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 June 28, 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 August 5, 1998
Common Stock, $.01 par value per share 16,054,027
<PAGE> 1
INDEX
SEROLOGICALS CORPORATION AND SUBSIDIARIES
PART I.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
December 28, 1997 and June 28, 1998. . . . . . . . . . . . . .3
Condensed Consolidated Statements of Income -
For the three and six months ended June 29,
1997 and June 28, 1998 . . . . . . . . . . . . . . . . . . . .4
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 29, 1997 and
June 28, 1998. . . . . . . . . . . . . . . . . . . . . . . . .5
Notes to Condensed Consolidated Financial Statements. . . . . . .6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . 10-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . . .14
PART II.
Item 4. Submission of Matters to a Vote of Security Holders. . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE> 2
PART I.
Item 1. Financial Statements
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
December 28, June 28,
1997 1998
------ ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $31,812 $28,164
Trade accounts receivable, net 9,991 18,061
Inventories 10,154 12,220
Other current assets 865 3,724
------- -------
Total current assets 52,822 62,169
------- -------
PROPERTY AND EQUIPMENT, net 13,682 15,051
------- -------
OTHER ASSETS:
Goodwill, net 51,006 52,896
Other, net 5,982 6,239
------- -------
Total other assets 56,988 59,135
------- -------
$123,492 $136,355
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt and capital lease obligations $ 2,352 $ 2,352
Accounts payable 3,654 4,320
Accrued liabilities 8,493 9,123
Deferred revenue 898 108
------- -------
Total current liabilities 15,397 15,903
------- -------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current maturities 4,446 3,074
------- -------
OTHER LIABILITIES 364 183
------- -------
STOCKHOLDERS' EQUITY:
Common stock 157 161
Additional paid-in capital 75,536 81,856
Retained earnings 27,370 35,293
Accumulated other comprehensive income 222 (115)
------- -------
Total stockholders' equity 103,285 117,195
------- -------
$123,492 $136,355
======= =======
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)
Six Months Ended Three Months Ended
---------------- ------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
--------- -------- -------- --------
Net sales $45,962 $59,670 $26,059 $30,236
Costs and expenses:
Cost of sales 29,211 38,528 17,133 19,389
Selling, general and
administrative expenses 6,204 7,023 3,264 3,516
Product development expenses 1,000 745 445 411
Interest income, net (224) (372) (65) (99)
Other expense, net 1,077 1,460 596 774
------ ------ ------ ------
Income before income taxes 8,694 12,286 4,686 6,245
Provision for income taxes 3,196 4,363 1,714 2,151
------ ------ ------ ------
Net income $5,498 $7,923 $2,972 $4,094
====== ====== ====== ======
Net income per common share:
Basic $0.38 $0.50 $0.20 $0.26
====== ====== ====== ======
Diluted $0.36 $0.47 $0.19 $0.24
====== ====== ====== ======
Weighted average common
and common equivalent
shares outstanding:
Basic 14,375,163 15,829,664 14,587,805 15,933,990
Diluted 15,359,971 17,164,717 15,620,080 17,234,164
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)
Six Months Ended
----------------
June 29, June 28,
1997 1998
---- ----
Operating activities:
Net income $5,498 $7,923
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,231 2,685
Deferred income tax provision (benefit) 178 (103)
Changes in operating assets and liabilities,
net of acquisitions of businesses:
Trade accounts receivable, net (2,742) (7,558)
Inventories (372) (1,871)
Other current assets (116) (800)
Accounts payable (1,214) 624
Accrued expenses 830 2,355
Deferred revenue (383) (865)
------- -------
Total adjustments (1,588) (5,533)
------- -------
Net cash provided by operating activities 3,910 2,390
------- -------
Investing activities:
Purchases of property and equipment (1,697) (2,398)
Acquisitions of businesses, net of cash acquired(10,020) (4,519)
Other (62) (2,570)
-------- -------
Net cash used in investing activities (11,779) (9,487)
======== =======
Financing activities:
Proceeds from issuance of long-term debt 230 --
Payments on long-term debt and capital
lease obligations (108) (39)
Proceeds from employee stock plans 886 3,488
------- -------
Net cash provided by financing activities 1,008 3,449
------- -------
Net decrease in cash and cash equivalents (6,861) (3,648)
Cash and cash equivalents, beginning of period 21,232 31,812
------- -------
Cash and cash equivalents, end of period $14,371 $28,164
======= =======
Supplemental Disclosures:
Interest Paid $146 $77
Taxes Paid $3,523 $2,696
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
JUNE 28, 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 August 5, 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 IVIG
antibodies from which a number of products are produced and one of
which is a clinical trial site dedicated to the management and
performance of clinical trials for the pharmaceutical industry. The
Company is also engaged in the development, manufacturing and sale
of monoclonal antibodies 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.
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 six months ended June 29, 1997 has 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, 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 six months ended June 29, 1997, respectively.
Reported diluted earnings per share is the same as the Company's
previously reported primary earnings per share.
<PAGE> 6
The following table sets forth a reconciliation of basic earnings
per share to diluted earnings per share (in thousands, except per
share amounts):
Six Months Three Months
Ended Ended
----------------- ----------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
-------- ------- -------- -------
Net income, as reported $5,498 $7,923 $2,972 $4,094
Effect of dilutive
securities:
Convertible notes 58 71 29 36
------ ------ ------ ------
Net income, assuming
full dilution $5,556 $7,994 $3,001 $4,130
====== ====== ====== ======
Common shares, basic 14,375 15,830 14,588 15,934
Effect of dilutive
securities:
Convertible notes 134 299 213 264
Stock options and
Warrants 851 1,035 819 1,036
------ ------ ------ ------
Common shares,
assuming full
dilution 15,360 17,164 15,620 17,234
====== ====== ====== ======
Net income per share
Basic $0.38 $0.50 $0.20 $0.26
====== ====== ====== ======
Diluted $0.36 $0.47 $0.19 $0.24
====== ====== ====== ======
Revenue Recognition and Deferred Revenue
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 and at the request of its
customers, the Company may enter into "bill and hold" arrangements
whereby the earnings process is complete but the customer has elected
to not take physical delivery of the product due to storage or other
constraints. Such transactions are generally recognized as revenue
when the arrangement is at the request of the customer, is represented
by a fixed, written commitment and includes a fixed schedule for the
delivery of the product, among other criteria. Furthermore, the
Company may also receive advance payments from customers for future
delivery of products that do not meet the criteria of "bill and hold"
sales. The revenue related to these advance payments is deferred and
generally recognized when the products are shipped.
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. The adoption of SFAS No. 130 had no effect on
the Company's net income. 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):
Six Months Ended Three Months Ended
----------------- ------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
------ ------ ------ -----
Net income, as reported $5,498 $7,923 $2,972 $4,094
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustments (42) (69) 47 (107)
Unrealized losses on securities -- (268) -- (108)
----- ----- ----- -----
Other comprehensive income (loss),
net of tax (42) (337) 47 (214)
----- ----- ----- -----
Comprehensive income $5,456 $7,596 $3,019 $3,880
===== ===== ===== =====
2. ACQUISITIONS
On March 27, 1998, the Company acquired substantially all of the
assets of Therapeutics, Inc., which operated a site in New Jersey
engaged in the performance of clinical trials for the pharmaceutical
industry. 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 June 28, 1998 consisted of the following (in thousands):
December 28, June 28,
1997 1998
--------- ---------
$4.0 million convertible subordinated note
payable, interest at 4.5% payable quarterly
commencing July 1, 1997; maturing on
March 7, 2002 $4,000 $2,667
$2.55 million 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 141 109
Other notes at varying interest rates
and terms maturing through December 1998 107 100
----- -----
6,798 5,426
Less current maturities 2,352 2,352
----- -----
$4,446 $3,074
===== =====
During the first quarter 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 71,000
shares of the Company's common stock.
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 and will adopt the standard for its full 1998 fiscal
year.
5. SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
The following non-cash investing and financing transactions were
entered into during the six months ended June 29, 1997 and June 28,
1998 (in thousands):
Six Months Ended
-------------------
June 29, June 28,
1997 1998
------ ------
Issuance of promissory note as
acquisition consideration $4,100 $ --
Conversion of promissory note
into common stock $3,500 $1,333
<PAGE> 9
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, and the duration of such impact, of changing regulatory and
industry standards, including the impact of the delay in the
validation of a customer's laboratory testing facility; current supply
and demand factors and this effect on the Company's long-term growth
prospects; the level of capital expenditures during 1998; the impact of
the Year 2000 issue, the ability of the Company to achieve Year 2000
compliance and the related cost to achieve such compliance; 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,
such as 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 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
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
focus 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 first applied to the plasma
fractionation industry 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 testing facilities. Specifically, the Company's
largest customer has experienced a significant and indeterminate
delay in the validation, or approval, of its relocated laboratory
testing facility. To mitigate the impact of this delay, the Company
has transferred the mandatory viral marker testing to alternative
testing facilities, including its own, recently expanded, laboratory.
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 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. However, 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.
The Company believes that any adverse impact it has experienced
or may continue to experience as a result of the factors described
above, including decreased collections of antibodies and delayed or
reduced shipments thereof, will be short-term in nature. Furthermore,
the Company 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.
<PAGE> 10
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.
Six months ended Three months ended
---------------- ------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 36.4% 35.4% 34.3% 35.9%
Selling, general and
administrative expenses 13.5% 11.8% 12.5% 11.6%
Product development
Expenses 2.2% 1.2% 1.7% 1.4%
Net income 12.0% 13.3% 11.4% 13.5%
Three Months Ended June 29, 1997 and June 28, 1998
Net sales increased 16.0%, or $4.2 million, from $26.0 million
in 1997 to $30.2 million in 1998. Of the increase, approximately
$2.6 million resulted from additional sales of specialty antibodies,
primarily anti-D, monoclonal and clinical diagnostic antibodies. This
increase was offset in part by small decreases in certain product
lines, including anti-cytomegalovirus (anti-CMV), a product of which
the Company does not expect significant sales beyond 1998. The
remainder of the increase, or approximately $1.6 million, related to
the full-quarter effect of acquisitions completed during the last six
months of 1997 and the first six months of 1998. The increase in sales
of anti-D antibodies was due primarily to increased production and to
a lesser extent, price increases. Net sales of the Company's
therapeutic and diagnostic product lines increased 14.2% and 18.5%,
respectively, over the second quarter of 1997.
During the second quarter of 1998 and 1997, therapeutic
antibodies represented approximately 82% and 83% of net sales,
respectively, while combined net sales of diagnostic antibodies and
revenues from clinical trials represented 18% and 17%, respectively.
Gross profit increased 21.5%, or $1.9 million, from $8.9 million
in the second quarter of 1997 to $10.8 million during 1998. The
increase was primarily attributable to additional sales of, and higher
margins on, anti-D monoclonal and clinical diagnostic antibodies,
offset in part by lower margins on non-specialty, IVIG antibodies.
The higher margins on diagnostic antibody sales were primarily
attributable to a favorable product mix. Gross profit as a percentage
of net sales ("gross margin") increased from 34.3% in 1997 to 35.9% in
1998, primarily as a result of the aforementioned favorable product -
mix. The increase in gross margins was offset in part by the under-
absorption of fixed costs resulting from lower production at many of
the Company's non-specialty donor centers. This decrease in
production was caused in part by the transitioning of the testing of
a large portion of the Company's non-specialty antibodies from a
customer's laboratory facility to alternative facilities, including
the Company's own laboratory.
Selling, general and administrative expenses increased 7.7%,
or $252,000, from $3.3 million in the second quarter of 1997 to $3.5
million in 1998. The increase was primarily attributable to a larger
regulatory, sales and marketing and general corporate infrastructure
needed to support the Company's acquisitions and internal growth.
However, selling, general and administrative expenses, as a percentage
of net sales, decreased from 12.5% to 11.6% as the Company continued
to effectively leverage its corporate infrastructure relative to
increased production and recent acquisitions.
<PAGE> 11
Product development expenses, which relate primarily to the
development of monoclonal antibodies and expenditures incurred in the
Company's development of clinical trial site management services,
decreased 7.6%, or $34,000, from $445,000 in 1997 to $411,000 in 1998.
Other expense, which consists primarily of amortization expense,
increased $178,000, or 29.9%, from $596,000 in 1997 to $774,000 in
1998, substantially all due to the increase in amortization of
goodwill and other intangible assets resulting from acquisitions
completed during 1997 and 1998.
Interest income, net increased 52.3%, or $34,000, from $65,000
in 1997 to $99,000 in 1998, due primarily to higher cash balances and
lower debt outstanding in the second quarter of 1998 versus the
comparable period a year earlier.
Six Months Ended June 29, 1997 and June 28, 1998
Net sales increased 29.8%, or $13.7 million, from $46.0 million
in 1997 to $59.7 million in 1998. Of the increase, approximately
$7.0 million was primarily attributable to increased sales of
specialty antibodies, particularly anti-D, monoclonal and clinical
diagnostic antibodies. The remainder of the increase, or approximately
$6.8 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 31.7% and
18.5%, respectively.
Gross profit increased 26.2%, or $4.4 million, from $16.8 million
in 1997 to $21.1 million in 1998. Of the increase, approximately $3.6
million was primarily the result of increased sales of, and higher
margins on, specialty antibodies, primarily anti-D and, to a lesser
extent, monoclonal antibodies. The remainder of the increase, or
approximately $798,000, was attributable to the full-period effect of
acquisitions completed during 1997 and 1998. Gross margins decreased
from 36.4% for the first six months of 1997 to 35.4% in 1998, due
primarily to under-absorption of fixed costs resulting from decreased
production at many of the Company's non-specialty donor centers, offset
by increased margins on certain of the Company's specialty antibody
products.
Selling, general and administrative expenses increased 13.2%,
or $819,000, from $6.2 million in 1997 to $7.0 million in 1998. The
increase was primarily attributable to a larger sales, financial and
regulatory infrastructure needed to support the Company's acquisitions
and growth. However, selling, general and administrative expenses, as
a percentage of net sales, decreased from 13.5% to 11.8%, as the
Company continued to effectively leverage its corporate
infrastructure.
Product development expenses decreased $255,000, or 25.5%, from
$1.0 million in the first six months of 1997 to $745,000 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 66.1%, or $148,000, from $224,000
in 1997 to $372,000 in 1998, due primarily to higher cash balances
and lower debt outstanding in the first six 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 950,000
shares of the Company's common stock.
Other expense, net increased 35.6%, or $383,000, from $1.1
million in 1997 to $1.5 million in 1998, due primarily to the full-
period effect of the amortization of goodwill and other intangible
assets resulting from acquisitions completed during 1997 and 1998.
<PAGE> 12
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
June 28, 1998:
December 28, June 28,
1997 1998
----------- ---------
Cash and cash equivalents $31,812 $28,164
Working capital 37,425 46,266
Total long-term debt and capital
lease obligations 6,798 5,426
Stockholders' equity 103,285 117,195
Total debt to equity ratio 6.6% 4.6%
The Company has three principal sources of near-term liquidity:
(i) existing cash and cash equivalents; (ii) cash generated by
operations, and (iii) borrowing capacity 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 growth opportunities may require supplementary funding, including
the issuance of equity or debt securities.
Net cash provided by operating activities during the first six
months of 1998 was $2.4 million as compared to $3.9 million in the
prior year, or a decrease of $1.5 million. This decrease was
primarily attributable to an increased investment in working capital
of approximately $4.1 million over the prior year and an increased
deferred tax benefit of $281,000, offset by increased net income of
$2.4 million and $454,000 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 $4.8
million and a larger increase in inventory of $1.5 million, offset by
larger increases in accounts payable and accrued expenses of $3.4
million. The increase in accounts receivable resulted from both
increased sales volume and the timing of sales, a significant amount
of which occurred in the last month of the second quarter. The
increase in inventory was partially due to a requirement of one of
the Company's foreign customers to obtain certain approvals for
several of the Company's donor centers, and the resulting delay in
shipping product collected from such centers.
Net cash used in investing activities during the second quarter
of 1998 was $9.5 million as compared to $11.8 million in 1997.
Investing activities in 1997 primarily consisted of the acquisition
of Nations Biologics, Inc. and its affiliates for approximately $10.0
million in cash (net) and capital expenditures of $1.7 million.
Investing activities in 1998 consisted primarily of the acquisition
of Allied Plasma Products, Inc. and Therapeutics, Inc. for
approximately $4.5 million (net) and capital expenditures of $2.4
million.
Capital expenditures relate primarily to the Company's
facilities, related equipment and information systems. The level of
capital expenditures is expected to continue at its current rate
during the remainder of 1998 as the Company continues to expand and
upgrade its information systems and donor centers. The Company expects
that capital expenditures for the remainder of the year will be financed
primarily with cash on hand and cash provided by operations.
Cash provided by financing activities was approximately $3.4
million, substantially all of which were proceeds from the exercise
of employee stock options.
Total long-term debt and capital lease obligations were $5.4
million at June 28, 1998, a decrease of approximately $1.4 million
from December 28, 1997. This decrease was primarily due to the
conversion of a $1.3 million principal portion of a $4.0 million
promissory note into the Company's common stock.
<PAGE> 13
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
June 28, 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, 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.
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. However, the ability of the Company's
significant customers, suppliers and other third parties to achieve
Year 2000 compliance in a timely and effective manner is uncertain. In
the event that such third parties are unable to achieve such
compliance, the Company's business and results of operations could be
materially adversely affected. The Company is currently in the process
of developing a contingency plan to address the potential
noncompliance of third parties, such as the inability of the Company
to obtain critical supplies or the inability of the Company's
significant customers to further manufacture the Company's products.
The Company currently expects to complete its contingency plan by the
second quarter of 1999.
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
Not Applicable
<PAGE> 14
PART II.
Item 4. Submission of Matters to a Vote of Security Holders.
The Registrant held its 1998 Annual Meeting of Stockholders on
May 19, 1998.
At the Annual Meeting, Harold J. Tenoso, Ph.D. and George M.
Shaw, M.D., Ph.D. were re-elected directors. The number of shares of
common stock voted in the election of Dr. Tenoso was 11,601,434 FOR
and 24,510 withheld. The number of shares of common stock voted
the election of Dr. Shaw was 11,601,684 FOR and 24,260 withheld.
In addition, the following other directors continued as such after
the meeting: Samuel A. Penninger, Jr., Matthew C. Weisman, James L.
Currie, Lawrence E. Tilton and Wade Fetzer, III.
In addition, at the Annual Meeting, amendments to the Company's
Amended and Restated 1994 Omnibus Incentive Plan were approved by a
vote of the stockholders as follows: 6,997,928 affirmative votes,
3,715,877 negative votes, 8,635 abstentions and 903,504 broker
non-votes. Further, amendments to the Company's 1995 Non-Employee
Directors' Stock Option Plan were approved by a vote of the
stockholders as follows: 11,484,586 affirmative votes, 131,979
negative votes and 9,379 abstentions.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 4.1: Amended and Restated 1995 Non-Employee
Director's Stock Option Plan
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: August 12, 1998 By: /s/ Russell H. Plumb//
------------------------------
Russell H. Plumb
Vice President/Chief Financial
Officer (Principal Financial
and Accounting Officer)
<PAGE> 15
<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 JUNE 28, 1998, AS SET FORTH IN ITS FORM 10-Q 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> JUN-28-1998
<CASH> 28,164
<SECURITIES> 0
<RECEIVABLES> 18,061
<ALLOWANCES> 0
<INVENTORY> 12,220
<CURRENT-ASSETS> 62,169
<PP&E> 15,051
<DEPRECIATION> 0
<TOTAL-ASSETS> 136,355
<CURRENT-LIABILITIES> 15,903
<BONDS> 0
0
0
<COMMON> 161
<OTHER-SE> 117,034
<TOTAL-LIABILITY-AND-EQUITY> 136,355
<SALES> 59,670
<TOTAL-REVENUES> 59,670
<CGS> 38,528
<TOTAL-COSTS> 7,768
<OTHER-EXPENSES> 1,460
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (372)
<INCOME-PRETAX> 12,286
<INCOME-TAX> 4,363
<INCOME-CONTINUING> 7,923
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,923
<EPS-PRIMARY> .50
<EPS-DILUTED> .47
</TABLE>
<PAGE>
SEROLOGICALS CORPORATION
AMENDED AND RESTATED 1995 NON-EMPLOYEE DIRECTORS'
STOCK OPTION PLAN
1. Purpose. The Amended and Restated 1995 Non-Employee
Directors' Stock Option Plan (the "Plan") of Serologicals Corporation,
a Delaware corporation (the "Corporation"), is designed to aid the
Corporation and its subsidiaries in retaining and attracting non-
employee directors of exceptional ability by enabling such non-
employee directors to purchase a proprietary interest in the
Corporation, thereby stimulating in such individuals an increased
desire to render greater services which will contribute to the
continued growth and success of the Corporation and its subsidiaries.
2. Amount and Source of Stock. The total number of shares
of the Corporation's Common Stock (the "Shares") which may be the
subject of options granted pursuant to the Plan shall be limited so
that the total number of Shares issued upon the exercise of options
granted pursuant to the Plan shall not exceed 540,000 (after giving
effect to the 3 for 2 split of the Shares in February 1997), subject
to adjustment as provided in paragraph 12. None of the options to be
granted under the Plan are intended to be "Incentive Stock Options" as
defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations (whether proposed, temporary
or final) promulgated thereunder. Such Shares may be reserved or made
available from the Corporation's authorized and unissued Shares or
from Shares reacquired and held in the Corporation's treasury. In the
event that any option granted hereunder shall terminate prior to its
exercise in full for any reason, then the Shares subject to such
option shall be added to the Shares otherwise available for issuance
pursuant to the exercise of options under the Plan.
3. Administration of the Plan. The Plan shall be
administered by a committee (the "Committee") of the Board of
Directors of the Corporation (the "Board") comprised of two or more
members of the Board, selected by the Board, all of which members
shall be "disinterested persons" as that term is defined in Rule 16b-
3(d)(3) (or any successor provision) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Committee
is hereinafter sometimes referred to as the "Administrative Body."
The Administrative Body shall have full authority to interpret the
Plan, to establish and amend rules
and regulations relating to it and to make all other determinations
necessary or advisable for the administration of the Plan.
<PAGE> 1
4. Non-Discretionary Lump Sum Grants.
(a) Each person who is elected for the first time to be
a non-employee director automatically shall, on the day after the date
of his initial election to be a non-employee director by the Board or
stockholders of the Corporation, be granted an option exercisable to
purchase 24,000 Shares. The date on which an option is granted under
paragraph 4 or 5 to a specified individual shall constitute the date
of grant of such option (the "Date of Grant").
(b) Subject to subparagraph 13(b) hereof, options
granted to a participant under subparagraph 4(a) hereof shall vest at
the rate of 25% per year commencing on the first anniversary of the
Date of Grant; provided that for each six months (or portion thereof)
of service as a director of the Corporation or any subsidiary prior to
the Date of Grant, such vesting shall accelerate by one (1) year.
5. Non-Discretionary Annual Grants.
(a) Each non-employee director shall automatically
receive an annual grant of an option to purchase 6,000 Shares on the
day after the annual meeting of stockholders at which directors are
elected each year (the "Annual Meeting Date"); provided, that the
first grant of an option to a particular non-employee director under
this subparagraph 5(a) shall be made on the first Annual Meeting Date
after the option granted under subparagraph 4(a) shall have or would
have (had not such director elected to decline an award in accordance
with subparagraph 6(a)), vested in full.
(b) Subject to subparagraph 13(b) hereof, options
granted to a participant under subparagraph 5(a) hereof shall vest at
the rate of 25% per year commencing on the first anniversary of the
Date of Grant.
6. Election to Decline Grant; Revocation of Declination.
(a) Any non-employee director entitled to an option
under paragraph 4 or 5 may, at any time on or before Date of Grant,
elect to decline such award. Such election shall be in writing, and
signed by the non-employee director.
(b) A non-employee director who makes an election under
(a) above, shall receive no compensation as a substitute for the
option(s) declined.
(c) An election described in (a) above may be revoked
on a prospective basis at any time prior to a scheduled award. Such
revocation election must be in writing and signed by the non-employee
director.
<PAGE> 2
7. Option Price. The exercise price of the Shares
purchasable under any option granted pursuant to the Plan shall be
100% of the fair market value of the Shares subject to such option on
the Date of Grant. For purposes of the Plan, the "fair market value
per share" of the Shares on a given date shall be: (i) if the Shares
are listed on a registered securities exchange or quoted on the
National Market System, the closing price per share of the Shares on
such date (or, if there was no trading reported on such date, on the
next preceding day on which there was trading reported); (ii) if the
Shares are not listed on a registered securities exchange and not
quoted on the National Market System, but the bid and asked prices per
share for the Shares are provided by Nasdaq, the National Quotation
Bureau Incorporated or any similar organization, the average of the
closing bid and asked price per share of the Shares on such date (or,
if there was no trading in the Shares on such date, on the next
preceding day on which there was trading) as provided by such
organization; and (iii) if the Shares are not traded on a registered
securities exchange and not quoted on the National Market System and
the bid and asked price per share of the Shares are not provided by
Nasdaq, the National Quotation Bureau Incorporated or any similar
organization, solely as determined by the Administrative Body in good
faith.
8. Term of Option.
(a) Options granted hereunder shall be exercisable for
a period of ten (10) years from the Date of Grant.
(b) The grant of options pursuant to the terms of the
Plan shall be effective as of the Date of Grant; provided, however,
that no option granted hereunder shall be exercisable unless and until
this Plan has been approved by the Corporation's stockholders and
unless and until the holder has entered into an individual option
agreement with the Corporation that shall set forth the terms and
conditions of such option. Each such agreement shall expressly
incorporate by reference the provisions of this Plan (a copy of which
shall be made available for inspection by the optionee during normal
business hours at the principal office of the Corporation), and shall
state that in the event of any inconsistency between the provisions
hereof and the provisions of such agreement, the provisions of this
Plan shall govern.
9. Exercise of Options. An option shall be exercised when
written notice of such exercise, signed by the person entitled to
exercise the option, has been delivered or transmitted by registered
or certified mail to the Secretary of the Corporation at its then
principal office. Such notice shall specify the number of Shares for
which the option is being exercised and shall be accompanied by (i)
such documentation, if any, as may be required by the Corporation as
provided in subparagraph 13(b), and (ii) payment of the aggregate
option price. Such payment shall be in the form of (i) cash or check
<PAGE> 3
payable to the order of the Corporation in the amount of the aggregate
option price, (ii) certificates duly endorsed for transfer (with all
transfer taxes paid or provided for) evidencing a number of Shares of
which the aggregate fair market value on the date of exercise is equal
to the aggregate option exercise price of the Shares being purchased,
(iii) any method of payment which is acceptable to the Administrative
Body (including pursuant to a cashless exercise program adopted by the
Administrative Body) or (iv) a combination of these methods of
payment. Delivery of such notice shall constitute an irrevocable
election to purchase the Shares specified in such notice, and
the date on which the Corporation receives the last of such notice,
documentation and the aggregate option exercise price for all of the
shares covered by the notice shall, subject to the provisions of
paragraph 13 hereof, be the date as of which the Shares so purchased
shall be deemed to have been issued. The person entitled to exercise
the option shall not have the right or status as a holder of the
Shares to which such exercise relates prior to receipt by the
Corporation of the payment, notice and documentation expressly
referred to in this paragraph 9. Notwithstanding the foregoing, a
holder whose transactions in Common Stock are subject to Section 16(b)
of the Exchange Act may tender Shares in payment of all or any portion
of the option price only if the following additional conditions are
met: (i) the tender is made at least six months after the Date of
Grant and (ii) either (x) the election to tender is irrevocably
made at least six months in advance of the tender of Shares or
(y) the tender of Shares takes place during the period beginning on
the third business day following the date of release of the
Corporation's quarterly or annual financial results and ending on the
twelfth business day following such date.
10. Exercise and Cancellation of Options After Termination,
Disability or Death. Except as set forth below, if a holder shall
voluntarily or involuntarily cease to serve as a director of the
Corporation or if a holder's service shall terminate on account of death or
disability, the option of such holder shall terminate two
years following the first day that the holder is no longer such a
director (the "Termination Date"); provided that if such director is
removed for cause, the option shall terminate immediately. In no
event may the holder, or the holder's guardian, conservator, executor
or administrator, as the case may be, exercise an option after the end
of the original term of the option.
Nothing contained herein or in any option agreement shall be
construed to confer on any option holder any right to continue as a
director of the Corporation or derogate from any right of the
Corporation, the Board or the stockholders of the Corporation to
remove such option holder as a director of the Corporation, with or
without cause.
11. Non-transferability of Options. No option granted under
the Plan shall be sold, pledged, assigned or transferred in any manner
except to the extent that options may be exercised by an executor or
administrator as provided in paragraph 10 hereof. An option may be
exercised, during the lifetime of the holder thereof, only by such
holder or his duly appointed guardian or conservator in the event of
his disability.
<PAGE> 4
12. Adjustments Upon Certain Events.
If the outstanding Shares are subdivided, consolidated,
increased, decreased, changed into, or exchanged for a different
number or kind of shares or other securities of the Corporation
through reorganization, merger, recapitalization, reclassification,
capital adjustment or similar transaction, or if the Corporation shall
issue additional Shares as a dividend or pursuant to a stock split,
then the number and kind of Shares available for issuance pursuant to
the exercise of options to be granted under this Plan and all Shares
subject to the unexercised portion of any option theretofore granted
and the exercise price of such options shall be adjusted on a pro rata
basis to prevent the inequitable enlargement or dilution of any rights
hereunder; provided, however, that any such adjustment in outstanding
options under the Plan shall be made without change in the aggregate
exercise price applicable to the unexercised portion of any such
outstanding option. Distributions to the Corporation's stockholders
consisting of property other than Shares of the Corporation or its
successor and distributions to stockholders of rights to subscribe for
Shares shall not result in the adjustment of the Shares purchasable
under outstanding options or the exercise price of outstanding
options. Adjustments under this paragraph shall be made by the
Administrative Body, whose determination thereof shall be conclusive
and binding. Any fractional Share resulting from adjustments pursuant
to this paragraph shall be eliminated from any then outstanding
option. Nothing contained herein or in any option agreement shall be
construed to affect in any way the right or power of the Corporation
to make or become a party to any adjustments, reclassifications,
reorganizations or changes in its capital or business structure or to
merge, consolidate, dissolve, liquidate or otherwise transfer all or
any part of its business or assets.
13. General Restrictions.
(a) No option granted hereunder shall be exercisable if
the Corporation shall at any time determine that (i) the listing upon
any securities exchange, registration or qualification under any state
or federal law of any Shares otherwise deliverable upon such exercise,
or (ii) the consent or approval of any regulatory body or the
satisfaction of withholding tax or other withholding liabilities, is
necessary or appropriate in connection with such exercise. In any of
the events referred to in clause (i) or clause (ii) above, the
exercisability of such options shall be suspended and shall not be
effective unless and until such withholding, listing, registration,
qualifications or approval shall have been effected or obtained free
of any conditions not acceptable to the Corporation in its sole
discretion, notwithstanding any termination of any option or any
portion of any option during the period when exercisability has been
suspended.
(b) The Administrative Body may require, as a condition
to the right to exercise an option, that the Corporation receive from
<PAGE> 5
the option holder, at the time of any such exercise, representations,
warranties and agreements to the effect that the Shares are being
purchased by the option holder for investment only and without any
present intention to sell or otherwise distribute such Shares and that
the option holder will not dispose of such Shares in transactions
which, in the opinion of counsel to the Corporation, would violate the
registration provisions of the Securities Act of 1933, as then
amended, and the rules and regulations thereunder. The certificates
issued to evidence such Shares shall bear appropriate legends
summarizing such restrictions on the disposition thereof.
14. Amendment. Except to the extent prohibited by
applicable law and unless otherwise expressly provided in an Option
agreement or in the Plan:
(a) The Board may amend, alter, suspend, discontinue or
terminate the Plan, except that any amendment, alteration, suspension,
discontinuation or termination that would impair the rights of any
participant, or any other holder or beneficiary of any option
theretofore granted to the extent such rights are not then accrued and
vested, shall require the consent of such participant, other holder or
beneficiary of an option. Notwithstanding the foregoing, the Board
may condition any amendment on the approval of the stockholders of the
Corporation if such approval is necessary or advisable with respect to
tax (including Code Sections 162(m) and 422), securities or other
applicable laws and rules and regulations to which the Corporation,
this Plan, participants or other applicable persons are subject.
(b) The Board may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any option in
the manner and to the extent it shall deem desirable to carry the Plan
into effect.
15. Termination. Unless the Plan shall theretofore have
been terminated as provided hereinafter and in paragraph 16 hereof,
the Plan shall terminate on August 9, 2005, and no options under the
Plan shall thereafter be granted; provided, however, that the Board
may at any time, in its sole discretion, terminate the Plan prior to
the foregoing date. No termination of the Plan by the Board shall,
without the consent of the holder of an existing option, materially
and adversely affect his rights under such option.
<PAGE> 6
