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 March 31, 1999
[ ] 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 March 31, 1999 there were 13,296,191 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, 1999 and December 31, 1998 2
Consolidated Statements of Operations - Three months ended
March 31, 1999 and 1998 3
Consolidated Statements of Changes in Stockholder's Equity and
Comprehensive Income (Loss) for the Three months ended March 31, 1999 4
Consolidated Statements of Cash Flows - Three months ended March 31, 1999
and 1998 5
Notes to Consolidated Interim Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II 16
ITEM 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I
ITEM 1. FINANCIAL STATEMENTS
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
March 31, December 31,
- --------------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,214 $ 1,864
Short-term investments - 3,990
Restricted Cash 1,400 -
Receivables 4,725 3,653
Inventories 2,320 1,855
Other current assets 567 469
- --------------------------------------------------------------------------------------------------------------
Total current assets 11,226 11,831
- --------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net 1,839 835
OTHER ASSETS 479 494
INTANGIBLE ASSETS, net 5,793 1,933
- --------------------------------------------------------------------------------------------------------------
Total assets $19,337 $15,093
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,279 $ 802
Accrued expenses 589 788
Deferred revenue 15 -
Current portion of LTD 1,301 83
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 3,184 1,673
- --------------------------------------------------------------------------------------------------------------
Long Term Debt 5,137 265
- --------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 17,500,000 shares
authorized, no shares issued or outstanding - -
Series A preferred stock, $.01 par value, 2,164,362
authorized, issued and outstanding 22 22
Series B preferred stock, $.01 par value, 556,286
authorized, issued and outstanding 6 -
Common stock, $.01 par value, 35,000,000 authorized,
13,296,191 and 13,262,157 issued and
outstanding at March 31, 1999 and December
31, 1998, respectively 133 133
Additional paid-in capital 25,119 23,946
Accumulated deficit (14,239) (10,921)
Cumulative translation adjustments (25) (25)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,016 13,155
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $19,337 $15,093
==============================================================================================================
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,
- --------------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------
Net revenues:
- --------------------------------------------------------------------------------------------------------------
Product related $3,571 $2,521
Contract and other 348 375
- --------------------------------------------------------------------------------------------------------------
Total net revenues 3,919 2,896
- --------------------------------------------------------------------------------------------------------------
Operating expenses:
Manufacturing 1,568 1,131
Research and development 565 377
Selling, general and administrative 1,630 1,454
In-process research & development 3,500 -
- --------------------------------------------------------------------------------------------------------------
Total operating expenses 7,263 2,962
- --------------------------------------------------------------------------------------------------------------
Operating income (loss) (3,344) (66)
- --------------------------------------------------------------------------------------------------------------
Interest and other income (expense), net 34 86
- --------------------------------------------------------------------------------------------------------------
Net income (loss) (3,310) 20
Preferred stock dividends (8) -
- --------------------------------------------------------------------------------------------------------------
Net income (loss)
applicable to common stockholders (3,318) 20
- --------------------------------------------------------------------------------------------------------------
Basic income (loss) per share
applicable to common stockholders $(0.25) $0.00
- --------------------------------------------------------------------------------------------------------------
Shares used in computing basic net income (loss)
per share applicable to common stockholders 13,266,000 13,147,000
- --------------------------------------------------------------------------------------------------------------
Diluted income (loss) per share
applicable to common stockholders $(0.25) $0.00
- --------------------------------------------------------------------------------------------------------------
Shares used in computing diluted net income (loss)
per share applicable to common stockholders 13,266,000 16,185,000
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Three Months Ended March 31, 1999
Series A Series B Additional Cumulative
Preferred Preferred Common Paid-In Accumulated Translation
Stock Stock Stock Capital Deficit Adjustments Total
- ---------------------------------------------------------------------------------------------------------------------------------
+
Balance,
December 31, 1998 $ 22 - 133 23,946 (10,921) (25) 13,155
- ---------------------------------------------------------------------------------------------------------------------------------
Exercises of stock options, warrants and other - - - 112 - - 112
Issuance of Series B Preferred Stock 6 - 1,061 - - 1,067
Net loss and comprehensive loss - - - (3,318) - (3,318)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance
March 31, 1999 $ 22 6 133 25,119 (14,239) (25) 11,016
=================================================================================================================================
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,
- --------------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities :
Net income (loss) $(3,318) $20
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation and amortization and other, net 186 151
In-process research and development 3,500 -
(Increase) decrease in:
Receivables (294) 221
Inventories (92) (4)
Other current assets (16) (68)
Note receivable and other assets 344 4
Increase (decrease) in:
Accounts payable (133) (256)
Accrued expenses (397) (489)
Deferred revenue 4 147
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (216) (274)
Cash Flows from Investing Activities:
Purchase of property and equipment (47) (85)
Short-term investment activity 3,990 (231)
Cash used in acquisition of HTI, net of cash acquired (8,072) -
Restricted Cash (1,400) -
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (5,529) (316)
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 112 17
Proceeds from issuance of long term debt 6,000 -
Repayments on financing obligations (17) (8)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,095 9
Net Increase (Decrease) in Cash and Cash Equivalents 350 (581)
Cash and Cash Equivalents, Beginning of Period 1,864 2,580
- --------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $2,214 $1,999
- --------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Disclosure:
Cash paid for interest 50 9
- --------------------------------------------------------------------------------------------------------------
Non-cash Investing and Financial Activity:
Series B Preferred Stock issued for the acquisition of
HTI Bio-Products, Inc. 1,067 -
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
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. (the "Company") develops, manufactures and markets
immunoassay-based test kits for rapid and inexpensive detection of a wide
variety of substances in the water quality, industrial and agricultural market
segments.
Business Risks
- --------------
The Company is subject to risks of entities in similar stages of development.
These risks include the Company's ability to successfully develop, produce and
market its products and its dependence on its key collaborative partners and
management personnel.
Basis of Presentation and Interim Financial Statements
- ------------------------------------------------------
The accompanying balance sheets at December 31, 1998 and March 31, 1999, and the
statements of operations for the three months ended March 31, 1998 and 1999, and
cash flows for the three months ended March 31, 1998 and 1999 include the
consolidated financial statements of the Company. All intercompany balances and
transactions have been eliminated in consolidation.
The accompanying unaudited consolidated interim financial statements of the
Company have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission regarding financial reporting.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements and
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998. In the opinion of management, the
accompanying financial statements include all adjustments (all of which are of a
normal recurring nature) necessary for a fair presentation. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results expected for the full year.
Use of Estimates
- -----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
6
2. SHORT-TERM INVESTMENTS:
The Company considers its investments as being available for sale in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities."
3. BASIC AND DILUTED INCOME PER SHARE:
The Company has adopted Statement of Financial Standards ("SFAS") No. 128,
"Earnings per Share," which requires dual presentation of basic and diluted
earnings per share ("EPS") for complex capital structures on the face of the
statement of operations. 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.
Share Calculations Three months ended Three months ended
March 31, 1999 March 31, 1998
------------------ ------------------
Average common shares outstanding 13,265,772 13,146,504
Shares used in computing basic net
income (loss) per share 13,265,772 13,146,504
========== ==========
Series A preferred stock - 2,164,362
Series B preferred stock - -
Stock options - 708,666
Warrants - 165,219
---------- -----------
Shares used in computing diluted net
income (loss) per share 13,265,772 16,184,750
========== ===========
The impact of 2.8 million shares of preferred stock, options and warrants for
the three months ended March 31, 1999, was excluded from the diluted net income
(loss) per share calculations because they were antidilutive.
4. COMPREHENSIVE INCOME:
On January 1, 1998, the Company adopted Statement of Financial Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income or loss and its
components in financial statements. For the periods presented, comprehensive
income (loss) equaled the net income (loss) as presented in the accompanying
Statements of Operations.
7
5. SALE OF TECHNOLOGY:
In July 1998, the Company entered into an agreement to sell its analytical test
to detect concentrations of lipoprotein (a) to a biotechnology company. The
purchaser has an extensive portfolio of diagnostic assays and an established
sales and distribution network targeted to physicians and clinical laboratories.
This agreement follows an exclusive distribution and supply agreement with the
same company that became effective June 30, 1998.
The Company will continue to manufacture and transfer the product until the
distributor is prepared to manufacture the product (estimated to be
approximately June 1999). The Company records revenues under the exclusive
distribution and supply agreement as the products are shipped. Thereafter, the
Company will receive a royalty for the life of the product.
At December 31, 1999, under the July 1998 agreement, the Company and the
purchaser will determine the cash purchase price to be paid to the Company for
its right, title and interest in the product. Such purchase price is based on a
multiple of sales volumes achieved during the second half of 1999. In July 1998
the Company purchased the intellectual and licensing rights to the product for
$380 thousand. The Company expects to record the sale of the asset during the
fourth quarter of 1999, after the sales price has been determined. All royalties
under the agreements are recorded in the quarter the products are sold.
6. ACQUISITION:
On February 26, 1999, the Company completed the acquisition of HTI Bio-Products
Inc., a privately held manufacturer of custom and proprietary antibody products
and services located near San Diego, CA (HTI). Under the terms of the agreement
to acquire HTI, the Company paid approximately $8.3 million in cash and issued
556,286 shares of Series B preferred stock. The preferred shares convert into
common shares on a 1-for-1 basis at any time at the option of the holder, and at
the option of the Company when the closing price of the Company's stock exceeds
$3.50 for a period of 10 consecutive business days, and carry a cumulative,
annual cash dividend of $0.175 per share and a liquidation of $3.50 per share or
$1.9 million. The Company is also obligated to pay a percentage of net sales of
certain products over the next three years, not to exceed $3 million.
Approximately $6 million of acquisition financing has been provided by the
Company's commercial bank, with the balance coming from existing cash on hand.
The acquisition financing consists of a five year term loan with monthly
amortization of equal principle payments plus interest. Interest on $2 million
of original principal amount is at a fixed rate of interest of 7.96% per annum,
and the remaining principal bears interest at a variable rate of 3% over the
published London Interbook Offered Rate ("LIBOR"). Also under the terms of the
financing, the Company is required to meet certain financial covenants
including, debt to net worth and minimum cash flows. The financing is secured by
all of the Company's assets, including $1.4 million of cash equivalents, the use
of which is restricted under the loan agreement.
8
The following unaudited pro forma statement of operations gives effect to the
HTI transaction, which was accounted for using the purchase method of
accounting, as if the HTI purchase had occurred on January 1, 1998, and includes
certain adjustments, including amortization of goodwill, increased interest
expense and preferred stock dividends related to the HTI purchase. The 1999 pro
forma results exclude $3.5 million of in-process research and development
expenses incurred in connection with the HTI transaction.
Unaudited Pro Froma Combined Results of Operations
Three Months Ended March 31 1999 1998
------------------------
(unaudited in thousands)
Revenues $4,702 $4,200
Loss before non-recurring charges directly
attributable to the HTI acquisition $ (164) $ (425)
------ ------
Basic and Diluted Net loss per share $(0.01) $(0.03)
The purchase price of HTI Bio-Products was allocated as follows:
Cash $249
Receivables 778
Prepaid Expenses 82
Inventory 373
Other Assets 329
Land 350
Buildings & Equipment 619
Other Fixed Assets 35
Payables (610)
Accrued Liabilities (135)
Deferred Revenue (11)
Note Payable (107)
In-process research & development 3,500
Goodwill 3,936
------
Total Transaction Value $9,388
======
Cash Paid $8,321
Series B Preferred Stock Issued $1,067
9
Goodwill is being amortized over its estimated useful life of 20 years.
The Company recorded expenses of $3.5 million of in-process research and
development in the quarter ended March 31, 1999. This amount represents an
allocation of the purchase price of HTI to projects that are currently under
development but have not yet been launched commercially because the development
is not complete. Because technological feasibility has not been established and
no alternative use determined, the entire amount of in-process research and
development has been expensed. The identified research and development consists
of in process projects for the development of eleven antibodies, as listed
below:
Troponin I Fatty Acide Binding Protein Cystatin C
Human Red Blood Cell cAMP Brain Natriuretic Peptide
Serum Amyloid A cGMP Phosphorylated Amino Acids
Phosphorylated Tau APE
At this time, management believes that Troponin I and Cystatin C have the
greatest immediate potential as commercial products. Troponin I will be used as
a diagnostic marker for the coronary care market. Cystatin C will be used as a
diagnostic marker for kidney malfunction. In future years, others of the
in-process research and development assets, such as Human Red Blood Cell, may
prove to have even greater potential as commercial products.
There is no guarantee that any of these markers will be commercially viable, or
that the customers who assist in the development will succeed in the marker
being diagnostically significant.
The Company commissioned an appraisal of these in-process research and
development projects by an independent firm familiar with such appraisals. This
independent appraisal valued the in- process research and development projects
at $3.5 million by considering, the nature and history of HTI's business,
description of the in-process research and development assets, the general
economic outlook, the outlook for the antibody production industry, the expected
future cash flows of the products and usage of a discounted cash flow analysis.
The average completion stage of the products was estimated at 93% and a 20%
discount rate was used in computing the present value of the future cash flows
of the products.
7. SEGMENT INFORMATION:
The Company develops, manufactures and markets immunoassay-based test kits for
rapid, cost- effective detection of a wide variety of different analytes in
three primary market categories: water quality, industrial testing and
agriculture.
The Antibody Segment includes TSD BioServices and HTI Bio-Products Inc. These
companies provide fully integrated polyclonal and monoclonal antibody
development and large scale manufacturing services to pharmaceutical and medical
diagnostic companies.
10
For reporting purposes a "pro-rata" share of common costs; including a
management fee, is charged to the Antibody Segment by the Company.
For the three months ended March 31, SDI Antibody Total
------- --------- -----
1999 Revenues $ 2,947 $ 972 $ 3,919
Segment Profit 237 (3,547) (3,310)
Segment Assets 15,284 4,053 19,337
Depreciation and amortization 161 25 186
Capital expenditures 47 0 47
1998 Revenues $ 2,334 $ 562 $2,896
Segment Profit (62) 82 20
Segment Assets 13,159 901 14,060
Depreciation and amortization 151 0 151
Capital expenditures 85 0 85
8. SUBSEQUENT EVENTS:
On May 12, 1999, the Company completed the acquisition of the operating assets
of the OEM business of Atlantic Antibodies of Windham, ME, one of the first
suppliers of custom and high- volume, bulk polyclonal antibodies for use in
diagnostic test kits and research. This unit serves a wide range of customers
including pharmaceutical, biotechnology, diagnostic companies and major research
centers in the United States and the Pacific Rim and had 1998 sales of
approximately $2 million, and is expected to be accretive to the Company's
earnings in 1999. Under the terms of the agreement to acquire the operating
assets of the OEM business of Atlantic Antibodies, the Company paid $3 million
in cash, and has agreed to a deferred payment of $150,000, upon the earlier of
the sale of certain real estate or November 11, 2000. The accounting for this
asset purchase is not expected to result in any significant one-time charges
arising from the transaction. The Company's commercial bank provided $3 million
of long-term acquisition financing.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
The information included in this report on Form 10-Q contains certain
forward-looking statements reflecting the current expectations of Strategic
Diagnostics Inc. and its subsidiaries (the "Company"). When used in this report,
the words "anticipate," "enable," "believe," "potential," "promising" and
similar expressions as they relate to SDI 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, inability to obtain required domestic and foreign government
regulatory approvals, modifications to regulatory requirements, modifications to
development and sales relationships, the ability to achieve anticipated growth,
competition, seasonality, and other factors more fully described in the
Company's filings with the Securities and Exchange Commission.
11
Background
The Company is the entity resulting from the combination of EnSys
Environmental Products, Inc. ("EnSys"), Ohmicron Corporation ("Ohmicron"), TSD
BioServices ("TSD"), HTI Bio-Products Inc. ("HTI") and Strategic Diagnostics
Inc. ("SDI").
Since 1992, the Company and its predecessors have entered into research and
development agreements with multiple corporate partners that have led to the
introduction of various products to the water quality, industrial testing,
agricultural and other markets. These agreements generally provide that sales
and marketing costs associated with a new product are borne by the corporate
partner, and the Company has the manufacturing rights. In addition, the Company
currently sells directly other products that it has developed or acquired.
Results of Operations
Three Months Ended March 31, 1999 vs. March 31, 1998
Total net revenues increased during the three month period ended March 31,
1999 over the three month period ended March 31, 1998 by $1.0 million, or 35%.
Product related revenues increased by $1.1 million, or 42%, over the product
related revenues recorded in the first quarter of 1998. The increase in product
related revenues was primarily driven by a 270% increase in agricultural sales
compared to the first three months of 1998. These sales included an increase in
the Company's test kit sales for traditional seed testing as well as the launch
shipments of the Company's new test kits to detect the presence of Genetically
Modified Organisms ("GMOs") in food and food fractions. Antibody sales increased
73% in the first quarter of 1999 versus the first quarter of 1998, due primarily
to the inclusion of HTI Bio-Products, Inc. ("HTI") sales for the month of March
1999, following the late February 1999 acquisition of HTI by the Company. Sales
in the industrial/chemical category decreased slightly from the prior year.
Several developments in the marketplace positively affected sales of
agricultural test kits during the quarter. In seed testing, transgenic crops
continue to revolutionize agriculture throughout the world, resulting in an
increasing need for the Company's seed test kits. The Company now has
relationships with four leading agricultural biotechnology companies and has
plans to introduce six additional trait test kits for seeds during the remainder
of 1999.
In March 1999, the European Commission required that all food companies
label products containing food derived from raw materials containing GMOs. The
European Commission validated the Company's test kits for the detection of GMOs
in food and food fractions, allowing the Company to offer the fastest, most
cost-effective solution to facilitate compliance requirements to the 22,000 food
processors selling into the European Union.
12
Sales of the Company's food testing kit to detect GMOs in food and food
fractions began during the first quarter of 1999. Sales of these kits during the
quarter totaled approximately $400,000. This volume of sales included an initial
shipment to GeneScan, an independent food testing laboratory located in Germany.
GeneScan conducts more than 2,000 tests on food and food ingredients each month.
GeneScan also agreed during the quarter to distribute the Company's food testing
products, on an exclusive basis in Germany and on a non- exclusive basis
throughout the rest of the European Union (other than the United Kingdom).
Total operating expenses for the period ended March 31, 1999 increased by
$801,000, or 27%, exclusive of the charge taken during the quarter for
in-process research and development, over the three month period ended March 31,
1998. A $3.5 million charge for in-process research and development was recorded
during the 1999 quarter as part of the Company's acquisition of HTI.
Manufacturing costs increased $437,000, or 39%, in the first quarter of
1999 versus the first quarter of 1998. This increase reflects the increased
volume in product related sales recorded during the 1999 first quarter.
Manufacturing costs as a percentage of product related revenues decreased to 44%
in the first quarter of 1999 from 45% in the first quarter of 1998.
Research and development expenses increased $188,000, or 50%, in the first
quarter of 1999 versus the first quarter of 1998. This increase is due to the
higher costs of labor and materials associated with the additional staffing
required for both internal Company projects and external customer needs.
Selling, general and administrative costs increased $176,000, or 12%, in
the first quarter of 1999 versus the first quarter of 1998. This increase is
primarily attributable to the increased levels of business activity of the
Company.
The technological feasibility of the purchased in-process research and
development has not yet been established and no alternative use determined,
therefore the entire amount has been expensed in the first quarter of 1999.
Net interest income decreased $52,000, or 60%. This decrease is
attributable to a lower level of invested balances and a higher level of
interest expense during the first quarter of 1999, as compared to the first
quarter of 1998, due to the acquisition of HTI on February 26, 1999.
Net income decreased $3.3 million during the first quarter of 1999 versus
the first quarter of 1998 all as described above. Exclusive of the $3.5 million
charge for in-process research and development, net income increased to $190,000
in the first quarter of 1999 from $20,000 in the first quarter of 1998.
13
Pro Forma Results of Operations
Three Months Ended March 31, 1999 vs. March 31, 1998
Pro forma revenues for the first quarter increased $502,000 or 12%,
primarily due to a 270% increase in agricultural sales during the first quarter
of 1999 versus the first quarter of 1998. Pro forma net loss decreased $261,000
or 61%, for the first quarter of 1999 versus the first quarter of 1998. This was
attributable to a $549,000 expense recorded in the first quarter of 1998, for
non-recurring stock based compensation. Exclusive of this one time charge, pro
forma net loss increased by $288,000 for the quarter. This increase is primarily
attributable to the additional expenses incurred by HTI prior to the acquisition
by the Company.
Liquidity and Capital Resources
The Company's working capital decreased $2.2 million from December 31, 1998
to $8.0 million at March 31, 1999. Cash, cash equivalents and short-term
investments decreased $3.6 million to $2.2 million. This decrease was primarily
attributable to the use of internal Company funds for the HTI acquisition.
The Company believes that it has, or has access to, sufficient resources to
meet its operating requirements for the foreseeable future. The Company's
ability to meet its long-term working capital and capital expenditure
requirements will depend on a number of factors, including the success of the
Company's current and future products, the focus and direction of the Company's
research and development programs, competitive and technological advances,
future relationships with corporate partners, government regulation, the
Company's marketing and distribution strategy and the success of the Company's
plans to make future acquisitions. Accordingly, no assurance can be given that
the Company will be able to meet the future liquidity requirements that may
arise from these inherent uncertainties.
Year 2000 Issues
The Company is aware of, and is evaluating, many of the "Year 2000" issues
associated with both information technology ("IT") and non-IT systems which
could cause problems and network failures should the systems fail to recognize
year designations after 1999.
14
The Company is currently reviewing its own computer, communication,
software and operating systems to determine if they are Year 2000 compliant. The
Company conducted system-wide testing in the first quarter of 1999 on all
internal network hardware and software, all enterprise system software and all
user workstation hardware and software. The Company is currently in the process
of replacing and modifying the systems' hardware and software that were found
not to be Year 2000 compliant. No major systems were found to be non-compliant.
During the second quarter of 1999, the Company will test all internal and OEM
equipment. Any system failures will be addressed at that time. The Company
expects that, absent unforeseen negative results of its testing, its systems
will be Year 2000 compliant no later than July 31, 1999. Accordingly the Company
has not conducted any contingency planning. The Company relies primarily on
third party provided software purchased and licensed commercially, and therefore
believes its Year 2000 risks are minimal. As a result, its historical and
estimated future costs of remediation are not now, and are not expected to
become, material.
The Company will continue to contact critical suppliers, collaborators and
partners to determine if their operations, as they relate to the Company, are
Year 2000 compliant. Based upon responses to date, the Company cannot presently
estimate the impact of the failure of such third parties to be Year 2000
compliant.
Although the Company will take all practical measures to prevent problems
related with the Year 2000 programming issues, such problems and failures may
occur which could seriously affect the Company's progress. Because of the
unprecedented nature of such problems, the extent of the effect on the Company's
progress cannot be certain.
15
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
No.
- -------
2.1 Stock Purchase Agreement dated as of February 26, 1999 by and among
Strategic Diagnostics Inc. and Robert J. Harman, Michael M. Dale, Eric
S. Bean and Sean Boyd (incorporated by reference to the identically
numbered exhibit contained in the Company's Form 8-K filed on March
15, 1999 (File No. 0-068440)).
4.1 Certificate of Powers, Designations, Preferences and Rights of the
Series B Convertible Preferred Stock of the Company filed with the
Secretary of the State of Delaware on February 26, 1999 (incorporated
by reference to the identically numbered exhibit contained in the
Company's Form 8-K filed on March 15, 1999 (file No. 0-068440)).
10.1 Loan and Security Agreement, dated February 26, 1999, among the
Company, TSD Bioservices, Inc. and First Union National Bank
(incorporated by reference to the identically numbered exhibit
contained in the Company's Form 8-K filed on March 15, 1999 (file No.
0- 068440)).
10.2 Promissory Note in the amount of $6 million, dated February 26, 1999,
payable to First Union National Bank (incorporated by reference to the
identically numbered exhibit contained in the Company's Form 8-K filed
on March 15, 1999 (file No. 0-068440)).
27 Financial Data Schedule (in electronic format only).
(b) Reports on Form 8-K
On March 15, 1999 the Company reported its acquisition of HTI
Bio-Products, Inc. which occurred on February 26, 1999. Financial
statements were filed on amendment no. 1 to such Form 8-K on May 12,
1999.
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 14, 1999
- ------------------------ (Principal Executive Officer)
Richard C. Birkmeyer
/s/ ARTHUR A. KOCH, JR. Vice President and Chief Operating Officer May 14, 1999
- ------------------------ (Principal Financial Officer)
Arthur A. Koch, Jr.