SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For The Transition Period From _______ to _________
Commission File No. 0-684401
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
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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 past 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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was $48,031,274 as of March 12, 2001.
As of March 12, 2001 there were 16,706,530 shares outstanding of the
Registrant's common stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the Company's 2001 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Report.
PART I.........................................................................................................1
ITEM 1. BUSINESS.......................................................................................1
Overview..................................................................................................1
Immunoassay Technology....................................................................................1
Markets and Products......................................................................................3
Major Customers...........................................................................................8
Sales and Marketing Strategy..............................................................................8
Regulatory Approvals......................................................................................9
Manufacturing............................................................................................10
Research and Development.................................................................................11
Proprietary Technology and Patents.......................................................................12
Competition..............................................................................................13
Employees................................................................................................14
ITEM 2. PROPERTIES.....................................................................................14
ITEM 3. LEGAL PROCEEDINGS..............................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................14
EXECUTIVE OFFICERS OF THE REGISTRANT...........................................................15
PART II.......................................................................................................16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...........................................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION..........18
Forward-Looking Statements...............................................................................18
Overview.................................................................................................18
Results of Operations....................................................................................19
Year ended December 31, 2000 versus year ended December 31, 1999.........................................19
Year ended December 31, 1999 versus year ended December 31, 1998.........................................20
Liquidity and Capital Resources..........................................................................21
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........23
PART III......................................................................................................23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.................................................23
ITEM 11. EXECUTIVE COMPENSATION.........................................................................23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................24
PART IV.......................................................................................................24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................24
PART I
ITEM 1. BUSINESS
Overview
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 food safety and water quality markets. Through
its Strategic BioSolutions division, the Company also provides antibody and
immunoreagent research and development production services.
Since its 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 food safety, water quality
and other markets. The Company expects that internal research and development
projects, primarily in the food safety area, will continue to represent a larger
percentage of its total research and development expenditures. The Company
believes that its competitiveness has been enhanced through the combinations of
talents, technology and resources resulting from the relationships and the
acquisitions it concluded during the past five years. These relationships and
acquisitions have enabled the Company to achieve meaningful economies of scale
for the unique products it offers through the utilization of its consolidated
facilities in Newark, Delaware, for the manufacture of test kits, antibodies and
biochemicals, its facility located outside of San Diego, California for the
manufacture of antibodies and biochemicals and its facility located in Windham,
Maine for the manufacture of custom, high-volume bulk polyclonal antibodies.
These economies of scale, in turn, enable the Company to offer its customers the
most appropriate test for each specific customer application.
Another key strategy that the Company used to develop its business was
the formation in 1991 of TSD BioServices, a joint venture between the Company
and a subsidiary of Taconic Farms of Germantown, NY. Taconic Farms is a
privately held company whose business is the production and sale of rodents,
primarily to the research community. In 1996, the joint venture was dissolved
and the Company's interests were distributed into a wholly owned subsidiary, TSD
BioServices, Inc. ("TSD"). With TSD and the 1999 acquisitions of HTI
BioProducts, Inc. and the operating assets of the OEM business of Atlantic
Antibodies, the Company formed a new operating division, Strategic BioSolutions,
which has now become one of the largest producers of antibodies in the United
States. The mission of Strategic BioSolutions is to supply monoclonal and
polyclonal antibodies, immunochemical reagents and related services to medical
diagnostic and pharmaceutical companies, as well as research institutions.
The Company is a recognized leader in the field of immunoassay
research, development and manufacturing and develops products in markets where
the attributes of immunoassay technology (i.e. speed, ease-of-use,
cost-effectiveness, quantitation, and flexibility), meet specific customer
needs. In addition to products serving the two primary markets, the Company
develops, manufactures and sells immunoassay test kits for medical applications.
The Company is the entity resulting from the combination of EnSys
Environmental Products, Inc. ("EnSys"), Ohmicron Corporation ("Ohmicron"), HTI
BioProducts Inc. ("HTI"), TSD BioServices Inc. ("TSD") and Strategic Diagnostics
Inc. ("SDI"). On August 30, 1996, Ohmicron was merged with and into SDI. On
December 30, 1996, SDI was merged with and into EnSys. The surviving entity was
then renamed Strategic Diagnostics Inc. On December 31, 1999, HTI and TSD were
merged with and into SDI.
Immunoassay Technology
An immunoassay is an analytical test that uses antibodies to detect the
presence of a target compound in a complex sample matrix with high degrees of
precision and accuracy.
The technology was first developed more than 25 years ago and has
replaced many laboratory diagnostic tests in the medical industry. The Company
has applied immunoassay technology to a variety of industrial and agricultural
applications. As with medical applications, immunoassay technology has
demonstrated its value in these markets by virtue of its ability to yield
specific, accurate, cost-effective and timely data in a manner previously
unavailable.
1
The major attributes of immunoassay technology can be summarized as
follows:
Sensitivity: Immunoassays can measure extremely low concentrations of
compounds (routinely as low as parts per billion; i.e.,
one millionth of one gram in a liter of liquid).
Specificity: Immunoassays can measure one specific compound out of a
chemical "soup," reducing the need for sample
preparation.
Speed: Total time to obtain a test result ranges from 1 minute
to several hours as compared to several days to several
weeks with many competing laboratory testing methods.
Cost: Price-per-test for immunoassays range from $1 to $50;
price-per-test for similar laboratory testing can range
from $5 to $1,000.
Accuracy: Immunoassays are typically as or more accurate than
their laboratory counterparts.
Flexibility: Immunoassays can be developed in a wide variety of test
formats, including multiple sample laboratory-based
tests, disposable, single-use units, and large automated
instruments. They can be designed for use by
non-technical persons on-site under a variety of field
conditions for testing of diverse sample types.
Immunoassay technology relies on the specific binding characteristics
of antibodies. Antibodies are proteins made by cells within the bodies of
animals as part of the immune system response to invasion by foreign substances
such as bacteria and viruses. An antibody physically binds only to the substance
that elicited its production. This characteristic of specific binding makes
antibodies useful tools for detecting substances in complex sample matrices
(e.g., blood, plant tissue, soil and water). Methods exist for isolating and
purifying antibodies from animals, and labeling them in such a way that they can
be used as components, or reagents, within a test to detect the presence of the
substance of interest. Immunoassay technology has advanced to the point that
antibodies can be made to a wide variety of substances including microorganisms,
drugs, hormones, proteins, polymers, environmental pollutants and other
chemicals.
Once an antibody reagent that has the desired performance
characteristics (sensitivity and specificity) has been identified, it can be
incorporated into a test format that is appropriate for the customer's
application. In the human clinical chemistry market, antibodies are employed as
reagents on large, automated instruments that can analyze hundreds of samples
per hour. In contrast, antibodies can also be packaged into single use,
disposable formats such as home pregnancy tests. Immunoassays can be designed to
be highly quantitative or yield a simple yes/no result. The type of test format
chosen for any given application depends on the needs of the customer and may
include factors such as ease-of-use, cost-per-test, number of samples to be
tested, the location the test will be performed and experience of the user.
The Company has expertise and proprietary technology relating to the
development and manufacture of five primary immunoassay formats: latex
filtration, magnetic particle, one-step strip tests, coated-tube and microtiter
plate. Latex filtration assays offer ease-of-use, field portability and
semi-quantitative results and are ideally suited for on-site, field screening
applications where limited numbers of samples are to be analyzed.
Magnetic particle assays have a greater number of steps and require
more technical expertise to execute than latex filtration assays, but are more
suited to the processing of larger number of samples at a single time, can be
highly quantitative, and are relatively inexpensive on a cost-per-test basis.
These characteristics make magnetic particle immunoassays effective measurement
tools in both laboratory and certain field applications, especially where highly
precise results are required.
Lateral flow immunoassay strips, often referred to as 'one-step' strip
tests, require only that the user apply a prepared sample to the test strip to
obtain the test result much like pH or Litmus paper tests. The low cost and
simplicity of these tests make them ideally suited for a wide range of
applications in many different markets. The current state-of-the-art of lateral
flow immunoassays is such that the results obtained using these tests are
qualitative, not quantitative, which imposes some limits on the applicability of
the format.
Coated-tube immunoassays are well suited for analyzing relatively large
numbers of samples in the field, yield a semi-quantitative result and are
intermediate in their ease-of-use and cost-per-test.
2
Microtiter plate assays are well established in the medical diagnostic
industry and offer many of the advantages of magnetic particle assays, including
quantitative results and the capacity to analyze large numbers of samples at a
relatively low cost-per-test. Special laboratory equipment, relatively high
levels of technical training, and a time-to-result measured in hours limits this
test format to laboratory applications.
All measurement technologies, including immunoassays, have strengths
and limitations. The Company's expertise with multiple immunoassay formats,
coupled with a thorough understanding of the needs of a market and specific
customer applications, has allowed the Company to develop a diverse array of
immunoassay products designed to meet the analytical needs of multiple, sizable
markets.
Markets and Products
The Company sells products in the food safety, water quality and
antibody market categories through its direct sales force, through a network of
over 40 distributors in Canada, Mexico, Latin America, Europe and Asia, and
through its corporate partners. This section describes the Company's current
markets and products as well as those in development.
Food Safety
The food safety marketing unit includes tests to detect targeted traits
in genetically engineered plants, two plant fungi, Rice Blast and Botrytis (crop
testing), and tests to detect Genetically Modified Organisms (GMOs) in food
ingredients and food fractions (food testing).
Crop Testing
Genetically Engineered Crops. Agricultural biotechnology companies are
developing varieties of commercially important crops like corn, cotton and
soybeans that have new additional genes which are designed to confer a
commercial advantage to the plant, such as insect or pesticide resistance or
enhanced growth or nutritional characteristics. Industry experts predict that
approximately one half of the acreage used to grow soybeans in the U.S. and
roughly one quarter of the acreage used to grow corn in the U.S. will be planted
with genetically engineered seed in the year 2001, in comparison to only limited
acreage in 1996.
A large agricultural biotechnology company that has developed
proprietary varieties of herbicide resistant soybeans and insect-resistant corn
and cotton among others, using genetic engineering technology, commissioned the
Company's first test in this market. Not all the seed produced by a genetically
engineered plant contains the gene for the desired trait and therefore not all
the plants arising from a batch of seed will express the desired characteristic.
The Company has developed a simple `one-step' strip test that is used at the
point of testing to determine if an individual plant contains the new genetic
trait. The Company has also developed similar one-step products for other crops.
Commercial seed producers use these products to ensure the quality of their
products. This type of test can also be used for enforcement purposes in crops
to prevent unlicensed application of the genetic technology.
Sales of this strip test and similar products to detect the presence of
genetically engineered traits in plants have been increasing rapidly since their
introduction in the third quarter of 1995 and the Company believes sales will
continue to grow. The number of acres of crops with genetically enhanced traits
under cultivation has grown rapidly since 1998 and published reports indicate
that the farmers' experience with these products was positive. The agricultural
biotechnology companies are currently developing additional traits and acreage
in 2001 is expected to grow further. Based on these results and with this
increased volume, the Company expects sales of these products to grow. The
Company continues to develop additional tests to detect traits in genetically
modified plants.
During 2000, a genetic trait known as Cry9C or StarLink(TM) that was
approved by the U.S. Environmental Protection Agency only for non-food uses was
discovered in food products. The impact of this discovery resulted in the need
for growers, handlers, processors, shippers and exporters to test corn for the
presence of StarLink(TM). SDI's Bt9 Trait Check test was the first GMO test
validated by the U.S. Department of Agriculture. The Company worked closely with
key grain processors worldwide to provide significant volumes of tests to meet
the high market and regulatory demand and more than 1,000,000 Bt9 strip tests
were sold in 2000. The StarLink(TM) issue brought to light the need for
definitive genetic analysis and that paper certifications as to genetic origin
and concentration alone are inadequate. The Company believes it is the
recognized leader in the field.
3
Also during 2000, several regulatory actions promoted testing in the
food safety area. The U.S. Department of Agriculture's Grain Inspection, Packers
and Stockyards Administration (GIPSA) recommended that all corn sold for the
2001 planting season and parent lines to be used in 2001 seed production be
tested for the presence of the StarLink(TM) protein. This recommendation has
expanded the market opportunities for SDI's Bt9 testing products. Additionally,
the FDA has issued a directive recommending dry millers to test all yellow corn
passing through their complexes for the presence of StarLink(TM).
Another noteworthy regulatory action was the creation of a new U.S.
national standard for organic fruits, vegetables and meats to help guide
consumers seeking alternatives to commercially produced food. Under this
standard, foods labeled "organic" cannot include genetically modified
ingredients. SDI is positioned to work closely with the organic food industry to
offer testing mechanisms to screen, confirm and quantify various GMO traits for
labeling and identity preservation programs.
Recent world events have also helped to change the food safety
marketplace. In Europe, re-emerging concerns over bovine spongiform
encephalopathy (BSE, or mad cow disease) have prompted broader uses for GMO
testing in feed supplies. BSE is a transmittable fatal brain disease in cattle.
The disease has been attributed to the use of animal bone meal and other animal
scrap in feed supplies. The elimination of bone meal used in feed has increased
the need for other sources of protein, such as soybean toasted meal. SDI's new
GMO Roundup Ready(TM) meal test kit can detect GMO in toasted meal. In addition,
this same test is also validated for use with other primary food ingredients,
including protein isolates, concentrates, soy milk, tofu and dietary fiber.
European feed companies and their suppliers now have the ability to verify their
feeds for the absence or presence of GMOs.
SDI continues to partner with the major agricultural biotechnology
firms to develop new products and promote rapid GMO testing methods throughout
the food distribution channel. With our new products and market opportunities we
believe SDI is well positioned as the leader in the rapidly growing market for
food ingredients testing for today and the future.
Food Testing
In 1998, a significant market opportunity for immunodiagnostic analysis
was created. This opportunity arose from regulatory response to public demands
to address a consumer's right-to-know whether a food product contains
concentrations of genetically modified organisms (GMOs). In May 1998, the
European Commission enacted food regulations governing the labeling of
foodstuffs that are derived from genetically modified crops. The legislation
affects food processors in all fifteen member states within the European Union.
Under the European Commission's EC 258/97 and EC 1139/98, beginning March 1,
1999, food processors were required to label food ingredients for the presence
of GMOs. Similar regulations have been adopted in many parts of the world
including Japan. The European Union and Japan comprise the largest customers for
U.S. soybean and corn exports.
During the second half of 1998, the Company began entering into
licenses to use proprietary genetic traits with major developers of genetically
engineered plants, and began developing an immunodiagnostic test to detect the
presence of GMOs at specified concentrations. This research and development was
completed and the Company participated in a Joint Research Centre - Institute
for Health and Consumer Protection Food Products Unit sponsored validation study
of its first test kit. Validation studies are common in the food testing
industry and are generally referred to as "Ring Studies." This Ring Study
involved 38 qualified laboratories throughout Europe and was completed in
December 1998. The JRC has informed the Company that its products have been
validated to detect the presence of the tested traits at the thresholds
established in the Ring Study protocol.
Also during the second half of 1998, the Company began to introduce its
technology and product plans to food processors. The reaction from the
marketplace was and continues to be positive. Prospective customers have shown
interest in the ability of the Company's technology and products to detect the
presence of GMOs above a specified threshold level, its fast time-to-result and
cost advantages.
This estimate is based on the volume of food fractions used by the more
than 22,000 European food processors. The Company believes this newly created
market opportunity could expand even further. Legislation similar to the
European legislation was passed in Australia and New Zealand in December 1998.
4
Mycotoxins
Mycotoxins are toxins formed in grains such as corn, barley, and wheat
by naturally occurring fungi. Many mycotoxins have been proven or associated
with health effects in both animals and humans. The FDA, in concert with the
USDA, has developed minimum acceptable levels for the mycotoxins aflatoxin and
vomitoxin. Testing is mandatory on all U.S. exported grains. Some mycotoxins do
not break down upon processing, and therefore testing continues at the food
processing level as well. The existing market for mycotoxin testing is greater
than $25 million annually. Though it is a developed market in which we will
compete with other established test providers, we believe we have an excellent
customer network developed with our other products in the food safety market,
including GMOs, and an enhanced product with significant competitive advantages,
including enhanced ease-of-use and rapid screening applications, and sales could
develop rapidly.
Water Quality
The water quality marketing unit provides analytical tests for
drinking water, industrial process water and waste water. Water quality testing
is driven by regulatory initiatives such as the Safe Drinking Water Act and the
Clean Water Act, and by economic factors including the cost of clean water and
productivity losses attributable to inadequate industrial water treatment.
Because of the increasing scarcity of potable water and the critical role
treated water is playing in the manufacturing process, the market for analytical
testing continues to grow. The Company offers a wide range of on-site analytical
testing products for the water quality market. These include kits to measure
concentrations of 40 different pesticides in water, tests for the presence of
pathogenic protozoa Cryptosporidium and Giardia, and test kits that measure
concentrations of water treatment polymers. The concentration of water treatment
polymers is critical to the success of industrial cooling tower processes.
Maintenance of the appropriate polymer concentration allows water systems to
operate efficiently and at a reduced cost. The unique patent-protected test kits
developed by the Company are the only practical and cost-effective way to
accurately detect these polymers at the low concentrations used.
Also within the water quality marketing unit, our industrial chemical
product line was enhanced by the addition of a rapid, on-site test method for
the detection of organic halides, including trichloroethylene, or TCE in water
and soil. TCE is the leading groundwater contaminant in the United States.
Though our key user segments continue to be the Department of Defense, federal
and state regulatory agencies and industrial processing facilities, we are
seeing new opportunities at dry cleaning facilities, Brownfields programs and
bio-remediation processes.
Water Treatment Polymers. The water treatment market encompasses both
industrial and municipal water treatment systems. Water treatment chemicals,
typically polymers, are critical to preparing finished drinking water in
municipal settings and to controlling water quality in industrial settings.
Competition between water treatment chemical manufacturers is intense and new
chemicals have evolved to the point that some of the more effective chemicals
are quite expensive. Cost-effective use of these chemicals requires careful
control of polymer concentrations throughout the system in which they are being
employed. Many of these polymers are toxic and have been implicated in fish
kills when industrial effluents have been discharged to natural bodies of water.
As a result, there is increased regulatory pressure to measure the amount of
chemical being discharged into surface waters. Polymer detection is quite
difficult and currently there is no other detection method capable of measuring
these substances at the levels at which they are used or discharged in
effluents.
The Company, working in collaboration with its corporate partners, has
successfully developed highly sensitive and accurate immunoassays for the
detection of a number of water treatment polymers. These immunoassays have been
demonstrated to be a reliable and cost-effective way to measure water treatment
polymers in samples from municipal water supplies, boilers, cooling towers, and
other processes and raw water sources. Some specific applications are: (i)
measuring concentrations of chemicals to allow more efficacious use of costly
compounds, (ii) detecting the presence of particular compounds in effluent
discharge in order to gauge regulatory compliance, and (iii) monitoring
processes to prevent fouling of highly expensive systems (such as reverse
osmosis) by excess polymer.
Pesticides. The entrance of pesticides into the water supply as a
result of agricultural and residential runoff continues to be a problem
requiring analytical testing. In areas of substantial agricultural activity,
5
drinking water is tested for several pesticides in order to ensure compliance
with federal regulations. Imported grains, fruits and vegetables are tested for
the presence of pesticide residues prior to use in the U.S. In addition,
pesticide residues in crops call for extensive testing at the time of pesticide
registration or re-registration under the Federal Insecticide, Fungicide, and
Rodenticide Act (FIFRA). In spite of their banned status, pesticides such as DDT
and chlordane still persist in soil at sites where they were stored or
distributed. The clean-up of these sites requires the use of specific analytical
methods of pesticide detection.
Cryptosporidium and Giardia. The Company, under a license agreement,
manufactures and sells Hydrofluor(TM), an EPA-accepted immunoassay-based method
for detecting the pathogenic protozoa Cryptosporidium and Giardia in water.
According to the EPA, Cryptosporidium and Giardia cause more outbreaks of
disease than any other water-borne pathogens. The Company's Hydrofluor-Combo(TM)
test kit has been designated as the American Society for Testing and Materials
(ASTM) standard method for detection of these pathogenic protozoa and also has
been designated as the method for use in complying with the EPA's Information
Collection Rule to establish the extent of contamination in the nation's
drinking water.
Total Trihalomethanes. Trihalomethanes are regulated, toxic by-products
that result from chlorine disinfection of drinking water. The Company's test is
a non-immunoassay-based test for the detection of `total trihalomethanes'
(TTHMs). The test is fast, easy, inexpensive and detects TTHMs at levels much
lower than the new proposed safe drinking water guideline. The Company's TTHM
kit has received US EPA Method Approval (Method 8530).
RaPID Assay(R) and EnviroGard(TM). The RaPID Assay(R) and
EnviroGard(TM) pesticide test kits are being used extensively by water quality
researchers, resource managers, regulators and drinking water system operators
for surface and groundwater monitoring, drinking water source and supply
management, and chemical fate and transport studies. Users of the Company's
water quality pesticide products include federal agencies, such as the U.S.
Geological Survey and Department of Agriculture, state environmental and health
departments, drinking water utilities, and environmental engineering companies.
Pollutants. Analysis of soil, water and waste samples to determine the
presence of hazardous chemicals has become increasingly important in connection
with environmental remediation and environmental monitoring activities. These
activities are largely the result of environmental legislation such as RCRA,
CERCLA, TSCA, the Safe Drinking Water Act (SDWA) and Federal Water Pollution
Control Act (the "Clean Water Act"). The Company believes that approximately
1,200 commercial environmental testing laboratories, as well as "in-house"
laboratories at industrial and disposal facilities provide environmental
testing.
Environmental remediation activities require a substantial amount of
testing in connection with the clean-up of contaminated sites. After initial
characterization of toxic chemicals at a site, substantial testing typically is
required to complete an assessment of the site to determine the extent and
location of contamination and the appropriate remediation plan. Upon the
commencement of the remediation project, additional testing is necessary to
determine the effectiveness of the remediation measures. In addition, ongoing
testing to monitor soil and groundwater is often required after completion of
the remediation activities. The contaminants of primary concern for remediation
activities include petroleum fuel products, polyaromatic hydrocarbons (PAHs),
polychlorinated biphenyls (PCBs), benzene, certain metals and chlorinated
solvents.
Environmental monitoring activities under SDWA and National Pollution
Discharge Elimination System (NPDES) legislation require periodic testing for
various hazardous chemicals. The nation's 58,000 drinking water systems test for
contaminants such as metals, benzene, other volatile organic compounds and
microbiological contamination. Approximately 6,400 major industrial and
municipal wastewater treatment facilities monitor and test wastewater for
contaminants such as chlorinated solvents, metals and volatile organic
compounds. Hazardous waste handling and disposal companies carry out large
volumes of analytical work, including pre-acceptance testing to determine the
suitability of waste streams for disposal and routine testing of incoming
shipments. In addition, the ongoing management of chemicals in the petrochemical
and pesticide industries also results in the need to test samples at many points
in the production, use and disposal cycle. Electrical utilities have ongoing
analytical needs pertaining to disposal of PCB-containing materials.
Proprietary Chemicals. The proprietary chemical market category
includes tests, commissioned by chemical manufacturers, that specifically
measure the particular compound of interest. In the chemical market category the
benefits of immunoassay testing have led to three key applications: (i)
regulatory registration, in which immunoassay data is generated to support the
registration of a product with the EPA; (ii) detection, to determine whether a
target compound is present in a complex matrix; and (iii) monitoring, in which
tests are performed to determine chemical concentrations for control purposes.
6
The application of immunoassay technology in conjunction with
regulatory registration is significant because of the requirement that
large-scale chemical manufacturers register their chemicals under FIFRA with the
EPA. As part of this registration process, manufacturers must provide extensive
data for both registration and post-registration analyses regarding toxicity and
environmental impact. For many new compounds, certain aspects of this analysis
require sensitivity which instrument-based testing cannot achieve. For others,
no classical analytical methods are available to measure the compound. In either
case, EPA requires the manufacturer to supply a method to monitor the compound
in the environment. The Company is currently commercializing four tests in this
area for two chemical companies. Agreements are in place for the development of
seven additional tests.
Industrial Markers. The Company is collaborating with a corporate
partner in this market category, which consists of test kits that detect marked
products. The product marking technology is based on the incorporation of trace
levels of inert chemicals or markers into solid or liquid products or on the
surface of the products. The use of these markers, in conjunction with
immunoassay techniques for marker detection, allows for the covert marking and
testing of nearly any product. This technology can be used to prevent revenue
loss due to counterfeiting and product diversion, limit a manufacturer's
exposure to unwarranted product liability, and enhance process efficiency and
product quality assurance.
Pollutant Test Products. The Company sells four different format
immunoassays into the environmental market: (i) D TECH(R) latex filtration
tests, (ii) EnSys RISC(TM) and EnviroGard(TM) coated-tube tests, (iii) RaPID
Assay(R) magnetic particle tests and (iv) EnviroGard(TM) microtiter plate tests.
Each of the four different test formats has performance characteristics that
make them more or less suited for a particular customer application. The Company
positions the sale of all of its products so as to provide the customer with the
best product for its specific application.
The D TECH(R) and EnSys RISC(TM) tests do not require refrigeration
which make them ideally suited for on-site, field applications. All of the
environmental test kits include components for the extraction of target analytes
from the sample and subsequent analysis. Sample preparation time is typically
less than five minutes per sample. All of the Company's environmental test kits
are capable of analyzing at least ten samples per hour and some allow analysis
of as many as forty samples per hour.
D TECH(R). The D TECH(R) tests are a latex filtration immunoassay
format and provide for rapid, easy-to-use, on-site, field screening analysis of
soil and water samples containing EPA Priority Pollutants such as PCBs, PAHs,
TNT, BTEX (benzene, toluene, ethylbenzene and xylene) and others. D TECH is
simple to use, requires little or no user training, yields a semi-quantitative
result and is ideally suited for true field applications where limited numbers
of samples are analyzed at one time.
RaPID Assay(R). The RaPID Assay(R) magnetic particle immunoassay
product line currently contains kits and accessories for detection of 21
different pesticides (herbicides, insecticides and fungicides), and six toxic
organic compounds. The magnetic particle test format is ideally suited for
applications requiring highly precise determination of contaminant
concentrations. Like the Company's other immunoassay tests, RaPID Assay(R) is
fast and easy to perform, but not as field-portable. RaPID Assay(R) pesticide
test kits are used for quantitation of pesticides in water, soil and food. RaPID
Assay(R) test kits for toxic organic chemicals are used for measuring
contaminant concentrations in both water and soil.
EnviroGard(TM) and EnSys RISC(TM). Like D TECH(R) and RaPID Assay(R),
these coated-tube and microtiter plate format testing products detect some of
the most commonly encountered toxic chemicals found in soil, water and on
surfaces at contaminated sites, including PCBs, fuel products, PCP, TNT,
benzene, PAHs, crude oil, and pesticides. Additionally, the EnviroGard(TM)
products detect pesticides in drinking water and foodstuffs. The coated-tube
format tests are used extensively to analyze relatively large numbers of samples
in the field and yield a semi-quantitative result. The EnviroGard(TM) microtiter
plate kits are designed for use in the laboratory and are ideally suited for
analysis of large numbers of samples where determination of exact concentrations
of contaminants are required.
Antibody Business
The Company develops, manufactures and markets a comprehensive set of
monoclonal and polyclonal antibody products and services through its Strategic
BioSolutions division. Specific expertise includes hybridoma development and
cell culture expertise, large-scale ascites and antibody production, large-scale
purification, characterization and a complete array of related services.
7
This division serves a wide range of customers including
pharmaceutical, biotechnology and diagnostic companies and major research
centers in the United States, the European Union and the Pacific Rim. During
1999, the Company significantly enhanced its presence in this market through the
acquisition of HTI and the operating assets of the OEM business of Atlantic
Antibodies as more fully described in the notes to the consolidated financial
statements. The Company believes this division is one of the largest independent
custom antibody operations in the United States. Throughout the Company's
history, many significant product development and commercial supply agreements
have followed from initial projects to develop and supply antibodies. The
comprehensive customer base of this division has the potential to provide an
even greater number of these meaningful opportunities.
During the past year Strategic BioSolutions began to offer immunoassay
contract manufacturing services, further expanding the range of capabilities for
our corporate partners. We have experienced an increase in sales to our
biotechnology customers, which we believe can be attributed to continuing work
on the human genome project. The study of gene functionality is often examined
at the protein level, and antibodies, which naturally bind to proteins, are
critical tools in building on this new knowledge. Going forward, we believe that
as work continues on this project, it will provide a unique opportunity for the
Company to build on our existing market share within this segment.
The Company received AAALAC (Association for the Assessment and
Accreditation of Laboratory Animal Care) accreditation at its Maine polyclonal
antibody facility. The Maine site now joins the Delaware facility, which has
maintained AAALAC accreditation since 1993, in offering products and services
which meet the highest quality standards in the industry.
The division employs approximately 97 people and supplies critical
reagents used in the Company's test kits in addition to the development and
marketing activities described above.
For additional information concerning the Antibody business, see Note 9
to the consolidated financial statements.
Other Products
RapidChek(R) SRB. Sulfate Reducing Bacteria ("SRBs") are
environmentally significant because they generate hydrogen sulfide gas and cause
corrosion of stainless steel pumps, pipelines, and drilling rigs and result in
the souring of oil reserves. SRBs can be controlled by the addition of treatment
chemicals. Historically, the majority of testing in this market was performed
using a culture method called the American Petroleum Institute Recommended
Procedure No. 38. This method requires that samples be incubated from 14-28 days
before a result is obtained. RapidChek(R) SRB test is a simple-to-use, field
portable test that provides the user with accurate results in 20 minutes and
allows for a rapid, more cost-effective application of treatment chemicals.
Major Customers
In 2000 and 1999, no single customer accounted for 10% or more of the
Company's revenues. In 1998, Delta and Pine Land Company accounted for 10% of
the Company's revenues.
Sales and Marketing Strategy
As a result of the consolidation of the SDI, EnSys, Ohmicron,
EnviroGard(TM) and HTI businesses, the Company has formed an experienced sales
and marketing organization of 30 individuals. In addition to its direct sales
force, the Company sells product through an extensive network of distributors
and through its corporate partners.
The Company uses a number of strategies for the sale of its products
worldwide. In the U.S., the major route of sale of its water quality testing
products is through a national field sales force in defined sales territories.
The field sales force is augmented by an in-house sales force, which in addition
to selling product directly to customers, provide marketing and logistics
support to the field sales personnel and interface between customers and
technical support.
8
In 1993 the Company opened a European headquarters and sales operation
near London, England, and the sale of the EnSys RISC(TM), RaPID Assay(R) and
EnviroGard(TM) products in Europe are principally directed through that office.
Sales and distribution of the D TECH product line outside of the U.S. are made
exclusively by E. Merck KGaA, Darmstadt, Germany.
Sales of the Company's products for detecting water treatment polymers,
proprietary chemicals, industrial markers, genetically engineered crops and Rice
Blast are through the Company's corporate partners in selected markets and
through the Company's direct organization in others. The RapidChek(R) SRB test
kit is sold directly by the Company and through five international distributors.
Regulatory Approvals
The environmental legislation and regulations that the Company believes
are most applicable to its current business are RCRA, CERCLA, TOSCA, FIFRA and
the Pure Food and Drug Act. As the Company expands its product line to meet the
environmental monitoring needs of municipalities and industrial facilities, the
SDWA, the Clean Water Act and the NPDES permitting program under the Clean Water
Act also will be significant to the Company's business. These programs regulate
the management, disposal and clean-up of hazardous substances and protect the
nation's ground and surface water and drinking water supplies. In addition,
regulatory responsibilities in a number of areas have been delegated to state
agencies and state and local laws and regulations impose additional restrictions
and requirements. While environmental regulations overseas vary, many countries,
particularly in Europe, have counterparts to the U.S. legislation.
The Company believes that regulatory acceptance, though not required
for the use of its products in most cases, is a significant factor in gaining
market acceptance. There are two main areas in which the Company is seeking
regulatory acceptance for its products: hazardous waste testing methods by the
federal and state environmental protection agencies and water testing methods by
the federal and state environmental protection agencies. The federal
Environmental Protection Agency and some state agencies have evaluated certain
of the Company's analytical methods and accepted their use for certain
remediation and monitoring activities. Further acceptance by these agencies
would stimulate demand for the Company's products. The Company expects that as
its products are subjected to wider use under various conditions and subjected
to traditional validation techniques, such acceptance will generally be granted.
Such acceptance would serve to strengthen already compelling customer
motivations such as the ease-of-use and specificity characteristics of the
Company's products and is not a prerequisite to selling the products in the
markets the Company serves.
Hazardous Waste Testing Methods. EPA SW-846 is the compendium of
analytical and test methods published by the EPA's Office of Solid Waste (OSW).
A number of provisions of the EPA's hazardous waste regulations under RCRA
mandate the use of SW-846 methods. In other contexts, SW-846 is a guidance
document setting forth acceptable, although not required methods to be
implemented by the user in response to sampling and analysis requirements. Some
states also require the use of SW-846 methods under their hazardous waste
programs. SW-846 methods are technically only applicable to regulatory programs
under RCRA. However, other federal, state and local environmental programs,
including CERCLA and TOSCA, often refer to and rely on SW-846 methods for
purposes of remediation and monitoring.
The process for a method to be incorporated into EPA SW-846 generally
takes approximately 24 to 36 months. The OSW evaluates the applicant's test
results and obtains additional information or conducts its own tests if
necessary. After a method is deemed acceptable, it is published by the EPA in
draft form ("EPA Draft Method"). Periodically, the EPA updates SW-846 through a
notice in the Federal Register referencing the EPA Draft Methods published since
the last update. Following a comment period, the EPA Draft Methods are
referenced in the Federal Register as a Final Rule and incorporated into SW-846.
9
The following table summarizes the EPA acceptance status of the
Company's hazardous waste testing products.
- ---------------------- ---------------- --------------- ---------------- ------------------
EPA SW-846
Method D TECH(R) EnSys RISC(TM) EnviroGard(TM) RaPID Assay(R)
No. Analyte
- ---------------------- ---------------- --------------- ---------------- ------------------
4010 PCP Soil & Water Soil
- ---------------------- ---------------- --------------- ---------------- ------------------
4015 2,4-D Soil & Water Soil & Water
- ---------------------- ---------------- --------------- ---------------- ------------------
4020 PCB Soil Soil & Oil Soil Soil
- ---------------------- ---------------- --------------- ---------------- ------------------
4030 TPH Soil Soil
4035 PAH Soil (APAH) Soil (APAH) Soil (APAH)
Soil (CPAH)
- ---------------------- ---------------- --------------- ---------------- ------------------
4040 Toxaphene Soil
4041 Chlordane Soil
4042 DDT Soil
- ---------------------- ---------------- --------------- ---------------- ------------------
4050 TNT Soil & Water Soil & Water
4051 RDX Soil & Water
- ---------------------- ---------------- --------------- ---------------- ------------------
4670 Triazines Water
- ---------------------- ---------------- --------------- ---------------- ------------------
8510 RDX Soil
8515 TNT Soil
8530 TTHM Water
- ---------------------- ---------------- --------------- ---------------- ------------------
Water Testing Methods. Water testing methods approved for use in
compliance with the SDWA are published periodically in the Federal Register.
Newly developed methods are reviewed by the EPA's Environmental Monitoring and
Systems Laboratory in Cincinnati to determine whether they are (i) an acceptable
version of a previously approved method or (ii) a new method in need of a
comparability study and proceed through a comment and approval procedure. The
EPA has a program aimed at expediting the approval of new methods that involves
the cooperation of the Solid Waste, Drinking Water, and Waste Water methods
groups.
The volatile organic halide (TCE) water test has been accepted as
Method 8535. The TTHM (total trihalomethanes) water test has been accepted as
Method 8530. In addition, the RaPID Assay(R) Atrazine test was accepted as the
first quantitative immunoassay method. It is anticipated that the EPA Office of
Drinking Water will adopt this method for screening according to the Drinking
Water Regulations for Triazines under the SDWA. More recently, the Company's
RaPID Assay(R) for Spinosad has been adopted by the EPA office of Pesticide
Programs as the official enforcement method for this pesticide.
Other Testing Methods. Tests for water treatment polymers, genetically
engineered traits in plants, and fungal plant pathogens are currently
unregulated. However, agencies such as the EPA, the FDA and the Food Safety and
Inspection Service of the U.S. Department of Agriculture are engaged in testing
environmental samples and, together with the Association of Official Analytical
Chemists ("AOAC"), maintain compilations of official methods for use in testing
for environmental contaminants in certain market segments. Some of these
organizations also issue procedures and guidelines for validating new methods.
Manufacturing
The Company currently manufactures over 270 different test kits for the
detection of a wide array of analytes in five immunoassay formats: one-step
strip tests, coated-tubes, latex particles, magnetic particles and microtiter
plates. In addition to test kits, the Company supplies its customers with
ancillary equipment and supplies including spectrophotometers, pipettes,
balances and timers among others.
The kit manufacturing process consists mainly of critical reagent
production and in-process testing, filling and dispensing, labeling, kit
assembly, quality control, packaging and shipping. The Company's Technical
Reagents Manufacturing group produces critical reagents from its laboratories in
Newark, Delaware. Sub-assemblies and finished kits are manufactured and shipped
worldwide out of the Company's headquarters facility in Newark, Delaware.
10
Biological materials are primarily developed and produced in-house,
however, some reagents are licensed from third parties or purchased from
commercial sources. A crucial step in the Company's manufacturing process is the
stabilization of the immunoreagents utilizing proprietary lyophilization
techniques. In general, raw materials used by the Company in its products are
obtainable from multiple sources. The Company purchases instruments and
ancillary equipment from outside vendors. A number of the instruments sold by
the Company were developed to be used exclusively with the Company's products
and are subject to specific supply agreements. The Company believes that the raw
materials, instruments and equipment used in the manufacture of its products are
adequately available for the Company's current and foreseeable manufacturing
needs.
The Company manufactures its products in accordance with the FDA's Good
Manufacturing Practices guidelines and has put in place systems designed to
control all elements of the manufacturing process including raw materials,
inventory, processes, documents, work-in-process, lot records, equipment and
training. Integrated inventory control, purchasing, manufacturing scheduling,
order processing, shipping and customer invoicing are elements of the Company's
computerized Manufacturing Resource Planning (MRP) systems.
The Company's manufacturing organization, including the Technical
Reagents Manufacturing group, consists of 34 individuals. The Company believes
the existing facilities and equipment are sufficient to support a significantly
larger manufacturing base. Manufacturing operations are currently running a
single shift.
Research and Development
The Company engages in substantial research and development activities
involving antibody and immunoassay development. In the three years ended
December 31, 2000, 1999 and 1998, the Company incurred approximately $2,932,000,
$2,450,000 and $1,922,000, respectively, in research and development
expenditures, principally in the test kit business segment. In 2000
approximately half of those expenditures were incurred pursuant to customer
research agreements or corporate partnerships and the other half related to
development of products directly by the Company. The Company expects that
internal research and development projects, primarily in the food safety area,
will continue to represent a larger percentage of its total research and
development expenditures. The Company's laboratory facilities located in Newark,
Delaware were designed and built specifically for conducting research and
development relating to antibody and immunoassay technology. These facilities
include the state-of-the art, GMP, Association for the Assessment and
Accreditation of Laboratory Animal Care ("AAALAC") approved, Strategic
BioSolutions antibody development and large-scale production facilities. The
Company has assembled a scientific staff with extensive experience in the
development of monoclonal and polyclonal antibodies, immunogens and assay
reagents.
The Company's assay development scientists are experienced in
developing tests in a variety of different immunoassay formats, including
one-step strips, latex filtration, magnetic particles, coated tubes and
microtiter plates. Research and development personnel have complementary skills
in several advanced research disciplines, including synthetic organic chemistry,
protein chemistry, biochemistry, immunology, immunochemistry, and microbiology.
In addition to the technical expertise resident within research and development,
Strategic Biosolutions provides the Company, as well as its outside clients,
with large-scale GMP production, bioprocessing, purification and quality control
of antibodies and reagents.
The Company's research and development activities are focused on
developing products to expand its manufacturing base and leverage its sales and
marketing organization. The Company is a recognized leader in the field of
contract antibody and immunoassay research and development in the industrial,
water quality and agricultural sectors, and markets its services primarily to
large chemical and pharmaceutical companies. Customer-sponsored product
development is performed either in collaboration with a corporate partner that
has identified a specific market need and provides funds to the Company to
develop an assay, or by the Company to fulfill an identified market need.
Research and development contracts are typically structured so that technology
developed within the program is co-owned by the Company and its partner and the
Company maintains manufacturing rights.
11
To the extent the Company believes that improvements to existing
products significantly enhance competitiveness, expand a market or improve
market penetration, the Company funds such efforts. In the markets where the
Company has chosen to compete, rapid field screening tests are highly valued and
the Company is actively engaged in developing proprietary technology to better
meet those needs and enhance the Company's overall performance. Through its
continuing development of tests to detect genetically engineered plants and
water treatment polymers, the Company has gained extensive expertise, facilities
and equipment relating to the development and manufacture of one-step strip
tests, and is working aggressively to further develop this technology.
The Company's technology organization, including research and
development, Strategic BioSolutions, Technical Reagents Manufacturing, and
Technical Marketing Support consists of approximately 55 individuals, of which
22 hold advanced academic degrees.
Proprietary Technology and Patents
The Company's products are based on the use of proprietary reagents,
technology and test systems developed by Company scientists or acquired
externally. Accordingly, the Company has implemented a number of procedures to
safeguard the proprietary nature of its technology. The Company requires its
employees and consultants to execute confidentiality agreements upon the
commencement of an employment or consulting relationship with the Company and
all employees are required to agree to assign to the Company all rights to any
inventions made during their employment or relating to the Company's activities.
Additionally, the Company seeks to protect its technology and processes
through the patent process for its test kit business. The Company currently
holds 25 issued U.S. patents. Two U.S. patents have been licensed for exclusive
use by the Company and 5 U.S. patent applications are pending, which are in the
field of testing for genetically enhanced agricultural crops.
- ------------- ------------------------------------------------------------------
U.S. Patent Title
- ------------- ------------------------------------------------------------------
4,999,286 Sulfate reducing bacteria determination and control
5,200,346 Aldicarb immunoassay by sulfone equivalents
5,411,869 Immunological analogs for captan
5,449,611 Polyaromatic hydrocarbon (PAH) immunoassay method, its components
and a kit for use in performing the same
5,484,709 Immunoassay method for detecting an immunologically non-remarkable
compound
5,547,877 Methods for the rapid detection of toxic halogenated hydrocarbons
and kits useful in performing the same
5,558,996 Fungus extraction method and kit
5,576,187 Standards for phosphorothioate insecticide immunoassays
5,593,850 Monitoring of industrial water quality using monoclonal antibodies
to polymers
5,618,681 Polyaromatic hydrocarbon (PAH) immunoassay method, its components
and a kit for use in performing the same
5,658,463 Kits and processes for extraction of analytes from solid materials
5,679,574 Quantitative test for oils, crude oil, hydrocarbon, or other
contaminants in soil and
a kit for performing the same
5,691,148 A petroleum immunoassay method, its components and a kit for
performing the same
5,891,657 Immunoassay standards for volatile analytes with benzene rings
5,780,250 Immunoassay standards for polyaromatic hydrocarbon detection
5,834,222 Polychlorinated Biphenyls (PCB) immunoassay method
5,858,692 PCB immunoassay
5,874,216 Indirect label assay device for detecting small molecules and
method of use thereof
5,891,657 Immunoassay standards for volatile analytes with benzene rings
5,994,145 Reagents, methods and kits for detecting TCE and PCE
5,541,079 Monoclonal and polyclonal antibodies and test method for
determination of organophosphates (license)
5,429,952 Marking of products to establish identity and source (license)
6,096,563 Dual particle immunoassay method & kit
6,146,903 Determination method
6,190,922 Substrate supported liquid extraction
12
The Company believes that their low-cost, easy-to-use, rapid field
screening tests have the potential to be significant products in their chosen
markets. Therefore, the Company continues to develop technology relating to
immunoassay formats with those features and one pending patent application has
to do with novel point-of-care diagnostic devices. The Company believes that
there is significant market opportunity for tests that can detect genetically
modified crops and three of its pending applications are in this field.
There can be no assurance that the Company's patent applications will
result in the issuance of any patent or that any patents issued to the Company
would provide protection that is sufficiently broad to protect the Company's
technology and products. In addition, the Company cannot be certain that it was
the first creator of inventions covered by pending patent applications or that
it was the first to file patent applications for such inventions.
In addition to seeking patent protection for the Company's proprietary
information in its test kit business, the Company also relies upon trade
secrets, know-how and continuing technical innovation to maintain
competitiveness for both the test kit and antibody businesses. The Company has
developed a number of proprietary technologies which it has chosen not to
patent, including stabilization systems for reagents, chemical syntheses for
conjugates, immunogens and analyte analogs, and strategies relating to antibody
development. Regarding the latter, the Company's extensive expertise has enabled
it to develop antibodies and products that are unique to the industry including
monoclonal antibodies to transgenic plant proteins, water treatment polymers,
the explosive RDX, BTEX and TCE. In the field of genetically modified crops, the
Company believes it is the only commercial supplier of antibodies and tests to
detect the Roundup Ready trait and that it has the greatest breadth of products
and is the leading provider of reagents and kits in this market.
Under two license agreements, the Company has been granted the right
and license throughout the world to use magnetocluster technology in connection
with the Company's RaPID Assay(R) products for the detection of environmental
analytes. This license carries royalties starting at 4% of net sales of such
products each year and declining to 2% based upon the volume of sales in such
year.
Competition
Many of the Company's potential competitors are large companies with
substantially greater financial and other resources than the Company. To the
extent that any such companies enter into one or more of the Company's markets,
the Company's operations could be materially, adversely affected. The Company
anticipates increased competition as potential competitors perceive that the
Company's markets have become commercially proven. During 2000, competitors
emerged with products that compete with certain of the Company's products to
detect Cry9C (StarLink(TM)) in corn for the food safety market. EnviroLogix,
Inc., a privately held company, and Neogen Corp. began offering Cry9C test kits
with characteristics similar to the Company's. Other companies may be developing
additional products for one or more of the Company's markets that could be
competitive with the Company's products. The Company believes neither of these
competitors has products that compete with all of the Company's products in the
food safety market. The Company believes that the breadth of its product
offerings in the food safety market, the expertise it has accumulated in
developing tests for GMOs in the food safety market, the relationships it
maintains with the developers of new genetically modified plant varieties and
the extensive customer relationships it has assembled throughout the
agricultural seed, grain and food processing industries are all significant
competitive advantages.
Currently, the Company believes that there are no similar competing immunoassay
products for the Company's RapidChek(R) Rice Blast, Botrytis and SRB,
proprietary chemical, industrial marker or water treatment polymer tests. The
Company holds U.S. patents relating to the Rice Blast and SRB tests and believes
they will help to provide a competitive advantage in the event that competing
products enter the market. The Company's water treatment polymer tests are
unique to the industry and the Company has secured U.S. patents and an exclusive
technology license and believes that such property will help to provide a
competitive advantage in the event that competing products enter the market.
13
A number of companies already have pursued, and are actively pursuing,
products for the detection of Cryptosporidium and Giardia in drinking water and
it is likely that the Company's Hydrofluor products will face increasing
competition in the future. Hydrofluor currently benefits from its designation as
the ASTM standard method for detection of these protozoa and from its selection
by the EPA as the method for use in complying to the EPA's Information
Collection Rule to establish the extent of contamination in the nation's
drinking water.
In the antibody segment, competitors include large pharmaceutical,
research and diagnostics organizations, some of whom have significantly greater
revenues than the Company, who produce these products internally and purchase
similar products from SBS. Additionally, there are a number of smaller companies
who offer competing products. The Company believes that the scale of its
operations and the breadth of its product lines, among other things, are
significant competitive advantages.
Employees
As of December 31, 2000, the Company employed 193 full time and 1 part
time individuals including 179 regular and 15 contract employees. All of the
Company's employees have executed agreements with the Company agreeing not to
disclose the Company's proprietary information, assigning to the Company all
rights to inventions made during their employment, and prohibiting them from
competing with the Company. None of the Company's employees are covered by
collective bargaining agreements. The Company believes that its relations with
its employees are good.
ITEM 2.
PROPERTIES
The Company is headquartered in Newark, Delaware, and occupies
approximately 28,000 square feet of space under an operating lease expiring in
December 2007. The Company also leases approximately 26,000 square feet of
manufacturing and research space also in Newark, Delaware under three operating
leases. Two of these leases expire in October 2001 and the Company plans to
extend them on similar terms. The third lease expires in November 2003.
The Company leases regional sales offices near London, England, and
Chestnut Hill, Massachusetts. The Company also leases warehouse space of 1,600
square feet or less with leases that run one year or less. The Company believes
that its equipment and facilities are adequate for its present purposes.
Strategic BioSolutions occupies approximately 8,000 square feet of
manufacturing, research and animal facility space, in Newark, DE and owns and
occupies approximately 45 acres of farmland near San Diego, California and 120
acres of farmland in Windham, Maine.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the fiscal year ended December 31, 2000.
14
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions with the Company
and ages are as follows:
Name Age Position
- ---- --- --------
Richard C. Birkmeyer 47 President and Chief Executive Office
Arthur A. Koch, Jr. 47 Vice President - Finance & Chief
Operating Officer
Martha C. Reider 46 Vice President - Quality Assurance/
Human Resources
James W. Stave, Ph.D. 46 Vice President - Research and
Development
Richard C. Birkmeyer, age 47, cofounded SDI in 1990 and has served as
its President and Chief Executive Officer and a director since its inception.
Prior to founding SDI, Mr. Birkmeyer was employed by E.I. du Pont de Nemours
("DuPont") from 1983 to 1990, where he most recently served as Product Manager.
Mr. Birkmeyer received a Ph.D. in Biochemistry/Immunology from the State
University of New York at Binghamton and his BS in Biology from the State
University of New York at Plattsburgh. In addition, Mr. Birkmeyer completed
post-doctoral research in immunogenetics at Iowa State University.
Arthur A. Koch, Jr., age 47, joined the Company in April 1997 as Vice
President - Finance and Chief Financial Officer. In October 1998, Mr. Koch was
appointed the Company's Chief Operating Officer. Prior to joining the Company,
Mr. Koch was Vice President and Chief Financial Officer of Paracelsian, Inc., a
publicly held biotechnology company. From 1992 to 1995, Mr. Koch was Vice
President and Chief Financial Officer of IBAH, Inc. a publicly held contract
clinical research corporation. Mr. Koch received a BA in Business Administration
from Temple University and is a Certified Public Accountant.
Martha C. Reider, age 46, co-founded SDI in 1990 and served as Vice
President - Manufacturing and Secretary since inception through 1998. In 1998
Ms. Reider was appointed Vice President Quality Assurance/Human Resources. Ms.
Reider continues to serve as the Corporate Secretary. From inception to December
30, 1996, Ms. Reider was a director of SDI. Prior to founding SDI, Ms. Reider
worked for DuPont from 1976 to 1990 where she most recently served as supervisor
of Quality Control and Quality Assurance. Ms. Reider received her BA in
Biological Sciences from Ohio Northern University.
James W. Stave, age 46, joined SDI in March 1991 as a research group
leader. Subsequently, Dr. Stave was promoted to director of Research and
Development, in October 1993 was promoted to Vice President - Research and
Development. Prior to joining SDI, Dr. Stave worked for DuPont. Molecular
Genetics, Inc. and the U.S. Department of Agriculture. Dr. Stave received his
Ph.D. in Microbiology from the University of Maryland and his B.S. in Biology
from Michigan Technological University.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq National Market
under the symbol "SDIX." Set forth below are the quarterly high and low bid
prices for the shares of Common Stock of the Company as reported by Nasdaq
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions:
Common Stock Price Range
Fiscal Year Ended High Low
- ----------------- ---- ---
December 31, 2000:
First Quarter 9 9/16 2
Second Quarter 7 5/8 2 15/32
Third Quarter 6 2
Fourth Quarter 5 2 1/16
December 31, 1999:
First Quarter 3 1 3/4
Second Quarter 4 31/32 2 1/8
Third Quarter 10 1/16 3 3/4
Fourth Quarter 9 1/4 5 1/32
On March 12, 2001 there were approximately 5,600 holders (241 holders
of record) of the Common Stock of the Company. The Company has never paid any
cash dividends on its Common Stock and pursuant to the Company's financing
agreement with PNC Bank, Delaware, the Company's commercial bank, no dividends
or distributions may be paid on account of its Common Stock.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
-----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(in thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product related $ 24,773 $ 21,225 $ 14,172 $ 12,703 $ 3,402
Contract and other 1,101 1,309 1,553 1,717 2,435
----------- ---------- ---------- ---------- ---------
Total revenues 25,874 22,534 15,725 14,420 5,837
Operating expenses:
Manufacturing cost of sales 11,287 9,078 6,222 5,305 2,839
Research and development 2,932 2,450 1,922 1,580 1,569
Selling, general and administrative 9,333 8,668 7,156 6,132 1,737
Acquired research and development - 3,500 - - 8,266
----------- ---------- ---------- ---------- ---------
Total operating expenses 23,552 23,696 15,300 13,017 14,411
Operating income (loss) 2,322 (1,162) 425 1,403 (8,574)
Interest income (expense), net (415) (372) 356 274 186
Gain on sale of assets 283 - - - -
----------- ---------- ---------- ---------- ---------
Income (loss) before taxes $ 2,190 $ (1,534) $ 781 $ 1,677 $ (8,388)
----------- ---------- ---------- ---------- ---------
Income tax (expense) benefit (642) 5,317 - - -
----------- ---------- ---------- ---------- ---------
Net income (loss) $ 1,548 $ 3,783 $ 781 $ 1,677 $ (8,388)
----------- ---------- ---------- ---------- ---------
Preferred stock dividends - (32) - - -
Accretion of redeemable preferred
stock liquidation value - - - - (635)
----------- ---------- ---------- ---------- ---------
Net income (loss) applicable to common
stockholders $ 1,548 $ 3,751 $ 781 $ 1,677 $ (9,023)
=========== ========== ========== ========== =========
Basic net income (loss) per share
applicable to common stockholders $ 0.09 $ 0.26 $ 0.06 $ 0.13 $ (2.12)
=========== ========== ========== ========== =========
Shares used in computing basic net income (loss)
per share applicable to common stockholders 16,585,000 14,374,000 13,174,000 13,084,000 4,248,000
=========== ========== ========== ========== =========
Diluted net income (loss) per share
applicable to common stockholders $ 0.09 $ 0.22 $ 0.05 $ 0.11 $ (2.12)
=========== ========== ========== ========== =========
Shares used in computing diluted net income (loss)
per share applicable to common stockholders 17,466,000 17,088,000 16,103,000 15,712,000 4,248,000
=========== ========== ========== ========== =========
December 31,
------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents $ 1,288 $ 2,491 $ 1,864 $ 2,580 $ 917
Short-term investments - - 3,990 3,638 5,710
----------- ---------- ---------- ---------- ---------
Sub total 1,288 2,491 5,854 6,218 6,627
Working capital 10,431 10,130 10,158 9,403 7,170
Total Assets 26,508 29,672 15,093 14,060 14,581
Long-term debt 1,889 6,275 265 25 50
Stockholders' equity 21,334 19,210 13,155 12,340 10,673
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Forward-Looking Statements
This Form 10-K 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," "should,"
"will" and similar expressions as they relate to the Company 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,
ability of manufacturers of non-GMO food products to charge premiums to
consumers, successful integration of the AZUR business if and when the
acquisition is completed, retention of customers and employees, 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, dependence on the sale of certain products,
the ability to achieve anticipated growth, competition, seasonality, and other
factors more fully described in the Company's filings with the U.S. Securities
and Exchange Commission.
Overview
The Company develops, manufactures and markets immunoassay-based test
kits for rapid and inexpensive detection of a wide variety of substances in the
food safety and water quality markets. Through its Strategic BioSolutions
division, the Company also provides antibody and immunoreagent research and
development production services.
Since its 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 food safety, water quality
and other markets. The Company expects that internal research and development
projects, primarily in the food safety area, will continue to represent a larger
percentage of its research and development expenditures. The Company believes
that its competitiveness has been enhanced through the combinations of talents,
technology and resources resulting from the relationships and the acquisitions
it concluded during the past four years. These relationships and acquisitions
have enabled the Company to achieve meaningful economies of scale for the unique
products it offers through the utilization of its consolidated facilites in
Newark, Delaware, for the manufacture of test kits, antibodies and biochemicals,
its facility located outside of San Diego, California for the manufacture of
antibodies and biochemicals and its facility located in Windham, Maine for the
manufacture of custom, high-volume bulk polyclonal antibodies. These economies
of scale, in turn, enable the Company to offer its customers the most
appropriate test for each specific customer application.
Another key strategy that the Company used to develop its business was
the formation in 1991 of TSD BioServices, a joint venture between the Company
and a subsidiary of Taconic Farms of Germantown, NY. Taconic Farms is a
privately held company whose business is the production and sale of mice and
rats, primarily to the research community. In 1996, the joint venture was
dissolved and the Company's interests were distributed into a wholly owned
subsidiary, TSD BioServices, Inc. ("TSD"). With TSD and the 1999 acquisitions of
HTI and the operating assets of the OEM business of Atlantic Antibodies, the
Company formed a new operating division, Strategic BioSolutions, which has now
become one of the largest producers of antibodies in the United States. The
mission of Strategic BioSolutions is to supply monoclonal and polyclonal
antibodies, immunochemical reagents and related services to medical diagnostic
and pharmaceutical companies, as well as research institutions.
18
The Company believes certain of its products in the food safety and
water quality testing markets are unique and fill potentially large, unmet
needs. The Company also believes that its products and technology currently
being developed have broad application in diverse markets. The Company believes
that its established product base, quality manufacturing expertise, experienced
sales and marketing organization, established network of distributors, corporate
partner relationships and proven research and development expertise will be
critical elements of its potential future success.
On September 26, 2000, the Company announced that it had entered into a
non-binding letter of intent to acquire AZUR Environmental. AZUR is a leading
provider of innovative analytical systems for monitoring water quality
throughout the world. The purchase of AZUR Environmental, whose corporate
headquarters are located in Carlsbad, California, is subject to due diligence
and approval by both companies' Board of Directors, approval of the stockholders
of AZUR and other conditions. The Company expects that the AZUR acquisition will
be consummated mid-2001.
Revenues in any particular quarter may not be indicative of revenues for
any subsequent quarter during the year, or for the year. As sales of the
Company's analytical tests for water-soluble polymers (which are generally not
affected by seasonal patterns) and food safety products to other parts of the
world develop over the next few years, the Company expects its seasonal
fluctuations to become gradually less pronounced.
Results of Operations
Year ended December 31, 2000 versus year ended December 31, 1999
Revenues: Net revenues increased $3.3 million or 15% in 2000 versus
1999. This increase is the result of a $3.5 million or 17% increase in product
related revenues offset by a $208 thousand or 16% decrease in contract and other
revenues. The growth in product revenues is predominately attributable to
increases, primarily in the fourth quarter, in sales of products in the food
safety category (tests to detect genetic traits in genetically engineered
plants, of GMOs) as sales in this category of products grew 21% from the levels
achieved in 1999. This increase was due primarily to sales of the Company's
products to detect the genetic traits in StarLinkTM corn. Sales of the Company's
Trait Check Bt9 product exceeded one million tests, virtually all of which were
sold in the fourth quarter of 2000. The Company expects StarLinkTM sales to
continue in 2001, although at a lower rate than in the fourth quarter of 2000.
Revenues of antibody products grew 34% from the 1999 levels, due primarily to
the full year inclusion of revenues from the HTI acquisition in February of
1999, and the acquisition of the operating assets of the OEM business of
Atlantic Antibodies in May of 1999 (see Note 3 to the Notes to Consolidated
Financial Statements). These increases were partially offset by decreases in the
Company's water quality marketing unit and decreases in sales of other products
when compared to the 1999 revenues recorded in these categories. Revenues in the
other products category in 1999 included sales of Macra Lp(a) testing kits, a
product which the Company sold in 1998, but for which sales under a
manufacturing agreement with the buyer of the product occurred during 1999.
There were no comparable sales in the year 2000. The decline in contract and
other revenues is primarily the result of the Company's expanded emphasis on
internal research and development programs versus contractual sponsored research
and development programs.
Operating Expenses: Operating expenses increased $3.4 million or 17% in
2000 to $23.6 million from $20.2 million in 1999, exclusive of the $3.5 million
one-time charge in 1999 for acquired research and development as a result of the
HTI acquisition. This increase is primarily attributable to an increase in the
general business activity that occurred during the year and is described below.
Manufacturing expenses, which include the cost of products sold,
increased $2.2 million or 24% in 2000 to $11.3 million from $9.1 million in
1999. This is primarily the result of the 17% increase in product related
revenues in 2000 and additional manufacturing expenses associated with the ramp
in production to meet the strong demand for StarLinkTM tests. We met this demand
by increasing production to three shifts at certain times, particularly early in
the quarter as we built inventories. By the end of the quarter, we were able to
smooth out production and returned to a more normalized production schedule.
We experienced price pressure in the food safety category later in the
fourth quarter as competitors launched products. We believe we have maintained
our market leading position and attempted to meet this pressure with competitive
pricing coupled with a high quality product. We believe we will see relatively
stable pricing from this point forward and we expect gross margins in the 50% to
55% range for the next few quarters versus 54% and 57% for the years ended
December 31, 2000 and 1999, respectively.
19
Research and development expenses increased $482 thousand or 20% in
2000 to $2.9 million from $2.5 million in 1999. This increase was due to the
Company's continuing investment in new product development for its food safety
marketing unit of products (tests to detect genetic traits in genetically
engineered plants) and for other ongoing project expenses.
Selling, general and administrative expenses increased $665 thousand or
8% in 2000 to $9.3 million from $8.7 million in 1999. This increase was
primarily the result of increased selling and marketing costs in the food safety
and antibody product marketing unit.
Interest expense net: Net interest expense increased $43 thousand or
12%, due to the higher levels of debt carried throughout the year 2000 versus
the year 1999.
Income taxes: During the fourth quarter of 2000, the Company recorded a
tax charge of $204 thousand (net of a reduction in the valuation allowance of
approximately $220 thousand) and in the fourth quarter of 1999, the Company
recorded a tax benefit of $5.3 million, also related to a reduction in the
valuation allowance, all in accordance with Statement of Financial Accounting
Standards 109 ("SFAS 109") since management believed that it is more likely than
not that the Company will realize that portion of the benefits of net operating
loss carryforwards. The recognition of these deferred tax assets under SFAS 109
has no impact on the Company's cash flows for income taxes. As a result net
income comparisons between 1999 and 2000 are not meaningful.
Net Income: Net income decreased (exclusive of the $5.3 income tax
benefit and the $3.5 million one-time acquired research and development charge
in 1999, recorded in connection with the HTI acquisition), decreased $418
thousand or 21%. This decrease is primarily attributable to the income tax
provision of $642 thousand for the year ended December 31, 2000, offset by a
gain on sale of assets of $283 thousand from the sale of the Company's Macra
Lp(a) product line, also recorded in the year 2000. Pre-tax income (exclusive of
the $3.5 million one-time acquired research and development charge) increased by
$224 thousand or 11% to $2.2 million in 2000 from $2.0 million in 1999.
Year ended December 31, 1999 versus year ended December 31, 1998
Revenues: Net revenues increased $6.8 million or 43% in 1999 versus
1998. This increase is the result of a $7.1 million or 50% increase in product
related revenues offset by a $244 thousand or 16% decrease in contract and other
revenues. The growth in product revenues is primarily attributable to increases
in sales of products in the agricultural category (tests to detect genetic
traits in genetically engineered plants), as sales in this category of products
grew 125% from the levels achieved in 1998, resulting from the expansion of the
agricultural product line to include kits designed for the quality assurance of
foundation seed and the launch of a product line designed for the food
processing and grain industry, and from increases in revenues of antibody
products which grew 187% from the 1998 levels, due primarily to the inclusion of
revenues from the HTI acquisition in February of 1999, and the acquisition of
the operating assets of the OEM business of Atlantic Antibodies in May of 1999,
for which there were no comparable 1998 revenues. These increases were partially
offset by decreases in the Company's water quality category of 6% and other
products categories when compared to the 1998 revenues recorded in these
categories. Revenues in the other products category in 1998 included the sale of
a line of antibodies and pre-commercial Macra Lp(a) testing kits as described
below for which there were no comparable amounts in 1999. The decline in
contract and other revenues is primarily the result of the Company's continued
emphasis on internal research and development programs versus contractual
research and development programs.
Operating Expenses: Operating expenses increased $4.9 million or 32% in
1999 to $20.2 million from $15.3 million in 1998, exclusive of the $3.5 million
one-time charge for acquired research and development as a result of the HTI
acquisition. This increase is primarily attributable to an increase in the
general business activity that occurred during the year and is described below.
20
Manufacturing expenses, which include the cost of products sold,
increased $2.9 million or 46% in 1999 to $9.1 million from $6.2 million in 1998.
This is primarily the result of the 50% increase in product related revenues the
Company experienced in 1999 versus the same period in 1998.
Research and development expenses increased $528 thousand or 27% in
1999 to $2.5 million from $1.9 million in 1998. This increase was due to the
Company's continuing investment in new product development for its agricultural
category of products (tests to detect genetic traits in genetically engineered
plants).
Selling, general and administrative expenses increased $1.5 million or
21% in 1999 to $8.7 million from $7.2 million in 1998. Additional costs and
acquired personnel, related to the acquisitions of HTI and the operating assets
of the OEM business of Atlantic Antibodies, and the subsequent expansion of the
antibody business through Strategic BioSolutions were the primary reasons for
the increased costs in this category.
For the year ended December 31, 1999, the Company incurred a one-time
special charge of $3.5 million for in-process research and development related
to the acquisition of HTI. This item is more fully described in Note 3 to the
Financial Statements "Mergers and Acquisitions."
Interest expense, net: Net interest and other income decreased $728
thousand or 204%, due to the interest paid on the $9 million of acquisition
financing used in the purchases of HTI and the operating assets of the OEM
business of Atlantic Antibodies.
Income taxes: At December 31, 1999, the Company had approximately $8.2
million of gross deferred tax assets consisting primarily of the future tax
benefit from net operating loss carryforwards. In the fourth quarter of 1999,
the Company concluded that it is more likely than not that it will realize a
portion of the benefit of such tax assets. Accordingly, the Company reduced the
valuation allowance against the asset and recorded a tax benefit of $5.3 million
in December 1999.
The recognition of these deferred tax assets under SFAS 109 has no
impact on the Company's cash flows for income taxes despite the change in the
Company's effective tax rate. The recognition of these deferred tax assets
impacted reported earnings per share due to the benefit recorded to the
statement of operations.
Net Income: Net income increased $1.2 million or 152%, (exclusive of
the $5.3 income tax benefit and the $3.5 million one-time acquired research and
development charge, recorded in connection with the HTI acquisition). This
increase is primarily attributable to the increased sales of the Company's
agricultural and antibody products, and the corresponding economies of scale
realized by the Company's higher level of business activity.
Liquidity and Capital Resources
The Company's working capital, which consists principally of cash,
accounts receivable and inventory, increased $301 thousand in 2000 to $10.4
million at December 31, 2000 from $10.1 million at December 31, 1999. This
increase was primarily attributable to the current portion of deferred tax
assets, the voluntary repayment of debt and a more flexible structure of the
Company's indebtedness. Outstanding debt decreased $4.9 million from $8.2
million at December 31, 1999 to $3.2 million on December 31, 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 $3.2 million
was outstanding at December 31, 2000, repayable over three years, and up to a $5
million revolving line of credit, of which no amount was outstanding at December
31, 2000.
For the year ended December 31, 2000, the Company's operating
activities provided more than $2.9 million in cash, a significant increase from
the $194 thousand provided in 1999. This cash, along with available cash
balances and the proceeds from the financing described above, allowed the
Company to satisfy all of its operating cash requirements and reduce total debt
outstanding by nearly $5 million in 2000. At December 31, 2000, the Company had
$1.9 million in long-term debt and stockholders' equity of over $21.3 million.
21
The Company believes it has, or has access to sufficient assets to meet
its operating requirements for the forseeable future. The Company's ability to
meet its long-term capital requirements will depend on a number of factors,
including the success of its current and future products, the focus and
direction of its research and development program, competitive and technological
advances, future relationships with corporate partners, government regulation,
the Company's marketing and distribution strategy, consummation of the AZUR
acquisition, which as presently contemplated will not require a significant cash
investment, and the success of the Company's plan 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 and similar
uncertainties (see Note 10 to the Consolidated Financial Statements).
ITEM 7A. 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 $3.2 million of
outstanding indebtedness is at a variable rate of between 1.75% and 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.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplemental
quarterly financial data of the Company and its subsidiaries are included as
part of this Form 10-K:
Page
----
Independent Auditors' Report .........................................................................................F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999..........................................................F-2
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2000.............................................................F-3
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income for each of the years in the three-year period ended December 31, 2000................................F-4
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000.............................................................F-5
Notes to Consolidated Financial Statements............................................................................F-6
Quarterly Financial Data (unaudited).................................................................................F-19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No information to report.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained under the caption "Election of a Class of Directors"
and the information contained under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Definitive Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Executive Compensation" in the
Company's Definitive Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Stock Ownership of Principal
Stockholders and Management" in the Company's Definitive Proxy Statement is
incorporated herein by reference.
23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and Related
Transactions" in the Company's Definitive Proxy Statement is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
See the Consolidated Financial Statements which begin on page F-1 of this
Report.
2. Financial Statement Schedules
Financial statement schedules are omitted because they are either not
required or not applicable or the required information is reflected in the
financial statements or notes thereto.
3. Exhibits
Previous
Exhibit Exhibit
Number Number
- ------ -------
3.1 Fourth Amended and Restated Certificate of Incorporation of the Company (1) 4.1
3.2 Amended and Restated Bylaws of the Company (1) 4.2
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Forms of Warrants to Purchase Common Stock of the Company (1) 4.4
10.1 Warrant Agreement dated June 1, 1991 between John Hancock (2) 10.5
Leasing Corporation and the Company, as amended December 19, 1991
10.3 EnSys Environmental Products, Inc. 1993 Stock Incentive Plan* (2) 10.17
10.4 Amended and Restated EnSys Environmental Products, Inc. 1995
Stock Incentive Plan* (3)
10.5 EnSys Environmental Products, Inc. 401(k) Plan Adoption
Agreement (2) 10.18
10.6 Lease Agreement dated June 1, 1989, between the Company and (2) 10.20
Imperial Center Partnership and Petula Associates, Ltd. for premises
at 4222 Emperor Boulevard, Morrisville, North Carolina, as
amended December 22, 1991 and April 7, 1993
10.9 License Agreement by and between the Company and Meridian (4) 10.22
Diagnostics, Inc. dated July 24, 1994
24
10.10 Asset Purchase Agreement among EnSys, Millipore Corporation, (5) 2.1
and ImmunoSystems, Inc.
10.11 Agreement and Plan of Merger by and between EnSys and Strategic (1) 2.1
Diagnostics Inc. dated as of October 11, 1996
10.14 Employment Agreement dated December 30, 1996 by and between (6) 10.14
Richard C. Birkmeyer and the Company*
10.15 Employment Agreement dated December 30, 1996 by and between (6) 10.15
Grover C.Wrenn and the Company*
10.16 Registration Rights Agreement dated December 30, 1996 between (6) 10.16
the Company and the stockholders listed therein
10.18 Industrial Lease dated October 26, 1993, by and between Tober & (6) 10.18
Agnew Properties, Inc. and Strategic Diagnostics Incorporated
10.19 Industrial Lease dated August 9, 1990, by and between Tober & (6) 10.19
Agnew Properties, Inc. and Strategic Diagnostics Incorporated
10.20 Industrial Lease dated June 7, 1991 by and between Tober & (6) 10.2
Agnew Properties, Inc. and TSD BioServices
10.21 Lease agreement dated October 29, 1997 by and between Pencader (7) 10.21
Courtyard, L.P. and Strategic Diagnostics Inc.
10.22 1998 Employee Stock Purchase Plan
10.23 Asset Purchase Agreeement dated as of May 11, 1999 by and among (8) 2.1
Strategic Diagnostics Inc., DiaSorin Inc., a Delaware corporation and
Atlantic Antibodies, Inc., a Delaware corporation
10.24 Promissory Note in the amount of $3 million, dated May 11, 1999, (8) 10.1
payable to First Union National Bank.
10.25 Stock Purchase Agreement dated as of February 26, 1999 by and among (9) 2.1
Strategic Diagnostics Inc. and Robert J. Harman, Michael M. Dale,
Eric S. Bean and Sean Boyd
10.26 Certificate of Powers, Designations, Preferences and Rights of the Series B (9) 4.1
Convertible Preferred Stock of the Company filed with the Secretary of the
State of Delaware on February 26, 1999
10.27 Loan Agreement between the Company and PNC Bank, Delaware, (10) 10.1
dated May 5, 2000
10.28 Line of Credit Note between the Company and PNC Bank, Delaware, (10) 10.2
dated May 5, 2000
10.29 Term Note between the Company and PNC Bank, Delaware, (10) 10.3
dated May 5, 2000
21.1 Subsidiaries of the Company (6) 21.1
24.1 Consent of KPMG LLP
25
(1) Incorporated by reference to the designated exhibit of the EnSys
Registration Statement on Form S-4 (No. 333-17505) filed on December 9, 1996.
(2) Incorporated by reference to the designated exhibit of the EnSys
Registration Statement on Form S-1 (No. 33-68440) filed on September 3, 1993.
(3) Incorporated by reference to Appendix F to the Joint Proxy
Statement/Prospectus contained in the EnSys Registration Statement on Form S-4
(No. 333-17505) filed on December 9, 1996.
(4) Incorporated by reference to the designated exhibit of the EnSys Form 10-K
for the fiscal year ended December 31, 1994.
(5) Incorporated by reference to the designated exhibit of the EnSys Form 10-Q
for the fiscal quarter ended March 31, 1996.
(6) Incorporated by reference to the designated exhibit of the Company's Form
10-K for the fiscal year ended December 31, 1996.
(7) Incorporated by reference to the designated exhibit of the Company's Form
10-K for the fiscal year ended December 31, 1997.
(8) Incorporated by reference to the identically numbered exhibit contained in
the Company's Form 8-K filed on May 26, 1999
(9) Incorporated by reference to the identically numbered exhibit contained in
the Company's Form 8-K filed on March 15, 1999
(10) Incorporated by reference to the designated exhibit of the Company's 10Q
for the fiscal quarter ended June 30, 2000
*Management contract or compensatory plan.
(b) Reports on Form 8-K (b)
None.
26
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Strategic Diagnostics Inc.:
We have audited the accompanying consolidated balance sheets of Strategic
Diagnostics Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Strategic
Diagnostics Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Philadelphia, Pennsylvania
February 9, 2001
F-1
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31, December 31,
- ------------------------------------------------------------------------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,288 $ 2,491
Receivables, net 4,298 6,021
Inventories 6,844 5,524
Deferred tax asset 1,070 -
Other current assets 216 281
- ------------------------------------------------------------------------------------------------------------
Total current assets 13,716 14,317
- ------------------------------------------------------------------------------------------------------------
Property and equipment, net 2,919 3,289
Other assets 438 431
Deferred tax asset 5,416 7,071
Intangible assets, net 4,019 4,564
- ------------------------------------------------------------------------------------------------------------
Total assets $ 26,508 $ 29,672
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 655 $ 1,375
Accrued expenses 1,129 697
Taxes payable - 55
Deferred revenue 162 162
Revolving line of credit - -
Current portion of long term debt 1,339 1,898
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 3,285 4,187
- ------------------------------------------------------------------------------------------------------------
Long-term Debt 1,889 6,275
- ------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, $.01 par value, 17,500,000 shares authorized,
no shares issued and outstanding - -
Series A preferred stock, $.01 par value, 2,164,362 shares
authorized, no shares issued and outstanding - -
Series B preferred stock, $.01 par value, 556,286 shares
authorized, no shares issued and outstanding - -
Common stock, $.01 par value, 35,000,000 shares authorized,
16,699,052 and 16,470,106 issued and outstanding
at December 31, 2000 and December 31, 1999, respectively 167 164
Additional paid-in capital 26,814 26,241
Accumulated deficit (5,622) (7,170)
Cumulative translation adjustments (25) (25)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 21,334 19,210
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 26,508 $ 29,672
- ------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
NET REVENUES:
- -------------------------------------------------------------------------------------------------------------------
Product related $ 24,773 $ 21,225 $ 14,172
Contract and other 1,101 1,309 1,553
- -------------------------------------------------------------------------------------------------------------------
Total net revenues 25,874 22,534 15,725
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Manufacturing 11,287 9,078 6,222
Research and development 2,932 2,450 1,922
Selling, general and administrative 9,333 8,668 7,156
Acquired research and development - 3,500 -
- -------------------------------------------------------------------------------------------------------------------
Total operating expenses 23,552 23,696 15,300
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss) 2,322 (1,162) 425
Interest income (expense), net (415) (372) 356
Gain on sale of assets 283 - -
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes 2,190 (1,534) 781
- -------------------------------------------------------------------------------------------------------------------
Income tax (expense) benefit (642) 5,317 -
- -------------------------------------------------------------------------------------------------------------------
Net income 1,548 3,783 781
Preferred stock dividends - (32) -
- -------------------------------------------------------------------------------------------------------------------
Net income
applicable to common stockholders 1,548 3,751 781
- -------------------------------------------------------------------------------------------------------------------
Basic net income per share
applicable to common stockholders $ 0.09 $ 0.26 $ 0.06
- -------------------------------------------------------------------------------------------------------------------
Shares used in computing basic net income
per share applicable to common stockholders 16,585,000 14,374,000 13,174,000
- -------------------------------------------------------------------------------------------------------------------
Diluted net income per share
applicable to common stockholders $ 0.09 $ 0.22 $ 0.05
- -------------------------------------------------------------------------------------------------------------------
Shares used in computing diluted net income
per share applicable to common stockholders 17,466,000 17,088,000 16,103,000
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
Series A Series B Additional Cumulative
Preferred Preferred Common Paid-In Accumulated Translation
Stock Stock Stock Capital Deficit Adjustments Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
January 1, 1998 $ 22 $ - $132 $23,913 $(11,702) $(25) $12,340
- ------------------------------------------------------------------------------------------------------------------------------------
Exercises of stock options, warrants
and other - - 1 33 - - 34
Net and comprehensive
income - - - - 781 - 781
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 22 - 133 23,946 (10,921) (25) 13,155
- ------------------------------------------------------------------------------------------------------------------------------------
Exercises of stock options and
warrants - - 3 815 - - 818
Conversion of Series A Preferred
Stock to Common Stock (22) - 22 - - - -
Issuance of Series B Preferred Stock - 6 - 1,061 - - 1,067
Conversion of Series B Preferred
Stock to Common Stock - (6) 6 - - - -
Tax benefit of stock option exercises - - - 419 - - 419
Preferred stock dividend - - - - (32) - (32)
Net and comprehensive income - - - - 3,783 - 3,783
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999 - - 164 26,241 (7,170) (25) 19,210
- ------------------------------------------------------------------------------------------------------------------------------------
Exercises of stock options, warrants
and other - - 3 448 - - 451
Acquisition of Envirol product line - - - 43 - - 43
Shares issued in connection with a
marketing agreement - - - 72 - - 72
Tax benefit of stock option exercises - - - 10 - - 10
Net and comprehensive income - - - - 1,548 - 1,548
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2000 $ - $ - $167 $ 26,814 $ (5,622) $(25) $21,334
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Twelve Months
Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 1,548 $ 3,783 $ 781
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 903 989 614
Deferred income tax provision 594 (5,372) -
Gain on sale of intangible assets (283) - -
Acquired in-process research and development - 3,500 -
(Increase) decrease in:
Receivables 1,723 (1,590) (494)
Inventories (1,320) (1,720) (308)
Other current assets 65 270 (295)
Other assets (7) 390 140
Increase (decrease) in:
Accounts payable (720) 18 183
Accrued expenses and taxes payable 403 (225) (165)
Deferred revenue - 151 (100)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,906 194 356
Cash Flows from Investing Activities:
Purchase of property and equipment (237) (398) (674)
Purchase of intangible assets - (316) (380)
Proceeds from sale of intangible assets 663 - -
Short-term investment activity - 3,990 (352)
Acquisition of HTI, net of cash acquired - (8,180) -
Acquisition of ATAB - (3,150) -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 426 (8,054) (1,406)
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 451 818 34
Proceeds from issuance of long term debt 6,356 9,000 323
Debt issuance costs (41) - -
Payments of preferred stock dividends - (32) -
Repayments on financing obligations (11,301) (1,299) (23)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (4,535) 8,487 334
Net increase (decrease) in cash and cash equivalents (1,203) 627 (716)
Cash and cash equivalents, beginning of year 2,491 1,864 2,580
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,288 $ 2,491 $ 1,864
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Disclosure:
Cash paid for taxes 122 20 2
Cash paid for interest 409 505 20
- ---------------------------------------------------------------------------------------------------------------------------
Non-cash investing and financing activity:
Shares issued in connection with a marketing agreement 72 - -
Common stock issued for the purchase of Envirol products 43 - -
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
F-5
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(in thousands, except share and per share data)
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 food safety and water quality markets. Through its
Strategic BioSolutions division, the Company also provides antibody and
immunoreagent research and development production services.
Basis of Presentation
The historical financial statements presented herein include the consolidated
financial statements of Strategic Diagnostics Inc. and its subsidiaries. As used
herein, unless the context requires otherwise, the Company collectively refers
to the Company and its subsidiaries for the periods indicated. All significant
intercompany balances and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CERTAIN BALANCE SHEET
INFORMATION:
Accounts Receivable
As of December 31, 2000, 1999 and 1998, the allowance for doubtful accounts was
$130, $214 and $97, respectively. In 2000, 1999 and 1998, approximately $42, $64
and $23 of write-offs were charged to this allowance in each of the respective
years. If receivables become uncollectible or unbillable, the Company's policy
is to charge these write-offs against the allowance. The Company continually
reviews the realizability of its receivables and charges current period earnings
for the amount deemed unrealizable. At December 31, accounts receivable
consisted of the following:
2000 1999 1998
- ----------------------------------------------------------------------
Accounts receivable $ 3,693 $ 5,539 $ 3,152
Unbilled accounts receivable 605 482 501
- ----------------------------------------------------------------------
$ 4,298 $ 6,021 $ 3,653
- ----------------------------------------------------------------------
Inventories
The Company's inventories, which consist primarily of test kit components, bulk
serum and antibody products are valued at the lower of cost or market. Cost is
determined using the first in, first out method. Realization of the Company's
inventories is dependent upon the successful marketing of its products. At
December 31, inventories consisted of the following:
2000 1999 1998
- --------------------------------------------------------------------
Raw materials $ 2,945 $ 2,258 $ 700
Work in progress 1,620 804 93
Finished goods 2,279 2,462 1,062
- --------------------------------------------------------------------
$ 6,844 $ 5,524 $ 1,855
- --------------------------------------------------------------------
F-6
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives
(generally three to five years) of the assets. Leasehold improvements are
depreciated over the shorter of the lease term or the estimated useful life.
Impairment of Long-Lived Assets
Long-lived assets and intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future undiscounted net
cash flows expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Revenue Recognition
Product related revenues, which include the sale of immunoassay-based test kits,
are generally recognized upon shipment. Included in product related revenues are
the sale of antibodies and immunochemical reagents, which are sold through
longer term development agreements. These revenues are recognized on a
percentage of completion method, and account for approximately 10% of the
Company's revenues. Contract revenues recorded under the Company's collaborative
agreements are recognized upon the completion of certain performance
requirements of the contracts.
During the year ended December 31, 2000, in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, the Company
changed certain revenue recognition policies related to technology access fees
included in contract and other revenues in the accompanying financial
statements. This change in policy results in technology access fees being
deferred and amortized over the term of the related contract. The impact of this
change on a proforma basis was as follows:
1999 1998
Net income applicable to common shareholders $ 3,751 $ 781
Proforma net income applicable to common shareholders $ 3,870 $ 606
Basic income per share $ 0.26 $ 0.06
Proforma basic income per share $ 0.27 $ 0.05
Diluted income per share $ 0.22 $ 0.05
Proforma diluted income per share $ 0.23 $ 0.04
Stock-Based Compensation
The Company discloses information relating to stock-based compensation awards in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, ("SFAS 123"), and has elected to apply
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, ("APB 25"), to such compensation awards. Under the
Company's employee share option plans, the Company grants employee stock options
at an exercise price equal to the fair market value at the date of grant. No
compensation expense is recorded with respect to such stock option grants.
Compensation expense with respect to stock awards granted to non-employees is
measured based upon the fair value of such awards and is charged to expense over
the vesting period.
F-7
Research and Development
Research and development costs are charged to expense as incurred.
Accounting for Income Taxes
Deferred income tax assets and liabilities are determined based on differences
between the financial statement reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The measurement of
deferred income tax assets is reduced, if necessary, by a valuation allowance
for any tax benefits which are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.
Basic and Diluted Income per Share
Basic earnings per share (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 dilutive effect of converting or
exercising all potentially dilutive securities is also included in the
denominator. The Company's calculation of diluted EPS includes the dilutive
effect of converting preferred stock and exercising stock options and warrants
into common shares.
Listed below are the basic and diluted share calculations for the years ended
December 31, 2000, 1999 and 1998.
Twelve Months Ended
December 31,
2000 1999 1998
--------------- ---------------- ----------------
Average common shares outstanding 16,584,579 14,373,869 13,174,151
Shares used in computing basic net income
per share 16,584,579 14,373,869 13,174,151
========== ========== ==========
Series A preferred stock - 1,486,825 2,164,362
Series B preferred stock - 190,637 -
Stock options 821,544 894,452 546,278
Warrants 59,577 142,454 218,347
---------- ---------- ----------
Shares used in computing diluted net income
per share 17,465,700 17,088,237 16,103,138
========== ========== ==========
- --------------------------------------------------------------------------------
In the second quarter of 1999, the 556,286 shares of the Company's Series B
preferred stock were converted by its holders into 556,286 shares of the
Company's common stock. During the third quarter of 1999, the 2,164,362 shares
of the Company's Series A preferred stock were converted by its holders into
2,164,362 shares of the Company's common stock.
F-8
Comprehensive Income
The Company adopted SFAS No. 130 "Reporting Comprehensive Income" ("SFAS 130").
Under SFAS 130, the Company is required to display comprehensive income (loss)
and its components as part of the Company's full set of financial statements.
Comprehensive income (loss) is comprised of net income (loss) and net unrealized
gains (losses) on securities and is presented in the consolidated statements of
changes in stockholders' equity.
Use of Estimates
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, 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 could differ from those
estimates.
Statements of Cash Flows
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
3. MERGERS AND ACQUISITIONS :
Acquisition of HTI BioProducts, Inc.
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. As of December 31,
2000, approximately $5 thousand has been paid under the royalty agreement.
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 was at a fixed rate of interest of 8.96%
per annum, and the remaining principal bore 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 were to 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 December 31, 2000, the Company was in compliance with all debt covenants
under its new financing agreement (see Note 7, Long Term 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 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:
F-9
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
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.
Acquisition of the Operating Assets of the OEM Business of Atlantic Antibodies,
Inc.
On May 11, 1999, the Company completed the acquisition of the operating assets
of the OEM business of Atlantic Antibodies of Windham, Maine, ("ATAB") 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 and 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 $3.2 million in cash, and made a deferred payment
of $150 thousand, on December 7, 2000. A commercial bank provided $3 million of
long-term acquisition financing under the Term Loan (see Note 7, Long Term
Debt).
Acquisition of Products of Envirol, Inc.
The Company completed the acquisition of certain assets of Envirol, Inc., a
private company located in Logan, Utah on April 26, 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 thousand (ii)
the issuance of 10,000 shares of common stock with a value of $43 thousand and
(iii) the payment of a continuing royalty to Envirol for ten years from the date
of acquisition, at a rate of 10% of purchased product sales for the first $125
thousand, and a rate of 4% of product sales in excess of $125 thousand for the
remainder of the royalty term.
Pending Acquisition
On September 26, 2000, the Company announced that it had entered into a
non-binding letter of intent to acquire AZUR Environmental. AZUR is a leading
provider of innovative analytical systems for monitoring water quality
throughout the world. The purchase of AZUR Environmental, whose corporate
headquarters are located in Carlsbad, California, which as presently
contemplated will not require any significant cash investment, is subject to due
diligence and approval by both companies' Board of Directors, approval of the
stockholders of AZUR and other conditions.
Unaudited Pro Forma Combined Results of Operations
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
F-10
forma results exclude $3.5 million of in-process research and development
expenses incurred in connection with the HTI transaction. The ATAB and Envirol
Inc. transactions were not considered material and therefore pro forma results
are not presented for these acquisitions.
Listed below are the pro forma results of the Company for the years ended
December 31, 1999 and 1998 (in thousands):
- -------------------------------------------------------------------------------
Year Ended December 31, 1999 1998
- -------------------------------------------------------------------------------
Revenues $ 23,317 $ 21,362
- -------------------------------------------------------------------------------
Income before non-recurring charges directly
attributable to the HTI acquisition $ 6,865 $ 353
- -------------------------------------------------------------------------------
Basic net income per share before non-recurring
charges directly attributable to HTI acquisition $ 0.48 $ 0.03
- -------------------------------------------------------------------------------
Diluted net income per share before non-recurring
charges directly attributable to HTI acquisition $ 0.40 $ 0.02
- -------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
The purchase price of HTI Bio-Products Inc. 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
4. PROPERTY AND EQUIPMENT:
As of December 31, property and equipment consisted of the following:
2000 1999
- ----------------------------------------------------------------------------
Equipment $ 3,965 $ 3,747
Furniture and fixtures 79 81
Land 710 710
Leasehold improvements 579 561
- ----------------------------------------------------------------------------
Total property and equipment $ 5,333 $ 5,099
Less - accumulated depreciation and amortization (2,414) (1,810)
- ----------------------------------------------------------------------------
$ 2,919 $ 3,289
- ----------------------------------------------------------------------------
Depreciation expense was $604, $559, and $322 in 2000, 1999, and 1998
respectively.
F-11
5. INTANGIBLE ASSETS:
2000 1999 Lives
- ------------------------------------------------------------------
Goodwill $ 4,044 $ 4,044 7 - 20
Intellectual and license rights - 380 -
Other 450 316 5 - 10
Less - accumulated amortization (475) (176)
- ------------------------------------------------------------------
$ 4,019 $ 4,564
- ------------------------------------------------------------------
Amortization of these intangible assets was $299, $451 and $279 in 2000, 1999
and 1998, respectively. In the fourth quarter of 1999, approximately $1.3
million of net intangible assets were eliminated in accordance with SFAS 109, as
the Company believes it will utilize the tax benefits of the net operating
losses acquired in the transactions that occurred in 1996.
6. ACCRUED EXPENSES:
As of December 31, accrued expenses consisted of the following:
2000 1999
- -----------------------------------------------------
Royalties $ 498 $ 275
Accrued salaries and bonus 311 194
Accrued other 250 199
Accrued purchases 70 29
- -----------------------------------------------------
$ 1,129 $ 697
- -----------------------------------------------------
7. LONG-TERM DEBT:
The Company entered into a financing agreement with a commercial bank during
1999, pursuant to which the Company borrowed a total of $9.0 million, in
connection with the acquisitions of HTI and the operating assets of the OEM
business of Atlantic Antibodies. 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 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.
The Company also maintained two term loans acquired in 1998, for the purchase of
specific equipment and leasehold improvements. The maturities of these loans are
48 and 60 months. These notes were secured with Certificates of Deposit (CD) of
$338 purchased by the Company and bore an interest rate of 1% over the purchased
CD rate.
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
$3.2 million is outstanding at December 31, 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 HTI and ATAB
acquisitions described above (see Note 3, Mergers and 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.
F-12
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 December 31, 2000, the Company is
in compliance with all such covenants, with additional borrowing capabilities of
approximately $2.9 million available under the $5 million revolving line of
credit. The financing is secured by substantially all of the Company's assets.
Listed below is a schedule of the Company's long-term indebtedness.
2001 $ 1,339
2002 1,333
2003 556
- ------------------------------------------------------------------
3,228
Less - current portion of long-term debt obligations (1,339)
- ------------------------------------------------------------------
Long-term debt $ 1,889
- ------------------------------------------------------------------
Interest expense was $499, $565 and $20 in 2000, 1999 and 1998 respectively.
8. STOCK OPTIONS:
The Company has two stock option plans (the "1993 Plan" and the "2000 Plan")
which authorize the granting of incentive and nonqualified stock options to
officers, key employees, directors and consultants. Incentive stock options are
granted at not less than 100% of fair market value at the date of grant (110%
for stockholders owning more than 10% of the Company's common stock).
Nonqualified stock options are granted at not less than 85% of fair market value
at the date of grant. All previously issued SDI options were converted into the
2000 Plan. A maximum of 2,500,000 shares of common stock are issuable under the
2000 Plan.
Certain additional options have been granted outside the plans. These options
generally follow the provisions of the 2000 Plan. Information with respect to
the stock options granted under the plans and options granted separately from
the plans is summarized as follows:
Price Aggregate
Number Range Proceeds
- -----------------------------------------------------------------------------
Balance, December 31, 1997 1,464,182 $0.19 - $3.25 $ 2,636
- -----------------------------------------------------------------------------
Granted 380,000 2.00 - 2.63 888
Cancelled (22,377) 0.64 - 1.88 (34)
Exercised (93,172) 0.19 - 1.88 (34)
- -----------------------------------------------------------------------------
Balance, December 31, 1998 1,728,633 $0.19 - $3.25 $ 3,456
- -----------------------------------------------------------------------------
Granted 371,000 2.31 - 4.69 1,020
Cancelled (18,000) 2.63 - 2.63 (47)
Exercised (368,918) 0.19 - 3.25 (818)
- -----------------------------------------------------------------------------
Balance, December 31, 1999 1,712,715 $0.19 - $3.25 $ 3,611
- -----------------------------------------------------------------------------
Granted 278,000 2.50 - 7.63 1,899
Cancelled (115,500) 2.31 - 4.69 (236)
Exercised (176,575) 0.19 - 3.25 (393)
- -----------------------------------------------------------------------------
Balance, December 31, 2000 1,698,640 $0.19 - $7.63 $ 4,881
- -----------------------------------------------------------------------------
F-13
As of December 31, 2000, options covering 1,009,640 shares were exercisable with
an aggregate exercise price of $1,926 and 235,639 shares were available for
future grant under the plans. For options granted, the Company recognizes as
deferred compensation the excess of the deemed value for accounting purposes of
the common stock issuable upon the exercise of options over the aggregate
exercise price of such options. The deferred compensation is amortized over the
vesting period of the options.
Options Outstanding Options Exercisable
--------------------------------------------- --------------------------
Weighted Average
Shares ------------------------------ Wtd. Average
Range of Outstanding Remianing Exercise Shares Exercise
Exercise Prices At 12/31/00 Contractual Life Price Exercisable Price
-------------------------------------------------------------------------------------------------
$ 0.19 89,269 3.3 Years $ 0.19 89,269 $ 0.19
$ 0.64 54,009 3.3 Years $ 0.64 54,009 $ 0.64
$ 1.38 - $ 2.00 691,362 1.9 Years $ 1.90 569,862 $ 1.91
$ 2.13 - $ 3.25 584,000 6.6 Years $ 2.69 292,000 $ 2.63
$ 4.68 - $ 7.63 280,000 9.1 Years $ 6.94 4,500 $ 4.69
-------------------------------------------------------------------------------------------------
$ 0.19 $ 7.63 1,698,640 6.6 Years $ 2.87 1,009,640 $ 1.91
=================================================================================================
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Effective January 1, 1995, the Company adopted the disclosure
requirement of this pronouncement. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under SFAS 123, the Company's net income applicable to common
stockholders for 2000, 1999 and 1998 would have been $946, $3,295 and $493 and
diluted net income per share applicable to common stockholders would have been
$.05, $.19, and $.03, respectively. Because the SFAS 123 method of accounting
has not been applied to options granted prior to January 1, 1995, the resulting
pro forma compensation cost, and thus pro forma net income, may not be
representative of that to be expected in future years.
The weighted average fair value at the date of grant for options granted during
2000, 1999 and 1998 is estimated at $5.65, $2.76 and $1.97 per share,
respectively, using the Black-Scholes option-pricing model. The assumptions used
in the Black-Scholes model are as follows: dividend yield of 0%, expected
volatility of 98% in 2000, 118% in 1999 and 97% in 1998, risk-free interest rate
of 5.75% in 2000, 6.14% in 1999 and 6.14% in 1998, and an expected option life
of 5 years in 2000, 1999 and in 1998.
9. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION:
The Company has two reportable segments. 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 two primary market
categories: food safety and water quality.
The Antibody Segment, Strategic BioSolutions (SBS), includes TSD BioServices,
HTI and the acquired operating assets of the OEM buisness of Atlantic
Antibodies. These businesses provide fully integrated polyclonal and monoclonal
antibody development and large scale manufacturing services to pharmaceutical
and medical diagnostic companies.
Geographic:
Net Revenues 2000 1999 1998
---------------------------------------------------------
United States $21,582 $19,150 $13,257
Rest of the World 4,292 3,384 2,468
---------------------------------------------------------
Total $25,874 $22,534 $15,725
---------------------------------------------------------
F-14
There were no individual countries outside of the United States that represented
more than 10% of the total revenues of the Company. There are no significant
long-lived assets located outside the United States.
Information about Major Customers:
In 2000 and 1999, no single customer accounted for 10% or more of the Company's
revenues. In 1998, Delta and Pine Land Company accounted for 10% of the
Company's revenues.
Reportable Segments:
For reporting purposes a "pro-rata" share of common costs is allocated among the
antibody segment by the test kit segment. Segment profit is based on income
before income taxes excluding the $3.5 million one time charge for in-process
research and development in connection with the acquisition of HTI in 1999.
Segment Information:
Years ended December 31, Test Kits Antibody Total
2000 Revenues $ 15,224 $ 10,650 $ 25,874
Segment profit 1,176 1,014 2,190
Segment assets 25,108 1,400 26,508
Depreciation and amortization 362 541 903
Capital expenditures 237 - 237
- ------------------------------------------------------------------------------------------
1999 Revenues $ 14,609 $ 7,925 $ 22,534
Segment profit (loss) 2,157 (191) 1,966
Segment assets 24,036 5,636 29,672
Depreciation and amortization 621 368 989
Capital expenditures 398 - 398
- ------------------------------------------------------------------------------------------
1998 Revenues $ 12,960 $ 2,765 $ 15,725
Segment profit (loss) 957 (176) 781
Segment assets 14,731 362 15,093
Depreciation and amortization 614 - 614
Capital expenditures 674 - 674
- ------------------------------------------------------------------------------------------
F-15
10. COMMITMENTS AND CONTINGENCIES:
The Company leases its office and manufacturing facilities and other equipment
under operating leases. Rent expense for the years ended December 31, 2000, 1999
and 1998, was $807, $684 and $598, respectively. Future commitments under these
non-cancellable leases at December 31 are as follows:
2001 $ 631
2002 470
2003 379
2004 308
2005 317
2006 and thereafter 663
----------------------------------------------
$ 2,768
----------------------------------------------
The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management, after consultation with legal counsel, does not
believe that the outcome of these matters will have a material adverse effect on
the Company's financial position or results of operations.
11. RETIREMENT SAVINGS PLAN:
In 1992, the Company instituted a retirement savings plan qualified under
Section 401(k) of the Internal Revenue Code. The plan allows for eligible
employees to contribute a portion of their gross wages to the plan. The Company
matches employees' contributions on a 50% basis up to 6% of gross wages. In
2000, 1999 and 1998, the Company recognized expense of $142, $104 and $77
respectively, associated with this plan.
12. INCOME TAXES:
The income tax expense (benefit) consists of the following (in thousands):
2000 1999 1998
- --------------------------------------------------------------------------
Federal current $ 12 $ 40 $ -
deferred 644 (5,149) -
- --------------------------------------------------------------------------
656 (5,109) -
- --------------------------------------------------------------------------
State current 36 15 -
deferred (50) (223) -
- --------------------------------------------------------------------------
(14) (208) -
- --------------------------------------------------------------------------
Foreign current - - -
deferred - - -
- --------------------------------------------------------------------------
$ 642 $ (5,317) $ -
- --------------------------------------------------------------------------
F-16
The following table summarizes the significant differences between the U.S.
Federal statutory rate and the Company's effective tax rate for financial
statement purposes:
2000 1999 1998
- -------------------------------------------------------------------------
Statutory tax rate 34.0% (34.0%) 34.0%
State taxes, net of U.S. Federal benefit 5.0% 0.6% 0.5%
Changes in net valuation reserve (11.2%) (316.3%) (35.4%)
Other, net 1.5% 3.1% 0.9%
- -------------------------------------------------------------------------
29.3% (346.6%) 0.0%
- -------------------------------------------------------------------------
Significant components of the Company's deferred tax assets as of December 31
are as follows:
2000 1999 1998
- -----------------------------------------------------------------------------
Net operating loss carryforwards $ 5,008 $ 5,925 $ 7,288
-
Credit carryforwards 129 40
Amortization and depreciation 1,938 2,076 699
Non-deductible reserves 176 118 55
Inventory costs not currently deductible 207 130 63
- -----------------------------------------------------------------------------
Total deferred tax assets 7,458 8,289 8,105
Valuation allowance (972) (1,218) (8,105)
- -----------------------------------------------------------------------------
Net deferred tax assets $ 6,486 $ 7,071 $ -
- -----------------------------------------------------------------------------
Management continually reviews the valuation on the Company's deferred tax
assets. In the fourth quarter of 1999, management concluded that it was more
likely than not that the Company would realize the tax benefits associated with
its federal deferred tax assets and a portion of its state deferred tax assets
and recorded a deferred tax benefit. In the fourth quarter of 2000, management
concluded that a deferred benefit could be recorded for certain of the state
deferred assets. A valuation allowance remains for a portion of the state
deferred assets and all of the foreign deferred tax assets.
The reduction of the valuation allowance is attributable to management's belief
that it is more likely than not that the deferred tax assets will be realized
through future earnings and/or tax planning strategies.
F-17
The amount of net operating loss carryforwards which can be utilized in any one
period, if any, will be limited by federal tax regulations since a cumulative
change in ownership of more than 50% has occurred within a three year period. In
the fourth quarter of 1999 the valuation allowance on the Company's deferred tax
assets was reduced. The reduction included approximately $1.3 million related to
net operating losses that were acquired in connection with business acquisitions
and mergers. The reduction in the valuation allowance related to the acquired
net operating losses was recorded as a reduction in the remaining intangibles
associated with the acquisition.
The net operating loss carryforwards differ from the accumulated deficit,
principally due to differences in the recognition of certain research and
development expenses, depreciation and amortization, other non-deductible
reserves and the accretion of preferred stock for financial and federal income
tax reporting.
As of December 31, 2000, the Company had federal net operating loss
carryforwards, including those acquired, of approximately $12,047, which begin
to expire as follows:
2005 $ 1,414
2006 2,603
2007 2,584
2008 1,182
2009 2,081
2010 2,183
- ------------------------------------
Total $ 12,047
- ------------------------------------
13. 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.
F-18
14. QUARTERLY FINANCIAL DATA (unaudited):
(In thousands except per share data)
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------
2000
Revenues $ 5,776 $ 5,788 $ 5,701 $ 8,609
Gross profit (1) 2,832 3,159 3,054 4,441
Net income (2) 304 265 89 888
Basic earnings per share 0.02 0.02 0.01 0.05
Diluted earnings per share 0.02 0.02 0.01 0.05
1999
Revenues $ 3,919 $ 5,475 $ 7,459 $ 5,681
Gross profit (1) 2,003 2,773 3,851 3,520
Net income (loss) (3) (3,310) 305 1,010 5,778
Basic earnings (loss) per share (0.25) 0.02 0.07 0.35
Diluted earnings (loss) per share (0.25) 0.02 0.06 0.33
(1) Gross profit is product revenues less manufacturing expenses.
(2) During the fourth quarter of 2000, the Company recorded a tax charge of $204
thousand (net of a reduction in the valuation allowance of approximately $220
thousand).
(3) Results for the three months ended March 31, 1999, includes a $3.5 million
charge for in-process research and development related to the acquisition of HTI
on February 26, 1999. Results for the three months ended December 31, 1999
included a $5.3 million income tax benefit related to the valuation of the
Company's deferred tax assets.
F-19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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.
Date: March 29, 2001 /s/ Richard C. Birkmeyer
---------------------------------------
Richard C. Birkmeyer
President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: March 29, 2001 /s/ Arthur A. Koch, Jr.
---------------------------------------
Arthur A. Koch, Jr.
Vice President - Finance, Chief Operating
Officer, and Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Date: March 29, 2001 /s/ Richard J. Defieux
--------------------------
Richard J. Defieux
Director
Date: March 29, 2001 /s/ Robert E. Finnigan
--------------------------
Robert E. Finnigan
Director
Date: March 29, 2001 /s/ Stephen O. Jaeger
--------------------------
Stephen O. Jaeger
Director
Date: March 29, 2001 /s/ Kathleen E. Lamb
--------------------------
Kathleen E. Lamb
Director
Date: March 29, 2001 /s/ Curtis Lee Smith, Jr.
--------------------------
Curtis Lee Smith Jr.
Director
Date: March 29, 2001 /s/ Grover C. Wrenn
--------------------------
Grover C. Wrenn
Director