<PAGE>
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, 1997
[ ] 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.)
128 Sandy Drive
Newark, Delaware 19713
(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 September 30, 1997 there were 13,102,949 outstanding shares of
the Registrant's common stock, par value $.01 per share.
<PAGE>
STRATEGIC DIAGNOSTICS INC.
INDEX
Item Page
- ----- ----
PART I
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - December 31, 1996
and September 30, 1997...................................... 2
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1996 and 1997............. 3
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1996 and 1997.................................. 4
Notes to Consolidated Interim Financial Statements................ 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 11
PART II
ITEM 6. Exhibits and Reports on Form 8-K............................. 19
SIGNATURES............................................................... 20
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, September 30,
- -----------------------------------------------------------------------------------------------------------------
1996 1997
(unaudited)
<S> <C> <C>
ASSETS
- -----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents............................................. 4,419 3,612
Short-term investments................................................ 2,208 1,501
Receivables........................................................... 2,334 3,468
Inventories........................................................... 1,557 1,839
Other current assets.................................................. 510 261
- -----------------------------------------------------------------------------------------------------------------
Total current assets.............................................. 11,028 10,681
- -----------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Equipment............................................................. 1,002 1,071
Furniture and fixtures................................................ 66 66
Leasehold improvements................................................ 198 235
- -----------------------------------------------------------------------------------------------------------------
1,226 1,372
Less accumulated depreciation......................................... (538) (880)
- -----------------------------------------------------------------------------------------------------------------
Net property and equipment........................................ 728 492
- -----------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Intangible assets, net................................................ 2,110 1,901
Notes receivable and other............................................ 715 696
- -----------------------------------------------------------------------------------------------------------------
Total other assets................................................ 2,825 2,597
- -----------------------------------------------------------------------------------------------------------------
Total assets...................................................... 14,581 13,770
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable...................................................... 1,566 432
Accrued expenses...................................................... 2,066 1,302
Deferred revenue...................................................... 141 118
Current portion of capital lease obligations.......................... 85 31
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities......................................... 3,858 1,883
- -----------------------------------------------------------------------------------------------------------------
CAPITAL LEASE OBLIGATIONS............................................... 50 29
- -----------------------------------------------------------------------------------------------------------------
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
Common stock $.01 par value, 35,000,000 authorized,
13,055,170 and 13,102,949 issued and outstanding
in 1996 and 1997,
respectively...................................................... 131 131
Additional paid-in capital............................................ 23,905 23,908
Accumulated deficit................................................... (13,379) (12,197)
Deferred compensation................................................. (6) (6)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity........................................ 10,673 11,858
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity........................ 14,581 13,770
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET REVENUES:
Product related..................................... 852 3,801 2,077 9,306
Contract and other.................................. 461 512 1,555 1,278
---------- ---------- ---------- ----------
Total net revenues............................... 1,313 4,313 3,632 10,584
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Manufacturing....................................... 606 1,577 1,534 3,826
Research and development............................ 396 313 1,178 1,216
Acquired research and development................... 3,913 -- 3,913 --
Selling, general and administrative................. 412 1,751 864 4,539
---------- ---------- ---------- ----------
Total Operating Expenses......................... 5,327 3,641 7,489 9,581
---------- ---------- ---------- ----------
Operating income (loss).......................... (4,014) 672 (3,857) 1,003
INTEREST INCOME (EXPENSE) NET.......................... (2) 50 6 179
EQUITY IN INCOME OF TSD BIOSERVICES.................... 15 -- 178 --
---------- ---------- ---------- ----------
NET INCOME............................................. (4,001) 722 (3,673) 1,182
ACCRETION OF REDEEMABLE
CONVERTIBLE PREFERRED STOCK
LIQUIDATION VALUE................................... (159) -- (477) --
---------- ---------- ---------- ----------
NET INCOME APPLICABLE TO
COMMON STOCKHOLDERS................................. $ (4,160) $ 722 $ (4,150) $ 1,182
---------- ---------- ---------- ----------
NET INCOME PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS................... $ (0.99) $ 0.05 $ (1.12) $ 0.08
---------- ---------- ---------- ----------
SHARES USED IN COMPUTING NET INCOME PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS.................... 4,220,000 15,623,000 3,716,000 15,606,000
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1996 1997
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income (loss)..................................................... ($3,673) $1,182
Adjustments to reconcile net income to cash used in
operating activities:
Acquired research and development write-off......................... 3,913
Depreciation and amortization....................................... 96 554
Equity in losses (income) of investment in TSD Bioservices.......... (178)
Amortization of deferred compensation............................... 40
(Increase) decrease in:
Receivables......................................................... (499) (1,134)
Inventories......................................................... (51) (282)
Other current assets................................................ (385) 249
Note receivable and other assets.................................... 30 19
Increase (decrease) in:
Accounts payable.................................................... 484 (1,134)
Accrued expenses.................................................... 61 (764)
Deferred revenue.................................................... (111) (23)
- -------------------------------------------------------------------------------------------------------------
Net cash used in operating activities...................................... (273) (1,333)
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of property and equipment.................................... (35) (106)
Proceeds from Ohmicron acquisition.................................... 54
Short-term investment activity........................................ (2) 707
- -------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities.................................. 17 601
- -------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from sale of preferred stock, net............................ 473
Repayments on capital lease obligations............................... (6) (75)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities........................ 467 (75)
- -------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents....................... 211 (807)
Cash and Cash Equivalents, Beginning of Period............................. 35 4,419
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period................................... $246 $3,612
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Supplement Cash Flow Disclosure:
Cash paid for interest................................................ $ 0 $ 36
The accompanying notes are an integral part of these statements.
</TABLE>
4
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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. Management believes
that its current cash resources are sufficient to fund operations for at
least the next 18 months.
Basis of Presentation and Interim Financial Statements
The accompanying balance sheets at December 31, 1996 and
September 30, 1997, and the statements of operations for the three months
and nine months ended September 30, 1996 and 1997 and cash flows for the
nine months ended September 30, 1996 and 1997 include the consolidated
financial statements of the Company. All intercompany balances and
transactions have been eliminated in consolidation. For comparative
purposes, the statements of operations for the three months and nine
months ended September 30, 1996 and 1997 and cash flows for the nine
months ended September 30, 1996 and 1997 include Strategic Diagnostics
Inc. ("SDI") prior to its acquisition of Ohmicron Corporation
("Ohmicron"), which occurred on August 30, 1996 (Note 3), the dissolution
of TSD BioServices which occurred on October 15, 1996 (Note 3) and its
merger with EnSys Environmental Products, Inc. ("EnSys") which occurred
on December 30, 1996 (Note 3). Also presented where indicated, is
selected pro forma information for the three months and nine months ended
September 30, 1996, which includes SDI, Ohmicron and EnSys as if the
EnSys and Ohmicron transactions had occurred on January 1, 1996.
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
5
<PAGE>
Report on Form 10-K for the fiscal year ended December 31, 1996. 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 and
nine months ended September 30, 1997 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 could differ from
those estimates.
2. NET INCOME PER SHARE APPLICABLE TO COMMON STOCKHOLDERS:
Net income per share applicable to common stockholders for all
periods presented is calculated by dividing net income applicable to
common stockholders by the weighted average number of shares
outstanding. All shares and per share amounts have been adjusted
retroactively to give effect to the equivalent number of shares received
by the SDI stockholders in the EnSys Merger discussed in Note 3. This
retroactive adjustment is reflected in the net income per share
calculations and the Notes to the Consolidated Interim Financial
Statements.
Net income applicable to common stockholders is the sum of the
net income less the accretion of the redeemable convertible preferred
stock liquidation value. Effective December 30, 1996, the redeemable
convertible preferred stock was converted into shares of a newly issued
class of Series A Preferred Stock (Note 6). No additional accretion will
be recorded.
3. MERGERS AND ACQUISITIONS
Merger with EnSys Environmental Products, Inc.
On December 30, 1996, SDI merged with and into EnSys (the
"Merger"). The Merger agreement provided that SDI common and preferred
stockholders receive .7392048 shares of EnSys stock for each share of SDI
Common or Preferred Stock. This resulted in the former SDI stockholders
owning 5,780,136 shares of EnSys Common Stock and 2,164,362 shares of
EnSys Series A Convertible Preferred Stock or approximately 52% of the
15,219,532 voting shares outstanding after the Merger. In addition to
the Common and Preferred Stock noted above, SDI option and warrant
holders received options and warrants to purchase .7818026 shares of
EnSys Common Stock for each option or warrant held. Upon consummation of
the Merger, SDI option and warrant holders received options and warrants
for the purchase of 383,216 and 599,644 shares, respectively, of EnSys
Common Stock. The difference in exchange ratios between stockholders and
option and warrant holders is due to the stock
6
<PAGE>
references received by SDI's preferred stockholders upon exchange of
their shares. The cost of receiving these preferences was shared by all
SDI stockholders upon exchange of their shares, but was not borne by the
SDI option and warrant holders.
The Merger was accounted for as a purchase transaction with SDI
as the acquiring company. Based on the $1.75 per share closing price of
EnSys Common Stock on October 14, 1996, (date of transaction public
announcement) the estimated total purchase price of EnSys was $16,133,
which consists of the following: (i) the $12,731 market value of the
outstanding shares of EnSys Common Stock (7,275,034 shares multiplied by
$1.75 per share), (ii) the $328 fair value of the outstanding options and
warrants to purchase EnSys Common Stock and (iii) estimated transaction
costs of approximately $3,074. Since SDI is the acquiror for accounting
purposes, the EnSys options and warrants are required to be valued for
purchase accounting purposes as if they are additional consideration in
the transaction. The valuation for EnSys options and warrants was
provided by an investment banking firm using a traditional valuation
approach. Of the approximately $3,074 of estimated transaction costs,
approximately $457 relates to severance payments to former EnSys
employees, $362 to facility termination and moving and $36 to employee
relocation. In connection with the Merger, approximately 35 EnSys
employees were terminated in December 1996.
In connection with the Merger, all identifiable assets acquired
by SDI, including intangible assets, were assigned a portion of the cost
of the acquired company based on an independent valuation of EnSys'
assets. Such allocation included the identification and evaluation of
each development project to determine if technological feasibility had
been achieved and if there were any alternative future uses. EnSys'
primary research and development focus, the "One Step" assay, is
currently under development. If such technology is not fully developed
on a timely basis, the existing products may not be competitive enough to
satisfy the technical requirements of a changing market or be cost
effective despite demonstration of research prototypes by EnSys. The
costs of developing the remaining technology for the "One Step" assay is
significant. As a result of the substantial time and effort to produce
the product in accordance with all functions and specification, it has
been determined that technological feasibility has not been achieved. In
addition, since alternative uses of this developmental technology do not
exist, the costs of such technology have been charged to expense in
accordance with SFAS No. 2, ("Accounting for Research and Development
Costs," "SFAS No. 2"). Based on the foregoing purchase price, the amount
allocated to acquired research and development of $4,353 was charged to
the statement of operations at the effective date of the Merger. The
remaining amount of intangible assets of approximately $1,167 includes
approximately $472 for developed technology, $55 for assembled workforce
and $640 for goodwill. The intangible assets purchased are being
amortized on a straight-line basis over 7-10 years. Amortization expense
included in selling, general and administrative in the accompanying
consolidated statement of operations, for the nine months ended September
30, 1997 is approximately $103 related to the merger.
7
<PAGE>
Acquisition of Ohmicron Corporation
On August 30, 1996, SDI acquired Ohmicron and certain of its
wholly owned subsidiaries for 2,268,456 shares of common stock. Prior
to the acquisition, Ohmicron spun-off certain assets and liabilities of
another of its wholly-owned subsidiaries, Ohmicron Medical Diagnostics,
Inc. The acquisition of Ohmicron was recorded as a purchase transaction
accounting using the fair market value of the SDI common stock issued to
Ohmicron. The total purchase price of approximately $4,503, including
transaction and other costs of $533, has been allocated to the fair
market value of the assets acquired and liabilities assumed. Based on
the foregoing estimated purchase price, the amount allocated to acquired
research and development of $3,913 was charged to the statement of
operations at the time of the acquisition. In connection with the
Ohmicron transaction, all identifiable assets acquired including
intangible assets were assigned a portion of the cost of the acquired
company based on an independent valuation of Ohmicron's assets. Such
allocation included the evaluation of each development project
identified to determine if technological feasibility had been achieved
and if there were any alternative future uses. Based on this analysis,
it has been determined that technological feasibility has not been
achieved, and that alternative uses of this developmental technology do
not exist. The cost of such technology has therefore been charged to
expense in accordance with SFAS No. 2. The remaining amount of
intangible assets of approximately $590 included approximately $384 for
developed technology, $103 for assembled workforce and $103 for
goodwill. The intangible assets purchased are being amortized on a
straight-line basis over 7-10 years. Amortization expense included in
selling, general and administrative in the accompanying consolidated
statement of operations for the nine months ended September 30, 1997 is
approximately $57. The fair market value of the common stock issued to
Ohmicron was based on several factors including recent equity
transactions, as well as the subsequently negotiated Merger.
TSD BioServices Dissolution
In October 1996, SDI entered into an agreement with Taconic
Farms, Inc. ("Taconic") to dissolve TSD BioServices, a partnership
between Taconic and SDI and to liquidate its assets, in connection with
which certain of the rights and assets were distributed to SDI. Upon
dissolution, certain rights and assets formerly owned by the joint
venture were placed in a wholly-owned subsidiary of SDI. The agreement
to dissolve TSD BioServices provides that each of the former partners
receive rights to perform services that were considered to be either a
core part of that partner's expertise, or an area in which the partner
wanted to increase its market presence or technical competency. The
dissolution agreement also provided that certain services previously
provided by TSD BioServices, such as ascites production and sales and
marketing, would be subcontracted to Taconic by SDI in the future based
on established fees set annually. For accounting purposes, this
transaction was treated as a purchase, with the consideration provided
being SDI's investment of $338 which approximated the fair market value
of the assets received.
8
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Unaudited Pro Forma Combined Results of Operations
The following table summarizes the unaudited pro forma combined
results of operations for the three months and nine months ended
September 30, 1996, assuming that the Merger, the Ohmicron acquisition
and the TSD BioServices dissolution had occurred on January 1, 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net Revenues $ 3,471 $ 10,097
Net loss $ (300) $ (2,434)
Net loss per share $ (.02) $ (.19)
</TABLE>
The above pro forma information excludes the $5,613 one-time
charge to earnings for acquired research and development.
The shares used in computing pro forma net loss per common share
assumes that the Merger with EnSys, the acquisition of Ohmicron and the
TSD BioServices dissolution had occurred on January 1, 1996. In addition
the pro forma information excludes accretion of preferred stock (Note 2).
SHORT-TERM INVESTMENTS:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ --------------
<S> <C> <C>
U.S. Government Securities $ 686 $ --
Commercial Paper 1,522 1,501
-------- ---------
$2,208 $1,501
-------- ---------
-------- ---------
</TABLE>
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."
5. NOTES PAYABLE:
In October 1994 and April 1995, the holders of the redeemable
convertible preferred stock provided $500 and $1,000, in working capital
loans to the Company. These notes bore interest at 9% and 10% per annum,
respectively, and each became due during 1995. In addition, 89,349 and
223,372 warrants were issued, respectively, for the purchase of Common
Stock of the Company at an exercise price of $2.37 per share. The
warrant values deemed for accounting purposes were $23 and $75,
respectively, which were recorded as an asset and amortized over the term
of the loans. The warrants have an exercise period of five years.
9
<PAGE>
In January 1996, the Company converted the $1,500 of Notes
Payable and $124 of accrued interest into 685,952 shares of redeemable
convertible preferred stock (Note 6).
6. SERIES A PREFERRED STOCK:
In June 1993, the Company sold 1,267,208 shares of redeemable
convertible preferred stock and received proceeds of $3,000 less $47 of
transaction costs. In connection with the 1996 financing, the Company
converted the $1,500 of notes payable and $124 of accrued interest into
685,952 shares of redeemable convertible preferred stock at $2.37 per
share and received an additional investment of $500 for the purchase of
211,202 shares less transaction costs of $27. All such shares were
redeemable with cumulative dividends, at the option of the holders,
beginning in 1998. Dividends have been accreted through the Merger
(Note 3).
In connection with the Merger, the redeemable convertible
preferred stock plus cumulative dividends were converted into 2,164,362
shares of a newly issued class of Series A Preferred Stock ("Series A").
The Series A has no redemption provisions outside the control of the
Company. As a result, the Series A is now classified as a component of
stockholders' equity.
The Series A is convertible into one share of Common Stock at the
option of the holder at any time, or at the option of the Company if the
closing share price of the Company's Common Stock exceeds $4.50 per share
for a period of 45 business days. The Series A carries an aggregate
liquidation preference of $6,378. The Series A contains no annual
dividend provisions and is only redeemable in the event the Company
converts the Series A into securities of a lesser value, as defined.
10
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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 forward
looking statements reflecting the current expectations of Strategic
Diagnostics Inc. and its subsidiaries (the "Company"). Investors are
cautioned that all forward looking statements involve risks and uncertainties
that 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, failure to obtain necessary
regulatory approvals, modifications to development and sales relationships,
the ability to integrate the acquired businesses and achieve anticipated
synergies, and competition.
Background
The Company is the entity resulting from the combination of EnSys
Environmental Products, Inc. ("EnSys"), Ohmicron Corporation ("Ohmicron"),
TSD BioServices ("TSD") and Strategic Diagnostics Inc. ("SDI"). On August
30, 1996 Ohmicron was acquired by SDI, with certain Ohmicron shareholders and
note holders receiving shares of SDI common stock. On October 1, 1996 SDI
entered into an agreement to dissolve TSD BioServices, a partnership, between
Taconic Farms, Inc. and SDI and to liquidate its assets, in connection with
which certain rights and assets formerly owned by the partnership were
distributed to SDI and placed in a wholly owned subsidiary of SDI. On
December 30, 1996 SDI was merged with and into EnSys. The surviving entity
was then renamed Strategic Diagnostics Inc. Each of the transactions was
accounted for as a purchase transaction with SDI as the acquiring company
and, therefore, the surviving company for financial reporting purposes. As a
result, the unaudited historical financial information presented herein
includes the results of SDI for all periods and the results of Ohmicron from
August 30, 1996, TSD from October 1, 1996, and EnSys from December 30, 1996,
(the "Historical Financial Statements").
EnSys was formed in 1987 to develop proprietary biotechnology based test
systems designed for fast and inexpensive detection of various chemicals in
soil and water samples. EnSys raised approximately $30 million in equity
financing, including approximately $16 million from the sale of 1,800,000
shares of EnSys common stock in its initial public offering in October 1993.
Since 1991, EnSys commercialized eleven immunoassay test kits and four other
test kits for the detection of various environmental contaminants. EnSys
marketed and sold these test kits and other associated products and services
to environmental consulting and engineering firms, hazardous waste processing
firms, environmental testing laboratories, and various state and federal
agencies through distributors and a regionally based direct sales force in
the US. EnSys also marketed and sold its products in Europe through EnSys
(Europe) Limited, a wholly owned subsidiary of EnSys. In March 1996, EnSys
acquired from Millipore, Inc. certain assets, which consisted primarily of
inventory, work-in-process, equipment, intellectual property rights,
11
<PAGE>
contract rights and customer lists related to Millipore's EnviroGard-TM-
product line for $1 million and 1,100,000 shares of EnSys common stock.
Ohmicron was founded in 1984 and began marketing its RaPID
Assay-Registered Trademark- products in 1991 to the same general market and
in the same fashion as previously described for EnSys.
Since its inception in 1990, SDI has focused on using proprietary
technology and know-how to develop, manufacture and market immunoassay test
kits for applications primarily in the water quality, industrial testing and
agricultural markets. Commercial operations were initiated with a contact
with a corporate partner (a large integrated chemical company) to develop an
immunoassay test to detect certain corrosion causing bacteria. This product
was introduced in late 1991 and SDI purchased all rights and technology
related to this product in 1994.
In February 1992, SDI entered into a $3.9 million research and
development partnership with EM Industries, Inc. (an affiliate of Merck
KGaA, Darmstadt, Germany) for the development and manufacture of a line of
immunoassay test kits capable of identifying and quantifying targeted
priority pollutants. The first products under this agreement were introduced
in 1993. Through August 1996, these products were manufactured by SDI and
marketed by EM Industries, Inc. In September 1996, EM Industries, Inc. and
SDI reached an agreement whereby the February 1992 agreement was terminated,
together with EM Industries, Inc.'s marketing rights thereunder, in exchange
for certain specified royalty payments to EM Industries, Inc. and shares of
SDI common stock. The marketing activities with respect to such products are
now the responsibility of the Company.
Since 1992, the Company has 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. In addition, the Company currently sells directly other products
that it has developed or acquired.
RESULTS OF OPERATIONS
As described above, the Historical Financial Statements presented herein
include the results of SDI for all periods and the results of Ohmicron from
August 30, 1996, TSD from October 1, 1996 and EnSys from December 30, 1996.
For comparative purposes, the following table sets forth the pro forma
results of operations for the periods indicated. The 1996 unaudited pro forma
information presents the combined results as if the acquisition of Ohmicron,
dissolution of TSD and the EnSys merger had been completed at January 1,
1996 (the "Pro Forma Financial Information").
12
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Selected Historical Financial Data and Pro Forma Combined Information
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------------------- --------------------------
Pro Forma Historical Pro Forma Historical
------------------------ --------------------------------- ----------- -----------
Sep-96(1) Dec-96(2) Mar-97 Jun-97 Sep-97 Sep-96(3) Sep-97
--------- --------- ------ ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES:
Product related............... $3,049 $2,310 $2,402 $3,103 $3,801 $8,624 $9,306
Contract and other............ 422 293 371 395 512 1,473 1,278
--------- --------- ------ ------ ------ ----------- ----------
Total net revenues.......... 3,471 2,603 2,773 3,498 4,313 10,097 10,584
OPERATING EXPENSES:
Manufacturing................. 1,590 1,652 809 1,440 1,577 4,295 3,826
Research and development...... 657 591 494 409 313 2,741 1,216
Selling, general and admini... 1,682 2,320 1,430 1,358 1,751 5,962 4,539
--------- --------- ------ ------ ------ ----------- ----------
Total operating expense..... 3,929 4,563 2,733 3,207 3,641 12,998 9,581
--------- --------- ------ ------ ------ ----------- ----------
Operating income (loss)..... (458) (1,960) 40 291 672 (2,901) 1,003
INTEREST INCOME, NET............ 158 122 69 60 50 467 179
--------- --------- ------ ------ ------ ----------- ----------
NET INCOME (LOSS)................ ($300) ($1,838) $109 $351 722 ($2,434) $1,182
--------- --------- ------ ------ ------ ----------- ----------
--------- --------- ------ ------ ------ ----------- ----------
</TABLE>
(1) Pro forma data excludes $3.9 million of acquired research
and development expenses incurred in connection with the acquisition of
Ohmicron.
(2) Pro forma data excludes $4.4 million of acquired research and
development expenses incurred in connection with the acquisition of EnSys.
(3) Pro forma data results excludes $5.6 million of acquired research and
development expenses incurred in connection with the acquisition of the
EnviroGard product line from Millipore, Inc. in March 1996, and the
acquisition of Ohmicron in August 1996. See the Historical Financial
Information for 1996 actual results.
COMPARISON WITH PRO FORMA COMBINED FINANCIAL INFORMATION
Three Months Ended September 30, 1997 vs. 1996
Product related revenues increased during the three month period ended
September 30, 1997 by $752,000 or 25%, over the comparable pro forma period
in 1996. Product revenues in the third quarter included the first sales of a
new pre-commercial product designed to detect the proprietary polymers of a
corporate partner. The Company shipped over 2,000 test kits during the
quarter to this corporate partner and earned revenues of $600,000. The
Company expects to ship the remaining pre-commercial kits under the terms of
the agreement in the fourth quarter of 1997, and expects to earn an
additional $400,000 in revenue. The Company also expects to begin shipping
additional tests in 1998 under this long-term supply agreement, which
provides among other things, for the Company to exclusively manufacture these
kits. Also during the third quarter of 1997, the Company continued shipping
product under the supply agreement initiated during the second quarter of
1997 with a major seed company. Revenues under this agreement totaled
approximately $460,000 during the third quarter of 1997, for which there were
no comparable amounts in the prior year.
13
<PAGE>
Other product revenues during the third quarter of 1997, declined to $2.7
million, a small decrease from $3.0 million in the third quarter of 1996.
This decline in the remediation and other base business categories is
attributable to a reduction in total volume from (1) the elimination of more
than 30 products during the quarter where continued sales and support was not
justified in light of the sales volume and (2) the consolidation of common
customers who previously purchased products from each of SDI, Ohmicron and
EnSys.
Research and Development revenues increased by $90,000 or 21%, reflecting
the achievement of milestones for three customers. Associated billings and
revenues of $350,000, were recorded during the third quarter relating to
these milestones. Research and Development contracts historically have been
large and long-term in nature. Accordingly, such revenues tend to fluctuate
from quarter-to-quarter.
Total operating expenses decreased by $288,000 or 7%, from the prior
period to $3.6 million. This decrease is primarily the result of lower costs
associated with more efficient operations of the combined companies after the
combinations. The combined Company has a lower level of personnel costs
compared with each of the separate companies combined. Efficiencies were
also achieved as duplicate facilities were closed. The operations in North
Carolina and portions of the Pennsylvania operation have been consolidated
into the Company's Delaware facility.
Manufacturing expenses include the costs of products sold and decreased
$13,000 or 1% in the third quarter of 1997 to $1.6 million. Gross margins
for product sales in the quarter increased to 58.5% in 1997, from 47.9% in
1996, due to increased sales volume, efficiencies gained through
consolidation and the elimination of the product sales at cost to EM
Industries, Inc. that occurred in the third quarter of 1996.
Research and Development expenses decreased $ 344,000 or 52% to $313,000
in the third quarter of 1997. This decrease is attributable to the
consolidation of the Research and Development departments of SDI, Ohmicron
and EnSys into one group.
Selling, general and administrative expenses increased $69,000 or 4% to
$1.8 million in the third quarter of 1997. This increase is attributable to
the increased sales and business activity recorded during the quarter.
Net interest income decreased $108,000 or 68% to $50,000 in the third
quarter of 1997. This decrease is primarily attributable to a lower average
balance of investments during the quarter ended September 30, 1997, than in
the same period of 1996.
Net income increased $1.0 million for the three month period ended
September 30, 1997 to $722,000. This increase was primarily the result of
increased sales activity as well as lower operating costs, all as described
above.
14
<PAGE>
Nine Months Ended September 30, 1997 vs. 1996
Overall, product related revenues increased in the nine month period
ended September 30, 1997 by $682,000 or 8% to $9.3 million compared to the
comparable period in the prior year. Product related revenues from the
Company's products for genetic testing of agricultural products and water
quality tests increased significantly during the period over 1996. During
the 1997 period, the Company completed major supply agreements with customers
in each of these markets. The aggregate revenue recognized under these
agreements was $1.2 million in the period. These increases were offset by a
small decrease in the Company's industrial testing business. This decrease
was primarily due to the consolidation of duplicative and low-volume product
lines previously sold by each of the separate companies prior to the
combinations.
Approximately 40% of the Company's product related revenues in 1997 has
been, and is expected to be, generated from the environmental remediation
industry. Historically, remediation activities have followed seasonal
patterns, with lower levels of activity during the period from October to
March. Therefore, the Company's sales in a particular quarter in 1997 may
not be indicative of its revenues for any subsequent quarter during the year.
Contract and other revenues decreased by $195,000 or 13% to $1.3 million
during the period, reflecting the Company's emphasis to increase revenues by
marketing developed products over additional research and development
projects. These contracts historically have been large and long-term in
nature. Accordingly, such revenues tend to fluctuate from period-to-period.
Total operating expenses decreased $3.4 million or 26% from the prior
period to $9.6 million. This decrease results primarily from lower costs
associated with more efficient operations of the combined companies after the
mergers as previously discussed.
Manufacturing costs decreased $469,000 or 11% from the prior period to
$3.8 million. This decrease resulted primarily from lower costs associated
with more efficient operations of the combined companies after the
combinations as previously discussed. Product related gross margins increased
$1.2 million or 27% to $5.5 million. These margins for the first three
quarters of 1997 were approximately 59% of product revenues. The increase in
gross margins for the first three quarters of 1997 resulted primarily from
the efficiencies and other factors described above. Product margins, as a
percent of revenue, for the final quarter of 1997 is expected to be
approximately equal to those in the first nine months.
Research and development costs decreased $1.5 million or 56% from the
prior period to $1.2 million. This decrease is attributable to the
consolidation of an EnSys research and development project underway during
the first half of 1996 with the Company's on-going research and development
projects, as well as other factors noted above.
Selling, general and administrative costs decreased $1.4 million or 24%
from the prior period to $4.5 million. These decreases are attributable to
increased efficiencies from the mergers as described above.
15
<PAGE>
Net interest income decreased $288,000 or 62% to $179,000. This decrease
is attributable primarily to a lower average balance of investments during
the quarter ended September 30, 1997.
The net income for the nine month period ended September 30, 1997 was
$1.2 million compared to the net loss of $2.4 million for the nine month
period ended September 30, 1996. The net income was primarily a result of a
combination of increased revenues and decreased total operating expenses due
to the combination of the companies as discussed above.
HISTORICAL FINANCIAL STATEMENTS
As described above, the Historical Financial Statements presented herein
include the results of SDI for all periods and the results of Ohmicron from
August 30, 1996, TSD from October 1, 1996 and EnSys from December 30, 1996.
Three Months Ended September 30, 1997 vs. June 30, 1997
Total net revenues increased during the three month period ended
September 30, 1997 over the three month period ended June 30, 1997 by
$815,000 or 23%. Product related sales increased $698,000 or 22%. This
increase reflects the favorable effects of the efforts the Company made
during the quarter to stabilize and further develop customer relationships
after the mergers. This increase also was achieved as demand for the
Company's immunoassay based test kits increased during the third quarter of
1997 due to seasonal factors. Historically, the third quarter is a strong
selling period of the year. Additionally, sales of the Company's products to
the agricultural and water quality market segments (segments that are less
seasonal) continued to be strong.
Total operating expenses increased $434,000 or 14% from the prior period
to $3.6 million. Included in this total, manufacturing costs increased
$137,000 or 10% from the prior period to $1.6 million. This increase in
manufacturing costs is due primarily to the higher volume of products sold in
the third quarter of 1997. The Company expects gross profit margins to
increase in 1997 due to an increase in the sales of its products and
efficiencies gained through consolidation. Research and development costs
decreased $96,000 or 23% from the prior period to $313,000 as continued
efficiencies from the combination of three former research and development
departments into one are being realized. Selling, general and administrative
costs increased $393,000 or 29% from the prior period to $1.8 million. The
increase in selling, general and administrative costs is due to the increased
business activity recorded in the quarter.
Net interest income decreased $10,000 or 17%. This decrease is
attributable primarily to a lower rate of return on cash invested during the
quarter ended September 30, 1997, as compared to the prior quarter.
16
<PAGE>
Net income increased $371,000 or 106% to $722,000, in the quarter ended
September 30, 1997. This increase in net income results from an increase in
sales volume that was larger than the increase in expenses, all as described
above.
Three Months Ended September 30, 1997 vs 1996
Net revenues for the period increased by $3 million or 228% to $4.3
million during the three month period ended September 30, 1997 compared to
the comparable period of 1996. Of this total, product related revenues
increased $2.9 million or 346% to $3.8 million and contract and other
revenues increased $51,000 or 11% to $512,000. The increase in total net
revenue and product related revenue is attributable to the additional
products and customers arising from the merger of SDI, Ohmicron and EnSys.
The increase in contract and other revenue reflects the achievement of
milestones and associated revenue and billings for three customers during the
three month period ended September 30, 1997.
Total operating expenses (exclusive of acquired research and development)
increased $2.2 million or 157% to $3.6 million. Of this total, manufacturing
costs increased $971,000 or 160% to $1.6 million, research and development
expenses decreased $83,000 or 21% to $313,000 and selling, general and
administrative expenses increased $1.3 million or 325% to $1.8 million. All
of these increases are due to the combination of SDI, Ohmicron, TSD and
EnSys.
Net interest income increased $52,000 to $50,000 during the period. This
increase is due to the investments acquired in the combinations.
Equity in the income of TSD, a partnership in which SDI was a general
partner, was eliminated in 1997 as TSD was dissolved in 1996 and certain
assets of the partnership were transferred into a wholly owned subsidiary of
the Company.
The net income for the three month period ended September 30, 1997 was
$722,000 compared to a net loss of $4,001,000 or a net loss of $88,000
(exclusive of acquired research and development) for the three month period
ended September 30, 1996. The net income was primarily a result of the
increase in revenue and decrease in the proportion of total operating
expenses due to the combined companies after the combinations as discussed
above.
Nine Months Ended September 30, 1997 vs. 1996
Revenues for the period increased by $7 million or 191% to $10.6 million
during the nine months ended September 30, 1997 as compared to the comparable
period of 1996. Of this total, product related revenues increased $7.2
million or 348% to $9.3 million and contract and other revenues decreased
$277,000 or 18% to $1.3 million. The increase in total net revenue and
product related revenue is attributable to the additional products and
customers arising from the combination of SDI, Ohmicron and EnSys. The
decrease in contract and other revenue reflects the decreased emphasis by the
Company on research and development contract revenues in favor of the
marketing of developed products as described above.
17
<PAGE>
Total operating expenses (exclusive of acquired research and development)
increased by $6 million 168% to $9.6 million. Of this total, manufacturing
costs increased $2.3 million or 149% to $3.8 million, research and
development expenses increased $38,000 or 3% to $1.2 million and selling,
general and administrative expenses increased $3.7 million or 425% to $4.5
million. All of these increases are due to the combination of SDI, Ohmicron,
TSD and EnSys.
Net interest income increased $173,000 to $179,000 during the period.
This increase is due to the investments acquired in the combinations.
Equity in income of TSD (a partnership) was eliminated in 1997 as TSD
was dissolved in 1996 and became a wholly owned subsidiary.
The net income for the nine month period ended September 30, 1997 was
$1.2 million compared to the net loss of $4.2 million or a net loss of
$237,000 (exclusive of acquired research and development) for the nine month
period ended September 30, 1996. The net income was primarily a result of
the increase in revenue and decrease in the proportion of total operating
expenses due to the combined companies after the combinations as discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital which consists principally of cash, cash
equivalents and marketable investments, increased $1.6 million from December
31, 1996 to $8.8 million at September 30, 1997. Cash, cash equivalents and
short-term investments decreased $1.5 million to $5.1 million. This decrease
was used to reduce accounts payable and accrued expenses by $1.9 million and
finance increases in accounts receivable and inventories of $1.4 million and
was net of increases attributable to changes in other current assets and
liabilities of $174,000 and net income of $1.2 million.
The Company believes that its current cash, cash equivalents and
marketable securities will be sufficient to meet its working capital and
funding needs for at least the next 18 months. However, 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
and the Company's marketing and distribution strategy. Accordingly, there
can be no assurance that the Company will be able to meet its long-term
requirements.
18
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule (in electronic format only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the
quarter covered by this report.
19
<PAGE>
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
- --------------------------
Richard C. Birkmeyer President and Chief October 30, 1997
Executive Officer
(Principal Executive Officer)
/s/ ARTHUR A. KOCH, JR.
- --------------------------
Arthur A. Koch, Jr. Vice President and Chief October 30, 1997
Financial Officer
(Principal Financial Officer)
20
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