SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From _____ to
Commission File Number 0-68440
STRATEGIC DIAGNOSTICS INC.
(Exact name of Registrant as specified in its charter)
----------------------------
Delaware 56-1581761
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
111 Pencader Drive
Newark, Delaware 19702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 456-6789
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report: None
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of March 31, 2001 there were 16,706,530 outstanding shares of the
Registrant's common stock, par value $.01 per share.
STRATEGIC DIAGNOSTICS INC.
INDEX
Item Page
- ---- ----
PART I
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 2
Consolidated Statements of Operations - Three months ended
March 31, 2001 and 2000 3
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the three months ended
March 31, 2001 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 2001 and 2000 5
Notes to Consolidated Interim Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
1
PART I
Item 1. Financial Statements
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited) (audited)
March 31, December 31,
- ----------------------------------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,250 $ 1,288
Receivables, net 4,322 4,298
Inventories 6,794 6,844
Deferred tax asset 1,070 1,070
Other current assets 374 216
- ----------------------------------------------------------------------------------------------------------
Total current assets 13,810 13,716
- ----------------------------------------------------------------------------------------------------------
Property and equipment, net 2,853 2,919
Other assets 445 438
Deferred tax asset 5,082 5,416
Intangible assets, net 3,955 4,019
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Total assets $26,145 $ 26,508
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 663 $ 655
Accrued expenses 720 1,129
Deferred revenue 162 162
Current portion of long term debt 1,328 1,339
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 2,873 3,285
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Long-term debt 1,444 1,889
- ----------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, $.01 par value, 17,500,000 shares authorized,
no shares issued or outstanding - -
Series A preferred stock, $.01 par value, 2,164,362 shares
authorized, no shares issued or outstanding - -
Series B preferred stock, $.01 par value, 556,286 shares
authorized, no shares issued or outstanding - -
Common stock, $.01 par value, 35,000,000 shares authorized,
16,706,530 and 16,699,052 issued and outstanding
at March 31, 2001 and December 31, 2000, respectively 167 167
Additional paid-in capital 26,830 26,814
Accumulated deficit (5,144) (5,622)
Cumulative translation adjustments (25) (25)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 21,828 21,334
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Total liabilities and stockholders' equity $26,145 $ 26,508
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The accompanying notes are an integral part of these statements.
2
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
Three months ended March 31,
- ----------------------------------------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------------------------------------
NET REVENUES:
- ----------------------------------------------------------------------------------------------------
Product related $ 6,891 $ 5,332
Contract and other 183 444
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Total net revenues 7,074 5,776
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OPERATING EXPENSES:
Manufacturing 3,323 2,500
Research and development 719 729
Selling, general and administrative 2,187 2,212
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Total operating expenses 6,229 5,441
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Operating income 845 335
Interest expense, net (33) (127)
Gain on sale of assets - 283
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Income before taxes 812 491
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Income tax expense (334) (187)
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Net income 478 304
- ----------------------------------------------------------------------------------------------------
Basic net income per share $ 0.03 $ 0.02
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Shares used in computing basic net income per share 16,703,000 16,511,000
- ----------------------------------------------------------------------------------------------------
Diluted net income per share $ 0.03 $ 0.02
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Shares used in computing diluted net income per share 17,216,000 17,583,000
- ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Series A Series B Additional Cumulative
Preferred Preferred Common Paid-In Accumulated Translation
Stock Stock Stock Capital Deficit Adjustments Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2000 $ - - 167 26,814 (5,622) (25) $ 21,334
- --------------------------------------------------------------------------------------------------------------------------------
Exercises of stock options
and employee stock
purchase plan - - - 16 - - 16
Net and comprehensive income - - - - 478 - 478
- --------------------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2001 $ - - 167 26,830 (5,144) (25) $ 21,828
================================================================================================================================
The accompanying notes are an integral part of these statements.
4
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months
Ended March 31,
- -----------------------------------------------------------------------------------------------------------
2001 2000
- -----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 478 $ 304
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 217 213
Deferred income tax provision 334 187
Gain on sale of intangible assets - (283)
(Increase) decrease in:
Receivables (24) 273
Inventories 50 (565)
Other current assets (158) (205)
Other assets (7) 9
Increase (decrease) in:
Accounts payable 8 (58)
Accrued expenses and taxes payable (409) (303)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 489 (428)
Cash Flows from Investing Activities:
Purchase of property and equipment (87) (57)
Proceeds from sale of intangible assets - 663
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (87) 606
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 16 178
Repayments on financing obligations (456) (472)
- -----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (440) (294)
Net decrease in Cash and Cash Equivalents (38) (116)
Cash and Cash Equivalents, Beginning of Period 1,288 2,491
- -----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 1,250 $ 2,375
- -----------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Disclosure :
Cash paid for taxes 46 51
Cash paid for interest 57 170
- -----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
5
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(unaudited)
1. BACKGROUND:
Business
Strategic Diagnostics Inc. (the "Company") develops, manufactures and markets
immunoassay-based test kits for rapid and inexpensive detection of a wide
variety of substances in the food safety and water quality markets through its
test kit division. Through its Strategic BioSolutions division, the Company also
provides antibody and immunoreagent research and development production
services.
Business Risks
The Company is subject to certain risks of entities in similar stages of
development. These risks include the Company's ability to successfully develop,
produce and market its products and its dependence on its key collaborative
partners and management personnel.
Basis of Presentation and Interim Financial Statements
The accompanying balance sheets at December 31, 2000 and March 31, 2001,
and the statements of operations for the three months ended March 31, 2000 and
2001, and cash flows for the three months ended March 31, 2000 and 2001 include
the consolidated financial statements of the Company. All intercompany balances
and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated interim financial statements of
the Company have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission regarding financial
reporting. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000. In the opinion of
management, the accompanying financial statements include all adjustments (all
of which are of a normal recurring nature) necessary for a fair presentation.
The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results expected for the full year.
Revenue Recognition
Product related sales are composed of the sale of immunoassay-based test kits
and the sale of antibodies and immunochemical reagents. The sale of
immunoassay-based test kits and certain antibodies and immunochemical reagents
are recognized upon the shipment of the product and transfer of title.
Sales of certain antibodies and immunochemical reagents are recognized under the
percentage of completion method and are recorded based on the percentage of
costs or time incurred through the reporting date versus the estimate for the
complete contract or project.
6
Contract revenues are recognized upon the completion of contractual milestones.
New Accounting Pronouncement
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
(Statement 133) on January 1, 2001. Statement 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
adoption of Statement 133 had no impact on the Company's financial position or
results of operations as it does not currently hold any derivative instruments
or engage in hedging activities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
2. BASIC AND DILUTED INCOME PER SHARE:
Basic EPS is computed by dividing net income or loss by the weighted-average
number of common shares outstanding during the period. Diluted EPS is similar to
basic EPS except that the effect of converting or exercising all potentially
dilutive securities is also included in the denominator. The Company's
calculation of diluted EPS includes the effect of converting or exercising stock
options and warrants into common shares.
Three Months Ended
March 31,
2001 2000
---------- ----------
Average common shares outstanding 16,702,791 16,511,363
Shares used in computing basic net income
per share 16,702,791 16,511,363
========== ==========
Stock options 512,211 1,070,113
Warrants 720 1,040
---------- ----------
Shares used in computing diluted net income
per share 17,215,722 17,582,516
========== ==========
7
3. SALE OF TECHNOLOGY:
In July 1998, the Company entered into an exclusive agreement to sell its
analytical test to detect concentrations of lipoprotein (a) to a biotechnology
company. The purchaser has an extensive portfolio of diagnostic assays and an
established sales and distribution network targeted to physicians and clinical
laboratories.
At December 31, 1999, pursuant to the terms of the July 1998 agreement, the
Company and the purchaser were to determine the purchase price to be paid to the
Company for its right, title and interest in the product. Such purchase price
was based on a multiple of sales volumes achieved during the second half of
1999.
The Company recorded proceeds of $663,000 from the sale of the asset during the
first quarter of 2000, after the sales price was determined on a preliminary
basis, and reported a net gain of $283,000.
4. ACQUISITIONS:
On February 26, 1999, the Company completed the acquisition of HTI Bio-Products
Inc. (HTI), a privately held manufacturer of custom and proprietary antibody
products and services located near San Diego, California. The acquisition was
accounted for using the purchase method of accounting. Under the terms of the
agreement to acquire HTI, the Company paid approximately $8.4 million in cash
and issued 556,286 shares of Series B preferred stock, with a fair market value
of approximately $1.1 million, as determined by an independent valuation firm,
Howard Lawson & Co. 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. These amounts will be
recorded as additional goodwill, when and if paid. 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 March 31, 2001, the Company was in compliance with all debt covenants under
its new financing agreement (see Note 7, Debt).
The Company recorded expenses of $3.5 million of in-process research and
development in the quarter ended March 31, 1999. This amount represented an
allocation of the purchase price of HTI to two primary projects (Troponin I and
Human Red Blood Cell) and nine others that were under development but were not
launched commercially because the development was not complete. Because
technological feasibility had not been established and there was no assurance
that the customers who assisted in the development would succeed in the marker
being diagnostically significant, and no alternative use has been determined,
the entire amount of in-process research and development has been expensed. The
identified research and development consisted of in process projects for the
development of eleven antibodies, as listed below:
8
Troponin I Fatty Acid Binding Protein Cystatin C
Human Red Blood Cell cAMP Brain Natriuretic Peptide
Serum Amyloid A cGMP Phosphorylated Amino Acids
Phosphorylated Tau APE
At this time, each of the eleven are commercially available. There can be no
assurance that all of these markers will be commercially successful. While each
of these markers are now commercially available, the market development has been
slower than anticipated.
The Company commissioned an appraisal of these in-process research and
development projects by an independent firm, Howard Lawson & Co., familiar with
such appraisals. This independent appraisal valued the in-process research and
development projects at $3.5 million by considering the nature and history of
HTI's business, a description of the in-process research and development assets,
the general economic outlook, the outlook for the antibody production industry,
the expected future cash flows of the products and usage of a discounted cash
flow analysis. The average completion stage of the products was estimated at 93%
and a 20% discount rate was used in computing the present value of the future
cash flows of the products.
On May 11, 1999, the Company completed the acquisition of the operating assets
of the OEM business of Atlantic Antibodies of Windham, Maine, one of the first
suppliers of custom and high-volume, bulk polyclonal antibodies for use in
diagnostic test kits and research. The acquisition was accounted for using the
purchase method of accounting. This unit serves a wide range of customers
including pharmaceutical, biotechnology, diagnostic companies and major research
centers in the United States and the Pacific Rim. Under the terms of the
agreement to acquire the operating assets of the OEM business of Atlantic
Antibodies, the Company paid $3.2 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, Debt).
9
The purchase price of HTI Bio-Products and the operating assets of the OEM
business of Atlantic Antibodies Inc. was allocated as follows (in thousands):
HTI ATAB
- --------------------------------------------------------- -------------------------------
Cash $ 249 Land $ 360
Other Assets 1,562 Fixed Assets 1,215
Fixed Assets 1,004 Inventory 1,575
-------------------------------
Liabilities (863)
In-process research & development 3,500 Cash Paid $ 3,150
-------------------------------
Goodwill 4,044
- ---------------------------------------------------------
Total fair value $ 9,496
- ---------------------------------------------------------
Cash Paid $ 8,429
Series B Preferred Stock Issued $ 1,067
Goodwill is being amortized over its estimated useful life of 20 years.
The Company completed an asset purchase agreement with 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 fair value of $43 thousand based on the
last reported sales price of the common stock on the closing date of the
transaction, May 12, 2000, and (iii) the payment of a continuing royalty to
Envirol for ten years, at a rate of 10% of purchased product sales for the first
$125 thousand, and a rate of 4% of purchased product sales for the remainder of
the royalty term. The continuing royalty payments are being expensed as
incurred.
On May 4, 2001, the Company signed a merger agreement to acquire AZUR
Environmental, a privately held manufacturer of proprietary rapid test systems
to measure toxicity in environmental and process waters located in Carlsbad,
California (AZUR). In the six month period ended December 31, 2000, AZUR
recorded sales of approximately $1.1 million. Under the terms of the merger
agreement, the Company will issue 700,000 shares of Series C preferred stock.
Each preferred share will be convertible into common shares at any time at the
option of the holder, and automatically when the closing price of the Company's
common stock is $6.00 or more for a period of 20 consecutive trading days,
according to a conversion ratio which is to be determined at the closing of the
merger and based upon the average closing price of the Company's common stock
during the consecutive 20 trading day period immediately before the closing. The
minimum number of common shares issuable upon conversion will be 700,000 and the
maximum number will be 890,000. If the average closing price is $3.50 or
greater, the number of shares issuable will be 700,000. The preferred shares
also carry a cumulative, annual cash dividend of $0.30 per share and a
liquidation value of $6.00 per share or $4.2 million. The closing of the merger
is subject to the satisfaction of certain conditions, including the issuance of
a permit from the California Department of Corporations to enable the Company to
rely upon the exemption provided by Section 3(a)(10) of the Securities Act of
1933, as amended. Upon the closing of the merger agreement, this transaction
will be accounted for under the purchase method of accounting.
10
5. SEGMENT INFORMATION:
The Test Kit segment develops, manufactures and markets immunoassay-based test
kits for rapid, cost-effective detection of a wide variety of different analytes
in two primary market categories: food safety and water quality testing.
The Antibody Segment, Strategic BioSolutions (SBS), includes the former TSD
BioServices, HTI and the acquired operating assets of the OEM business of
Atlantic Antibodies. These companies provide fully integrated polyclonal and
monoclonal antibody development and large scale manufacturing services to
pharmaceutical and medical diagnostic companies.
For reporting purposes a "pro-rata" share of common costs is charged to the
Antibody segment. Segment assets are those assets associated with the respective
segment's operating activities. Segment profit is based on income before income
taxes.
Segment Information:
For the three months ended March 31, Test Kits Antibody Total
2001 Revenues $ 4,537 $ 2,537 $ 7,074
Segment profit 633 179 812
Segment assets 13,921 12,224 26,145
Depreciation and amortization 93 124 217
Capital expenditures 47 40 87
2000 Revenues $ 3,113 $ 2,663 $ 5,776
Segment profit 270 221 491
Segment assets 17,076 12,245 29,321
Depreciation and amortization 89 124 213
Capital expenditures 57 - 57
6. INVENTORIES:
At March 31, 2001 and December 31, 2000, inventories consisted of the following
(in thousands):
March 31, 2001 December 31, 2000
-------------- -----------------
Raw Materials $ 2,960 $ 2,945
Work in progress 1,256 1,620
Finished goods 2,578 2,279
--------------------------------------------------------------------------
$ 6,794 $ 6,844
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11
7. DEBT:
On May 5, 2000, the Company entered into a financing agreement with a commercial
bank. This agreement provides for a $4 million term loan, of which approximately
$2.8 million is outstanding at March 31, 2001, repayable over three years, and
for up to a $5 million revolving line of credit, based on eligible assets as
described below. Proceeds from this financing retired substantially all of the
Company's previous indebtedness, incurred in connection with the acquisitions
described above (see Note 4, Acquisitions).
The term loan bears a variable interest rate of between 2% and 3% over the
London Interbank Offered Rate ("LIBOR"), depending upon the ratio of the
Company's funded debt to EBITDA (earnings before interest expense, income taxes,
depreciation and amortization). Payments are due monthly, with equal
amortization of principal payments plus interest.
The revolving line of credit bears a variable interest rate of between 1.75% and
2.75% over LIBOR, depending upon the ratio of the Company's funded debt to
EBITDA, and is subject to a borrowing base determined by the Company's eligible
accounts receivable.
Under the terms of the financing, the Company is required to meet certain
financial covenants including funded debt to EBITDA and EBITDA to current
maturities of debt plus interest and taxes. At March 31, 2001, the Company is in
compliance with all such covenants, with additional borrowing capabilities of
approximately $3.1 million available under the revolving line of credit. The
financing is secured by substantially all of the Company's assets.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The information included in this report on Form 10-Q contains certain
forward-looking statements reflecting the current expectations of Strategic
Diagnostics Inc. and its subsidiaries (the "Company"). When used in this report,
the words "anticipate," "enable," "expect," "intend," "believe," "estimate,"
"potential," "promising," "should," "plan," "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.
12
Background
The Company is the entity resulting from the combination of EnSys Environmental
Products, Inc. ("EnSys"), Ohmicron Corporation ("Ohmicron"), TSD BioServices
("TSD"), HTI Bio-Products Inc. ("HTI"), Atlantic Antibodies Inc. ("ATAB") and
Strategic Diagnostics Inc. ("SDI").
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 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.
On May 4, 2001, the Company signed a merger agreement to acquire AZUR
Environmental, a privately held manufacturer of proprietary rapid test systems
to measure toxicity in environmental and process waters located in Carlsbad,
California (AZUR). In the six month period ended December 31, 2000, AZUR
recorded sales of approximately $1.1 million. Under the terms of the merger
agreement, the Company will issue 700,000 shares of Series C preferred stock.
Each preferred share will be convertible into common shares at any time at the
option of the holder, and automatically when the closing price of the Company's
common stock is $6.00 or more for a period of 20 consecutive trading days,
according to a conversion ratio which is to be determined at the closing of the
merger and based upon the average closing price of the Company's common stock
during the consecutive 20 trading day period immediately before the closing. The
minimum number of common shares issuable upon conversion will be 700,000 and the
maximum wil be 890,000. If the average closing price is $3.50 or greater, the
number of shares issuable will be 700,000. The preferred shares also carry a
cumulative, annual cash dividend of $0.30 per share and a liquidation value of
$6.00 per share or $4.2 million. The closing of the merger is subject to the
satisfaction of certain conditions, including the issuance of a permit from the
California Department of Corporations to enable the Company to rely upon the
exemption provided by Section 3(a)(10) of the Securities Act of 1933, as
amended. Upon the closing of the merger agreement, this transaction will be
accounted for under the purchase method of accounting.
13
Results of Operations
Three Months Ended March 31, 2001 vs. March 31, 2000
Net revenues for the first quarter of 2001 were $7.1 million versus $5.8 million
in the first quarter of 2000 or an increase of 22%. Product related revenues
increased by $1.6 million or 29%. The increase in product related revenues was
primarily attributable to increases in purchases of the Company's food safety
products, principally the Company's tests to detect the presence of StarLink(TM)
in corn. These increases more than offset smaller decreases in the Company's
water quality market category and antibody market segment. Contract and other
revenues decreased $261 thousand or 59% in the first quarter of 2001 versus the
same period in 2000. This decrease reflects the Company's continued emphasis on
internal research and development projects.
The strong performance in the food safety category during the first quarter of
2001, was primarily the result of an increasing number of production,
distribution and food companies purchasing and using the Company's GMO
(genetically modified organism) test kits. More importantly the recall of foods
containing Starlink(TM) corn is accelerating change in the procedures used
throughout the food processing industry. The Company plans to leverage its
customer relationships, including new relationships that have developed as a
result of the Starlink(TM) corn situation.
Manufacturing expenses increased $823 thousand or 33% in the first quarter of
2001 versus the first quarter of 2000. This increase reflects the higher level
of product shipments made in the first quarter of 2001 versus the comparable
period of 2000. The gross profit on sales was consistent for both periods.
Research and development costs decreased $10 thousand or 1% in the first quarter
of 2001 when compared to the first quarter of 2000. This decrease is due to a
consolidation of the department's efforts towards more internal versus
contractual research and development projects.
Selling, general and administrative expenses decreased $25 thousand or 1% in the
first quarter of 2001 versus the first quarter of 2000.
Interest expense decreased $94 thousand or 74% in first quarter of 2001 versus
the first quarter of 2000. This decrease is due to a lower level of outstanding
indebtedness.
Income before income taxes increased to $812 thousand from $491 thousand or 65%
in the first quarter of 2001 versus the first quarter of 2000. Excluding the
$283 thousand gain on sale of assets recorded in the first quarter of 2000,
income before taxes grew 290% to $812 thousand from the $208 thousand recorded
in the year earlier period. Segment profit for the test kit segment increased
$363 thousand to $633 thousand or 134% due primarily to the increase in sales of
the segments' food safety products. Segment profit for the antibody segment
decreased by $42 thousand to $179 thousand or 19% due primarily to a decrease in
antibody segment sales.
14
Net income increased $174 thousand or 57% in the first quarter of 2001 versus
the first quarter of 2000, for reasons all as described above. Net income in the
first quarter of 2000 included $175 thousand ($283 thousand less applicable
income taxes) in other income attributable to a gain on sale of assets the
Company recorded in connection with the sale of its Macra product line and
represents the amount the Company received in excess of its investment in the
product. Exclusive of this gain on sales of assets after related taxes, the
Company recorded a $349 thousand or 271% increase in net income for the first
quarter of 2001 when compared to the first quarter net income recorded in 2000.
Liquidity and Capital Resources
The Company's working capital, which consists principally of cash, accounts
receivable and inventory, increased $506 thousand in the first quarter of 2001
to $10.9 million at March 31, 2001 from $10.4 million at December 31, 2000. This
increase was primarily attributable to a reduction in the amount of accrued
expenses at March 31, 2001. Outstanding debt decreased $456 thousand from $3.2
million at December 31, 2000 to $2.8 million on March 31, 2001.
For the quarter ended March 31, 2001, the Company's operating activities
provided more than $489 thousand in cash, a significant increase from the $428
thousand used in the first quarter of 2000. This cash, along with available cash
balances allowed the Company to satisfy all of its operating cash requirements
and reduce total debt outstanding by approximately $456 thousand in the first
quarter of 2001. At March 31, 2001, the Company had $1.4 million in long-term
debt and stockholders' equity of over $21.8 million.
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
is not expected to 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.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to changing interest rates, and is currently not
engaged in hedging activities. Interest on approximately $2.8 million of
outstanding indebtedness is at a variable rate of between 1.75% to 3% over the
published London Interbank Offered Rate.
The Company conducts operations in Great Britain. The consolidated financial
statements of the Company are denominated in U.S. Dollars and changes in
exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company's consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.
16
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATEGIC DIAGNOSTICS INC.
(Registrant)
Signature Title Date
- --------- ----- ----
/s/ RICHARD C. BIRKMEYER President and Chief Executive Officer May 14, 2001
- ------------------------ (Principal Executive Officer)
Richard C. Birkmeyer
/s/ ARTHUR A. KOCH, JR. Vice President and Chief Operating Officer May 14, 2001
- ----------------------- (Principal Financial Officer)
Arthur A. Koch, Jr.
18