SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 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.
(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
--------------------
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 October 31, 2002 there were 18,937,330 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 - September 30, 2002 and December 31, 2001 2
Consolidated Statements of Operations - Three months and nine months
ended September 30, 2002 and 2001 3
Consolidated Statement of Stockholders' Equity and
Comprehensive Income for the nine months ended
September 30, 2002 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 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 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20
ITEM 4. Controls and Procedures 21
PART II 22
ITEM 2. Changes in Securities and Use of Proceeds 22
ITEM 3. Defaults upon Senior Securities 22
ITEM 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
Item 1. Financial Statements
PART I
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
September 30, December 31,
- --------------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,330 $ 2,379
Receivables, net 4,703 4,737
Inventories 6,905 7,639
Deferred tax asset 861 861
Other current assets 805 504
- --------------------------------------------------------------------------------------------------------------------
Total current assets 14,604 16,120
- --------------------------------------------------------------------------------------------------------------------
Property and equipment, net 4,079 4,072
Other assets 48 351
Deferred tax asset 7,436 6,875
Intangible assets, net 7,128 4,716
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 33,295 $ 32,134
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 979 $ 1,620
Accrued expenses 668 1,236
Current portion of long term debt 245 1,333
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,892 4,189
- --------------------------------------------------------------------------------------------------------------------
Long-term debt 1,264 1,174
- --------------------------------------------------------------------------------------------------------------------
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,
18,936,122 and 17,858,889 issued and outstanding
at September 30, 2002 and December 31, 2001, respectively 189 178
Additional paid-in capital 35,270 31,114
Accumulated deficit (5,295) (4,496)
Cumulative translation adjustments (25) (25)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 30,139 26,771
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 33,295 $ 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 Nine Months
Ended September 30, Ended September 30,
- -------------------------------------------------------------------------------------------- ----------------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------- ----------------------------
NET REVENUES:
- -------------------------------------------------------------------------- --------------- ------------ -------------
Product related $ 5,921 $ 8,270 $ 16,959 $ 22,160
Contract and other 198 205 480 590
- -------------------------------------------------------------------------- --------------- ------------ -------------
Total net revenues 6,119 8,475 17,439 22,750
- -------------------------------------------------------------------------- --------------- ------------ -------------
OPERATING EXPENSES:
Manufacturing 2,707 3,671 8,736 10,252
Research and development 804 718 2,448 2,142
Selling, general and administrative 2,434 2,667 7,938 7,317
- -------------------------------------------------------------------------- --------------- ------------ -------------
Total operating expenses 5,945 7,056 19,122 19,711
- -------------------------------------------------------------------------- --------------- ------------ -------------
Operating income (loss) 174 1,419 (1,683) 3,039
Interest expense, net (18) (4) (51) (52)
Gain on sale of assets - - 374 76
- -------------------------------------------------------------------------- --------------- ------------ -------------
Income (loss) before taxes 156 1,415 (1,360) 3,063
- -------------------------------------------------------------------------- --------------- ------------ -------------
Income tax expense (benefit) 35 519 (561) 1,174
- -------------------------------------------------------------------------- --------------- ------------ -------------
Net income (loss) 121 896 (799) 1,889
- -------------------------------------------------------------------------- --------------- ------------ -------------
Basic net income (loss) per share $ 0.01 $ 0.05 $ (0.04) $ 0.11
========================================================================== =============== ============ =============
Shares used in computing basic
net income (loss) per share 18,581,000 16,856,000 18,244,000 16,807,000
========================================================================== =============== ============ =============
Diluted net income (loss) per share $ 0.01 $ 0.05 $ (0.04) $ 0.11
========================================================================== =============== ============ =============
Shares used in computing diluted
net income (loss) per share 18,941,000 17,473,000 18,244,000 17,353,000
========================================================================== ============== ============ =============
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
- -------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2001 $ 178 31,114 (4,496) (25) $ 26,771
- -------------------------------------------------------------------------------------------------------------------
Exercises of stock options, warrants
and other 1 167 - - 168
Employee stock purchase plan - 33 - - 33
Directors stock purchase 4 1,460 - - 1,464
Acquisition of Molecular Circuitry Inc. 6 2,496 - - 2,502
Net and comprehensive income - - (799) - (799)
- -------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 2002 $ 189 35,270 (5,295) (25) $ 30,139
===================================================================================================================
The accompanying notes are an integral part of these statements.
4
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months
Ended September 30,
- ------------------------------------------------------------------------------------------------
2002 2001
- ------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ (799) $ 1,889
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 654 669
Deferred income tax provision (561) 999
Gain on sale/disposal of assets (374) (76)
(Increase) decrease in:
Receivables 53 (1,214)
Inventories 734 (273)
Other current assets (301) (298)
Other assets 114 (281)
Increase (decrease) in:
Accounts payable (641) 731
Accrued expenses (668) 474
Deferred revenue - (100)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,789) 2,520
Cash Flows from Investing Activities:
Purchase of property and equipment (883) (954)
Proceeds from sale of land - 330
Net cash acquired in acquisition of Azur Environmental - 212
- ------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (883) (412)
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 168 368
Proceeds from employee stock purchase plan 33 31
Proceeds from sale of stock 1,464 -
Proceeds from issuance of long & short term debt 1,947 -
Proceeds from sale/disposal of assets 956 -
Repayments on financing obligations (2,945) (1,336)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,623 (937)
Net increase (decrease) in Cash and Cash Equivalents (1,049) 1,171
Cash and Cash Equivalents, Beginning of Period 2,379 1,288
- ------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $1,330 $ 2,459
================================================================================================
Supplemental Cash Flow Disclosure:
Cash paid for taxes 3 176
Cash paid for interest 72 126
================================================================================================
Non-cash investing and financing activity:
Note receivable in connection with the sale of assets 300 -
Preferred stock issued for the purchase of Azur Environmental - 2,989
Common stock issued for the purchase of
Molecular Circuitry Inc. 2,502 -
================================================================================================
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 cost-effective 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 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 of the results of
operation.
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
nine months ended September 30, 2002 and 2001 these sales represented 83% and
91% of total Company revenues, respectively.
Sales of monoclonal and polyclonal antibodies under customer contracts and
purchase orders 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 takes between two and twelve months to complete and costs are incurred
throughout the production process. For the nine months ended September 30, 2002
and 2001 these sales represented 14% and 6% of total Company revenues,
respectively.
Contract revenues are recognized upon the completion of contractual milestones.
For each of the nine month periods ended September 30, 2002 and 2001 these sales
represented 3% of total Company revenues.
6
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 and nine-month period ended September 30, 2001 would have been
$926 or $.05 per diluted share and $1,980 or $.11 per diluted share, compared to
the $896 or $.05 per diluted share and $1,889 or $.11 per diluted share as
reported, respectively.
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 other than goodwill, 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 a material impact on the financial position or results
of operations of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant issues
regarding the recognition, measurement and reporting of costs associated with
exit and disposal activities, including restructuring activities. SFAS No. 146
also addresses recognition of certain costs related to terminating a contract
that is not a capital lease, costs to consolidate facilities or relocate
employees and termination of benefits provided to employees that are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred compensation
contract. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. Adoption of SFAS No. 146 is not expected to
have a material impact on the financial position or results of operations of the
Company.
7
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 (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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Average common shares outstanding 18,580,855 16,856,103 18,243,870 16,807,262
Shares used in computing basic
net income (loss) per share 18,580,855 16,856,103 18,243,870 16,807,262
========== ========== ========== ==========
Series C preferred stock - 15,385 - 5,147
Stock options 358,841 552,814 - 496,914
Warrants 1,040 48,570 - 43,583
---------- ---------- ---------- ----------
Shares used in computing diluted
net income (loss) per share 18,940,736 17,472,872 18,243,870 17,352,906
========== ========== ========== ==========
In the nine months ended September 30, 2002, the effect of approximately 600,000
equivalent shares of stock options and warrants were excluded from the diluted
shares calculation, because they were anti-dilutive.
8
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.
Segment Information:
For the three months ended September 30, Test Kits Antibody Total
--------- -------- -----
2002 Revenues $ 3,544 $ 2,575 $ 6,119
Segment profit (loss) (239) 395 156
Segment assets 20,930 12,365 33,295
Depreciation and amortization 119 81 200
Capital expenditures 13 89 102
2001 Revenues $ 5,726 $ 2,749 $ 8,475
Segment profit 1,282 133 1,415
Segment assets 19,187 11,807 30,994
Depreciation and amortization 94 132 226
Capital expenditures 150 482 632
For the nine months ended September 30, Test Kits Antibody Total
--------- -------- -----
2002 Revenues $ 9,912 $ 7,527 $ 17,439
Segment profit (loss) (2,180) 820 (1,360)
Segment assets 20,930 12,365 33,295
Depreciation and amortization 391 263 654
Capital expenditures 130 753 883
2001 Revenues $ 14,908 $ 7,842 $ 22,750
Segment profit 2,697 366 3,063
Segment assets 19,187 11,807 30,994
Depreciation and amortization 284 385 669
Capital expenditures 214 740 954
9
4. INVENTORIES:
The Company's inventories, which consist primarily of test kit components, bulk
antibody serum and other antibody products are valued at the lower of cost or
market. Cost is determined using the first in, first out method. At September
30, 2002 and December 31, 2001, inventories consisted of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Raw Materials $ 3,056 $ 3,030
Work in progress 1,050 1,398
Finished goods 2,799 3,211
- ---------------------------------------------------------------------
$ 6,905 $ 7,639
=====================================================================
5. INTANGIBLE ASSETS:
September 30, 2002 December 31, 2001
------------------ -----------------
Goodwill $ 5,128 $ 4,997
Other 2,791 450
Less - accumulated amortization (791) (731)
- ---------------------------------------------------------------------
Net intangible assets $ 7,128 $ 4,716
=====================================================================
6. 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, all of which had been paid
on or before September 30, 2002, and for up to a $5,000 revolving line of
credit, none of which was outstanding and approximately $2,800 of which was
available at September 30, 2002, based on eligible assets as described below.
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
approximately 3.56% at September 30, 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 financing, of which
approximately $1,475 was outstanding at September 30, 2002, and is repayable
over seven years, with principal payments beginning on October 1, 2002.
The 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 September 30, 2002
taking into account the variable rate of interest and LIBOR, was approximately
3.81%.
10
Under the terms of the above financings, the Company is required to meet certain
financial covenants. These covenants require the Company 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 Company was in breach of the EBITDA to current
maturities of debt plus interest and taxes, loan covenant at March 31, 2002 and
both the ratio of funded debt to EBITDA and EBITDA to current maturities of debt
plus interest and taxes, loan covenants at June 30 2002. For the quarter ended
September 30, 2002, these loan covenants were amended to a minimum level of
EBITDA of $1,500. The Company has received a waiver and suspension of these loan
covenants for the first, second and third quarters of 2002, respectively, and
the loan covenants have been modified to a minimum level of EBITDA of $700 for
the fourth quarter of 2002 and $650 for the first quarter of 2003. After the
first quarter of 2003, the original provisions of the loan agreement regarding
financial covenants will be operative.
As of September 30, 2002, the outstanding balance on all of the Company's
commercial bank debt was approximately $1,475, as described above. This
indebtedness is secured by substantially all of the Company's assets. The
Company expects that it will be able to meet or exceed all of its financial
covenants with respect to this indebtedness, or to successfully negotiate a
waiver of or modification to cure any breach of any of these financial
covenants.
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 approximately $35 is outstanding at
September 30, 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%.
7. 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. For the nine months ended September 30, 2002, the Company recorded an
additional $64, of which $40 was charged in the quarter ending March 31, 2002
and additional $24 of which was charged in the quarter ending June 30, 2002, all
of which is included in selling, general and administrative expense in the
accompanying statement of operations. The severance costs relate to 44 employees
in the Company's San Diego, California facility, all of whom left the Company on
or before July 31, 2002, as production was transferred to the Company's Maine
facility. As of September 30, 2002, $282 had been charged against the $317
thousand severance accrual.
8. GAIN ON SALE AND DISPOSAL OF ASSETS:
In March 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 carried an
interest rate of 5% annually, and was payable in three monthly installments of
11
interest only payments, with the balance being paid over an additional nine
months of principal and interest payments. The note was repaid in full in August
of 2002. The Company recorded a gain on sale of $131, which represents the
amount the Company received above the carrying value of the assets sold.
In March 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 $359 and is carrying an additional $19 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.
9. ACQUISITIONS:
On July 8, 2002, the Company purchased certain assets of Molecular Circuitry,
Inc. ("MLC"). The purchased assets consist primarily of various proprietary
media technology that will be used in combination with the Company's new
diagnostic tests for food-borne pathogens including salmonella and E. Coli. The
assets purchased also include the sales and marketing rights to the ruminant
feed test product line that the Company and MLC have been jointly developing in
collaboration with McDonald's Corporation.
In consideration for these and other related assets, the Company issued to MLC
600,000 unregistered shares of the Company's common stock with a value of $4.17
per share or $2,502, computed by averaging the price of the Company's common
stock for the period beginning on the two business days before the acquisition
and ending two business days after the acquisition, plus an additional $100 in
transaction related costs. In addition the Company will also pay MLC a
continuing royalty for ten years on sales of specified products, and/or
components of products, which will be charged to operations when and if
incurred.
The assets of MLC were valued by AUS Consultants Valuation Services of New
Jersey, a firm that is familiar with such valuations. AUS Consultants determined
the value of the assets purchased to be $261 in laboratory equipment (tangible
assets) and approximately $2,341 for the intellectual and property rights to the
MLC developed Express Media, Chromagenic Media and Ruminant Feed Test product
lines (intangible assets).
The intangible assets were valued using the income approach. This method
estimates market value as the present value of future economic benefits to be
derived from the exploitation of these assets or product lines. This methodology
requires a forecast of net cash flow from each product line, an estimate of the
relative risk of achieving that income stream, and an estimate as to the
duration of the income. An economic life of twenty years was used in the above
calculations utilizing a discount rate of approximately 25%.
10. SALE OF STOCK TO DIRECTORS:
During the third quarter of 2002, the Company issued 455,472 shares of its
unregistered common stock to its outside directors and certain of their
affiliates at a price of $3.216 per share. This price represents the higher of
the closing price of the Company's common stock on August 15, 2002, the last
12
complete trading day before the stock purchase agreement for such shares was
executed, and the average of the closing prices for the five trading days ending
on that date. The approximately $1,500 raised from the sale of these shares was
used for working capital and general corporate purposes.
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", "may", "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, attraction and retention of management and key
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, the ability to obtain financing 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
Test Kit segment. Through its Strategic BioSolutions division, the Company also
provides antibody and immunoreagent research, development and 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 and the Company will continue to do so from time to time. The
Company expects that internal research and development projects, primarily in
the food safety area, will continue to represent a substantial 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,
13
California for the manufacture of instruments and its facility located in
Windham, Maine for the manufacture of custom, high-volume bulk polyclonal
antibodies. These relationships and acquisitions also 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.
On July 8, 2002, the Company purchased certain assets of Molecular Circuitry
Inc. ("MLC"). The purchased assets consist primarily of various proprietary
media technology that will be used in combination with the Company's new
diagnostic tests for food-borne pathogens including salmonella and E. Coli. The
assets purchased also include the sales and marketing rights to the ruminant
feed test product line that the company and MLC have been jointly developing in
collaboration with McDonald's Corporation.
Results of Operations
Three Months Ended September 30, 2002 vs. September 30, 2001
Net revenues for the third quarter of 2002 were $6.1 million versus $8.5 million
in the third quarter of 2001, a decrease of $2.4 million or 28%. Product related
revenues for the third quarter of 2002 decreased by $2.3 million to $5.9 million
or 28% from the third quarter of 2001. Sales of food safety products decreased
$1.8 million to $1.6 million when comparing the third quarter of 2002 to the
third quarter of 2001. The foregoing decreases are primarily attributable to the
continued decreased sales of test kits to detect StarLink(TM) in corn, as
StarLink(TM) test kit sales expanded rapidly in 2001 following the discovery of
StarLink(TM) in certain manufactured food products. Water quality product sales
decreased $404 thousand or 19%, to $1.7 million in the third quarter of 2002
when compared to the third quarter of 2001. This decrease is primarily
attributable to a spike in sales of the Company's Microtox(R) toxicity test
systems, following the events of September 11, 2001, in the prior years quarter.
However, sales of the Company's Microtox(R) toxicity testing systems for
drinking water applications have been steadily increasing in 2002 with more than
30 North American cities utilizing the system.
14
Antibody product sales were $2.6 million in the third quarter of 2002, a
decrease from the $2.7 million in the third quarter of 2001. Contract and other
revenues decreased slightly to $198 thousand in the third quarter of 2002, when
compared to the $205 thousand recorded in the third quarter of 2001.
Food safety revenues increased to $1.6 million in the third quarter of 2002 from
the $1.2 million recorded in the second quarter of 2002. The Company believes
its leadership position in GMO testing is continuing to grow. The Company
believes that the reliance on GMO technology continues to grow both in the U.S.
and abroad, and the demand for the Company's testing products is increasing as
well. Sales of GMO tests for cottonseed increased during the quarter versus the
second quarter of 2002. The Company believes it now supplies every major
cottonseed company (in terms of seed sales) in the U.S. and Australia (two
principal regions in the world where GMO technology is utilized). In addition
the Company believes the outlook for GMO sales in South America is
strengthening, as a major distributor is expecting as much as a 30% increase in
sales during the coming season.
The Company launched its RapidChek(R) lateral flow test for E. Coli in the third
quarter. Since RapidChek's(R) launch several companies with large testing
requirements have initiated validation studies using RapidChek(R). Initial
results have been favorable. Additionally the Company's research and product
development efforts are continuing toward the introduction of new products in
the food pathogen market. These new products include tests for salmonella,
listeria and a test for proteins in animal feed that are linked to the
transmission of BSE, or mad cow disease.
Antibody product sales increased to $2.6 million in the third quarter of 2002
from the $2.4 million recorded in the second quarter of 2002. Several new or
expanded customer relationships were established in the antibody segment during
the quarter as customers and prospects had the opportunity to validate the
manufacturing and quality procedures at the Company's expanded manufacturing
facilities in Windham, Maine. The Company's project to develop a
point-of-treatment diagnostic test for Bayer Corporation's new product Repinotan
(TM) is continuing with Bayer's Phase III clinical trials, which are expected to
be completed during 2003.
Manufacturing expenses decreased $964 thousand to $2.7 million in the third
quarter of 2002 versus the third quarter of 2001. These expenses decreased
approximately $220 thousand in the Antibody segment due primarily to lower costs
of reagents, supplies and labor used in manufacturing. These expenses decreased
approximately $744 thousand in the Test Kit segment, which reflects among other
things, the lower level of product shipments made in the third quarter of 2002
versus the comparable period in 2001. Gross product margins in the Test Kit
segment declined slightly to 61.0% in the third quarter of 2002 versus the 62.9%
gross product margin recorded in the third quarter of 2001. This decline
primarily results from lower volumes of food safety products sold during the
2002 period and was partially offset by an increase in the gross product margins
of the Antibody segment, as those margins rose to 45.5% in third quarter of 2002
from the 41.0% gross product margin recorded during the third quarter of 2001.
This increase is primarily attributable to the operating efficiencies achieved
through the consolidation of the Company's antibody manufacturing facilities in
Windham, Maine.
Research and development costs increased $86 thousand or 12% when comparing the
third 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. As described above, the first
of these products was launched in third quarter of 2002, and others are expected
to reach commercial launch over the next two quarters.
15
Selling, general and administrative expenses decreased by $233 thousand or 9% in
the third quarter of 2002 versus the third quarter of 2001. This decrease is
primarily attributable to the Company's effort to reduce expenses, which
included the consolidation of its antibody production facilities in Windham,
Maine.
Net interest expense increased by $14 thousand in the third quarter of 2002 when
compared to the third quarter of 2001. This increase is primarily attributable
to the higher levels of outstanding debt during the 2002 period due to the
decrease in revenues as described above, combined with lower levels of interest
earning funds on deposit.
Income before taxes decreased $1.3 million to $156 thousand. Segment profit for
the Test Kit segment decreased $1.5 million to a loss of $239 thousand in the
third quarter of 2002 compared to the third quarter of 2001. This decrease is
primarily attributable to reduced product sales and increased research costs,
all as described above. Segment profit for the Antibody segment totaled $395
thousand during the third quarter of 2002 an increase of $262 thousand from the
year earlier period. This increase is attributable to the lower operating,
general and administrative expenses resulting from the consolidation of
facilities and other initiatives as described above. (See Note 3 in Notes to the
Consolidated Financial Statements).
Nine Months Ended September 30, 2002 vs. September 30, 2001
Net revenues for the nine months ended September 30, 2002 were $17.4 million
versus $22.8 million in the nine months ended September 30, 2001, a decrease of
$5.3 million or 23%. Product related revenues decreased by $5.2 million or 23%.
Sales of food safety products decreased $5.5 million to $4.3 million when
comparing the nine months ended September 30, 2002 to the nine months ended
September 30, 2001. These decreases are primarily attributable to the continued
decreased sales of test kits to detect StarLink(TM) in corn, as StarLink(TM)
test kit sales expanded rapidly in 2001 following its discovery in certain
manufactured food products. Water quality product sales increased $620 thousand
or 14%, to $4.6 million in the nine months ended September 30, 2002. This
increase is primarily attributable to additional sales of the Company's general
screening test for toxicity in water. Antibody product sales were $7.5 million
in the nine months ended September 30, 2002, a 4% decrease from the $7.8 million
recorded in the nine months ended September 30, 2001. Contract and other
revenues decreased to $480 thousand in the nine months ended September 30, 2002,
when compared to the $590 recorded in the nine months ended September 30, 2001.
Manufacturing expenses decreased $1.5 million to $8.7 million in the nine months
ended September 30, 2002 versus the nine months ended September 30, 2001. These
expenses decreased approximately $206 thousand in the Antibody segment due
primarily to lower costs of reagents, supplies and labor used in manufacturing.
Manufacturing expenses decreased approximately $1.3 million in the Test Kit
segment, which reflects the lower level of product shipments made in the nine
months ended September 30, 2002 versus the comparable period in 2001. Gross
product margins in the Test Kit segment declined to 54.8% in the nine months
ended September 30, 2002 versus the 61.1% gross product margin recorded in the
nine months ended September 30, 2001. This decrease is primarily attributable to
the lower levels of food safety product shipments in the 2002 period. Gross
16
product margins in the Antibody segment grew to 40.6% in the third quarter of
2002 from the 40.4% gross product margin recorded during the year earlier
period. This increase is primarily attributable to the completion of the
consolidation of the Antibody manufacturing facilities in Windham, Maine.
Research and development costs increased $306 thousand or 14% when comparing the
nine months ended September 30, 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. As described
above, the first of these products was launched in third quarter 2002 and others
are expected to reach commercial launch in the next six months.
Selling, general and administrative expenses increased by $621 thousand or 8% in
the nine months ended September 30, 2002 versus the nine months ended September
30, 2001. This increase is primarily attributable to increased marketing
expenses associated with the launch of the E. Coli test kit and the anticipated
launch of additional new products, increased insurance premiums, professional
fees and $64 thousand in additional severance expenses for the antibody segment.
The 2001 results included a $253 thousand charge for severance related to the
closure of the Company's antibody facility near San Diego, California (See Note
7 in Notes to the Consolidated Financial Statements).
Net interest expense remained virtually the same when comparing the nine months
ended September 30, 2002 to the nine months ended September 30, 2001.
During the first quarter of 2002, the Company sold certain property in
California, and recorded a gain on sale of $131 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 $243 thousand. During the
first quarter of 2001, the Company sold certain assets and realized a gain of
$76 thousand. (See Note 8 in Notes to the Consolidated Financial Statements,
with respect to the sale of property and settlement of costs).
Income before taxes decreased $4.4 million to a loss of $1.4 million. Segment
profit for the Test Kit segment decreased $4.9 million to a loss of $2.2 million
in the nine months ended September 30, 2002. This decrease in the Test Kit
segment is primarily attributable to reduced product sales and increased
operating costs, all as described above. Segment profit for the Antibody segment
was $820 thousand for the nine months ended September 30, 2002 an increase of
$454 thousand over the prior years nine month period. This increase is
attributable to the lower operating, severance and general and administrative
expenses as described above. (See Note 3 in Notes to the Consolidated Financial
Statements).
Liquidity and Capital Resources
During the third quarter of 2002, the Company issued 455,472 shares of its
unregistered common stock to its outside directors and certain of their
affiliates at a price of $3.216 per share. This price represents the higher of
the closing price of the Company's common stock on August 15, 2002, the last
complete trading day before the stock purchase agreement for such shares was
executed, and the average of the closing prices for the five trading days ending
on that date. The approximately $1.5 million raised from the sale of these
shares was used for working capital and general corporate purposes.
17
The Company's working capital (current assets less current liabilities), which
consists principally of cash, accounts receivable and inventory, increased $781
thousand or 7%, to approximately $12.7 million when comparing September 30,
2002, to December 31, 2001. Decreases in cash of $1 million, inventory of $734
thousand and an increase in other current assets of $301 thousand due primarily
to increases in prepaid insurance, were more than offset by decreases in
accounts payable of $641 thousand, accrued expenses of $568 thousand and current
portion of debt $1.1 million. The decrease in cash is primarily attributable to
the $1.7 million operating loss incurred during the first nine months of 2002
and approximately $1 million of debt repaid during the nine month period ending
September 30, 2002. Outstanding debt decreased $998 thousand from approximately
$2.5 million at December 31, 2001 to approximately $1.5 million at September 30,
2002, primarily as a result of the cash raised through the sale of the Company's
common stock to its outside directors as described above.
For the nine months ended September 30, 2002, the Company's operating activities
used more than $1.5 million in cash, a significant change from the $2.5 million
provided by the Company's operating activities in the first nine months of 2001,
due to the $1.7 million operating loss described above. The Company expects
future gross margins to improve based on new products introduced in the third
quarter and as other new products are introduced in the fourth quarter of 2002
and first quarter of 2003, at higher margins and as the Company continues to
realize operating efficiencies from the consolidation of its antibody production
facilities in Maine. At September 30, 2002, the Company had $1.5 million in
debt, stockholders' equity in excess of $30 million and unused borrowing
capacity under a revolving line of credit of approximately $2.8 million.
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 $1.5 million in financing, all of
which was outstanding at September 30, 2002, and is repayable over seven years,
with principal payments beginning on October 1, 2002.
The 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 September 30, 2002
taking into account the variable rate of interest and LIBOR, was approximately
3.81%.
Under the terms of the above financing, 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 Company was in breach of the EBITDA to current
maturities of debt plus interest and taxes, loan covenant at March 31, 2002 and
both the ratio of funded debt to EBITDA and EBITDA to current maturities of debt
plus interest and taxes, loan covenants at June 30 2002. For the quarter ended
September 30, 2002, these loan covenants were amended to a minimum level of
EBITDA of $1.5 million. The Company has received a waiver and suspension of
18
these loan covenants for the first, second and third quarters of 2002,
respectively, and the loan covenants have been modified to a minimum level of
EBITDA of $700 thousand for the fourth quarter of 2002 and $650 thousand for the
first quarter of 2003. After the first quarter of 2003, the original provisions
of the loan agreement regarding financial covenants will be operative.
As of September 30, 2002, the outstanding balance on all of the Company's
commercial bank debt was approximately $1.5 million. This indebtedness is
secured by substantially all of the Company's assets. The Company expects that
it will be able to meet or exceed all of its financial covenants with respect to
this indebtedness, or to successfully negotiate a waiver of or modification to
cure any breach of any of these financial covenants.
Based upon its cash on hand, credit facilities, current product sales and the
anticipated sales of new products, 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 needs 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, its successful sale of additional common
stock and/or the Company's successfully locating and obtaining other financing,
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.
Critical Accounting Policies
Critical Accounting Policies - The Company's accounting policies are described
in Note 1 of the Notes to the Consolidated Financial Statements. The
Consolidated Financial Statements are prepared in conformity with accounting
principles generally accepted in the United States of America, which require the
Company to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the year. On an on-going basis, the Company evaluates its
estimates, including those related to bad debts, inventories, and contingencies.
The Company bases its estimates on historical experience and on various other
assumptions that the Company believes are reasonable under the circumstances.
The results form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results could differ from those estimates. The Company considers the following
policies to be most critical in understanding the judgments that are involved in
preparing the Consolidated Financial Statements and the uncertainties that could
impact the results of operations, financial condition and cash flows.
Valuation of Accounts Receivable - Accounts receivable as of September 30, 2002
and December 31, 2001, were net of an allowance for doubtful accounts of $271
thousand and $239 thousand, respectively. The recorded allowance is continually
evaluated based on current market conditions, an analysis of customer specific
facts and circumstances, and the size and composition of the overall portfolio.
If receivables become uncollectible, these write-offs are charged against the
allowance.
19
Valuation of Inventories - Inventories, which consist primarily of test kit
components, bulk antibody 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 inventories is dependent upon the successful marketing of our
products. Judgments are made regarding the carrying value of inventory based on
current market conditions. Market conditions may change depending upon
competitive product introductions and customer demand. If market conditions
change or if the introduction of new products by the Company impacts the market
for previously released products, the Company may be required to write-down the
cost of its inventory.
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 nine months ended September 30, 2002 and 2001 these sales
represented 83% and 91% of total Company revenues, respectively.
Sales of monoclonal and polyclonal antibodies under customer contracts and
purchase orders 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 takes between two and twelve months to complete and costs are incurred
throughout the production process. For the nine months ended September 30, 2002
and 2001 these sales represented 14% and 6% of total Company revenues,
respectively.
Contract revenues are recognized upon the completion of contractual milestones.
For each of the nine month periods ended September 30, 2002 and 2001 these sales
represented 3% of total Company revenues.
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 $1.5 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 $35 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 annual effect of $15 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.
20
Item 4. Controls and Procedures
(a) The Company's management, including the Company's Chief Executive Officer
and Chief Financial Officer, have evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined under
Rules 13a-14 and 15d-14 of the Securities of the Securities Exchange Act of
1934, as amended) as of a date within ninety days of the filing date of this
report. Based upon that evaluation, the Company's management, including its
Chief Executive Officer and Chief Financial Officer, has concluded that the
Company's disclosure controls and procedures are adequate and effective.
(b) There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of such evaluation.
21
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On or about July 8, 2002, the Company issued 600,000 shares of its unregistered
common stock to Molecular Circuitry, Inc. ("MLC") as partial consideration for
the assets purchased by the Company from MLC under an asset purchase agreement
of the same date. The purchased assets consist primarily of various proprietary
media technology that will be used in combination with the Company's new
diagnostic tests for food-borne pathogens including salmonella and E. Coli. The
purchased assets also include the sales and marketing rights to the ruminant
feed test product that the Company and MLC have been jointly developing in
collaboration with McDonald's Corporation. No underwriters were engaged in
connection with this sale of securities. The shares were issued in reliance upon
exemptions from registration under the Securities Act, including Section 4(2) of
the Securities Act and Rule 506 of Regulation D promulgated under the Securities
Act because among other things, the offering was limited to a single accredited
investor and no general solicitation was made in connection with the offering.
On or about August 22, 2002, the Company issued 455,472 shares of its
unregistered common stock to its outside directors and certain of their
affiliates at a price of $3.216 per share. This price represents the higher of
the closing price of the Company's common stock on August 15, 2002, the last
complete trading day before the stock purchase agreement for such shares was
executed, and the average of the closing prices for the five trading days ending
on that date. No underwriters were engaged in connection with this sale of
securities. The shares were issued in reliance upon exemptions from registration
under the Securities Act, including Section 4(2) of the Securities Act and Rule
506 of Regulation D promulgated under the Securities Act because among other
things the offering was limited to accredited investors and no general
solicitation was made in connection with the offering.
Item 3. Defaults upon Senior Securities
The Company is required to meet certain financial covenants under its commercial
bank financing agreement. These covenants require the Company 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 Company was in breach of the EBITDA to current
maturities of debt plus interest and taxes, loan covenant at March 31, 2002 and
both the ratio of funded debt to EBITDA and EBITDA to current maturities of debt
plus interest and taxes, loan covenants at June 30 2002. For the quarter ended
September 30, 2002, these loan covenants were amended to a minimum level of
EBITDA of $1.5 million. The Company has received a waiver and suspension of
these loan covenants for the first, second and third quarters of 2002,
respectively, and the loan covenants have been modified to a minimum level of
EBITDA of $700 thousand for the fourth quarter of 2002 and $650 thousand for the
first quarter of 2003. After the first quarter of 2003, the original provisions
of the loan agreement regarding financial covenants will be operative.
As of September 30, 2002, the outstanding balance on all of the Company's
commercial bank debt was approximately $1.5 million, as described above. This
indebtedness is secured by substantially all of the Company's assets. The
Company expects that it will be able to meet or exceed all of its financial
covenants with respect to this indebtedness, or to successfully negotiate a
waiver of or modification to cure any breach of any of these financial
covenants.
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 - Stock Purchase Agreement among the Company and its outside
directors and certain of their affiliates dated August 16, 2002.
10.2 - Demand Registration Agreement among the Company and its
outside directors and certain of their affiliates dated August 16,
2002.
99.1 - Certification by Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 - Certification by Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On July 22, 2002, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 announcing the acquisition of certain assets of
Molecular Circuitry Inc.
On July 30, 2002, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 announcing the election of Herb Lotman to its
Board of Directors.
On July 30, 2002, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 announcing the Company's second quarter results of
operations.
On August 27, 2002, the Company filed a report on Form 8-K pursuant
to Item 7 and Item 9 announcing the sale of 455,472 shares of common
stock in a private placement to the Company's outside Directors.
On November 8, 2002, the Company filed a report on Form 8-K pursuant
to Item 7 and Item 9 announcing the Company's third quarter results
of operations.
23
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 November 13, 2002
- --------------------------- (Principal Executive Officer)
Richard C. Birkmeyer
/s/ Stanley J. Musial Chief Financial Officer November 13, 2002
- --------------------------- (Principal Financial Officer)
Stanley J. Musial
24
Certifications
I, Richard C. Birkmeyer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Strategic Diagnostics
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
25
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Richard C. Birkmeyer
- ------------------------------
Richard C. Birkmeyer
President and CEO
26
I, Stanley J. Musial, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Strategic Diagnostics
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
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6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Stanley J. Musial
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Stanley J. Musial
Chief Financial Officer
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