<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From ________to____________
Commission File Number 0-68440
STRATEGIC DIAGNOSTICS INC.
(Exact name of Registrant as specified in its charter)
----------------------------
Delaware 56-1581761
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
111 Pencader Drive
Newark, Delaware 19702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 456-6789
--------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report: None
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
As of June 30, 1999 there were 13,869,264 outstanding shares of the
Registrant's common stock, par value $.01 per share.
<PAGE>
STRATEGIC DIAGNOSTICS INC.
INDEX
Item Page
PART I
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 2
Consolidated Statements of Operations - Three months and
six months ended June 30, 1999 and 1998 3
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive Income (Loss) for the
six months ended June 30, 1999 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 1999 and 1998 5
Notes to Consolidated Interim Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II 17
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 19
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
- -------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,515 $ 1,864
Short-term investments -- 3,990
Restricted Cash 1,400 --
Receivables 5,049 3,653
Inventories 4,155 1,855
Other current assets 358 469
- -------------------------------------------------------------------------------------------------
Total current assets 12,477 11,831
- -------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net 3,357 835
OTHER ASSETS 463 494
INTANGIBLE ASSETS, net 5,662 1,933
- -------------------------------------------------------------------------------------------------
Total assets $ 21,959 $ 15,093
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,096 $ 802
Accrued expenses 438 788
Deferred revenue 7 --
Current portion of LTD 1,900 83
- -------------------------------------------------------------------------------------------------
Total current liabilities 3,441 1,673
- -------------------------------------------------------------------------------------------------
Long Term Debt 7,217 265
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 17,500,000 shares authorized,
no shares issued or outstanding -- --
Series A preferred stock, $.01 par value, 2,164,362
authorized, issued and outstanding 22 22
Series B preferred stock, $.01 par value, 556,286
authorized, no shares issued and outstanding -- --
Common stock, $.01 par value, 35,000,000 authorized,
13,869,264 and 13,262,157 issued and outstanding
at June 30, 1999 and December 31, 1998, respectively 139 133
Additional paid-in capital 25,123 23,946
Accumulated deficit (13,958) (10,921)
Cumulative translation adjustments (25) (25)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 11,301 13,155
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 21,959 $ 15,093
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues:
- -----------------------------------------------------------------------------------------------------------------
Product related $5,218 $4,886 $8,789 $7,407
Contract and other 257 290 605 665
- -----------------------------------------------------------------------------------------------------------------
Total net revenues 5,475 5,176 9,394 8,072
- -----------------------------------------------------------------------------------------------------------------
Operating expenses :
Manufacturing 2,445 1,789 4,013 2,920
Research and development 571 465 1,136 842
Selling, general and administrative 2,031 2,243 3,661 3,697
In-process research & development -- -- 3,500 --
- -----------------------------------------------------------------------------------------------------------------
Total operating expenses 5,047 4,497 12,310 7,459
- -----------------------------------------------------------------------------------------------------------------
Operating income (loss) 428 679 (2,916) 613
- -----------------------------------------------------------------------------------------------------------------
Interest and other income (expense), net (123) 91 (89) 177
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) 305 770 (3,005) 790
Preferred stock dividends 24 - 32 -
- -----------------------------------------------------------------------------------------------------------------
Net income (loss)
applicable to common stockholders 281 770 (3,037) 790
- -----------------------------------------------------------------------------------------------------------------
Basic income (loss) per share
applicable to common stockholders $ 0.02 $ 0.06 $(0.23) $ 0.06
- -----------------------------------------------------------------------------------------------------------------
Shares used in computing basic net income (loss)
per share applicable to common stockholders 13,305,000 13,202,000 13,274,000 13,168,000
- -----------------------------------------------------------------------------------------------------------------
Diluted income (loss) per share
applicable to common stockholders $0.02 $0.05 $(0.23) $0.05
- -----------------------------------------------------------------------------------------------------------------
Shares used in computing diluted net income (loss)
per share applicable to common stockholders 16,956,000 16,361,000 13,274,000 16,306,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Series A Series B Additional Cumulative
Preferred Preferred Common Paid-In Accumulated Translation
Stock Stock Stock Capital Deficit Adjustments Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $22 -- 133 23,946 (10,921) (25) 13,155
- ------------------------------------------------------------------------------------------------------------------------------
Exercises of stock options,
warrants and other -- -- -- 116 -- -- 116
Issuance of Series B Preferred Stock -- 6 -- 1,061 -- -- 1,067
Converson of Series B Preferred Stock
to Common Stock -- (6) 6 -- -- -- --
Net loss and comprehensive loss -- -- -- -- (3,037) -- (3,037)
- ------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 1999 $22 0 139 25,123 (13,958) (25) 11,301
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
- -----------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(3,037) $790
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization 459 299
In-process research and development 3,500 --
(Increase) decrease in:
Receivables (618) (1,168)
Inventories (352) (270)
Other current assets 193 (40)
Note receivable and other assets 360 5
Increase (decrease) in:
Accounts payable (332) 575
Accrued expenses (485) (13)
Deferred revenue (4) (98)
- -----------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (316) 80
Cash Flows from Investing Activities:
Purchase of property and equipment (179) (333)
Short-term investment activity 3,990 (291)
Cash used in acquisition of HTI, net of cash acquired (8,072) --
Cash used in acquisition of ATAB (3,150)
Restricted Cash (1,400) --
- -----------------------------------------------------------------------------------
Net cash used in investing activities (8,811) (624)
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 116 28
Proceeds from issuance of long term debt 9,000 --
Repayments on financing obligations (338) (16)
- -----------------------------------------------------------------------------------
Net cash provided by financing activities 8,778 12
Net Decrease in Cash and Cash Equivalents (349) (532)
Cash and Cash Equivalents, Beginning of Period 1,864 2,580
- -----------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $1,515 $2,048
- -----------------------------------------------------------------------------------
Supplemental Cash Flow Disclosure:
Cash paid for interest 216 14
- -----------------------------------------------------------------------------------
Non-cash investing and financing activity:
Series B Preferred Stock issued for the acquisition of
HTI Bio-Products, Inc. 1,067 --
- -----------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
1. BACKGROUND:
Business
Strategic Diagnostics Inc. (the "Company") develops, manufactures and
markets immunoassay-based test kits for rapid and inexpensive detection of a
wide variety of substances in the water quality, industrial and agricultural
market segments.
Business Risks
The Company is subject to risks of entities in similar stages of
development. These risks include the Company's ability to successfully
develop, produce and market its products and its dependence on its key
collaborative partners and management personnel.
Basis of Presentation and Interim Financial Statements
The accompanying balance sheets at December 31, 1998 and June 30, 1999, and
the statements of operations for the three months and six months ended June
30, 1998 and 1999, and cash flows for the six months ended June 30, 1998 and
1999 include the consolidated financial statements of the Company. All
intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated interim financial statements of the
Company have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission regarding financial
reporting. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998. In the opinion of
management, the accompanying financial statements include all adjustments
(all of which are of a normal recurring nature) necessary for a fair
presentation. The results of operations for the three months and six months
ended June 30, 1999 are not necessarily indicative of the results expected
for the full year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
6
<PAGE>
2. SHORT-TERM INVESTMENTS:
The Company considers its investments as being available for sale in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
3. BASIC AND DILUTED INCOME PER SHARE:
The Company has adopted Statement of Financial Standards ("SFAS") No. 128,
"Earnings per Share," which requires dual presentation of basic and diluted
earnings per share ("EPS") for complex capital structures on the face of the
statement of operations. Basic EPS is computed by dividing net income or loss
by the weighted-average number of common shares outstanding during the
period. Diluted EPS is similar to basic EPS except that the effect of
converting or exercising all potentially dilutive securities is also included
in the denominator. The Company's calculation of diluted EPS includes the
effect of converting or exercising stock options and warrants into common
shares.
<TABLE>
<CAPTION>
Share Calculations Three months ended Six months ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Average common shares outstanding 13,304,585 13,201,608 13,274,166 13,168,053
Shares used in computing basic net income
(loss) per share 13,304,585 13,201,608 13,274,166 13,168,053
========== =========== ========== ==========
Series A preferred stock 2,164,362 2,164,362 -- 2,164,362
Series B preferred stock 556,286 -- -- --
Stock options 692,453 743,063 -- 721,541
Warrants 238,054 252,082 -- 252,082
---------- ---------- ---------- ----------
Shares used in computing diluted net income
(loss) per share 16,955,740 16,361,115 13,274,166 16,306,038
========== ========== ========== ==========
</TABLE>
The impact of 3.3 million shares of preferred stock, options and warrants
for the six months ended June 30, 1999, was excluded from the diluted net
income (loss) per share calculations because it was antidilutive.
4. COMPREHENSIVE INCOME:
On January 1, 1998, the Company adopted Statement of Financial Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for reporting and display of comprehensive income or loss and its
7
<PAGE>
components in financial statements. For the periods presented, comprehensive
income (loss) equaled the net income (loss) as presented in the accompanying
Statements of Operations.
5. SALE OF TECHNOLOGY:
In July 1998, the Company entered into an agreement to sell its analytical
test to detect concentrations of lipoprotein (a) to a biotechnology company.
The purchaser has an extensive portfolio of diagnostic assays and an
established sales and distribution network targeted to physicians and
clinical laboratories. This agreement follows an exclusive distribution and
supply agreement with the same company that became effective June 30, 1998.
The Company records revenues under the exclusive distribution and supply
agreement as the products are shipped. Thereafter, the Company will receive a
royalty for the life of the product.
At December 31, 1999, under the July 1998 agreement, the Company and the
purchaser will determine the cash purchase price to be paid to the Company
for its right, title and interest in the product. Such purchase price is
based on a multiple of sales volumes achieved during the second half of 1999.
In July 1998 the Company purchased the intellectual and licensing rights to
the product for $380 thousand. The Company expects to record the sale of the
asset during the fourth quarter of 1999, after the sales price has been
determined, and expects to report a gain at that time. All royalties under
the agreements are recorded in the quarter the products are sold.
6. ACQUISITIONS:
On February 26, 1999, the Company completed the acquisition of HTI
Bio-Products Inc., a privately held manufacturer of custom and proprietary
antibody products and services located near San Diego, CA (HTI). Under the
terms of the agreement to acquire HTI, the Company paid approximately $8.3
million in cash and issued 556,286 shares of Series B preferred stock. The
preferred shares convert into common shares on a 1-for-1 basis at any time at
the option of the holder, and at the option of the Company when the closing
price of the Company's stock exceeds $3.50 for a period of 10 consecutive
business days, and carry a cumulative, annual cash dividend of $0.175 per
share and a liquidation value of $3.50 per share or $1.9 million. On June 16,
1999, such shares were converted into the Company's common stock. The Company
is also obligated to pay a percentage of net sales of certain products over
the next three years, not to exceed $3 million. Approximately $6 million of
acquisition financing was provided by the Company's commercial bank, with the
balance coming from existing cash on hand.
The acquisition financing consists of a five year term loan (the Term Loan)
with monthly amortization of equal principal payments plus interest. Interest
on $2 million of original principal amount is at a fixed rate of interest of
7.96% per annum, and the remaining principal bears interest at a variable
rate of 3% over the published London Interbook Offered Rate ("LIBOR"). Also
under the terms of the financing, the Company is required to meet certain
financial covenants including debt to net worth and minimum cash flows. The
8
<PAGE>
financing is secured by all of the Company's assets, including $1.4 million
of cash equivalents, the use of which is restricted under the loan agreement.
The following unaudited pro forma statement of operations gives effect to
the HTI transaction, which was accounted for using the purchase method of
accounting, as if the HTI purchase had occurred on January 1, 1998, and
includes certain adjustments, including amortization of goodwill, increased
interest expense and preferred stock dividends related to the HTI purchase.
The 1999 pro forma results exclude $3.5 million of in-process research and
development expenses incurred in connection with the HTI transaction.
Unaudited Pro Froma Combined Results of Operations
(unaudited in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $5,475 $6,535 $10,176 $10,735
- --------------------------------------------------------------------------------------------
Income before non-recurring charges directly
attributable to the HTI acquisition $ 305 $ 857 $ 165 $ 455
- --------------------------------------------------------------------------------------------
Basic net income per share before non-recurring
charges directly attributable to HTI acquisition $ 0.02 $ 0.06 $ 0.01 $ 0.03
- --------------------------------------------------------------------------------------------
Diluted net income per share before non-recurring
charges directly attributable to HTI acquisition $ 0.02 $ 0.05 $ 0.01 $ 0.03
- --------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
The purchase price of HTI Bio-Products was allocated as follows:
Cash $249
Receivables 778
Prepaid Expenses 82
Inventory 373
Other Assets 329
Land 350
Buildings & Equipment 619
Other Fixed Assets 35
Payables (610)
Accrued Liabilities (135)
Deferred Revenue (11)
Note Payable (107)
In-process research & development 3,500
Goodwill 3,936
------
Total Transaction Value $9,388
======
Cash Paid $8,321
Series B Preferred Stock Issued $1,067
Goodwill is being amortized over its estimated useful life of 20 years.
The Company recorded expenses of $3.5 million of in-process research and
development in the quarter ended March 31, 1999. This amount represents an
allocation of the purchase price of HTI to projects that are currently under
development but have not yet been launched commercially because the development
is not complete. Because technological feasibility has not been established and
no alternative use determined, the entire amount of in-process research and
development has been expensed. The identified research and development consists
of in process projects for the development of eleven antibodies, as listed
below:
Troponin I Fatty Acid Binding Protein Cystatin C
Human Red Blood Cell cAMP Brain Natriuretic Peptide
Serum Amyloid A cGMP Phosphorylated Amino Acids
Phosphorylated Tau APE
At this time, management believes that Troponin I and Cystatin C have the
greatest immediate potential as commercial products. Troponin I will be used as
a diagnostic marker for the coronary care market. Cystatin C will be used as a
diagnostic marker for kidney malfunction. In future years, others of the
in-process research and development assets, such as Human Red Blood Cell, may
prove to have even greater potential as commercial products.
There is no guarantee that any of these markers will be commercially viable, or
that the customers who assist in the development will succeed in the marker
being diagnostically significant.
10
<PAGE>
The Company commissioned an appraisal of these in-process research and
development projects by an independent firm familiar with such appraisals. This
independent appraisal valued the in-process research and development projects at
$3.5 million by considering, the nature and history of HTI's business,
description of the in-process research and development assets, the general
economic outlook, the outlook for the antibody production industry, the expected
future cash flows of the products and usage of a discounted cash flow analysis.
The average completion stage of the products was estimated at 93% and a 20%
discount rate was used in computing the present value of the future cash flows
of the products.
On May 11, 1999, the Company completed the acquisition of certain assets of the
OEM business of Atlantic Antibodies of Windham, Maine, one of the first
suppliers of custom and high-volume, bulk polyclonal antibodies for use in
diagnostic test kits and research. This unit serves a wide range of customers
including pharmaceutical, biotechnology, diagnostic companies and major research
centers in the United States and the Pacific Rim. Under the terms of the
agreement to acquire the operating assets of the OEM business of Atlantic
Antibodies, the Company paid $3 million in cash, and has agreed to a deferred
payment of $150,000, upon the earlier of the sale of certain real estate or
November 11, 2000. The Company's commercial bank provided $3 million of
long-term acquisition financing under the Term Loan.
The purchase price of the assets of Atlantic Antibodies was allocated as
follows:
Land $ 360
Buildings & Equipment 1,215
Inventory 1,575
------
Cash Paid $3,150
======
7. SEGMENT INFORMATION:
The Company (SDI) develops, manufactures and markets immunoassay-based test
kits for rapid, cost-effective detection of a wide variety of different analytes
in three primary market categories: water quality, industrial testing and
agriculture.
The Antibody Segment, Strategic BioSolutions (SBS), includes TSD BioServices,
HTI and Atlantic Antibodies. These companies provide fully integrated polyclonal
and monoclonal antibody development and large scale manufacturing services to
pharmaceutical and medical diagnostic companies.
For reporting purposes a "pro-rata" share of common costs; including a
management fee, is charged to SBS, and results exclude a one-time $3.5 million
expense in the first quarter of 1999, for in-process research and development
expenses incurred in connection with the HTI acquisition.
11
<PAGE>
Segment Information :
For the three months ended June 30, SDI SBS Total
--- --- -----
1999 Revenues $ 3,192 $ 2,283 $ 5,475
Segment Profit 220 85 305
Segment Assets 15,264 6,695 21,959
Depreciation and amortization 165 107 272
Capital expenditures 132 -- 132
1998 Revenues $ 4,562 $ 614 $ 5,176
Segment Profit 973 (203) 770
Segment Assets 14,786 541 15,327
Depreciation and amortization 148 -- 148
Capital expenditures 248 -- 248
For the six months ended June 30, SDI SBS Total
--- --- -----
1999 Revenues $ 6,138 $ 3,256 $ 9,394
Segment Profit 457 38 495
Segment Assets 15,264 6,695 21,959
Depreciation and amortization 327 132 459
Capital expenditures 179 -- 179
1998 Revenues $ 6,896 $ 1,176 $ 8,072
Segment Profit 750 40 790
Segment Assets 14,786 541 15,327
Depreciation and amortization 299 -- 299
Capital expenditures 333 -- 333
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The information included in this report on Form 10-Q contains certain
forward-looking statements reflecting the current expectations of Strategic
Diagnostics Inc. and its subsidiaries (the "Company"). When used in this report,
the words "anticipate," "enable," "believe," "estimate," "potential,"
"promising" and similar expressions as they relate to SDI are intended to
identify such forward-looking statements. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, which may cause
actual results to differ from those anticipated at this time. Such risks and
uncertainties include, without limitation, changes in demand for products,
delays in product development, inability to obtain required domestic and foreign
government regulatory approvals, modifications to regulatory requirements,
modifications to development and sales relationships, the ability to achieve
12
<PAGE>
anticipated growth, competition, seasonality, and other factors more fully
described in the Company's filings with the Securities and Exchange Commission.
Background
The Company is the entity resulting from the combination of EnSys
Environmental Products, Inc. ("EnSys"), Ohmicron Corporation ("Ohmicron"), TSD
BioServices ("TSD"), HTI Bio-Products Inc. ("HTI"), Atlantic Antibodies Inc.
("ATAB") and Strategic Diagnostics Inc. ("SDI").
Since 1992, the Company and its predecessors have entered into research
and development agreements with multiple corporate partners that have led to the
introduction of various products to the water quality, industrial testing,
agricultural and other markets. These agreements generally provide that sales
and marketing costs associated with a new product are borne by the corporate
partner, and the Company has the manufacturing rights. In addition, the Company
currently sells directly other products that it has developed or acquired.
Results of Operations
Three Months Ended June 30, 1999 vs. June 30, 1998
Net revenues for the second quarter increased 6% to $5.5 million
compared to $5.2 million in the second quarter of 1998. Product related revenues
increased by $332,000, or 7% over the product related revenues recorded in the
second quarter of 1998. Revenues in the second quarter and first half of 1999
include those of the former HTI, which was acquired during the first quarter of
1999. Revenues for the antibody business totaled $2.3 million for the second
quarter of 1999, compared to $614,000 in the second quarter of 1998.
In July 1999 the Company announced the launch of its Roundup Ready
soybean test kit (a test kit to detect Monsanto's Roundup Ready genetic trait).
At the time of the launch, the Company reported its belief that the potential
for this product could reach over 25 million tests annually over the next two to
three years. Initial product development was completed in March 1999, and during
the second quarter, the Company worked with prospective customers to validate
and develop testing protocols under a variety of uses that would provide users
with reliable and statistically meaningful results. The need for these
analytical testing tools has developed rapidly in 1999 as a result of recent GMO
regulatory action and market responses, in particular the commercial success of
the Roundup genetic technology (over one-half of the 1999 commercial soybean
crop in the United States is expected to incorporate this technology) coupled
with a consumer concern about genetically modified plants. This has resulted in
the development of a second tier in the world grain markets for non-genetically
modified product, resulting in the need for rapid testing for product
identification.
The Company believes that for the 1999 growing season, hundreds of
farmers have been contracted to grow non-genetically enhanced soybeans. These
producers, harvesting over an estimated 35 million acres, a large part of which
are for Europe and Japan, will be required, due to new regulations, to verify
13
<PAGE>
the purity of their crops once harvesting begins in July of 1999. The
development of this non-GMO market has led to new needs to maintain the identity
of these products at multiple risk points throughout the distribution systems in
world trade. The Company expected sales of these products to begin in June 1999
to partially meet the initial demand for this new technology, however, the rapid
evolution of foreign policies for GMO's and changes in acceptable thresholds
drove the creation of new testing points in the trade distribution systems. This
additional validation has been completed and the Company began the commercial
sale of this product in July 1999. The delay in the commercial launch of this
product, was necessary to ensure proper use of the product in the field.
Manufacturing expenses increased approximately $700,000, or 37%, in
the second quarter of 1999 over the comparable period in 1998. This is primarily
attributable to the change in the Company's sales mix, as antibody products have
a higher cost of goods sold than the Company's test kit products.
Research and development costs increased $106,000, or 23%, in the
second quarter of 1999 when compared to the second quarter of 1998. The increase
is attributable to a larger volume of product development expenses associated
with new test kits being developed primarily for the agricultural market.
Selling, general and administrative expenses decreased $212,000, or
9%, in the second quarter of 1999 over the comparable period in 1998. This
decrease is the result of effective cost controls implemented by the Company
during the period.
Interest expense increased $214,000 in the second quarter of 1999 when
compared to the second quarter of 1998. This increase is due to the borrowings
the Company made to purchase HTI in the first quarter of 1999, and the assets of
ATAB in the second quarter of 1999.
Net income decreased to $305,000 from $770,000, or 60%, in the second
quarter of 1999 versus the second quarter of 1998, for the reasons described
above.
Six Months Ended June 30, 1999 vs. June 30, 1998
Net revenues for the first six months of 1999 increased $1.3 million,
or 16%, compared with the same period in 1998. Product related revenues for the
first six months of 1999 increased $1.4 million, or 19%, compared with the first
six months of 1998. This increase is primarily attributable to increases in the
agricultural products category and the antibody business segment due to the
acquisition of HTI and certain assets of ATAB during the first six months of
1999 (see also note 6 to the consolidated financial statements) and were offset
by a decrease in other product sales, where pre-commercial Macra Lp(a) test kits
were sold to a corporate partner in 1998 and smaller decreases in the
industrial/chemical and water quality categories.
Manufacturing expenses increased $1.1 million in the first six months
of 1999 or 37%, compared to the first six months of 1998. This increase is
primarily attributable to the change in product sales mix the Company is
experiencing. Antibody products have a higher cost of goods sold component than
the Company's test kit products.
14
<PAGE>
Research and development costs increased by $294,000, or 35%, in the
first six months of 1999 versus the comparable period in 1998. This increase is
primarily the result of increased development costs related to the introduction
of new agricultural products.
Selling, general and administrative expenses decreased $36,000, or 1%,
in the first six months of 1999 versus the first six months of 1998. This
decrease is due to effective cost controls enacted by the Company.
Interest expense increased $266,000 in the first six months of 1999
versus the comparable period in 1998. This increase is due to the borrowings the
Company made to purchase HTI in the first quarter of 1999, and the assets of
ATAB in the second quarter of 1999.
Net income decreased $295,000, or 37%, to $495,000 from $790,000,
during the first six months of 1999 versus the first six months of 1998. These
results exclude a $3.5 million one-time charge for in-process research and
development taken during the first quarter of 1999.
Liquidity and Capital Resources
The Company's working capital decreased $1.1 million from December 31,
1998 to $9.0 million at June 30, 1999. Cash, cash equivalents, restricted cash
and short-term investments decreased $2.9 million to $2.9 million at June 30,
1999. This decrease was primarily attributable to the use of internal Company
funds for the HTI and ATAB acquisitions.
The Company believes that it has, or has access to, sufficient
resources to meet its operating requirements for the foreseeable future. The
Company's ability to meet its long-term working capital and capital expenditure
requirements will depend on a number of factors, including the success of the
Company's current and future products, the focus and direction of the Company's
research and development programs, competitive and technological advances,
future relationships with corporate partners, government regulation, the
Company's marketing and distribution strategy and the success of the Company's
plans to make future acquisitions. Accordingly, no assurance can be given that
the Company will be able to meet the future liquidity requirements that may
arise from these inherent uncertainties.
Year 2000 Issues
The Company is aware of, and is evaluating, many of the "Year 2000"
issues associated with both information technology ("IT") and non-IT systems
which could cause problems and network failures should the systems fail to
recognize year designations after 1999.
The Company is currently reviewing its own computer, communication,
software and operating systems to determine if they are Year 2000 compliant. The
Company conducted system-wide testing in the first quarter of 1999 on all
internal network hardware and software, all enterprise system software and all
user workstation hardware and software. The Company is currently in the process
of replacing and modifying the systems' hardware and software that were found
not to be Year 2000 compliant. No major systems were found to be non-compliant.
During the second quarter of 1999, the Company tested all internal and OEM
equipment. No system failures were detected during the testing. The Company
expects that, absent unforeseen negative results of its testing, its systems
will be Year 2000 compliant no later than September 30, 1999. Accordingly the
15
<PAGE>
Company has not conducted any contingency planning. The Company relies primarily
on third party provided software purchased and licensed commercially. This
software is warranted to be Year 2000 compliant, and therefore the Company
believes its Year 2000 risks are minimal. As a result, its historical and
estimated future costs of remediation are not now, and are not expected to
become, material.
The Company will continue to contact critical suppliers, collaborators
and partners to determine if their operations, as they relate to the Company,
are Year 2000 compliant. Based upon responses to date, the Company cannot
presently estimate the impact of the failure of such third parties to be Year
2000 compliant.
Although the Company will take all practical measures to prevent
problems related with the Year 2000 programming issues, such problems and
failures may occur which could seriously affect the Company's progress. Because
of the unprecedented nature of such problems, the extent of the effect on the
Company's progress cannot be certain.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to changing interest rates, and is
currently not engaged in hedging activities. Interest on $2 million of
outstanding indebtedness is at a fixed rate of 7.96% per annum, and the
remaining principal bears interest at a variable rate of 3% over the published
London Interbook Offered Rate.
The Company conducts operations in Great Britain. The consolidated
financial statements of the Company are denominated in U.S. dollars and changes
in exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiares into U.S. dollars for
purposes of recording the Company's consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.
16
<PAGE>
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 26, 1999, the Company completed the acquisition of HTI
Bio-Products Inc., a privately held manufacturer of custom and proprietary
antibody products and services. Under the terms of the acquisition agreement,
the Company paid cash and issued 556,286 shares of Series B preferred stock. The
preferred shares convert into common shares on a 1-for-1 basis at any time at
the option of the holder, and at the option of the Company when the closing
price of the Company" stock exceeds $3.50 for a period of 10 consecutive
business days, and carry a cumulative, annual cash dividend of $0.175 per share
and a liquidation value of $3.50 per share or $1.9 million. The Series B
preferred stock is preferential to the common stock with respect to distribution
of assets and rights upon liquidation, dissolution or winding up of the Company.
The Company believes that the issuance of the Series B preferred Stock
was exempt from registration under section 3(b) or 4(2) of the Securities Act of
1933 and Regulation D thereunder because they were issued to a limited number of
persons, each of whom was believed to have been a sophisticated, accredited
investor who acquired the shares on a fully informed basis without a view to
further distribution.
Pursuant to the Company's acquisition financing agreement with First
Union National Bank, the Company's commercial bank, no dividends or
distributions may be paid on account of its Common Stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on April 27,
1999. At the meeting, the following Class I Directors were
elected:
Directors Shares Voted For Shares Withheld
--------- ---------------- ---------------
Grover C. Wrenn 9,015,380 56,031
Richard C. Birkmeyer 9,028,611 42,800
Kathleen E. Lamb 9,028,611 42,800
Curtis Lee Smith Jr. 9,022,111 49,300
17
<PAGE>
Approved amendments to the Company's 1995 Stock Incentive Plan (to be
renamed the Strategic Diagnostic Inc. 2000 Stock Incentive Plan) to
increase the number of shares authorized for issuance from 1,700,000 to
2,500,000:
For Against Abstain
--- ------- -------
4,499,196 184,380 8,272
Approved the Company's Employee Stock Purchase Plan:
For Against Abstain
--- ------- -------
4,576,936 146,527 5,650
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule (in electronic format only).
(b) Reports on Form 8-K
On May 26, 1999 the Company reported its acquisition of certain assets
of Atlantic Antibodies Inc. which occurred on May 11, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
STRATEGIC DIAGNOSTICS INC
(Registrant)
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ RICHARD C. BIRKMEYER President and Chief Executive Officer August 12, 1999
- ------------------------ (Principal Executive Officer)
Richard C. Birkmeyer
/s/ ARTHUR A. KOCH, JR. Vice President and Chief Operating Officer August 12, 1999
- ------------------------
Arthur A. Koch, Jr. (Principal Financial Officer)
</TABLE>
19
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<NAME> STRATEGIC DIAGNOSTICS, INC.
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