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 March 28, 1999
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
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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
Atlanta, 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 May 7, 1999
----- --------------------------
Common Stock, $.01 par value per share 23,935,541
INDEX
SEROLOGICALS CORPORATION AND SUBSIDIARIES
PART I.
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
December 27, 1998 and March 28, 1999. . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income -
For the quarters ended March 29, 1998 and March 28, 1999. . . 4
Condensed Consolidated Statements of Cash Flows -
For the quarters ended March 29, 1998 and March 28, 1999. . . 5
Notes to Condensed Consolidated Financial Statements . . . . . . . 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . 10-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk . 16
PART II.
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 17
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART I.
Item 1. Financial Statements
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
December 27, March 28,
1998 1999
----------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $34,940 $8,605
Trade accounts receivable, net 22,072 26,650
Inventories 13,441 17,781
Other current assets 2,563 3,128
-------- --------
Total current assets 73,016 56,164
-------- --------
PROPERTY AND EQUIPMENT, net 16,332 27,863
-------- --------
OTHER ASSETS:
Goodwill, net 51,741 68,126
Other, net 6,242 6,405
-------- --------
Total other assets 57,983 74,531
-------- --------
$147,331 $158,558
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt
and capital lease obligations $4,406 $4,391
Accounts payable 4,028 4,934
Accrued liabilities 8,172 12,542
Deferred revenue 246 149
-------- --------
Total current liabilities 16,852 22,016
-------- --------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current maturities 878 872
-------- --------
OTHER LIABILITIES 592 592
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 243 246
Additional paid-in capital 84,983 86,515
Retained earnings 43,715 48,267
Accumulated other comprehensive income 68 50
-------- --------
Total stockholders' equity 129,009 135,078
-------- --------
$147,331 $158,558
======== ========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share amounts)
(Unaudited)
Quarter Ended
-----------------------
March 29, March 28,
1998 1999
---------- ----------
Net sales $29,434 $39,532
Costs and expenses:
Cost of sales 19,139 27,006
Selling, general and administrative expenses 3,841 4,669
Other expense, net 686 897
Interest income, net (273) (51)
---------- ----------
Income before income taxes 6,041 7,011
Provision for income taxes 2,212 2,460
---------- ----------
Net income $3,829 $4,551
========== ==========
Net income per common share:
Basic $0.16 $0.19
========== ==========
Diluted $0.15 $0.17
========== ==========
Weighted average shares:
Basic 23,588,254 24,581,753
========== ==========
Diluted 25,666,500 26,276,603
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarter Ended
-----------------------
March 29, March 28,
1998 1999
Operating activities: --------- ----------
Net income $3,829 $4,551
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 1,233 1,913
Deferred income tax benefit (263) (3)
Changes in operating assets and liabilities,
net of acquisitions of businesses:
Trade accounts receivable, net (6,397) (3,217)
Inventories 455 (205)
Other current assets (216) (359)
Accounts payable (1,224) 417
Accrued expenses 1,780 819
Deferred revenue (786) (97)
-------- --------
Total adjustments (5,418) (732)
-------- --------
Net cash provided by (used in)
operating activities (1,589) 3,819
-------- --------
Investing activities:
Purchases of property and equipment (1,338) (4,073)
Acquisitions of businesses,
net of cash acquired (1,444) (27,872)
Other (2,398) 274
-------- --------
Net cash used in investing activities (5,180) (31,671)
-------- --------
Financing activities:
Payments on long-term debt and capital
lease obligations (22) (21)
Proceeds from employee stock plans 314 1,538
-------- --------
Net cash provided by financing
Activities 292 1,517
-------- --------
Net decrease in cash and cash equivalents (6,477) (26,335)
Cash and cash equivalents,
beginning of period 31,812 34,940
-------- --------
Cash and cash equivalents, end of period $25,335 $8,605
======= =======
Supplemental Disclosures:
Interest Paid $68 $68
Taxes Paid $674 $89
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Conversion of promissory note into
common stock $1,333 --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1999
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Serologicals Corporation (the "Company") is a leading worldwide
provider of biological materials and services to major healthcare companies.
The Company provides value-added antibody-based products that are used as the
active ingredients in therapeutic products for the treatment and management of
diseases such as Rh incompatibility in newborns, rabies and hepatitis and in
diagnostic products such as blood typing reagents and diagnostic test kits. On
December 29, 1998, the Company acquired substantially all of the domestic
assets of Pentex Blood Proteins ("Pentex"), a unit of Bayer Corporation, a
wholly owned subsidiary of Bayer AG. Located in Kankakee, Illinois, Pentex
supplies a broad line of purified animal and human blood proteins to the
diagnostic and biopharmaceutical industries (Note 2). As of May 7, 1999, the
Company operated 64 donor centers, 17 of which specialize in the collection of
specialty antibodies and 47 of which primarily collect source plasma
containing non-specialty antibodies from which a number of products, primarily
intravenous immune globulin (IVIG), are produced. The Company is also engaged
in the development, manufacturing and sale of monoclonal antibodies at its
facilities in the United Kingdom and owns a clinical trial site dedicated to
the management and performance of clinical trials for the pharmaceutical and
biotech industries.
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 27, 1998 and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 27, 1998.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Earnings Per Share
Basic earnings per share are calculated by dividing net income by the
weighted average number of common shares outstanding during the period. The
calculation of the Company's diluted earnings per share are similar to basic
earnings per share, except that net income is adjusted by the after-tax
interest expense on convertible indebtedness and the weighted average number
of shares includes the dilutive effect of stock options, warrants, convertible
indebtedness and similar instruments.
All share and per share data included herein have been adjusted to
reflect a three-for-two stock split effected in August of 1998.
6
The following table sets forth the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):
Quarter Ended
March 29, March 28,
1998 1999
-------- ---------
Basic earnings per share:
Net income $ 3,829 $ 4,551
Weighted average shares of
common stock outstanding 23,588 24,582
-------- --------
Net income per share $ 0.16 $ 0.19
======== ========
Diluted earnings per share:
Net income $ 3,829 $ 4,551
Plus: interest expense on convertible
indebtedness, net of tax 45 36
-------- --------
Net income, as adjusted $ 3,874 $ 4,587
-------- --------
Weighted average shares of common
stock outstanding 23,588 24,582
Effect of dilutive securities:
Stock options and warrants 1,579 1,299
Convertible indebtedness 500 396
-------- --------
Weighted average shares of common
stock outstanding, including
dilutive instruments 25,667 26,277
-------- --------
Net income per share $ 0.15 $ 0.17
======== ========
Comprehensive Income
The following table sets forth the calculation of the Company's
comprehensive income for the periods indicated below (in thousands):
Quarter Ended
March 29, March 28,
1998 1999
------- -------
Net income, as reported $3,829 $4,551
Other comprehensive income,
net of tax
Foreign currency translation
adjustments 38 (124)
Unrealized loses on securities:
Unrealized holding (losses)
gains arising during period (160) 178
Less: reclassification adjustment
for gains included in net income -- (72)
------ ------
Other comprehensive income (122) (18)
------ ------
Comprehensive income $3,707 $4,533
====== ======
2. ACQUISITION OF PENTEX
On December 29, 1998, the Company acquired Pentex for $27.5 million (the
"Pentex Acquisition") plus the assumption of certain liabilities, before
recording transaction costs and subject to adjustment based on the closing net
assets of Pentex as of the closing date. Pursuant to the same transaction,
the Company agreed to purchase certain foreign assets owned by affiliated
companies of Bayer AG located in Europe for $1.5 million, which has not yet
been consummated. Pentex is engaged in the research, manufacturing, marketing
and sale of quality purified blood protein products primarily to customers in
the diagnostics and biopharmaceuticals industries in the United States and
approximately 25 other countries worldwide. The Company funded the
acquisition with cash on hand.
7
The Pentex Acquisition was accounted for as a purchase in accordance with
APB No. 16, and accordingly, the purchase price has been preliminarily
allocated to the net tangible and identifiable intangible assets acquired
based on their estimated fair values as of the acquisition date. 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.
The following unaudited data summarize the pro forma results of
operations for the quarter ended March 29, 1998 as if the Pentex Acquisition
had occurred on the first fiscal day of such period. Pro forma results of
operations for the quarter ended March 28, 1999 are not presented herein as
the results of operations for the two days subsequent to the Company's 1998
fiscal year end and prior to the consummation of the Pentex Acquisition are
immaterial to the Company. The unaudited pro forma information has been
prepared for comparative purposes only and does not purport to represent what
the results of operations would actually have been had the transaction
actually occurred on the date indicated, or what the results of operations may
be in the future (in thousands, except per share data).
Net sales $ 32,629
Net income $ 4,205
Net income per common share:
Basic $ 0.18
Diluted $ 0.17
3. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at December 27, 1998 and
March 28, 1999 consisted of the following (in thousands):
December 27, March 28,
1998 1999
------------ -----------
Convertible subordinated note payable
in the original principal amount of
$4 million, interest payable quarterly
at 4.5%; maturing on March 7, 2002 $2,667 $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 67 46
----- -----
5,284 5,263
Less current maturities 4,406 4,391
----- -----
$878 $872
===== =====
8
4. SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" ("SFAS No. 131"), established
standards for reporting information about operating segments in annual
financial statements and requires selected information in interim financial
reports. Selected financial information is reported below for the quarters
ended March 29, 1998 and March 28, 1999 (in thousands):
Quarter Ended
March 29, March 28,
1998 1999
--------- ---------
Net sales-unaffiliated customers:
Therapeutic Products $24,413 $29,813
Diagnostic Products 5,017 9,457
Corporate/Other 4 262
------- -------
Total $29,434 $39,532
======= =======
Segment operating income:
Therapeutic Products $7,242 $5,780
Diagnostic Products 1,756 3,750
Corporate/Other (2,544) (1,673)
------ ------
Total 6,454 7,857
------ ------
Reconciling items:
Other expense, net 686 897
Interest income, net (273) (51)
------ ------
Income before income taxes $6,041 $7,011
====== ======
Segment operating income is defined as earnings before income taxes,
interest, amortization, foreign currency gains and losses and other non-
operating income and expenses. "Corporate and Other" includes general
corporate expenses, corporate interest income, interest expense other than
that directly attributable to an operating segment and other operations that
do not otherwise meet the SFAS No. 131 criteria for disclosure. The Company
had no intersegment sales during 1998 or 1999.
On December 29, 1998, the Company purchased Pentex for $27.5 million in
cash at closing. The cash used was considered a corporate asset, while the
assets purchased are considered assets of the Diagnostic Products segment.
There were no other material changes in identifiable assets disclosed in the
Company's Annual Report on Form 10-K for the year ended December 27, 1998.
5. COMMON STOCK REPURCHASES
During April 1999, the Company's Board of Directors authorized the
repurchase of up to $20 million of the Company's common stock, subject to
market conditions, prevailing stock prices and Serologicals' capital
resources. The Company expects to fund any repurchases with existing cash
balances, cash flow from operations and availability under its revolving
credit facility. As of May 7, 1999, the Company had repurchased a total of
945,000 shares of its common stock for aggregate consideration of
approximately $7.1 million.
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
increasing regulatory scrutiny; the impact on the Company of reduced anti-D
sales and the Company's efforts to replace them; the impact on the Company of
current industry supply and demand factors and the supply of and demand for
the Company's individual products; the margin pressure on the Company's non-
specialty antibody product line; the impact of certain operational adjustments
regarding anti-D antibody collections; the level of capital expenditures
during 1999; the timing of the completion of the Pentex expansion and the
impact thereof; the sufficiency of capital and liquidity to fund operations,
capital expenditures, stock repurchases and acquisitions; and the Company's
ability to increase the borrowing capacity under the Revolver. These forward
looking statements are subject to certain risks and uncertainties, such as
changes in the economy or market conditions, changes in financial, banking
and capital markets, changes in customers' needs or abilities to manufacture
products, 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 27, 1998, which could cause actual results to differ
materially.
Overview and Recent Developments
The Company is a leading worldwide provider of biological materials and
services to major healthcare companies. The Company provides value-added
antibody-based products that are used as the active ingredients in therapeutic
products for the treatment and management of diseases such as Rh
incompatibility in newborns, rabies and hepatitis and in diagnostic products
such as blood typing reagents and diagnostic test kits. Through its protein
fractionation facility, the Company also provides a variety of proteins used
in diagnostic reagents and tissue culture media components for use as
additives in biotech products. As of May 7, 1999, the Company operated 64
donor centers, 17 of which specialize in the collection of specialty
antibodies and 47 of which primarily collect source plasma containing non-
specialty antibodies from which a number of products, primarily IVIG, are
produced. The Company is also engaged in the development, manufacturing and
sale of monoclonal antibodies at its facilities in the United Kingdom and owns
a clinical trial site dedicated to the management and performance of clinical
trials for the pharmaceutical and biotech industries.
On December 29, 1998, the Company acquired Pentex for $27.5 million in
cash at closing. Pursuant to the same transaction, the Company entered into
an agreement to purchase certain foreign assets of Pentex for $1.5 million;
that transaction has not yet been consummated. Pentex provides a full range of
over 100 distinct animal protein products derived from different animal
species. A number of these products, such as bovine serum albumin (BSA), are
primarily supplied to healthcare companies for use in diagnostic reagents. The
Company also provides a line of highly purified animal proteins known as tissue
culture media components that are used primarily by biopharmaceutical companies
as nutrient additives in cell culture media. One example of these media
components is Bovine EX-CYTE(r), Growth Enhancement Media Supplement, which is
produced through a patented manufacturing process. The Company accounted for
the acquisition as a purchase in accordance with Accounting Principles Board
Opinion Number 16.
For management purposes, the operations of the Company's subsidiaries are
organized into two primary operating segments, Therapeutic Products and
Diagnostic Products. These segments are based primarily on the differing
nature of the ultimate end use of the Company's products, the differing
production and other value-added processes performed by the Company with
respect to the products and, to a lesser extent, the differing customer bases
to which each reportable segment sells its products.
The activities of the Therapeutic Products segment primarily include the
collection and sale of human antibodies that are used as the active
ingredients in therapeutic products for the treatment and management of
diseases such as Rh incompatibility in newborns, hepatitis and rabies. The
activities of the Diagnostic Products segment primarily include the Company's
monoclonal antibody production facilities and certain human-sourced,
polyclonal antibodies. While an increasing number of Pentex-branded products
are being used in therapeutic end products, the management of this business is
performed within the Company's diagnostic business unit and, accordingly, is
included in the Diagnostic Products reportable business segment. The
antibodies and other proteins provided by the Diagnostic Products segment are
used in diagnostic products such as blood typing reagents and diagnostic test
kits and as nutrient additives in cell culture media.
10
Increasing regulatory scrutiny continues to be a significant factor
shaping the biologics 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 an approach to inspections of donor centers and
laboratory testing and manufacturing facilities, including the Company's
customers', entitled "Team Biologics". Under this approach, substantially
all such inspections are performed by highly trained field investigators who
focus extensively on the FDA's current good manufacturing practices (cGMP) and
quality systems. This approach was first applied to plasma fractionators and
subsequently to other biologic product areas, including certain of 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 have experienced a longer than anticipated FDA approval
process of new, relocated or expanded manufacturing and laboratory testing
facilities.
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. However, since the
Company's operations have not yet been fully subjected to Team Biologics
inspections, it is unable to determine what impact, if any, such inspections
will have on the Company and its operations when they occur.
During April 1999, the Company was notified by two of its international
customers that their fractionation facilities used in the manufacture of anti-
D immune globulin will be closed for extended periods of time for various
quality control enhancements, due in part to changing regulatory requirements,
and in one case, the validation of manufacturing procedures relating to the
customer's product. Although the Company is attempting to market this planned
volume of anti-D antibody collections to other pharmaceutical companies,
including its current customers, it does not expect to generate a sufficient
level of incremental shipments to significantly offset the reduced demand from
these customers in the near term. As the Company indicated in an April 15,
1999 press release, it believes that the loss of revenues could result in an
impact on after-tax earnings of approximately $4.0 million for the remainder
of the year. Furthermore, if the Company is unsuccessful in its efforts to
generate additional orders to mitigate the impact of this reduced demand,
additional adjustments may be made to operations, including reducing the level
of anti-D antibody collections, which could increase the per unit production
costs of anti-D and other specialty therapeutic products.
Another trend the industry is currently experiencing is the continuing
imposition of more rigorous donor screening standards by the FDA and certain
regulatory bodies in foreign countries, in particular those governing the
manufacture and sale of plasma-based products in Germany. Furthermore, the
Company's customers and certain industry trade organizations continue to
impose stricter standards. Such 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, the Company believes that,
owing in part to the general strength of the national economy, the financial
incentives provided to donors of non-specialty antibodies are potentially
becoming relatively less attractive, further decreasing the pool of potential
donors.
While the Company continues to be adversely impacted by these and other
factors, including lower than anticipated collections of non-specialty
antibodies, increased collection costs thereof and delayed or reduced
shipments of certain products, it believes that the current supply and demand
factors affecting the industry may serve to enhance the pricing of non-
specialty antibodies in the future.
11
In contrast to these constraints impacting the supply of antibodies, in
particular non-specialty antibodies, current demand for certain 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. These factors have led to recent, and in
some cases critical, shortages of certain plasma-based products, most notably
IVIG.
In order to meet increased demand for, and to improve the profitability
of, its non-specialty antibodies, the Company is currently pursuing various
alternatives to increase production at its non-specialty donor centers and is
currently in pricing negotiations with certain significant customers which
could improve margins on this product. However, there can be no assurance
that such efforts will be successful, or that any further impact related to
any of the factors discussed above 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.
Quarter Ended
---------------------
March 29, March 28,
1998 1999
------- -------
Net sales 100.0% 100.0%
Gross profit 35.0 31.7
Selling, general and administrative expenses 13.0 11.8
Net income 13.0 11.5
Quarters Ended March 29, 1998 and March 28, 1999
NET SALES
Consolidated
Consolidated net sales increased approximately $10.1 million, or 34.3%,
from $29.4 million in 1998 to $39.5 million in 1999. Of the increase,
approximately $5.0 million related primarily to increased sales of antibodies,
in particular, non-specialty antibodies and, to a lesser extent, specialty
antibodies. The increase in sales of non-specialty antibodies was due in large
part to an increase in the percentage of the product sold on a "gross"
pricing basis, for which the increased selling price is reflective of the
Company's provision of laboratory testing services and certain donor supplies
that were previously borne by the customer on a net basis. The remainder of
the increase, or approximately $4.9 million, related to the Pentex Acquisition
completed at the beginning of fiscal 1999.
Therapeutic Products
Net sales of Therapeutic Products increased approximately $5.4 million,
or 22.1%, from $24.4 million in 1998 to $29.8 million in 1999. A significant
portion of this increase was due to increased sales from non-specialty
12
antibodies, a larger percentage of which were sold on a gross pricing basis.
Total liters of non-specialty antibodies sold increased approximately 8%
during the same time period. Total net sales of specialty antibodies increased
approximately $989,000, or 8.2%, from $12.1 million in 1998 to $13.1 million
in the current year, while total net sales of non-specialty antibodies
increased approximately $4.4 million, or 35.8 %, from $12.3 million in 1998 to
$16.7 million in 1999.
Diagnostic Products
Net sales of Diagnostic Products increased approximately $4.4 million, or
88.5%, from $5.0 million in 1998 to $9.5 million in 1999. The increase was
primarily attributable to the Pentex Acquisition completed at the beginning of
the current fiscal quarter. Total net sales of monoclonal antibodies decreased
approximately $202,000 or 7.2%, from $2.8 million in 1998 to $2.6 million in
the first quarter of 1999. Sales of Pentex products, including bovine serum
albumin (BSA) and the EX-CYTE(r) product line, were approximately $4.9 million
during 1999, the first period of ownership by the Company. The remaining net
sales, primarily human-sourced antibodies used in blood typing reagents and
diagnostic test kits, decreased approximately $223,000, or 10.2%, from $2.2
million in 1998 to $2.0 million in 1999.
GROSS PROFIT
Consolidated
Consolidated gross profit increased approximately $2.2 million, or 21.7%,
from $10.3 million in the first quarter of 1998 to $12.5 million during 1999.
This increase was primarily the result of the Pentex Acquisition, offset
slightly by lower gross profit from existing operations, which continue to be
negatively impacted by lower than anticipated production at many non-specialty
donor centers, resulting in decreased fixed cost absorption and lower gross
profit per unit. Gross profit as a percentage of net sales ("gross margin")
decreased from 35.0% in 1998 to 31.7% in the current year, primarily as a
result of the increased production costs of non-specialty antibodies. Gross
margins were also adversely impacted by the increase in the percentage of non-
specialty antibodies sold on a gross basis, as there was relatively
insignificant gross profit attributed to this additional revenue.
Therapeutic Products
Gross profit from Therapeutic Products decreased approximately $474,000,
or 6.2%, from $7.7 million in 1998 to $7.2 million in the first quarter of
1999, primarily as a result of the increased production costs of non-specialty
antibodies, offset in part by increased gross profit from additional sales of
specialty antibodies. Gross margins on Therapeutic Products decreased from
31.5% to 24.2%, substantially all due to an increase in production costs of
non-specialty antibodies and a significant increase in the percentage of this
product sold on a gross pricing basis. Gross margins on specialty products
were relatively unchanged from the previous year.
Diagnostic Products
Gross profit from Diagnostic Products increased approximately $2.8
million, or 106.3%, from $2.6 million in 1998 to $5.4 million in 1999,
primarily attributable to the Pentex Acquisition, offset in part by lower
gross profit from certain other diagnostic products. Gross margins on
Diagnostic Products increased from 51.8% in 1998 to 56.7% during 1999, a
result of higher margins on antibodies sold for clinical diagnostic purposes,
primarily a result of a favorable product mix, and the inclusion of relatively
higher margin blood protein products acquired in the Pentex Acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased approximately
$828,000, or 21.6%, from $3.8 million in the first quarter of 1998 to $4.7
million in 1999. The increase was primarily attributable to ongoing selling,
13
general and administrative expenses incurred as a result of the Pentex
Acquisition and marginal increases in general corporate overhead, offset by
decreased product and service development expenses.
OTHER EXPENSE, NET
Other expense, net, increased approximately $211,000, or 30.8%, from
$686,000 in 1998 to $897,000 in 1999. The increase was primarily due to the
amortization of goodwill and other intangible assets acquired in the Pentex
Acquisition, offset by gains on the sale of certain investments.
INTEREST INCOME, NET
Interest income, net decreased approximately $222,000, or 81.3%, from
$273,000 in 1998 to $51,000 in 1998, due primarily to the use of $27.5 million
in cash for the Pentex Acquisition on December 29, 1998 and the resulting loss
of interest income.
Liquidity and Capital Resources
The following table sets forth certain indicators of financial condition
and liquidity of the Company as of December 27, 1998 and March 28, 1999:
December 27, March 28,
1998 1999
-------- --------
Cash and cash equivalents $34,940 $8,605
Working capital 56,164 34,148
Total long-term debt and capital
lease obligations 5,284 5,263
Stockholders' equity 129,009 135,084
Total debt to equity ratio 4.1% 3.9%
Cash and cash equivalents and working capital decreased approximately
$26.3 million and $22.0 million, respectively, from December 27, 1998,
primarily due to the use of $27.5 million of cash on hand for the Pentex
Acquisition.
The Company has three principal sources of near-term liquidity: (i)
existing cash and cash equivalents; (ii) cash generated by operations, and
(iii) available 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 may be
available for use in acquisitions. However, the Company anticipates that
future acquisition and growth opportunities may require supplementary funding,
including the issuance of equity or debt securities.
During April 1999, the Company's Board of Directors authorized the
repurchase of up to $20 million of the Company's common stock, subject to
market conditions, prevailing stock prices and Serologicals' capital
resources. The Company expects to fund any repurchases with existing cash
balances, cash flow from operations and availability under the Revolver. As
of May 7, 1999, the Company had repurchased a total of 945,000 shares of its
common stock for aggregate consideration of approximately $7.1 million.
Net cash provided by operating activities in 1999 was $3.8 million as
compared to a use of cash of $1.6 million in the prior year, or an increase of
$5.4 million. This increase was attributable to a smaller investment in
working capital of approximately $3.7 million versus the prior year, increased
net income of $722,000, an increased deferred tax benefit of $260,000 and
$680,000 of additional non-cash depreciation and amortization expense. The
decreased investment in working capital was in large part due to a smaller
increase in accounts receivable of $3.2 million and an increase in accounts
payable of $417,000 in 1999 versus a decrease of $1.2 million in 1998, offset
primarily by a $961,000 decrease in accrued expenses. Accounts receivable
increased approximately 21% from the previous year end, while net sales
increased approximately 34% during the same period. The increase in accounts
receivables during the first quarter of 1998 was primarily a result of the
timing of shipments, a large portion of which occurred in the last month of
the quarter, and the timing of the receipt of payments from certain large
customers.
14
Net cash used in investing activities during the first quarter of 1999
was $31.7 million as compared to $5.2 million in 1998. Investing activities in
1999 consisted primarily of the Pentex Acquisition, related transaction costs
and capital expenditures relating primarily to the expansion of the Pentex
manufacturing facility and the development of a donor center operating system
("DCOS"). Investing activities in 1998 primarily consisted of the
acquisition of a clinical trial site and capital expenditures.
The Company anticipates total capital expenditures during the 1999 fiscal
year of approximately $18 million to $20 million, approximately $11 million of
which relates to the expansion of the Pentex manufacturing facility. The
remainder of the expenditures relates primarily to the development of DCOS and
to the renovation or relocation of a number of donor centers.
Net cash provided by financing activities was $1.5 million in 1999 as
compared to $292,000 in 1998. Financing activities in both periods consisted
primarily of proceeds from the exercise of stock options.
Total long-term debt and capital lease obligations were relatively
unchanged from the previous fiscal year end. Subsequent to quarter end 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 the outstanding principal balance of the note of
approximately $2.7 million into approximately 213,200 shares of the Company's
common stock.
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 27, 1998 or March 28, 1999. The
Company is currently in negotiations with the bank and expects to increase the
borrowing capacity under the Revolver to $75 million; however, there can be no
assurance that the Company will be successful in its efforts.
Outlook
Therapeutic Products
Demand for non-specialty antibodies remains strong and generally exceeds
the Company's ability to supply targeted amounts to its customers. However,
the Company expects continued margin pressure on this product line unless and
until it is able to increase its collections of this product and its selling
prices to its customers. Furthermore, there can be no assurance that the
Company will be successful in these efforts, or that it will be able to regain
historical levels of profitability for this product line.
In light of the announcement of reduced demand from two of its large
customers, the Company expects reduced sales of anti-D antibodies at least
through the remainder of current fiscal year. The Company continues to market
its planned production of anti-D antibodies to other customers, but does not
currently expect that this shortfall can be replaced in the near term. If the
Company is unsuccessful in its efforts to generate additional orders to
mitigate the impact of this reduced demand, additional adjustments may be made
to operations, including reducing the level of anti-D antibody collections,
which could increase the per unit production costs of anti-D and other
specialty therapeutic products.
Diagnostic Products
The Company anticipates moderate increases in sales of monoclonal and
polyclonal antibodies used in blood typing reagents and antibodies used in
diagnostic test kits. The Company expects demand for its Pentex line of blood
protein products to continue to increase, in particular the EX-CYTE(r) line of
15
tissue culture media. The Company's ability to meet this expected demand is
largely dependent on the successful and timely completion of the expansion of
its manufacturing facilities in Kankakee, Illinois, which is scheduled for the
fourth quarter of 1999.
Year 2000 Update
As outlined in the Company's Annual Report on Form 10-K for the year
ended December 27, 1998, the Company has developed plans to address the
possible exposures related to the impact on its business of the Year 2000
issue. These plans, which include an assessment of the Company's information
systems, an assessment of the Year 2000 readiness of its significant
customers, suppliers and other third parties, and contingency planning, have
not changed materially in terms of scope or estimated costs to complete, and
are progressing according to previously disclosed time schedules.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes regarding the Company's market risk
position from the information provided in its Annual Report on Form 10-K for
the fiscal year ended December 27, 1998. The quantitative and qualitative
disclosures about market risk are discussed under the caption "Market Risk"
in Item 7-Management's Discussion and Analysis of Financial Condition and
Results of Operations, contained in the Company's Form 10-K.
16
PART II.
Item 1. Legal Proceedings
In connection with a dispute relating to the "earn-out" provisions in
a stock and asset purchase agreement entered into by the Company and
certain of its subsidiaries with Nations Biologics, Inc. affiliated
entities and the other sellers named therein (the "Sellers"), dated
March 6, 1997, pursuant to which the Company acquired 16 donor centers
(the "Purchase Agreement"), the Sellers in November 1998 commenced an
action titled Decatur Plasma, Inc. et al. v. Serologicals Corporation,
et al., in federal district court in the Northern District of Georgia.
The complaint asserted a claim for breach of contract, alleging that the
Sellers were entitle to an "earn-out" payment in addition to the
consideration already received by the Sellers in connection with the
transaction. The Company notified the Sellers that it denied the
allegations and intended to defend the action vigorously and potentially
to assert counterclaims against the Sellers. Subsequently, the Company
filed a motion to dismiss the complaint, and no answer was filed or
discovery taken. During the pendency of the motion to dismiss, the
parties agreed to voluntarily dismiss the action and to exchange
releases pursuant to a settlement. In accordance with the settlement,
no earn-out or other consideration beyond the initial purchase price is
being paid to the Sellers.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit 27: Financial Data Schedule
b. Reports on Form 8-K:
On January 12, 1999, the Company filed a Current Report on Form
8-K, in which it reported under Item 2-Acquisition or Disposition
of Assets, that it had acquired substantially all of the net assets
of the Pentex Blood Proteins Business of Bayer Corporation. On
March 15, 1999, the Company filed an amended Current Report on Form
8-K/A, in which it included under Item 7-Financial Statements and
Exhibits, the audited financial statements of the Pentex Blood
Proteins Business as of and for the nine months ended September 30,
1998.
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: May 12, 1999 By: /s/ Russell H. Plumb//
------------------------
Russell H. Plumb
Vice President/Chief Financial
Officer (Principal Financial and
Accounting Officer)
17
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This schedule contains summary financial information extracted from the
consolidated financial statements of Serologicals Corporation and
subsidiaries for the quarter ended March 28, 1999, as set forth in its
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to such financial statements.
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