Back to GetFilings.com
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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition Period From _________ to _________
Commission File Number 0-68440
STRATEGIC DIAGNOSTICS INC.
(Exact name of Registrant as specified in its charter)
____________________
Delaware 56-1581761
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
128 Sandy Drive
Newark, Delaware 19713
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 456-6789
____________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(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 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 __
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 or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $14,629,871 as of March 31, 1997.
On March 31, 1997 the Registrant had outstanding 13,057,672 shares of
Common Stock, $.01 par value.
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 1997 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Report.
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.................................................................1
ITEM 1. BUSINESS................................................1
Overview....................................................1
General Development of Business.............................1
Immunoassay Technology......................................4
Markets and Products........................................6
Sales and Marketing Strategy...............................11
Regulatory Approvals.......................................12
Manufacturing..............................................14
Research and Development...................................15
Proprietary Technology and Patents.........................16
Competition................................................18
Employees..................................................18
ITEM 2. PROPERTIES.............................................19
ITEM 3. LEGAL PROCEEDINGS......................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
...........................................................19
ITEM 4(a).EXECUTIVE OFFICERS OF THE REGISTRANT...................20
PART II...............................................................22
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...........28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................29
PART III..............................................................30
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.........30
ITEM 11. EXECUTIVE COMPENSATION.................................30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
.......................................................30
PART IV...............................................................31
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K..............................................31
PART I
ITEM 1. BUSINESS
Overview
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 three primary market segments: water quality,
industrial testing, and agricultural. The Company is a 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, low cost-per-test, quantitation, and flexibility) meet specific
customer needs. The substances detected by the Company's test kits 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 for the detection of pesticides and environmental
contaminants (D TECH-Registered Trademark-, EnviroGard-TM-, EnSys RISc-TM-
and RaPID Assay-Registered Trademark-), are well recognized in the
immunoassay field testing market. The Company sells its environmental
products in the U.S. through its direct sales force and through distributors
in Europe and the rest of the world. The Company's one-step strip tests
hold a leading position in the emerging market of genetically engineered crop
testing. In addition to products serving the three primary market segments,
the Company also manufactures and sells Macra-Registered Trademark- Lp(a), an
immunoassay test kit for medical applications, which is a leading method for
measuring lipoprotein(a) in human serum.
In addition to developing, manufacturing and marketing immunoassay test
kits, the Company provides fully integrated monoclonal antibody development
and production, as well as large scale manufacturing services, to
pharmaceutical and medical diagnostic companies through its wholly-owned
subsidiary, TSD BioServices, Inc.
General Development of Business
Developments in 1996
Prior to December 30, 1996, the Company was named EnSys Environmental
Products, Inc. ("EnSys"). On December 30, 1996, EnSys merged with a
privately held company, Strategic Diagnostics Inc. ("SDI"), with EnSys being
the surviving entity, but changing its name to Strategic Diagnostics Inc.
On March 29, 1996, EnSys acquired from Millipore Corporation
("Millipore") certain assets which consisted primarily of inventory,
work-in-progress, equipment, intellectual property rights, contract rights
and customer lists, of Millipore's EnviroGard-TM- product line. In exchange
for such assets, EnSys paid to
Millipore $1,000,000 in cash and issued to Millipore 1,100,000 shares of
EnSys Common Stock, which represented approximately 15% of the outstanding
Common Stock of EnSys after the acquisition. The EnviroGard-TM- product line
consists of immunoassay-based test systems used in the detection of
environmental contaminants and pesticide residues.
On August 30, 1996, SDI acquired all of the stock of Ohmicron Corporation
and its subsidiaries ("Ohmicron"), excluding Ohmicron Medical Diagnostics,
Inc. which was spun-off to its stockholders prior to the acquisition date.
Ohmicron stockholders received common stock of SDI representing approximately
26% of the fully diluted equity of SDI (as defined in the Ohmicron
acquisition agreement) as of June 30, 1996. Ohmicron developed,
manufactured and marketed immunoassay-based products which measure
contaminants in water, soil and food and employ magnetic particle immunoassay
technology for precise determination of very low concentrations of
contaminants.
The rationale employed by both SDI and EnSys regarding market
consolidation led to the merger of the two companies on December 30, 1996.
SDI merged into EnSys and the name of the surviving corporation was changed
to Strategic Diagnostics Inc. Grover C. Wrenn, Chief Executive Officer
of EnSys prior to the merger, was named Chairman of the Board of Directors of
the Company, and Richard C. Birkmeyer, President and Chief Executive Officer
of SDI prior to the merger, and the other principal executive officers of
SDI, retained their respective roles in the Company. The EnSys facility in
North Carolina was closed and operations were moved to the SDI facilities in
Newark, Delaware, and Newtown, Pennsylvania.
The Company believes that its competitiveness will be enhanced by virtue
of its larger size, broader product line and the achievement of operational
economies of scale. The Company believes that the expansion of its industrial
testing product line resulting from its consolidation activities
significantly enhances its ability to provide customers with the most
appropriate test for each specific application. The Company believes that
its products in the water quality, industrial testing and agricultural
markets are unique and fill a potentially large, unmet need. The Company
also believes that the 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 development expertise are critical elements of its
potential for future success.
2
Developments Prior to 1996
SDI was founded to develop and commercialize rapid, field-portable
immunoassay tests primarily for non-medical diagnostic testing applications
in water quality, industrial testing and agricultural markets. SDI's core
expertise was research, development and manufacturing of immunoassays,
including immunogen and antibody development (especially monoclonal
antibodies), immunoreagent development, assay development and manufacturing.
SDI's founders initiated commercial operations in 1990 with a contract
from a corporate partner to develop and manufacture a rapid field test to
detect corrosion causing sulfate-reducing bacteria. The sale and marketing
of the resulting product, RapidChek-Registered Trademark- SRB, was the
responsibility of the corporate partner, Conoco Specialty Products, Inc.
The initial corporate partnering agreement is illustrative of one of the
strategies SDI used to grow its business. Corporate partners who had
identified a market opportunity provided funding to SDI to develop and
manufacture immunoassay products to meet the identified market need. Most of
the corporate partner agreements were written so that SDI retained the right,
or had a right of first refusal, 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 core technology and built
a manufacturing base of commercial products. This strategy has proven an
effective way for the Company to identify new market areas, to enhance its
product pipeline and to provide funding for research and development. The
Company plans to continue this partnering strategy for the foreseeable future.
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, Inc. ("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. The mission
of TSD BioServices was to supply antibodies, especially monoclonal
antibodies, immunochemical reagents and related services to medical
diagnostic and pharmaceutical companies, as well as the research community.
The TSD BioServices business provided SDI with a critical mass of
technology related to the development and production of antibodies with which
to support its own product development activities. Late in 1996, in order to
consolidate and streamline activities associated with the TSD BioServices
business, Taconic Farms and SDI dissolved the original joint venture between
the two companies and SDI established TSD BioServices, Inc. ("TSD") as a
wholly-owned subsidiary. Taconic Farms is the exclusive supplier of mice for
TSD production contracts.
Another key factor in the growth of SDI occurred in 1992, when SDI
entered into a research, development and manufacturing agreement with EM
Industries, Inc. ("EM Industries") an affiliate of Merck KGaA, Darmstadt,
Germany. This collaboration produced the D TECH-Registered Trademark- product
line for rapid
3
detection of priority pollutants in the field. EM Science, Inc., a
subsidiary of EM Industries, sold and marketed the D TECH-Registered
Trademark- product directly to the U.S. market through a dedicated sales
force of approximately 6 full time individuals. During 1996, sales through EM
Industries accounted for 11% of the Company's revenues. Late in 1996, in
order to facilitate and enhance the marketing of the D TECH-Registered
Trademark- product line, SDI and EM Industries restructured their corporate
partnering arrangement such that the Company now markets and sells the D
TECH-Registered Trademark- product line. EM Industries received certain
royalty rights and shares of stock in the Company and is represented on the
Company's Board of Directors.
Immunoassay Technology
An immunoassay is an analytical test which 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
replaced many laboratory diagnostic tests in the medical industry. The pace
in which immunoassays have been adopted in the medical arena has been driven
in large part by three factors: (1) a demand for analyses which were
otherwise unavailable through conventional methods; (2) a desire for
analytical methods which could yield results more quickly than conventional
methods; and (3) 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 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.
4
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.
Once an antibody reagent that has the desired performance characteristics
(sensitivity and specificity) has been identified, it must be incorporated
into a test format which 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. 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 surrounding 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 processing a larger number 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 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 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.
5
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 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 segments through its direct sales force in the United
States, through a network of over 40 distributors in North America, Europe
and Asia, and through its corporate partners.
Product revenues in the industrial testing market segment were 29% of
total product revenue in 1994, 32% of total product revenue in 1995, and 26%
of total product revenue in 1996.
Product revenues in the agricultural market segment were 4% of total
product revenue in 1994, 22% of total product revenue in 1995, and 30% of
total product revenue in 1996.
Product revenues in other markets (primarily attributable to sales of
Macra-Registered Trademark- Lp(a) test kits) were 67% of total product
revenue in 1994, 45% of total product revenue in 1995, and 27% of total
product revenue in 1996.
Water Quality
The Company believes that all of its products sold in this market provide
high value testing solutions to fill largely unserviced analytical needs in
this critical and highly regulated industry. 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 segment are products 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. Certain of these polymers are toxic and occasionally have
been implicated in fish kills when industrial effluents have been discharged
to natural bodies of water. As a result, there may be increased regulatory
pressure to measure the amount of chemicals being discharged into surface
waters.
The Company, working in collaboration with its corporate partners, has
developed highly sensitive and accurate immunoassays for the detection of a
number of water treatment polymers. These immunoassays have been field
tested and have been demonstrated to be a 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. To date, the Company
has not derived significant revenues from this product line.
6
Cryptosporidium and Giardia. During 1994, EnSys 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 Hydrofluor-Combo-TM- test kit is the American
Society for Testing and Materials ("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.
Total Trihalomethanes. Trihalomethanes are regulated, toxic by-products
which result from chlorine disinfection of drinking water. The Company's test
is a non-immunoassay-based test for the detection of total trihalomethanes
("TTHMs"). This recently introduced, inexpensive test 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 EnviroGardTM pesticide test kits are being used
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 segment is comprised of immunoassays for
pesticides, pollutants, proprietary chemicals and industrial markers. Products
in this market are developed and marketed in collaboration with the Company's
corporate partners.
Proprietary Chemicals. The proprietary chemical market segment includes
tests, commissioned by chemical manufacturers, that specifically measure the
particular compound of interest. In the chemical market segment the benefits of
immunoassay testing have led to three key applications: (1) regulatory
registration, in which immunoassay data is generated to support the registration
of a product with the EPA; (2) detection, to determine whether a target compound
is present in a complex matrix; and (3) 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 the Federal
Insecticide, Fungicide and Rodenticide Act ("FIFRA") with the EPA. As part of
this registration process, manufacturers must provide extensive data for both
registration and post-registration analyses regarding 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, the 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 and agreements are in place for the
development of seven additional tests.
7
Industrial Markers. The Company is collaborating with a corporate
partner in this market segment, 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 help 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.
Pollutants. Analysis of soil, water and waste samples to determine the
presence of hazardous chemicals has become increasingly important in
connection with the environmental remediation and environmental monitoring
activities. These activities are largely the result of environmental
legislation such as the Resource Conservation and Recovery Act ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), Toxic Substances Control Act, ("TSCA"), the Safe Drinking Water
Act ("SDWA") and the Federal Water Pollution Control Act (the "Clean Water
Act"). It is estimated that environmental testing is provided by
approximately 1,200 commercial environmental testing laboratories, as well as
"in-house" laboratories at industrial and disposal facilities. Market
research reports estimate that commercial environmental testing laboratories
accounted for approximately one half of all environmental tests performed and
had revenues exceeding $1.1 billion in 1995.
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 ("PAH"s), polychlorinated biphenyls ("PCB"s),
benzene, certain metals and chlorinated solvents.
Environmental monitoring activities under SDWA and the National Pollution
Discharge Elimination System ("NPDES") regulations under the Clean Water Act
require periodic testing for various hazardous chemicals. The nation's
approximately 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 waste
water treatment facilities monitor and test waste water 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 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.
Pesticide Residues. 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 reregistration under FIFRA. In spite of their
8
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.
Pollutant Test Products. The Company sells four different format
immunoassays for detection of environmental pollutants, latex filtration
tests (D TECH-Registered Trademark-), coated-tube tests (EnSys RIScTM and
EnviroGardTM), magnetic particle tests (RaPID Assay-Registered Trademark-)
and microtiter plate tests (EnviroGardTM). Each of the four different test
formats have performance characteristics that make them more or less suited
for a particular customer application. The Company positions the sale of its
environmental products so as to provide the customer with the best product
for their specific application.
The D TECH-Registered Trademark- and EnSys RIScTM 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
test kits are capable of analyzing at least ten samples per hour and some
allow analysis of as many as forty samples per hour. Generally, less than
four hours of training is required before an operator can effectively use the
tests.
D TECH.-Registered Trademark- The D TECH-Registered Trademark- tests are
a latex filtration immunoassy 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, trinitrotoluene ("TNT"), benzene,
toluene, ethylbenzene and xylene (collectively, "BTEX") and others. D
TECH-Registered Trademark- 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.
EnviroGardTM and EnSys RIScTM. 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 EnviroGardTM 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 EnviroGardTM 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 for genetically engineered
crops and two plant fungi, Rice Blast and Botrytis.
9
Genetically Engineered Crops. Agricultural companies are developing
varieties of commercially important crops like corn, cotton and soybean 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 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.
The Company's first test in this market was commissioned by a large
agricultural chemical company which developed proprietary varieties of
insect-resistant corn and cotton using genetic engineering technology. 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 markets a simple
one-step strip test (GeneCheck-TM- B.t.k ) which is used in the field to
determine if an individual plant contains the new genetic trait. The product
is used by commercial seed producers to insure that each plant harvested for
seed contains the resistance gene. This type of test can also be used for
enforcement purposes in crops where unscrupulous individuals could harvest
and sell or plant the seed instead of purchasing it from authorized dealers.
Sales of the GeneCheck-TM- B.t.k. product have been increasing since its
introduction in the third quarter of 1995 and the Company believes sales will
continue to grow in 1997. 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 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, affects a wide variety of food crops
including grapes, strawberries, cucumbers, lettuce and others. 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 botyytis
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
10
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, a 510(k) application has been submitted to the FDA. A
great deal of clinical data has been generated with the Macra-Registered
Trademark- Lp(a) kit because of its leading market position, and its use in
benchmark projects such as the Framingham Study, a multi-generational
analysis of coronary risk factors.
RapidChek-Registered Trademark- SRB. Sulfate Reducing Bacteria ("SRB"s)
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
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.
BiMelyze. In 1994, EnSys entered into a three year sales and marketing
agreement for the distribution of the BiMelyze test, an immunoassay-based
test for detecting mercury in soil and water. Sales of the BiMelyze test have
not been significant to date, and there can be no assurance that significant
sales will be realized under this agreement in the future.
Sales and Marketing Strategy
As a result of the recent consolidation of the SDI, EnSys, Ohmicron and
EnviroGardTM 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, provides
marketing and logistical support to the field sales personnel and an
interface between customers and technical support.
11
In September 1993, EnSys opened a European headquarters and sales
operation in London, England, and the sale of the EnSys RIScTM and
EnviroGardTM products in Europe were principally directed through that
office. Ohmicron sold the RaPID Assay-Registered Trademark- product line
through over 40 distributors in North and South America, Europe, the Far
East, Australia/New Zealand and South Africa. More recently, the Company has
restructured the organization to coordinate selling of the RaPID
Assay-Registered Trademark- abroad through its London office. Sales and
distribution of the D TECH-Registered Trademark- product line outside of the
U.S. is handled exclusively by Merck KGaA, Darmstadt, Germany.
During 1994, EnSys signed a distribution and supply agreement with a
catalog distribution company to distribute the EnSys products to
environmental laboratories. The Company's agreement grants certain
exclusive catalog distribution rights subject to a minimum annual purchase
commitment. To date, sales through this catalog distribution channel have
not been significant and have not met the minimum annual purchase commitment
specified in the agreement. Either party can cancel the existing agreement
with 90 days written notice.
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. The
RapidChek-Registered Trademark- SRB test kit is sold directly by the Company
and through five international distributors. The Company has arrangements
with three international distributors for sale of the Macra-Registered
Trademark- Lp(a) 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, water testing methods and FDA 510(k) approval for Macra-Registered
Trademark- Lp(a).
12
Hazardous Waste Testing Methods. EPA SW-846 ("SW-846") is the compendium
of analytical and test methods published by the EPA's Office of Solid Waste
(the "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 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 new test methods for the third update of the
third edition of SW-846 were proposed in the Federal Register in July 1995.
The comment period closed in December 1995 and the comments are currently
being evaluated. The final methods are expected to be promulgated in 1997.
The following table summarizes the EPA approval status of the Company
products:
EPA SW-846
Method
Validations D TECH-Registered Trademark- EnSys RISc-TM- EnviroGard-TM- RaPIDA ssay-Registered Trademark-
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 Soil
Toxaphene Soil
4041 Soil
Chlordane
4042 DDT
4050 TNT Soil & Water Soil & Water Soil & Water
4051 RDX Soil & Water
4670 Triazines Water
8510 RDX Soil
8515 TNT Soil
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
13
at expediting the approval of new methods that involves the cooperation of
the Solid Waste, Drinking Water, and Waste Water methods groups.
The Company's TTHM 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 (the "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 filtration, magnetic particles and
microtiter plates. In addition to test kits, the Company supplies its
customers with ancillary equipment and supplies including spectrophotometers,
pipettes, balances, timers and the like.
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, Delaware. Sub-assemblies and finished kits are manufactured and
shipped world-wide out of the Company's Newark, Delaware and Newtown,
Pennsylvania facility.
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's
products and are subject to specific supply agreements.
The Company manufactures its products in accordance with the FDA's Good
Manufacturing Practices ("GMP") 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
14
records, equipment and training. The Company is presently integrating its
inventory control, purchasing, manufacturing scheduling, order processing and
shipping system.
The Company's manufacturing organization, including the Technical
Reagents Manufacturing group, consists of approximately 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, 1996, 1995 and 1994, SDI incurred approximately $1,569,000,
$2,272,000 and $2,832,000, respectively in research and development
expenditures, substantially all of which has been customer-sponsored. The
Company's laboratory facilities located in Newark, Delaware, 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 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 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 is 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. Prior to the merger with SDI, EnSys was developing
one-step strip test products for the industrial testing market, and the
Company is continuing with that development program.
15
The Company's technology organization, including research and
development, TSD, Technical Reagents Manufacturing, and Technical Marketing
Support consists of approximately 35 individuals, of whom 15 hold advanced
academic degrees.
Proprietary Technology and Patents
The Company's products are based on the use of proprietary reagents,
technology and test systems developed by its scientists. 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 eight issued U.S.
patents and the claims for another three are in a state of allowance. Two
additional U.S. patents have been licensed for exclusive use by the Company
and eight U.S. patent applications are pending.
- --------------------------------------------------------------------------
U.S. Patent Title
- ----------------------------------------------------------------------------
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 PAH immunoassay method, its components and akit 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
Allowed PAH immunoassay method, its components and a kit for use
in performing the same
Allowed Kits and processes for extraction of analytes from solid
materials
Allowed A petroleum immunoassay method, its components and a kit
for performing the same
5,429,952 Marking of products to establish identity and source
(Biocode
License)
- ----------------------------------------------------------------------------
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. One of the Company's pending U.S.
16
patent applications has to do with what the Company believes is a novel latex
filtration test format, and two of the Company's pending applications involve
one-step strip test formats. In addition to the assay format patent
applications, the Company has pending applications relating to immunoassays
for trichloroethylene ("TCE") and PCB, standards for immunoassays used to
detect volatile aromatic hydrocarbons, and a non-immunoassay chemical test
for quantitation of crude oil contamination of soil.
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 it 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 the explosive RDX, BTEX and TCE.
Library of monoclonal antibodies to clinical analytes. SDI acquired 42
monoclonal antibodies for clinical diagnostic applications in 1993. These
antibodies are being licensed by numerous 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-Registered Trademark- Lp(a) test.
Detection of marked polymers. A method of detecting water treatment
polymers is to chemically couple an unrelated "marker" substance to the
polymers and use antibodies and immunoassays to detect the marker. This
technology has been patented by Biocode Incorporated (U.S. Patent 5,429,952).
The Company has licensed the exclusive rights to this technology for the
detection of water treatment polymers.
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. In addition, it
has been agreed that all of the Company's requirements of uncoupled
magnetocluster particle reagents are to be supplied until September 1997 on
specified terms.
Antibodies to Heavy Metals. The Company has funded research for the
development of an immunoassay-based test for the detection of heavy metals
(e.g., lead and mercury). As part of that agreement, the Company has an
option to license certain patent rights resulting from that research. There
can be no assurance that the Company will exercise the option, or that any
products can be developed as a result of this research.
17
Competition
Many of the Company's potential competitors are large companies with
substantially greater resources than the Company. To the extent that any
such companies enter 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
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 EnviroGardTM businesses.
Currently, there are no similar significant competing immunoassay
products for the Company's RapidChek-Registered Trademark- Rice Blast,
Botrytis and SRB, GeneCheck-TM- B.t.k., 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 an exclusive license for use of Biocode's patented marker technology
with these products.
A number of companies already have, 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
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 with 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 as a result of its
quality performance and having been first to the research market, it
benefits from the fact that a large quantity of clinical data has been
generated by researchers and clinicians using the test in large prospective
studies. The Company is seeking to use this data to help secure 510(k)
approval from the FDA. The Company believes that FDA approval will further
solidify Macra-Registered Trademark- Lp(a)'s market position.
Employees
As of December 31, 1996, The Company employed 95 full time and 3 part
time individuals including 81 regular and 17 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, and prohibiting them from competing with the
Company during their employment. None of the Company's employees is covered
by collective bargaining agreements. The Company believes that its relations
with its employees are good.
18
ITEM 2. PROPERTIES
The Company is headquartered in Newark, Delaware, and occupies
approximately 26,000 square feet of space under three operating leases that
expire in October 2000, October 2001 and November 2003, respectively. The
Company also leases approximately 21,000 square feet of space formerly leased
by Ohmicron in Newtown, Pennsylvania. This lease expires June 30, 1998.
Prior to the merger with SDI, 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 the Company is in the process of locating a tenant to occupy
the facility and terminating its obligation's under the lease. The Company
leases regional sales offices in London, England, Newport Beach, California,
and Chestnut Hill, Massachusetts. 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.
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
On December 30, 1996, EnSys held a special meeting of its stockholders to
consider and vote upon the following proposals:
1. Approval and adoption of the Agreement and Plan of Merger with SDI
and the transactions contemplated thereby.
2. Approval and adoption of the amendment and restatement of EnSys'
Certificate of Incorporation to (i) change the corporate name of the
surviving corporation, (ii) increase the number of authorized shares of
EnSys capital stock, and (iii) reclassify the board of directors.
3. Approval and adoption of amendments to the EnSys 1995 Stock
Incentive Plan.
All such proposals were approved by the stockholders. The number of
votes cast for, against or withheld, as well as the number of abstentions and
broker non-votes as to each such matter was as follows:
Votes For Votes Against or Withheld Abstentions and Broker Non-votes
--------- ------------------------- --------------------------------
Proposal 1: 5,375,834 151,244 263,754
Proposal 2(i): 5,363,403 186,429 241,000
Proposal 2(ii): 4,924,903 601,075 264,824
Proposal 2(iii): 5,030,003 489,575 271,254
Proposal 3: 5,302,048 222,130 266,654
19
ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions with the Company and
ages are as follows:
Name Age Position
- ---- --- ---------
Richard C. Birkmeyer 43 President and Chief Executive Officer
Martha C. Reider 42 Vice President- Manufacturing
Anne F. Cavanaugh 37 Vice President- TSD BioServices
Arthur A. Koch, Jr.* 43 Vice President- Finance and Chief Financial Officer
Gregory J. Bell** 37 Vice President- Finance and Chief Financial Officer
James W. Stave, Ph.D. 42 Vice President- Research and Development
_______________________________________________________________________________
* Beginning on April 14, 1997
** Resigned as of March 31, 1997
Richard C. Birkmeyer, age 43, cofounded SDI in 1990 and has served as its
President and Chief Executive Officer and a director since 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 a product
manager. Mr. Birkmeyer received a Ph.D. in Biochemistry/Immunology from the
State University of New York at Binghamton and his B.S. 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.
Martha C. Reider, age 42, 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 B.A. in Biological Sciences from Ohio Northern University.
Anne F. Cavanaugh, age 37, 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.. 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 B.S. in Biochemistry from
East Stroudsburg University and has attended the University of Delaware's MBA
program.
Arthur A. Koch, Jr., age 43, 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
contract clinical research organization. Mr. Koch received a B.A.in Business
Administration from Temple University and is a Certified Public Accountant.
Gregory J. Bell, age 37, joined SDI in June 1993 as Vice President
- --Finance and Chief Financial Officer. From 1989 to 1993, Mr. Bell served as
Director of Finance and Administration of Enzymatics, Inc., a public company
that developed and manufactured medical diagnostics test kits. Prior to
joining
20
Enzymatics, Mr. Bell spent more than seven years at Arthur Andersen & Co.,
where he was most recently a manager in Arthur Andersen's emerging business
practice group. Mr. Bell received his B.S. in Accounting from the
Pennsylvania State University and is a Certified Public Accountant.
James W. Stave, age 42, 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.
Key employees, their positions with the Company, and their ages are as
follows:
Ralph E. Stever, age 51, joined SDI in August 1996 as Director of Sales.
From January 1993 to July 1996, Mr. Stever was employed by Ohmicron where he
most recently served as Vice President of Sales and Marketing. From 1983 to
1993, Mr. Stever was Director of Sales of Becton Dickinson Instrument
Systems. Mr. Stever received his B.S. degree in Marketing from Bradley
University.
Joseph X. Dautlick, age 54, joined SDI in January 1994 as Marketing
Manager and now serves as Director of Marketing. Prior to joining SDI Dr.
Dautlick worked 17 years in DuPont's Medical Diagnostics Division as Product
Manager, Technical Manager, Marketing Manager-Europe and Strategic Planning
Manager. He then joined Ohmicron as Marketing Manager for 3 years. Dr.
Dautlick received his Ph.D. from the University of Pittsburgh School of
Medicine and his B.S. from Lafayette College.
Unless otherwise noted, all executive officers and key employees
identified above joined the Company in December 1996 after the consummation
of the merger between EnSys and SDI.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on Nasdaq National Market System
under the stock symbol "SDIX." Set forth below are the high and low sales
prices for the shares of Common Stock of the Company as reported by Nasdaq.
Common Stock Price Range
Fiscal Year Ended High Low
------------------- -------- --------
December 31, 1997:
First Quarter 2 1/16 1 3/4
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
December 31, 1995:
First Quarter 3 3/8 1 5/8
Second Quarter 3 3/8 2 3/8
Third Quarter 4 2 1/4
Fourth Quarter 4 1/4 3 1/4
On March 31, 1997, there were approximately 132 holders of record of the
Common Stock of the Company. The Company has never paid cash dividends on
its Common Stock, and the Company has no intention to pay cash dividends in
the foreseeable future.
In January 1996, SDI conducted a private placement of its Series A
Redeemable Convertible Preferred Stock pursuant to which 685,952 shares were
issued upon conversion of $1,624,000 of aggregate principal and accrued
interest related to previously issued convertible notes and 211,201 shares
were issued to new investors for an aggregate of $500,000. With respect to
the conversion of notes into the Series A Redeemable Convertible Preferred
Stock, SDI relied upon Section 3(a)(9) of the Securities Act of 1933, as
amended (the "Securities Act") as an exemption from registration under the
Securities Act. With respect to the offering to new investors, based on the
limited nature of the offering and the fact that such investors consisted
solely of accredited investors, SDI relied upon Section 4(2) of the
Securites Act as an exemption from registration, including Regulation D
thereunder.
As previously described, in March 1996 Ensys acquired certain assets of
Millipore and in consideration therefor issued shares of EnSys common stock
to Millipore's stockholders in addition to cash consideration. EnSys relied
upon Section 4(2) of the Securities Act as an exemption from registration.
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical financial data of SDI as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996 is
derived from the audited financial statements of SDI included elsewhere herein.
The selected historical financial data as of December 31, 1992, 1993 and 1994
and for the years ended December 31, 1992 and 1993 is derived from the
financial statements of SDI not included herein. The following selected
historical financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto included elsewhere
herein.
(in thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996(1)
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Product-related.................................................. $ 137 $ 551 $ 1,192 $ 1,605 3,402
Contract and other............................................... 1,102 2,064 2,580 2,084 2,435
--------- --------- --------- --------- ---------
Total revenues................................................... 1,239 2,615 3,772 3,689 5,837
OPERATING EXPENSES:
Manufacturing.................................................... 208 791 910 1,288 2,839
Acquired research and development................................ -- -- -- -- 8,266
Research and development......................................... 1,027 1,735 2,832 2,272 1,569
Selling, general and administrative.............................. 348 1,013 1,385 1,190 1,737
--------- --------- --------- --------- ---------
Total operating expenses......................................... 1,583 3,539 5,127 4,750 14,411
--------- --------- --------- --------- ---------
Operating loss..................................................... (344) (924) (1,355) (1,061) (8,574)
OTHER INCOME (EXPENSE):
Interest income.................................................. 10 46 20 8 11
Interest expense................................................. (14) (50) (8) (214) (3)
--------- --------- --------- --------- ---------
Other income (expense), net........................................ (4) (4) 12 (206) 8
Equity in income (loss) of TSD BioServices......................... (150) (60) 42 41 178
--------- --------- --------- --------- ---------
Net loss........................................................... (498) (988) (1,301) (1,226) (8,388)
Accretion of redeemable convertible preferred stock liquidation
value(2).......................................................... -- (192) (367) (367) (635)
Net loss applicable to common stockholders......................... $ (498) $ (1,180) $ 1,668) $ (1,593) $ (9,023)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share applicable to common stockholders............... $ (.17) $ (.40) $ (.55) $ (.46) $ (2.12)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used in computing net loss per share applicable to
common stockholders............................................... 2,957,000 2,957,000 3,041,000 3,464,000 4,248,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DECEMBER 31
---------------------------------------------------------
1992 1993 1994 1995 1996(1)
--------- --------- --------- --------- --------
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 93 $ 1,259 $ 67 $ 35 $ 917
Working capital (deficit)......................... (51) 1,288 126 (891) 7,170
Total assets...................................... 611 3,044 2,106 2,076 14,581
Long-term debt, less current portions (including
capital lease obligations)...................... 500 0 0 0 50
Redeemable convertible preferred stock (2)........ 0 3,145 3,512 3,879 --
Accumulated deficit (3)........................... (1,084) (1,094) (2,763) (4,356) (13,379)
Stockholders' equity (deficit).................... (168) (1,050) (2,580) (4,064) 10,673
- ------------------------------
(1) The unaudited pro forma results for the year ended December 31, 1996,
assuming the Ensys merger, Ohmicron acquisition and the TSD dissolution had
occurred on January 1, 1996 would have resulted in pro forma revenue of
$12,700,000 and a pro forma net loss of $5,973,000 or $0.47 pro forma net
loss per share. See Note 3 to the consolidated financial statements.
(2) The redeemable convertible preferred stock was reclassified into
stockholders' equity in connection with the Ensys Merger. No additional
accretion will be recorded on preferred stock.
(3) There have been no common stock dividends declared or paid since the
inception of SDI.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
This Form 10-K contains certain 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, failure to obtain necessary regulatory approvals,
modifications to development and sales relationships, the ability of the Company
to integrate acquired businesses and achieve anticipated synergies, 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 transaction 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 the fast and inexpensive detection of various chemicals
in soil and water samples. EnSys raised approximately $30 million in equity
financing, including approximately $16 million from the sale of 1,800,000
shares of EnSys common stock in its initial public offering in October 1993.
Since 1991, EnSys commercialized eleven immunoassay test kits and four other
test kits for the detection of various environmental contaminants. EnSys
marketed and sold these test kits and other associated products and services
to environmental consulting and engineering firms, hazardous waste processing
firms, environmental testing laboratories, and various state and federal
agencies through distributors and a regionally based direct sales force in
the 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 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 $1,000,000 and 1,100,000 shares of EnSys common stock.
23
Ohmicron was founded in 1984 and began marketing its RAPID
Assay-Registered Trademark- products in 1991 to the same general market and
in the same fashion as previously described for EnSys.
Since its inception in 1990, SDI has focused on using proprietary
technology and know-how to develop, manufacture, and market immunoassay test
kits for applications primarily in the water quality, industrial testing and
agricultural markets. Commercial operations were initiated with a contract
from the Company's first corporate partner to develop an immunoassay test to
detect certain corrosion causing bacteria. This product was introduced in
late 1991 and SDI purchased all rights and technology related to this product
in 1994.
In February 1992, SDI entered into a $3.9 million research and
development partnership with EM Industries 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. In September 1996, EM
Industries and SDI reached an agreement whereby the February 1992 agreement
was terminated, together with EM Industries' marketing rights thereunder, in
exchange for certain specified royalty payments to EM Industries and shares
of SDI common stock. The marketing activities with respect to such products
are now the responsibility of the Company.
Since 1992, SDI 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 which it has
developed and/or acquired.
Results of Operations
As described above, the historical financial information discussed below
includes the results of operations of SDI for all periods presented and the
actual results of Ohmicron from August 30, 1996 and EnSys from December 30,
1996.
Year ended December 31, 1996 versus year ended December 31, 1995
Revenues. Revenues increased 58% to $5,837,000 in 1996 from $3,689,000 in
1995. This $2,148,000 increase is the result of a $1,797,000 (112%) increase
in product related revenues and a $351,000 (17%) increase in contract and
other revenues. Product related revenues increased to $3,402,000 in 1996
from $1,605,000 in 1995. This was due to overall increased sales for certain
of SDI's new products, especially the first of SDI's strip assays which was
introduced in mid-1995, improved priority pollutant sales over the prior
year, and product related revenues generated by TSD in the fourth quarter of
1996 subsequent to its establishment as a wholly-owned subsidiary of SDI.
The product revenues do not include any revenues from any of SDI's industrial
testing kits in the fourth quarter of 1996, since SDI licensed these products
to EnSys in October 1996. However, they do include approximately $537,000 in
product revenues from the sale of SDI inventory, at cost, to EnSys in
connection with the license agreement. Product related revenues are expected
to significantly increase in 1997 due to the mergers completed in 1996 and
the inclusion of revenues of TSD for a full year. Contract and other
revenues increased to $2,435,000 in 1996 from $2,084,000 in 1995 primarily
due to a $300,000 license fee from EnSys and $367,000 in revenues from one-
24
time contracting of SDI personnel services by EnSys and Ohmicron prior to and
in connection with the mergers, which was offset by a $200,000 decrease in
contract revenue received from EM Industries in 1996 due to the completion of
the EM Industries contract. While research and development contracts are
anticipated to continue to be integral to the Company's overall business
strategy, the Company anticipates little or no growth in overall contract
revenues over the short-term.
During 1997, a significant portion of the Company's revenues will be
generated from the environmental remediation industry. Historically,
remediation activities have followed seasonal patterns with lower levels of
activity during the period from October to March. Therefore, the Company's
sales in a particular quarter in 1997 may not be indicative of its revenues
for any subsequent quarter during the year.
Manufacturing Expenses. Manufacturing expenses increased 120% to
$2,839,000 in 1996 from $1,288,000 in 1995. This $1,551,000 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. Due to the anticipated post-merger increase in product
related sales in 1997, manufacturing expenses are expected to increase
accordingly. The Company's overall gross profit margins on product related
sales are anticipated to improve due to an increase in sales of its products,
efficiencies gained through consolidation and the elimination of product
sales at cost to EM Industries and EnSys that occurred in 1996.
Research and Development Expenses. Research and development expenses
decreased 31% to $1,569,000 in 1996 from $2,272,000 in 1995. This decrease
was primarily the result of a reduction of research and development personnel
and certain salaries and related expenses, beginning in the third quarter of
1995. Due to planned internal research and development activities, in
addition to research and development activities performed under contracts for
third parties, overall research and development expenses are anticipated to
slightly increase in 1997.
Acquired Research and Development Expenses. Acquired research and
development expenses were $8,266,000 in 1996. These expenses were entirely
due to the merger transactions with Ohmicron and EnSys, which resulted in
acquired research and development expenses of $3,913,000 and $4,353,000,
respectively.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 46% to $1,737,000 in 1996 from $1,190,000
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 SDI'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. It is anticipated that selling, general and
administrative expenses will increase from 1996 levels during 1997 due to the
inclusion of a full year of the selling expenses described above in 1997,
as well as increased general and administrative expenses associated with the
Company being a publicly held entity in 1997.
Interest Income and Interest Expense. Interest income increased $3,000
to $11,000 in 1996 from $8,000 in 1995 due to increased cash balances from a
January 2, 1996 preferred stock financing. Due to cash, cash equivalents and
marketable securities received in connection with the EnSys/SDI merger,
overall interest income is expected to significantly increase in 1997.
Interest expense decreased to $3,000 in 1996
25
from $214,000 in 1995 primarily due to the conversion of $1,500,000 in notes
payable and related interest to preferred stock in connection with a January
1996 financing. Due to interest expense on capital lease obligations assumed
in connection with the 1996 mergers, overall interest expense is expected to
increase nominally in 1997.
Equity in Income of TSD BioServices. Equity in income of the TSD
BioServices partnership increased $137,000 to $178,000 in 1996 from $41,000
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
newly-formed, wholly-owned subsidiary of SDI. As a result of the dissolution
and the related distribution of certain of the partnership's rights and
assets, revenues earned and expenses incurred after September 30, 1996
associated with the rights and assets so distributed were included in the
revenues and expenses of SDI through TSD BioServices, Inc.
Provision for Income Taxes. Due to net operating loss carry forwards, the
Company has made no provision for income taxes for 1996. Although net
operating loss carry forwards were obtained in connection with the mergers
discussed above, the use of these carry forwards, if any, will be limited in
future years pursuant to the "change in ownership" rules under Section 382 of
the Internal Revenue Code.
Year ended December 31, 1995 versus year ended December 31, 1994
Revenues. Products related revenues increased $413,000 (35%) to
$1,605,000 in 1995 from $1,192,000 in 1994. This increase was primarily due
to the introduction of four new products during the year, increased sales of
commercial cell lines to third parties and increased royalties from EM
Industries. Contract and other revenues decreased $496,000 (19%) to
$2,084,000 in 1995 from $2,580,000 in 1994 due to a reduction of contract
funding by EM Industries to $600,000 in 1995 from $1,709,000 in 1994.
Despite the reduction in funding from EM Industries during the year, overall
revenues decreased by only $83,000 (2%) to $3,689,000 in 1995 from $3,772,000
in 1994 due to an overall increase in product related revenues and existing
or new research contract programs outside of the EM Industries agreement.
Manufacturing Expenses. Manufacturing expenses increased 42%, to
$1,288,000 in 1995 from $910,000 in 1994. This increase was primarily the
result of an increase in overall product sales, especially the EM Industries
product line, and the cost associated with new product introductions. Under
SDI's agreement with EM Industries, SDI's sales of product to EM Industries
generally provided no profit margin in 1995, except for royalties.
Research and Development Expenses. Research and development expenses
decreased 20%, to $2,272,000 in 1995 from $2,832,000 in 1994. This decrease
was primarily the result of a reduction of research and development personnel
and certain salaries in the third quarter of 1995, coupled with decreased
field trial, consulting and other research and development expenses as
products previously under development were completed and transferred to
manufacturing.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 14%, to $1,190,000 in 1995 from $1,385,000
in 1994 primarily due to a reduction in selling, general and administrative
personnel and certain salaries in the third quarter of 1995.
26
Interest Income and Interest Expense. Interest income decreased 60% to
$8,000 in 1995 from $20,000 in 1994. This decrease was primarily the result
of less funds available during the year due to utilization of available cash
and cash equivalents for operating needs. Interest expense increased to
$214,000 in 1995 from $8,000 in 1994 primarily due to interest on bridge
loans from stockholders and interest expense imputed on certain warrants
issued in connection with the bridge loans.
Liquidity and Capital Resources
The Company's working capital, which consists principally of cash, cash
equivalents and marketable debt investments was $7,170,000 at December 31,
1996 versus a working capital deficit $891,000 at December 31, 1995. This
increase was due to the SDI/EnSys merger on December 30, 1996 and the
conversion of notes payable held by SDI stockholders to SDI preferred stock
on January 2, 1996. Cash, cash equivalents and marketable debt investments,
which consist primarily of money market instruments, U.S. corporate
obligations and other securities of agencies of the U.S. government were
$6,627,000 at December 31, 1996 versus $35,000 at December 31, 1995 due to
the SDI/EnSys merger. The Company considers all of its investments to be
available-for-sale and plans to use the proceeds from sales or maturities of
these investments to finance future operating needs. The Company's investment
policy is to limit exposure at any one institution.
Accounts receivable and inventory balances increased in 1996 over 1995
due to the mergers occurring in 1996. The Company incurred a net loss in
1996 of $122,000 (after exclusion of $8,266,000 in charges for acquired
research and development incurred in connection with the mergers) versus a
net loss of $1,226,000 during 1995. This large decrease in the net loss is
attributable to additional product related revenues generated in 1996 over
1995 and to cost reduction efforts begun in late 1995. The Company used
$370,000 in cash to fund operations in 1996 versus $1,017,000 in 1995 and
purchased $67,000 in property and equipment during 1996.
The Company believes that its current cash, cash equivalents and
marketable debt investments will be sufficient to meet its funding needs for
at least the next 18 months. However, the Company's ability to meet its
long-term working capital and capital expenditure requirements will depend on
a number of factors, including the success of the Company's current and
future products, the focus and direction of the Company's research and
development programs, competitive and technological advances, future
relationships with corporate partners, government regulation and the
Company's marketing and distribution strategy. Accordingly, there can be no
assurance that the Company will be able to meet these long-term requirements.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries are included as part of this Form 10-K:
Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-2
Consolidated Statements of Operations for each of the years
in the three year period ended December 31, 1996 F-3
Consolidated Statements of Stockholders' Equity (Deficit) for each
of the years in the three year period ended December 31, 1996 F-4
Consolidated Statements of Cash Flows for each of the years
in the three year period ended December 31, 1996 F-5
Notes to Consolidated Financial Statements F-6
28
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,
1996 and 1995, 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, 1996. 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 financial position of Strategic Diagnostics Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 31, 1997
F-1
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 917 $ 35
Short-term investments 5,710 --
Receivables 2,334 560
Inventories 1,557 447
Other current assets 510 328
--------- ---------
Total current assets 11,028 1,370
--------- ---------
PROPERTY AND EQUIPMENT:
Equipment 1,002 530
Furniture and fixtures 66 24
Leasehold improvements 198 29
--------- ---------
1,266 583
Less- Accumulated depreciation and amortization (538) (334)
--------- ---------
Net property and equipment 728 249
--------- ---------
OTHER ASSETS:
Restricted cash 119 49
Prepaid rent 171 68
Note receivable 341 --
Deposits and other 84 180
Investment in TSD BioServices -- 160
Intangible assets 2,110 --
--------- ---------
Total other assets 2,825 457
--------- ---------
$ 14,581 $ 2,076
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 1,566 $ 222
Accrued expenses 2,066 328
Deferred revenue 141 211
Current portion of capital lease obligations 85 --
Notes payable -- 1,500
--------- ---------
Total current liabilities 3,858 2,261
--------- ---------
CAPITAL LEASE OBLIGATIONS 50 --
--------- ---------
REDEEMABLE CONVERTIBLE PREFERRED STOCK -- 3,879
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 17,500,000 shares authorized, no shares issued and
outstanding -- --
Series A preferred stock, $.01 par value, 2,164,362 shares authorized, issued and outstanding 22 --
Common stock, $.01 par value, 35,000,000 and 5,913,638 shares authorized, 13,055,170 and
3,463,702 issued and outstanding in 1996 and 1995, respectively 131 47
Additional paid-in capital 23,905 294
Accumulated deficit (13,379) (4,356)
Deferred compensation (6) (49)
--------- ---------
Total stockholders' equity (deficit) 10,673 (4,064)
--------- ---------
$ 14,581 $ 2,076
--------- ---------
--------- ---------
The accompanying notes are an integral part of these statements.
F-2
STRATEGIC DIAGNOSTICS INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
NET REVENUES:
Product related $ 3,402 $ 1,605 $ 1,192
Contract and other 2,435 2,084 2,580
------------ ------------ ------------
Total net revenues 5,837 3,689 3,772
------------ ------------ ------------
OPERATING EXPENSES:
Manufacturing 2,839 1,288 910
Research and development 1,569 2,272 2,832
Acquired research and development 8,266 -- --
Selling, general and administrative 1,737 1,190 1,385
------------ ------------ ------------
Total operating expenses 14,411 4,750 5,127
------------ ------------ ------------
Operating loss (8,574) (1,061) (1,355)
INTEREST (EXPENSE) INCOME, net 8 (206) 12
EQUITY IN INCOME OF TSD BIOSERVICES 178 41 42
------------ ------------ ------------
NET LOSS (8,388) (1,226) (1,301)
ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK LIQUIDATION VALUE (635) (367) (367)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (9,023) $ (1,593) $ (1,668)
------------ ------------ ------------
------------ ------------ ------------
NET LOSS PER SHARE APPLICABLE TO COMMON STOCKHOLDERS $ (2.12) $ (0.46) $ (0.55)
------------ ------------ ------------
------------ ------------ ------------
SHARES USED IN COMPUTING NET LOSS PER SHARE APPLICABLE TO COMMON
STOCKHOLDERS 4,248,000 3,464,000 3,041,000
------------ ------------ ------------
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
SERIES A ADDITIONAL
PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED DEFERRED
STOCK STOCK STOCK CAPITAL DEFICIT COMPENSATION
--------- --------- ----------- ----------- ------------ ---------------
BALANCE, JANUARY 1, 1994 $ -- $ -- $ 40 $ 43 $ (1,095) $ (38)
Exercise of warrants -- -- 7 (7) -- --
Issuance of warrants in connection with debt -- -- -- 23 -- --
Amortization of deferred compensation -- -- -- -- -- 10
Issuance of warrant to Conoco -- -- -- 105 -- --
Accretion of redeemable convertible preferred stock --
liquidation value -- -- -- (367) --
Net loss -- -- -- -- (1,301) --
--------- --------- ----- ----------- ------------ ---
BALANCE, DECEMBER 31, 1994 -- -- 47 164 (2,763) (28)
Issuance of warrants in connection with debt -- -- -- 75 -- --
Amortization of deferred compensation -- -- -- -- -- 34
Issuance of common stock options -- -- -- 55 -- (55)
Accretion of redeemable convertible preferred stock --
liquidation value -- -- -- (367) --
Net loss -- -- -- -- (1,226) --
--------- --------- ----- ----------- ------------ ---
BALANCE, DECEMBER 31, 1995 -- -- 47 294 (4,356) (49)
Amortization of deferred compensation -- -- -- -- -- 43
Accretion of redeemable convertible preferred stock --
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 stock 22 -- 6,588 -- --
Net loss -- -- -- -- (8,388) --
--------- --------- ----- ----------- ------------ ---
BALANCE, DECEMBER 31, 1996 $ -- $ 22 $ 131 $ 23,905 $ (13,379) $ (6)
TOTAL
---------
BALANCE, JANUARY 1, 1994 $ (1,050)
Exercise of warrants --
Issuance of warrants in connection with debt 23
Amortization of deferred compensation 10
Issuance of warrant to Conoco 105
Accretion of redeemable convertible preferred stock
liquidation value (367)
Net loss (1,301)
---------
BALANCE, DECEMBER 31, 1994 (2,580)
Issuance of warrants in connection with debt 75
Amortization of deferred compensation 34
Issuance of common stock options --
Accretion of redeemable convertible preferred stock
liquidation value (367)
Net loss (1,226)
---------
BALANCE, DECEMBER 31, 1995 (4,064)
Amortization of deferred compensation 43
Accretion of redeemable convertible preferred stock
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 stock 6,610
Net loss (8,388)
---------
BALANCE, DECEMBER 31, 1996 $ 10,673
The accompanying notes are an integral part of these statements.
F-4
STRATEGIC DIAGNOSTICS INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,388) $ (1,226) $ (1,301)
Adjustments to reconcile net loss to cash used in operating activities-
Acquired research and development write off 8,266 -- --
Issuance of warrant to Conoco -- -- 105
Depreciation and amortization 181 135 100
Equity in income of investment in TSD BioServices (178) (41) (42)
Amortization of deferred compensation 43 34 10
Imputed interest on note payable -- 75 23
(Increase) decrease in-
Receivables (753) 1 40
Inventories 208 (70) (87)
Other current assets (696) 33 (104)
Prepaid rent (103) 21 23
Other assets 159 (66) (81)
Increase (decrease) in-
Accounts payable 472 (262) 253
Accrued expenses 589 138 (28)
Deferred revenue (170) 211 --
--------- --------- ---------
Net cash used in operating activities (370) (1,017) (1,089)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash 56 26 --
Investment in TSD BioServices -- -- (30)
Proceeds from Ohmicron and EnSys acquisitions 807 -- --
Purchases of property and equipment (67) (41) (73)
--------- --------- ---------
Net cash provided by (used in) investing activities 796 (15) (103)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable -- 1,000 500
Payment on note payable -- -- (500)
Repayments on capital lease obligations (17) -- --
Proceeds from sale of redeemable convertible preferred stock, net 473 -- --
Net cash provided by financing activities 456 1,000 --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 882 (32) (1,192)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 35 67 1,259
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 917 $ 35 $ 67
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest $ 3 $ -- $ 53
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these statements.
F-5
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(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
market segments.
Business Risks
- --------------
The Company is subject to risks of entities in similar stages of
development. These risks include the Company's ability to successfully develop,
produce and market its products and its dependence on its key collaborative
partners and management personnel. Management believes that its current cash
resources are sufficient to fund operations into 1998.
Basis of Presentation
- ---------------------
The historical financial statements presented herein include the
consolidated financial statements of Strategic Diagnostics Inc. ("SDI") for all
periods and the actual results of Ohmicron Corporation ("Ohmicron") from August
30, 1996 (Note 3) and EnSys Environmental Products, Inc. ("EnSys") 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 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 Loss Applicable to Common Stockholders
- ------------------------------------------
Net loss per share applicable to common stockholders for all periods
presented is calculated by dividing net loss applicable to common
stockholders by the weighted average number of shares outstanding. All shares
and per share amounts have been adjusted retroactively to give effect to the
equivalent number of shares received by the SDI stockholders in the Easys
Merger discussed in Note 3. This retroactive adjustment is reflected in the
net loss per share calculations and the Notes to the Consolidated Financial
Statements.
F-6
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(in thousands, except share and per share data)
Net loss applicable to common stockholders is the sum of the net loss plus
the accretion of the redeemable convertible preferred stock liquidation value.
Effective December 30, 1996, the redeemable convertible preferred stock was
converted into shares of a newly issued class of Series A Preferred Stock
(Note 9). No additional accretion will be recorded.
Statement 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
- -------------------
The Company classifies both its billed and unbilled receivables as accounts
receivable. As of December 31, 1996 and 1995, the allowance for doubtful
accounts was $180 and $11, respectively. In 1996, 1995 and 1994, approximately
$2, $10 and $3 of write-offs were charged to this allowance which was offset by
approximately $81, $9 and $4 charged to earnings in each of the respective
years. At December 31, accounts receivable consisted of the following:
1996 1995
--------- ---------
Accounts receivable $ 1,739 $ 560
Unbilled accounts receivable 595 --
--------- ---------
$ 2,334 $ 560
--------- ---------
--------- ---------
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.
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:
1996 1995
--------- ---------
Raw materials $ 626 $ 383
Work in progress 356 46
Finished goods 575 18
--------- ---------
$ 1,557 $ 447
--------- ---------
--------- ---------
F-7
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(in thousands, except share and per share data)
LONG-LIVED ASSETS
- -----------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present.
SFAS No. 121 also addresses accounting for long-lived assets where disposal is
expected. Management continually evaluates whether events or circumstances have
occurred that indicate that the remaining useful lives of the fixed assets and
other assets should be revised or that the remaining balance of such assets may
not be recoverable based upon expectations of future undiscounted cash flows in
accordance with SFAS No. 121. The Company adopted SFAS No. 121 effective
January 1, 1996. As of December 31, 1996, management believes no write-downs or
reserves are required.
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 are recognized upon product shipment or based upon
management's estimate of the percentage of the project completed (Note 12).
Revenue recognized under the Company's collaborative agreements is recorded
upon completion of certain performance requirements of the contracts. License
revenue is recognized upon transfer of such licenses.
Research and Development
- ------------------------
Research and development costs are charged to expense as incurred.
Fair Value of Financial Instruments
- -----------------------------------
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, accounts payable, accrued expenses and
capital lease obligations. The book values of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and accrued
expenses are considered to approximate their respective fair values. None of
the Company's capital lease obligations that are outstanding as of December
31, 1996 have readily ascertainable market values; however, the carrying values
are considered to approximate their respective fair values.
F-8
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(in thousands, except share and per share data)
Income Taxes
- ------------
As of December 31, 1996, the Company had a federal net operating loss
carryforward of approximately $2,722, which will begin to expire in the year
2009 if not previously used. 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 amortization, other
non-deductible reserves and the accretion of preferred stock for financial and
federal income tax reporting.
Significant components of SDI's deferred tax assets for federal and state
tax purposes as of December 31 are as follows:
1996 1995
--------- ---------
Net operating loss carryforwards $ 925 $ 969
Other non-deductible reserves 95 --
Depreciation and amortization (46) (36)
--------- ---------
Total deferred tax assets 974 933
Valuation allowance for deferred tax assets (974) (933)
--------- ---------
Net deferred tax assets $ -- $ --
--------- ---------
--------- ---------
In connection with the merger with EnSys and the Ohmicron acquisition (Note
3), the Company acquired certain net operating losses. The amounts of such
losses were approximately $22,180 at September 30, 1995 and $15,155 as of
December 31, 1995, respectively. The amount of net operating loss carryforwards
(including those of SDI) which can be utilized in any one period, if any, will
be limited by federal income tax regulations since a cumulative change in
ownership of more than 50% has occurred within a three year period. The
Company has recorded a 100% valuation allowance on such items, as determined.
Reclassification
- ----------------
Certain reclassifications have been made to the prior year financial
statements to conform to current year financial statement presentation.
F-9
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(in thousands, except share and per share data)
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 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, the
F-10
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(in thousands, except share and per share data)
"One Step" assay, is currently under development. If such technology is not
fully developed on a timely basis, the existing products may not be
competitive enough to satisfy the technical requirements of a changing market
or be cost effective despite demonstration of research prototypes by EnSys.
The costs of developing the remaining technology for the "One Step" assay is
significant. As a result of the substantial time and effort to produce the
product in accordance with all functions and specification, it has been
determined that technological feasibility has not been achieved. In
addition,since alternative uses of this developmental technology do not
exist, the costs of such technology has been 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 the effective date of the Merger. The remaining amount of
intangible assets of approximately $1,167 includes approximately $472 for
developed technology, $55 for assembled workforce and $640 for goodwill. The
intangible assets purchased will be 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 transaction accounting using the fair
market value of the SDI common stock issued to Ohmicron. The total purchase
price of approximately $4,503, including transaction and other costs of $533,
has been allocated to the fair market value of the assets acquired and
liabilities assumed. Based on the foregoing estimated purchase price, the
amount allocated to acquired research and development of $3,913 was charged
to the statement of operations at the time of the acquisition. In connection
with the Ohmicron transaction, all identifiable assets acquired including
intangible assets were assigned a portion of the cost of the acquired company
based on an independent valuation of Ohmicron's assets. Such allocation
included the evaluation of each development project identified to determine
if technological feasibility had been achieved and if there were any
alternative future uses. Based on this analysis, it has been determined that
technological feasibility has not been achieved, and that alternative uses of
this developmental technology do not exist. The cost of such technology has
therefore been charged to expense in accordance with SFAS No. 2, "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 will be 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. Recent equity transactions
included the January 2, 1996 sale of 897,154 shares of redeemable convertible
preferred stock at $2.37 per share.
F-11
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(in thousands, except share and per share data)
The redeemable convertible preferred stock was mandatorily redeemable and
received dividends, registration rights and senior liquidation rights to the
common stock. 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 BioServices provides that
each of the former partners receive rights to perform services that were
considered to be either a core part of that partner's expertise, or an area
in which the partner wanted to increase its market presence or technical
competency. The dissolution agreement also provided that certain services
previously provided by TSD BioServices, such as ascites production and sales
and marketing, would be subcontracted to Taconic by SDI in the future based
on established fees set annually. For accounting purposes, this transaction
will be treated as a purchase, with the consideration provided being SDI's
investment of $338 which approximates the fair market value of the assets
received.
F-12
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(in thousands, except share and per share data)
Unaudited ProForma 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, 1996:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
--------- ---------
(unaudited)
Revenues $ 12,700 $ 11,184
--------- ---------
--------- ---------
Net loss $ (5,973) $ (7,721)
--------- ---------
--------- ---------
Net loss per share $ (0.47) $ (0.66)
--------- ---------
--------- ---------
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 common share assumes that the Merger with EnSys, the
acquisition of Ohmicron and the TSD BioServices dissolution had occurred on
January 1, 1996. In addition the pro forma information excludes accretion of
preferred stock (Note 2).
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:
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
---------
---------
F-13
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(in thousands, except share and per share data)
4. SHORT-TERM INVESTMENTS:
-----------------------
At December 31, 1996, short-term investments consisted of the following:
Unrealized Carrying
Principal Cost Gain/(Loss) Value
--------- --------- ----------- -----------
Cash equivalents $ 3,502 $ 3,502 $ -- $ 3,502
Securities of agencies of the U.S. government 689 686 -- 686
Commercial paper 1,525 1,522 -- 1,522
--------- ----------- --------- ---------
$ 5,716 $ 5,710 $ -- $ 5,710
--------- ----------- --------- ---------
--------- ----------- --------- ---------
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." The Company classifies these investments as short term and
records them at fair market value. Contractual maturities of the Company's
investments in debt securities as of December 31, 1996 are $5,287 in 1997, $284
in 1999 and $139 in 2002.
5. OTHER ASSETS:
-------------
In December 1993, the Company purchased all product rights, technology,
patents, trademarks and other rights for its RapidChek-Registered Trademark-
Sulfate Reducing Bacteria product from Conoco Specialty Products Inc.
("Conoco") for $225. This acquisition was being amortized over 10 years. In
1996, the unamortized cost of this asset of $159 was charged to expense as
management believed that such asset was not realizable.
Note Receivable
- ---------------
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,
1996, the outstanding loan balance was approximately $346 of which
approximately $6 in principal is payable annually through the year 2000 with
the balance payable in January 2001.
Investment in TSD BioServices
- -----------------------------
Included in the 1995 financial statements is $160 representing the Company's
50% interest in TSD BioServices under the equity method of accounting.
Summarized financial information of TSD BioServices is as follows:
1995 1994
--------- ---------
Total assets $ 656 $ 502
--------- ---------
--------- ---------
Partners' capital $ 320 $ 238
--------- ---------
--------- ---------
Revenues $ 1,641 $ 1,351
--------- ---------
--------- ---------
Net income $ 82 $ 84
--------- ---------
--------- ---------
F-14
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(in thousands, except share and per share data)
In October 1996, the Company entered into an agreement to dissolve TSD
BioServices (Note 3) and certain rights and assets formerly owned by the
joint venture were placed into a wholly-owned subsidiary of the Company.
Prior to the dissolution in 1996, the partnership generated $1,737 of
revenues and equity in income of TSD BioServices to the Company of $178.
6. ACCRUED EXPENSES:
-----------------
1996 1995
--------- ---------
Legal and professional $ 260 $ 99
Interest -- 124
Merger costs 1,069 --
Other 737 105
--------- ---------
$ 2,066 $ 328
--------- ---------
--------- ---------
7. NOTES PAYABLE:
--------------
In August 1992, EM Industries, Inc. ("EM"), an affiliate of E Merk (Note 11)
loaned the Company $500 at an annual interest rate of 8%. This loan, along with
$53 in accumulated interest, was repaid in March 1994.
In October 1994 and April 1995, the holders of the redeemable convertible
preferred stock provided $500 and $1,000, in working capital loans to the
Company. These notes bore interest at 9% and 10% per annum, respectively, and
each became due during 1995. In addition, 89,349 and 223,372 warrants were
issued, respectively, for the purchase of common stock of the Company at an
exercise price of $2.37 per share. The warrant values deemed for accounting
purposes were $23 and $75, respectively, which were recorded as an asset and
amortized over the term of the loans. The warrants have an exercise period of
five years.
In January 1996, the Company converted the $1,500 of Notes Payable and $124
of accrued interest into 685,952 shares of redeemable convertible preferred
stock (Note 9).
F-15
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(in thousands, except share and per share data)
8. 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, 1996,
future minimum capital lease payments are as follows:
1997 $ 98
1998 33
1999 16
2000 12
2001 8
---------
167
Less--amount representing
interest (32)
---------
Present value of minimum
lease payments 135
Less--current portion of capital
lease obligations (85)
---------
$ 50
=========
9. 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 7) 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 now classified as a component of stockholders' equity.
F-16
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(in thousands, except share and per share data)
The Series A is convertible into one share of common stock at the option of
the holder at any time, or at the option of the Company if the closing share
price of the Company's common stock exceeds $4.50 per share for a period of 45
business days. The Series A carries an aggregate liquidation preference of
$6,378. The Series A contains no annual dividend provisions and is only
redeemable in the event the Company converts the Series A into securities of a
lesser value, as defined.
10. STOCK OPTIONS AND WARRANTS:
---------------------------
Stock Options
- -------------
EnSys had two stock option plans (the "1993 Plan" and the "1995 Plan") which
authorized 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).
Non qualified 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.
Information with respect to the stock options granted under the plans and
options granted separately from the plans is summarized as follows:
PRICE AGGREGATE
NUMBER RANGE PRICE
--------- ------- ---------
Balance, January 1, 1994 169,353 $ .19 $ 32
Granted 116,098 .64 74
Canceled (7,036) .64 (5)
--------- -------- ---------
Balance, December 31, 1994 278,415 .19-.64 101
Granted 146,275 .19-.64 39
Canceled (27,402) .64 (18)
--------- --------- ----------
Balance, December 31, 1995 397,288 .19-.64 122
Options acquired in conjunction with
the Merger 461,023 .25-7.50 1,226
Granted 200,000 2.00-2.20 420
Canceled (14,072) .64 (9)
--------- --------- ----------
Balance, December 31, 1996.............. 1,044,239 $ .19-7.50 $ 1,759
--------- --------- ----------
--------- --------- ----------
F-17
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(in thousands, except share and per share data)
As of December 31, 1996, 818,829 options were exercisable with an aggregate
exercise price of $1,411 and 955,761 options 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 shares and
options.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Effective January 1, 1995, the Company has elected to adopt 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 loss applicable to
common stockholders for 1996 and 1995 would have been $9,113 and $1,610 and net
loss per share applicable to common stockholders would have been $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 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 1995 and 1996 is estimated at $.47 and $1.46 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 6.51% in 1995 and 6.37% in 1996, 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.
F-18
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(in thousands, except share and per share data)
In 1993, the Company issued warrants for the purchase of 5,473 shares of
common stock at $.19 per share. These warrants expire in 1998.
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 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 exercise price
of five years from the dates of grant.
At December 31, 1996, the Company maintains 3,530 of outstanding warrants
granted by EnSys. These warrants contain an exercise price of $4.96 per share
and expire in 2001.
11. EM COLLABORATIVE AGREEMENT:
---------------------------
In February 1992, SDI entered into an agreement with 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 $400, $600 and $1,709 in 1996, 1995 and 1994, 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.
The Company made this acquisition in connection with the Ohmicron
Acquisition and charged the related cost to acquired research and development.
12. REVENUES:
---------
The Company earns revenue in two major areas: product related revenues and
contract and other revenues.
F-19
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(in thousands, except share and per share data)
Product Related Revenues
- ------------------------
The Company generates product revenue through: (i) the sale of products it
has developed or acquired and (ii) through its TSD subsidiary on a percentage of
completion basis. Under percentage of completion, revenues earned and related
costs incurred are recorded based on management's estimates of the percentage of
completion of each project. Product sales are made to collaborative partners,
distributors or directly to the end users of the products. Included in product
related revenues are royalties earned through the sale of antibodies to a
distributor, who pays a royalty based on sales. In addition, from 1994 through
August 1996, the Company began receiving royalties based on EM sales of products
developed by SDI for EM (Note 11). Royalties earned from EM were $23, $35 and $7
in 1996, 1995 and 1994, respectively.
Contract and Other Revenues
- ---------------------------
The Company has entered into various assay development and other
collaborative arrangements. Revenue recognized under such collaborative
agreements is recorded upon completion of certain performance requirement of the
contracts. Other revenues consist primarily of license revenue which is
recognized upon the transfer of such license.
Major Customers
- ---------------
During 1994, EM (Note 11) was the Company's only major customer, providing
revenues of $1,900. 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% of the Company's revenues, respectively.
13. TSD BIOSERVICES TRANSACTIONS:
-----------------------------
TSD BioServices purchased certain supplies, raw materials and services
from Taconic and the Company. In 1996, 1995 and 1994, the Company included in
revenues $53, $275 and $208 of contract and other revenues resulting from
transactions with TSD BioServices. In October 1996, TSD BioServices was
dissolved (see Note 3).
In 1991, TSD BioServices 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.
F-20
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(in thousands, except share and per share data)
14. 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,
1996, 1995 and 1994, was $250, $226 and $226, respectively. Future commitments
under these noncancelable leases at December 31, 1996, are as follows:
1997 $ 577
1998 499
1999 349
2000 152
2001 93
2002 and thereafter 115
---------
$ 1,785
---------
---------
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 $15, $25 and $43 in
royalties under this agreement in 1996, 1995 and 1994, respectively.
The Company is also 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.
15. 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
1996, 1995 and 1994, the Company recognized expense of $51, $51 and $30,
respectively, associated with this plan.
F-21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
29
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.
30
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
Previous
Exhibit Exhibit
Number Number
- ------- --------
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
10.2* EnSys Environmental Products, Inc. 1990 Stock Option Plan (2) 10.16
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
10.7 Master Lease Agreement by and between the Company and John (2) 10.22
Hancock Leasing Corporation dated April 8, 1991
31
10.8 Master Equipment Lease Agreement by and between the Company (2) 10.23
and Ally Capital Corporation dated October 20, 1992
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.
10.11 Agreement and Plan of Merger by and between EnSys and Strategic (1) 2.1
Diagnostics Inc. dated as of October 11, 1996
10.12 Form of Lock-Up Letter Agreement dated December 30, 1996 (1) 10.29
between the Company and each of Richard Birkmeyer; Anne
Cavanaugh; Martha Reider; DSV Partners IV; Edison Venture Fund
II, L.P.; Edison Venture Fund, II-P.A., L.P.; The Perkin-Elmer
Corporation; EM Industries, Incorporated and CIP Capital L.P.
10.13 Form of Stockholder Voting Agreement (1) 10.30
10.14* Employment Agreement dated December 30, 1996 by and between
Richard C. Birkmeyer and the Company
10.15* Employment Agreement dated December 30, 1996 by and between
Grover C.Wrenn and the Company
10.16 Registration Rights Agreement dated December 30, 1996 between
the Company and the stockholders listed therein
10.17 Lease Agreement dated June 24, 1996 by and between Lang
Associates and Strategic Diagnostics Inc.
10.18 Industrial Lease dated October 26, 1993, by and between Tober &
Agnew Properties, Inc. and Strategic Diagnostics Incorporated
10.19 Industrial Lease dated August 9, 1990, by and between Tober &
Agnew Properties, Inc. and Strategic Diagnostics Incorporated
10.20 Industrial Lease dated June 7, 1991 by and between Tober &
Agnew Properties, Inc. and TSD BioServices
21.1 Subsidiaries of the Company
24 Consent of Arthur Andersen LLP
27 Financial Date Schedule
_____________________________________________
(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.
*Management contract or compensatory plan.
(b) Reports on Form 8-K
None.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 11, 1997 By: /s/ Richard C. Birkmeyer
-------------------------------
Richard C. Birkmeyer
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on the dates indicated.
Signatures Title Date Signed
- ---------- ----- -----------
/s/ Richard C. Birkmeyer
- ---------------------------- President, Chief Executive April 11, 1997
Richard C. Birkmeyer Officer and Director
(Principal Executive Officer)
/s/ Gregory J. Bell
- ---------------------------- Chief Financial Officer April 11, 1997
Gregory J. Bell (Principal Financial and
Accounting Officer)
/s/ Richard J. Defieux
- ---------------------------- Director April 11, 1997
Richard J. Defieux
/s/ Robert E. Finnigan, Ph.D
- ---------------------------- Director April 11, 1997
Robert E. Finnigan, Ph.D
/s/ Kathleen E. Lamb
- ---------------------------- Director April 11, 1997
Kathleen E. Lamb
/s/ Stephen O. Jaeger
- ---------------------------- Director April 11, 1997
Stephen O. Jaeger
/s/ Curtis Lee Smith, Jr.
- ---------------------------- Director April 11, 1997
Curtis Lee Smith, Jr.
/s/ Grover C. Wrenn
- ---------------------------- Director April 11, 1997
Grover C. Wrenn
33