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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For The Transition Period From _______ to _________
Commission File No. 0-684401
STRATEGIC DIAGNOSTICS INC.
(Exact name of Registrant as specified in its charter)
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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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
-------------------------------------
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 past 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $31,400,000 as of February 23, 1998.
As of February 23, 1998 there were 13,150,826 shares outstanding of the
Registrant's common stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the Company's 1998 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Report.
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . .1
OVERVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
IMMUNOASSAY TECHNOLOGY. . . . . . . . . . . . . . . . . . . . . . . .1
MARKETS AND PRODUCTS. . . . . . . . . . . . . . . . . . . . . . . . .3
SALES AND MARKETING STRATEGY. . . . . . . . . . . . . . . . . . . . .7
REGULATORY APPROVALS. . . . . . . . . . . . . . . . . . . . . . . . .7
MANUFACTURING . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
RESEARCH AND DEVELOPMENT. . . . . . . . . . . . . . . . . . . . . . .9
PROPRIETARY TECHNOLOGY AND PATENTS. . . . . . . . . . . . . . . . . 10
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 12
ITEM 4(a) EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . . . 13
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. . . . . . . . . . . . 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION. . . . . . . . . . . . . . . . . . 16
FORWARD LOOKING STATEMENTS. . . . . . . . . . . . . . . . . . . . . 16
OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . 18
COMPARISON OF ACTUAL 1997 WITH HISTORICAL FINANCIAL INFORMATION . . 21
ITEM 8. FINANCIAL STATEMENTS AND SUPLEMENTARY DATA. . . . . . . . . 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . . . . . 23
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT. . . . . . . 23
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . 23
PART IV . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
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PART I
ITEM 1. BUSINESS
OVERVIEW
Strategic Diagnostics Inc. (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 segments: water
quality, industrial testing and agricultural. The Company is the entity
resulting from the combination of EnSys Environmental Products, Inc. ("EnSys"),
Ohmicron Corporation ("Ohmicron") and Strategic Diagnostics, Inc. ("SDI"). On
August 30, 1996, Ohmicron was merged with and into SDI. On December 30, 1996,
SDI was merged with and into EnSys. The surviving entity was then renamed
Strategic Diagnostics Inc.
The Company is a recognized leader in the field of immunoassay research,
development and manufacturing and develops products in markets where the
attributes of immunoassay technology (i.e. speed, ease-of-use, cost effective,
quantitation, and flexibility), meet specific customer needs. The substances
detected by the Company's test kits and strip tests include chemicals used to
treat drinking water, proprietary chemicals used in industrial processes,
environmental contaminants, pesticides, genetically engineered traits in plants,
and diseases of commercial crops.
The Company's kits tests for the detection of pesticides and environmental
contaminants (D TECH(-Registered Trademark-), EnviroGard-TM-, EnSys RIS-TM- and
RaPID Assay(-Registered Trademark-) are well recognized in the immunoassay field
testing market. The Company sells its environmental products through its direct
sales force in the U.S. and through distributors in Europe and the rest of the
world. The Company's "one-step" strip tests hold a lead position in the emerging
markets of analytical tests for the detection of water-soluble polymers and
specific traits of genetically engineered plants. In addition to products
serving the three primary markets, the Company manufactures and sells select
immunoassay test kits for medical research applications including
Macra(-Registered Trademark-) Lp(a), a leading method for measuring
lipoprotein(a) in human serum.
In addition to developing and marketing test kits and strip tests, the
Company provides fully integrated monoclonal antibody development and large
scale manufacturing services to pharmaceutical and medical diagnostic
companies through it's wholly-owned subsidiary, TSD BioServices, Inc.
IMMUNOASSAY TECHNOLOGY
An immunoassay is an analytical test that uses antibodies to detect the
presence of a target compound in a complex sample matrix with high degrees of
precision and accuracy.
The technology was first developed more than 25 years ago and has
rapidly replaced many laboratory diagnostic tests in the medical industry.
The speed with which immunoassays have been adopted in the medical arena has
been driven in large part by three factors: (i) a demand for analyses which
were otherwise unavailable through conventional methods; (ii) a desire for
analytical methods which could yield results much more quickly than
conventional methods; and (iii) a need for more specific and accurate data.
Currently, immunoassays are used extensively in the medical arena to detect
drugs of abuse, therapeutic drugs, steroid and thyroid hormones, and
microorganisms like those causing hepatitis and AIDS. One well-known
application of immunoassay technology is the home pregnancy test kit. This
test illustrates many of the benefits of immunoassay technology, namely, it
provides an inexpensive, rapid, accurate result in an easy to use format that
can be used in the privacy of one's own home.
The Company has applied immunoassay technology to a variety of
industrial and agricultural applications. As with medical applications,
immunoassay technology has demonstrated its value in these markets by virtue
of its ability to yield specific, accurate, cost-effective and timely data in
a manner previously unavailable.
The major attributes of immunoassay technology can be summarized as
follows:
Sensitivity: Immunoassays can measure extremely low concentrations of
compounds (routinely as low as parts
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per billion; i.e., one millionth of one gram in a liter of
liquid).
Specificity: Immunoassays can measure one specific compound out of a
chemical "soup," reducing the need for sample preparation.
Speed: Total time to obtain a test result ranges from 1 minute to
several hours as compared to several days to several weeks
with many competing laboratory testing methods.
Cost: Price per test for immunoassays range from $1 to $50; price
per test for similar laboratory testing can range from $5 to
$1,000.
Accuracy: Immunoassays are typically as or more accurate than their
laboratory counterparts.
Flexibility: Immunoassays can be developed in a wide variety of test
formats, including multiple sample laboratory-based tests,
disposable, single-use units, and large automated instruments.
They can be designed for use by non-technical persons on-site
under a variety of field conditions for testing of diverse
sample types.
Immunoassay technology relies on the specific binding characteristics of
antibodies. Antibodies are proteins made by cells within the bodies of animals
as part of the immune response to invasion by foreign substances like bacteria
and viruses. An antibody physically binds only to the substance that elicited
its production. This characteristic of specific binding makes antibodies useful
tools for detecting substances in complex sample matrices (e.g., blood, plant
tissue, soil and water). Methods exist for isolating and purifying antibodies
from animals, and labeling them in such a way that they can be used as
components, or reagents, within a test to detect the presence of the substance
of interest. Immunoassay technology has advanced to the point that antibodies
can be made to a wide variety of substances including microorganisms, drugs,
hormones, proteins, polymers, environmental pollutants and other chemicals.
Once an antibody reagent that has the desired performance characteristics
(sensitivity and specificity) has been identified, it must be incorporated into
a test format that is appropriate for the customer's application. In the human
clinical chemistry market, antibodies are employed as reagents on large,
automated instruments that can analyze hundreds of samples per hour. In
contrast, antibodies can also be packaged into single use, disposable formats
such as the home pregnancy tests. Immunoassays can be designed to be highly
quantitative or yield a simple yes/no result. The type of test format chosen for
any given application depends on the needs of the customer and may include
factors such as ease-of-use, cost per test, number of samples to be tested, the
location the test will be performed and experience of the user.
The Company has expertise and proprietary technology relating to the
development and manufacture of primarily five immunoassay formats: latex
filtration, magnetic particle, one-step strip tests, coated-tube and microtiter
plate. Latex filtration assays offer ease-of-use, field portability and
semi-quantitative results and are ideally suited for on-site, field screening
applications where limited numbers of samples are to be analyzed.
Magnetic particle assays have a greater number of steps and require more
technical expertise to execute than latex filtration assays, but are more suited
to the processing of larger numbers of samples at a single time, can be highly
quantitative, and are relatively inexpensive on a cost-per-test basis. These
characteristics make magnetic particle immunoassays effective measurement tools
in both laboratory and certain field applications, especially where highly
precise results are required.
Lateral flow immunoassay strips, often referred to as 'one-step' strip
tests, require only that the user apply a prepared sample to the test strip to
obtain the test result--much like pH or Litmus paper tests. The low cost and
simplicity of these tests make them ideally suited for a wide range of
applications in many different markets. The current state-of-the-art of lateral
flow immunoassays is such that the results obtained using these tests are
qualitative, not quantitative, which imposes some limits on the applicability of
the format.
Coated-tube immunoassays are well suited for analyzing relatively large
numbers of samples in the field, yield a semi-quantitative result and are
intermediate in their ease-of-use and cost-per-test.
Microtiter plate assays are well established in the medical diagnostic
industry and offer many of the advantages of magnetic particle assays, including
quantitative results and the capacity to analyze large numbers of samples at a
relatively low cost-per-test. Special laboratory equipment, relatively high
levels of technical training, and a time-to-result measured in hours limits this
test format to laboratory applications.
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All measurement technologies, including immunoassays, have strengths and
limitations. The Company's expertise with multiple immunoassay formats, coupled
with a thorough understanding of the needs of a market and specific customer
applications, has allowed the Company to develop a diverse array of immunoassay
products designed to meet the analytical needs of multiple, sizable markets.
MARKETS AND PRODUCTS
The Company sells products in the water quality, industrial testing and
agricultural market categories through its direct sales force, through a network
of over 40 distributors in Canada, Mexico, Latin America, Europe and Asia, and
through its corporate partners. This section describes the Company's current
markets and products as well as those in development.
WATER QUALITY
The Company believes that all of its products sold in this market are
unique to the Company and provide high value testing solutions to fill largely
unserviced analytical needs in this critical and highly regulated industry. In
this arena, the Company markets established products such as those for the
detection of pesticides, as well as emerging products for the detection of
pathogenic microorganisms and toxic chemicals resulting from chlorine
disinfection of drinking water. Also included in this market category are
products developed and others currently under development for the detection of
water treatment polymers used to clarify water and prevent scale formation.
WATER TREATMENT POLYMERS. The water treatment market encompasses both
industrial and municipal water treatment systems. Water treatment chemicals,
typically polymers, are critical to preparing finished drinking water in
municipal settings and to controlling water quality in industrial settings.
Competition between water treatment chemical manufacturers is intense and new
chemicals have evolved to the point that some of the more effective chemicals
are quite expensive. Cost effective use of these chemicals requires careful
control of polymer concentrations throughout the system in which they are being
employed. Many of these polymers are toxic and have been implicated in fish
kills when industrial effluents have been discharged to natural bodies of water.
As a result, there is increased regulatory pressure to measure the amount of
chemical being discharged into surface waters. Polymer detection is quite
difficult and currently there is no other detection method capable of measuring
these substances at the levels at which they are used or discharged in
effluents.
The Company, working in collaboration with its corporate partners, has
successfully developed highly sensitive and accurate immunoassays for the
detection of a number of water treatment polymers. These immunoassays have been
demonstrated to be reliable and cost-effective way to measure water treatment
polymers in samples from municipal water supplies, boilers, cooling towers, and
other process and raw water sources. Some specific applications are: (i)
measuring concentrations of chemicals to allow more efficacious use of costly
compounds, (ii) detecting the presence of particular compounds in effluent
discharge in order to gauge regulatory compliance, and (iii) monitoring
processes to prevent fouling of highly expensive systems (like reverse osmosis)
by excess polymer. The Company is currently commercializing multiple tests in
this area and began shipping its first product during the third quarter of 1997.
PESTICIDES. The entrance of pesticides into the water supply as a result
of agricultural and residential runoff continues to be a problem requiring
analytical testing. In areas of substantial agricultural activity, drinking
water is tested for several pesticides in order to ensure compliance with
federal regulations. Imported grains, fruits and vegetables are tested for the
presence of pesticide residues prior to use in the U.S. In addition, pesticide
residues in crops call for extensive testing at the time of pesticide
registration or re-registration under the Federal Insecticide, Fungicide, and
Rodenticide Act (FIFRA). In spite of their banned status, pesticides such as
DDT and chlordane still persist in soil at sites where they were stored or
distributed. The clean up of these sites requires the use of specific
analytical methods of pesticide detection.
CRYPTOSPORIDIUM AND GIARDIA. During 1994, the Company entered into an
exclusive five-year license agreement, under which it would manufacture and sell
Hydrofluor-TM-, an EPA-accepted immunoassay-based method for detecting the
pathogenic protozoa Cryptosporidium and Giardia in water. According to the EPA,
Cryptosporidium and Giardia cause more outbreaks of disease than any other water
born pathogens. The Company's Hydrofluor-Combo-TM- test kit has been designated
as the American Society for Testing and Materials (ASTM) standard method for
detection of these pathogenic protozoa and also has been designated as the
method for use in complying with the EPA's Information Collection Rule to
establish the
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extent of contamination in the nation's drinking water.
TOTAL TRIHALOMETHANES. Trihalomethanes are regulated, toxic by-products
that result from chlorine disinfection of drinking water. The Company's test is
a non-immunoassay-based test for the detection of 'total trihalomethanes'
(TTHMs). The test is fast, easy and inexpensive, detects TTHMs at levels much
lower than EPA regulated levels and correlates well with standard EPA laboratory
methods. The EPA is currently reviewing the Company's TTHM method for use in
drinking water compliance testing.
RaPID ASSAY(-REGISTERED TRADEMARK-) AND ENVIROGARD-TM-. The RaPID
Assay(-Registered Trademark-) and EnviroGard-TM- pesticide test kits are being
used extensively by water quality researchers, resource managers, regulators and
drinking water system operators for surface and groundwater monitoring, drinking
water source and supply management, and chemical fate and transport studies.
Users of the Company's water quality pesticide products include federal
agencies, such as the U.S. Geological Survey and Department of Agriculture,
state environmental and health departments, drinking water utilities, and
environmental engineering companies.
INDUSTRIAL TESTING
The industrial testing market category is comprised of immunoassays for
pollutants, proprietary chemicals and industrial markers.
POLLUTANTS. Analysis of soil, water and waste samples to determine the
presence of hazardous chemicals has become increasingly important in connection
with environmental remediation and environmental monitoring activities. These
activities are largely the result of environmental legislation such as RCRA,
CERCLA, TSCA, the Safe Drinking Water Act (SDWA) and Federal Water Pollution
Control Act (the "Clean Water Act"). It is estimated that approximately 1,200
commercial environmental testing laboratories, as well as "in-house"
laboratories at industrial and disposal facilities provide environmental
testing. Market research reports estimate that commercial environmental testing
laboratories accounted for approximately one half of all environmental tests
performed and had revenues exceeding $1 billion in 1996.
Environmental remediation activities require a substantial amount of
testing in connection with the clean up of contaminated sites. After initial
characterization of toxic chemicals at a site, substantial testing typically is
required to complete an assessment of the site to determine the extent and
location of contamination and the appropriate remediation plan. Upon the
commencement of the remediation project, additional testing is necessary to
determine the effectiveness of the remediation measures. In addition, ongoing
testing to monitor soil and groundwater is often required after completion of
the remediation activities. The contaminants of primary concern for remediation
activities include petroleum fuel products, polyaromatic hydrocarbons (PAHs),
polychlorinated biphenyls (PCBs), benzene, certain metals and chlorinated
solvents.
Environmental monitoring activities under SDWA and National Pollution
Discharge Elimination System (NPDES) legislation require periodic testing for
various hazardous chemicals. The nation's 58,000 drinking water systems test
for contaminants such as metals, benzene, other volatile organic compounds and
microbiological contamination. Approximately 6,400 major industrial and
municipal wastewater treatment facilities monitor and test wastewater for
contaminants such as chlorinated solvents, metals and volatile organic
compounds. Hazardous waste handling and disposal companies carry out large
volumes of analytical work, including pre-acceptance testing to determine the
suitability of waste streams for disposal and routine testing of incoming
shipments. In addition, the ongoing management of chemicals in the
petrochemical and pesticide industries also results in the need to test samples
at many points in the production, use and disposal cycle. Electrical utilities
have on-going analytical needs pertaining to disposal of PCB containing
materials.
PROPRIETARY CHEMICALS. The proprietary chemical market category includes
tests, commissioned by chemical manufacturers, that specifically measure the
particular compound of interest. In the chemical market category the benefits
of immunoassay testing have led to three key applications: (i) regulatory
registration, in which immunoassay data is generated to support the registration
of a product with the EPA; (ii) detection, to determine whether a target
compound is present in a complex matrix; and (iii) monitoring, in which tests
are performed to determine chemical concentrations for control purposes.
The application of immunoassay technology in conjunction with regulatory
registration is significant because of the requirement that large-scale chemical
manufacturers register their chemicals under FIFRA with the EPA. As part of this
registration process, manufacturers must provide extensive data for both
registration and post-registration analyses regarding
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toxicity and environmental impact. For many new compounds, certain aspects of
this analysis require sensitivity which instrument-based testing cannot achieve.
For others, no classical analytical methods are available to measure the
compound. In either case, EPA requires the manufacturer to supply a method to
monitor the compound in the environment. The Company is currently
commercializing four tests in this area for two chemical companies. Agreements
are in place for the development of seven additional tests.
INDUSTRIAL MARKERS. The Company is collaborating with a corporate partner
in this market category, which consists of test kits that detect marked
products. The product marking technology is based on the incorporation of trace
levels of inert chemicals or markers into solid or liquid products or on the
surface of the products. The use of these markers, in conjunction with
immunoassay techniques for marker detection, allows for the covert marking and
testing of nearly any product. This technology can be used to prevent revenue
loss due to counterfeiting and product diversion, limit a manufacturer's
exposure to unwarranted product liability, and enhance process efficiency and
product quality assurance.
POLLUTANT TEST PRODUCTS. The Company sells four different format
immunoassays into the environmental market: (i) D TECH(-Registered Trademark-)
latex filtration tests, (ii) EnSys RISc-TM- and EnviroGard-TM- coated-tube
tests, (iii) RaPID Assay-TM- magnetic particle tests and (iv) EnviroGard-TM-
microtiter plate tests. Each of the four different test formats has performance
characteristics that make them more or less suited for a particular customer
application. The Company positions the sale of all of its products so as to
provide the customer with the best product for its specific application.
The D TECH(-Registered Trademark-) and EnSys RISc-TM- tests do not
require refrigeration which make them ideally suited for on-site, field
applications. All of the environmental test kits include components for the
extraction of target analytes from the sample and subsequent analysis. Sample
preparation time is typically less than five minutes per sample. All of the
Company's environmental test kits are capable of analyzing at least ten
samples per hour and some allow analysis of as many as forty samples per hour.
D TECH(-REGISTERED TRADEMARK-). The D TECH(-Registered Trademark-)
tests are a latex filtration immunoassay format and provide for rapid, easy
to use, on-site, field screening analysis of soil and water samples
containing EPA Priority Pollutants like PCBs, PAHs (polyaromatic
hydrocarbons), TNT, BTEX (benzene, toluene, ethylbenzene and xylene) and
others. D TECH is very simple to use, requires little or no user training,
yields a semi-quantitative result and is ideally suited for true field
applications where limited numbers of samples are to be analyzed at one time.
RaPID ASSAY(-REGISTERED TRADEMARK-). The RaPID Assay(-Registered
Trademark-) magnetic particle immunoassay product line currently contains kits
and accessories for detection of 21 different pesticides (herbicides,
insecticides and fungicides), and 6 toxic organic compounds. The magnetic
particle test format is ideally suited for applications requiring highly
precise determination of contaminant concentrations. Like the Company's
other immunoassay tests, RaPID Assay(-Registered Trademark-) is fast and easy
to perform, but not as field-portable. RaPID Assay(-Registered Trademark-)
pesticide test kits are used for quantitation of pesticides in water, soil
and food. RaPID Assay(-Registered Trademark-) test kits for toxic organic
chemicals are used for measuring contaminant concentrations in both water and
soil.
ENVIROGARD-TM- AND ENSYS RISc-TM-. Like D TECH(-Registered Trademark-)
and RaPID Assay(-Registered Trademark-), these coated-tube and microtiter plate
format testing products detect some of the most commonly encountered toxic
chemicals found in soil, water and on surfaces at contaminated sites,
including PCBs, fuel products, PCP, TNT, benzene, PAHs, crude oil, and
pesticides. Additionally, the EnviroGard-TM- products detect pesticides in
drinking water and foodstuffs. The coated-tube format tests are used
extensively to analyze relatively large numbers of samples in the field and
yield a semi-quantitative result. The EnviroGard-TM- microtiter plate kits
are designed for use in the laboratory and are ideally suited for analysis of
large numbers of samples where determination of exact concentrations of
contaminants are required.
AGRICULTURAL
The agricultural market segment includes tests to detect targeted traits in
genetically engineered plants and two plant fungi, Rice Blast and Botrytis.
GENETICALLY ENGINEERED CROPS. Agricultural companies are developing
varieties of commercially important crops like corn, cotton and soybeans that
have new additional genes which confer some commercial advantage to the plant,
such as insect or pesticide resistance or enhanced growth or nutritional
characteristics. Industry experts predict that roughly one quarter of
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the acreage used to grow corn in the U.S. will be planted with genetically
engineered seed by the year 2000, in comparison to only 0.5% in 1996.
A large agricultural chemical company that has developed proprietary
varieties of insect-resistant corn and cotton using genetic engineering
technology commissioned the Company's first test in this market. Not all the
seed produced by a genetically engineered plant contains the gene for the
desired trait and therefore not all the plants arising from a batch of seed
will express the desired characteristic. The Company has developed a simple
one-step strip test that is used at the point of testing to determine if an
individual plant contains the new genetic trait. The Company has also
developed similar one-step products for other crops. Commercial seed
producers use these products to ensure the quality of their products. This
type of test can also be used for enforcement purposes in crops to prevent
unlicensed application of the genetic technology.
Sales of this strip test and similar products to detect the presence of
genetically engineered traits in plants have been increasing rapidly since their
introduction in the third quarter of 1995 and the Company believes sales will
continue to grow. The number of acres of crops with
genetically enhanced traits under cultivation grew rapidly in 1997 and published
reports indicate that the farmers' experience with these products was positive.
Acreage in 1998 is expected to grow further based on these results and with this
increased volume, the Company expects sales of these products to grow.
Additional tests for genetically engineered plants are currently under
development.
RICE BLAST. Rice blast is a fungus that can devastate a rice crop.
Worldwide, over 360 million acres of land are planted with rice. Countries such
as Thailand, China, Japan and Indonesia are dependent on rice both as a food
source and for export revenues. The Company's RapidChek(-Registered Trademark-)
Blast Finder is a very simple, field-portable test kit (in the latex filtration
format), which allows early detection of the fungus on growing rice plants.
Early detection allows treatment of the rice with fungicides before the crop is
severely damaged. The Company and its marketing affiliate have worked with the
International Rice Research Institute to demonstrate the test kit
internationally and the government of Thailand has taken an aggressive role in
evaluating the test kit. To date the Company has only derived modest revenues
from this product line.
BOTRYTIS. Botrytis, or gray mold, effects a wide variety of food crops
including grapes, strawberries, cucumbers, lettuce, etc. The Company's
RapidChek(-Registered Trademark-) Botrytis test was originally developed to
serve the wine industry and has been field tested in California. The
California Department of Food and Agriculture (CDFA) acts as a liaison
between the grape growers and the wineries and oversees testing of the
harvested grapes in the field. Truckloads of harvested grapes are sampled as
they leave the field and the grapes are visually inspected for botrytis
infection. Botrytis levels are used to establish pricing and the growers,
vintners and the CDFA all have a vested interest in methods for more
accurately determining levels of infection in harvested grapes. As a result
of this and other work, the use of immunoassays for grape inspection has been
promulgated in the California Code of Regulations. While the
RapidChek(-Registered Trademark-) Botrytis test was originally developed for
grape testing, the Company believes that the larger opportunity for this
product is the testing of fresh fruits and vegetables during import/export
and is seeking to expand the application of this product to that market.
OTHER PRODUCTS
MACRA(-REGISTERED TRADEMARK-) Lp(a). Macra(-Registered Trademark-)
Lp(a) is a microtiter plate assay that measures a lipoprotein found in human
serum. This lipoprotein has been shown to be an indicator of risk for
myocardial infarction, heart disease and stroke. The product is currently
for research use only, however the Company has submitted a 510(k) application
to the FDA. A great deal of clinical data has been generated with the Macra
Lp(a) kit because of its leading research position, and its use in benchmark
projects such as the Framingham Study, a multi-generation analysis of
coronary risk factors.
RAPIDCHEK(-REGISTERED TRADEMARK-) SRB. Sulfate Reducing Bacteria
("SRBs") are environmentally significant because they generate hydrogen
sulfide gas and cause corrosion of stainless steel pumps, pipelines, and
drilling rigs and result in the souring of oil reserves. SRBs can be
controlled by the addition of treatment chemicals. Historically, the
majority of testing in this market was performed using a culture method
called the American Petroleum Institute Recommended Procedure No. 38. This
method requires that samples be incubated from 14-28 days before a result is
obtained. RapidChek(-Registered Trademark-) SRB test is a simple to use,
field portable test that provides the user with accurate results in 20
minutes and allows for an immediate, more cost effective application of
treatment chemicals.
MAJOR CUSTOMERS. During 1997, the Company's sales to two customers,
Rohm and Haas and Delta and Pine Land Co. each accounted for approximately
ten percent of consolidated revenues. During 1996, EM and EnSys accounted
for 11
6
<PAGE>
percent and 19 percent respectively.
SALES AND MARKETING STRATEGY
As a result of the consolidation of SDI, EnSys, Ohmicron and
EnviroGard-TM- businesses, the Company has formed an experienced sales and
marketing organization of 25 individuals. In addition to its direct sales
force, the Company sells product through an extensive network of
distributors, and through its corporate partners.
The Company uses a number of strategies for the sale of its products
worldwide. In the U.S., the major route of sale of its industrial testing
products is through a national field sales force in defined sales territories.
The field sales force is augmented by an in-house sales force, which in addition
to selling product directly to customers, provide marketing and logistic support
to the field sales personnel and interface between customers and technical
support.
In 1993 the Company opened a European headquarters and sales operation
near London, England, and the sale of the EnSys RISc-TM-, RaPID
Assay(-Registered Trademark-) and EnviroGard-TM- products in Europe are
principally directed through that office. Sales and distribution of the D
TECH product line outside of the U.S. are made exclusively by E. Merck KGaA,
Darmstadt, Germany.
Sales of the Company's products for detecting water treatment polymers,
proprietary chemicals, industrial markers, genetically engineered crops and Rice
Blast are through the Company's corporate partners in selected markets and
through the Company's direct organization in others. The RapidChek-Registered
Trademark- SRB test kit is sold directly by the Company and through 5
international distributors. The Company has arrangements with 3 international
distributors for sale of the Macra test kit.
REGULATORY APPROVALS
The environmental legislation and regulations that the Company believes are
most applicable to its current business are RCRA, CERCLA, TSCA, FIFRA and the
Pure Food and Drug Act. As the Company expands its product line to meet the
environmental monitoring needs of municipalities and industrial facilities, the
SDWA, the Clean Water Act and the NPDES permitting program under the Clean Water
Act also will be significant to the Company's business. These laws regulate the
management, disposal and clean up of hazardous substances and protect the
nation's ground and surface water and drinking water supplies. In addition,
regulatory responsibilities in a number of areas have been delegated to state
agencies and state and local laws and regulations impose additional restrictions
and requirements. While environmental regulations overseas vary, many
countries, particularly in Europe, have counterparts to the U.S. legislation.
The Company believes that regulatory acceptance, though not required for
the use of its products in most cases, is a significant factor in gaining
market acceptance. There are three main areas in which the Company is
seeking regulatory acceptance for its products: hazardous waste testing
methods by the federal and state environmental protection agencies, water
testing methods by the federal and state environmental protection agencies
and FDA approval for the Company's 510(k) application for Macra(-Registered
Trademark-) Lp(a). The federal Environmental Protection Agency and some
state agencies have evaluated certain of the Company's analytical methods and
accepted their use for certain remediation and monitoring activities.
Further acceptance by these agencies would further stimulate demand for the
Company's products. The Company expects that as its products are subjected
to wider use under a variety of conditions and subjected to traditional
validation techniques, such acceptance will generally be granted. Such
acceptance would serve to strengthen already compelling customer motivations
such as the ease-of-use and specificity characteristics of the Company's
products and is not a prerequisite to selling the products in the markets the
Company serves.
HAZARDOUS WASTE TESTING METHODS. EPA SW-846 is the compendium of
analytical and test methods published by the EPA's Office of Solid Waste
(OSW). A number of provisions of the EPA's hazardous waste regulations under
RCRA mandate the use of SW-846 methods. In other contexts, SW-846 is a
guidance document setting forth acceptable, although not required methods to
be implemented by the user in response to sampling and analysis requirements.
Some states also require the use of SW-846 methods under their hazardous
waste programs. While SW-846 methods are technically only applicable to
regulatory programs under RCRA, other federal, state and local environmental
programs, including CERCLA and TSCA, often refer to and rely on SW-846
methods for purposes of remediation and monitoring.
The process for a method to be incorporated into EPA SW-846 generally
takes approximately 24 to 36 months. The
7
<PAGE>
OSW evaluates the applicant's test results and obtains additional information or
conducts its own tests if necessary. After a method is deemed acceptable, it is
published by the EPA in draft form ("EPA Draft Method"). Periodically, the EPA
updates SW-846 through a notice in the Federal Register referencing the EPA
Draft Methods published since the last update. Following a comment period, the
EPA Draft Methods are referenced in the Federal Register as a Final Rule and
incorporated into SW-846. The following table summarizes the EPA acceptance
status of the Company's products.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
EPA SW-846
Method D TECH(-Registered Trademark-) EnSys RISc-TM- EnviroGard-TM- RaPID Assay(-Registered Trademark-)
No. Analyte
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4010 PCP Soil & Water Soil & Water Soil
----------------------------------------------------------------------------------------------------------------------
4015 2,4-D Soil & Water Soil Soil
----------------------------------------------------------------------------------------------------------------------
4020 PCB Soil Soil & Oil Soil Soil
----------------------------------------------------------------------------------------------------------------------
4030 TPH Soil Soil Per CalEPA
4035 PAH Soil (APAH) Soil (APAH) Soil (APAH)
Soil (CPAH)
----------------------------------------------------------------------------------------------------------------------
4040 Toxaphene Soil
4041 Chlordane Soil
4042 DDT Soil
----------------------------------------------------------------------------------------------------------------------
4050 TNT Soil & Water Soil & Water Soil & Water
4051 RDX Soil & Water
----------------------------------------------------------------------------------------------------------------------
4670 Triazines Water
----------------------------------------------------------------------------------------------------------------------
8510 RDX Soil
8515 TNT Soil
----------------------------------------------------------------------------------------------------------------------
</TABLE>
WATER TESTING METHODS. Water testing methods approved for use in
compliance with the SDWA are published periodically in the Federal Register.
Newly developed methods are reviewed by the EPA's Environmental Monitoring and
Systems Laboratory in Cincinnati to determine whether they are (i) an acceptable
version of a previously approved method or (ii) a new method in need of a
comparability study and proceed through a comment and approval procedure. The
EPA has recently begun a program aimed at expediting the approval of new methods
that involves the cooperation of the Solid Waste, Drinking Water, and Waste
Water methods groups.
The TTHM (total trihalomethanes) water test has been accepted as Draft
Method 8530 by OSW and will receive further consideration by the Drinking
Water Methods Group. In addition, the RaPID Assay(-Registered Trademark-)
Atrazine test was accepted as a quantitative method through the OSW and by
the Association of Official Analytical Chemists ("AOAC"), and it is
anticipated that the EPA Office of Drinking Water will adopt this method for
compliance in the enforcement of the Drinking Water Regulations for Triazines
under the SDWA. More recently, the Company's RaPID Assay-Registered
Trademark- for Spinosad has been adopted by the EPA as the official
enforcement method for this pesticide. The Hydrofluor-Combo-TM- test kit is
the ASTM standard method for detection of these pathogenic protozoa and has
been designated as the method for use in complying with the EPA's Information
Collection Rule to establish the extent of contamination in the nation's
drinking water.
Tests for water treatment polymers, genetically engineered traits in
plants, and fungal plant pathogens are currently unregulated. However, agencies
such as the EPA, the FDA and the Food Safety and Inspection Service of the U.S.
Department of Agriculture are engaged in testing environmental samples and,
together with AOAC International, maintain compilations of official methods for
use in testing for environmental contaminants in certain market segments. Some
of these organizations also issue procedures and guidelines for validating new
methods.
MANUFACTURING
The Company currently manufactures over 150 different test kits for the
detection of a wide array of analytes in five immunoassay formats; one-step
strip tests, coated-tubes, latex particles, magnetic particles and microtiter
plates. In addition to test kits, the Company supplies its customers with
ancillary equipment and supplies including spectrophotometers, pipettes,
balances, and timers among others.
8
<PAGE>
The kit manufacturing process consists mainly of critical reagent
production and in process testing, filling and dispensing, labeling, kit
assembly, quality control, packaging and shipping. The Company's Technical
Reagents Manufacturing group produces critical reagents from its laboratories in
Newark, DE. Sub-assemblies and finished kits are manufactured and shipped
worldwide out of the Company's headquarters facility in Newark, DE.
Biological materials are primarily developed and produced in-house,
however, some reagents are licensed from third parties or purchased from
commercial sources. A crucial step in the Company's manufacturing process is
the stabilization of the immunoreagents utilizing proprietary lyophilization
techniques. In general, raw materials used by the Company in its products are
obtainable from multiple sources. The Company purchases instruments and
ancillary equipment from outside vendors. A number of the instruments sold by
the Company were developed to be used exclusively with the Company products and
are subject to specific supply agreements. The Company believes that the raw
materials, instruments and equipment used in the manufacture of its products are
adequately available for the Company's current and foreseeable manufacturing
needs.
The Company manufactures its products in accordance with the FDA's Good
Manufacturing Practices guidelines and has put in place systems designed to
control all elements of the manufacturing process including raw materials,
inventory, processes, documents, work-in-process, lot records, equipment and
training. Integrated inventory control, purchasing, manufacturing scheduling,
order processing, shipping and customer invoicing are elements of the Company's
computerized Manufacturing Resource Planning (MRP) systems.
The Company's manufacturing organization, including the Technical Reagents
Manufacturing group, consists of 30 individuals. The Company believes the
existing facilities and equipment are sufficient to support a significantly
larger manufacturing base. Manufacturing operations are currently running a
single shift.
RESEARCH AND DEVELOPMENT
The Company engages in substantial research and development activities
involving antibody and immunoassay development. In the three years ended
December 31, 1997, 1996 and 1995, the Company incurred approximately $1,580,000,
$1,569,000 and $2,272,000, respectively in research and development
expenditures, substantially all of which has been customer-sponsored. The
Company's laboratory facilities located in Newark, DE were designed and built
specifically for conducting research and development relating to antibody and
immunoassay technology. These facilities include the state-of-the art, GMP,
American Association for Accreditation of Laboratory Animal Care ("AAALAC")
approved, TSD BioServices monoclonal antibody development and large-scale
production facility. The Company has assembled a scientific staff with
extensive experience in the development of monoclonal and polyclonal antibodies,
immunogens and assay reagents. The Company's assay development scientists are
experienced in developing tests in a variety of different immunoassay formats
including one-step strips, latex filtration, magnetic particles, coated tubes
and microtiter plates. Research and development personnel have complementary
skills in several advanced research disciplines, including synthetic organic
chemistry, protein chemistry, biochemistry, immunology, immunochemistry,
microbiology and soil science. In addition to the technical expertise resident
within research and development, TSD BioServices provides the Company
scientists, as well as its outside clients, with large-scale GMP production,
bioprocessing, purification and quality control of antibodies and reagents.
The Company's research and development activities are focused on developing
products to expand its manufacturing base and leverage its Sales and Marketing
organization. The Company is a recognized leader in the field of contract
antibody and immunoassay research and development in the industrial, water
quality and agricultural sectors, and markets its services primarily to large
chemical and pharmaceutical companies. Product development is typically
performed in collaboration with a corporate partner that has identified a
specific market need and provides funds to the Company to develop an assay.
Research and development contracts are typically structured such that technology
developed within the program are co-owned by the Company and its partner and the
Company maintains exclusive manufacturing rights.
To the extent the Company believes that improvements to existing products
significantly enhance competitiveness, expand a market or improve market
penetration, the Company has periodically funded such efforts. In the markets
where the Company has chosen to compete, rapid field screening tests are highly
valued and the Company is actively engaged in developing proprietary technology
to better meet those needs and enhance the Company's overall performance.
Through its continuing development of tests to detect genetically engineered
plants and water treatment polymers, the Company has gained
9
<PAGE>
extensive expertise in development and manufacture of one-step strip tests, and
is working aggressively to further develop this technology.
The Company's technology organization, including research and development,
TSD, Technical Reagents Manufacturing, and Technical Marketing Support consists
of approximately 45 individuals of which 15 hold advanced academic degrees.
PROPRIETARY TECHNOLOGY AND PATENTS
The Company products are based on the use of proprietary reagents,
technology and test systems developed by the Company scientists or acquired
externally. Accordingly, the Company has implemented a number of procedures to
safeguard the proprietary nature of its technology. The Company requires its
employees and consultants to execute confidentiality agreements upon the
commencement of an employment or consulting relationship with the Company and
all employees are required to agree to assign to the Company all rights to any
inventions made during their employment or relating to the Company's activities.
Additionally, the Company seeks to protect its technology and processes
through the patent process. The Company currently holds thirteen issued U.S.
patents and the claims for another two are in a state of allowance. Two
additional U.S. patents have been licensed for exclusive use by the Company and
seven U.S. patent applications are pending.
During 1997 the Company acquired all right, title and interest to U.S.
Patent 5,593,850 from Nalco Chemical Company (the '850 patent). The '850 patent
provides broad coverage for the determination of water treatment polymers in
industrial samples using monoclonal antibodies that bind directly to the
polymer. The '850 patent is presently the subject of an interference
proceeding.
An alternative method of detecting water treatment polymers is to
chemically couple an unrelated "marker" substance to the polymers and use
antibodies and immunoassays that bind to the marker to detect the polymer. The
technology for using antibodies to detect markers that are chemically coupled to
a substance to be detected is patented by Biocode Incorporated (U.S. Patent
5,429,952). In 1996 the Company licensed from Biocode Incorporated the
exclusive rights to this technology for the detection of water treatment
polymers. Together, the '850 patent and the Biocode license provide broad
protection for the use of immunoassay detection of water treatment polymers.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
U.S. Patent Title
---------------------------------------------------------------------------
<S> <C>
4,999,286 Sulfate reducing bacteria determination and control
5,200,346 Aldicarb immunoassay by sulfone equivalents
5,411,869 Immunological analogs for captan
5,449,611 Polyaromatic hydrocarbon (PAH) immunoassay method, its
components and a kit for use in performing the same
5,484,709 Immunoassay method for detecting an immunologically
non-remarkable compound
5,547,877 Methods for the rapid detection of toxic halogenated
hydrocarbons and kits useful in performing the same
5,554,730 Fungus extraction method and kit
5,576,187 Standards for phosphorothioate insecticide immunoassays
5,593,850 Monitoring of industrial water quality using monoclonal
antibodies to polymers
5,618,681 Polyaromatic hydrocarbon (PAH) immunoassay method, its
components and a kit for use in performing the same
5,658,463 Kits and processes for extraction of analytes from solid
materials
5,679,574 Quantitative test for oils, crude oil, hydrocarbon, or other
contaminants in soil and a kit for performing the same
5,691,148 A petroleum immunoassay method, its components and a kit for
performing the same
10
<PAGE>
Allowed Immunoassay standards for volatile analytes with benzene
rings
Allowed Immunoassay standards for polyaromatic hydrocarbon detection
5,429,952 Marking of products to establish identity and source
---------------------------------------------------------------------------
</TABLE>
The Company believes that low-cost, easy to use, rapid field screening
tests have the potential to be significant products in its chosen markets.
Therefore, the Company is aggressively developing technology relating to
immunoassay formats with those features. Two of the Company's pending
applications involve one-step strip test formats, and one of the applications
has to do with a novel latex filtration test format. In addition to the assay
format patent applications, the Company has pending applications relating to
immunoassays for trichloroethylene (TCE) and polychlorinated biphenyls (PCB).
There can be no assurance that the Company's patent applications will
result in the issuance of any patent or that any patents issued to the Company
would provide protection that is sufficiently broad to protect the Company's
technology and products. In addition, the Company cannot be certain that it was
the first creator of inventions covered by pending patent applications or that
it was the first to file patent applications for such inventions.
In addition to seeking patent protection for the Company's proprietary
information, the Company also relies upon trade secrets, know-how and continuing
technical innovation to maintain competitiveness. The Company has developed a
number of proprietary technologies which the Company has chosen not to patent
including stabilization systems for reagents, chemical syntheses for conjugates,
immunogens and analyte analogs, and strategies relating to antibody development.
Regarding the latter, the Company's extensive expertise has enabled it to
develop antibodies and products that are unique to the industry including
monoclonal antibodies to water treatment polymers, the explosive RDX, BTEX and
TCE.
LIBRARY OF MONOCLONAL ANTIBODIES TO CLINICAL ANALYTES: The Company has a
library of 42 monoclonal antibodies for clinical diagnostic applications. These
antibodies are licensed by diagnostic companies for use in commercial assays.
The Company has several outstanding licenses to a variety of diagnostic
companies.
MONOCLONAL ANTIBODY TO Lp(a): The Company has licensed the exclusive use
of the monoclonal antibody which confers the specificity in the Macra Lp(a)
test.
MAGNETIC PARTICLES. Under two license agreements, the Company has been
granted the right and license throughout the world to use magnetocluster
technology in connection with the Company's RaPID Assay(-Registered Trademark-)
products for the detection of environmental analytes. This license carries
royalties starting at 4% of net sales of such products each year and declining
to 2% based upon the volume of sales in such year.
COMPETITION
Many of the Company's potential competitors are large companies with
substantially greater financial and other resources than the Company. To the
extent that any such companies enter into one or more of the Company's markets,
the Company's operations could be materially, adversely affected. The Company
anticipates increased competition as potential competitors perceive that the
Company's markets have become commercially proven. Other companies may be
developing additional products for one or more of the Company's markets that
could be competitive with the Company's products. Nevertheless, the Company
believes that its competitiveness has been significantly enhanced as a result of
the consolidation of the SDI, EnSys, Ohmicron and EnviroGard-TM- businesses.
Currently, the Company believes that there are no similar competing
immunoassay products for the Company's RapidChek(-Registered Trademark-) Rice
Blast, Botrytis and SRB, GeneCheck-TM- B.t.k., proprietary chemical, industrial
marker or water treatment polymer tests. The Company holds U.S. patents
relating to the Rice Blast and SRB tests and believes they will help to provide
a competitive advantage in the event that competing products enter the market.
The Company's water treatment polymer tests are unique to the industry and the
Company has secured U.S. patents and an exclusive technology license and
believes that such property will help to provide a competitive advantage in the
event that competing products enter the market.
A number of companies already have pursued, and are actively pursuing,
products for the detection of Cryptosporidium and Giardia in drinking water and
it is likely that the Company's Hydrofluor products will face increasing
11
<PAGE>
competition in the future. Hydrofluor currently benefits from its
designation as the ASTM standard method for detection of these protozoa and
from its selection by the EPA as the method for use in complying to the EPA's
Information Collection Rule to establish the extent of contamination in the
nation's drinking water.
The Company's Macra(-Registered Trademark-) Lp(a) product competes with
other existing immunoassay tests in the marketplace, but since it was first
to the market, Macra(-Registered Trademark-)'s competitive position is
enhanced by the large quantity of clinical data that has been generated by
researchers and clinicians that have used the test in large prospective
studies. The Company is seeking to use this data to help secure 510(k)
approval from the FDA.
EMPLOYEES
As of December 31, 1997, the Company employed 103 full time and 2 part
time individuals including 77 regular and 28 contract employees. All of the
Company's employees have executed agreements with the Company agreeing not to
disclose the Company's proprietary information, assigning to the Company all
rights to inventions made during their employment, and prohibiting them from
competing with the Company. None of the Company's employees is covered by
collective bargaining agreements. The Company believes that its relations
with its employees are good.
ITEM 2. PROPERTIES
The Company is headquartered in Newark, DE, and occupies approximately
28,000 square feet of space under an operating lease expiring in December
2007. The Company also leases approximately 26,000 square feet of
manufacturing and research space also in Newark, DE under three operating
leases that expire in October 2000, October 2001 and November 2003,
respectively.
Prior to the merger with the Company, EnSys leased approximately 18,000
square feet of space in one building in the Research Triangle park area in
North Carolina under a ten-year lease that expires in 1999 with a renewal
option through 2004. Following the merger, the Company closed the North
Carolina operation and has sub-let the space to an unrelated third party for
the remaining term of the lease. The Company leases regional sales offices
near London, England, Newport Beach, CA, and Chestnut Hill, MA. The Company
also leases warehouse space of 1,600 square feet or less with leases that run
one year or less. The Company believes that its equipment and facilities are
adequate for its present purposes. (See Note 15 to Notes to the Financial
Statements).
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended December 31, 1997.
12
<PAGE>
ITEM 4(a) EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions with the Company and
ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard C. Birkmeyer 44 President and Chief Executive Officer
Anne F. Cavanaugh 38 Vice President - Corporate Development
Kelly J. Cullum* 37 Vice President - Sales and Marketing
Arthur A. Koch, Jr. 44 Vice President - Finance and Chief Financial Officer
Martha C. Reider 43 Vice President - Manufacturing
James W. Stave, Ph.D. 43 Vice President - Research and Development
--------------------------------------------------------------------------------------------
* Effective February 16, 1998
</TABLE>
RICHARD C. BIRKMEYER, age 44, cofounded SDI in 1990 and has served as
its President and Chief Executive Officer and a director since its inception.
Prior to founding SDI, Mr. Birkmeyer was employed by E.I. du Pont de Nemours
("DuPont") from 1983 to 1990, where he most recently served as product
manager. Mr. Birkmeyer received a Ph.D. in Biochemistry/Immunology from the
State University of New York at Binghamton and his BS in Biology from the
State University of New York at Plattsburgh. In addition, Mr. Birkmeyer
completed post-doctoral research in immunogenetics at Iowa State University.
ANNE F. CAVANAUGH, age 38, cofounded SDI in 1990 and has served as a
Vice President in various capacities since its inception and is presently
responsible for operations of TSD BioServices, Inc. and Corporate
Development. From inception to December 30, 1996, Ms. Cavanaugh was a
director of SDI. Prior to founding SDI, Ms. Cavanaugh was employed by Terumo
Medical Corporation and the Rockefeller University. Ms. Cavanaugh received
her BS in Biochemistry from East Stroudsburg University and has attended the
University of Delaware's MBA program.
KELLY J. CULLUM, age 37, joined the Company in February 1998 as Vice
President - Sales and Marketing. Prior to joining the Company, Ms. Cullum
was employed at Idexx Laboratories in Tokyo, Japan, as Corporate Vice
President, Pacific Rim Division. From 1994 to 1995, Ms. Cullum was Global
Director of Marketing for Veterinary Products Division at Idexx. Prior to
this position and since 1987, Ms. Cullum held a variety of sales management
positions at Idexx. Ms. Cullum received her BS in Marketing from the
University of Massachusetts, Amherst.
ARTHUR A. KOCH, JR., age 44, joined the Company in April 1997 as Vice
President - Finance and Chief Financial Officer. Prior to joining the
Company, Mr. Koch was Vice President and Chief Financial Officer of
Paracelsian, Inc., a publicly held biotechnology company. From 1992 to 1995,
Mr. Koch was Vice President and Chief Financial Officer of IBAH, Inc. a
publicly held contract clinical research corporation. Mr. Koch received a
BBA in Business Administration from Temple University and is a Certified
Public Accountant.
MARTHA C. REIDER, age 43, cofounded SDI in 1990 and has served as Vice
President - Manufacturing and Secretary since inception. From inception to
December 30, 1996, Ms. Reider was a director of SDI. Prior to founding SDI,
Ms. Reider worked for DuPont from 1976 to 1990 where she most recently served
as supervisor of Quality Control and Quality Assurance. Ms. Reider received
her BA in Biological Sciences from Ohio Northern University.
JAMES W. STAVE, age 43, joined SDI in March 1991 as a research group
leader. Subsequently, Dr. Stave was promoted to director of Research and
Development, in October 1993 was promoted to Vice President - Research and
Development. Prior to joining SDI, Dr. Stave worked for DuPont. Molecular
Genetics, Inc. and the U.S. Department of Agriculture. Dr. Stave received
his Ph.D. in Microbiology from the University of Maryland and his B.S. in
Biology from Michigan Technological University.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under
the symbol "SDIX". Set forth below are the quarterly high and low bid prices
for the shares of Common Stock of the Company as reported by Nasdaq:
<TABLE>
<CAPTION>
Common Stock Price Range
High Low
---- ---
Fiscal Year Ended
-----------------
<S> <C> <C>
December 31, 1997:
First Quarter 2 3/4 1 3/8
Second Quarter 2 1 1/4
Third Quarter 1 13/16 1
Fourth Quarter 2 5/16 1 1/16
December 31, 1996:
First Quarter 2 1/2 1
Second Quarter 2 1/4 1 3/8
Third Quarter 2 1/4 1 3/8
Fourth Quarter 2 3/8 1 3/8
</TABLE>
On February 23, 1998, there were approximately 590 holders (99 holders of
record) of the Common Stock of the Company. The Company has never paid any cash
dividends on its Common Stock and has no plans to pay cash dividends in the
foreseeable future.
14
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(in thousands, except share and per share data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
REVENUES:
Product related $ 12,703 $ 3,402 $ 1,605 $ 1,192 $ 551
Contract and other 1,717 2,435 2,084 2,580 2,064
----------- ----------- ----------- ----------- -----------
Total revenues 14,420 5,837 3,689 3,772 2,615
OPERATING EXPENSES:
Manufacturing 5,305 2,839 1,288 910 791
Acquired research and development - 8,266 - - -
Research and development 1,580 1,569 2,272 2,832 1,735
Selling, general and administrative 6,132 1,737 1,190 1,385 1,013
----------- ----------- ----------- ----------- -----------
Total operating expenses 13,017 14,411 4,750 5,127 3,539
Operating Income (Loss) 1,403 (8,574) (1,061) (1,355) (924)
Interest and other income (expense), net 274 186 (165) 30 (64)
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) 1,677 (8,388) (1,226) (1,325) (988)
Accretion of redeemable preferred
stock liquidation value(1) - (635) (367) (367) (192)
----------- ----------- ----------- ----------- -----------
Net Income (Loss) applicable to common
stockholders $ 1,677 $ (9,023) $ (1,593) $ (1,692) $ (1,180)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
BASIC NET INCOME (LOSS) PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS: $ 0.13 $ (2.12) $ (0.46) $ (0.56) $ (0.40)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SHARES USED IN COMPUTING
BASIC PER SHARE AMOUNTS: 13,084,000 4,248,000 3,464,000 3,041,000 2,957,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
DILUTED NET INCOME (LOSS) PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS: $ 0.11 $ (2.12) $ (0.46) $ (0.56) $ (0.40)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
SHARES USED IN COMPUTING
DILUTED PER SHARE AMOUNTS: 15,712,000 4,248,000 3,464,000 3,041,000 2,957,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1997 1996(1) 1995 1994 1993
BALANCE SHEET DATA: ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents 2,580 917 35 67 1,259
Short-term investments 3,638 5,710 - - -
----------- ----------- ----------- ----------- -----------
Sub total 6,218 6,627 35 67 1,259
Working capital (deficit) 9,403 7,170 (891) 126 1,288
Total Assets 14,060 14,581 2,076 2,106 3,044
Redeemable convertible preferred stock(1) - - 3,879 3,512 3,145
Accumulated deficit(2) (11,702) (13,379) (4,356) (2,763) (1,094)
Stockholders' equity (deficit) 12,340 10,673 (4,064) (2,580) (1,050)
</TABLE>
(1) The redeemable convertible preferred stock was reclassified into
stockholders' equity in connection with the EnSys merger.
(2) There have been no common stock dividends declared or paid since the
inception of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FORWARD LOOKING STATEMENTS
This Form 10-K contains several forward-looking statements reflecting the
Company's current expectations. 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 government
approvals, modifications to development and sales relationships, the ability to
achieve anticipated growth, seasonality and competition.
OVERVIEW
The Company is the entity resulting from the combination of EnSys, Ohmicron
and SDI. On August 30, 1996, Ohmicron was merged with and into SDI, with
certain Ohmicron stockholders and note holders receiving shares of SDI common
stock. On December 30, 1996, SDI was merged with and into EnSys. The surviving
entity was then renamed Strategic Diagnostics Inc. Each of these transactions
was accounted for as a purchase with SDI as the acquiring company and,
therefore, the surviving company for financial reporting purposes. As a result,
the historical financial information discussed includes the results of SDI for
all periods presented and the actual results of Ohmicron from August 30, 1996
and EnSys from December 30, 1996.
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
16
<PAGE>
various state and federal agencies through distributors and a regionally based
direct sales force in the U.S. 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, 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, 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. One of the strategies SDI used to develop its business was to
establish relationships with other companies who had significantly greater
resources and capabilities to evaluate market opportunities and potential for
new products. The Company refers to these relationships as "Corporate
Partnerships". Corporate Partners, who had identified and researched a market
opportunity, funded SDI to develop and manufacture immunoassay products to meet
the market need. Most of the Corporate Partner agreements were written so that
SDI retained a right to manufacture the finished product, and the technology
developed during the course of the project was co-owned by SDI and its partner.
In this way, SDI developed proprietary technology and built a base of
manufactured commercial products. 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 Corporate 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 in the U.S. 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.
The Company believes that its competitiveness has been enhanced through the
combinations of talents, technology and resources resulting from the mergers and
acquisitions described above. The Company has also achieved meaningful
economies of scale, operates from consolidated facilities in Newark, DE and is
now offering its customers the most appropriate test for each specific customer
application.
Another key strategy that SDI used to develop its business was the
formation in 1991 of TSD BioServices, a joint venture between SDI and a
subsidiary of Taconic Farms of Germantown, NY. Taconic Farms is a privately held
company whose business is the production and sale of mice and rats, primarily to
the research community. In 1996, the joint venture was dissolved and SDI's
interests were distributed into a wholly owned subsidiary, TSD BioServices, Inc.
("TSD"). The mission of TSD is to supply antibodies, especially monoclonal
antibodies, immunochemical reagents and related services to medical diagnostic
and pharmaceutical companies, as well as the research community. TSD's primary
facility occupies approximately 8,000 square feet of space in Newark, DE.
The Company believes that its products in the water quality, industrial
testing and agricultural markets are unique and fill potentially large, unmet
needs. The Company also believes that its products and technology currently
being developed have broad application in diverse markets.
The Company believes that its established product base, quality
manufacturing expertise, experienced sales and marketing organization,
established network of distributors, corporate partner relationships and proven
research and
17
<PAGE>
development expertise will be critical elements of its potential future success.
The Company experiences a seasonal pattern to its business. Sales of
industrial and agricultural products are highest during the summer months with
the lower levels of activity occurring during the winter months. Accordingly,
revenues in a particular quarter in 1998 may not be indicative of revenues for
any subsequent quarter during the year, or for the year. As sales of the
Company's analytical tests for water-soluble polymers (which are generally not
affected by seasonal patterns) and agricultural products to other parts of the
world develop over the next few years, the Company expects its seasonal
fluctuations to become gradually less pronounced.
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 1997 audited
results of operations and the 1996 unaudited pro forma results of operations.
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").
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
.......................................................................................
1997 1996 (1)(2)
(ACTUAL) (Pro Forma)
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
NET REVENUES:
- ---------------------------------------------------------------------------------------
Product related $ 12,703 $ 10,934
Contract and other 1,717 1,766
-----------------------------------------------------------------------------------
Total net revenues 14,420 12,700
-----------------------------------------------------------------------------------
OPERATING EXPENSES:
Manufacturing 5,305 5,947
Research and development 1,580 3,332
Selling, general and administrative 6,132 8,282
-----------------------------------------------------------------------------------
Total operating expenses 13,017 17,561
-----------------------------------------------------------------------------------
Operating income (loss) 1,403 (4,861)
INTEREST INCOME (EXPENSE), NET 274 589
- ---------------------------------------------------------------------------------------
NET INCOME $ 1,677 $ (4,272)
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
DILUTED NET INCOME PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS $0.11 ($0.33)
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
SHARES USED IN COMPUTING NET INCOME PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS 15,712,000 12,800,000
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
(1) Reflects the operations of the Company as if the EnSys, Ohmicron and TSD
transactions had occurred on January 1, 1996
(2) 1996 expenses exclude costs of acquired research and development of $10.0
million incurred in connection with the acquisitions of Millipore's
EnviroGard(TM), Ohmicron and EnSys.
18
<PAGE>
COMPARISON OF ACTUAL WITH PRO FORMA FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 1997 VERSUS PRO FORMA YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased 13.5% to $14.4 million in 1997 from $12.7
million in pro forma 1996. This increase is the result of a $1.8 million
(16.2%) increase in product related revenues reduced by a $49 thousand (2.8%)
decrease in contract and other revenues. Product related revenues increased to
$12.7 million in 1997 from pro forma $10.9 million in 1996. This growth in
product revenues is primarily attributable to increases in total product sales
in emerging markets (tests to detect (i) proprietary polymers and (ii) traits in
genetically engineered plants in agriculture) to $3.1 million from $845 thousand
in pro forma 1996, an increase of over 260%, partially offset by a decrease in
all other product revenue. The increase in total product revenues in emerging
markets was comprised of the first sales of a new product designed to detect the
proprietary polymers of a Corporate Partner. Polymer detection is quite
difficult and currently there is no other detection method capable of measuring
these substances at the levels at which they are used or discharged in
effluents. The Company is currently commercializing multiple tests in this area
and began shipping its first product to a Corporate Partner during the third
quarter of 1997. Shipments of these pre-commercial test kits continued during
the fourth quarter and the Company earned revenues of $1.0 million during the
second half of 1997. The Company expects to ship additional tests in 1998 under
this long-term supply agreement, which provides among other things, for the
Company to exclusively manufacture these kits. Also contributing to the
increase in 1997 product revenues were sales of tests to detect the presence of
specified traits in genetically engineered plants. The Company shipped product
under a supply agreement initiated during the second quarter of 1997 with a
major seed company. Revenues under this agreement totaled approximately $1.1
million during 1997. Sales of similar tests to other customers in the
agricultural market totaled $1.0 million. The Company expects product sales in
these emerging markets to grow significantly in 1998 and thereafter as these
markets develop.
All other product revenues totaled $9.6 million in 1997 compared to $10.1
million in 1996. While sales of certain products in this category increased in
1997 over 1996, overall, this 5% decrease was primarily attributable to lower
sales in the Company's industrial testing category early in 1997 as duplicate
customer relationships and early customer confusion over the integrated product
lines resulting from the mergers. These matters were addressed during 1997
through the Company's sales and marketing channels. The Company expects product
sales in this category to grow from the 1997 level but at a modest rate for the
foreseeable future.
Contract and other revenues decreased by less than 3% to $1.717 million in
1997 from $1.766 million in 1996. This decrease is attributable to a slightly
lower volume of research contracts in 1997 than in 1996. The Company expects
contract and other revenues to increase in 1998 as additional projects,
particularly to develop additional products in the emerging markets in
collaboration with its corporate partners, are anticipated.
While the experience of the Company has been favorable, there can be no
assurance that the anticipated projects and the growth rates described above
will be realized.
OPERATING EXPENSES. Total operating expenses decreased by $4.5 million
or 25.9% in 1997 from $17.6 million in pro forma 1996 to $13.0 million. This
decrease is primarily the result of lower costs associated with more efficient
operations after the integration of the separate companies. The combined
Company has a lower level of personnel costs compared with each of the separate
companies. Efficiencies were also achieved as duplicate facilities were closed.
The operations in North Carolina and Pennsylvania have now been consolidated
into the Company's Delaware facilities.
Manufacturing expenses, which include the costs of products sold, decreased
$642 thousand or 10.8% in 1997 to $5.3 million. Gross margins for product sales
increased to 58.2% in 1997 from 45.6% in 1996, due to increased sales volume and
efficiencies gained through consolidation.
Research and Development expenses decreased $1.8 million or 52.6% to $1.6
million in 1997 from $3.3 million in 1996. This decrease is attributable to the
consolidation of the Research and Development departments of SDI, Ohmicron and
EnSys into one integrated operation focusing on a single set of corporate
objectives.
19
<PAGE>
Selling, general and administrative expenses decreased $2.2 million or 26%
to $6.1 million in 1997. This decrease is attributable to the efficiencies
afforded through the merger. The Company now maintains a single administrative
function to support the operations of the Company.
NET INTEREST AND OTHER INCOME. Net interest income decreased $315
thousand or 53% to $274 thousand in 1997. This decrease is primarily
attributable to a lower average balance of investments during 1997 than in 1996.
PROVISION FOR INCOME TAXES. Due to net operating loss carry forwards,
the Company has made no provision for income taxes for 1997. Although net
operating loss carry forwards were obtained in connection with the mergers
discussed above, the use of these carry forwards, if any, in any particular
year will be limited in future years pursuant to the "change in ownership"
rules under Section 382 of the Internal Revenue Code. The Company estimates
that it has approximately $16 million of such carryforwards as of December
31, 1997 after the foregoing limitations (see Note 2 to notes of consolidated
financial statements).
NET INCOME. Net income increased $5.9 million to $1.677 million in 1997.
This increase was primarily the result of increased sales activity as well as
lower operating costs, all as described above.
COMPARISON OF ACTUAL 1997 WITH HISTORICAL FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues increased $8.6 million in 1997 or 147% over 1996.
This increase is attributable to the increase in business activity after the
mergers and the increased sales of products in the Company's emerging markets
all as described above. Product revenues increased $9.3 million or 273% for the
reasons described above. Contract and other revenues decreased $718 thousand or
29% to $1.7 million in 1997. The 1996 volume includes approximately $667
thousand in revenues from transactions between EnSys and SDI prior to the
merger. These businesses were integrated during 1997.
OPERATING EXPENSES. Operating expenses decreased $1.4 million or 9.7%
in 1997 to $13.0 million. This decrease is attributable to the inclusion in
1996 of a one-time charge of $8.3 million to write-off research and development
costs acquired in connection with the mergers. Excluding this charge, operating
expenses increased $6.9 million or 113% as a result of increases in
manufacturing costs of $2.5 million or 87%, research and development expenses of
$11 thousand or 0.7% and selling, general and administrative expenses of $4.4
million or 253%. These increases are all attributable to the higher costs of
operation (principally additional personnel and related costs) of the combined
companies.
NET INTEREST INCOME. Net interest income increased $266 thousand in
1997 from $8 thousand in 1996. This increase is attributable to the increase in
invested funds acquired through the mergers.
NET INCOME. Net income increased $10.1 million in 1997 to $1.677 million
from a loss of $8.4 million. This increase in net income is attributable to the
higher volume of revenues reduced in part by the increased costs and the
elimination of the one-time write-offs all associated with the mergers and all
as described above.
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased 58% to $5.8 million in 1996 from $3.7
million in 1995. This $2.1 million increase is the result of a $1.8 million
(112%) increase in product-related revenues and a $351 thousand (17%) increase
in contract and other revenues. Product related revenues increased to $3.4
million in 1996 from $1.6 million in 1995. This was due to overall increased
sales for certain of the Company's new products, especially the first of the
Company's strip assays which was introduced in mid-1995, improved priority
pollutant sales over the prior year, and product related revenues generated by
TSD BioServices in the fourth quarter of 1996 as a wholly-owned subsidiary of
the Company. The product revenues do not include any revenues from any of the
Company's industrial testing kits in the fourth quarter of 1996, since the
Company licensed these products to EnSys in October 1996. However, revenues do
include approximately $537 thousand in product revenues from the sale of the
Company inventory, at cost, to EnSys in connection with the license agreement.
20
<PAGE>
Contract and other revenues increased to $2.4 million in 1996 from $2.1 million
in 1995. This increase is primarily due to a $300 thousand license fee from
EnSys and Ohmicron prior to the mergers, which was offset by a $200 thousand
decrease in contract revenue received from EM Industries in 1996 due to the
completion of the EM Industries contract.
MANUFACTURING EXPENSES. Manufacturing expenses increased 120% to $2.8
million in 1996 from $1.3 million in 1995. This $1.5 million increase was
primarily a result of the overall increase in product related sales during the
year versus the prior year, and, to a lesser extent, the assumption of the
expenses associated with the former Ohmicron manufacturing facility in September
1996.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 31% to $1.6 million in 1996 from $2.3 million in 1995. This decrease
was primarily the result of a reduction of research and development personnel
and certain salaries and related expenses, during the third quarter of 1995.
ACQUIRED RESEARCH AND DEVELOPMENT EXPENSES. Acquired research and
development expenses were $8.3 million in 1996. These expenses were incurred in
connection with the merger transactions with Ohmicron and EnSys, and resulted in
acquired research and development expenses of $3.9 million and $4.4 million,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 46% to $1.7 million in 1996 from $1.2 million
in 1995. This increase was primarily due to the salaries and related expenses
associated with the additional hiring of sales and marketing personnel required
in connection with the Company's acquisition of Ohmicron and the Company's
direct selling of its products, as well as additional accounting and
administrative support personnel necessitated by the mergers and the overall
growth of the Company.
INTEREST INCOME AND INTEREST EXPENSE. Interest income increased $3
thousand to $11 thousand in 1996 from $8 thousand in 1995 due to increased cash
balances from a January 2, 1996 preferred stock financing.
EQUITY IN INCOME OF TSD BIOSERVICES. Equity in income of the TSD
BioServices partnership increased $137 thousand to $178 thousand in 1996 from
$41 thousand in 1995. This increase was primarily due to a significant increase
in revenues for the partnership during 1996 versus the prior year. In October
1996, the TSD BioServices partnership was dissolved and its assets were
liquidated, in connection with which certain of the rights and assets of the TSD
BioServices partnership were distributed to TSD BioServices, Inc., a wholly
owned subsidiary of the Company.
LIQUIDITY AND CAPITAL RESOURCES. The Company utilizes computer software
provided by third parties under a commercial license to support operations,
including materials resource planning and general accounting. The suppliers of
such software have indicated their intentions to deliver updates to the
application during 1998 so that it will continue to process information during
and after the year 2000. The Company expects that the costs of the changes
necessary to process its information after the year 2000 will not have any
material effect on its working capital or results of operations.
The Company's working capital, which consists principally of cash, cash
equivalents and short-term investments increased by $2.2 million in 1997 to
$9.4 million at December 31, 1997 from $7.2 million at December 31, 1996.
This increase is attributable to the increases in cash and cash equivalents
of $1.7 million (181%), accounts receivable $825 thousand (35.3%) and
decreases in accounts payable of $946 thousand (60.5%), accrued expenses of
$1.1 million (53.8%), other current liabilities of $103 thousand (45.6%) and
reduced by decreases in short-term investments of $1.7 million (32.0%),
inventories of $10 thousand (0.6%) and other current assets of $336 thousand
(65.9%).
The Company believes it has, or has access to sufficient assets to meet its
operating requirements for the foreseeable future. The Company's ability to
meet its long-term capital requirements will depend on a number of factors
including the success of its current and future products, the focus and
direction of its research and development program, competitive and technological
advances, future relationships with Corporate Partners, government regulation,
the Company's marketing and distribution strategy and the success of the
Company's 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 and similar uncertainties (See Note 15 to the
Consolidated Financial Statements).
For the year ended December 31, 1997, the Company satisfied all of its cash
requirements from cash available and
21
<PAGE>
on-hand. At December 31, 1997, the Company has virtually no long-term debt and
stockholders' equity of over $12.3 million.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries are included as part of this Form 10-K:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants................................F-1
Consolidated Balance Sheet as of December 31, 1997 and 1996.............F-2
Consolidated Statements of Operations for each of the years
in the three year period ended December 31, 1997...................F-3
Consolidated Statements of Stockholder's Equity (Deficit) for each
of the years in the three year period ended December 31, 1997......F-4
Consolidated Statements of Cash Flows for each of the years
in the three year period ended December 31, 1997...................F-5
Notes to Consolidated Financial Statements..............................F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
</TABLE>
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information contained under the caption "Election of a Class of Directors"
and the information contained under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Definitive Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the caption "Executive Compensation" in the
Company's Definitive Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Stock Ownership of Principal
Stockholders and Management" in the Company's Definitive Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and Related
Transactions" in the Company's Definitive Proxy Statement is incorporated herein
by reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
See the Consolidated Financial Statements which begin on page F-1 of this
Report.
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because they are either not
required or not applicable or the required information is reflected in the
financial statements or notes thereto.
3. EXHIBITS
<TABLE>
<CAPTION>
Previous
Exhibit Exhibit
Number Number
- ------ ------
<S> <C> <C>
3.1 Fourth Amended and Restated Certificate of Incorporation of the Company (1) 4.1
3.2 Amended and Restated Bylaws of the Company (1) 4.2
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Forms of Warrants to Purchase Common Stock of the Company (1) 4.4
10.1 Warrant Agreement dated June 1, 1991 between John Hancock (2) 10.5
Leasing Corporation and the Company, as amended December 19, 1991
10.3 EnSys Environmental Products, Inc. 1993 Stock Incentive Plan* (2) 10.17
10.4 Amended and Restated EnSys Environmental Products, Inc. 1995*
Stock Incentive Plan (3)
10.5 EnSys Environmental Products, Inc. 401(k) Plan Adoption
Agreement (2) 10.18
10.6 Lease Agreement dated June 1, 1989, between the Company and (2) 10.20
Imperial Center Partnership and Petula Associates, Ltd. for premises
at 4222 Emperor Boulevard, Morrisville, North Carolina, as
amended December 22, 1991 and April 7, 1993
10.9 License Agreement by and between the Company and Meridian (4) 10.22
Diagnostics, Inc. dated July 24, 1994
10.10 Asset Purchase Agreement among EnSys, Millipore Corporation, (5) 2.1
and ImmunoSystems, Inc.
24
<PAGE>
10.11 Agreement and Plan of Merger by and between EnSys and Strategic (1) 2.1
Diagnostics Inc. dated as of October 11, 1996
10.14 Employment Agreement dated December 30, 1996 by and between (6) 10.14
Richard C. Birkmeyer and the Company*
10.15 Employment Agreement dated December 30, 1996 by and between (6) 10.15
Grover C. Wrenn and the Company*
10.16 Registration Rights Agreement dated December 30, 1996 between (6) 10.16
the Company and the stockholders listed therein
10.18 Industrial Lease dated October 26, 1993, by and between Tober & (6) 10.18
Agnew Properties, Inc. and Strategic Diagnostics Incorporated
10.19 Industrial Lease dated August 9, 1990, by and between Tober & (6) 10.19
Agnew Properties, Inc. and Strategic Diagnostics Incorporated
10.20 Industrial Lease dated June 7, 1991 by and between Tober & (6) 10.2
Agnew Properties, Inc. and TSD BioServices
10.21 Lease agreement dated October 29, 1997 by and between Pencader
Courtyard, L.P. and Strategic Diagnostics Inc.
21.1 Subsidiaries of the Company (6) 21.1
24 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
- --------------------------------------------------------------
(1) Incorporated by reference to the designated exhibit of the EnSys
Registration Statement on Form S-4 ( No. 333-17505) filed on December 9, 1996.
(2) Incorporated by reference to the designated exhibit of the EnSys
Registration Statement on Form S-1 ( No. 33-68440) filed on September 3, 1993.
(3) Incorporated by reference to Appendix F to the Joint Proxy
Statement/Prospectus contained in the EnSys Registration Statement on Form S-4
(No. 333-17505) filed on December 9, 1996.
(4) Incorporated by reference to the designated exhibit of the EnSys Form 10-K
for the fiscal year ended December 31, 1994.
(5) Incorporated by reference to the designated exhibit of the EnSys Form 10-Q
for the fiscal quarter ended March 31, 1996.
(6) Incorporated by reference to the designated exhibit of the Company's Form
10-K for the fiscal year ended December 31, 1996.
*Management contract or compensatory plan.
25
<PAGE>
(b) Reports on Form 8-K
None.
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Strategic Diagnostics Inc.:
We have audited the accompanying consolidated balance sheets of Strategic
Diagnostics Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Strategic
Diagnostics Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
January 30, 1998
F-1
<PAGE>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,580 $ 917
Short-term investments 3,638 5,710
Receivables, net 3,159 2,334
Inventories 1,547 1,557
Other current assets 174 510
--------- ---------
Total current assets 11,098 11,028
PROPERTY AND EQUIPMENT, net 496 728
OTHER ASSETS 634 715
INTANGIBLE ASSETS, net 1,832 2,110
--------- ---------
Total assets $ 14,060 $ 14,581
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 619 $ 1,566
Accrued expenses 953 2,066
Deferred revenue 100 141
Current portion of capital lease obligations 23 85
--------- ---------
Total current liabilities 1,695 3,858
--------- ---------
CAPITAL LEASE OBLIGATIONS 25 50
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 17,500,000 shares
authorized, no shares issued -- --
Series A preferred stock, $.01 par value, 2,164,362 shares authorized,
issued and outstanding (liquidation value of $6,378 at December 31,
1997) 22 22
Common stock, $.01 par value, 35,000,000 shares authorized, 13,112,949
and 13,055,170 issued and outstanding in 1997 and 1996, respectively 132 131
Additional paid-in capital 23,913 23,905
Accumulated deficit (11,702) (13,379)
Cumulative translation adjustments (25) --
Deferred compensation -- (6)
--------- ---------
Total stockholders' equity 12,340 10,673
--------- ---------
Total liabilities and stockholders' equity $ 14,060 $ 14,581
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and ver share data)
<TABLE>
<CAPTION>
Year Ended December 31,
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
------------------------------------------------------------------------
Product related $ 12,703 $ 3,402 $ 1,605
Contract and other 1,717 2,435 2,084
- --------------------------------------------------------------------------------
Total net revenues 14,420 5,837 3,689
------------------------------------------------------------------------
OPERATING EXPENSES:
Manufacturing 5,305 2,839 1,288
Research and development 1,580 1,569 2,272
Selling, general and administrative 6,132 1,737 1,190
Acquired research and development - 8,266 -
------------------------------------------------------------------------
Total operating expenses 13,017 14,411 4,750
------------------------------------------------------------------------
Operating income (loss) 1,403 (8,574) (1,061)
Interest and other income (expense), net 274 186 (165)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) 1,677 (8,388) (1,226)
Accretion of redeemable preferred stock
liquidation value - (635) (367)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCKHOLDERS 1,677 (9,023) (1,593)
---------------------------------------------------------------------------
BASIC NET INCOME (LOSS) PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS: $ 0.13 $ (2.12) $ (0.46)
- --------------------------------------------------------------------------------
SHARES USED IN COMPUTING
BASIC PER SHARE AMOUNTS: 13,084,000 4,248,000 3,464,000
- --------------------------------------------------------------------------------
DILUTED NET INCOME (LOSS) PER SHARE
APPLICABLE TO COMMON STOCKHOLDERS: $ 0.11 $ (2.12) $ (0.46)
- --------------------------------------------------------------------------------
SHARES USED IN COMPUTING
DILUTED PER SHARE AMOUNTS: 15,712,000 4,248,000 3,464,000
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Series A Additional
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance,
January 1, 1995 $ - $ 47 $ 164 $ (2,763)
Amortization of deferred compensation
Accretion of liquidation value (367)
Issuance of warrants in connection with debt 75
Issuance of common stock options 55
Net loss (1,226)
- --------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 - 47 294 (4,356)
- --------------------------------------------------------------------------------------------------------------------
Amortization of deferred compensation
Accretion of liquidation value (635)
Acquisition of Ohmicron Corporation 31 4,017
Acquisition of EnSys Environmental Products, Inc. 53 13,006
Conversion of redeemable convertible preferred to
Series A preferred 22 6,588
Net loss (8,388)
- --------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 22 131 23,905 (13,379)
- --------------------------------------------------------------------------------------------------------------------
Exercises of stock options, warrants and other 1 8
Foreign currency translation adjustment, net
Net Income 1,677
- --------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 $22 $132 $23,913 $(11,702)
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Cumulative Deferred
Translation Compen-
Adjustments sation Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance,
January 1, 1995 $ - $(28) $(2,580)
Amortization of deferred compensation 34 34
Accretion of liquidation value (367)
Issuance of warrants in connection with debt 75
Issuance of common stock options (55) -
Net loss (1,226)
- ----------------------------------------------------------------------------------------------------
Balance,
December 31, 1995 - (49) (4,064)
- ----------------------------------------------------------------------------------------------------
Amortization of deferred compensation 43 43
Accretion of liquidation value (635)
Acquisition of Ohmicron Corporation 4,048
- ----------------------------------------------------------------------------------------------------
Acquisition of EnSys Environmental Products, Inc. 13,059
Conversion of redeemable convertible preferred to
Series A preferred 6,610
Net loss (8,388)
- ----------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 - (6) 10,673
- ----------------------------------------------------------------------------------------------------
Exercises of stock options, warrants and other 6 15
Foreign currency translation adjustment, net (25) (25)
Net Income 1,677
- ----------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 (25) $ - $12,340
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 1,677 ($8,388) ($1,226)
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization and other, net 643 181 135
Acquired research and development write-off - 8,266 -
Equity in (income) of TSD BioServices - (178) (41)
Amortization of deferred compensation 6 43 34
Imputed interest on note payable - - 75
(Increase) decrease in:
Receivables (825) (753) 1
Inventories 10 208 (70)
Other current assets 336 (696) 33
Note receivable and other assets 81 56 (45)
Increase (decrease) in:
Accounts payable (947) 472 (262)
Accrued expenses (1,113) 589 138
Deferred revenue (41) (170) 211
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (173) (370) (1,017)
Cash Flows from Investing Activities:
Purchase of property and equipment (159) (67) (41)
Proceeds from EnSys and Ohmicron acquisitions - 807 -
Short-term investment activity 2,072 - -
Restricted cash - 56 26
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,913 796 (15)
Cash Flows from Financing Activities :
Proceeds from exercise of incentive stock options 9 - -
Repayments on capital lease obligations (87) (17)
Proceeds from sale of preferred stock, net - 473 -
Proceeds from note payable - - 1,000
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (78) 456 1,000
Net Increase (Decrease) in Cash and Cash Equivalents 1,663 882 (32)
Cash and Cash Equivalents, Beginning of Period 917 35 67
- -------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 2,580 $ 917 $ 35
- -------------------------------------------------------------------------------------------------
Supplemental Cash Flow Disclosure :
Cash paid for interest $ 36 $ 3 $ 0
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements
F-5
<PAGE>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(in thousands, except share and per share data)
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 markets.
BASIS OF PRESENTATION
The Company is the entity resulting from the combination of Strategic
Diagnostics Inc. ("SDI") Ohmicron Corporation ("Ohmicron") and EnSys
Environmental Products, Inc. ("EnSys").
The historical financial statements presented herein include the consolidated
financial statements of Strategic Diagnostics Inc. for all periods and the
actual results of Ohmicron Corporation from August 30, 1996 (Note 3) and EnSys
Environmental Products, Inc. from December 30, 1996 (Note 3). As used herein,
unless the context requires otherwise, the Company collectively refers to SDI
and its subsidiaries for the periods indicated. All significant intercompany
balances and transactions have been eliminated in consolidation.
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which supersedes APB Opinion No. 15 ("APB No. 15"), "Earnings Per
Share," and which is effective for all periods ending after December 16, 1997.
SFAS 128 requires dual presentation of basic and diluted earnings per share
("EPS") for complex capital structures. Basic EPS is computed by dividing
income by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock, such as stock options and warrants.
The calculation of the Company's basic and diluted EPS measured under SFAS 128
for each period presented is not materially different than the primary and fully
diluted EPS measured under APB No. 15 for each period presented.
Outstanding options to purchase 976,500 shares of Common stock at $1.875 to
$6.25 were excluded from the computation of diluted earnings per share, as the
options' exercise price was greater than the average market price of the common
shares.
F-6
<PAGE>
STATEMENTS OF CASH FLOWS
The Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
As of December 31, 1997 and 1996, the allowance for doubtful accounts was $120
and $180, respectively. In 1997, 1996 and 1995, approximately $60, $2 and $10 of
write-offs were charged to this allowance which was offset by approximately $0,
$81 and $9 charged to earnings in each of the respective years. If receivables
become uncollectible or unbillable, the Company's policy is to charge these
write-offs against the allowance. The Company continually reviews the
realizability of its receivables and charges current period earnings for the
amount deemed unrealizable.
At December 31, accounts receivable consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accounts receivable $ 2,745 $ 1,739
Unbilled accounts receivable 414 595
-------- --------
$ 3,159 $ 2,334
-------- --------
-------- --------
</TABLE>
INVENTORIES
The Company's inventories, which consist primarily of test kit components and
accessories, are valued at the lower of cost or market. Cost is determined
using standard costs which approximate average cost. Realization of the
Company's inventories is dependent upon the successful marketing of its
products. At December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials $ 619 $ 626
Work in progress 51 356
Finished goods 877 575
-------- --------
$ 1,547 $ 1,557
-------- --------
-------- --------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives
(generally three to five years) of the assets.
REVENUE RECOGNITION
Product related revenues which include the sale of immunoassay-based test kits
are generally recognized upon shipment. Included in product related revenues are
also the sale of antibodies and immunochemical reagents which are sold through
longer term development agreements. These revenues are recognized on a
percentage of completion method. Contract revenues recorded under the Company's
collaborative agreements are recognized upon the completion of certain
performance requirements of the contracts. License revenue is recognized upon
transfer of such licenses.
RESEARCH AND DEVELOPMENT
F-7
<PAGE>
Research and development costs are charged to expense as incurred.
OTHER INCOME
Other income of $178 and $41 was recorded in 1996 and 1995, respectively,
for the Company's equity in the income of TSD BioServices (Note 3).
INCOME TAXES
As of December 31, 1997, the Company had federal net operating loss
carryforwards, including those acquired (Note 3), of approximately $15,780,
which begin to expire as follows:
<TABLE>
<S> <C>
2001 $ 13
2002 716
2003 489
2004 1,362
2005 2,565
2006 2,603
2007 2,584
2008 1,182
2009 2,081
2010 2,185
-------
Total $15,780
-------
-------
</TABLE>
The amount of the net operating loss carryforwards which can be utilized in any
one period, if any, will be limited by federal tax regulations since a
cumulative change in ownership of more than 50% has occurred within a three year
period. The benefits of the utilization of acquired net operating losses, if
any, will be recorded as a reduction of the remaining unamoritized intangibles
that were acquired in the transaction in which the utilized net operating losses
were acquired. Any benefits obtained in excess of the remaining related
intangibles will be reported as a reduction in the income tax provision during
the year in which management determines that it is more likely than not that
these benefits will be realized. As of December 31, 1997 approximately $4,400
of future utilization, if any, of acquired net operating losses will be recorded
as a reduction of the related acquired intangibles.
The net operating loss carryforwards differ from the accumulated deficit
principally due to differences in the recognition of certain research and
development expenses, depreciation and amoritization, other non-deductible
reserves and the accretion of preferred stock for financial and federal income
tax reporting.
Significant components of the Company's deferred tax assets as of December 31
are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Net operating loss carryforwards 5,429 5,439
Amoritization and depreciation 517 832
Non-deductible reserves 127 262
Inventory costs not currently deductible 129 266
------ ------
Total deferred tax assets 6,202 6,799
Valuation allowance (6,202) (6,799)
------ ------
Net deferred tax assets
------ ------
------ ------
</TABLE>
F-8
<PAGE>
The following table summarizes the significant differences between the U.S.
Federal statutory rate and the Company's effective tax rate for financial
statement purposes:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 34.0% (34.0)% (34.0)%
State taxes, net of U.S. Federal benefit - .1 (.4)
Write-off of acquired research and
development - 33.5 -
Increase in (utilization of) net operating loss
carryforwards (.6) (3.2) 34.4
Changes in net valuation reserve (34.9) 3.1 .1
Other, net 1.5 .5 (.1)
------ ------ ------
- % - % - %
------ ------ ------
------ ------ ------
</TABLE>
Management continually reviews the valuation allowance and will recognize
deferred tax benefits only as reassessment indicates that it is more likely than
not that these benefits will be realized. The total amount of future taxable
income in the U.S. necessary to realize the Company's gross deferred tax assets
is approximately $18,000. Management believes that the Company will generate
future taxable income; however, management also believes that the recorded
valuation allowance is consistent with the provisions of SFAS 109, "Accounting
for Income Taxes."
RECLASSIFICATION
Certain reclassifications have been made to the prior year financial statements
to conform to current year financial statement presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," which is effective for all periods ending after December 15,
1997. This statement establishes standards for disclosing information about an
entity's capital structure. In adopting SFAS 129, the company disclosed
additional information regarding the Series A Preferred Stock in the financial
statements and the notes hereto.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). This statement requires companies to classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for financial statements issued for
fiscal years beginning after December 15, 1997. Management believes that SFAS
130 will not have a material effect on the Company's financial statement
disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" ("SFAS 131"). This statement establishes
additional standards for segment reporting in the financial statements and is
effective for fiscal years beginning after December 15, 1997. Management
believes that SFAS No. 131 will not have a material effect on the Company's
financial statement disclosures.
3. MERGERS AND ACQUISITIONS:
MERGER WITH ENSYS ENVIRONMENTAL PRODUCTS, INC.
On December 30, 1996, the Company merged with and into EnSys Environmental
Products, Inc. (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
F-9
<PAGE>
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, current 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 preferences
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 acquirer
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 at the time of the
merger, the "One Step" assay, was evaluated and it was determined that
technological feasibility had not been achieved. In addition, since alternative
uses of this developmental technology did not exist, the costs of such
technology were charged to expense in accordance with 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 December 30,
1996, the effective date of the Merger. The remaining amount of intangible
assets of approximately $1,167 included approximately $472 for developed
technology, $55 for assembled workforce and $640 for goodwill. The intangible
assets purchased are amortized on a straight-line basis over 7-10 years.
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 using the fair 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 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, "Accounting for
Research and Development Costs." 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 amortized on a straight-line basis over 7-10 years. 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 with
EnSys.
F-10
<PAGE>
The redeemable convertible preferred stock was mandatorily redeemable and
received dividends, registration rights and senior liquidation rights to the
common stock (see Note 11). The common stock was valued at $1.75 per share
reflecting a discount from the redeemable convertible preferred stock due to the
difference in preferences between the two classes of stock.
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 Bio Services 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
approximates the fair market value of the assets received.
UNAUDITED PRO FORMA COMBINED RESULTS OF OPERATIONS
The following table summarizes the unaudited pro forma combined results of
operations for the years ended December 31, 1996 and 1995, assuming that the
Merger, the Ohmicron acquisition and the TSD dissolution had occurred on January
1, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995
---------- ----------
(unaudited)
<S> <C> <C>
Revenues $ 12,700 $ 11,184
---------- ----------
---------- ----------
Net loss $ (5,973) $ (7,721)
---------- ----------
---------- ----------
Basic and Diluted Net loss per share $ (0.47) $ (0.66)
---------- ----------
---------- ----------
</TABLE>
The above pro forma information excludes the $8,266 one-time charge to earnings
for acquired research and development. The shares used in computing pro forma
net loss per share assumes that the Merger with EnSys, the acquisition of
Ohmicron and the TSD BioServices dissolution had occurred January 1, 1995.
F-11
<PAGE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following table displays the net non cash assets that were acquired during
1996 as a result of the Merger and the Ohmicron Acquisition:
<TABLE>
<S> <C>
Non cash (assets) liabilities:
Short term investments $ (5,710)
Receivables (808)
Inventories (1,318)
Property and equipment (443)
Restricted cash (126)
Note receivable (357)
Intangibles (2,135)
Accounts payable 1,483
Accrued expenses including acquisition costs 1,128
Deferred revenue 100
Capital lease obligations 152
---------
(8,034)
Issuance of common stock 17,107
Acquired research and development (8,266)
---------
Net cash acquired in business acquisitions $ 807
---------
---------
</TABLE>
4. SHORT-TERM INVESTMENTS:
At December 31, 1997, short-term investments consisted primarily of
commercial paper. Contractual maturities of the Company's investments as of
December 31, 1997 are $3,550 in 1998 and $100 in 2000. The Company considers
these investments as being available-for-sale in accordance with SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities."
Available-for-sale securities are carried at fair value, based on quoted
market prices, with unrealized gains and losses reported as a separate
component of stockholders' equity. As of December 31, 1997, unrealized gains
were not material to the financial statements. Interest income and other
realized gains were $310, $11, and $8 in 1997, 1996, and 1995, respectively.
5. PROPERTY AND EQUIPMENT:
At December 31, property and equipment consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Equipment $ 1,071 $ 1,002
Furniture and fixtures 66 66
Leasehold improvements 288 198
-------- --------
Less- Accumulated depreciation and amortization (929) (538)
-------- --------
$ 496 $ 728
-------- --------
-------- --------
</TABLE>
Depreciation expense was $391, $91, and $130 in 1997, 1996, and 1995
respectively.
6. OTHER ASSETS:
As of December 31, other assets consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Restricted cash $ 100 $ 119
Deferred rent 192 171
Note receivable--(Net of allowance) 276 341
Deposits and other 66 84
-------- --------
$ 634 $ 715
-------- --------
-------- --------
</TABLE>
F-12
<PAGE>
The Company maintains a note receivable from a former executive of EnSys. The
original loan amount was $350 and is secured by the individual's personal
residence. The loan bears interest at 5.8% per annum. At December 31, 1997,
the outstanding loan balance was approximately $344 of which approximately $6 in
principal is payable annually through the year 2000 with the balance payable in
January 2001.
7. INTANGIBLE ASSETS:
<TABLE>
<CAPTION>
1997 1996 Lives
---- ---- -----
<S> <C> <C> <C>
Developed Technology $1,250 $1,250 7
Goodwill 743 743 7
Other 208 208 5 to 7
Less - Accumulated Amoritization (369) (91)
------ ------
$1,832 $2,110
------ ------
------ ------
</TABLE>
Amortization of these intangible assets was $278 and $91 in 1997 and 1996,
respectively.
8. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
As of December 31, accrued expenses consisted of the following:
1997 1996
-------- --------
<S> <C> <C>
Legal and professional $ 131 $ 260
Merger costs 118 1,069
Accrued taxes, salaries, and other 704 737
-------- --------
$ 953 $ 2,066
-------- --------
-------- --------
</TABLE>
9. 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, 87,349 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.
In January 1996, the Company converted the $1,500 of Note Payable and $124 of
accrued interest into 685,952 shares of redeemable convertible preferred
stock (Note 10).
F-13
<PAGE>
10. CAPITAL LEASES:
The Company leases equipment under capital lease agreements which expire at
various dates through 2001. Certain of the leases contain options to
purchase the equipment at the end of the respective lease terms. As of
December 31, 1997, future minimum capital lease payments are as follows:
<TABLE>
<S> <C>
1998 $ 32
1999 16
2000 12
2001 8
--------
68
Less- Amount representing interest (20)
--------
Present value of minimum lease payments 48
Less- Current portion of capital lease obligations (23)
--------
$ 25
--------
--------
</TABLE>
Interest expense was $36, $3, and $214 in 1997, 1996, and 1995 respectively.
11. 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 (Note 9) 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, as defined, 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 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 and per share
liquidation preference of $6,378 and $2.95, respectively, as of December 31,
1997. 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.
12. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS
The Company has two stock option plans (the "1993 Plan" and the "1995 Plan")
which authorize the granting of incentive and nonqualified stock options to
officers, key employees, directors and consultants. Incentive stock options
are granted at not less than 100% of fair market value at the date of grant
(110% for stockholders owning more than 10% of the Company's common stock).
Nonqualified stock options are granted at not less than 85% of fair market
value at the date of grant. All previously issued SDI options were converted
into the 1995 Plan. A maximum of 1,700,000 shares of common stock are
issuable under the 1995 Plan and options to purchase up to 300,000 shares of
common stock had been authorized under the 1993 Plan.
Certain additional options have been granted outside the plans. These
options generally follow the provisions of the 1995 Plan.
F-14
<PAGE>
Information with respect to the stock options granted under the plans and
options granted separately from the plans is summarized as follows:
<TABLE>
<CAPTION>
Price Aggregate
Number Range Proceeds
---------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1994 278,415 $ 0.19 - $ 0.64 $ 101
Granted 146,275 0.19 - 0.64 39
Cancelled (27,402) 0.64 (18)
--------- --------------- -----------
Balance, December 31, 1995 397,288 0.19 - 0.64 122
Options acquired in conjunction
with the Merger 461,023 0.25 - 7.50 1,226
Granted 200,000 2.00 - 2.20 420
Cancelled (14,072) 0.64 (9)
--------- --------------- -----------
Balance, December 31, 1996 1,044,239 $ 0.19 - $ 7.50 $ 1,759
Granted 545,000 1.88 1,022
Cancelled (204,198) 0.19 - 7.50 (576)
Exercised (25,502) 0.19 - 0.64 (7)
--------- --------------- -----------
Balance, December 31, 1997 1,359,539 $ 0.19 - $ 6.25 $ 2,198
--------- --------------- -----------
--------- --------------- -----------
</TABLE>
As of December 31, 1997, options covering 692,497 shares were exercisable
with an aggregate exercise price of $942 and 614,959 shares were available
for future grant under the plans.
For options granted, the Company recognizes as deferred compensation the
excess of the deemed value for accounting purposes of the common stock
issuable upon the exercise of options over the aggregate exercise price of
such options. The deferred compensation is amortized over the vesting period
of the options.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Effective January 1, 1995, the Company adopted the disclosure
requirement of this pronouncement. Had compensation cost for the Company's
stock option plans been determined based upon the fair value at the grant
date for awards under SFAS 123, the Company's net income (loss) applicable to
common stockholders for 1997, 1996 and 1995 would have been $1,493, $(9,113)
and $(1,610) and diluted net income (loss) per share applicable to common
stockholders would have been $0.10, $(2.15) and $(0.46), respectively.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost,
and thus pro forma net income (loss), may not be representative of that to be
expected in future years.
The weighted average fair value at the date of grant for options granted
during 1997, 1996 and 1995 is estimated at $1.37, $1.46 and $0.47 per share,
respectively, using the Black-Scholes option-pricing model. The assumptions
used in the Black-Scholes model are as follows: dividend yield of 0%,
expected volatility of 80%, risk-free interest rate of 6.4% in 1997, 6.4% in
1996 and 6.5% in 1995, and an expected option life of 6 years.
WARRANTS
In December 1994, in connection with a prior collaboration agreement, the
Company issued to Conoco a warrant that enables Conoco to purchase 164,179
shares of the Company's common stock for an exercise price of one dollar. In
connection with this exchange, the Company recorded a charge of $105 in 1994
in the statement of operations reflecting the fair value of the warrant. If
Conoco exercises this warrant, and the Company completes an equity financing
with aggregate proceeds of $7 million or greater, then Conoco has the right
to require the Company to repurchase the warrant at a price equal to 164,179
shares multiplied by the price per share received in the equity financing.
The warrant expires in November 1999.
In connection with the original issuance of the redeemable convertible
preferred stock and the notes payable issued in October 1995 and April 1995
which were subsequently converted to redeemable convertible stock in
F-15
<PAGE>
January 1996, the Company granted warrants to purchase a total of 429,992
shares of common stock at an exercise price of $2.37. The warrants have an
expire five years from the dates of grant.
At December 31, 1997, the Company maintains 3,530 of outstanding warrants.
These warrants are exercisable at $4.96 per share and expire in 2001.
13. EM COLLABORATIVE AGREEMENT:
In February 1992, SDI entered into an agreement with EM Industries, Inc. (an
affilitate of Merck KgaA, "EM") for the development and manufacture of a
product line of immunoassays capable of identifying and quantifying certain
substances found on the priority pollutant list published by the
Environmental Protection Agency. In connection with this agreement, the
Company received $0, $400 and $600 in 1997, 1996 and 1995, respectively, for
the achievement of certain defined development milestones. In September
1996, the Company acquired the product rights to the D TECH-Registered
Trademark-product line from EM in exchange for a royalty payment based on
sales of specified products into selected markets and 48,048 shares of common
stock.
14. MAJOR CUSTOMERS
During 1995, EM and two customers accounted for 26%, 17% and 14% of the
Company's revenue, respectively. During 1996, EM and EnSys (Note 3)
accounted for 11% and 19%, respectively of the Company's revenues. During
1997, Rohm & Haas and Delta and Pine Land Company each accounted for 10% of
the Company's revenues.
15. TSD BIOSERVICES TRANSACTIONS:
TSD purchased certain supplies, raw materials and services from Taconic and
the Company. In 1996 and 1995, the Company included in revenues $53 and $275
of contract and other revenues resulting from transactions with TSD. In
October 1996, TSD was dissolved (Note 3).
In 1991, TSD entered into a five-year management agreement with each of its
partners. The agreements provided that the partners could charge TSD
BioServices for work performed on behalf of the partnership by any of the
partners' principals. TSD BioServices partners elected not to charge TSD
BioServices for these and certain other expenses related to the partnership,
but rather elected to absorb such costs in the parent organizations. Such
costs were immaterial and the management agreement was terminated in 1996.
16. COMMITMENTS AND CONTINGENCIES:
The Company leases its office and manufacturing facilities and other
equipment under operating leases. Rent expense for the years ended December
31, 1997, 1996 and 1995, was $466, $250 and $226, respectively. Future
commitments under these noncancelable leases at December 31:
<TABLE>
<S> <C>
1998 $676
1999 563
2000 436
2001 383
2002 351
2003 and thereafter 1,650
------
$4,059
------
</TABLE>
In July 1993, the Company purchased certain equipment, inventory, cell lines
and product rights and other assets for Macra-Registered Trademark-Lp(a) from
Terumo Medical Corporation ("Terumo") for $128. In connection with this
agreement, the Company agreed to pay Terumo a royalty on net sales of the
Macra-Registered Trademark-Lp(a) product. The royalty is based on a
specified formula, but generally requires the Company to pay a 6% royalty on
the net sales of Macra-Registered Trademark-products, with a minimum royalty
payment each year of $10. The Company paid Terumo $25, $15 and $25 in
royalties under this agreement in 1997, 1996 and 1995, respectively.
F-16
<PAGE>
The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management, after consultation with legal counsel, does not
believe that the outcome of these matters will have a material adverse effect
on the Company's financial position or results of operations.
17. RETIREMENT SAVINGS PLAN:
In 1992, the Company instituted a retirement savings plan qualified under
Section 401(k) of the Internal Revenue Code. The plan allows for eligible
employees to contribute a portion of their gross wages to the plan. The
Company matches employees' contributions on a 50% basis up to 6% of gross
wages. In 1997, 1996 and 1995, the Company recognized expense of $76, $51
and $51, respectively, associated with this plan.
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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.
Date: March 11, 1998 /s/ Richard C. Birkmeyer
----------------------------
Richard C. Birkmeyer
President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: March 11, 1998 /s/ Arthur A. Koch, Jr.
----------------------------
Arthur A. Koch, Jr.
Vice President -- Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 11, 1998 /s/ Richard J. Defieux
------------------------------
Richard J. Defieux
Director
Date: March 11, 1998 /s/ Robert E. Finnigan
------------------------------
Robert E. Finnigan
Director
Date: March 11, 1998 /s/ Stephen O. Jaeger
------------------------------
Stephen O. Jaeger
Director
Date: March 11, 1998 /s/ Kathleen E. Lamb
------------------------------
Kathleen E/. Lamb
Director
Date: March 11, 1998 /s/ Curtis Lee Smith, Jr.
------------------------------
Curtis Lee Smith, Jr.
Director
Date: March 11, 1998 /s/ Grover C. Wrenn
------------------------------
Grover C. Wrenn
Director
<PAGE>
LEASE SUMMARY SHEET
1. LANDLORD: PENCADER COURTYARD L.P.
2. TENANT: STRATEGIC DIAGNOSTICS INC.
3. BUILDING: 111 Pencader Drive
Newark, Delaware, 19702
4. PREMISES: As set forth on Exhibit A hereto
5. TERM: TEN (10) years
Commencement Date: Upon Substantial Completion of the Premises/Date of
Issuance of Certificate of Occupancy
6. RENT:
(a) Base Rent: $9.00/square foot, increased by three percent (3%)
annually on a cumulative basis.
NOTE: This Lease Summary Sheet is for the convenience of Landlord and
Tenant and shall not be deemed to be incorporated into or made a
part of the attached Lease for any reason.
<PAGE>
TABLE OF CONTENTS
Page
1. The Parties..........................................................1
2. Building, Premises and Common Areas..................................1
3. Leasing Clause: Quiet Enjoyment......................................2
4. Use of Premises......................................................2
5. Term.................................................................2
6. Rent.................................................................4
7. Net Lease............................................................4
8. Subletting Or Assignment.............................................7
9. Inspection And Repair of Premises....................................8
10. Damage To Premises...................................................8
11. Eminent Domain.......................................................9
12. Tenant's Obligations................................................10
13. Landlord's Obligations..............................................12
14. Life Safety.........................................................14
15. Indemnification.....................................................14
16. Tenant Default......................................................15
17. Landlord Default....................................................16
18. Environmental Compliance............................................17
19. Mechanics' Liens....................................................19
-i-
<PAGE>
20. Subordination.......................................................19
21. Estoppel Certificate................................................20
22. Holding Over........................................................20
23. Attorney's Fees.....................................................20
24. Signs...............................................................20
25. Other Utilities.....................................................21
26. Broker..............................................................21
27. Notices.............................................................21
28. Miscellaneous.......................................................22
-ii-
<PAGE>
LEASE
This LEASE AGREEMENT (this "Lease") is made and entered into as of this
29th day of October, 1997, between Landlord and Tenant named below.
1. The Parties
(a) The name and address of Landlord is:
Pencader Courtyard, L.P.
1300 Market Street, Suite 300
Wilmington, DE 19801
Attn: Keith D. Stoltz
(b) The name and address of Tenant is:
Strategic Diagnostics Inc.
128 Sandy Drive
Newark, DE 19713
2. Building, Premises and Common Areas
(a) Landlord, in consideration of the Rent (as hereinafter defined)
reserved and the terms and conditions herein contained on the part of Tenant
to be performed, hereby demises and lets unto the Tenant, and Tenant, subject
to the terms hereof and the performance by the Landlord of its obligations
hereunder, takes and lets from the Landlord, that certain property located at
111 Pencader Drive, Newark, Delaware, 19713 within the section of the
Pencader Corporate Center owned by Landlord (the "Pencader Courtyard
Property") consisting of 28,653 rentable square feet of manufacturing space,
warehouse space, office space, and storage space within the Building (the
"Building") situated thereon and as further described on Exhibit A hereto
(the "Premises").
(b) Tenant, its employees, agents, licensees and invitees shall have
the right to use all areas and equipment, fixtures and furniture within the
Property (as hereinafter defined) including the Building's entrances, access
ways, roads, driveways, sidewalks, exterior ramps, parking facilities and
other similar areas which enable Tenant to obtain full use and enjoyment
of the Premises for all customary purposes (the "Common Areas").
(c) The Building, the Premises, the Common Areas, and the land and other
improvements on the land are hereinafter collectively referred to as the
"Property."
(d) Landlord represents and warrants that, immediately after the
Initial Landlord Improvements are Substantially Completion (as such terms are
defined in Section 13 hereof) and prior to occupancy by Tenant, the Property
shall be in compliance with all applicable
<PAGE>
laws, rules and regulations, including, without limitation, all Environmental
Laws (as defined in Section 18 hereof) and the Americans with Disabilities
Act for 1990, as amended.
(e) Landlord represents and warrants that it is, as of the date hereof,
and will continue at all times during the Term (as defined in Section 5
hereof) to be, in compliance with respect to any and all of its obligations
and duties, as an "owner" (as defined in the Declaration of Restrictions) or
otherwise, provided for in that certain Pencader Corporate Center Declaration
of Restrictions dated February 13, 1997 by and between Howard P. Wilson (as
Granter), EHM Pencader I Limited Partnership. New Castle Country Economic
Development Corporation and Karen Peterson (President of County Council. New
Castle Country) (the Declaration of Restrictions"). Contemporaneous with the
execution of this Lease, Landlord shall provide to Tenant a copy of the
Declaration of Restrictions.
3. Leasing Clause: Quiet Enjoyment Landlord represents that (i) it is the
fee simple owner of the Property, (ii) there are no encumbrances, liens,
options to purchase and/or mortgage existing with respect to the Property,
other than that certain First Mortgage and Construction Loan with First Trust
Bank in effect as of the date of execution of this Lease: and (iii) it has
full right and authority to make this Lease. Landlord hereby leases the
Premises to Tenant and Tenant hereby accepts the same from Landlord in
accordance with the provisions of the Lease. Landlord covenants that,
provided that Tenant is not in default beyond applicable notice and cure
periods under this Lease at the time of any exercise of an option. Tenant
shall have peaceful and quiet enjoyment of the Premises during the Term (as
defined below) of this Lease.
4. Use of Premises. Tenant may use and occupy the Premises for
manufacturing, packaging, production, sales, marketing, research,
warehousing, general commercial office and storage purposes and uses
incidental thereto.
5. Term. The term of this Lease (the "Term") shall begin on the date the
Initial Landlord Improvements are Substantially Complete or such other time
as mutually agreed in writing between Landlord and Tenant (the "Commencement
Date") and shall end on that date which is the last day of the one hundred
twentieth (120th) month following the first day of the month immediately
following the Commencement Date (the "Expiration Date"), unless sooner
terminated in accordance with the terms and conditions contained this lease.
-2-
<PAGE>
6. Rent.
(a) Base Rent - The Base Rent (defined below) shall be payable by
Tenant to Landlord in advance commencing on the Commencement Date, and
thereafter, on the first day of each month during the Term, in lawful money
of the United States, payable in monthly installments at an initial rate of
Nine Dollars ($9.00) per rentable square foot (the "Base Rent"), such rate to
increase by three percent (3%) annually on a cumulative basis, as set forth
in this Section 6 (a) below. In the event that the Commencement Date occurs
on a day other than the first day of a calendar month. Tenant shall pay to
Landlord a pro rate portion of the monthly installment of Base Rent for such
partial month, computed at the annual Base Rent of $9.00 per rentable square
foot. Tenant shall pay Rent promptly when due without abatement, deduction or
set-off except as specifically stated in this Lease. If Tenant fails to pay
monthly Rent within ten (10) days after receipt from Landlord of written
notice that Landlord has not received such monthly Rent as due. Tenant shall
pay to Landlord a Late Fee (a "Late Fee" equal to five percent (5%) of the
then applicable Rent in addition to the Rent then due for such month.
MONTHS
ANNUALIZED RENT
MONTHLY RENT
RATE/SQ. FT
1-12
$257.877
$21,490
$9.00
13-24
$256.613
$22.134
$9.27
25-36
$273.636
$22.805
$9.55
37-48
$281.946
$23,495
$9.84
49-60
$290,541
$24,212
$10.14
61-72
$299,137
$24,928
$10.44
73-84
$308,020
$25,668
$10.75
85-96
$317,189
$26,432
$11.07
97-108
$326.644
$27,221
$11.40
109-120
$336,386
$28,032
$11.74
(B) Additional Rent - In addition to the Base Rent (and exclusive
therefore) the sums of money provided for in Section 7 of this Agreement
(the "Additional Rent") shall be payable by Tenant to Landlord in accordance
with the term and conditions set forth therin. Whenever under the terns of
this Lease any sum of money is required to be paid by Tenant in addition to
the Base Rent herein reserved, and said additional sum is not designated as
-3-
<PAGE>
"Additional Rent", then if not paid when due, said sum shall nevertheless be
deemed Additional Rent and be collectible as such with any installment of
Base Rent thereafter falling due hereunder, but nothing herein contained
shall be deemed to suspend or delay the payment of any such sum at the time
the same became due and payable hereunder, or limit any other remedy of
Landlord.
(c) All payments of Base Rent and Additional Rent shall be paid when
due, without demand, at Stoltz Management Company, 1303 Delaware Avenue, at
Suite 1505, Wilmington, Delaware 19806, Attn: Accounting Department, or at such
other place as Landlord may from time to time direct by notice to Tenant. All
checks shall be made payable to the order of Landlord.
7. Net Lease.
(a) For the purpose of this Lease:
(i) Real Estate Taxes shall mean all taxes, assessments, levies and
other real estate charges (including Delaware lease and use taxes), which are
assessed, levied or charged upon the Property by the federal, state, county
or municipality during any calendar year including any which have been
finally determined by legal proceedings or otherwise to be legally payable,
less any abatement received by Landlord or any affiliate of Landlord. Real
Estate Taxes shall not include: (A) any interest or penalties not caused by
Tenant's actions; or (B) any capital levy, estate, succession, inheritance,
transfer, sales, use or franchise taxes, or any income, profits, or revenue
tax, assessment or charge imposed upon the rent received as such by the
Landlord under this Lease. If at any time during the Term, the method of
taxation prevailing on the date hereof shall be altered, such additional or
substitute tax, assessment, levy or imposition shall be deemed to include
within the term "Real Estate Taxes" for the purposes hereof.
(ii) Operation and Maintenance Costs shall mean the total accrual
out-of-pocket costs and expenses to Landlord for the operation and routine
normal maintenance and repair of the Building and Common Areas which are
incurred during any calendar year or portion thereof, in accordance with
generally accepted accounting principles, consistently applied, including
without limitations, the following items:
(A) All utilities consumed by the Common Areas and the external
and/or structural portion of the Building and the servicing and maintenancing
thereof, including, without limitation, gas, water, sewer, electricity, power
and lighting;
(B) All reasonable fees and charges paid to third parties engaged
in or contracted for the repair (including necessary replacements),
maintenance, and
-4-
<PAGE>
external security of the Building and Common Areas, including without
limitation, window cleaning, sprinkler system, snow removal and landscaping;
(C) Premiums on all fire and extended coverage (with all risk
coverage) insurance and comprehensive general liability insurance covering
the Building and the Common Areas and Landlord's personal property and
fixtures used in connection therewith;
(D) All repairs (including necessary replacements) and general
maintenance (including with respect to external security) of the Building and
the Common Areas performed by Landlord, its employees and/or agents, provided
that the fees for such repairs and general maintenance shall not exceed the
fees and charges payable to third parties for similar services in an arms
length transaction;
(E) The cost of any reasonably necessary capital improvements to
the Building and Common Areas made after the Commencement Date, either (i)
for the primary purpose of reducing Operation and Maintenance Costs or (ii)
to comply with any requirements mandated by governmental authority under any
governmental law or regulation that was not applicable to the Building and
the Common Areas as of the Commencement Date. The costs of all such permitted
capital improvements shall be amortized over the expected useful life of the
capital improvement (as reasonably determined by Landlord), together with
interest on the unamortized balance at the Prime Rate being charged by
Wilmington Trust Bank, Wilmington, Delaware (or any successor bank); and
(F) The following shall be excluded from the term "Operation and
Maintenance Costs" (i) expenses for repairs or other work occasioned by fire,
windstorm or other insured casualty (excluding any deductible amounts); (ii)
expenses incurred in leasing or procuring new tenants (e.g., for lease
commissions, advertising expenses and expenses of renovating space for new or
existing tenants); (iii) legal expenses in enforcing the terms of any lease;
(iv) interest and amortization payments on any mortgage or mortgages; (v) the
cost of any item, whether purchased or leased, that would be considered a
capital item or improvement under generally accepted accounting principles
(except to the extent permitted by Section 7(a)(ii)(E) above); (vi)
depreciation; (vii) Real Estate Taxes; (viii) advertising and promotional
expenditures; (ix) all items and services for which Tenant reimburses
Landlord or pays third parties; (x) any costs incurred as a result of
environmental matters of any kind which are assignable to Landlord under the
terms and conditions of this Lease; (xi) any costs assigned to Landlord
under the provisions of Sections 13(a) and (b) of this Lease; and (xii) any
charge or fee paid entirely by, or for which Landlord is entirely reimbursed
by, any other tenant occupying the other building within the Pencader
Courtyard Property;
(iii) "Tenant's Percentage" shall be 53.89% which is the ratio that
the rentable square foot area of the Premises (i.e., 28,653 rentable square
feet) bears to the
-5-
<PAGE>
total rentable square foot area of office space in the two buildings
(including the Building) located in Pencader Courtyard Property (i.e., 53,168
rentable square feet).
(iv) During each calendar year (or part thereof) commencing on the
Commencement Date, Landlord and Tenant agree that Tenant shall pay monthly,
in advance, as Additional Rent an amount equal to one-twelfth of Tenant's
Percentage of the estimated annual Operation and Maintenance Costs and Real
Estate Taxes for each calendar year. For each calendar year. Landlord shall
make a reasonable estimate of Tenant's Percentage of the Operation and
Maintenance Costs and Real Estate Taxes constituting Additional Rent and
notify Tenant as to such estimate on or about December 15th of the preceding
calendar year. For each calendar year after the first full calendar year
during the term of this Lease, the estimate of Tenant's Percentage of the
Operation and Maintenance Costs and Real Estate Taxes shall not be greater
than the then current actual Operation and Maintenance Costs for such
preceding calendar year, increased by five percent (5%) (the "Estimate
Ceiling"); provided, however, that the Estimate Ceiling shall not apply to
Landlord's estimate of Operation and Maintenance Costs and Real Estate Taxes
hereunder until the Lease year commencing January 1, 1999.
(v) On or about April 1 of each calendar year commencing with
calendar year 1998, Landlord shall submit to Tenant a reasonably detailed
statement, certified by Landlord, setting forth the actual Operation and
Maintenance Costs and Real Estate Taxes for the preceding calendar year and
Tenant's Percentage thereof. Within thirty (30) days after delivery of such
statement to Tenant, Landlord or Tenant, as applicable, shall pay to the
other any difference between Tenant's estimated payments under Section
7(a)(iv) above and Tenant's Percentage of the actual Operation and
Maintenance Costs and Real Estate Taxes. Within ninety (90) days after
receipt of each statement. Tenant shall have the right to audit and contest
Landlord's determination of Operation and Maintenance Costs and/or Real
Estate Taxes and to inspect Landlord's records with respect thereto during
normal hours upon at least ten (10) days advance written notice. If any such
audit shall reveal a discrepancy in Landlord's determination of the Operation
and Maintenance Costs and/or Real Estate Taxes, Landlord and Tenant shall
cooperate in good faith to resolve the discrepancy and mutually agree upon
the amount of the actual Operation and Maintenance Costs and/or Real Estate
Taxes. In the event it is determined that Tenant has been charged more than
its actual Tenants Percentage of Operation and Maintenance Costs and/or Real
Estate Taxes, Landlord shall refund the excess payment to Tenant and if the
amount of the excess payment is more than five percent (5%) of Tenant's
actual Tenant's Percentage of Operation and Maintenance Costs and/or Real
Estate Taxes. Landlord shall reimburse Tenant for the reasonable cost of
Tenant's audit up to a maximum amount of $2,000.00 during the first through
fifth years of the Lease and $2,500.00 during the sixth through tenth years
of the Lease.
(vi) All sums due under this Section 7 shall be appropriately
apportioned and prorated for any portion of a Lease year, so that Tenant
shall not be obligated to pay any Operation and Maintenance Costs or Real
Estate Taxes that accrue either prior to the
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Commencement Date or following the Expiration Date. In the event that this
Lease shall expire at any time other that at the end of a calendar year,
then within thirty (30) days after statements reflecting the actual Operation
and Maintenance Costs and Real Estate Taxes for the year in which such
expiration occurs are submitted by Landlord to Tenant (pro-rated on the basis
of the number of calendar year days included within such partial Lease year
divided by 365 days), either Landlord or Tenant shall pay to the other party
the adjustment sum due. The provisions of this paragraph shall survive the
expiration of this Lease.
(b) All sums, liabilities, obligations and other amounts which
Tenant is required to pay or discharge pursuant to Section 7 of this Lease in
addition to Base Rent, together with any interest, penalty or other sum which
may be added for late payment thereof shall constitute Additional Rent
hereunder. Base Rent and Additional Rent may be referred to collectively as
"Rent". Tenant shall not be entitled to any abatement or reduction (except
as other-wise expressly provided in Section 10 hereof) set-off or deduction
with respect to its obligations to pay Rent hereunder. In the event of any
failure on the part of Tenant to pay or discharge any additional Rent,
Landlord shall have all rights, powers and remedies provided for herein or by
law or equity or otherwise in the case of nonpayment of Base Rent.
8. Subletting or Assignment.
(a) Tenant shall be permitted to (i) assign or otherwise transfer
this Lease, or the Term and estate hereby granted or (ii) sublet the Premises
or any part thereof, or offer or advertise to do so or allow the same to be
used or occupied by anyone other than Tenant only upon receiving the prior
written-consent of Landlord, which consent shall not be unreasonably if
withheld, delayed or conditioned. Tenant specifically acknowledges that by
way of example and without limitation. Landlord may withhold its consent if;
(x) the reputation or financial responsibility of a proposed assignee or
subtenant is unsatisfactory to Landlord in its reasonable discretion; (y)
Landlord determines in its reasonable discretion that the business of the
proposed assignee or subtenant is not consistent with the nature of the
Premises; or (z) Tenant is renting or subletting the Premises or any part
thereof for a rent which exceeds Tenants Base Rent hereunder, unless Tenant
agrees to deliver such excess rent to Landlord as Additional Rend hereunder.
Any violation of the provisions hereinabove set forth shall constitute a
default hereunder and Landlord, after notice and an opportunity to cure
pursuant to Section 16, shall have option to cancel the same and proceed in
accordance with the provisions set forth in this Lease. Any consent by
Landlord to a particular assignment or sublease, shall not constitute consent
or approval of any subsequent assignment or sublease and Landlords written
approval shall be required in all instances. In the event that Landlord
consents to any assignment or sublease, Landlord shall not be deemed to have
released Tenant from its obligation hereunder unless so stated in a separate
agreement between Landlord and Tenant.
(i) Landlord shall have fifteen (15) days from the date on which Tenant
has submitted to Landlord the information set forth in this Section 8, to
notify
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Tenant in writing of Landlord's rejection or consent to the proposed
subtenant or assignee, Landlord shall specify the reasons for rejection in
any notice of rejection. In the even Landlord reasonably claims that any of
the above information is incomplete, Landlord shall immediately notify
Tenant, in writing, of such claim, and the fifteen (15) day period shall be
extended by the number of days of Tenant's delay in delivering reasonably
complete information to Landlord in accordance with this Section 8.
Landlord's consent shall be conclusively deemed given after the fifteen (150
day period, unless refused or delayed as described above.
(ii) Notwithstanding the provisions of this Section 8, Tenant shall
have the right to assign or transfer any interest in this Lease to a
subsidiary, parent or an affiliate of Tenant or a successor to Tenant,
including, without limitation, by way of merger, consolidation, corporate
reorganization or the purchaser of all or substantially all of Tenant's
assets (so long as the surviving entity after such purchase has a financial
net worth greater than or equal to that of Tenant), each without Landlord's
consent.
(iii) Notwithstanding anything to the contrary in this Section 8,
any transfer, sale, pledge or other disposition and/or power to vote the
outstanding shares of corporate stock of Tenant shall not be deemed an
assignment.
(b) Upon written notice delivered to Landlord by Tenant of Tenant's
desire to sublet the Premises Landlord agrees to use all reasonable best
efforts to assist Tenant in obtaining a sublettor suitable to Landlord in
accordance with this Section 8.
(c) Estoppels and Landlord Waivers. Landlord shall, at Tenant's
reasonable request: (i) provide Tenant with an estoppel certificate stating
whether Landlord knows of any defaults under this Lease at the time of any
proposed subletting or assignment; and (ii) provide to any lender to Tenant
an agreement in recordable form stating that Landlord waives any and all
rights to Tenant's fixtures, inventory, equipment, furniture or other
personal property located at the Property.
9. Inspection and Repair of Premises. Landlord may inspect and repair
the Premises at reasonable times and after reasonable prior notice to Tenant
(except prior notice shall not be required in emergencies). In making any
inspection or performing maintenance or repairs to, or construction in, or
around the Premises, Landlord shall use all commercially reasonable efforts
to protect Tenant's property and personnel from loss and injury and to avoid
interfering with the conduct of Tenant's business.
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10. Damage to Premises.
(a) If the Property or any portion of the Property to which Landlord
is required to make repairs, maintenance or replacements pursuant to the
terms hereof is damaged by fire or other casualty, then, except as provided
below, the damage shall be promptly repaired by and at the expense of
Landlord. Until such repairs and restoration are completed, the Base Rent,
Real Estate Taxes and Maintenance and Operating Expenses shall be equitably
abated to the extent that damage to the Premises and/or other portions of the
Property materially adversely interferes with the conduct of Tenant's
business. If such damage to the Property or any portion thereof, for which
Landlord is required to make repairs, maintenance or replacements, shall
materially adversely interfere with the conduct of Tenant's business and the
parties agree that such damage shall not be susceptible of complete repair
and restoration within one hundred twenty (120) days after the occurrence of
such casualty, then Landlord or Tenant may, by written notice to the other,
terminate this Lease as of the date of occurrence of such damage, provided
such notice is given within forty-five (45) days after the date of such
casualty. If such damage shall be the responsibility of Landlord and can be
repaired within one hundred twenty days (120) days and Landlord fails to
repair or restore such damage within such period, then Tenant may terminate
this Lease by thirty (30) days' prior written notice to Landlord, in addition
to all other remedies Tenant may have under this Lease at law or in equity.
The parties agree to cooperate with each other to process the release of the
Insurance proceeds for the aforementioned repair purposes. In the event of
the termination of this Lease pursuant to this Section 10, Base Rent, Real
Estate Taxes and Maintenance and Operating Expenses shall be prorated as of
the date of such termination.
(b) Landlord and Tenant to each hereby release and discharge the other
party and any officer, agent, employee or representative of such party from
any claim, suit, action, and liability for any and all loss of, or damage
to, any of its property located within or upon or constituting a part of the
Premises (including the Building) or the Property, to the extent that such
loss or damage is recovered or should have been recovered under an insurance
policy or policies required by the terms of this Lease. Each party agrees to
require its insurers to issue policies containing such provisions and a
waiver of the right subrogation. Landlord and Tenant shall provide notice to
the other party to the extent either of their respective policies do not
contain such a required waiver of claims and right of subrogation.
11. Eminent Domain. If the property or any portion thereof shall be taken
under the power of eminent domain or conveyed in lieu thereof, and the taking
of which materially adversely interferes with the conduct of Tenant's
business, then Tenant shall have the right to terminate this Lease as of the
date of vesting of title of such taking, an in which event Base Rent, Real
Estate Taxes and Maintenance and Operating Expenses shall be pro-rated as of
such date. If Tenant does not terminate this Lease, Landlord shall proceed
with due diligence to make all repairs necessary to restore the Property to
as near its former condition as circumstances
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will permit and the Lease shall remain in full force and effect, except that,
effective on the date of taking or conveyance, the Premises shall be reduced
by the portion of the Premises so taken or conveyed, and the Base Rent, Real
Estate Taxes and Maintenance and Operating Expenses shall be proportionately
reduced by the portion of the Premises taken or conveyed.
12. Tenant's Obligations.
(a) Tenant shall maintain, at its sole cost and expense, with an
insurer(s) reasonably acceptable to Landlord and rated "A" or better by
Best's Insurance Guide:
(i) Standard Commercial General Liability Insurance. The limits
of liability of such insurance shall be an amount which is not less than One
Million Dollars ($1,000,000) per occurrence an account of bodily injuries to
or death of one person and One million Dollars ($1,000,000) per occurrence
for property damage liability or Two Million Dollars ($2,000,000) combined
single limit for personal injury and property damage. Such insurance shall
cover Tenant against any claim directly out of liability for bodily injury and
death and personal injury and property damage occurring in an about the
Premises and otherwise resulting from any acts and operations of Tenant, its
agents and employees. The total amount of a deductible or otherwise
self-insured retention with respect to such coverage shall not be more than
$10,000 per occurrence. Such insurance shall include inter alia: (i)
"occurrence" rather than "claims made" policy forms unless such "occurrence"
policy forms are not available; (ii) any and all liability assumed by the
Tenant under the terms of this Lease, to the extent such as insurance is
available; (iii) the Landlord, as an additional insured, with respect to (A)
the Premises, and (B) all operations of the Tenant, and (C) any property and
areas and facilities of the Landlord used by the Tenant, its employees,
invitees, customers and guests; and (iv) severability of insured and cross
liability so the protection of such insurance shall be afforded to the
Landlord in the same manner as if a separate policy had been issued to each
of the insured parties; and
(ii) Excess Liability Insurance in Umbrella Form, the limits of
which shall be an amount which is not less than Three Million Dollars
($3,000,000) per occurrence or in the aggregate; and
(iii) "all risk" property insurance on Tenant's personal
property, including inventory, trade fixtures, floor coverings, furniture or
other property. This insurance shall include fire and extended coverage
perils.
(b) Tenant shall be responsible, as its sole cost, for the provision,
maintenance, and repair (including replacement if reasonably necessary) of
the following:
(i) Utilities, including without limitation, electricity, sewage
and water, with respect to the interior of the Building. Such Tenant
responsibilities expressly do
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not include maintenance and repair with respect to the structural electrical,
plumbing and sewage systems of the Premises:
(ii) Janitorial and cleaning services with respect to the
interior of the Building:
(iii) General maintenance and repair to the interior of the
Building, including, without limitation, light fixtures, interior walls,
ceilings, floors, doors, and windows. Such Tenant responsibilities expressly
do not include maintenance and repair with respect to the structural aspects
of the Building, any external loading docks and any elevators; and
(iv) Heating, ventilation and air conditioning ("HVAC") units and
compressors.
(c) Tenant shall comply with all laws pertaining to Tenant's specific
use of the Premises, provided Tenant shall not be required to make any
alterations or improvements of a capital nature to the Premises or the
Building unless due to its specific use thereof. Tenant shall, at its own
expense, observe and comply with all applicable Environmental Laws (hereafter
defined) and all regulations or standards as are promulgated thereunder with
respect to its particular use of the Premises and Tenant shall correct any
violation thereof arising from its specific use of the Premises from and
after the Commencement Date through the Expiration Date. This provision
shall survive the expiration or termination of this Lease.
(d) During the Term, Tenant may make improvements, alterations or
additions to the interior of the Premises (including the interior of the
Building) provided such work is done in a workmanlike manner with materials
and finishes at least comparable to those then existing in the Premises, and
provided that any improvements, alterations and additions effecting the
external structure of the Building, including without limitation, the roof,
exterior walls, bearing walls, support beams, foundation, columns and lateral
support, shall be made only with the prior written consent of Landlord, which
consent shall not be unreasonable withheld, conditioned or delayed. Any of
the foregoing Tenant improvements shall remain the sole property of Tenant
notwithstanding that such improvements may be affixed to the Building and
Tenant shall remove such improvements at the expiration of the Term hereof
and shall, at Tenant's cost, repair any damage such removal causes, and
restore the Premises without restoration of pre-existing equipment, to the
condition which existed prior to the installation of Tenant's alterations,
improvements, or additions. If Tenant makes any improvements, alterations
or additions, Tenant agrees to comply with all insurance requirements and all
laws, ordinances, rules and regulations of all governmental authorities,
provided that Landlord shall cooperate with Tenant in securing any necessary
permits, the cost for such permits to be borne by Tenant.
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(e) Tenant may install and maintain its own security system for the
Premises, which may include establishing limited access areas within the
Premises that are reasonably acceptable to Landlord. At its sole option,
Tenant may remove any security, telephone or computer system or any portion
thereof (the "Systems") installed on behalf of Tenant, provided Tenant
repairs any damage caused by such removal. In no event, however, shall
Tenant be required to remove any portion of the Systems (including without
limitations, cabling) installed in any wall, floor, partition, ceiling or
under any floor covering.
(f) At or before the expiration or earlier termination of this Lease.
Tenant shall surrender the Premises in substantially as good condition as
when entered, except for loss or damages resulting from casualty,
condemnation, acts of God, ordinary wear and tear and any improvements,
alterations or additions made to the Premises.
(i) Tenant at is expense, shall remove from the Premises all of
Tenant's property (except with respect to the "interior block walls" as
described in Section 12(f)(ii)below and such items as Landlord and Tenant
shall have expressly agreed, in writing, to remain, which property shall
become the property of the Landlord), and Tenant shall repair any damage to
the Premises resulting from any installation and/or removal of Tenant's
property. Any other items of Tenant's property (except with respect to the
"interior block walls" as described in Section 12(f)(ii) below) that shall
remain in the Premises after the expiration of the Lease, or following any
earlier termination date, may, at the option of Landlord, be deemed to have
been abandoned, and in such case, such items may be retained by Landlord as
its property or be disposed of by Landlord, without accountability, in such
manner as Landlord shall determine at Tenant's expense.
(ii) With respect to the "interior block walls" constructed as
part of the Initial Landlord Improvements (as defined in Section 13(a)),
Tenant shall not remove such interior block walls, unless, within thirty (30)
days after the expiration or earlier termination of this Lease, Landlord
requests, in writing, that Tenant remove the interior block walls from the
Premises, such removal (and repair of any damage caused thereby) to be
completed at the sole cost and expense of Tenant.
13. Landlord's Obligations
(a) Landlord shall have sixty (60) days from the date of execution of
this Lease (the "Substantial Completion Period"), at Landlord's sole cost and
expense, to substantially complete all construction work and improvements
specified on the design and construction plans (as approved by Tenant),
including, without limitation, improvements with respect to the interior
structure (including the interior block walls), systems, and facilities within
the Building as set forth on Exhibit A hereto (the "Initial Landlord
Improvements"). For the purposes of this Lease, the Premises shall be
"Substantially Complete" as of the date when (x) the Initial Landlord
Improvements have been substantially completed in conformity with the
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specifications outlined therein in all aspects necessary to permit Tenant to
occupy and utilize the Premises for the uses permitted by this Lease, subject
to minor punch list items and (y) Landlord is able to obtain from the
appropriate governmental office in the County of New Castle, State of
Delaware, a Certificate of Occupancy with respect to the Premises (and a copy
of such Certificate of Occupancy is furnished to Tenant), or if Landlord is
unable to obtain such a Certificate of Occupancy (but New Castle County has
not refused to issue the same) due to the County's administrative delay in
its final inspection and issuance process. Landlord's architect certifies to
Tenant that the Premises has been completed in accordance with the applicable
laws and that Landlord is entitled to the issuance of a Certificate of
Occupancy regarding the Premises and that such Certificate of Occupancy
should be issued in due course. In the event that Landlord does not
Substantially Complete the Premises within the Substantial Completion Period.
Tenant's obligation hereunder with respect to the payment to Landlord of
Rent when due shall be abated for one (1) calendar day for every one (1)
calendar day beyond the Substantial Completion Period for which Landlord
fails to Substantially Complete the Premises, up to a maximum of sixty (60)
days beyond the Substantial Completion Period (i.e. one hundred twenty (120)
calendar days from the date of execution of this Lease). In the event that
Landlord doe not Substantially Complete the Premises within one hundred
twenty (120) calendar days of the date of execution of this Lease, Tenant
shall have the right to terminate this Lease. For the avoidance of doubt,
Landlord's obligations under this Section 13(a) shall not be subject to Force
Majeure provisions set forth in Section 17(b) hereunder.
(b) During the term of this Lease, Landlord, without cost to Tenant,
shall maintain, repair and replace, as necessary, and keep in good order and
in safe and operational condition, all structural portions of the Property,
and all service systems for the same, including, without limitation:
(i) the structural plumbing, Building electrical and mechanical
lines and equipment associated therewith, all of which either are located in
or serve the Building, the Premises or Common Areas:
(ii) the exterior structure of the Building including the roof,
exterior walls, bearing walls, support beams, foundation, columns, and
lateral support; and
(c) Without limiting subsections (a) and (b) above, Landlord shall
provide the following services and facilities, such cost to be borne by Tenant
as Additional Rent in accordance with the terms of this Lease:
(i) All utilities necessary for the Common Areas and external
structural portion of the Building, including, without limitation, gas,
water, sewer, electricity, power and lighting;
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(ii) General cleaning and maintenance of the external portion of
the Building and the Common Areas, including, without limitation, parking
facilities, snow removal services, landscaping and garbage/trash removal
(except any environmentally sensitive or hazardous medical garbage/trash); and
(iii) the exterior capital improvements to the Common Areas,
including curbs, driveways, parking areas, sidewalks, lighting, and ditches.
(d) Tenants Premises and leasehold interests hereunder shall include,
for the benefit of Tenant, its employees and agents, a total of seventy (70)
parking spaces within the Property, such parking spaces to be located in
reasonably close proximity to the Building. Upon Tenant's reasonable
request, Landlord shall designate ten (10) of such parking spaces (to be
located in the ten spaces closest to the main entrance of the Building,
notwithstanding any parking spaces which under applicable law must be
reserved for handicapped drivers, emergency, fire or other similar safety
purposes), by way of appropriate and conspicuous signs or markings, for the
benefit of Tenant, for the use of Tenant's invitees, licenses and/or visitors
(the "Visitors' Parking Spaces"). Tenant understands and acknowledges that,
after the designation of the Visitors Parking Spaces. Tenant solely shall be
responsible for any necessary policing or enforcement with respect thereto.
14. Life Safety. Landlord, without cost to Tenant, shall install and
maintain within the Property any required sprinkler systems, fire alarms,
emergency lighting, and other related life safety equipment, and exits from
the Premises to comply with all requirements of federal, state, county and
city governments and all other governmental authorities having or claiming
jurisdiction with respect to the occupancy of the Premises.
15. Indemnification.
(a) Tenant shall defend and indemnify Landlord and hold Landlord
harmless from and against any and all losses, claims, liability, expenses and
damages which, either directly or indirectly, in whole or in part, arise out
of or result from: (i) the negligence or willful misconduct of Tenant, its
agents, contractors or employees; (ii) judgements, citations, fines or other
penalties rendered or assessed against Landlord as a result of Tenant's
failure to comply with all federal, state and local laws, safety and health
regulations relating to Tenant's specific use of the Premises, provided that
Landlord agrees to give Tenant prompt notice of any such violation asserted
by any government agency; and (iii) the breach of any provision of this lease
by Tenant, its agents, contractors or employees.
(b) Landlord shall defend and indemnify Tenant and hold Tenant
harmless from and against any and all losses, claims, liability, expenses and
damages which, either directly or indirectly, in whole or in part, arise out
of or result from (i) the negligence or willful misconduct of Landlord, its
agents, contractors or employees; (ii) judgements, citations,
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fines or other penalties rendered or assessed against Tenant as a result of
Landlord's failure to comply with all federal, state and local laws, safety
and health regulations relating to any portion of the Building or the Common
Areas which Landlord has assumed the duty to maintain pursuant to this Lease,
provided that Tenant agrees to give Landlord prompt notice of any such
violation asserted by any government agency; (iii) judgements, citations,
fines or other penalties rendered or assessed against Tenant, as well as any
liability imposed upon Tenant, as a result of: (A) the presence of any
Hazardous Materials (as defined herein)on, in or beneath the Premises at or
before the Commencement Date including, but not limited to polychlorinated
biphenyls ("PCBs"), asbestos and any material currently or formerly contained
in an underground storage tank ("UST"); (B) the subsequent placement of
Hazardous Materials on, in or beneath the Premises by Landlord; (C) the
presence of any USTs at the Premises; (D) the (past or future) violation of,
or noncompliance with any Environmental Law (as defined herein) by Landlord;
or (E) any other environmental condition with respect to the Premises not
caused by Tenant; and (iv) the breach of any provision of this Lease by
Landlord, its agents, contractors or employees.
(c) Nothing in this Section 15 is intended to require indemnification
for any property claim for which insurance is required to be maintained under
the terms of this Lease. The rights and obligations of Landlord and Tenant
under this Section 15 shall survive the expiration or earlier termination of
this Lease.
16. Tenant Default.
(a) Event of Default. Tenant shall not be deemed to be in default
hereunder unless an "Event of Default," as hereinafter specified, has
occurred. The following shall constitute Events of Default by Tenant
hereunder:
(i) Failure to pay the Base Rent or Additional Rent within ten
(10) days after receipt of Landlord's written notice of such deficiency (a
"Financial Default"); provided, however, that Landlord shall not avail itself
of any of the remedies set forth in Section 16(b) (below) on account of
Financial Default for at least twenty (20) days from the date of such
Financial Default (i.e. thirty (30) days from Tenant's receipt of written
notice from Landlord that Tenant has failed to timely pay the applicable Base
Rent or Additional Rent);
(ii) Failure to comply with or perform any of the other material
terms, covenants, conditions or agreements to be complied with or performed
by Tenant and continuance of such failure for thirty (30) days after written
notice from Landlord to Tenant, or, if the failure is of such a character as
cannot reasonably be cured within thirty (30) days, failure to initiate
within said thirty (30) day period such action as reasonably can be taken
toward curing the same and/or failure to prosecute such action as promptly as
is reasonably practicable after said action is initiated;
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(iii) Tenant is adjudicated a bankrupt in a proceeding against it
or a receiver for Tenant or for all or a substantial part of its property is
appointed, or a court order is entered approving a petition seeking
reorganization or an arrangement under the Bankruptcy Code, and any such
adjudication, appointment or order is not vacated, set aside or otherwise
terminated to stayed within sixty (60) days from the date of its entry.
(b) Landlord's Remedies. If an Event of Default shall have occurred
and shall have continued after any applicable cure period provided herein,
then or at any time thereafter, Landlord may at its option; (1) terminate this
Lease by notice to Tenant, recover possession of the Premises, and recover
from Tenant the present value of the difference, if any, between the Base
Rent and Additional Rent owed by Tenant for the remaining portion of the Term
and the fair rental value of the Premises for the period; provided, however,
that if such Event of Default was a result of a Financial Default, Landlord
may terminate this Lease by notice to Tenant, recover possession of the
Premises, and recover from Tenant the present value of the Base Rent and
Additional Rent owed by Tenant for the remaining portion of the Term (such
present value calculation to exclude any Late Fees); or (2) without
terminating this Lease, recover possession of the Premises and relet the
Premises or any part of the Premises, as the agent of the Tenant, and Tenant
shall pay the Landlord the present value of the difference, if any, between
the Base Rent and Additional Rent owed by Tenant for the remaining portion of
the Lease term and the amount received or to be received under such reletting
for such period. Landlord shall use best efforts to mitigate its damages as
a result of an Event of Default by Tenant.
17. Landlord Default
(a) If Landlord shall:
(i) file or have filed against it a petition or case under any
section or chapter of the United States Bankruptcy Code, as amended, or under
any similar law or statute of the United States or any state and such
petition or case is not discharged within sixty (60) days; or
(ii) fail to fulfill any covenant or provision of this Lease on
its part to be performed and fail to remedy such failure within thirty (30)
days after Tenant shall have given Landlord written notice of such failure,
then the same shall be an event of default and Tenant shall have all rights,
powers and remedies available at law or equity; provided, however that if
Landlord continues to fail to fulfill a covenant or provision of this Lease
on its part to be performed without remedy for a period of ninety (90) days
and such failure materially adversely affects Tenant's business, Tenant may
terminate this Lease.
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(b) Force Majeure. The obligations of Tenant hereunder shall not be
affected, impaired or excused and Landlord shall have no liability whatsoever
to Tenant, with respect to any act, event or circumstances arising out of:
(i) Landlord's failure to fulfill or delay in fulfilling any of
its obligations under this Lease by reason of strike or other labor trouble
(with respect to Landlord only), governmental preemption of properties or
other controls in connection with a national or other public emergency or
shortages of fuel, supplies, labor or materials, beyond Landlord's reasonable
control, acts of God, governmental delays or delays caused by Tenant
(collectively, "Force Majuere"); provided, however, that Section 17(b) shall
not apply to or relieve Landlord of Landlord's obligation to Substantially
Complete the Initial Landlord Improvements within the Substantial Completion
Period as set forth in Section 13(a) of this Lease; or
(ii) Any failure or defect in the supply, quantity or character
of service furnished to the Premises, or by reason of any requirement, act
or omission of any public utility or others serving the Premises, beyond the
Landlord's reasonable control.
18. Environmental Compliance.
(a) Landlord represents that, to the best of Landlord's knowledge
and belief, the Property and its existing uses comply with, and Landlord has
not received any notice or communication of any violation or non-compliance
with, is not in violation of, and has not violated, in connection with he
ownership, use, maintenance or operation of the Property and the conduct of
the business related thereto, any applicable federal, state, county, regional
or local statutes, laws, regulations, rules, ordinances, codes, standards,
orders, licenses, permits and authorizations of any governmental authorities
relating to environmental, health or safety matters (including, without
limitation, Hazardous Materials, as defined in Section 18(b) below)
(collectively, "Environmental Laws"). Landlord shall, at its own expense,
promptly observe and comply with all present and future Environmental Laws,
as amended from time to time, and all regulations or standards as are or may
be promulgated thereunder.
(b) Without limited the generality of Section 18(a), Landlord
represents that, to the best of Landlord's knowledge and belief, Landlord,
its agents, contractors and employees (i) have operated the Property and have
at all times received, handled, used, stored, treated, transported and
disposed of any chemical, material or substance, exposure to which (by humans
or the environment) is prohibited, limited or regulated by an Environmental
Law or federal, state, county, regional or local authority or which even if
not so prohibited, limited or regulated, poses a hazard to the health and
safety of the occupants of the Property or the occupants of the area near the
Property (collectively, "Hazardous Materials") in strict compliance with all
Environmental Laws, and (ii) have removed (or will remove prior to the
Commencement Date) from the Property all Hazardous Materials.
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<PAGE>
(c) Landlord represents that, to the best of Landlord's knowledge and
belief, there is no fact pertaining to the physical condition of the Property
or the area surrounding the Property which (i) materially and adversely
affects or materially and adversely will affect the Property, or the use,
enjoyment or value thereof, or Landlord's ability to perform the obligations
contained in this Lease, and (ii) which Landlord has not disclosed to Tenant
in writing prior to the date of this Lease.
(d) Landlord represents that, to the best of Landlord's knowledge and
belief, it has received no notices of any violation or claimed violation of
any of the matters referred to in Sections 14, 19(a) and 19(b) or of any
pending or contemplated investigation, lawsuit or other action relating
thereto, nor are there any unresolved or outstanding investigations,
lawsuits, enforcement actions, administrative orders, or other actions.
(e) Landlord shall provide Tenant with copies of all communications,
permits or agreements with any governmental authority or agency (federal,
state or local) or any private entity relating in any way to the presence,
release, threat of release, placement on or in the Premises or any portion
thereof, or the generation, transportation, storage, treatment, or disposal
at the Premises of any Hazardous Materials.
(f) If Tenant generates, transports, stores, or disposes of any
Hazardous Materials, or in any portion of the Property or Building:
(i) Tenant shall, at its own expense, observe and comply in all
material respects with applicable Environmental Laws, and all regulations or
standards as are or may be promulgated thereunder with respect to Tenant's
activities on the Property;
(ii) Tenant shall provide Landlord with copies of all
communications, permits or agreements with any governmental authority or
agency (federal, state or local) or any private entity relating in any way to
the presence, release, threat of release, placement on or in the Premises or
any portion thereof, or the generation, transportation, storage, treatment,
or disposal at the Premises of any Hazardous Materials; and
(iii) Landlord shall have the right, when accompanied by Tenant's
representative (except in cases of emergency), to enter the Premises and/or
conduct appropriate tests, at Landlord's own expense, for the purposes of
ascertaining that Tenant complies with all applicable laws, rules or permits
relating in any way to the presence of Hazardous Materials on the Land, the
Premises, or any portion thereof. Landlord shall provide to Tenant a copy of
the results of any such tests or investigations.
(g) If the presence, release, threat of release, placement on or in
the land, the Premises or any portion thereof, or the generation,
transportation, storage, treatment or
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<PAGE>
disposal at the land, the Building, or any portion thereof of any Hazardous
Materials solely due to Tenant's actions:
(i) gives rise to liability under RCRA, CERCLA, other
Environmental Laws or any common law theory based on nuisance or strict
liability.
(ii) impacts or causes an effect to public health which is
prohibited by or in violation of Environmental Laws.
Tenant shall promptly take, at Tenant's sole cost and expense, any and all
remedial and removal action required by applicable Environmental Laws.
Tenant's obligations under this Section 18(g)(ii) shall survive the
termination of the Lease for any reason.
(h) The representations contained in this Section 19 shall survive
the expiration or earlier termination of this Lease.
19. Mechanics Liens. Prior to Tenant performing any construction or
other work in or about the Premises for which a lien could be filed against
the Premises or the Building (a 'Mechanics' Lien'), Tenant shall have its
contractor execute a waiver of such Mechanics' Lien, satisfactory to
Landlord, and provide Landlord with the original copy thereof.
Notwithstanding the foregoing, if any Mechanics' Lien or other lien shall be
filed against the Premises or the Building purporting to be for labor or
materials furnished or to be furnished at the request of Tenant, then at its
expense. Tenant shall cause such Mechanics' Lien or other lien to be removed
of record by payment, bond or otherwise, within thirty (30) days after the
filing thereof. If Tenant shall fail to cause such Mechanics' Lien or other
lien to be removed of record within such thirty (30) day period, Landlord may
cause such Mechanics' Lien or other lien to be removed of record by payment,
bond or otherwise, without investigation as to the validity thereof or as to
any offsets or defenses thereto, in which event Tenant shall reimburse
Landlord in the amount paid by Landlord, including expenses, within ten (10)
days after Landlord's billing therefor. Tenant shall indemnify and hold
Landlord harmless from and against any and all claims, costs, damages,
liabilities and expenses (including attorney fees) which may be brought or
imposed against or incurred by Landlord by reason of any such Mechanics' Lien
or other lien or removal of record.
20. Subordination
(a) Subject to the provisions of paragraph (b) below, this Lease shall
be subject and subordinate at all times to the lien of any mortgages now
placed on the Premises or the Building without necessity of any further
instrument or act on the part of the Tenant to effectuate such subordination.
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<PAGE>
(b) Landlord covenants and agrees to use its best efforts to obtain
and furnish to Tenant, within six (6) months of Tenant's execution of this
Lease, an agreement ("Non-Disturbance Agreement') executed and acknowledged
from the holder(s) of any mortgage now encumbering the Building or the
Premises ("Existing Holder"), whereby each Existing Holder agrees to not
disturb Tenant in its rights, use and possession of the Premises and Building
under this Lease or to terminate this Lease, except to the extent permitted
to Landlord by the terms of this Lease, notwithstanding the foreclosure or
the enforcement of the mortgage or termination or other enforcement of an
underlying lease or installment purchase agreement. Tenant covenants and
agrees to execute and deliver upon demand the Non-Disturbance Agreement(s).
(c) Tenant further agrees that this Lease shall be subject and
subordinate to the lien of any mortgages hereafter placed upon the Premises
or the Building, provided that the Landlord shall have used its best efforts
to cause the holder thereof to have entered into a Non-Disturbance Agreement
with Tenant as described in paragraph (b) above.
21. Estoppel Certificate. At any time and from time to time and within
ten (10) days after written request by Landlord or Tenant, Landlord or
Tenant, as the case may be, shall execute, acknowledge and deliver to the
other a statement in writing duly executed by Landlord or Tenant, as the case
may be, certifying (i) that this Lease is in full force and effect, without
modification or amendment (or, if there have been any modifications or
amendments, that this Lease is in full force and effect as modified and
amended and setting forth the date of the modifications and amendments), (ii)
that the dates to which annual Base Rent and Additional Rent have been paid,
(iii) that to the knowledge of the certifying party, no default exists under
this Lease or specifying each such default and (iv) as to any other
reasonable and customary request for certification of factual information
concerning this Lease; it being the intention and agreement of Landlord and
Tenant that any such statement by Tenant may be relied upon by a prospective
purchaser or a prospective mortgagee of the Building, or by a prospective
assignee or subtenant of Tenant, or by others, in any matter affecting the
Premises.
22. Holding Over. If Tenant shall hold over after the expiration of the
Term, its tenancy shall be on a month-to-month basis and Tenant shall pay to
Landlord an amount equal to 125% of the then current Base Rent required to be
paid by Tenant under this Lease, applied to the first thirty (30) days Tenant
shall remain in possession after the expiration or sooner termination of this
Lease, and 150% of the then current Base Rent required to be paid by Tenant
under this Lease, applied to the holdover period from and after the 31st day
Tenant shall remain in possession after the expiration or sooner termination
of this Lease. Payments made by Tenant to Landlord under this Section 22
shall not be exclusive of any other rights or remedies afforded to Landlord
in law or equity.
23. Attorney's Fees. In the event of litigation of any dispute or
controversy arising from, in, under or concerning this Lease or any amendment
hereof, including, without
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<PAGE>
limiting the generality of the foregoing, any claimed breach or default
hereof or thereof, the prevailing party in such action shall be entitled to
recover from the other party in such action, such sum as the court shall fix
as reasonable attorney's fees incurred by such prevailing party.
24. Signs. Tenant shall not install or affix any signs to the exterior
of the Building or any exterior part of the Property without the prior
written consent of Landlord, which consent shall not unreasonably be
withheld. Tenant acknowledges that, by way of example and without
limitation, Landlord may withhold its consent with respect to a proposed
installation of a sign by Tenant if: (i) such sign or subsequent removal
thereof would cause in Landlord's reasonable determination material damage to
the exterior of the Building or the exterior of the Property; (ii) such sign
violates local zoning or land use laws; or (iii) the color, size, location or
aesthetic character of such sign is significantly inconsistent with that of
the Property.
25. Other Utilities. At Tenant's sole cost and expense, Tenant shall
have the right to introduce into the Premises such other utilities as Tenant
might require and Tenant shall pay the cost of such other utilities directly
to the applicable utility companies. Tenant shall, at its sole cost and
expense, remove all such utilities and restore the Premises to substantially
the same condition as when this Lease was executed, ordinary wear and tear,
condemnation, casualty and Act of God excluded, and shall repair any damage
caused by such removal.
26. Broker. Neither Landlord nor Tenant had any conversations with any
broker concerning the leasing of the Premises. Each party agrees to and
hereby does defend, indemnify and hold the other harmless against and from
any brokerage commissions, or finders' fees or claims therefor by a party
claiming to have dealt with the indemnified party and all costs, expenses and
liabilities in connection therewith, including, without limitation,
reasonable attorneys' fees and expenses for any breach of the foregoing. The
foregoing indemnification shall survive the termination of this Lease for any
reason.
27. Notices. Any notice or other communication required to be given
either party (i) shall be in writing and either hand delivered, delivered by
courier, transmitted by telecopier or mailed by registered or certified mail,
return receipt requested, postage prepaid, (ii) shall be effective on the
date of actual receipt, and (iii) shall be sent to the parties at the
following addresses or at such other addresses as either party may from time
to time notify the other
If to Tenant, to:
Strategic Diagnostics Inc.
128 Sandy Drive
Newark, DE 19713
Fax: (302) 456-6793
Attention: Richard Birkmeyer
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<PAGE>
With a required copy to:
Pepper, Hamilton & Scheetz LLP
1235 Westlakes Drive
Suite 400
Berwyn, PA 19312
Fax: (610) 640-7835
Attention: William A. Scari, Jr., Esquire
If to the Landlord, to:
Pencader Courtyard, L.P.
1300 Market Street, Suite 300
Wilmington, DE 19801
Fax: (302) 655-3854
Attention: Randy M. Stoltz
With a required copy to:
Pencader Courtyard, L.P.
1300 Market Street, Suite 300
Wilmington, DE 19801
Fax: (302) 655-3854
Attention: Keith D. Stoltz
28. Miscellaneous
(a) Landlord Transfer. Within ten (10) days following any transfer
by Landlord of its ownership interest in the Property, Landlord shall provide
Tenant with written notice of such transfer of the Property and the name and
address of the successor Landlord to whom Tenant should send future rent
payments and notices (the "Transfer Notice"). In the event that a
predecessor Landlord fails to provide the Transfer Notice; (a) Tenant shall
not be liable to any successor Landlord for any rent payments paid to a
predecessor Landlord; and (b) any successor Landlord shall be bound by any
notice sent to a predecessor Landlord.
(b) Captions. The captions appearing within the body of this Lease
have been inserted as a matter of convenience and for reference only and in
no way define, limit or enlarge the scope of meaning of this Lease or any
provision of this Lease.
(c) Counterparts. This Lease may be executed in several
counterparts, all of which constitute one and the same instrument.
-22-
<PAGE>
(d) Governing Law. This Lease shall be governed by and construed in
accordance with the laws of the State of Delaware.
(e) Construction. The language of this Lease shall be construed
according to its normal and usual meaning and not strictly for or against
either Landlord or Tenant. The rule of construction which allows a court to
construe a document more strictly against its author shall not govern the
interpretation of this Lease.
(f) Remedies. No right or remedy herein conferred upon or reserved
to either party is intended to be exclusive of any other right or remedy, and
every right and remedy shall be cumulative and in addition to any other right
or remedy given by this Lease or now or hereafter existing at law or in
equity. The failure of either party to insist upon the strict performance of
any obligation shall not be deemed a waiver thereof.
(g) Severability. If any provision of this Lease shall be invalid or
unenforceable to any extent, the remainder of this Lease shall not be
affected thereby, and every provision of this Lease shall be valid and
enforceable to the fullest extent permitted by law.
(h) Entire Agreement. This Lease constitutes the entire agreement
between the parties with respect to the lease of the Property, superseding
any other oral or written agreements between the parties with respect to the
lease of the Property that may exist at the time of the execution of this
Lease, including, without limitation, that certain Letter Agreement dated
September 17, 1997 between Landlord and Tenant, and may be amended only by
written agreement of the parties. No representations, inducements, promises
or agreements, oral or otherwise, between Landlord and Tenant regarding the
Property not embodied herein.
(i) Successors and Assigns. This Lease shall be binding upon and
shall inure to the benefit of the parties hereto, their heirs, executors,
administrators, successors and permitted assigns.
(j) Time is of the Essence. Landlord and Tenant agree that in
fulfilling all terms and conditions of this Lease, time is of the essence.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant, intending to be legally bound
hereby, have signed this Lease as of the day and year first above written.
LANDLORD,
PENCADER COURTYARD, L.P.
/s/ Randy M. Stoltz
----------------------------------
By: Randy M. Stoltz
Its: (illegible)
TENANT
STRATEGIC DIAGNOSTICS INC.
/s/ Richard C. Birkmeyer
----------------------------------
By: Richard C. Birkmeyer
Its: President
<PAGE>
STRATEGIC DIAGNOSTIC
Scope of Work
Walls
Standard Interior Partitions: 3 5/8" Metal Studs 25 ga. 10' High with 1/2"
Drywall and 3 1/2" insulation in office and conference rooms.
Bathroom Partitions: 6" Track with staggered 3 5/8" Metal Studs 25 ga. 10'
High with 1/2" Drywall and 3 1/2" insulation.
Exterior Partitions: Exterior Metal Studs are existing and will be insulated
with 3" insulation and sheathed with 1/2" drywall in the office area.
Masonry Partitions in Manufacturing, Quality Control, Wet Lab and Lab as
shown on plan: 6" CMU 0" High
Masonry Partitions in Shipping and Inventory: 6" CMU 12' High
Ceilings
Office Manufacturing/Labs/Bathrooms: 2'x 2' Grid System with 2' x 2'
Armstrong Cortrga Tegular tile or equal with R11 insulation laid on top.
Shipping & Inventory: 2' x 4' Grid System with 2' x 4' Fissured
Non-Directional Flay Lay-in Tile.
Ceiling Height: Office Areas: 9'10"
Open Offices 9'10"
Shipping & Inventory 11'5"
Break Room 9'10"
Hallways & Other Areas 9'10"
Manufacturing/Labs 9'10"
Doors: (Office & Bathrooms) 3'0" x 7'0" Solid Core Birch Veneer with half
glass
(All Others Except Existing Exterior) 3'0" x 7'0" Hollow Metal
(Overhead Door) 10'0" x 9'0" Sectional Overhead Door
Hardware: (Bathroom) Push/Pull Sets with kick plates and closers, hinges and
door stop.
(All other Doors) Passage Sets, hinges and door stop.
Plumbing: Toilets and Urinals and Sinks as shown on plan. Stainless Steel
sink in Break Room.
Rough plumbing (deionized) in Wet Lab, Quality Control, and Lab.
(2) 80 Gallon Hot Water Heaters
Cabinets: 6' Base Cabinet in Break Room and Counter Top
Paint: (Drywall) Acrylic Eggshell Enamel (2) coats
(Interior Block) Semi-gloss Enamel
(Metal Doors and Frames) Oil Base Semi-gloss
(Wood Doors) Clear Urethane Stain
Flooring: (Carpet) Queen Moriah #738 Slate or equal with carpet cove base
(VCT) Armstrong Excellon with Vinyl Cove Base
<PAGE>
Page two
Strategic Diagnostic
Scope of Work
Mechanical: (Office/Manufacturing/Labs/Bathrooms/Roof Top Units to provide
Heating and Cooling.
(Shipping and Inventory Gas Fired Unit Heaters to maintain 70
degrees at 20 degrees outside.
Electrical: Outlets as shown on plans including (10) 208 Volt Outlets 3 of
which are 3 phase Switches for lights
2' x 4' Lay-in fixtures with prismatic lenses
Electrical wiring and hook up for 3 cold rooms:
Sprinklers: Per Code
Toilet Partitions: As shown on plan in standard color of grey or tan
Loading Area: Black top Driveway, Dock Height 4', drainage to not hold water
Blinds: Existing in building
<PAGE>
[Floor Plan diagram]
<PAGE>
[Floor Plan diagram]
<PAGE>
[Floor Plan diagram]
<PAGE>
[Floor Plan diagram]
<PAGE>
[Floor Plan diagram]
<PAGE>
[Floor Plan diagram]
<PAGE>
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements on Forms S-8 No. 333-20421 and No. 333-21211 of
Strategic Diagnostics Inc. (formerly EnSys Environmental Products, Inc.)
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
March 6, 1998
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