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, 2002
[ ] 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.
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(Exact name of Registrant as specified in its charter)
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Delaware 56-1581761
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
111 Pencader Drive
Newark, Delaware 19702
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(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, 2002 there were 17,861,068 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, 2002 and December 31, 2001 2
Consolidated Statements of Operations - Three months
ended March 31, 2002 and 2001 3
Consolidated Statement of Stockholders' Equity and
Comprehensive Income for the three months ended
March 31, 2002 4
Consolidated Statements of Cash Flows - Three months ended
March 31, 2002 and 2001 5
Notes to Consolidated Interim Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II 16
ITEM 4. Submission of Matters to a Vote of Security Holders 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
1
ITEM 1. FINANCIAL STATEMENTS
PART I
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
March 31, December 31,
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2002 2001
- -------------------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,348 $ 2,379
Receivables, net 4,644 4,737
Inventories 7,472 7,639
Deferred tax asset 861 861
Other current assets 705 504
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Total current assets 15,030 16,120
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Property and equipment, net 3,702 4,072
Other assets 65 351
Deferred tax asset 7,090 6,875
Intangible assets, net 4,841 4,716
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Total assets $ 30,728 $ 32,134
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 1,309 $ 1,620
Accrued expenses 606 1,236
Current portion of long term debt 1,282 1,333
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Total current liabilities 3,197 4,189
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Long-term debt 1,079 1,174
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Stockholders' Equity
Preferred stock, $.01 par value, 20,920,648 shares authorized,
no shares issued or outstanding - -
Common stock, $.01 par value, 35,000,000 shares authorized,
17,861,068 and 17,858,889 issued and outstanding
at March 31, 2002 and December 31, 2001, respectively 179 178
Additional paid-in capital 31,167 31,114
Accumulated deficit (4,869) (4,496)
Cumulative translation adjustments (25) (25)
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Total stockholders' equity 26,452 26,771
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Total liabilities and stockholders' equity $ 30,728 $ 32,134
===================================================================================================================
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,
- -------------------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------------------
NET REVENUES:
- -------------------------------------------------------------------------------------------
Product related $ 5,567 $ 6,891
Contract and other 177 183
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Total net revenues 5,744 7,074
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OPERATING EXPENSES:
Manufacturing 3,111 3,323
Research and development 756 719
Selling, general and administrative 2,823 2,187
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Total operating expenses 6,690 6,229
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Operating income (loss) (946) 845
Interest expense, net (16) (33)
Gain on sale and disposal of assets 374 -
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Income (loss) before taxes (588) 812
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Income tax expense (benefit) (215) 334
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Net income (loss) (373) 478
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Basic net income (loss) per share $(0.02) $0.03
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Shares used in computing basic net income
net income (loss) per share 17,860,000 16,703,000
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Diluted net income (loss) per share $(0.02) $0.03
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Shares used in computing diluted
net income (loss) per share 17,860,000 17,216,000
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The accompanying notes are an integral part of these statements.
3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Additional Cumulative
Common Paid-In Accumulated Translation
Stock Capital Deficit Adjustments Total
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Balance,
December 31, 2001 $178 31,114 (4,496) (25) $26,771
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Exercises of stock options, warrants
and other 1 36 - - 37
Employee stock purchase plan - 17 - - 17
Net and comprehensive income - - (373) - (373)
- -------------------------------------------------------------------------------------------------------------------
Balance,
March 31, 2002 $179 31,167 (4,869) (25) $26,452
===================================================================================================================
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,
2002 2001
- ------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ (373) $ 478
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 217 217
Deferred income tax provision (benefit) (215) 334
Gain on sale/disposal of assets (374) -
(Increase) decrease in:
Receivables 495 (24)
Inventories 167 50
Other current assets (201) (158)
Other assets 90 (7)
Increase (decrease) in:
Accounts payable (311) 8
Accrued expenses (630) (409)
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Net cash provided by (used in) operating activities (1,135) 489
Cash Flows from Investing Activities:
Purchase of property and equipment (377) (87)
- ------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (377) (87)
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 37 -
Proceeds from employee stock purchase plan 17 16
Proceeds from issuance of long term debt 554 -
Proceeds from sale/disposal of assets 573 -
Repayments on financing obligations (700) (456)
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Net cash provided by (used in) financing activities 481 (440)
Net increase (decrease) in Cash and Cash Equivalents (1,031) (38)
Cash and Cash Equivalents, Beginning of Period 2,379 1,288
- ------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 1,348 $ 1,250
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Supplemental Cash Flow Disclosure:
Cash paid for taxes 3 46
Cash paid for interest 26 57
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Non-cash investing and financing activity:
Note receivable in connection with sale of assets 300 -
- ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
5
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
1. BACKGROUND:
Business
- --------
Strategic Diagnostics Inc. and its subsidiaries (the "Company") develops,
manufactures and markets immunoassay and bioluminescence-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 segment. Through its
Antibody segment (Strategic BioSolutions), the Company also provides antibody
and immunoreagent research, development and production services.
Basis of Presentation and Interim Financial Statements
- ------------------------------------------------------
The accompanying balance sheets at March 31, 2002 and December 31, 2001, and the
statements of operations and cash flows for the three months ended March 31,
2002 and 2001, include the consolidated financial statements of the Company. All
inter-company 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, 2001. 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.
Revenue Recognition
- -------------------
Product related sales are composed of the sale of immunoassay and
bioluminescence-based test kits and the sale of antibodies and immunochemical
reagents. The sale of all immunoassay and bioluminescence-based test kits, bulk
antibodies and immunochemical reagents are recognized upon the shipment of the
product and transfer of title or when related services are provided. For the
three months ended March 31, 2002 and 2001 these sales represented 86% and 91%
of total Company revenues, respectively.
Sales of monoclonal and polyclonal antibodies 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. The Company recognizes revenues in this manner as
production of these types of antibodies generally take between two and twelve
months to complete and costs are incurred throughout the production process. For
the three months ended March 31, 2002 and 2001 these sales represented 11% and
6% of total Company revenues, respectively.
6
Contract revenues are recognized upon the completion of contractual milestones.
For the three months ended March 31, 2002 and 2001 these sales represented 3% of
total Company revenues in each of these periods.
New Accounting Pronouncements
- -----------------------------
The Company adopted the provisions of FASB Statement No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement 142. Had the amortization provisions of Statement 142
been in effect for all periods presented, the Company's adjusted net income for
the three-month period ended March 31, 2001 would have been $508 or $.03 per
diluted share. The Company will complete the first step of the transitional
goodwill impairment test during its quarter ending June 30, 2002. Any resulting
impairment would be recognized as the cumulative effect of a change in
accounting principle. The Company does not anticipate the testing results will
have an impact of the financial position or results of operations of the
Company.
Upon adoption, the Company was also required to reassess the useful lives and
residual values of all intangible assets with a definite life acquired in
purchase business combinations prior to June 30, 2001. No adjustments were made
to the useful lives and residual values as a result of this reassessment. The
Company did not have any intangible assets with indefinite useful lives acquired
prior to June 30, 2001, which were subject to the transitional intangible asset
impairment test.
FASB Statement No. 143, Accounting for Asset Retirement Obligations (Statement
No. 143) which was released in August 2001, addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and for the associated asset retirement costs. Statement No. 143 requires
an enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development or normal use of the assets. The enterprise is also
required to record a corresponding increase to the carrying amount of the
related long-lived asset (i.e., the associated asset retirement cost) and to
depreciate that cost over the life of the asset. The liability is changed at the
end of each period to reflect the passage of time (i.e., accretion expense) and
changes in the estimated future cash flows underlying the initial fair value
measurement. Because of the extensive use of estimates, most enterprises will
record a gain or loss when they settle the obligation. The Company is required
to adopt Statement No. 143 for its fiscal year beginning January 1, 2003, but it
is not expected to have an impact on the financial position or results of
operations of the Company.
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
7
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 (LOSS) 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,
2002 2001
---------- ----------
Average common shares outstanding 17,859,979 16,702,791
Shares used in computing basic
net income (loss) per share 17,859,979 16,702,791
========== ==========
Stock options - 512,211
Warrants - 720
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Shares used in computing diluted
net income (loss) per share 17,859,979 17,215,722
========== ==========
In the first quarter of 2002, the effect of approximately 832,000 equivalent
shares of stock options and warrants were excluded from the diluted shares
calculation, because they were anti-dilutive.
3. SEGMENT INFORMATION:
The Company has two reportable segments. The Test Kit segment, which includes
products acquired in the AZUR Environmental acquisition, develops, manufactures
and markets immunoassay and bioluminescence-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 business of Atlantic
Antibodies. These businesses 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.
8
Segment Information:
For the three months ended March 31, Test Kits Antibody Total
2002 Revenues $ 3,226 $ 2,518 $ 5,744
Segment profit (loss) (823) 235 (588)
Segment assets 19,303 11,425 30,728
Depreciation and amortization 126 91 217
Capital expenditures 20 357 377
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
4. 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. At March 31, 2002 and December
31, 2001, inventories consisted of the following (in thousands):
March 31, 2002 December 31, 2001
-------------- -----------------
Raw Materials $ 2,963 $ 3,030
Work in progress 1,189 1,398
Finished goods 3,320 3,211
- --------------------------------------------------------------------------------
$ 7,472 $ 7,639
================================================================================
5. DEBT:
On May 5, 2000, the Company entered into a financing agreement with a commercial
bank. This agreement provides for a $4,000 term loan, of which approximately
$928 is outstanding at March 31, 2002, repayable over three years, and for up to
a $5,000 revolving line of credit, of which no amount is outstanding and $2,200
is available at March 31, 2002, based on eligible assets as described below.
Proceeds from this financing retired substantially all of the Company's previous
indebtedness.
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 Company's effective annual
rate of interest on this loan at March 31, 2002, taking into account the
variable interest rate and LIBOR, was 3.87%.
9
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. The Company's effective annual rate of interest on this
line of credit, taking into account the variable interest rate and LIBOR, was
3.62% at March 31, 2002.
On December 13, 2001 the Company entered into an agreement with a commercial
bank to finance the construction of new facilities at its Windham, Maine
location. This agreement provides for up to $1,500 in construction financing, of
which $1,193 is outstanding at March 31, 2002, and is repayable over seven
years, with principal payments to begin when construction is completed or August
13, 2002, whichever is earlier.
The construction loan bears a variable interest rate of between 2% and 3% over
LIBOR depending upon the ratio of the Company's funded debt to EBITDA. Payments
are due monthly, with equal amortization of principal payments plus interest.
The Company's effective annual rate of interest on this loan at March 31, 2002,
taking into account the variable rate of interest and LIBOR, was 3.87%.
Under the terms of the above financings, the Company is required to meet certain
financial covenants including a ratio of funded debt to EBITDA and EBITDA to
current maturities of debt plus interest and taxes. The Company was in breach of
certain loan covenants at March 31, 2002. The Company has received a waiver and
suspension of these loan covenants for the first and second quarters of 2002,
respectively, and the loan covenants have been modified to a minimum level of
EBITDA of $1,500 for the third quarter of 2002. After the third quarter of 2002,
the original provisions of the loan agreement regarding financial covenants will
be operative. Under those provisions the Company is required to maintain a ratio
of current maturities of indebtedness at no less than 1.5 times the amount of
EBITDA on a rolling four-quarter basis and a ratio of funded debt to EBITDA not
to exceed 3.25 times. The above financings are secured by substantially all of
the Company's assets.
On February 18, 2002, the Company entered into an agreement to finance its 2002
insurance premiums with a commercial lender. The agreement provides for $309 in
insurance premium financing, of which $240 is outstanding at March 31, 2002.
Payments are due in nine equal monthly payments ending November 1, 2002. This
insurance premium loan bears a fixed annual interest rate of 5.73%.
6. SEVERANCE ACCRUAL:
In June 2001, the Company recorded $253 in expense for severance costs in
connection with the announced consolidation and expansion of its Antibody
segment. In March 2002, the Company recorded an additional $40 in expense, which
is included in selling, general and administrative expense in the accompanying
statement of operations for the three months ended March 31, 2002. The severance
costs relate to 43 employees in the Company's San Diego, California facility,
all of whom will be terminated by September 30, 2002, as production is
transferred to the Company's Maine facility. As of March 31, 2002, 25 employees
had been terminated and $131 had been charged against the $293 thousand
severance accrual.
10
7. GAIN ON SALE AND DISPOSAL OF ASSETS:
In March of 2002, the Company sold most of the remaining assets of its antibody
production facility near San Diego, California. The Company received proceeds of
$600 for the sale of the property, which included a $300 cash payment and a
one-year note from the purchaser for the remaining $300. The note carries an
interest rate of 5% annually, and is payable in three monthly installments of
interest only payments, with the balance being paid over an additional nine
months of principal and interest payments. The Company recorded a gain on sale
of $131, which represents the amount the Company received above the carrying
value of the assets sold. The current note balance of $300 is classified on the
Company's balance sheet as part of accounts receivable.
In March of 2002, the Company reached an agreement with its insurance carrier in
settlement of costs related to a building fire on its Maine property. The
Company has received proceeds of $273 and is carrying an additional $105 on its
balance sheet in accounts receivable as an amount due for the balance of the
insurance settlement. The Company recorded a gain on disposal of $243, which
represents the amount the Company received above its investment in the assets
destroyed.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This 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 Form 10-Q, the words "anticipate", "enable",
"estimate", "intend", "expect", "believe", "potential", "will", "should",
"project" and similar expressions as they relate to the Company are intended to
identify said 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,
retention of customers and employees, adequate supply of raw materials, the
successful integration and consolidation of the Maine production facilities,
inability to obtain or delays in obtaining third party approvals, including
American Organization of Analytical Chemists Research Institute ("AOAC"), or
required government approvals, the ability to meet increased market demand,
competition, protection of intellectual property, non-infringement of
intellectual property, seasonality, and other factors more fully described in
the Company's public filings with the U.S. Securities and Exchange Commission.
Background
The Company develops, manufactures and markets immunoassay and
bioluminescence-based test kits for rapid and cost-effective 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, development and production services.
11
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 an
increasing percentage of its research and development expenditures. The Company
believes that its competitiveness has been enhanced through the combination of
talent, technology and resources resulting from the relationships and the
acquisitions it has effected since the Company's inception. 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 development and manufacture
of test kits, antibodies and biochemicals, its facility located in Oceanside,
California for the manufacture of instruments, its facility located outside of
San Diego, California (currently being relocated to Windham, Maine, see Notes 6
and 7 in Notes to the Consolidated Financial Statements) 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.
With the 1999 acquisitions of HTI BioProducts, Inc. and certain assets 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.
On September 28, 2001 the Company acquired AZUR Environmental (AZUR), a
privately held manufacturer of proprietary rapid test systems, including the
Microtox Toxicity Test System, which measures toxicity in drinking and process
water, formerly located in Carlsbad, California. With more than 500
peer-reviewed scientific articles and more than 1,700 instruments sold
worldwide, the Microtox Toxicity Test System has been approved in regulations or
standards in Canada and eight (8) European countries, and has been submitted to
the United States of America Environmental Protection Agency ("EPA") for
approval.
Results of Operations
Three Months Ended March 31, 2002 vs. March 31, 2001
Net revenues for the first quarter of 2002 were $5.7 million versus $7.1 million
in the first quarter of 2001, a decrease of $1.3 million or 19%. Product related
revenues decreased by $1.3 million or 19%. Sales of food safety products
decreased $2.1 million to $1.4 million when comparing the first quarter of 2002
to the first quarter of 2001. This decrease is primarily attributable to
decreased sales of test kits to detect StarLink(TM) in corn, as StarLink(TM)
sales were expanding rapidly in the first quarter of 2001 following its
discovery in certain manufactured food products. Water quality product sales
increased $800 thousand or 100%, to $1.6 million in the first quarter of 2002.
This increase is primarily attributable to additional sales of the general
screening test for toxicity following the acquisition of AZUR and the events of
September 11, 2001. Antibody product sales were $2.5 million in the first
quarter of 2002, virtually the same as in the first quarter of 2001. Contract
and other revenues decreased slightly to $177 thousand in the first quarter of
2002, when compared to the $183 recorded in the first quarter of 2001.
12
Manufacturing expenses decreased $212 thousand to $3.1 million in the first
quarter of 2002 versus the first quarter of 2001. These expenses increased
approximately $120 thousand in the Antibody segment due primarily to increased
reagent costs associated with the bulk sale of purchased reagents. These
expenses decreased approximately $330 thousand in the Test Kit segment, which
reflects the lower level of product shipments made in the first quarter of 2002
versus the comparable period in 2001. Gross margins declined to 45.8% in the
first quarter of 2002 versus the 53.0% gross margin recorded in the first
quarter of 2001. This decline primarily results from lower average selling
prices in the food safety category on most products shipped in the first quarter
of 2002, when compared to the first quarter of 2001. Pricing in the food safety
category has been relatively stable since the fourth quarter of 2001.
Research and development costs increased $37 thousand or 5% when comparing the
first quarter of 2002 to the comparable 2001 period. This increase reflects the
Company's continuing investment in new products, including tests to detect food
borne-pathogens and unapproved proteins (including proteins linked to the
transmission of mad cow disease) in animal feed. These new products are expected
to reach commercial launch in the second half of the 2002, except for the test
for E. coli, one of the pathogen tests, which is expected to reach commercial
markets late in the second quarter of 2002, upon receipt of AOAC approval.
Selling, general and administrative expenses increased by $636 thousand or 29%
in the first quarter of 2002 versus the first quarter of 2001. This increase
includes approximately $40 thousand of additional severance expenses associated
with the consolidation of the Antibody facilities in Maine and approximately
$100 thousand of additional expenses in the antibody segment attributable to
maintaining two antibody production facilities. The remainder of the increase is
primarily attributable to increased sales and marketing expenses associated with
the anticipated launch of new products later this year.
Interest expense decreased by $17 thousand or 52% in the first quarter of 2002
when compared to the first quarter of 2001. This decrease is primarily
attributable to the lower levels of outstanding debt during the 2002 period.
During the first quarter of 2002, the Company sold certain property in
California, and recorded a gain on sale of $83 thousand. Also in the first
quarter of 2002, the Company reached an agreement with its insurance carrier for
settlement of costs related to a building fire in Maine. The gain on disposal of
these assets recorded in the first quarter of 2002 was $154 thousand. All of the
foregoing amounts are net of applicable taxes (see Note 7 in Notes to the
Consolidated Financial Statements, with respect to the sale of property and
settlement of costs).
Income before taxes decreased $1.4 million to a loss of $588 thousand. Segment
profit for the Test Kit segment decreased $1.5 million to a loss of $823
thousand in the first quarter of 2002. This decrease is primarily attributable
to reduced product sales and increased operating costs all as described above.
Segment profit for the antibody segment grew $56 thousand during the first
quarter of 2002. Exclusive of the gain on sale of assets, segment profit for the
antibody segment declined $318 thousand to a loss of $139 thousand due to the
increase in expenses described above (see Note 3 in Notes to the Consolidated
Financial Statements).
13
The net loss for the first quarter of 2002 of $373 thousand represents an $851
thousand decrease from the first quarter of 2001 all as described above.
Liquidity and Capital Resources
The Company's working capital, which consists principally of cash, accounts
receivable and inventory, decreased slightly to approximately $11.8 million when
comparing March 31, 2002, to December 31, 2001. Decreases in cash of $1 million,
accounts receivable of $93 thousand, inventory of $166 thousand and an increase
in other current assets of $201 thousand were offset by decreases in accounts
payable of $311 thousand and accrued expenses of $630 thousand. The decrease in
cash is primarily attributable to the $946 operating loss incurred during the
first quarter of 2002. Outstanding debt decreased $145 thousand from
approximately $2.5 million at December 31, 2001 to approximately $2.4 million on
March 31, 2002.
For the three months ended March 31, 2001, the Company's operating activities
used more than $1.1 million in cash, a significant change from the $489 thousand
provided by the Company's operating activities in the first three months of
2001. The Company expects future gross margins to improve as new products are
introduced in the second half of 2002 at higher margins and the Company begins
to realize operating efficiencies from the consolidation of its antibody
production facilities (estimated to be between $750 thousand and $1 million
annually) in Maine. The Company also expects operating expenses to be at or near
the levels achieved in the first quarter of 2002 until the Company identifies
further cost savings or increases in sales activity warrant additional expenses.
At March 31, 2002, the Company had $1.1 million in long-term debt, stockholders'
equity in excess of $26.4 million and unused borrowing capacity under a
revolving line of credit of approximately $2.2 million.
The Company was in breach of certain loan covenants at March 31, 2002. The
Company has received a waiver and suspension of these loan covenants for the
first and second quarters of 2002, respectively, and the loan covenants have
been modified to a minimum level of EBITDA of $1.5 million for the third quarter
of 2002. The Company believes that based on its expectations for the second half
of the year that it will be able to comply with this requirement. After the
third quarter of 2002, the original provisions of the loan agreement regarding
financial covenants will be operative. Under those provisions the Company is
required to maintain a ratio of current maturities of indebtedness at no less
than 1.5 times the amount of EBITDA on a rolling-four quarter basis and a ratio
of funded debt to EBITDA not to exceed 3.25 times (see Note 5 in Notes to the
Consolidated Financial Statements).
The Company believes it has, or has access to sufficient resources to meet its
operating requirements for the foreseeable future. The Company's ability to meet
its long-term capital requirements will depend on a number of factors, including
compliance with existing and new loan covenants, 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 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.
14
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 $2.1 million of
outstanding indebtedness is at a variable rate of between 2% to 3% over the
published London Interbank Offered Rate (LIBOR), based upon the Company's ratio
of funded debt to EBITDA, and was 2% over LIBOR on average for the quarter.
Interest on approximately $240 thousand of indebtedness is at a fixed rate of
5.73%. At the Company's current level of indebtedness, each 1% change in the
variable interest rate will have an effect of $21 thousand on the Company's
interest expense charges.
The Company conducts operations in Great Britain. The consolidated financial
statements of the Company are denominated in U.S. Dollars and changes in
exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company's consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.
15
PART II - OTHER INFORMATION
Item 3. Defaults upon Senior Securities
The Company was in breach of certain loan covenants at March 31, 2002. The
Company has received a waiver and suspension of these loan covenants for the
first and second quarters of 2002, respectively, and the loan covenants have
been modified to a minimum level of EBITDA of $1.5 million for the third quarter
of 2002. After the third quarter of 2002, the original provisions of the loan
agreement regarding financial covenants will be operative. Under those
provisions the Company is required to maintain a ratio of current maturities of
indebtedness at no less than 1.5 times amount of EBITDA on a rolling
four-quarter basis and a ratio of funded debt to EBITDA not to exceed 3.25 times
(see Note 5 in Notes to the Consolidated Financial Statements).
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
On February 22, 2002, the Company filed a report on Form 8-K
pursuant to Item 7 and Item 9 providing fourth quarter 2001 and
year-end 2001 results.
On April 8, 2002, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 providing a first quarter 2002 update and outlook
for 2002.
On April 25, 2002, the Company filed a report on Form 8-K pursuant
to Item 7 and Item 9 providing the Company's first quarter 2002
actual results.
16
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 13, 2002
- ------------------------ (Principal Executive Officer)
Richard C. Birkmeyer
/s/ ARTHUR A. KOCH, JR. Vice President and Chief Operating Officer May 13, 2002
- ------------------------ (Principal Financial Officer)
Arthur A. Koch, Jr.
17