluded from the
diluted net loss per share calculations because it was antidilutive.
7
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 preliminary sales price was determined,
and reported a net gain of $283,000.
4. ACQUISITIONS:
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 of $35,000 (ii) the
issuance of 10,000 shares of common stock valued at $42,500 and (iii) the
payment of a continuing royalty to Envirol for ten years, at a rate of 10% of
product sales for the first $125,000, and a rate of 4% of product sales for
the remainder of the royalty term. 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 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. On May 5, 2000, the
Company refinanced substantially all of its' existing debt, and as of June
30, 2000, the Company was in compliance with all debt covenants under its'
new financing agreement. (See Note 7, Debt.)
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.
8
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. As of June 30, 2000,
approximately $5,000 has been paid under the percentage of sales agreement,
and recorded as an increase in the purchase price of HTI. 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.
The acquisition financing consisted 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 was 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. On May 5, 2000, the Company refinanced substantially all of its'
existing debt, and as of June 30, 2000, the Company was in compliance with
all debt covenants under its' new financing agreement. (See Note 7, Debt.)
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 were under
development at the date of the acquisition but had not been launched
commercially because the development was not complete. Because technological
feasibility had not been established and no alternative use determined, the
entire amount of in-process research and development was 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.
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.
9
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.
The acquisitions of HTI and ATAB are fully included for the three-month
periods ended June 30, 2000 and 1999.
Unaudited Pro Froma Combined Results of Operations
(unaudited in thousands)
Six Months Ended
June 30,
2000 1999
Revenues $11,564 $10,176
Income before non-recurring charges directly
attributable to the HTI acquisition $ 569 $ 165
Basic net income per share before non-recurring
charges directly attributable to HTI acquisition $ 0.03 $ 0.01
Diluted net income per share before non-recurring
charges directly attributable to HTI acquisition $ 0.03 $ 0.01
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):
10
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 (agriculture, food and water quality) 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 June 30, Test Kits Antibody Total
2000 Revenues $ 3,006 $2,782 $ 5,788
Segment Profit 30 415 445
Segment Assets 23,622 4,149 27,771
Depreciation and amortization 90 118 208
Capital expenditures 63 - 63
1999 Revenues $3,192 $2,283 $ 5,475
Segment Profit 220 85 305
Segment Assets 15,264 6,695 21,959
Depreciation and amortization 165 107 272
Capital expenditures 132 - 132
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For the six months ended June 30, Test Kits Antibody Total
2000 Revenues $ 6,119 $5,445 $11,564
Segment Profit 300 636 936
Segment Assets 23,622 4,149 27,771
Depreciation and amortization 185 236 421
Capital expenditures 120 - 120
1999 Revenues $ 6,138 $3,256 $ 9,394
Segment Profit 457 38 495
Segment Assets 15,264 6,695 21,959
Depreciation and amortization 327 132 459
Capital expenditures 179 - 179
6. INVENTORIES:
At June 30, 2000 and December 31, 1999, inventories consisted of the
following (in thousands):
June 30, 2000 December 31, 1999
------------- -----------------
Raw Materials $2,613 $2,258
Work in progress 1,835 804
Finished goods 2,558 2,462
------ ------
$7,006 $5,524
====== ======
7. DEBT:
On May 5, 2000, the Company entered into a financing agreement with a
commercial bank. This agreement provides for a $4 million term loan, of which
approximately $3.9 million is outstanding at June 30, 2000, repayable over
three years, and for up to a $5 million revolving line of credit, based on
eligible assets as described below. 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.)
12
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 June 30, 2000, the Company
is in compliance with all such covenants, with additional borrowing
capabilities pursuant to the eligible assets, of approximately $1.1 million
available under the revolving line of credit. The financing is secured by
substantially all of the Company's assets.
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.
13
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 June 30, 2000 vs. June 30, 1999
During the second quarter of 2000, the Company reorganized its sales and
marketing resources to pursue a market focus to provide customers a
comprehensive set of related products that will provide useful information
necessary to make informed analytical decision. These resources are now
organized in four discrete business units; Antibodies and Agriculture, Food,
and Water Quality, which comprise the test kit segment.
Total net revenues increased by $313,000 or 6% during the three month period
ended June 30, 2000 versus the three month period ended June 30, 1999.
Product related revenues increased by $260,000 or 5% over the product related
revenues recorded in the second quarter of 1999. The increase in product
related revenues was primarily attributable to increases in sales of the
Company's agricultural products which increased 28% over the second quarter
of 1999, and sales of the Company's antibody products which increased 22%
over the comparable 1999 period. These increases were partially offset by
decreases in the Company's Water Quality, Food and Other products categories
compared with the second quarter of 1999.
The activities for the second quarter were focused on preparations for
meeting the expected demand for our GMO test kits in the upcoming U.S.
harvest that begins in September 2000. The Company has completed validation
of two additional GMO test kits for corn. These new test kits, now being
released, combined with the Company's existing line of GMO test kits, enable
customers to test for every trait currently in significant commercial
production in corn. The Company has also completed the final validation of
test kits for the significant traits in sugar beets and canola. The Company's
complement of GMO test kits now encompass traits in the major agricultural
crops where genetic technology is in commercial production, corn, soybeans,
canola and sugar beets.
Based on a survey by the Company of its customers, including grain elevators
and intermediate grain processors, the Company believes that approximately
15% of the U.S. soybean harvest that begins in September will be tested. This
same survey conducted in the second quarter of 1999, indicated that few, if
any, customers would be adopting testing protocols for last year's harvest.
Many factors, including weather and the rate of adoption of testing protocols
by the Company's customers will affect the
14
timing and amount of the demand for these kits between the third and fourth
quarters.
During the second quarter, field evaluations of the Company's recently
acquired mycotoxin test kits indicated enhancements were necessary to meet
the Company's quality standards. The Company has been working with the
developer, Beacon Analytical Systems and the performance characteristics for
one of the three mycotoxin tests currently meet the necessary requirements
and this test is now commercially available. As a result of the additional
time required to implement the quality enhancements, the Company delayed the
commercial sale of the these test kits in the second quarter and expects
lower sales of these test kits in the third and fourth quarters than
previously anticipated.
Total operating expenses for the three months ended June 30, 2000 increased
by $209,000 or 4% versus the three-month period ended June 30, 1999.
Manufacturing costs decreased by $126,000 or 5% in the second quarter of 2000
versus the second quarter of 1999. This decrease was due primarily to the
efficiencies derived from the successful integration of the 1999 acquisitions
within the antibody segment.
Research and development expenses increased $135,000 or 24% in the second
quarter of 2000 versus the second quarter of 1999. This increase is due to
the addition of personnel and related expanses used for the development of a
number of test kits, primarily within the agriculture market.
Selling, general and administrative expenses increased $199,000 or 10% in the
second quarter of 2000 versus the second quarter of 1999. These increased
costs are primarily attributable to increased costs for the direct selling
and promotion of the Company's antibody and agriculture products.
Interest expense decreased $36,000 or 29% in the second quarter of 2000
versus the second quarter of 1999. This decrease is due to the repayment and
refinancing of the Company's debt (See Note 7, Debt) and the resulting lower
outstanding indebtedness.
Income before taxes increased $140,000 or 46%, in the second quarter of 2000
versus the comparable 1999 period, for the reasons as described above.
In the second quarter of 2000, the Company accrued approximately $180,000 of
income tax expense, a non-cash charge related to the utilization of the
Company's net operating tax-loss carry-forwards, which have been previously
recognized in the fourth quarter of 1999, for financial reporting purposes.
There was no income tax expense or benefit in the second quarter of 1999.
Net income decreased $40,000 or 13% during the same three month period,
primarily as a result of the income tax accrual described above.
Earnings before interest expense, income taxes, depreciation and amortization
(EBITDA) increased 6% to $740,000, or 12.8% of total net revenues, for the
three months ended June 30, 2000, all as described above.
15
Six Months Ended June 30, 2000 vs. June 30, 1999
Net revenues for the first six months of 2000 increased $2.2 million or 23%
compared with the same period in 1999. Product related revenues for the first
six months of 2000 increased $2 million or 23% compared with the first six
months of 1999. This increase is primarily attributable to increases in
revenues of the antibody segment of 67%, due to growth in sales within the
business unit, as well as the acquisition of HTI in February 1999, and the
operating assets of the OEM business of ATAB in May of 1999, and increases in
revenues of Agricultural products of 46%. The increased revenues from the
Company's agriculture 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. These increases were partially offset
by decreases in other product sales including Macra Lp(a) (see Note 3) for
which no comparable year 2000 sales have been recorded, and smaller decreases
in the Company's Water Quality and Food categories when compared with the
first six months of 1999.
Manufacturing expenses increased $806,000 in the first six months of 2000 or
20%, compared to the first six months of 1999. This increase is primarily
attributable to the increase in product related sales as described above for
the same period.
Research and development costs increased $299,000 or 26%, in the first six
months of 2000 versus the comparable period in 1999. This increase is
primarily the result of increased development costs related to the
introduction of new agricultural products.
Selling, general and administrative expenses increased $782,000 or 21%, in
the first six months of 2000 versus the first six months of 1999. This
increase is due to the expansion of selling and marketing efforts the Company
has undertaken in promoting its' antibody and agriculture products.
Interest expense increased $125,000 or 140% in the first six months of 2000
versus the comparable 1999 period. This increase is due to the debt the
Company acquired to finance the purchases of HTI in February of 1999, and the
operating assets of the OEM business of ATAB in May of 1999.
In the first six months of 2000, the Company accrued approximately $367,000
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 in the fourth quarter of 1999, for financial reporting purposes.
There was no income tax expense or benefit in the first six months of 1999.
Net income was $569,000 during the first six months of 2000 versus a net loss
of $3 million in the first six months of 1999. Net income for the six months
ended June 30, 2000, included $283,000 of other income attributable to a gain
on the sale of assets the Company recorded in connection with the sale of its
Macra Lp(a) product line in the third quarter of 1998, 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 acquired research and
development included in the first six months of 1999, net income increased to
$569,000 in the first six months of 2000 from the $495,000 recorded in the
first six months of 1999.
Earnings before interest expense, income taxes, depreciation and amortization
(EBITDA) increased 51% to $1.6 million in the first six months of 2000, or
28% of total net revenues, all as described above.
16
Liquidity and Capital Resources
The Company's working capital was $8.2 million at June 30, 2000, a decrease
of $1.9 million or 19% from December 31, 1999. Cash and cash equivalents
decreased $2.1 million to $439,000 at June 30, 2000. This decrease was
primarily attributable to the repayment of debt and a more flexible structure
of its indebtedness. Outstanding debt decreased $2 million from $8.2 million
at December 31, 1999 to $6.2 million on June 30, 2000. On May 5, 2000, the
Company entered into a financing agreement with a commercial bank which
provides for a $4 million term loan, of which approximately $3.9 million was
outstanding at June 30, 2000, repayable over three years, and up to a $5
million revolving line of credit. Proceeds from this financing retired
substantially all of the Company's previous indebtedness. The Company had
$2.3 million of its revolving line of credit in use at June 30, 2000 with
availability of another $1.1 million based upon the eligible assets of the
Company.
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 fourth
fiscal quarter of the fiscal year beginning after December 15, 1999 with an
effective date as of the beginning of such year. The adoption of this
standard has not had a material impact on the Company's financial position or
results of operations.
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 is not expected to have a material
impact on the Company's earnings or financial position.
17
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 approximately $6.2 million of
outstanding indebtedness is at a variable rate of between 1.75% to 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.
18
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 issuance of these
shares was completed in accordance with Section 4(2) of the Securities Act of
1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on April 26, 2000. At the
meeting, the following Class II Directors were elected:
Directors Shares Voted For Shares Withheld
--------- ---------------- ---------------
Richard J. Defieux 14,471,911 22,576
Robert E. Finnigan 14,472,010 22,477
Stephen O. Jaeger 14,471,987 22,500
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
List of Exhibits:
10.1 Loan Agreement between the Company and PNC Bank, Delaware dated
May 5, 2000
10.2 Line of Credit Note between the Company and PNC Bank, Delaware
dated May 5, 2000
10.3 Term Note between the Company and PNC Bank, Delaware dated
May 5, 2000
27 Financial Data Schedule
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATEGIC DIAGNOSTICS INC.
(Registrant)
Signature Title Date
- --------- ----- ----
/s/ RICHARD C. BIRKMEYER President and Chief Executive Officer August 11, 2000
- ------------------------
Richard C. Birkmeyer (Principal Executive Officer)
/s/ ARTHUR A. KOCH, JR. Vice President and Chief Operating Officer August 11, 2000
- -----------------------
Arthur A. Koch, Jr. (Principal Financial Officer)
20