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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period From _____________ to
Commission File Number 0-68440
STRATEGIC DIAGNOSTICS INC.
(Exact name of Registrant as specified in its charter)
----------------------------
Delaware 56-1581761
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
111 Pencader Drive
Newark, Delaware 19702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (302) 456-6789
--------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report: None
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of July 31, 2002 there were 18,480,650 outstanding shares of the
Registrant's common stock, par value $.01 per share.
STRATEGIC DIAGNOSTICS INC.
INDEX
Item Page
- ---- ----
PART I
ITEM 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 2
Consolidated Statements of Operations - Three months and six months
ended June 30, 2002 and 2001 3
Consolidated Statement of Stockholders' Equity and
Comprehensive Income for the six months ended
June 30, 2002 4
Consolidated Statements of Cash Flows - Six months ended
June 30, 2002 and 2001 5
Notes to Consolidated Interim Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II 21
ITEM 3. Defaults upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Matters 22
ITEM 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
1
Item 1. Financial Statements
PART I
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
June 30, December 31,
- --------------------------------------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 1,392 $ 2,379
Receivables, net 4,711 4,737
Inventories 7,192 7,639
Deferred tax asset 861 861
Other current assets 797 504
- --------------------------------------------------------------------------------------------------------------
Total current assets 14,953 16,120
- --------------------------------------------------------------------------------------------------------------
Property and equipment, net 3,883 4,072
Other assets 57 351
Deferred tax asset 7,471 6,875
Intangible assets, net 4,806 4,716
- --------------------------------------------------------------------------------------------------------------
Total assets $ 31,170 $ 32,134
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 1,139 $ 1,620
Accrued expenses 667 1,236
Current portion of long term debt 2,055 1,333
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 3,861 4,189
- --------------------------------------------------------------------------------------------------------------
Long-term debt 1,264 1,174
- --------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock, $.01 par value, 19,664,362 shares authorized,
no shares issued or outstanding - -
Common stock, $.01 par value, 35,000,000 shares authorized,
17,878,959 and 17,858,889 issued and outstanding
at June 30, 2002 and December 31, 2001, respectively 179 178
Additional paid-in capital 31,307 31,114
Accumulated deficit (5,416) (4,496)
Cumulative translation adjustments (25) (25)
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 26,045 26,771
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 31,170 $ 32,134
==============================================================================================================
The accompanying notes are an integral part of these statements.
2
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
NET REVENUES:
- ------------------------------------------------------------------------------------------------------------------------------------
Product related $ 5,471 $ 6,999 $ 11,038 $ 13,890
Contract and other 105 202 282 385
- ------------------------------------------------------------------------------------------------------------------------------------
Total net revenues 5,576 7,201 11,320 14,275
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Manufacturing 2,918 3,258 6,029 6,581
Research and development 888 705 1,644 1,424
Selling, general and administrative 2,681 2,463 5,504 4,649
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 6,487 6,426 13,177 12,654
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (911) 775 (1,857) 1,621
Interest expense, net (17) (15) (33) (48)
Gain on sale of assets - 76 374 76
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before taxes (928) 836 (1,516) 1,649
- ------------------------------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) (381) 321 (596) 655
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (547) 515 (920) 994
- ------------------------------------------------------------------------------------------------------------------------------------
Basic net income (loss) per share $ (0.03) $ 0.03 $ (0.05) $ 0.06
====================================================================================================================================
Shares used in computing basic
net income (loss) per share 17,870,000 16,752,000 17,869,000 16,748,000
====================================================================================================================================
Diluted net income (loss) per share $ (0.03) $ 0.03 $ (0.05) $ 0.06
====================================================================================================================================
Shares used in computing diluted
net income (loss) per share 17,870,000 17,352,000 17,869,000 17,303,000
====================================================================================================================================
The accompanying notes are an integral part of these statements.
3
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(in thousands)
(unaudited)
Additional Cumulative
Common Paid-In Accumulated Translation
Stock Capital Deficit Adjustments Total
- ----------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2001 $ 178 31,114 (4,496) (25) $ 26,771
- ----------------------------------------------------------------------------------------------------------------
Exercises of stock options, warrants
and other 1 167 - - 168
Employee stock purchase plan - 26 - - 26
Net and comprehensive loss - - (920) - (920)
- ----------------------------------------------------------------------------------------------------------------
Balance,
June 30, 2002 $ 179 31,307 (5,416) (25) $ 26,045
================================================================================================================
The accompanying notes are an integral part of these statements.
4
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months
Ended June 30,
- -----------------------------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income (loss) $ (920) $ 994
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 454 443
Deferred income tax provision (benefit) (596) 524
Gain on sale/disposal of assets (374) (76)
(Increase) decrease in:
Receivables 405 (209)
Inventories 447 (112)
Other current assets (293) (170)
Other assets 119 (89)
Increase (decrease) in:
Accounts payable (481) 322
Accrued expenses (569) (107)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,808) 1,520
Cash Flows from Investing Activities:
Purchase of property and equipment (781) (322)
Proceeds from sale of land - 330
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (781) 8
Cash Flows from Financing Activities:
Proceeds from exercise of incentive stock options 168 137
Proceeds from employee stock purchase plan 26 19
Proceeds from issuance of long term debt 1,947 -
Proceeds from sale/disposal of assets 596 -
Repayments on financing obligations (1,135) (1,003)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,602 (847)
Net increase (decrease) in Cash and Cash Equivalents (987) 681
Cash and Cash Equivalents, Beginning of Period 2,379 1,288
- -----------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Period $ 1,392 $ 1,969
===========================================================================================================
Supplemental Cash Flow Disclosure:
Cash paid for taxes 3 132
Cash paid for interest 49 97
===========================================================================================================
Non-cash investing and financing activity:
Note receivable in connection with the sale of assets 300 -
===========================================================================================================
The accompanying notes are an integral part of these statements
5
STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(unaudited)
1. BACKGROUND:
Business
Strategic Diagnostics Inc. and its subsidiaries (the "Company") develops,
manufactures and markets immunoassay and bioluminescence-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 Test Kit segment. Through its
Antibody segment (Strategic BioSolutions), the Company also provides antibody
and immunoreagent research, development and production services.
Basis of Presentation and Interim Financial Statements
The accompanying balance sheets at June 30, 2002 and December 31, 2001,
and the statements of operations for the three months and six months ended June
30, 2002 and 2001, and the statements of cash flows for the six months ended
June 30, 2002 include the consolidated financial statements of the Company. All
inter-company balances and transactions have been eliminated in consolidation.
The accompanying unaudited consolidated interim financial statements of
the Company have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission regarding financial
reporting. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001. In the opinion of
management, the accompanying financial statements include all adjustments (all
of which are of a normal recurring nature) necessary for a fair presentation.
Revenue Recognition
Product related sales are composed of the sale of immunoassay and
bioluminescence-based test kits and the sale of antibodies and immunochemical
reagents. The sale of all immunoassay and bioluminescence-based test kits, bulk
antibodies and immunochemical reagents are recognized upon the shipment of the
product and transfer of title or when related services are provided. For the six
months ended June 30, 2002 and 2001 these sales represented 84% and 89% of total
Company revenues, respectively.
Sales of monoclonal and polyclonal antibodies under customer contracts and
purchase orders 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. The Company
recognizes revenues in this manner as production of these types of
6
antibodies generally takes between two and twelve months to complete and costs
are incurred throughout the production process. For the six months ended June
30, 2002 and 2001 these sales represented 14% and 8% of total Company revenues,
respectively.
Contract revenues are recognized upon the completion of contractual milestones.
For the six months ended June 30, 2002 and 2001 these sales represented 2% and
3% of total Company revenues, respectively.
New Accounting Pronouncements
The Company adopted the provisions of FASB Statement No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of Statement 142. Had the amortization provisions of Statement 142
been in effect for all periods presented, the Company's adjusted net income for
the three-month and six-month period ended June 30, 2001 would have been $546 or
$.03 per diluted share and $1,055 or $.06 per diluted share, compared to the
$515 or $.03 per diluted share and $994 or $.06 per diluted share as reported,
respectively. The Company completed the first step of the transitional goodwill
impairment testing during its quarter ended June 30, 2002, and no resulting
impairments were found.
Upon adoption, the Company was also required to reassess the useful lives and
residual values of all intangible assets with a definite life acquired in
purchase business combinations prior to June 30, 2001. No adjustments were made
to the useful lives and residual values as a result of this reassessment. The
company did not have any intangible assets other than goodwill, with indefinite
useful lives acquired prior to June 30, 2001, which were subject to the
transitional intangible asset impairment test.
FASB Statement No. 143, Accounting for Asset Retirement Obligations (Statement
No. 143) which was released in August 2001, addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and for the associated asset retirement costs. Statement No. 143 requires
an enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development or normal use of the assets. The enterprise is also
required to record a corresponding increase to the carrying amount of the
related long-lived asset (i.e., the associated asset retirement cost) and to
depreciate that cost over the life of the asset. The liability is changed at the
end of each period to reflect the passage of time (i.e., accretion expense) and
changes in the estimated future cash flows underlying the initial fair value
measurement. Because of the extensive use of estimates, most enterprises will
record a gain or loss when they settle the obligation. The Company is required
to adopt Statement No. 143 for its fiscal year beginning January 1, 2003, but it
is not expected to have a material impact on the financial position or results
of operations of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant issues
regarding the recognition, measurement and reporting of costs associated with
exit and disposal activities, including
7
restructuring activities. SFAS No. 146 also addresses recognition of certain
costs related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocate employees and termination of benefits
provided to employees that are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred compensation contract. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. Adoption of SFAS
No. 146 is not expected to have a material impact on the financial position or
results of operations of the Company.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
2. BASIC AND DILUTED INCOME (LOSS) PER SHARE:
Basic EPS is computed by dividing net income or loss by the weighted-average
number of common shares outstanding during the period. Diluted EPS is similar to
basic EPS except that the effect of converting or exercising all potentially
dilutive securities is also included in the denominator. The Company's
calculation of diluted EPS includes the effect of converting or exercising stock
options and warrants into common shares.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Average common shares outstanding 17,870,014 16,751,632 17,868,924 16,747,893
Shares used in computing basic
net income (loss) per share 17,870,014 16,751,632 17,868,924 16,747,893
========== ========== ========== ==========
Stock options 0 555,974 0 513,743
Warrants 0 43,976 0 40,885
---------- ---------- ---------- ----------
Shares used in computing diluted
net income (loss) per share 17,870,014 17,351,582 17,868,924 17,302,521
========== ========== ========== ==========
In the first six months of 2002, the effect of approximately 800,000 equivalent
shares of stock options and warrants were excluded from the diluted shares
calculation, because they were anti-dilutive.
8
3. SEGMENT INFORMATION:
The Company has two reportable segments. The Test Kit segment, which includes
products acquired in the AZUR Environmental acquisition, develops, manufactures
and markets immunoassay and bioluminescence-based test kits for rapid,
cost-effective detection of a wide variety of different analytes in two primary
market categories: food safety and water quality.
The Antibody segment, Strategic BioSolutions (SBS), includes TSD BioServices,
HTI and the acquired operating assets of the OEM business of Atlantic
Antibodies. These businesses provide fully integrated polyclonal and monoclonal
antibody development and large scale manufacturing services to pharmaceutical
and medical diagnostic companies.
For reporting purposes a "pro-rata" share of common costs is charged to the
Antibody segment. Segment assets are those assets associated with the respective
segment's operating activities. Segment profit is based on income before income
taxes.
Segment Information:
For the three months ended June 30, Test Kits Antibody Total
--------- -------- -----
2002 Revenues $ 3,142 $2,434 $ 5,576
Segment profit (loss) (1,118) 190 (928)
Segment assets 18,549 12,621 31,170
Depreciation and amortization 146 91 237
Capital expenditures 97 307 404
2001 Revenues $ 4,644 $2,557 $ 7,201
Segment profit 783 53 836
Segment assets 14,105 12,765 26,870
Depreciation and amortization 97 129 226
Capital expenditures 17 218 235
For the six months ended June 30, Test Kits Antibody Total
--------- -------- -----
2002 Revenues $ 6,368 $4,952 $ 11,320
Segment profit (loss) (1,941) 425 (1,516)
Segment assets 18,549 12,621 31,170
Depreciation and amortization 272 182 454
Capital expenditures 117 664 781
2001 Revenues $ 9,182 $5,093 $ 14,275
Segment profit 1,416 233 1,649
Segment assets 14,105 12,765 26,870
Depreciation and amortization 190 253 443
Capital expenditures 64 258 322
9
4. INVENTORIES:
The Company's 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. At June 30, 2002 and December
31, 2001, inventories consisted of the following (in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
Raw Materials $ 2,913 $ 3,030
Work in progress 1,067 1,398
Finished goods 3,212 3,211
- ----------------------------------------------------------------------------
$ 7,192 $ 7,639
============================================================================
5. INTANGIBLE ASSETS:
June 30, 2002 December 31, 2001
------------- -----------------
Goodwill $ 5,114 $ 4,997
Other 450 450
Less - accumulated amortization (758) (731)
- ----------------------------------------------------------------------------
Net intangible assets $ 4,806 $ 4,716
============================================================================
6. DEBT:
On May 5, 2000, the Company entered into a financing agreement with a commercial
bank. This agreement provides for a $4,000 term loan, of which approximately
$595 is outstanding at June 30, 2002, repayable over three years, and for up to
a $5,000 revolving line of credit, of which approximately $1,112 is outstanding
and approximately $1,349 is available at June 30, 2002, based on eligible assets
as described below. Proceeds from this financing retired substantially all of
the Company's previous indebtedness.
The term loan bears a variable interest rate of between 2% and 3% over the
London Interbank Offered Rate ("LIBOR") depending upon the ratio of the
Company's funded debt to EBITDA (earnings before interest expense, income taxes,
depreciation and amortization). Payments are due monthly, with equal
amortization of principal payments plus interest. The Company's effective annual
rate of interest on this loan at June 30, 2002, taking into account the variable
interest rate and LIBOR, was approximately 3.84%.
The revolving line of credit bears a variable interest rate of between 1.75% and
2.75% over LIBOR depending upon the ratio of the Company's funded debt to
EBITDA, and is subject to a borrowing base determined by the Company's eligible
accounts receivable. The Company's effective annual rate of interest on this
line of credit, taking into account the variable interest rate and LIBOR, was
approximately 3.59% at June 30, 2002.
10
On December 13, 2001 the Company entered into an agreement with a commercial
bank to finance the construction of new facilities at its Windham, Maine
location. This agreement provides for up to $1,500 in construction financing, of
which approximately $1,475 is outstanding at June 30, 2002, and is repayable
over seven years, with principal payments to begin when construction is
completed or August 13, 2002, whichever is earlier.
The construction loan bears a variable interest rate of between 2% and 3% over
LIBOR depending upon the ratio of the Company's funded debt to EBITDA. Payments
are due monthly, with equal amortization of principal payments plus interest.
The Company's effective annual rate of interest on this loan at June 30, 2002,
taking into account the variable rate of interest and LIBOR, was approximately
3.84%.
Under the terms of the above financings, the Company is required to meet certain
financial covenants including a ratio of funded debt to EBITDA and EBITDA to
current maturities of debt plus interest and taxes. The Company was in breach of
the EBITDA to current maturities of debt plus interest and taxes, loan covenant
at March 31, 2002 and both the ratio of funded debt to EBITDA and EBITDA to
current maturities of debt plus interest and taxes, loan covenants at June 30,
2002. The Company has received a waiver and suspension of these loan covenants
for the first and second quarters of 2002, respectively, and the loan covenants
have been modified to a minimum level of EBITDA of $1,500 for the third quarter
of 2002. After the third quarter of 2002, the original provisions of the loan
agreement regarding financial covenants will be operative. Under those
provisions the Company is required to maintain a ratio of current maturities of
indebtedness at no less than 1.5 times the amount of EBITDA on a rolling
four-quarter basis and a ratio of funded debt to EBITDA not to exceed 3.25
times. Based on the year to date results and the Company's anticipated third
quarter results it is possible the Company may not meet the amended loan
covenants for the quarter ending September 30, 2002.
The Company is discussing the restrictive covenants with its commercial bank,
and such discussions are ongoing. The Company is also currently evaluating its
financing options, including the possible private sale of approximately $1,000
of common stock. Sales of common stock may be dilutive to current shareholders.
As of June 30, 2002, the outstanding balance on this debt was approximately
$3,200. This indebtedness is secured by substantially all of the Company's
assets. The Company expects that it will be able to meet or exceed the financial
covenants or successfully negotiate a waiver of or modification to these
financial covenants to cure any breach. Consequently, the debt has not been
classified as a current obligation.
On February 18, 2002, the Company entered into an agreement to finance its 2002
insurance premiums with a commercial lender. The agreement provides for $309 in
insurance premium financing, of which approximately $137 is outstanding at June
30, 2002. Payments are due in nine equal monthly payments ending November 1,
2002. This insurance premium loan bears a fixed annual interest rate of 5.73%.
11
7. SEVERANCE ACCRUAL:
In June 2001, the Company recorded $253 in expense for severance costs in
connection with the announced consolidation and expansion of its Antibody
segment. For the six months ended June 30, 2002, the Company recorded an
additional $64 in expense, which is included in selling, general and
administrative expense in the accompanying statement of operations. The
severance costs relate to 44 employees in the Company's San Diego, California
facility, all of whom were terminated on or before July 31, 2002, as production
was transferred to the Company's Maine facility. As of June 30, 2002, 36
employees had been terminated and $199 had been charged against the $317
thousand severance accrual.
8. GAIN ON SALE AND DISPOSAL OF ASSETS:
In March 2002, the Company sold most of the remaining assets of its antibody
production facility near San Diego, California. The Company received proceeds of
$600 for the sale of the property, which included a $300 cash payment and a
one-year note from the purchaser for the remaining $300. The note carries an
interest rate of 5% annually, and is payable in three monthly installments of
interest only payments, with the balance being paid over an additional nine
months of principal and interest payments. The Company recorded a gain on sale
of $131, which represents the amount the Company received above the carrying
value of the assets sold. The current note balance of $300 is classified on the
Company's balance sheet as part of accounts receivable.
In March 2002, the Company reached an agreement with its insurance carrier in
settlement of costs related to a building fire on its Maine property. The
Company has received proceeds of $296 and is carrying an additional $82 on its
balance sheet in accounts receivable as an amount due for the balance of the
insurance settlement. The Company recorded a gain on disposal of $243, which
represents the amount the Company received above its investment in the assets
destroyed.
9. SUBSEQUENT EVENTS:
On July 8, 2002, the Company purchased certain assets of Molecular Circuitry,
Inc. ("MLC"). The purchased assets consist primarily of various proprietary
media technology that will be used in combination with the Company's new
diagnostic tests for food-borne pathogens including salmonella and E. Coli. The
assets purchased also include the sales and marketing rights to the ruminant
feed test product line that the Company and MLC have been jointly developing in
collaboration with McDonald's Corporation.
In consideration for these and other related assets, the Company is issuing to
MLC 600,000 unregistered shares of the Company's common stock and will pay MLC a
continuing royalty for ten years on sales of specified products.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements reflecting the
current expectations of Strategic Diagnostics Inc. and its subsidiaries (the
"Company"). When used in this Form 10-Q, 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 third party approvals, including
American Organization of Analytical Chemists Research Institute ("AOAC"), or
required government approvals, the ability to meet increased market demand,
competition, protection of intellectual property, non-infringement of
intellectual property, seasonality, the ability to obtain financing and other
factors more fully described in the Company's public filings with the U.S.
Securities and Exchange Commission.
Background
The Company develops, manufactures and markets immunoassay and
bioluminescence-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
Test Kit segment. 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 Notes 6
and 7 in Notes to the Consolidated Financial Statements) 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
relationships and acquisitions also enable the Company to offer its customers
the most appropriate test for each specific customer application.
13
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.
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.
On July 8, 2002, the Company purchased certain assets of Molecular Circuitry
Inc. ("MLC"). The purchased assets consist primarily of various proprietary
media technology that will be used in combination with the Company's new
diagnostic tests for food-borne pathogens including salmonella and E. Coli. The
assets purchased also include the sales and marketing rights to the ruminant
feed test product line that the company and MLC have been jointly developing in
collaboration with McDonald's Corporation.
In consideration for these and other related assets, the Company issued to MLC
600,000 unregistered shares of the Company's common stock and will pay MLC a
continuing royalty for ten years on sales of specified products.
Results of Operations
Three Months Ended June 30, 2002 vs. June 30, 2001
Net revenues for the second quarter of 2002 were $5.6 million versus $7.2
million in the second quarter of 2001, a decrease of $1.6 million or 23%.
Product related revenues for the second quarter of 2002 decreased by $1.5
million to $5.5 million or 22% from the second quarter of 2001. Sales of food
safety products decreased $1.6 million to $1.2 million when comparing the second
quarter of 2002 to the second quarter of 2001. This decrease is primarily
attributable to decreased sales of test kits to detect StarLink(TM) in corn, as
StarLink(TM) test kit sales had been expanding rapidly in the second quarter of
2001 following the discovery of StarLink(TM) in certain manufactured food
products. Water quality product sales increased $226 thousand or 14%, to $1.8
million in the second quarter of 2002 when compared to the second quarter of
2001. This increase is primarily attributable to additional sales of the
Company's general screening test for toxicity in water. Antibody product sales
were $2.4 million in the second quarter of 2002, a decrease from the $2.6
million in the second quarter of 2001. The Company has completed the validation
of its antibody production facility and revenues are expected to grow during the
second half of 2002. Contract and other revenues decreased to $105 thousand in
the second quarter of 2002, when compared to the $202 recorded in the second
quarter of 2001.
14
In July 2002, the Company launched the first of a series of new products
expected to be introduced in the second half of 2002 in the food safety
category. This first test is a rapid test to detect E. Coli in food samples.
Additional tests expected to be introduced in this time frame, include tests for
other food pathogens including salmonella, additional tests to detect
genetically modified organisms or GMOs, and a test to detect proteins in animal
feed that are linked to the transmission of BSE, or mad cow disease. These new
products are expected to drive sales growth in the second half of 2002.
Manufacturing expenses decreased $340 thousand to $2.9 million in the second
quarter of 2002 versus the second quarter of 2001. These expenses decreased
approximately $108 thousand in the Antibody segment due primarily to lower costs
of reagents used in manufacturing. These expenses decreased approximately $232
thousand in the Test Kit segment, which reflects the lower level of product
shipments made in the second quarter of 2002 versus the comparable period in
2001. Gross margins declined to 47.7% in the second quarter of 2002 versus the
54.8% gross margin recorded in the second quarter of 2001. This decline
primarily results from lower units of product manufactured and sold in the
second quarter of 2002, versus the second quarter of 2001, causing more of the
fixed costs of manufacturing to be allocated to each unit sold.
Research and development costs increased $183 thousand or 26% when comparing the
second quarter of 2002 to the comparable 2001 period. This increase reflects the
Company's continuing investment in new products, including tests to detect food
borne-pathogens and unapproved proteins (including proteins linked to the
transmission of mad cow disease) in animal feed. As described above, the first
of these products was launched in July 2002 and others are expected to reach
commercial launch in the second half of the 2002.
Selling, general and administrative expenses increased by $218 thousand or 9% in
the second quarter of 2002 versus the second quarter of 2001. This increase is
primarily attributable to increased marketing expenses associated with the
launch of the Company's E. Coli test kit and the anticipated launch of
additional new products. The 2002 results also include $24 thousand of
additional severance expenses for the antibody segment. The 2001 results
included a $253 thousand charge for severance expenses related to the closure of
the Company's antibody facility near San Diego, California (See Note 7 in Notes
to the Consolidated Financial Statements).
Net interest expense increased by $2 thousand or 13% in the second quarter of
2002 when compared to the second quarter of 2001. This increase is primarily
attributable to the higher levels of outstanding debt during the 2002 period
combined with lower levels of interest earning funds on deposit.
Income before taxes decreased $1.8 million to a loss of $928 thousand. Segment
profit for the Test Kit segment decreased $1.9 million to a loss of $1.1 million
in the second quarter of 2002. This decrease is primarily attributable to
reduced product sales and increased operating costs, all as described above.
Segment profit for the antibody segment grew $137 thousand during the second
quarter of 2002. This increase is attributable to the lower general and
administrative expenses as described above. (See Note 3 in Notes to the
Consolidated Financial Statements).
15
Six Months Ended June 30, 2002 vs. June 30, 2001
Net revenues for the six months ended June 30, 2002 were $11.3 million versus
$14.3 million in the six months ended June 30, 2001, a decrease of $3.0 million
or 21%. Product related revenues decreased by $2.9 million or 21%. Sales of food
safety products decreased $3.7 million to $2.7 million when comparing the six
months ended June 30, 2002 to the six months ended June 30, 2001. This decrease
is primarily attributable to decreased sales of test kits to detect StarLink(TM)
in corn, as StarLink(TM) test kit sales were expanding rapidly in the six months
ended June 30, 2001 following its discovery in certain manufactured food
products. Water quality product sales increased $1.0 million or 43%, to $3.4
million in the six months ended June 30, 2002. This increase is primarily
attributable to additional sales of the Company's general screening test for
toxicity in water. Antibody product sales were $5.0 million in the six months
ended June 30, 2002, a slight decrease from the $5.1 million in the six months
ended June 30, 2001. Contract and other revenues decreased to $282 thousand in
the six months ended June 30, 2002, when compared to the $385 recorded in the
six months ended June 30, 2001.
In July 2002, the Company launched the first of a series of new products
expected to be introduced in the second half of 2002 in the food safety
category. This first test is a rapid test to detect E. Coli in food samples.
Additional tests expected to be introduced in this time frame, include tests for
other food pathogens including salmonella, additional tests to detect
genetically modified organisms or GMOs, and a test to detect proteins in animal
feed that are linked to the transmission of BSE, or mad cow disease. These new
products are expected to drive sales growth in the second half of 2002.
Manufacturing expenses decreased $552 thousand to $6.0 million in the six months
ended June 30, 2002 versus the six months ended June 30, 2001. These expenses
increased approximately $14 thousand in the Antibody segment due primarily to
higher costs of reagents used in manufacturing. These expenses decreased
approximately $566 thousand in the Test Kit segment, which reflects the lower
level of product shipments made in the six months ended June 30, 2002 versus the
comparable period in 2001. Overall, gross margins declined to 46.7% in the six
months ended June 30, 2002 versus the 53.9% gross margin recorded in the six
months ended June 30, 2001. This decline primarily results from lower units of
product manufactured and sold, causing more of the fixed costs of manufacturing
to be allocated to each unit sold in the six months ended June 30, 2002 compared
with the six months ended June 30, 2001.
Research and development costs increased $220 thousand or 15% when comparing the
six months ended June 30, 2002 to the comparable 2001 period. This increase
reflects the Company's continuing investment in new products, including tests to
detect food borne-pathogens and unapproved proteins (including proteins linked
to the transmission of mad cow disease) in animal feed. As described above, the
first of these products was launched in July 2002 and others are expected to
reach commercial launch in the second half of the 2002.
Selling, general and administrative expenses increased by $855 thousand or 18%
in the six months ended June 30, 2002 versus the six months ended June 30, 2001.
This increase is primarily attributable to increased marketing expenses
associated with the launch of the E. coli test kit and
16
the anticipated launch of additional new products and $64 thousand in additional
severance expenses for the antibody segment. The 2001 results included a $253
thousand charge for severance related to the closure of the Company's antibody
facility near San Diego, California (See Note 7 in Notes to the Consolidated
Financial Statements).
Net interest expense decreased by $15 thousand or 31% in the six months ended
June 30, 2002 when compared to the six months ended June 30, 2001. This decrease
is primarily attributable to the lower levels of outstanding debt at a lower
average rate of interest for the six months ended June 30, 2002 versus the six
months ended June 30, 2001.
During the first quarter of 2002, the Company sold certain property in
California, and recorded a gain on sale of $131 thousand. Also in the first
quarter of 2002, the Company reached an agreement with its insurance carrier for
settlement of costs related to a building fire in Maine. The gain on disposal of
these assets recorded in the first quarter of 2002 was $243 thousand. During the
first quarter of 2001, the Company sold certain assets and realized a gain of
$76 thousand. (See Note 8 in Notes to the Consolidated Financial Statements,
with respect to the sale of property and settlement of costs).
Income before taxes decreased $3.2 million to a loss of $1.5 million. Segment
profit for the Test Kit segment decreased $3.4 million to a loss of $1.9 million
in the six months ended June 30, 2002. This decrease is primarily attributable
to reduced product sales and increased operating costs, all as described above.
Segment profit for the antibody segment grew $192 thousand during the six months
ended June 30, 2002. This increase is attributable to the lower general and
administrative expenses as described above. (See Note 3 in Notes to the
Consolidated Financial Statements).
Liquidity and Capital Resources
The Company's working capital (current assets less current liabilities), which
consists principally of cash, accounts receivable and inventory, decreased $839
thousand or 7%, to approximately $11.1 million when comparing June 30, 2002, to
December 31, 2001. Decreases in cash of $1 million, inventory of $447 thousand
and an increase in other current assets of $293 thousand due primarily to
increases in prepaid insurance, were partially offset by decreases in accounts
payable of $481 thousand and accrued expenses of $569 thousand. The decrease in
cash is primarily attributable to the $1.9 million operating loss incurred
during the first six months of 2002. Outstanding debt increased $812 thousand
from approximately $2.5 million at December 31, 2001 to approximately $3.3
million at June 30, 2002.
For the six months ended June 30, 2002, the Company's operating activities used
more than $1.8 million in cash, a significant change from the $1.5 million
provided by the Company's operating activities in the first six months of 2001,
due to the $1.9 million operating loss described above. The Company expects
future gross margins to improve as new products are introduced in the second
half of 2002 at higher margins and the Company begins to realize operating
efficiencies from the consolidation of its antibody production facilities in
Maine. The Company also expects operating expenses to be at or near the levels
achieved in the second quarter of 2002. At June 30, 2002, the Company had $3.3
million in debt, stockholders' equity in excess of $26 million and unused
borrowing capacity under a revolving line of credit of approximately $1.3
million.
17
The Company was in breach of certain loan covenants at March 31, 2002. The
Company has received a waiver and suspension of these loan covenants for the
first and second quarters of 2002, respectively, and the loan covenants have
been modified to a minimum level of EBITDA of $1.5 million for the third quarter
of 2002. After the third quarter of 2002, the original provisions of the loan
agreement regarding financial covenants will be operative. Under those
provisions the Company is required to maintain a ratio of current maturities of
indebtedness at no less than 1.5 times the amount of EBITDA on a rolling-four
quarter basis and a ratio of funded debt to EBITDA not to exceed 3.25 times (see
Note 6 in Notes to the Consolidated Financial Statements). Based on the year to
date results and current projections it is possible the Company may not meet the
amended loan covenants for the quarter ending September 30, 2002.
The Company is discussing the restrictive covenants with its commercial bank,
and such discussions are ongoing. The Company is also currently evaluating its
financing options, including the possible private sale of approximately $1
million of common stock. Sales of common stock may be dilutive to current
shareholders.
In July 2002, the Company launched the first of a series of new products
expected to be introduced in the second half of 2002 in the food safety
category. This first test is a rapid test to detect E. Coli in food samples.
Additional tests expected, include tests for other food pathogens including
salmonella, additional tests to detect genetically modified organisms or GMOs,
and a test to detect proteins in animal feed that are linked to the transmission
of BSE, or mad cow disease. These new products are expected to drive sales
growth in the second half of 2002.
As of June 30, 2002, the outstanding balance on this debt was approximately $3.2
million. This indebtedness is secured by substantially all of the Company's
assets. The Company expects that it will be able to meet or exceed the financial
covenants or successfully negotiate a waiver of or modification to these
covenants to cure any breach. Consequently, the debt has not been classified as
a current obligation.
Based upon its cash on hand, credit facilities, current product sales and sales
of new products, the Company believes it has, or has access to sufficient
resources to meet its operating requirements for at least the next twelve
months. The Company's ability to meet its long-term capital needs will depend on
a number of factors, including compliance with existing and new loan covenants,
the success of its current and future products, the focus and direction of its
research and development program, competitive and technological advances, future
relationships with corporate partners, government regulation, the Company's
marketing and distribution strategy, its successful sale of additional common
stock and/or the Company's successfully locating and obtaining other financing,
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.
Accounting Standards
Potential Impact of Our Critical Accounting Policies - The Company's accounting
policies are described in Note 1 of the Notes to the Consolidated Financial
Statements. The Consolidated Financial Statements are prepared in conformity
with accounting principles generally accepted in
18
the United States of America, which require the Company 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, the Company evaluates its estimates, including those related
to bad debts, inventories, and contingencies. The Company bases its estimates on
historical experience and on various other assumptions that the Company believes
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. The Company considers the following policies to be most critical in
understanding the judgments that are involved in preparing the Consolidated
Financial Statements and the uncertainties that could impact the results of
operations, financial condition and cash flows.
Valuation of Accounts Receivable - Accounts receivable as of June 30, 2002 and
December 31, 2001, were net of an allowance for doubtful accounts of $239
thousand and $215 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 uncollectible, these write-offs are charged against the
allowance.
Valuation of Inventories - 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.
Judgments are made regarding the carrying value of 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 the Company impacts the market for previously
released products, the Company may be required to write-down the cost of its
inventory.
Revenue Recognition - Product related sales are composed of the sale of
immunoassay and bioluminescence-based test kits and the sale of antibodies and
immunochemical reagents. The sale of all immunoassay and bioluminescence-based
test kits, bulk antibodies and immunochemical reagents are recognized upon the
shipment of the product and transfer of title or when related services are
provided. For the six months ended June 30, 2002 and 2001 these sales
represented 84% and 89% of total Company revenues, respectively.
Sales of monoclonal and polyclonal antibodies under customer contracts and
purchase orders 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. The Company
recognizes revenues in this manner as production of these types of antibodies
generally takes between two and twelve months to complete and costs are incurred
throughout the production process. For the six months ended June 30, 2002 and
2001 these sales represented 14% and 8% of total Company revenues, respectively.
Contract revenues are recognized upon the completion of contractual milestones.
For the six months ended June 30, 2002 and 2001 these sales represented 2% and
3% of total Company revenues, respectively.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to changing interest rates, and is currently not
engaged in hedging activities. Interest on approximately $3.2 million of
outstanding indebtedness is at a variable rate of between 1.75% to 3% over the
published London Interbank Offered Rate (LIBOR), based upon the Company's ratio
of funded debt to EBITDA, and was 2% over LIBOR on average for the quarter.
Interest on approximately $137 thousand of indebtedness is at a fixed rate of
5.73%. At the Company's current level of indebtedness, each 1% change in the
variable interest rate will have an effect of $32 thousand on the Company's
interest expense charges.
The Company conducts operations in Great Britain. The consolidated financial
statements of the Company are denominated in U.S. Dollars and changes in
exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company's consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.
20
PART II - OTHER INFORMATION
Item 3. Defaults upon Senior Securities
The Company was in breach of certain loan covenants at March 31, 2002. The
Company has received a waiver and suspension of these loan covenants for the
first and second quarters of 2002, respectively, and the loan covenants have
been modified to a minimum level of EBITDA of $1.5 million for the third quarter
of 2002. After the third quarter of 2002, the original provisions of the loan
agreement regarding financial covenants will be operative. Under those
provisions the Company is required to maintain a ratio of current maturities of
indebtedness at no less than 1.5 times amount of EBITDA on a rolling
four-quarter basis and a ratio of funded debt to EBITDA not to exceed 3.25 times
(see Note 6 in Notes to the Consolidated Financial Statements). Based on the
year to date results and current projections it is possible the Company may not
meet the amended loan covenants for the quarter ending September 30, 2002.
The Company is discussing the restrictive covenants with its commercial bank,
and such discussions are ongoing. The Company is also currently evaluating its
financing options, including the possible private sale of approximately $1
million of common stock. Sales of common stock may be dilutive to current
shareholders.
As of June 30, 2002, the outstanding balance on this debt was approximately $3.2
million. This indebtedness is secured by substantially all of the Company's
assets. The Company expects that it will be able to meet or exceed the financial
covenants or successfully negotiate a waiver of or modification to these
financial covenants to cure any breach. Consequently, the debt has not been
classified as a current obligation.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on April 25, 2002. At the
meeting, the following Class II Directors were elected for a term of two years:
Directors Shares Voted For Shares Withheld
- --------- ---------------- ---------------
Richard J. Defieux 8,882,072 85,970
Timothy S. Ramey 8,882,072 85,970
Stephen L. Waechter 8,882,072 85,970
Richard C. Birkmeyer, Morton Collins, Kathleen E. Lamb and Grover C. Wrenn
constitute the Class I directors whose terms continued after the annual meeting.
21
Item 5. Other Information
On July 8, 2002, the Company purchased certain assets of Molecular Circuitry
Inc. ("MLC"). The purchased assets consist primarily of various proprietary
media technology that will be used in combination with the Company's new
diagnostic tests for food-borne pathogens including salmonella and E. Coli. The
assets purchased also include the sales and marketing rights to the ruminant
feed test product line that the Company and MLC have been jointly developing in
collaboration with McDonald's Corporation.
In consideration for these and other related assets, the Company is issuing to
MLC 600,000 unregistered shares of the Company's common stock and will pay MLC a
continuing royalty for ten years on sales of specified products.
On July 24, 2002, the Company announced the election of Herb Lotman to its
Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 - Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 - Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On April 12, 2002, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 providing a first quarter of 2002 update.
On April 25, 2002, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 announcing the Company's first quarter results of
operations.
On July 22, 2002, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 announcing the acquisition of certain assets of
Molecular Circuitry Inc.
On July 30, 2002, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 announcing the election of Herb Lotman to its Board
of Directors.
On July 30, 2002, the Company filed a report on Form 8-K pursuant to
Item 7 and Item 9 announcing the Company's second quarter results of
operations.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STRATEGIC DIAGNOSTICS INC.
--------------------------
(Registrant)
Signature Title Date
- --------- ----- ----
/s/ RICHARD C. BIRKMEYER President and Chief Executive Officer August 14, 2002
- ------------------------ (Principal Executive Officer)
Richard C. Birkmeyer
/s/ ARTHUR A. KOCH, JR. Vice President and Chief Operating Officer August 14, 2002
- ----------------------- (Principal Financial Officer)
Arthur A. Koch, Jr.
23