<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, 1998
[ ] 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 September 30, 1998 there were 13,249,961 outstanding shares of the
Registrant's common stock, par value $.01 per share.
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STRATEGIC DIAGNOSTICS INC.
INDEX
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Item Page
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PART I
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 2
Consolidated Statements of Operations - Three months and nine months ended
September 30, 1998 and 1997 3
Consolidated Statements of Cash Flows - Nine months ended September 30, 1998
and 1997 4
Notes to Consolidated Interim Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II 11
ITEM 5. Other Information 11
ITEM 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
- -------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------
ASSETS (unaudited)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,401 $ 2,580
Short-term investments 3,980 3,638
Receivables 4,361 3,159
Inventories 1,825 1,547
Other current assets 375 174
- -------------------------------------------------------------------------------------------------------------------
Total current assets 11,942 11,098
- -------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net 789 496
OTHER ASSETS 631 634
INTANGIBLE ASSETS, net 2,003 1,832
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 15,365 $ 14,060
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,009 $ 619
Accrued expenses 728 953
Deferred revenue -- 100
Current portion of capital lease obligations 10 23
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,747 1,695
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CAPITAL LEASE OBLIGATIONS 17 25
- -------------------------------------------------------------------------------------------------------------------
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,
13,249,961 and 13,102,949 issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 132 132
Additional paid-in capital 23,941 23,913
Accumulated deficit (10,469) (11,702)
Cumulative translation adjustments (25) (25)
Deferred compensation -- --
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,601 12,340
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 15,365 $ 14,060
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
2
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STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
NET REVENUES:
- --------------------------------------------- -------------------------------- --------------------------------
Product related $ 3,739 $ 3,801 $ 11,146 $ 9,306
Contract and other 292 512 957 1,278
- --------------------------------------------- -------------------------------- --------------------------------
Total net revenues 4,031 4,313 12,103 10,584
- --------------------------------------------- -------------------------------- --------------------------------
OPERATING EXPENSES:
Manufacturing 1,640 1,577 4,560 3,826
Research and development 477 313 1,319 1,216
Selling, general and administrative 1,550 1,751 5,247 4,539
- --------------------------------------------- -------------------------------- --------------------------------
Total operating expenses 3,667 3,641 11,126 9,581
- --------------------------------------------- -------------------------------- --------------------------------
Operating income 364 672 977 1,003
Interest and other income (expense), net 79 50 256 179
- --------------------------------------------- -------------------------------- --------------------------------
NET INCOME 443 722 1,233 1,182
============================================= ================================ ================================
BASIC NET INCOME PER COMMON SHARE $ 0.03 $ 0.06 $0.09 $ 0.09
============================================= ================================ ================================
SHARES USED IN COMPUTING BASIC
NET INCOME PER COMMON SHARE 13,223,000 13,083,000 13,168,000 13,080,000
============================================= ================================ ================================
DILUTED NET INCOME PER COMMON SHARE $ 0.03 $ 0.05 $ 0.08 $ 0.08
============================================= ================================ ================================
SHARES USED IN COMPUTING DILUTED
NET INCOME PER COMMON SHARE 16,073,000 15,623,000 16,232,000 15,606,000
============================================= ================================ ================================
</TABLE>
The accompanying notes are an integral part of these statements.
3
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STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
- ---------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,233 $ 1,182
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization and other, net 451 554
(Increase) decrease in:
Receivables (1,202) (1,134)
Inventories (278) (282)
Other current assets (201) 249
Note receivable and other assets 3 19
Increase (decrease) in:
Accounts payable 390 (1,134)
Accrued expenses (225) (764)
Deferred revenue (100) (23)
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 71 (1,333)
Cash Flows from Investing Activities:
Purchase of property and equipment (535) (106)
Purchase of intangible assets (380) --
Short-term investment activity (342) 1,973
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (1,257) 1,867
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 28 --
Repayments on capital lease obligations (21) (75)
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 7 (75)
Net Increase (Decrease) in Cash and Cash Equivalents (1,179) 459
Cash and Cash Equivalents, Beginning of Period 2,580 917
- ---------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 1,401 $ 1,376
===================================================================================================
Supplemental Cash Flow Disclosure:
Cash paid for interest 15 36
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements
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.
Basis of Presentation and Interim Financial Statements
The accompanying balance sheets at December 31, 1997 and September 30,
1998, and the statements of operations for the nine months ended September 30,
1997 and 1998, and the three months ended September 30, 1997 and 1998 and cash
flows for the nine months ended September 30, 1997 and 1998 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, 1997. 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 nine months ended September 30, 1998 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.
5
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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.
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 approximated the net income as presented in the
accompanying Statements of Operations.
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 March 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
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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 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 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.
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").
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 September 30, 1998 vs. September 30, 1997
Net revenues decreased $282,000 or 7% during the three-month period
ended September 30, 1998 versus the three-month period ended September 30, 1997.
Product related sales decreased $62,000 or 2%, primarily as a result of lower
sales of water quality products compared to the 1997 period when a large order
of pre-commercial test kits were sold to a corporate partner. This decrease was
partially offset primarily by a 45% increase in sales of the Company's
7
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agricultural products. Research contract and other revenue decreased $220
thousand or 43% during the third quarter of 1998 compared to the third quarter
of 1997. During the third quarter of 1998, the Company devoted significant
sales, marketing, research, development and executive resources to developing
test kits for the detection of Genetically Modified Organisms (GMO's) in food
and enter the European market for GMO testing. The focus during the third
quarter of 1998 on this developing market adversely impacted the Company's
effort to generate additional research contract revenues during the quarter.
The deployment of resources during the third quarter in the GMO food
testing market is expected to continue during the fourth quarter of 1998. The
market opportunity in Europe is developing rapidly as regulations are
implemented and the European food processing industry prepares food testing
protocols and quality control practices under the regulations. The Company is
working with regulatory, industry and other representatives to introduce its
products, promote significant competitive advantages, including the unique
capability to detect GMO's at threshold levels as required under the anticipated
final regulatory specifications, and demonstrate the utility and efficiency of
its products. The first sales of these products, if any, are expected at the
earliest, in the first quarter of 1999, as food processors are required to
implement appropriate testing protocols by March 1, 1999. This new market
opportunity has emerged rapidly and the Company has devoted and expects to
continue to devote substantial resources to pursue this opportunity for revenues
in 1999 and thereafter. While these efforts continue, the Company expects fourth
quarter 1998 revenues to be in line with those of the third quarter of 1998.
Total operating expenses for the three-month period ended September 30,
1998 increased $26,000 or 1%, over the three-month period ended September 30,
1997. Manufacturing costs increased $63,000 or 4%, in the third of quarter of
1998 over the third quarter of 1997. This increase reflects increased costs in
materials, labor and overhead, necessary for the continued expansion of the
agricultural product line. Research and development expenses increased $164,000
or 52%, in the third quarter of 1998 versus the third quarter of 1997. This
increase was due to the higher costs of labor associated with additional staff
required to develop new, and modify existing, products for the company's entry
into the European GMO food testing market. Selling, general and administrative
expenses decreased $201,000 or 11%, in the third quarter of 1998 versus the
third quarter of 1997. This decrease is attributable to lower expenses for bad
debt, legal fees and accounting services from the prior year.
Net interest income increased $29,000 or 58%. This increase was due to
a combination of higher invested balances and lower interest expense during the
quarter ended September 30, 1998, as compared to the quarter ended September 30,
1997.
Net income decreased $279,000 or 39% as a result of the foregoing.
Nine Months Ended September 30, 1998 vs. September 30, 1997
Total net revenues increased $1.5 million or 14% during the nine month
period ended September 30, 1998 over the nine month period ended September 30,
8
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1997. Product related sales increased $1.8 million or 20%, primarily due to
growth in the agricultural products and increased antibody, custom antibody, and
other revenues for the nine months ended September 30, 1998 versus the nine
months ended September 30, 1997. Sales of the agricultural products have
increased more than 90% in the 1998 period over 1997. Sales in this category are
expected to continue to grow as acreage under cultivation continues to increase
throughout the world and the Company's sales of GMO food test kits commence in
1999. These increases more than offset a decline in sales of water quality
products during the nine month period ended September 30, 1998 compared to the
prior year period, when a large order of pre-commercial test kits were sold to a
corporate partner, and a small decline in the Company's industrial products
sales.
Total operating expenses for the nine months ended September 30, 1998
increased by $1.5 million or 16%, over the nine months ended September 30, 1997.
Manufacturing costs increased $734,000 or 19%, in the nine month period ended
September 30, 1998 versus the nine months ended September 30, 1997. This
increase reflects the increased product related sales (20%), recorded during the
period. Research and development expenses increased $103,000 or 8%, for the nine
month period ended September 30, 1998 compared to the nine-month period ended
September 30, 1997. This increase was due to higher costs of labor required to
meet both internal and external customer demands. Selling, general and
administrative expenses increased $708,000 or 16%, for the nine months ended
September 30, 1998 versus the nine months ended September 30, 1997. This
increase is attributable to higher levels of personnel and infrastructure
necessary to support the increase in business activity recorded during the
period.
Net interest income increased $77,000 or 43%. This increase was
primarily the result of higher levels of invested balances and lower interest
expense during the nine months ended September 30, 1998, as compared to the nine
months ended September 30, 1997.
Net income increased $51,000 or 4% as a result of the foregoing.
Liquidity and Capital Resources
The Company's working capital, which consists principally of cash, cash
equivalents and marketable investments, increased $792,000 from December 31,
1997 to $10.2 million at September 30, 1998. Cash, cash equivalents and
short-term investments decreased $837,000 to $5.4 million. This decrease was
primarily used to purchase property and equipment ($535,000), intangible assets
($380,000), increase accounts receivable ($1.2 million) and inventories
($278,000) and was net of increases attributable to changes in other current
assets and liabilities of $133,000, depreciation and amortization of $451,000
and net income of $1.2 million.
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.
9
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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.
The Company is currently reviewing its own computer, communication,
software and operating systems to determine if they are Year 2000 compliant. The
Company has planned system-wide testing in the fourth quarter of 1998. 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 March 31, 1999. Accordingly the Company has not
conducted any contingency planning. The Company relies primarily on third party
provided software purchased and licensed commercially, therefore the Company
believes its Year 2000 risks are minimal, as a result its historical and
estimated future costs of remediation are 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. 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
10
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PART II
ITEM 5. OTHER INFORMATION
Discretionary Proxy Voting Authority / Shareholder Proposals
On May 21, 1998 the Securities and Exchange Commission adopted an
amendment to Rule 14a-4, as promulgated under the Securities and Exchange Act of
1934. The amendment to Rule 14a-4(c)(1) governs the Company's use of its
discretionary proxy voting authority with respect to a shareholder proposal
which the shareholder has not sought to include in the Company's proxy
statement. The new amendment provides that if a proponent of a proposal fails to
notify the Company at least 45 days prior to the month and day of mailing of the
prior year's proxy statement (or any date specified in an advance notice
provision), then the management proxies will be allowed to use their
discretionary voting authority when the proposal is raised at the meeting,
without any discussion of the matter in the proxy statement.
With respect to the Company's 1999 Annual Meeting of Shareholders, if
the Company is not provided notice of a shareholder proposal, which the
shareholder has not previously sought to include in the Company's proxy
statement, by March 2, 1999, the management proxies will be allowed to use
their discretionary authority as outlined above.
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
A Form 8-K was filed on September 17, 1998 reporting a change in the
Company's auditors.
11
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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)
<TABLE>
<CAPTION>
Signature Title Date
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<S> <C> <C>
/s/ RICHARD C. BIRKMEYER President and Chief Executive Officer November 13, 1998
- ------------------------- (Principal Executive Officer)
Richard C. Birkmeyer
/s/ ARTHUR A. KOCH, JR. Vice President and Chief Financial Officer November 13, 1998
- ------------------------- (Principal Financial Officer)
Arthur A. Koch, Jr.
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,401
<SECURITIES> 3,980
<RECEIVABLES> 4,361
<ALLOWANCES> 0
<INVENTORY> 1,825
<CURRENT-ASSETS> 11,942
<PP&E> 1,981
<DEPRECIATION> 1,192
<TOTAL-ASSETS> 15,365
<CURRENT-LIABILITIES> 1,747
<BONDS> 0
0
22
<COMMON> 132
<OTHER-SE> 13,447
<TOTAL-LIABILITY-AND-EQUITY> 15,365
<SALES> 11,146
<TOTAL-REVENUES> 12,103
<CGS> 0
<TOTAL-COSTS> 4,560
<OTHER-EXPENSES> 6,566
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 443
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 443
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
