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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For The Transition Period From _______ to _________
Commission File No. 0-684401
STRATEGIC DIAGNOSTICS INC.
(Exact name of Registrant as specified in its charter)
-------------------------
Delaware 56-1581761
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
111 Pencader Drive
Newark, Delaware 19702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 456-6789
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of class)
-------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
-----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was $67,595,880 as of March 20, 2002.
As of March 20, 2002 there were 17,861,085 shares outstanding of the
Registrant's common stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the Company's 2002 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Report.
PART I......................................................................................................................1
ITEM 1. BUSINESS.....................................................................................................1
Overview...............................................................................................................1
Immunoassay Technology.................................................................................................2
Bioluminescence Technology.............................................................................................3
Markets and Products...................................................................................................4
Major Customers.......................................................................................................10
Sales and Marketing Strategy..........................................................................................10
Regulatory Approvals..................................................................................................11
Manufacturing.........................................................................................................13
Research and Development..............................................................................................13
Proprietary Technology and Patents....................................................................................14
Competition...........................................................................................................16
Employees.............................................................................................................17
ITEM 2. PROPERTIES..................................................................................................17
ITEM 3. LEGAL PROCEEDINGS...........................................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................................17
PART II....................................................................................................................18
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................................................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.......................20
Forward-Looking Statements............................................................................................20
Overview..............................................................................................................20
Results of Operations.................................................................................................21
Year ended December 31, 2001 versus year ended December 31, 2000......................................................21
Year ended December 31, 2000 versus year ended December 31, 1999......................................................23
Liquidity and Capital Resources.......................................................................................24
Contractual Obligations...............................................................................................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................................27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................29
PART III...................................................................................................................29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT..............................................................29
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 and bioluminesence-based test kits for rapid and cost-effective
detection of a wide variety of substances in the food safety and water quality
markets. Through its Strategic BioSolutions division, the Company also provides
antibody and immunoreagent research, development and production services.
Since its inception, the Company and its predecessors have, in addition to
conducting internal research and development of new products, entered into
research and development agreements with multiple corporate partners that have
led to the introduction of various products to the food safety, water quality
and other markets. The Company expects that internal research and development
projects, primarily in the food safety area, will continue to represent an
increasing percentage of its research and development expenditures. The Company
believes that its competitiveness has been enhanced through the combination of
talent, technology and resources resulting from the relationships and the
acquisitions it has effected since the Company's inception. These relationships
and acquisitions have enabled the Company to achieve meaningful economies of
scale for the unique products it offers through the utilization of its
consolidated facilities in Newark, Delaware, for the development and manufacture
of test kits, antibodies and biochemicals, its facility located in Oceanside,
California for the manufacture of instruments, its facility located outside of
San Diego, California (currently being relocated to Windham, Maine, see Note 14)
for the manufacture of antibodies and biochemicals and its facility located in
Windham, Maine for the manufacture of custom, high-volume bulk polyclonal
antibodies. These economies of scale, in turn, enable the Company to offer its
customers the most appropriate test for each specific customer application.
On September 28, 2001 the Company acquired AZUR Environmental (AZUR), a
privately held manufacturer of proprietary rapid test systems, including the
Microtox Toxicity Test System, which measures toxicity in drinking and process
water, formerly located in Carlsbad, California. With more than 500
peer-reviewed scientific articles and more than 1,700 instruments sold
worldwide, the Microtox Toxicity Test System has been approved in regulations or
standards in Canada and eight (8) European countries, and has been submitted to
the United States of America Environmental Protection Agency ("EPA") for
approval.
With the 1999 acquisitions of HTI BioProducts, Inc. and certain assets of
Atlantic Antibodies, the Company formed a new operating division, Strategic
BioSolutions, which has now become one of the largest producers of antibodies in
the United States. The mission of Strategic BioSolutions is to supply monoclonal
and polyclonal antibodies, immunochemical reagents and related services to
medical diagnostic and pharmaceutical companies, as well as research
institutions.
The Company is the entity resulting from the combination of EnSys Environmental
Products, Inc. ("EnSys"), Ohmicron Corporation ("Ohmicron"), HTI BioProducts
Inc. ("HTI"), TSD BioServices Inc. ("TSD") AZUR Environmental ("AZUR") and
Strategic Diagnostics Inc. ("SDI"). On August 30, 1996, Ohmicron was merged with
and into SDI. On December 30, 1996, SDI was merged with and into EnSys. The
surviving entity was then renamed Strategic Diagnostics Inc. On December 31,
1999, HTI and TSD were merged with and into SDI.
1
Immunoassay Technology
An immunoassay is an analytical test that uses antibodies to detect the presence
of a target compound in a complex sample matrix with high degrees of precision
and accuracy.
The technology was first developed more than 25 years ago and has replaced many
laboratory diagnostic tests in the medical industry. 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: The price-per-test for immunoassays ranges from $1 to
$50, industry wide; the price-per-test for similar
laboratory testing can range from $5 to $1,000.
Accuracy: Immunoassays are typically as or more accurate than
their laboratory counterparts.
Flexibility: Immunoassays can be developed in a wide variety of
test formats, including multiple sample
laboratory-based tests, disposable, single-use units,
and large automated instruments. They can be designed
for use by non-technical persons on-site under a
variety of field conditions for testing of diverse
sample types.
Immunoassay technology relies on the specific binding characteristics of
antibodies. Antibodies are proteins made by cells within the bodies of animals
as part of the immune system response to invasion by foreign substances such as
bacteria and viruses. An antibody physically binds only to the substance that
elicited its production. This characteristic of specific binding makes
antibodies useful tools for detecting substances in complex sample matrices
(e.g., blood, plant tissue, soil and water). Methods exist for isolating and
purifying antibodies from animals, and labeling them in such a way that they can
be used as components, or reagents, within a test to detect the presence of the
substance of interest. Immunoassay technology has advanced to the point that
antibodies can be made to a wide variety of substances including microorganisms,
drugs, hormones, proteins, polymers, environmental pollutants and other
chemicals.
Once an antibody reagent that has the desired performance characteristics
(sensitivity and specificity) has been identified, it can be incorporated into a
test format that is appropriate for the customer's application. In the human
clinical chemistry market, antibodies are employed as reagents on large,
automated instruments that can analyze hundreds of samples per hour. In
contrast, antibodies also can be packaged into single use, disposable formats
such as home pregnancy tests. Immunoassays can be designed to be highly
quantitative or yield a simple yes/no result. The type of test format chosen for
any given application depends on the needs of the customer and may include
factors such as ease-of-use, cost-per-test, number of samples to be tested,
location where the test will be performed and experience of the user.
The Company has expertise and proprietary technology relating to the development
and manufacture of five primary immunoassay formats: latex particle filtration,
magnetic particle, one-step strip tests, coated-tube and microtiter plate. Latex
particle 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.
2
Magnetic particle assays have a greater number of steps and require more
technical expertise to execute than latex particle filtration assays, but are
more suited to the processing of 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 an effective
measurement tools in both laboratory and certain field applications, especially
where highly precise results are required.
Lateral flow immunoassay strips, often referred to as 'one-step' strip tests,
require only that the user apply a prepared sample to the test strip to obtain
the test result - much like pH or Litmus paper tests. The low cost and
simplicity of these tests make them ideally suited for a wide range of
applications in many different markets. The current state-of-the-art of lateral
flow immunoassays is such that the results obtained using these tests are
qualitative, not quantitative, which imposes some limits on the applicability of
the format.
Coated-tube immunoassays are well suited for analyzing relatively large numbers
of samples in the field, yield a semi-quantitative result and are intermediate
in their ease-of-use and cost-per-test.
Microtiter plate assays are well established in the medical diagnostic industry
and offer many of the advantages of magnetic particle assays, including
quantitative results and the capacity to analyze large numbers of samples at a
relatively low cost-per-test. Special laboratory equipment, relatively high
levels of technical training, and a time-to-result measured in hours limits this
test format to laboratory applications.
All measurement technologies, including immunoassays, have strengths and
limitations. The Company's expertise with multiple immunoassay formats, coupled
with a thorough understanding of the needs of a market and specific customer
applications, has allowed the Company to develop a diverse array of immunoassay
products designed to meet the analytical needs of multiple, sizable markets.
The products the Company manufactures and markets using this technology includes
RaPID Assay(R), EnviroGard(TM), D TECH(R), EnSys and RISC(TM).
Bioluminescence Technology - Microtox(R)
Bioluminescence technology uses certain strains of luminescent bacteria, which
possess attributes that support their use as biosensors for toxicity testing.
These strains divert up to 10% of their respiratory energy into a specific
metabolic pathway, which converts chemical energy into visible light.
Bioluminescence technology is based upon exposing a living organism to a test
sample for the purpose of determining whether or not a sample is toxic and if
so, how toxic. This technology provides a quick and inexpensive way to assess
the bioreactivity of various substances.
By using a naturally occurring microorganism that gives off light as a
by-product of its respiration, a temperature controlled precision photometer can
then measure the change in light output with (sample) and without (control)
toxin. The reduction in light output is proportional to the toxicity
(bioreactivity) of the substance tested. A data collection and reduction system
can then analyze the results of a dose-response test procedure and print out a
report quantifying sample toxicity.
The major attributes of bioluminescence technology can be summarized as
follows:
Sensitivity: Response of the system compares favorably with
traditional bioassay procedures, tissue culture tests
and other chemical/life interactions.
Standardized: Standardized reagents and test procedures make
test/test and lab/lab comparisons possible.
Speed: Samples can be tested in 30 minutes.
Cost: Cost per test is significantly lower than lab testing
methods.
Accuracy: Provides a reproducible, quantitative measure of
toxicity or bioreactivity.
Flexibility: Bioassay organisms are handled as a chemical reagent.
Response is monitored instrumentally and presented as
digital output or graphical data. No special operator
skills are required.
The product that the Company manufactures and markets using this technology, is
the Microtox(R) Toxicity Test System.
3
Markets and Products
The Company sells products in the food safety, water quality and antibody market
categories through its direct sales force, through a network of over 50
distributors in Canada, Mexico, Latin America, Europe and Asia, and through its
corporate partners. This section describes the Company's current markets and
products, as well as those in development.
Food Safety
The food safety marketing unit includes tests to detect targeted traits in
genetically engineered plants, two plant fungi, Rice Blast and Botrytis (crop
testing), tests to detect Genetically Modified Organisms (GMOs) in food
ingredients and food fractions (food testing), tests to detect naturally
occurring fungi in grains (mycotoxins), tests for rapid hygiene testing
(bacteria testing) and products in development to detect remnants of ruminants
in animal feed (ruminant testing).
Crop Testing
Genetically Engineered Crops. Agricultural biotechnology companies are
developing varieties of commercially important crops like corn, cotton and
soybeans that have new additional genes which are designed to confer a
commercial advantage to the plant, such as insect or pesticide resistance or
enhanced growth or nutritional characteristics.
A large agricultural biotechnology company that has developed proprietary
varieties of herbicide resistant soybeans and insect-resistant corn and cotton
among others, using genetic engineering technology, commissioned the Company's
first test in this market. Not all the seed produced by a genetically engineered
plant contains the gene for the desired trait and, therefore, not all the plants
arising from a batch of seed will express the desired characteristic. The
Company has developed a simple `one-step' strip test that is used at the point
of testing to determine if an individual plant contains the new genetic trait.
The Company also has developed similar one-step products for other crops.
Commercial seed producers use these products to ensure the quality of their
products. This type of test also can be used for enforcement purposes in crops
to prevent unlicensed application of the genetic technology.
Sales of this strip test and similar products to detect the presence of
genetically engineered traits in plants have been increasing rapidly since their
commercial introduction in the third quarter of 1995 and the Company believes
sales will continue to grow. The number of acres of crops with genetically
enhanced traits under cultivation has grown rapidly since 1998 and published
reports indicate that the farmers' experience with these products has been
positive. The agricultural biotechnology companies are currently developing
additional genetically engineered traits in plants. Based on these results and
with the increased volume of such traits, the Company expects sales of these
products to grow. The Company continues to develop additional tests to detect
traits in genetically modified plants.
During 2000, a genetic trait known as Cry9C or StarLink(TM) that was approved by
the U.S. Environmental Protection Agency only for non-food uses was discovered
in food products. The impact of this discovery resulted in the need for growers,
handlers, processors, shippers and exporters to test corn for the presence of
StarLink(TM). SDI's Bt9 Trait Check test was the first GMO test validated by the
U.S. Department of Agriculture. The Company worked closely with key grain
processors worldwide to provide significant volumes of tests to meet the high
market and regulatory demand and hence more than 2 million Bt9 strip tests were
sold in 2001. The StarLink(TM) issue brought to light the need for definitive
genetic analysis and that paper certifications as to genetic origin and
concentration alone are inadequate. The Company believes it is the recognized
leader in the field of Cry9C detection.
4
During the year 2000, several regulatory actions promoted testing in the food
safety area. The U.S. Department of Agriculture's Grain Inspection, Packers and
Stockyards Administration (GIPSA) recommended that all corn seed sold for the
2001 planting season and parent lines to be used in 2001 seed production be
tested for the presence of the StarLink(TM) protein. This recommendation
expanded the market opportunities for the Company's Bt9 testing products.
Additionally, the FDA issued a directive recommending dry millers to test all
yellow corn passing through their complexes for the presence of StarLink(TM).
Another noteworthy regulatory action was the creation of a new U.S. national
standard for organic fruits, vegetables and meats to help guide consumers
seeking alternatives to commercially produced food. Under this standard, foods
labeled "organic" cannot include genetically modified ingredients. The Company
is positioned to work closely with the organic food industry to offer testing
mechanisms to screen, confirm and quantify various GMO traits for labeling and
identity preservation programs.
Food Testing
In 1998, a significant market opportunity for immunodiagnostic analysis was
created in manufactured food products. This opportunity arose from regulatory
response to public demands to address a consumer's right-to-know whether a food
product contains concentrations of genetically modified organisms (GMOs). In May
1998, the European Commission enacted food regulations governing the labeling of
foodstuffs that are derived from genetically modified crops. The legislation
affects food processors in all fifteen member states within the European Union.
Under the European Commission's EC 258/97 and EC 1139/98, beginning March 1,
1999, food processors were required to label food ingredients for the presence
of GMOs. Similar regulations have been adopted in many parts of the world
including Japan. The European Union and Japan comprise the largest customers for
U.S. soybean and corn exports.
During the second half of 1998, the Company began entering into licenses to use
proprietary genetic traits with major developers of genetically engineered
plants, and began developing an immunodiagnostic test to detect the presence of
GMOs at specified concentrations. This research and development was completed
and the Company participated in a Joint Research Centre - Institute for Health
and Consumer Protection Food Products Unit sponsored validation study of its
first test kit. Validation studies are common in the food testing industry and
are generally referred to as "Ring Studies." This Ring Study involved 38
qualified laboratories throughout Europe and was completed in December 1998. The
JRC has informed the Company that its products have been validated to detect the
presence of the tested traits at the thresholds established in the Ring Study
protocol.
Also during the second half of 1998, the Company began to introduce its
technology and product plans to food processors. The reaction from the
marketplace was and continues to be positive. Prospective customers have shown
interest in the ability of the Company's technology and products to detect the
presence of GMOs above a specified threshold level, its fast time-to-result and
cost advantages.
Recent world events also have helped to change the food safety marketplace. In
Europe, re-emerging concerns over bovine spongiform encephalopathy (BSE, or mad
cow disease) have prompted broader uses for GMO testing in feed supplies. BSE is
a transmittable fatal brain disease in cattle. The disease has been attributed
to the use of animal bone meal and other animal scrap in feed supplies. The
elimination of bone meal used in feed has increased the need for other sources
of protein, such as soybean toasted meal. The Company's new GMO Roundup
Ready(TM) meal test kit can detect GMO in toasted meal. In addition, this same
test is also validated for use with other primary food ingredients, including
protein isolates, concentrates, soy milk, tofu and dietary fiber. European feed
companies and their suppliers now have the ability to verify their feeds for the
absence or presence of GMOs.
5
The Company continues to partner with the major agricultural biotechnology firms
to develop new products and promote rapid GMO testing methods throughout the
food distribution channel. With our new products and market opportunities we
believe the Company is well positioned as the leader in the rapidly growing
market for food ingredients testing for today and the future.
Mycotoxins. Mycotoxins are toxins formed in grains such as corn, barley, and
wheat by naturally occurring fungi. Many mycotoxins have been proven or
associated with health effects in both animals and humans. The FDA, in concert
with the USDA, has developed minimum acceptable levels for the mycotoxins,
aflatoxin and vomitoxin. Testing is mandatory on all U.S. exported grains. Some
mycotoxins do not break down upon processing, and therefore testing continues at
the food processing level as well. The existing market for mycotoxin testing is
greater than $25 million annually. Though it is a developed market in which we
compete with other established test providers, we believe we have an excellent
customer network developed with our other products in the food safety market,
including GMOs, and an enhanced product with significant competitive advantages,
including enhanced ease-of-use and rapid screening applications, and sales could
develop rapidly.
Bacteria Testing. Rapid hygiene testing is a fast, relatively inexpensive way
for companies to assess the cleanliness of their production lines and surfaces.
Management estimates the current market for rapid hygiene testing to be
approximately $70 million for the year 2001 and is expected to grow 15%
annually.
Pathogen specific testing is an increasingly important part of the microbiology
tests performed in the global food industry. In 2000, the pathogen testing
market was estimated to be $60 million in the U.S. and $160 million worldwide
according to independent studies.
Ruminant Testing. There is currently no simple, cost-effective method to detect
the proteins of ruminant animals in feed. Due to the association of animal
proteins in feed with outbreaks of BSE, or mad cow disease, regulations are now
in place in the U.S. and throughout the world to prohibit the use of ruminants
as components of animal feed. In the U.S., a final rule 21CFR 589.2000 prohibits
the feeding of certain mammalian protein to cattle and other ruminants. In
Europe, a complete ban on all meat and bone meal (MBM) is in place. Testing feed
for ruminants provides assurances that feed is safe for cattle and other
animals.
Water Quality
The water quality marketing unit provides analytical tests for drinking water,
industrial process water and waste water. Water quality testing is driven by
regulatory initiatives such as the Safe Drinking Water Act and the Clean Water
Act in the United States of America, and by economic factors including the cost
of clean water and productivity losses attributable to inadequate industrial
water treatment. Because of the increasing scarcity of potable water and the
critical role treated water plays in the manufacturing process, the market for
analytical testing continues to grow. The Company offers a wide range of on-site
analytical testing products for the water quality market. These include kits to
measure concentrations of 40 different pesticides in water, tests for the
presence of pathogenic protozoa Cryptosporidium and Giardia, testing systems for
toxicity in drinking and wastewater and test kits that measure concentrations of
water treatment polymers. Though our key user segments continue to be the
Department of Defense, federal and state regulatory agencies and industrial
processing facilities, we are seeing new opportunities at dry cleaning
facilities, Brownfields programs and bio-remediation processes.
6
Water Treatment Polymers. The water treatment market encompasses both industrial
and municipal water treatment systems. Water treatment chemicals, typically
polymers, are critical to preparing finished drinking water in municipal
settings and to controlling water quality in industrial settings. Competition
between water treatment chemical manufacturers is intense and new chemicals have
evolved to the point that some of the more effective chemicals are quite
expensive. Cost-effective use of these chemicals requires careful control of
polymer concentrations throughout the system in which they are being employed.
Many of these polymers are toxic and have been implicated in fish kills when
industrial effluents have been discharged into natural bodies of water. As a
result, there is increased regulatory pressure to measure the amount of chemical
being discharged into surface waters.
The Company, working in collaboration with its corporate partners, has
successfully developed highly sensitive and accurate immunoassays for the
detection of a number of water treatment polymers. These immunoassays have been
demonstrated to be a reliable and cost-effective way to measure water treatment
polymers in samples from municipal water supplies, boilers, cooling towers, and
other processed 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 (such as reverse
osmosis) by excess polymer.
Pesticides. The entrance of pesticides into the water supply as a result of
agricultural and residential runoff continues to be a problem requiring
analytical testing. In areas of substantial agricultural activity, drinking
water is tested for several pesticides in order to ensure compliance with
federal regulations. Imported grains, fruits and vegetables are tested for the
presence of pesticide residues prior to use in the U.S. In addition, pesticide
residues in crops call for extensive testing at the time of pesticide
registration or re-registration under the Federal Insecticide, Fungicide, and
Rodenticide Act (FIFRA). In spite of their banned status, pesticides such as DDT
and chlordane still persist in soil at sites where they were stored or
distributed. The clean-up of these sites requires the use of specific analytical
methods of pesticide detection.
Cryptosporidium and Giardia. The Company, under a license agreement,
manufactures and sells 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-borne pathogens. The Company's Hydrofluor-Combo(TM)
test kit has been designated as the American Society for Testing and Materials
(ASTM) standard method for detection of these pathogenic protozoa and also was
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 that
result from chlorine disinfection of drinking water. The Company's test is a
non-immunoassay-based test for the detection of `total trihalomethanes' (TTHMs).
The test is fast, easy, inexpensive and detects TTHMs at levels much lower than
the new proposed safe drinking water guideline. The Company's TTHM kit has
received US EPA Method Approval (Method 8530).
RaPID Assay(R) and EnviroGard(TM). The RaPID Assay(R) and EnviroGard(TM)
pesticide test kits are being used extensively by water quality researchers,
resource managers, regulators and drinking water system operators for surface
and groundwater monitoring, drinking water source and supply management, and
chemical fate and transport studies. Users of the Company's water quality
pesticide products include federal agencies, such as the U.S. Geological Survey
and Department of Agriculture, state environmental and health departments,
drinking water utilities, and environmental engineering companies.
7
Microtox(R) Test System. The Microtox Test System(R) is a general toxicity test
that detects a broad range of toxins and chemical agents in water. The Microtox
Acute Toxicity Test is being used to monitor drinking water supplies in various
countries and U.S. cities where either accidental or deliberate contamination is
a concern. The test can be completed in as little as 15 minutes, allowing for a
quick response to changes in water quality. Microtox Toxicity Test Systems are
uniquely suited for drinking water surveillance because they provide rapid
screening and confirmation results, which are cost-effective and easy to
perform. With more than 500 peer-reviewed scientific articles and more than
1,700 instruments sold worldwide, the Microtox Toxicity Test System is the
standard for rapid toxicity screening and analysis.
Pollutants. Analysis of soil, water and waste samples to determine the presence
of hazardous chemicals has become increasingly important in connection with
environmental remediation and environmental monitoring activities. These
activities are largely the result of environmental legislation such as RCRA,
CERCLA, TSCA, the Safe Drinking Water Act (SDWA) and Federal Water Pollution
Control Act (the "Clean Water Act"). The Company believes that approximately
1,200 commercial environmental testing laboratories, as well as "in-house"
laboratories at industrial and disposal facilities provide environmental
testing.
Environmental remediation activities require a substantial amount of testing in
connection with the clean-up of contaminated sites. After initial
characterization of toxic chemicals at a site, substantial testing typically is
required to complete an assessment of the site to determine the extent and
location of contamination and the appropriate remediation plan. Upon the
commencement of the remediation project, additional testing is necessary to
determine the effectiveness of the remediation measures. In addition, ongoing
testing to monitor soil and groundwater is often required after completion of
the remediation activities. The contaminants of primary concern for remediation
activities include petroleum fuel products, polyaromatic hydrocarbons (PAHs),
polychlorinated biphenyls (PCBs), benzene, certain metals and chlorinated
solvents.
Environmental monitoring activities under SDWA and National Pollution Discharge
Elimination System (NPDES) legislation require periodic testing for various
hazardous chemicals. The nation's 58,000 drinking water systems test for
contaminants such as metals, benzene, other volatile organic compounds and
microbiological contamination. Approximately 6,400 major industrial and
municipal wastewater treatment facilities monitor and test wastewater for
contaminants such as chlorinated solvents, metals and volatile organic
compounds. Hazardous waste handling and disposal companies carry out large
volumes of analytical work, including pre-acceptance testing to determine the
suitability of waste streams for disposal and routine testing of incoming
shipments. In addition, the ongoing management of chemicals in the petrochemical
and pesticide industries also results in the need to test samples at many points
in the production, use and disposal cycle. Electrical utilities have ongoing
analytical needs pertaining to disposal of PCB-containing materials.
Proprietary Chemicals. The proprietary chemical market category includes tests,
commissioned by chemical manufacturers, that specifically measure the particular
compound of interest. In the chemical market category the benefits of
immunoassay testing have led to three key applications: (i) regulatory
registration, in which immunoassay data is generated to support the registration
of a product with the EPA; (ii) detection, to determine whether a target
compound is present in a complex matrix; and (iii) monitoring, in which tests
are performed to determine chemical concentrations for control purposes.
The application of immunoassay technology in conjunction with regulatory
registration is significant because of the requirement that large-scale chemical
manufacturers register their chemicals under FIFRA with the EPA. As part of this
registration process, manufacturers must provide extensive data for both
registration and post-registration analyses regarding 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.
8
Industrial Markers. The Company is collaborating with a corporate partner in
this market category, which consists of test kits that detect marked products.
The product marking technology is based on the incorporation of trace levels of
inert chemicals or markers into solid or liquid products or on the surface of
the products. The use of these markers, in conjunction with immunoassay
techniques for marker detection, allows for the covert marking and testing of
nearly any product. This technology can be used to prevent revenue loss due to
counterfeiting and product diversion, limit a manufacturer's exposure to
unwarranted product liability, and enhance process efficiency and product
quality assurance.
Pollutant Test Products. The Company sells four different format immunoassays
into the environmental market: (i) D TECH(R) latex particle filtration tests,
(ii) EnSys RISC(TM) and EnviroGard(TM) coated-tube tests, (iii) RaPID Assay(R)
magnetic particle tests and (iv) EnviroGard(TM) microtiter plate tests. Each of
the four different test formats has performance characteristics that make them
more or less suited for a particular customer application. The Company positions
the sale of all of its products so as to provide the customer with the best
product for its specific application.
The D TECH(R) and EnSys RISC(TM) tests do not require refrigeration which make
them ideally suited for on-site, field applications. All of the environmental
test kits include components for the extraction of target analytes from the
sample and subsequent analysis. Sample preparation time is typically less than
five minutes per sample. All of the Company's environmental test kits are
capable of analyzing at least ten samples per hour and some allow analysis of as
many as forty samples per hour.
D TECH(R). The D TECH(R) tests are a latex particle filtration immunoassay
format and provide for rapid, easy-to-use, on-site, field screening analysis of
soil and water samples containing EPA Priority Pollutants such as PCBs, PAHs,
TNT, BTEX (benzene, toluene, ethylbenzene and xylene) and others. D TECH is
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 analyzed at one time.
RaPID Assay(R). The RaPID Assay(R) magnetic particle immunoassay product line
currently contains kits and accessories for detection of 21 different pesticides
(herbicides, insecticides and fungicides), and six 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(R) is fast and easy to perform, but not as
field-portable. RaPID Assay(R) pesticide test kits are used for quantitation of
pesticides in water, soil and food. RaPID Assay(R) test kits for toxic organic
chemicals are used for measuring contaminant concentrations in both water and
soil.
EnviroGard(TM) and EnSys RISC(TM). Like D TECH(R) and RaPID Assay(R), these
coated-tube and microtiter plate format testing products detect some of the most
commonly encountered toxic chemicals found in soil, water and on surfaces at
contaminated sites, including PCBs, fuel products, PCP, TNT, benzene, PAHs,
crude oil, and pesticides. Additionally, the EnviroGard(TM) products detect
pesticides in drinking water and foodstuffs. The coated-tube format tests are
used extensively to analyze relatively large numbers of samples in the field and
yield a semi-quantitative result. The EnviroGard(TM) microtiter plate kits are
designed for use in the laboratory and are ideally suited for analysis of large
numbers of samples where determination of exact concentrations of contaminants
are required.
Antibody Business
The Company develops, manufactures and markets a comprehensive set of monoclonal
and polyclonal antibody products and services through its Strategic BioSolutions
division. Specific expertise includes hybridoma development and cell culture
expertise, large-scale ascites and antibody production, large-scale
purification, characterization and a complete array of related services.
9
This division serves a wide range of customers including pharmaceutical,
biotechnology and diagnostic companies and major research centers in the United
States, the European Union and the Pacific Rim. During 1999, the Company
significantly enhanced its presence in this market through the acquisition of
HTI and the operating assets of the OEM business of Atlantic Antibodies, as more
fully described in the notes to the consolidated financial statements. The
Company believes this division is one of the largest independent custom antibody
operations in the United States. Throughout the Company's history, many
significant product development and commercial supply agreements have followed
from initial projects to develop and supply antibodies. The comprehensive
customer base of this division has the potential to provide an even greater
number of these meaningful opportunities.
Continuing work on the human genome project by our biotechnology customers has
provided an opportunity for increased sales to these customers. The study of
gene functionality is often examined at the protein level, and antibodies, which
naturally bind to proteins, are critical tools in building on this new
knowledge. Going forward, we believe that, as work continues on this project, it
will provide a unique opportunity for the Company to build on our existing
market share within this segment.
The Company received AAALAC (Association for the Assessment and Accreditation of
Laboratory Animal Care) accreditation at its Maine polyclonal antibody facility
in October 2000. The Maine site now joins the Delaware facility, which has
maintained AAALAC accreditation since 1993, in offering products and services
which meet the highest quality standards in the industry.
The division employs approximately 101 people and supplies critical reagents
used in the Company's test kits in addition to the development and marketing
activities described above. For additional information concerning the Antibody
business, see Notes 9 and 14 to the consolidated financial statements.
Other Products
RapidChek(R) SRB. Sulfate Reducing Bacteria ("SRBs") are environmentally
significant because they generate hydrogen sulfide gas and cause corrosion of
stainless steel pumps, pipelines, and drilling rigs and result in the souring of
oil reserves. SRBs can be controlled by the addition of treatment chemicals.
Historically, the majority of testing in this market was performed using a
culture method called the American Petroleum Institute Recommended Procedure No.
38. This method requires that samples be incubated from 14-28 days before a
result is obtained. RapidChek(R) SRB test is a simple-to-use, field portable
test that provides the user with accurate results in 20 minutes and allows for a
rapid, more cost-effective application of treatment chemicals.
Major Customers
In 2001, Aventis Cropscience USA L.P. accounted for 15% of the Company's
revenues. In 2000 and 1999, no single customer accounted for 10% or more of the
Company's revenues.
Sales and Marketing Strategy
As a result of the consolidation of the SDI, EnSys, Ohmicron, EnviroGard(TM),
HTI and AZUR businesses, the Company has formed an experienced sales and
marketing organization of 42 individuals. In addition to its direct sales force,
the Company sells product through an extensive network of distributors and
through its corporate partners.
10
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 water quality 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 logistics support
to the field sales personnel and interfaces between customers and technical
support.
In 1993, the Company opened a European headquarters and sales operation near
London, England. The sale of the EnSys RISC(TM), RaPID Assay(R),EnviroGard(TM)
and Microtox(R) products in Europe are principally directed through that office.
Sales and distribution of the D TECH(R) product line outside of the U.S. are
made exclusively by E. Merck KGaA, Darmstadt, Germany.
Sales of the Company's products for detecting water treatment polymers,
proprietary chemicals, industrial markers, genetically engineered crops and rice
blast are through the Company's corporate partners in selected markets and
through the Company's direct organization in others. The RapidChek(R) SRB test
kit is sold directly by the Company and through five international distributors.
Regulatory Approvals
The environmental legislation and regulations that the Company believes are most
applicable to its current business are RCRA, CERCLA, TOSCA, 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 programs 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 two main areas in which the Company is seeking regulatory
acceptance for its products: hazardous waste testing methods by the federal and
state environmental protection agencies and water testing methods by the federal
and state environmental protection agencies. The EPA and some state agencies
have evaluated certain of the Company's analytical methods and accepted their
use for certain remediation and monitoring activities. Further acceptance by
these agencies would stimulate demand for the Company's products. The Company
expects that as its products are subjected to wider use under various conditions
and subjected to traditional validation techniques, such acceptance will
generally be granted. Such acceptance would serve to strengthen already
compelling customer motivations such as the ease-of-use and specificity
characteristics of the Company's products, but is not a prerequisite to selling
the products in the markets the Company serves.
Hazardous Waste Testing Methods. EPA SW-846 is the compendium of analytical and
test methods published by the EPA's Office of Solid Waste (OSW). A number of
provisions of the EPA's hazardous waste regulations under RCRA mandate the use
of SW-846 methods. In other contexts, SW-846 is a guidance document setting
forth acceptable, although not required methods to be implemented by the user in
response to sampling and analysis requirements. Some states also require the use
of SW-846 methods under their hazardous waste programs. SW-846 methods are
technically only applicable to regulatory programs under RCRA. However, other
federal, state and local environmental programs, including CERCLA and TOSCA,
often refer to and rely on SW-846 methods for purposes of remediation and
monitoring.
11
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 following table summarizes the EPA acceptance status of the Company's
hazardous waste testing products.
- --------------------------------------------------------------------------------------------------------------
EPA SW-846
Method D TECH(R) EnSys RISC(TM) EnviroGard(TM) RaPID Assay(R) Envirol(R)
No. Analyte
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
4010 PCP Soil & Water Soil
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
4015 2,4-D Soil & Water Soil & Water
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
4020 PCB Soil Soil & Oil Soil Soil
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
4030 TPH Soil Soil
4035 PAH Soil (APAH) Soil (APAH) Soil (APAH)
Soil (CPAH)
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
4040 Toxaphene Soil
4041 Chlordane Soil
4042 DDT Soil
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
4050 TNT Soil & Water Soil & Water
4051 RDX Soil & Water
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
4670 Triazines Water
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
8510 RDX Soil
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
8515 TNT Soil
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
8530 TTHM Water
- ---------------------- ---------------- --------------- ---------------- ------------------ ------------------
8535 TCE Water
- --------------------------------------------------------------------------------------------------------------
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 a
program aimed at expediting the approval of new methods that involves the
cooperation of the Solid Waste, Drinking Water, and Waste Water methods groups.
The volatile organic halide (TCE) water test has been accepted as Method 8535.
The TTHM (total trihalomethanes) water test has been accepted as Method 8530. In
addition, the RaPID Assay(R) Atrazine test was accepted as the first
quantitative immunoassay method. It is anticipated that the EPA Office of
Drinking Water will adopt this method for screening according to the Drinking
Water Regulations for Triazines under the SDWA. The Company's RaPID Assay(R) for
Spinosad has been adopted by the EPA office of Pesticide Programs as the
official enforcement method for this pesticide.
Other Testing Methods. 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 the Association of Official Analytical
Chemists ("AOAC"), 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.
12
Manufacturing
The Company currently manufactures over 180 different test kits for the
detection of a wide array of analytes in five immunoassay formats: one-step
strip tests, coated-tubes, latex particle filtration, magnetic particles and
microtiter plates, and in one bioluminescence format: Microtox(R) Toxicity Test
System. In addition to test kits, the Company supplies its customers with
ancillary equipment and supplies including reagents, spectrophotometers,
pipettes, balances and timers among others.
The kit manufacturing process consists mainly of instrument production, critical
reagent production and in-process testing, filling and dispensing, labeling, kit
assembly, quality control, packaging and shipping. The Company's instrument
manufacturing group produces the Microtox(R) Test Systems from its manufacturing
facility in Oceanside, California. The technical reagents manufacturing group
produces critical reagents from its laboratories in Newark, Delaware.
Sub-assemblies and finished kits are manufactured and shipped worldwide out of
the Company's headquarters facility in Newark, Delaware.
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 believes that the raw
materials, instruments and equipment used in the manufacture of its products are
adequately available for the Company's current and foreseeable manufacturing
needs.
The Company manufactures its products in accordance with the FDA's Good
Manufacturing Practices guidelines and has put in place systems designed to
control all elements of the manufacturing process including raw materials,
inventory, processes, documents, work-in-process, lot records, equipment and
training. Integrated inventory control, purchasing, manufacturing scheduling,
order processing, shipping and customer invoicing are elements of the Company's
computerized Manufacturing Resource Planning (MRP) systems.
The Company's manufacturing organization, including the technical reagents
manufacturing group, consists of 41 individuals. The Company believes the
existing facilities and equipment are sufficient to support a significantly
larger manufacturing base. Manufacturing operations are currently running one
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,
2001, 2000 and 1999, the Company incurred approximately $3.0 million, $2.9
million and $2.5 million, respectively, in research and development
expenditures, principally in the test kit business segment. In 2001
approximately 40% of those expenditures were incurred pursuant to customer
research agreements or corporate partnerships and the other 60% related to
development of products directly by the Company. The Company expects that
internal research and development projects, primarily in the food safety area,
will continue to represent an increasing percentage of its total research and
development expenditures. 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, Association for the Assessment and
Accreditation of Laboratory Animal Care ("AAALAC") approved, Strategic
BioSolutions antibody development and large-scale production facilities. The
Company has assembled a scientific staff with extensive experience in the
development of monoclonal and polyclonal antibodies, immunogens and assay
reagents.
13
The Company's assay development scientists are experienced in developing tests
in a variety of different immunoassay formats, including one-step strips, latex
particle 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, and microbiology. In addition to the
technical expertise resident within the research and development staff,
Strategic Biosolutions provides the Company, 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. Customer-sponsored product development is
performed either in collaboration with a corporate partner that has identified a
specific market need and provides funds to the Company to develop an assay, or
by the Company to fulfill an identified market need. Research and development
contracts are typically structured so that technology developed within the
program is co-owned by the Company and its partner and the Company maintains
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 funds such efforts. In the markets where the Company
has chosen to compete, rapid field screening tests are highly valued and the
Company is actively engaged in developing proprietary technology to better meet
those needs and enhance the Company's overall performance. Through its
continuing development of tests to detect genetically engineered plants and
water treatment polymers, the Company has gained extensive expertise, facilities
and equipment relating to the development and manufacture of one-step strip
tests, and is working aggressively to further develop this technology.
The Company's technology organization, including research and development,
Strategic BioSolutions, Technical Reagents Manufacturing, and Technical
Marketing Support consists of approximately 57 individuals, of which 24 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 Company scientists or acquired externally.
Accordingly, the Company has implemented a number of procedures to safeguard the
proprietary nature of its technology. The Company requires its employees and
consultants to execute confidentiality agreements upon the commencement of an
employment or consulting relationship with the Company and all employees are
required to agree to assign to the Company all rights to any inventions made
during their employment or relating to the Company's activities.
Additionally, the Company seeks to protect its technology and processes through
the patent process for its test kit business. The Company currently holds 26
issued U.S. patents. One U.S. patent application has been allowed, two U.S.
patents have been licensed for exclusive use by the Company and 5 U.S. patent
applications are pending.
14
- ------------------------------------------------------------------------------------------------------------
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
5,426,035 Method for compensating toxicity test data
5,427,955 Photochemical determination of organic compounds
5,429,952 Marking of products to establish identity and source (license)
5,449,611 Polyaromatic hydrocarbon (PAH) immunoassay method, its components and a kit for use in
performing the same
5,484,709 Immunoassay method for detecting an immunologically non-remarkable compound
5,541,079 Monoclonal and polyclonal antibodies and test method for determination of
organophosphates (license)
5,547,877 Methods for the rapid detection of toxic halogenated hydrocarbons and kits useful in
performing the same
5,558,996 Fungus extraction method and kit
5,573,954 Method of obtaining a small representative solid-phase sample
5,576,187 Standards for phosphorothioate insecticide immunoassays
5,593,850 Monitoring of industrial water quality using monoclonal antibodies to polymers
5,618,681 Polyaromatic hydrocarbon (PAH) immunoassay method, its components and a kit for use in
performing the same
5,658,463 Kits and processes for extraction of analytes from solid materials
5,679,574 Quantitative test for oils, crude oil, hydrocarbon, or other contaminants in soil and
a kit for performing the same
5,691,148 A petroleum immunoassay method, its components and a kit for performing the same
5,780,250 Immunoassay standards for polyaromatic hydrocarbon detection
5,834,222 Polychlorinated Biphenyls (PCB) immunoassay method
5,858,692 PCB immunoassay
5,874,216 Indirect label assay device for detecting small molecules and method of use thereof
5,891,657 Immunoassay standards for volatile analytes with benzene rings
5,919,645 Method for the direct determination of the toxicity of particulate solids
5,994,145 Reagents, methods and kits for detecting TCE and PCE
6,096,563 Dual particle immunoassay method & kit
6,146,903 Determination method
6,190,922 Substrate supported liquid extraction
The Company believes that their low-cost, easy-to-use, rapid field screening
tests have the potential to be significant products in their applicable markets.
Therefore, the Company continues to develop technology relating to immunoassay
formats with those features and has one pending patent application related to
novel point-of-care diagnostic devices. The Company believes that there is
significant market opportunity for tests that can detect genetically modified
crops and three of its pending applications are in this field.
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.
15
In addition to seeking patent protection for the Company's proprietary
information in its test kit business, the Company also relies upon trade
secrets, know-how and continuing technical innovation to maintain
competitiveness for both the test kit and antibody businesses. 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 transgenic plant proteins, water treatment polymers,
the explosive RDX, BTEX and TCE. In the field of genetically modified crops, the
Company believes that it has the greatest breadth of products and is the leading
provider of reagents and kits in this market.
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(R) products for the detection of environmental analytes.
This license carries royalties starting at 4% of net sales of such products each
year and declining to 2% based upon the volume of sales in such year.
Competition
Many of the Company's potential competitors are large companies with
substantially greater financial and other resources than the Company. To the
extent that any such companies enter into one or more of the Company's markets,
the Company's operations could be materially adversely affected. The Company
anticipates increased competition as potential competitors perceive that the
Company's markets have become commercially proven. During 2000, competitors
emerged with products that compete with certain of the Company's products to
detect Cry9C (StarLink(TM)) in corn for the food safety market and in 2001
competing products emerged for the detection of certain other traits in soybeans
and corn. EnviroLogix, Inc., a privately held company, and Neogen Corp. began
offering Cry9C test kits with characteristics similar to the Company's. Other
companies may be developing additional products for one or more of the Company's
markets that could be competitive with the Company's products. The Company
believes neither of these competitors has products that compete with all of the
Company's products in the food safety market. The Company believes that the
breadth of its product offerings in the food safety market, the expertise it has
accumulated in developing tests for GMOs in the food safety market, the
relationships it maintains with the developers of new genetically modified plant
varieties and the extensive customer relationships it has assembled throughout
the agricultural seed, grain and food processing industries are all significant
competitive advantages.
Currently, the Company believes that there are no similar competing immunoassay
products for the Company's RapidChek(R) Rice Blast, Botrytis and SRB,
proprietary chemical, industrial marker or water treatment polymer tests. The
Company holds U.S. patents relating to the Rice Blast and SRB tests and believes
they will help to provide a competitive advantage in the event that competing
products enter the market. The Company's water treatment polymer tests are
unique to the industry and the Company has secured U.S. patents and an exclusive
technology license and believes that such property will help to provide a
competitive advantage in the event that competing products enter the market.
There is no direct competition for the Company's Microtox(R) product line in the
United States. In Europe and other parts of the world, the Company competes
against other instrument based test methods, provided by small to mid-sized
companies, some of whom have greater technical and marketing resources than the
Company. The Company believes its products have a number of competitive
advantages including the comprehensive screening for general toxicity and
competes effectively on superior features and functions.
In the antibody segment, competitors include large pharmaceutical, research and
diagnostics organizations, some of which have significantly greater revenues
than the Company, that produce these products internally and purchase similar
products from SBS. Additionally, there are a number of smaller companies that
offer competing products. The Company believes that the scale of its operations
and the breadth of its product lines, among other things, are significant
competitive advantages.
16
Employees
As of December 31, 2001, the Company employed 209 full time and 3 part time
individuals including 185 regular and 27 contract employees. All of the
Company's employees have executed agreements with the Company agreeing not to
disclose the Company's proprietary information, assigning to the Company all
rights to inventions made during their employment, and prohibiting them from
competing with the Company. None of the Company's employees are covered by
collective bargaining agreements. The Company believes that its relations with
its employees are good.
ITEM 2. PROPERTIES
The Company is headquartered in Newark, Delaware, and occupies approximately
28,000 square feet of space under an operating lease expiring in December 2007.
The Company also leases approximately 26,000 square feet of manufacturing and
research space, also in Newark, Delaware, under three operating leases. Two of
these leases expire in October 2002 and the Company plans to extend them on
similar terms. The third lease expires in November 2003. The Company leases
approximately 1,700 square feet of instrument manufacturing space in Oceanside,
California, under an operating lease expiring in June of 2003. The Company also
leases approximately 20 acres of farmland and animal housing, in addition to
approximately 1,200 square feet of office space in Ramona, California under an
operating lease expiring in December 2002.
The Company leases regional sales offices near London, England. 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.
Strategic BioSolutions occupies approximately 8,000 square feet of
manufacturing, research and animal facility space, in Newark, Delaware and owns
and occupies approximately 20 acres of farmland near San Diego, California and
120 acres of farmland in Windham, Maine.
The farmland near San Diego, California is under an Agreement of Sale with an
intended sales date of March 27, 2002. The Company will be using this farmland
subsequent to March 27, 2002 for limited production.
The Ramona, California facility lease will be subject to a sublease which shall
commence on August 1, 2002 and continue until the end of the lease term in
December 2002. The sublease is under negotiation and is expected to be completed
and executed March 27, 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended December 31, 2001.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under the
symbol "SDIX." Set forth below are the quarterly high and low bid prices for the
shares of Common Stock of the Company as reported by Nasdaq without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions:
Common Stock Price Range
Fiscal Year Ended High Low
- ----------------- ---- ---
December 31, 2001:
First Quarter 3.88 2.00
Second Quarter 4.20 2.50
Third Quarter 4.67 3.28
Fourth Quarter 9.99 4.55
December 31, 2000:
First Quarter 9.56 2.00
Second Quarter 7.63 2.47
Third Quarter 6.00 2.00
Fourth Quarter 5.00 1.88
On March 20, 2002 there were approximately 8,000 holders (285 holders of record)
of the Common Stock of the Company. The Company has never paid any cash
dividends on its Common Stock and pursuant to the Company's financing agreement
with PNC Bank, Delaware, the Company's commercial bank, no dividends or
distributions may be paid on account of its Common Stock.
In connection with the acquisition of AZUR, which acquisition was consummated on
September 28, 2001, the Company issued 700,000 shares of its Series C preferred
stock to the former shareholders of AZUR in consideration for all of the then
outstanding shares of AZUR capital stock. The Company issued the shares of
Series C preferred stock in reliance upon the exemption from registration
contained in Section 3(a)(10) of the Securities Act of 1933, as amended, after a
hearing upon the fairness and terms of the proposed transaction between the
Company and Azur before the Department of Corporations of the State of
California, by which the Department of Corporations of the State of California,
determined such transaction to be fair. Each share of Series C preferred stock
was convertible into one share of Common Stock at anytime at the option of the
holder, and automatically when the closing price of the Company's Common Stock
was $6.00 or more for a period of twenty consecutive trading days. The closing
price of the Company's Common Stock was $6.00 or more for each of the twenty
trading days from October 8, 2001 through and including November 2, 2001. As a
result, on November 2, 2001, the 700,000 Series C shares were automatically
converted to 700,000 shares of the Company's Common Stock.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(in thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product related $ 28,497 $ 24,773 $ 21,225 $ 14,172 $ 12,703
Contract and other 874 1,101 1,309 1,553 1,717
------------ ----------- ----------- ----------- -----------
Total revenues 29,371 25,874 22,534 15,725 14,420
Operating expenses:
Manufacturing 14,512 11,287 9,078 6,222 5,305
Research and development 2,954 2,932 2,450 1,922 1,580
Selling, general and administrative 10,290 9,333 8,668 7,156 6,132
Acquired research and development - - 3,500 - -
------------ ----------- ----------- ----------- -----------
Total operating expenses 27,756 23,552 23,696 15,300 13,017
Operating income (loss) 1,615 2,322 (1,162) 425 1,403
Interest income (expense), net (33) (415) (372) 356 274
Gain on sale of assets 76 283 - - -
------------ ----------- ----------- ----------- -----------
Income (loss) before taxes $ 1,658 $ 2,190 $ (1,534) $ 781 $ 1,677
------------ ----------- ----------- ----------- -----------
Income tax expense (benefit) 512 642 (5,317) - -
------------ ----------- ----------- ----------- -----------
Net income $ 1,146 $ 1,548 $ 3,783 $ 781 $ 1,677
------------ ----------- ----------- ----------- -----------
Preferred stock dividends 20 - 32 - -
------------ ----------- ----------- ----------- -----------
Net income applicable to common
stockholders $ 1,126 $ 1,548 $ 3,751 $ 781 $ 1,677
============ =========== =========== =========== ===========
Basic net income per share
applicable to common stockholders $ 0.07 $ 0.09 $ 0.26 $ 0.06 $ 0.13
============ =========== =========== =========== ===========
Shares used in computing basic net income
per share applicable to common stockholders 17,008,000 16,585,000 14,374,000 13,174,000 13,084,000
=========== =========== =========== =========== ===========
Diluted net income per share
applicable to common stockholders $ 0.06 $ 0.09 $ 0.22 $ 0.05 $ 0.11
============ =========== =========== =========== ===========
Shares used in computing diluted net income
per share applicable to common stockholders 17,642,000 17,466,000 17,088,000 16,103,000 15,712,000
============ =========== =========== =========== ===========
December 31,
------------------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,379 $ 1,288 $ 2,491 $ 1,864 $ 2,580
Short-term investments - - - 3,990 3,638
------------ ----------- ----------- ----------- -----------
Sub total 2,379 1,288 2,491 5,854 6,218
Working capital 11,931 10,384 10,130 10,158 9,403
Total assets 32,134 26,555 29,672 15,093 14,060
Long-term debt 1,174 1,889 6,275 265 25
Stockholders' equity 26,771 21,334 19,210 13,155 12,340
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Forward-Looking Statements
This Form 10-K contains certain forward-looking statements reflecting the
current expectations of Strategic Diagnostics Inc. and its subsidiaries (the
"Company"). When used in this Form 10-K, the words "anticipate", "enable",
"estimate", "intend", "expect", "believe", "potential", "will", "should",
"project" and similar expressions as they relate to the Company are intended to
identify said forward-looking statements. Investors are cautioned that all
forward-looking statements involve risks and uncertainties, which may cause
actual results to differ from those anticipated at this time. Such risks and
uncertainties include, without limitation, changes in demand for products,
delays in product development, delays in market acceptance of new products,
retention of customers and employees, adequate supply of raw materials, the
successful integration and consolidation of the Maine production facilities,
inability to obtain or delays in obtaining required government approvals, the
ability to meet increased market demand, competition, protection of intellectual
property, non-infringement of intellectual property, seasonality, and other
factors more fully described in the Company's public filings with the U.S.
Securities and Exchange Commission.
Overview
The Company develops, manufactures and markets immunoassay-based test kits for
rapid and cost-effective detection of a wide variety of substances in the food
safety and water quality markets. Through its Strategic BioSolutions division,
the Company also provides antibody and immunoreagent research, development and
production services.
Since its inception, the Company and its predecessors have, in addition to
conducting internal research and development of new products, entered into
research and development agreements with multiple corporate partners that have
led to the introduction of various products to the food safety, water quality
and other markets. The Company expects that internal research and development
projects, primarily in the food safety area, will continue to represent a larger
percentage of its research and development expenditures. The Company believes
that its competitiveness has been enhanced through the combination of talent,
technology and resources resulting from the relationships and the acquisitions
it concluded during the past five years. These relationships and acquisitions
have enabled the Company to achieve meaningful economies of scale for the unique
products it offers through the utilization of its consolidated facilities in
Newark, Delaware, for the manufacture of test kits, antibodies and biochemicals,
its facility located in Oceanside, California for the manufacture of
instruments, its facility located outside of San Diego, California (currently
being relocated to Windham, Maine, see Note 14) for the manufacture of
antibodies and biochemicals and its facility located in Windham, Maine for the
manufacture of custom, high-volume bulk polyclonal antibodies. These economies
of scale, in turn, enable the Company to offer its customers the most
appropriate test for each specific customer application.
On September 28, 2001 the Company acquired AZUR Environmental (AZUR), a
privately held manufacturer of proprietary rapid test systems, including the
Microtox Toxicity Test System, which measures toxicity in drinking and process
water, formerly located in Carlsbad, California. With more than 500
peer-reviewed scientific articles and more than 1,700 instruments sold
worldwide, the Microtox Toxicity Test System has been approved in regulations or
standards in Canada, eight (8) European countries, and has been submitted to the
U.S. EPA for approval. Under the terms of the merger agreement, the Company
issued 700,000 shares of Series C preferred stock, with a fair market value of
approximately $3.0 million, as determined by an independent valuation firm. On
November 2, 2001 the 700,000 Series C preferred shares were automatically
converted to 700,000 shares of the Company's common stock in accordance with
their terms (see Note 3).
20
With the 1999 acquisitions of HTI BioProducts, Inc. and certain assets of
Atlantic Antibodies, the Company formed a new operating division, Strategic
BioSolutions, which has now become one of the largest producers of antibodies in
the United States. The mission of Strategic BioSolutions is to supply monoclonal
and polyclonal antibodies, immunochemical reagents and related services to
medical diagnostic and pharmaceutical companies, as well as research
institutions.
The Company believes that its products in the food safety and water quality
testing markets are unique and fill potentially large, unmet needs. The Company
also believes that its products and technology currently being developed have
broad application in diverse markets. The Company believes that its established
product base, quality manufacturing expertise, experienced sales and marketing
organization, established network of distributors, corporate partner
relationships and proven research and development expertise will be critical
elements of its potential future success.
Revenues in any particular quarter may not be indicative of revenues for any
subsequent quarter during the year, or for the year. With the anticipated
increase in sales of the Company's Microtox test systems (these tests are
generally not affected by seasonal patterns) and as sales of food safety
products to other parts of the world develop over the next few years, the
Company expects its seasonal fluctuations to become gradually less pronounced.
Results of Operations
Year ended December 31, 2001 versus year ended December 31, 2000
Revenues: Net revenues increased $3.5 million or 14% in 2001 over 2000. The
following table sets out revenues by business segment and market category.
(in thousands)
Year Ended
------------------------ Increase Percent
2001 2000 (Decrease) Change
- ------------------------------------------------------------------------------------
Kit segment
Water quality $ 6,534 $ 4,908 $ 1,626 33.1%
Food safety 11,380 9,216 2,164 23.5%
Contract and other revenues 874 1,100 (226) -20.6%
--------------------------------------------------
Total kit revenues 18,788 15,224 3,564 23.4%
Antibody segment revenues 10,583 10,650 (67) -0.6%
--------------------------------------------------
Total net revenues $ 29,371 $ 25,874 $ 3,497 13.5%
==================================================
Water quality revenue growth is primarily attributable to strong demand since
September 11th for the Company's recently acquired general screening test for
chemical toxicity, Microtox(R). This product was acquired during 2001 in
connection with the acquisition of AZUR Environmental. In the period from
September 11th through December 31, 2001, the Company sold approximately 40
Microtox(R) units primarily to the drinking water industry as a means to detect
the presence of toxic concentrations of chemicals in water supplies. Revenues
from the sale of these units and their attendant consumables were approximately
$1.3 million during the September 11th through December 31, 2001 period. The
Company expects water quality revenues to grow in 2002, particularly due to
increased demand for Microtox(R) and its attendant consumables as water
processors and users have a heightened awareness of the potential threat of
chemical contamination (intentional or otherwise).
21
Food safety revenue growth is primarily due to increased sales of tests to
detect genetically modified organisms (GMOs) in plants, seeds, grain and
intermediate food products including tests to detect StarLink(TM) in corn. The
Company continues to lead the market with tests for every significant trait in
commercial production. The Company expects sales in the food safety category to
continue to grow for the year 2002, primarily in the third and fourth quarters,
as GMO testing for traits other than StarLink(TM) expand throughout the food
complex and as several new products, including additional GMO tests, the animal
feed tests and the food-borne pathogen lateral flow (strip) tests are developed
and brought to market.
Contract and other revenue declined as the Company continued to place greater
emphasis on devoting its research and development resources on internal
projects, particularly in the food safety category. These revenues are expected
to be in the range of the 2001 revenues for the foreseeable future.
Antibody revenue declined slightly in 2001 as the Company began consolidating
its operations into a single site at its Maine location during 2001. The Company
has recently opened the first of two new production facilities on the Maine site
and expects the second facility to open in March 2002. Once both facilities are
fully operational and validated, which is expected in June 2002, the Company
will be able to offer expanded production capacity with key customer features
such as the ability to produce a wide variety of antibody programs. With these
capabilities, the Company expects to be well-suited to meet the needs of its
marketplace, particularly the in-vitro diagnostic market and anticipates that
revenue will grow, particularly in the second half of the year.
Operating Expenses: Operating expenses increased $4.2 million or 18% in 2001.
This increase included additional costs of the consolidation of the California
and Maine facilities of $716 thousand, test kit inventory adjustments of
approximately $242 thousand and $100 thousand of costs for a retainer and fees.
The consolidation expenses include relocation, moving, startup and severance
expenses incurred in connection with the winding down of antibody production
facilities in California and the startup of combined operations at its Windham,
Maine facilities. Of these expenses, approximately $316 thousand were related to
manufacturing expenses associated with the closing and startup of the antibody
facilities and the balance were selling, general and administrative expenses
primarily associated with the relocation to Windham, Maine. The inventory
adjustments resulted from a computational and procedural error that resulted in
higher inventory values. These items were identified as the Company completed
its accounting for the fiscal year. To correct this error, inventory was reduced
by $242 thousand and manufacturing expenses were increased by $242 thousand. The
retainer and related fees relates to an engagement of an investment bank to
explore strategic alternatives. This engagement commenced in July 2001 and is
for a one-year term. Operating expenses before the items described above
increased $3.1 million or 13% to $26.7 million as described below.
Manufacturing expenses, which include the cost of goods sold, increased $3.2
million or 29% to $14.5 million. After the effect of the $316 thousand
adjustment for the Maine consolidation and the $242 thousand inventory
adjustment described above, manufacturing expenses increased $2.7 million or 24%
from the year earlier period. This increase is primarily attributable to
increased sales in 2001 and the increased costs attendant to the consolidation
of the antibody facilities, which required the Company to run certain
duplicative operations to facilitate the transition. As previously stated, the
Company expects to consolidate its antibody operations during 2002, which should
produce savings of between $750 thousand and $1 million per year. Gross profits
(total revenues less manufacturing costs) increased $272 thousand or 2% to $14.9
million and gross margins declined to 50.6% in 2001 from 56.4% in 2000. After
giving effect to the adjustments in 2001 described above, gross profits
increased $830 thousand or 5.7% and gross margins declined to 52.5% in 2001 from
56.4% in 2000. The decline in gross margins is attributable to the increased
costs of production during the transition of the antibody manufacturing
facilities from California to Maine as described above, and lower selling prices
for certain products in the food safety category at substantially higher volumes
in 2001. Gross margins are expected to improve in 2002 particularly in the
second half of the year, when several new products in the food safety category
are expected to be introduced to the market and with the completion of the
consolidation of the antibody operation in Maine and the operating efficiencies
expected to be derived in the second half of 2002 there from. Therefore, margins
for the antibody segment in 2002, particularly in the second half of 2002, are
expected to exceed those reported in 2001.
22
Research and development expenses were approximately the same in the year 2001
as in 2000. These expenses are expected to grow in 2002 as additional resources
are devoted to developing new products, including a test for unapproved proteins
in animal feed for McDonald's Corporation, the lateral flow food pathogen tests
and additional tests for genetic traits. The increase is expected to range from
20% to 40%, depending on the resource requirements.
Selling, general and administrative expenses increased $957 thousand or 10% to
$10.3 million. After adjusting for $400 thousand in costs related to the Maine
consolidation and $100 thousand in costs for a retainer and fees related to the
engagement of an investment bank as described above, selling, general and
administrative expenses increased $457 thousand or 5%. This increase is
primarily attributable to the general increase in business activity. These
expenses are expected to continue to grow in 2002 with the expected further
increase in business activity. However, as a percent of revenues, these expenses
are expected to decline from 35% to a range under 30% of revenues, as the
Company leverages its selling, general and administrative investments through
greater efficiencies of selling additional products to its existing customer
base.
Interest expense net: Net interest expense decreased $382 thousand or 92%, due
to the lower levels of debt carried throughout 2001 versus 2000.
Income taxes: Income tax expense decreased $130 thousand, largely due to reduced
pre-tax earnings. In 2001, the Company recorded a favorable adjustment to income
tax of $79 thousand compared to a $220 thousand favorable adjustment recorded in
2000. These adjustments reflect the increased utilization of the Company's net
operating loss carry-forwards and research and development tax credits. The
Company's effective annual tax rate rose slightly after the effect of these
adjustments to 31% of pre-tax earnings in 2001 from the 29% rate recorded in
2000.
Net Income: Net income decreased $422 thousand or 27% in the year 2001 when
compared to the year 2000 for the reasons described above, in particular the
additional costs of the consolidation of the California and Maine facilities of
$716 thousand, $242 thousand in inventory adjustments and $100 thousand in costs
for a retainer and fees related to the engagement of an investment bank. These
additional costs were partially offset by a $79 thousand favorable tax
adjustment. The net after tax effect of these items was $651 thousand. When
taking into account these items, net income rose $229 thousand or 15% in 2001 to
$1.8 million from the $1.5 million recorded in 2000.
Year ended December 31, 2000 versus year ended December 31, 1999
Revenues: Net revenues increased $3.3 million or 15% in 2000 versus 1999. This
increase was the result of a $3.5 million or 17% increase in product related
revenues offset by a $208 thousand or 16% decrease in contract and other
revenues. The growth in product revenues was primarily attributable to increases
in sales of products in the food safety category, primarily in the fourth
quarter (tests to detect genetic traits in genetically engineered plants) as
sales in this category of products grew 21% from the levels achieved in 1999.
This increase was due primarily to sales of the Company's products to detect the
genetic traits in StarLink TM corn. Sales of the Company's Traitcheck Bt9
product exceeded 1 million tests, virtually all of which were sold in the fourth
quarter of 2000. Revenues of antibody products grew 34% from the 1999 levels,
due primarily to the full year inclusion of revenues from the HTI acquisition in
February of 1999, and the OEM business of Atlantic Antibodies in May of 1999.
These increases were partially offset by decreases in the Company's water
quality category and decreases in sales of other products when compared to the
1999 revenues recorded in these categories. Revenues in the other products
category in 1999 included sales of Macra Lp(a) testing kits, a product line
which the Company sold in 1998, but for which sales under a manufacturing
agreement with the buyer of the product occurred during 1999. There were no
comparable sales in the year 2000. The decline in contract and other revenues
was primarily the result of the Company's continued emphasis on internal
research and development programs versus contractual sponsored research and
development programs.
23
Operating Expenses: Operating expenses increased $3.4 million or 17% in 2000 to
$23.6 million from $20.2 million in 1999, exclusive of the $3.5 million one-time
charge in 1999 for acquired research and development as a result of the HTI
acquisition. This increase was primarily attributable to an increase in the
general business activity that occurred during the year and is described below.
Manufacturing expenses, which include the cost of products sold, increased $2.2
million or 24% in 2000 to $11.2 million from $9.1 million in 1999. This was
primarily the result of the 17% increase in product related revenues in 2000 and
additional manufacturing expenses associated with the ramp in production to meet
the strong demand for StarLink tests. Throughout the fourth quarter, we were
able to ship test kits without any significant customer backorders. We met this
demand by increasing production to three shifts at certain times, particularly
early in the quarter as we built inventories. By the end of the quarter, we were
able to smooth out production and returned to a more normalized production
schedule. We experienced price pressure in the food safety category later in the
fourth quarter as competitors launched products.
Research and development expenses increased $482 thousand or 20% in 2000 to $2.9
million from $2.5 million in 1999. This increase was due to the Company's
continuing investment in new product development for its food safety category of
products (tests to detect genetic traits in genetically engineered plants) and
the ongoing project expenses related to the Bayer AG sponsored drug level
monitoring project.
Selling, general and administrative expenses increased $665 thousand or 8% in
2000 to $9.3 million from $8.7 million in 1999. This increase was primarily the
result of increased selling and marketing costs in the food safety and antibody
product categories.
Interest expense net: Net interest expense increased $43 thousand or 12%, due to
the higher levels of debt carried throughout the year 2000 versus the year 1999.
Income taxes: During the fourth quarter of 2000, the Company recorded a tax
charge of $204 thousand (net of a reduction in the valuation allowance of
approximately $220 thousand) and in the fourth quarter of 1999, the Company
recorded a tax benefit of $5.3 million, also related to a reduction in the
valuation allowance, all in accordance with Statement of Financial Accounting
Standards 109 ("SFAS 109") since management believed that it is more likely than
not that the Company will realize that portion of the benefits of net operating
loss carryforwards. The recognition of these deferred tax assets under SFAS 109
has no impact on the Company's cash flows for income taxes. As a result net
income comparisons between 1999 and 2000 are not meaningful.
Net Income: Net income decreased $418 thousand or 21%, (exclusive of the $5.3
million income tax benefit and the $3.5 million one-time acquired research and
development charge in 1999, recorded in connection with the HTI acquisition).
This decrease was primarily attributable to the income tax provision of $642
thousand for the year ended December 31, 2000, offset by a gain on sale of
assets of $283 thousand from the sale of the Company's Macra Lp(a) product line,
also recorded in the year 2000. Pre-tax net income (exclusive of the $3.5
million one-time acquired research and development charge) increased by $224
thousand or 11% to $2.2 million in 2000 from $2.0 million in 1999.
24
Liquidity and Capital Resources
The Company's working capital, which consists principally of cash and cash
equivalents, accounts receivable and inventory, increased $1.5 million in 2001
to $11.9 million at December 31, 2001 from $10.4 million at December 31, 2000.
This increase was primarily attributable to increases in the Company's cash and
cash equivalents of $1 million and to lesser increases in accounts receivable
and inventory accounts when compared to the prior year. Outstanding debt
decreased $721 thousand from $3.2 million at December 31, 2000 to $2.5 million
on December 31, 2001. On May 5, 2000, the Company entered into a financing
agreement with a commercial bank, which provides for a $4 million term loan, of
which approximately $1.6 million was outstanding at December 31, 2001, repayable
over three years, and up to a $5 million revolving line of credit, of which no
amount was outstanding at December 31, 2001. Proceeds from this financing
retired substantially all of the Company's previous indebtedness. On December
13, 2001, the Company entered into an agreement with the same commercial bank to
finance the construction of new facilities at its Windham, Maine location. This
agreement provides for up to $1.5 million in construction financing, of which
$948 thousand is outstanding at December 31, 2001 and is repayable over seven
years, with principal payments to begin when construction is completed, or
August 13, 2002, whichever is earlier.
Under the terms of the above financings, the Company is required to meet certain
financial covenants including funded debt to EBITDA and EBITDA to current
maturities of debt plus interest and taxes. At December 31, 2001, the Company is
in compliance with all such covenants, and accordingly, the related debt is
classified as long-term. As of March 28, 2002, that Company has determined that
it will violate one of the covenants for the quarter ending March 31, 2002.
Further, the Company has assessed it is also probable that it will violate
certain financial covenants for other quarterly measurement dates during 2002.
With the violation of the covenant on March 31, 2002, the commercial bank has
the right to demand repayment of the debt. The Company is in the process of
renegotiating the restrictive covenants with the commercial bank however, it has
not reached a definitive agreement. As of March 28, 2002, the outstanding
balance on this debt was approximately $2.1 million. The financing is secured by
substantially all of the Company's assets. The Company is confident that it will
be able to successfully negotiate a waiver of or modification to these covenants
to cure any violations.
For the year ended December 31, 2001, the Company satisfied all of its cash
requirements from cash available and on-hand, and from the financing agreements
described above. At December 31, 2001, the Company had $1.2 million in long-term
debt and stockholders' equity of over $26.7 million.
Contractual Obligations
We are committed to making cash payments in the future on two types of
contracts: our long-term indebtedness and leases. We have no off-balance sheet
debt or other such unrecorded obligations and we have not guaranteed the debt of
any other party. Below is a schedule of the future payments that we were
obligated to make based on agreements in place as of December 31, 2001. This
schedule excludes an obligation in connection with the acquisition of HTI
Bio-Products Inc. to pay a percentage of net sales of certain products over the
three-year period from February 26, 1999 to February 25, 2002, not to exceed $3
million. Any payments under this agreement will be recorded as additional
goodwill.
(in thousands)
Payments Due by Year
2006 and
Total 2002 2003 2004 2005 Beyond
- ----------------------------------------------------------------------------------------------------
Long-term debt (1) $ 2,507 1,333 556 214 214 190
Operating leases (2) $ 2,440 673 409 343 352 663
Construction related $ 205 205 - - - -
- ----------------------------------------------------------------------------------------------------
Total contractual
cash obligations $ 5,152 2,211 965 557 566 853
====================================================================================================
(1) See discussion in Note 7 of the Notes to the Consolidated Financial
Statements for additional information on our long-term debt.
(2) See discussion of operating leases in Note 10 of the Notes to the
Consolidated Financial Statements.
The Company believes it has, or has access to sufficient resources to meet these
contractual obligations and its operating requirements for the forseeable
future. The Company currently has in place an agreement to borrow up to $5
million on a revolving line of credit, of which no amount is outstanding at
December 31, 2001. The Company's ability to meet its capital requirements will
depend on a number of factors, including the ability to meet the loan covenant
requirements or obtain waivers necessary under its current debt agreements, the
success of its current and future products, competitive and technological
advances, future relationships with corporate partners, government regulation
and the Company's marketing and distribution strategy. The Company's future
capital requirements could change as a result of a number of factors including
the focus and direction of its research and development program and the success
of the Company's plan to make future acquisitions. Accordingly, no assurance can
be given that the Company will be able to meet the future liquidity requirements
that may arise from these inherent and similar uncertainties.
25
Accounting Standards
Potential Impact of Our Critical Accounting Policies - Our accounting policies
are described in Note 2 of the Notes to Consolidated Financial Statements. We
prepare our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the United States of America, which require us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. On an on-going basis, we evaluate our estimates, including
those related to bad debts, inventories, and contingencies. We base our
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances. The results form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from those
estimates. We consider the following policies to be most critical in
understanding the judgments that are involved in preparing our financial
statements and the uncertainties that could impact our results of operations,
financial condition and cash flows.
Valuation of Accounts Receivable - Our accounts receivable as of December 31,
2001, 2000 and 1999, was net of an allowance for doubtful accounts of $215
thousand, $130 thousand, and $214 thousand, respectively. The recorded allowance
is continually evaluated based on current market conditions, an analysis of
customer specific facts and circumstances, and the size and composition of the
overall portfolio. If receivables become uncollectable, we charge these
write-offs against the allowance.
Valuation of Inventories - Our inventories, which consist primarily of test kit
components, bulk serum and antibody products are valued at the lower of cost or
market. Cost is determined using the first in, first out method. Realization of
inventories is dependent upon the successful marketing of our products. We make
judgments regarding the carrying value of our inventory based on current market
conditions. Market conditions may change depending upon competitive product
introductions and customer demand. If market conditions change or if the
introduction of new products by us impacts the market for our previously
released products we may be required to write-down the cost of our inventory.
Revenue Recognition - Product related sales are composed of the sale of
immunoassay-based test kits and the sale of certain antibodies and
immunochemical reagents. For 2001, 2000 and 1999 these sales represented 90%,
87% and 83% of total Company revenues, respectively. The sale of
immunoassay-based test kits and certain antibodies and immunochemical and other
reagents are recognized upon the shipment of the product and transfer of title
or when related services are provided and when collection of any resulting
receivable is reasonably assured.
Sales of certain antibodies and immunochemical reagents are recognized under the
percentage of completion method and are recorded based on the percentage of
costs or time incurred through the reporting date versus the estimate for the
complete contract or project. For 2001, 2000 and 1999 these sales represented
7%, 9% and 11% of total revenues, respectively.
Contract revenues are recognized upon the completion of contractual milestones.
For 2001, 2000 and 1999 these sales represented 3%, 4% and 6% of total revenues,
respectively.
26
New Accounting Standards and Disclosures
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires use of
the purchase method of accounting for all business combinations initiated after
June 30, 2001 and that certain acquired intangible assets in a business
combination be recognized as assets separate from goodwill. SFAS No. 142
requires that goodwill and other intangibles that are determined to have an
indefinite life are no longer to be amortized but are to be tested for
impairment at least annually. SFAS No. 142 requires that an impairment test
related to the carrying values of existing goodwill be completed within the
first six months of 2002. Impairment losses on existing g