UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 September 27, 1998
OR
/ / 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: 0-26126
SEROLOGICALS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 58-2142225
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
780 Park North Blvd.
Suite 110
Clarkston, Georgia 30021
(Address of principal (Zip Code)
executive offices)
(404) 296-5595
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past (90) days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding at November 6, 1998
Common Stock, $.01 par value per share 24,305,716
PAGE 1
INDEX
SEROLOGICALS CORPORATION AND SUBSIDIARIES
PART I.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
December 28, 1997 and September 27, 1998 . . . . . . . . . . 3
Condensed Consolidated Statements of Income -
For the three and nine months ended
September 30, 1997
and September 27, 1998 . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -
For the nine months ended September 30, 1997
and September 27, 1998 . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . .6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . 11-16
Item 3. Quantitative and Qualitative Disclosure about
Market Risk . . . . . . . . . . . . . . . . . . . . . . 16
PART II.
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 17
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PAGE 2
PART I.
Item 1. Financial Statements
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
December 28, September 27,
1997 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $31,812 $32,713
Trade accounts receivable, net 9,991 18,996
Inventories 10,154 12,953
Other current assets 865 2,235
------- --------
Total current assets 52,822 66,897
------- --------
PROPERTY AND EQUIPMENT, net 13,682 15,770
------- --------
OTHER ASSETS:
Goodwill, net 51,006 52,360
Other, net 5,982 6,389
-------- --------
Total other assets 56,988 58,749
-------- --------
$123,492 $141,416
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt
and capital lease obligations $2,352 $1,288
Accounts payable 3,654 2,660
Accrued liabilities 8,493 10,053
Deferred revenue 898 100
-------- --------
Total current liabilities 15,397 14,101
-------- --------
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, less current maturities 4,446 3,070
-------- --------
OTHER LIABILITIES 364 244
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 235 245
Additional paid-in capital 75,458 84,499
Retained earnings 27,370 39,390
Accumulated other comprehensive income (expense) 222 (133)
-------- --------
Total stockholders' equity 103,285 124,001
-------- --------
$123,492 $141,416
======== ========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
PAGE 3
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(Unaudited)
Nine Months Ended Three Months Ended
----------------- ------------------
Sept. 30, Sept. 27, Sept. 30, Sept. 27,
1997 1998 1997 1998
-------- --------- -------- ---------
Net sales $72,571 $91,506 $26,609 $31,836
Costs and expenses:
Cost of sales 46,085 59,953 16,873 21,425
Selling, general and
administrative expenses 9,621 10,383 3,415 3,359
Product development expenses 1,474 1,144 474 399
Interest income, net (358) (632) (134) (260)
Other expense, net 2,016 1,995 942 535
------ ------ ----- -----
Income before income taxes 13,733 18,663 5,039 6,378
Provision for income taxes 5,008 6,644 1,812 2,280
------ ------ ----- -----
Net income $8,725 $12,019 $3,227 $4,098
====== ======= ====== ======
Net income per common share:
Basic $0.40 $0.50 $0.14 0.17
===== ===== ===== ====
Diluted $0.38 $0.47 $0.13 $0.16
===== ===== ===== =====
Weighted average common and common
equivalent shares outstanding:
Basic 21,839,801 23,883,699 22,393,914 24,161,470
========== ========== ========== ==========
Diluted 23,310,858 25,792,407 24,039,362 26,047,592
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
statements.
PAGE 4
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
-----------------
September 30, September 27,
1997 1998
---- ----
Operating activities:
Net income $8,725 $12,019
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,721 4,160
Deferred income tax provision (benefit) 202 (43)
Changes in operating assets and liabilities,
net of acquisitions of businesses:
Trade accounts receivable, net (4,711) (8,394)
Inventories (1,226) (2,563)
Other current assets 281 456
Accounts payable (1,181) (1,072)
Accrued expenses 1,442 3,248
Deferred revenue (201) (870)
------ ------
Total adjustments (1,673) (5,078)
Net cash provided by operating activities 7,052 6,941
------ ------
Investing activities:
Purchases of property and equipment (3,128) (3,746)
Acquisitions of businesses, net of
cash acquired (15,449) (4,566)
Other (655) (2,815)
------ -------
Net cash used in investing activities (19,232) (11,127)
------ -------
Financing activities:
Proceeds from issuance of long-term debt 525 --
Payments on long-term debt and capital
lease obligations (200) (108)
Proceeds from sale of common stock 17,542 --
Proceeds from employee stock plans 994 5,195
------ -----
Net cash provided by financing activities 18,861 5,087
------ -----
Net increase in cash and cash equivalents 6,681 901
Cash and cash equivalents, beginning
of period 21,232 31,812
------- -------
Cash and cash equivalents, end of period $27,913 $32,713
======= =======
Supplemental Disclosures:
Interest Paid $207 $182
Taxes Paid $4,311 $4,894
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 5
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1998
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Serologicals Corporation (the "Company") is a leading worldwide
provider of specialty human antibodies and related services to major
healthcare companies. The Company's services, including donor
recruitment, donor management and clinical testing services, enable the
Company to provide value-added antibodies that are used as the active
ingredients in therapeutic and diagnostic pharmaceutical products. As
of November 6, 1998, the Company operated 64 sites, 16 of which are donor
centers specializing in the collection of specialty antibodies, 47 of
which are donor centers that primarily collect source plasma from which a
number of products, including non-specialty antibodies such as intravenous
immune globulin (IVIG), are produced and one of which is a clinical trial
site dedicated to the management and performance of clinical trials for
the pharmaceutical and biotechnology industries. The Company is also engaged
in the development, manufacturing and sale of monoclonal antibodies for
diagnostic uses at its facilities in the United Kingdom.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The accompanying statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, which
are of a normal recurring nature, to present fairly the Company's
financial position, results of operations and cash flows at the dates and
for the periods presented. Interim results of operations are not
necessarily indicative of results to be expected for a 12-month period.
The interim financial statements should be read in conjunction with the
audited consolidated financial statements as of December 28, 1997 and the
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 28, 1997.
Revenue Recognition
The Company records revenue when title and the full risk of ownership
are transferred to the customer, which generally occurs when products are
shipped. On occasion, the Company receives advance payments from
customers for future delivery of specified products. The revenue related
to these advance payments is generally deferred until the specified
products are shipped.
The Company sells virtually all therapeutic specialty antibodies on a
"gross" pricing basis, under which the selling price is reflective of the
costs of certain plasmapheresis supplies and laboratory testing services
borne by the Company and included in its cost of sales. Conversely, the
majority of sales of antibodies collected at the Company's non-specialty
donor centers are sold on either a "semi-gross" or "net" pricing basis,
under which the selling price to the customer is recorded net of the costs
of certain plasmapheresis supplies (semi-gross) or both plasmapheresis
supplies and laboratory testing services (net) provided by the customer.
Earnings Per Share
As of December 28, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS No.
128"), which requires a dual presentation of basic earnings per share and
diluted earnings per share on the face of the consolidated statements of
income. As a result, earnings per share for the three and nine months
ended September 30, 1997 have been restated to comply with the provisions
of SFAS No. 128. SFAS No. 128 replaces the traditional presentations of
primary earnings per share and fully diluted earnings per share with basic
earnings per share and diluted earnings per share, respectively. Basic
earnings per share excludes the dilutive effect of stock options,
PAGE 6
warrants, convertible indebtedness and similar instruments while diluted
earnings per share is computed similarly to fully diluted earnings per
share. The impact of adopting SFAS No. 128 was an increase to basic
earnings per share of $0.01 and $0.02 over the previously reported primary
earnings per share for the three and nine months ended September 30, 1997,
respectively. Reported diluted earnings per share are the same as the
Company's previously reported primary earnings per share.
Share and per share data for all periods presented have been adjusted
to reflect the Company's 3-for-2 common stock split effected in the form
of a 50% stock dividend paid August 14, 1998 to holders of record as of
July 31, 1998.
The following table sets forth a reconciliation of basic earnings per
share to diluted earnings per share for the periods indicated below (in
thousands, except per share amounts):
Nine Months Ended Three Months Ended
----------------- ------------------
Sept. 30, Sept. 27, Sept. 30, Sept. 27,
1997 1998 1997 1998
-------- -------- -------- ---------
Net income, as reported $8,725 $12,019 $3,227 $4,098
Effect of dilutive securities:
Convertible notes 67 53 18 (23)
------- -------- -------- --------
Net income, assuming
full dilution $8,792 $12,072 $3,245 $4,075
======= ======== ======== ========
Common shares, basic 21,840 23,884 22,394 24,161
Effect of dilutive securities:
Convertible notes 243 346 330 311
Stock options and warrants 1,228 1,562 1,316 1,576
------- -------- -------- --------
Common shares, assuming full
dilution 23,311 25,792 24,039 26,048
======= ======== ======== ========
Net income per common share
Basic $0.40 $0.50 $0.14 $0.17
======= ======== ======== ========
Diluted $0.38 $0.47 $0.13 $0.16
======= ======== ======== ========
Comprehensive Income
As of December 29, 1997, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS No. 130 establishes new rules for
the reporting of "comprehensive income", which is the total of net income
and all other non-owner changes in stockholders' equity. Prior year
amounts have been reclassified to conform to the requirements of SFAS No.
130.
PAGE 7
The following table sets forth the calculation of the Company's
comprehensive income for the periods indicated below (in thousands):
Nine Months Ended Three Months Ended
----------------- ------------------
Sept. 30, Sept. 27, Sept. 30, Sept. 27,
1997 1998 1997 1998
---- ---- ---- ----
Net income, as reported $8,725 $12,019 $3,227 $4,098
Other comprehensive income
(loss), net of tax:
Foreign currency
translation adjustments (120) 67 (78) 136
Unrealized losses
on securities -- (422) -- (154)
Other comprehensive income ------ ------- ------ ------
(loss), net of tax (120) (355) (78) (18)
------ ------- ------ ------
Comprehensive income $8,605 $11,664 $3,149 $4,080
====== ======= ====== ======
2. ACQUISITIONS
On March 27, 1998, the Company acquired substantially all of the
assets of Therapeutics, Inc., which operated a site in New Jersey that
performed clinical trials for the pharmaceutical and biotechnology
industries. On March 30, 1998, the Company acquired substantially all of
the assets of Allied Plasma Products, Inc., which operated four non-
specialty donor centers in Ohio and Indiana. Both of these acquisitions
were accounted for as purchases in accordance with APB No. 16, and
accordingly, the purchase prices have been preliminarily allocated to the
net tangible and identifiable intangible assets acquired based on their
estimated fair values as of the acquisition dates. The excess of the cost
over the estimated fair values of the net tangible and identifiable
intangible assets acquired has been preliminarily allocated to goodwill.
PAGE 8
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at December 28, 1997
and September 27, 1998 consisted of the following (in thousands):
December 28, Sept. 27,
1997 1998
------ ------
Convertible subordinated note payable,
interest payable quarterly at 4.5%;
maturing on March 7, 2002 $4,000 $1,610
Convertible subordinated note payable,
interest payable quarterly at 4.0%;
principal payable on September 23, 2000 2,550 2,550
Capital lease obligations at varying
interest rates and terms, maturing
through 2001 141 97
Other notes at varying interest rates
and terms maturing through December 1998 107 101
----- ------
6,798 4,358
Less current maturities 2,352 1,288
------ ------
$4,446 $3,070
====== ======
During the first nine months of 1998 and pursuant to the terms of
the related note agreement, the holder of a convertible promissory note
in the original principal amount of $4.0 million opted to convert $1.33
million principal amount of the note into approximately 107,000 shares of
the Company's common stock. During the third quarter of 1998, the Company
further reduced the note by approximately $1.1 million due to certain
purchase price adjustments related to the acquisition for which the note
was issued.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In July 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131, which supersedes
SFAS Nos. 14, 18, 24 and 30, establishes new standards for segment
reporting, using the "management approach," in which reportable segments
are based on the same criteria on which management disaggregates a
business for making operating decisions and assessing performance. The
Company is in the process of evaluating SFAS No. 131 and its impact on the
Company's reporting and will adopt the standard for its full 1998 fiscal year.
PAGE 9
5. SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
The following non-cash investing and financing transactions were
entered into during the nine months ended September 30, 1997 and September
27, 1998 (in thousands):
Nine Months Ended
-----------------
Sept. 30, Sept. 27,
1997 1998
---- ----
Issuance of promissory notes as
acquisition consideration $6,650 $ --
Conversion of promissory note into
common stock 3,500 1,333
Reduction of promissory note due to
acquisition purchase price adjustments -- 1,056
PAGE 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
This Quarterly Report on Form 10-Q contains certain "forward looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995, which generally can be identified by the use of terms such as
"may," "expect," "anticipate," "intend," "estimate," "believe," "continue"
or similar variations or the negative thereof. These forward looking
statements include, without limitation, statements regarding the impact on
the Company and its customers of changing regulatory and industry standards,
including the impact of the delay in the validation of a customer's laboratory
testing facility and the impact of the closure of one of the Company's
customer's manufacturing facilities; current supply and demand factors and
their effect on the Company's long-term growth prospects; the level of capital
expenditures during the next twelve months; the impact of the Year 2000 issue,
the ability of the Company to achieve Year 2000 compliance and the related cost
and timing to achieve such compliance; the most likely worst-case Year 2000
scenario and its impact on the Company; the timing of completion of a Year 2000
contingency plan; and the sufficiency of capital and liquidity to fund
operations, capital expenditures and the Company's acquisition strategy. These
forward looking statements are subject to certain risks and uncertainties,
including, but not limited to, changes in the economy or market conditions; the
Company's ability to recruit and retain sufficient numbers of qualified donors;
changes in government policy or regulations; the technical skills of employees
and independent contractors involved in correcting the Year 2000 issue;
the representations and preparedness of third parties, including customers and
suppliers, regarding their Year 2000 compliance; and other factors
discussed in Part I of the Company's Annual Report on Form 10-K for the
year ended December 28, 1997, which could cause actual results to differ
materially.
Recent Developments
Increasing regulatory scrutiny continues to be a significant factor
shaping the industry, resulting in more detailed and frequent Food and
Drug Administration (FDA) inspections of the Company's and its customers'
operations, a potentially greater number of observations, deficiency
notices and warning letters per inspection, and more product recalls and
temporary or permanent closures of facilities. One factor contributing to
this trend is the FDA's implementation of a new approach to inspections of
donor centers and laboratory testing and manufacturing facilities,
including the Company's customers, entitled "Team Biologics". Under this
new approach, substantially all such inspections are performed by highly
trained field investigators who are focusing more extensively on the FDA's
current good manufacturing practices (cGMP) and the Quality Assurance
guidelines adopted by the FDA in 1995. This approach was applied to the
plasma fractionators and subsequently to other biologic product areas,
including the Company's operations. Several large fractionators,
including certain of the Company's customers, have been affected in
varying degrees, from complete shutdowns of manufacturing facilities to
operating under a consent decree to bring their facilities into
compliance. Furthermore, the Company believes certain manufacturers are
currently experiencing a longer than anticipated FDA approval process of
new, relocated or expanded manufacturing and laboratory testing
facilities. Specifically, the Company's largest customer has experienced
an indeterminate delay in the validation, or approval, of its relocated
laboratory testing facility. To mitigate the impact of this delay, the
Company arranged for the transfer of the mandatory viral marker testing of
product shipped to this customer to alternative testing facilities, including
its own, recently expanded, laboratory. Furthermore, the Company was
notified that another of its customers, which has been operating under a
consent decree, has suspended certain operations following a
recent FDA inspection. As the majority of the Company's sales to this
customer are made to its European affiliate whose manufacturing facilities are
fully functional, the Company believes that the impact on its results of
operations and financial condition will not be material.
On occasion, the Company has received notifications and warning
letters from the FDA related to possible deficiencies in the Company's
compliance with FDA requirements. To date, the Company believes
that it has adequately addressed or corrected such deficiencies and that
it is in substantial compliance with all relevant laws and regulations.
PAGE 11
Another trend the industry is currently experiencing is the
continuing imposition of more rigorous donor screening standards by the
FDA, the Company's customers and certain industry trade organizations.
Such new standards, including donor age restrictions, the elimination of one-
time and certain other infrequent donors and the introduction of new
testing techniques have reduced the pool of, and increased the competition
for, potential donors. Furthermore, donor availability has been negatively
impacted by external factors such as the general strength of the economy.
Conversely, current demand for many of the antibodies the Company offers has
increased for a variety of reasons, including increased demand for the end
products into which they are manufactured, expanded use of the various end
products and increased manufacturing capacity of certain fractionators as they
are able to bring their facilities into compliance.
While the Company has been adversely impacted by the factors described
above, including decreased collections of antibodies, decreased gross margins
and delayed or reduced shipments of products, it believes that the current
supply and demand factors affecting the industry may serve to enhance its
long-term growth prospects. However, there can be no assurance that any future
impact related to these factors will not have a material adverse effect on the
Company or its operations.
Results of Operations
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto.
The following table sets forth certain operating data of the Company
as a percentage of net sales for the periods indicated below.
Nine Months Ended Three Months Ended
----------------- ------------------
Sept. 30, Sept. 27, Sept. 30, Sept. 27,
1997 1998 1997 1998
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 36.5% 34.5% 36.6% 32.7%
Selling, general and
administrative expenses 13.3% 11.3% 12.8% 10.6%
Product development
expenses 2.0% 1.3% 1.8% 1.3%
Net income 12.0% 13.1% 12.1% 12.9%
Three Months Ended September 30, 1997 and September 27, 1998
Net sales increased 19.6%, or $5.2 million, from $26.6 million in
1997 to $31.8 million in 1998. Of the increase, approximately $3.7
million resulted primarily from additional sales of non-specialty
antibodies and anti-D antibodies. The increase in net sales of non-
specialty antibodies was due in large part to the increase in those
antibodies sold on a "gross" and "semi-gross" basis (as compared to a
"net" basis) and, to a lesser extent, volume increases. This increase
was offset in part by decreased net sales in certain product lines, primarily
anti-cytomegalovirus (CMV) and anti-respiratory syncytial virus (RSV),
products of which the Company does not expect significant sales beyond
1998. The remainder of the increase, or approximately $1.5 million,
related to the full-quarter effect of acquisitions completed during the
third quarter of 1997 and the first nine months of 1998. Net sales of
the Company's therapeutic and diagnostic product lines increased 21.6%
and 5.0%, respectively, over the third quarter of 1997.
During the third quarter of 1998 and 1997, therapeutic antibodies
represented approximately 83% and 82% of net sales, respectively, while
combined net sales of diagnostic antibodies and revenues from clinical
trials represented 17% and 18%, respectively.
PAGE 12
Gross profit increased 6.9%, or $675,000, from $9.7 million in the
third quarter of 1997 to $10.4 million during 1998. The increase was
primarily attributable to additional net sales of anti-D antibodies and
increased sales of, and higher margins on, clinical diagnostic antibodies,
offset in part by decreased net sales of certain antibodies and lower margins
on non-specialty antibodies. Gross profit as a percentage of net sales
("gross margin") decreased from 36.6% in 1997 to 32.7% in 1998. This
decrease was primarily a result of lower margins on the Company's non-
specialty antibodies, due largely to lower than anticipated production
levels at most of the Company's non-specialty donor centers and the
resulting decrease in fixed cost absorption. Furthermore, sales of
relatively lower margin non-specialty antibodies increased from 46%
to 48% of total net sales, an increasing amount of which were sold on a
semi-gross or gross pricing basis, which carry a similar gross profit but
a lower gross margin than antibodies sold on a "net" basis.
Selling, general and administrative expenses were relatively
unchanged, decreasing 1.6%, or $56,000, from $3.4 million in the third
quarter of 1997 to $3.3 million in 1998. Selling, general and
administrative expenses, as a percentage of net sales, decreased from
12.8% to 10.6% as the Company continued to leverage its corporate
infrastructure relative to increased net sales and recent acquisitions.
Product development expenses decreased 15.8%, or $75,000, from
$474,000 in 1997 to $399,000 in 1998, due primarily to decreased
expenditures relating to the development of a therapeutic monoclonal anti-
D product, offset by increased expenditures incurred in the development of
clinical trial site management services.
Other expense, net, decreased $407,000, or 43.2%, from $942,000 in
1997 to $535,000 in 1998. The decrease was due in part to the inclusion
in 1997 of a $208,000 one-time write-off of an acquisition-related non-
compete agreement. The remainder of the decrease was due to favorable
foreign exchange rates that resulted in a $147,000 gain in the current
quarter versus a loss of $25,000 in 1997, and a gain on the sale of a
stock investment, offset by additional amortization expense related to
acquisitions completed during 1997 and 1998.
Interest income, net increased 94.0%, or $126,000, from $134,000 in
1997 to $260,000 in 1998, due primarily to higher cash balances and lower
debt outstanding in the third quarter of 1998 versus the comparable period
a year earlier.
Nine Months Ended September 30, 1997 and September 27, 1998
Net sales increased 26.1%, or $18.9 million, from $72.6 million in
1997 to $91.5 million in 1998. Of the increase, approximately $10.5
million was primarily attributable to increased sales of anti-D antibodies
and to a lesser extent, non-specialty antibodies, anti-hepatitis
antibodies and antibodies for diagnostic purposes. The increase in net
sales of non-specialty antibodies was partially attributable to the
increase in semi-gross and gross pricing sales as a percentage of total
net sales. These increases were offset in part by decreased net sales in
certain product lines, primarily anti-CMV, anti-RSV and anti-rabies. The
remainder of the increase, or approximately $8.4 million, was attributable
to the full-period effect of acquisitions completed during 1997 and 1998.
Net sales of the Company's therapeutic and diagnostic products increased
28.0% and 13.7%, respectively.
Gross profit increased 19.1%, or $5.1 million, from $26.5 million
in 1997 to $31.6 million in 1998. Of the increase, approximately $4.4
million was primarily the result of increased net sales of, and to a
lesser extent, higher margins on, specialty antibodies, primarily anti-D
and, to a lesser extent, antibodies used for diagnostic purposes. The
remainder of the increase was attributable to the full-period effect of
acquisitions completed during 1997 and 1998. Gross margins decreased from
36.5% for the first nine months of 1997 to 34.5% in 1998, due primarily to
lower than anticipated production at the Company's non-specialty donor
PAGE 13
centers and the resulting decrease in fixed cost absorption, offset by
increased gross margins on certain of the Company's specialty therapeutic
and diagnostic antibodies. Sales of relatively lower margin non-specialty
antibodies, an increasing amount of which were sold on a semi-gross and
gross pricing basis, increased from 44% to 45% of total net sales.
Selling, general and administrative expenses increased 7.9%, or
$762,000, from $9.6 million in 1997 to $10.4 million in 1998. The increase
was primarily attributable to a larger regulatory, sales and corporate
infrastructure needed to support the Company's acquisitions and growth.
However, selling, general and administrative expenses, as a percentage of
net sales, decreased from 13.3% to 11.3%, as the Company continued to
effectively leverage its corporate infrastructure relative to increased
net sales and recent acquisitions.
Product development expenses decreased $330,000, or 22.4%, from $1.5
million in the first nine months of 1997 to $1.1 million in the current
year, due primarily to a reduction in expenditures relating to the
development of a therapeutic monoclonal anti-D product, offset by certain
expenditures incurred in the Company's development of clinical trial site
management services.
Interest income, net increased 76.5%, or $274,000, from $358,000 in
1997 to $632,000 in 1998, due primarily to higher cash balances and lower
debt outstanding in the first nine months of 1998 versus the comparable
period a year earlier. The increase in cash was partially attributable
to the receipt in September 1997 of approximately $17.5 million in net
proceeds from a private placement sale of 1,425,000 shares of the
Company's common stock.
Other expense, net was relatively unchanged between periods at $2.0
million in 1997 and 1998. Other expense, net in 1997 included a $208,000
one-time write-off of an acquisition-related non-compete agreement.
Included in other expense, net in 1998 was $147,000 in foreign currency
gains versus losses of $25,000 in 1997. These favorable changes were
offset by the full-period effect of the amortization of goodwill and other
intangible assets resulting from acquisitions completed during 1997 and
1998.
Liquidity and Capital Resources
The following table sets forth certain indicators of financial
condition and liquidity of the Company as of December 28, 1997 and
September 27, 1998:
December 28, September 27,
1997 1998
---- ----
Cash and cash equivalents $31,812 $32,713
Working capital 37,425 52,796
Total long-term debt and capital
lease obligations 6,798 4,358
Stockholders' equity 103,285 124,001
Total debt to equity ratio 6.6% 3.5%
The Company has three principal sources of near-term liquidity: (i)
existing cash and cash equivalents, (ii) cash provided by operations, and
(iii) borrowing availability under the Revolver (as defined below).
Management believes the Company's liquidity and capital resources are
sufficient to meet its working capital, capital expenditure and other
anticipated cash requirements over the next twelve months, and will be
available for use in its acquisition strategy. However, the Company
anticipates that future acquisition and other growth opportunities may
require supplementary funding, including the issuance of equity or
debt securities.
Net cash provided by operating activities during the first nine
months of 1998 was $6.9 million as compared to $7.1 million in the
prior year, or a decrease of $111,000. This decrease was primarily
attributable to an increased investment in working capital of
approximately $3.6 million over the prior year and an decreased deferred
tax provision of $245,000, offset by increased net income of $3.3 million
and $439,000 of additional non-cash depreciation and amortization expense.
The increased investment in working capital was in large part due to a
larger increase in accounts receivable of $3.7 million and a larger
PAGE 14
increase in inventory of $1.3 million, offset by larger increases in
accounts payable and accrued expenses of $1.9 million. The increase in
accounts receivable resulted from increased sales volume, particularly to
European customers, and the timing of shipments, a significantly larger
percentage of which occurred in the last month of the third quarter of
1998 versus the comparable period a year earlier. The increase in
inventory was partially due to a delay of one of the Company's foreign
customers in obtaining certain regulatory approvals to receive product
collected from certain of the Company's donor centers.
Net cash used in investing activities during the first nine months of
1998 was $11.1 million as compared to $19.2 million in 1997. Investing
activities in 1997 primarily consisted of the acquisition of Nations
Biologics, Inc. and its affiliates ("Nations") and Bio-Lab, Inc. and its
affiliate for approximately $15.4 million in cash (net) and capital
expenditures of $3.1 million. Investing activities in 1998 consisted
primarily of the acquisition of Allied Plasma Products, Inc. and
Therapeutics, Inc. for approximately $4.6 million (net), capital
expenditures of $3.7 million and other miscellaneous investments of $2.8
million, offset by the receipt of approximately $878,000 in settlement of
certain post-closing adjustments related to the Nations acquisition.
Capital expenditures relate primarily to the Company's facilities,
related equipment and information systems. The Company anticipates
continued significant levels of capital expenditures over the next twelve
months as it continues to expand and upgrade its information systems and
donor centers. The Company expects that capital expenditures over the next
twelve months will be financed primarily with cash on hand and cash
provided by operations.
Cash provided by financing activities was approximately $5.1 million
in 1998 versus $18.9 million in the prior year. Financing activities in
1997 primarily consisted of the private placement sale of 1,425,000 shares
of the Company's common stock, which provided net proceeds of
approximately $17.5 million. Substantially all cash provided by financing
activities in 1998 were proceeds from the exercise of employee stock
options.
Total long-term debt and capital lease obligations were $4.4 million
at September 27, 1998, a decrease of approximately $2.4 million from $6.8
million outstanding at December 28, 1997. This decrease was primarily due
to an approximately $2.4 reduction in a convertible promissory note issued
in the original principal amount of $4.0 million. Of this reduction,
approximately $1.3 million was due to the conversion of that principal
portion into approximately 107,000 shares Company's common stock, while
the remaining $1.1 million was due to a non-cash reduction to the purchase
price of the acquisition for which the note was issued.
The Company has a revolving credit facility with a bank (the
"Revolver"), which provides for total borrowing capacity of $35 million,
$30 million of which may be used for acquisitions. There were no amounts
outstanding under the Revolver at December 28, 1997 or September 27, 1998.
Year 2000
The Year 2000 issue results from computer-based systems that use two
digits rather than four to define the applicable year. If not corrected,
many computer applications could fail or create erroneous results after
December 31, 1999, or before, to the extent a system references future
dates. This Year 2000 issue is believed to affect the majority of all
companies and organizations worldwide, including the Company.
In response to increasing regulatory scrutiny and to improve customer
service and increase its operating performance and efficiency, the Company
has recently undertaken a number of significant information system
initiatives. These initiatives include the installation of a new laboratory
system during 1997 and the development of a donor center operating system
(DCOS), which the Company expects to complete and put into use during 1999.
An ancillary benefit of these initiatives is that the resulting systems are
Year 2000 compliant. The Company is in the process of evaluating all other
owned and leased information systems and will upgrade those products that
are intended for continued use beyond the year 1999. The Company has also
begun an analysis of all other systems that are material to its operations
and that could contain date-sensitive embedded technology, such as its
automated plasmapheresis machines and plasma storage freezers. Furthermore,
PAGE 15
the Company is analyzing the Year 2000 issue as it relates to its
customers, suppliers, financial institutions and other third parties with
which it has a material relationship and what, if any, impact that could
have on the Company. Analysis and evaluation activities were begun in 1997
and are expected to be completed by the end of 1998.
While the Company currently markets its products to over 200 customers
worldwide, 84% of the Company's net sales during the previous fiscal year were
made to its top ten customers. Furthermore, certain plasmapheresis and other
supplies critical to its operations are purchased from a limited number of
suppliers. As a result of these concentrated risks, the inability of any of the
Company's major suppliers to provide it with critical supplies, or any
prolonged delay or other disruption in the manufacturing, laboratory testing
or other processes of the Company's customers, could have a material adverse
effect on the Company. The Company is currently communicating with its
significant customers, suppliers and other third parties to determine the
status of their Year 2000 compliance. While the process is not complete,
none of the responses received to date suggests that any significant
customer, supplier or other third party expects the Year 2000 issue to cause
an interruption in its operations which would have a material adverse impact
on the Company. However, because these suppliers, customers and other third
parties are exposed to the risk of failure not only of their own systems,
but of other third parties, the ultimate effect of the Year 2000 issue is
subject to a high degree of uncertainty. Furthermore, due to the inherent
lack of control over these third parties, the Company is able to give no
assurance as to the current readiness or success of these parties' Year 2000
compliance.
Based on the information known to date, the Company believes that the
most likely worst-case Year 2000 scenario would entail a significant
interruption in its business, including disruption in the collection or
manufacturing of antibodies due to the inability to obtain critical supplies,
and loss of revenue due to the inability of the Company's customers to
further manufacture the Company's products or to provide the required
laboratory testing services. The Company could also be significantly
affected by the failure of infrastructure services such as electricity and
telephone service. While the Company is unable to quantify the effect of
such a scenario, it could potentially have a material adverse impact on the
Company's results of operations, liquidity or financial condition.
Based on the analysis the Company has completed to date, it does not
expect that the cost of its Year 2000 compliance program will be material to
its business, results of operations or financial condition. The Company
believes that it will be able to achieve compliance by the end of 1999 and
does not currently anticipate any material disruption of its operations as
the result of any failure by the Company to be in compliance. The Company
is currently in the process of developing a contingency plan to address the
potential noncompliance of third parties, which it expects to complete by
the second quarter of 1999.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
Not Applicable.
PAGE 16
PART II.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 27.1: Financial Data Schedule
b. Reports on Form 8-K
None
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.
SEROLOGICALS CORPORATION
------------------------
(Registrant)
Date: November 10, 1998 By: /s/ Russell H. Plumb
--------------------------------
Russell H. Plumb
Vice President/Chief Financial
Officer (Principal Financial and
Accounting Officer)
PAGE 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF SEROLOGICALS CORPORATION
FOR THE QUARTER ENDED SEPTEMBER 27, 1998, AS SET FORTH IN ITS FORM 10Q
FOR SUCH QUARTER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 32,713
<SECURITIES> 0
<RECEIVABLES> 18,996
<ALLOWANCES> 0
<INVENTORY> 12,953
<CURRENT-ASSETS> 66,897
<PP&E> 25,174
<DEPRECIATION> 9,404
<TOTAL-ASSETS> 141,416
<CURRENT-LIABILITIES> 14,101
<BONDS> 0
0
0
<COMMON> 245
<OTHER-SE> 123,756
<TOTAL-LIABILITY-AND-EQUITY> 141,416
<SALES> 91,506
<TOTAL-REVENUES> 91,506
<CGS> 59,953
<TOTAL-COSTS> 59,953
<OTHER-EXPENSES> 1,995
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (632)
<INCOME-PRETAX> 18,663
<INCOME-TAX> 6,644
<INCOME-CONTINUING> 12,019
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,019
<EPS-PRIMARY> .50
<EPS-DILUTED> .47
</TABLE>
