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 29, 2003 | ||||
| OR |
||||
| o | 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 incorporation or organization) |
(I.R.S. Employer Identification Number) |
|
| 5655 Spalding Drive | ||
| Norcross, Georgia | 30092 | |
| (Address of principal executive offices) |
(Zip Code) |
(678) 728-2000
(Registrant’s Telephone Number Including Area Code)
Indicate by check 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 o No o
Indicate by check whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No o
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 7, 2003 | |
|
|
||
| Common Stock, $.01 par value per share | 24,562,142 |
INDEX
SEROLOGICALS CORPORATION AND SUBSIDIARIES
PART I |
|||||
Item 1. Financial Statements |
|||||
Unaudited Consolidated Balance Sheets -
June 29, 2003 and December 29, 2002 |
3 | ||||
Unaudited Consolidated Statements of Income -
For the three and six months ended June 29, 2003 and June 30, 2002 |
4 | ||||
Unaudited Consolidated Statements of Cash Flows -
For the six months ended June 29, 2003 and June 30, 2002 |
5 | ||||
Unaudited Notes to Consolidated Financial Statements |
6 | ||||
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
16 | ||||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
29 | ||||
Item 4. Controls and Procedures |
29 | ||||
PART II |
|||||
Item 1. Legal Proceedings |
30 | ||||
Item 4. Submission of Matters to a Vote of Security Holders |
30 | ||||
Item 6. Exhibits and Reports on Form 8-K |
31 | ||||
SIGNATURES |
32 | ||||
PART I.
Item 1. Financial Statements
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)
| June 29, | December 29, | ||||||||||
| 2003 | 2002 | ||||||||||
ASSETS |
|||||||||||
CURRENT ASSETS: |
|||||||||||
Cash and cash equivalents |
$ | 4,957 | $ | 12,850 | |||||||
Trade accounts receivable, net |
33,759 | 35,868 | |||||||||
Inventories |
38,614 | 26,305 | |||||||||
Other current assets |
8,305 | 6,692 | |||||||||
Total current assets |
85,635 | 81,715 | |||||||||
PROPERTY AND EQUIPMENT, net |
65,798 | 55,461 | |||||||||
OTHER ASSETS: |
|||||||||||
Goodwill |
101,744 | 39,226 | |||||||||
Intangible assets, net |
51,197 | 14,212 | |||||||||
Other, net |
670 | 551 | |||||||||
Total other assets |
153,611 | 53,989 | |||||||||
Total assets |
$ | 305,044 | $ | 191,165 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|||||||||||
CURRENT LIABILITIES: |
|||||||||||
Current maturities of long-term debt and capital lease obligations |
$ | 1,871 | $ | 385 | |||||||
Accounts payable |
3,972 | 5,361 | |||||||||
Accrued liabilities |
17,246 | 10,501 | |||||||||
Total current liabilities |
23,089 | 16,247 | |||||||||
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
maturities |
87,536 | 39 | |||||||||
DEFERRED INCOME TAXES |
17,211 | 4,116 | |||||||||
OTHER LIABILITIES |
407 | 393 | |||||||||
STOCKHOLDERS’ EQUITY: |
|||||||||||
Preferred stock |
— | — | |||||||||
Common stock |
278 | 277 | |||||||||
Additional paid-in capital |
118,709 | 118,116 | |||||||||
Retained earnings |
75,365 | 72,211 | |||||||||
Accumulated other comprehensive income |
2,796 | 113 | |||||||||
Less: Common stock held in treasury |
(20,347 | ) | (20,347 | ) | |||||||
Total stockholders’ equity |
176,801 | 170,370 | |||||||||
Total liabilities and stockholders’ equity |
$ | 305,044 | $ | 191,165 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except share and per share data)
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June 29, | June 30, | June 29, | June 30, | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Net sales |
$ | 43,924 | $ | 37,292 | $ | 74,092 | $ | 68,763 | |||||||||
Costs and expenses: |
|||||||||||||||||
Cost of sales |
23,334 | 18,672 | 39,783 | 34,660 | |||||||||||||
Selling, general and administrative
expenses |
12,286 | 10,163 | 20,152 | 20,381 | |||||||||||||
Research and development |
1,944 | 1,380 | 2,970 | 2,376 | |||||||||||||
Amortization of intangibles |
685 | 233 | 931 | 476 | |||||||||||||
Special charges, net |
2,234 | 1,309 | 3,573 | 1,309 | |||||||||||||
Operating income |
3,441 | 5,535 | 6,683 | 9,561 | |||||||||||||
Other expense, net |
193 | 99 | 262 | 35 | |||||||||||||
Interest expense (income), net |
1,495 | (382 | ) | 1,557 | (458 | ) | |||||||||||
Income before income taxes |
1,753 | 5,818 | 4,864 | 9,984 | |||||||||||||
Provision for income taxes |
622 | 2,036 | 1,711 | 3,494 | |||||||||||||
Net income |
$ | 1,131 | $ | 3,782 | $ | 3,153 | $ | 6,490 | |||||||||
Net income per common share: |
|||||||||||||||||
Basic |
$ | 0.05 | $ | 0.16 | $ | 0.13 | $ | 0.27 | |||||||||
Diluted |
$ | 0.05 | $ | 0.15 | $ | 0.13 | $ | 0.26 | |||||||||
Weighted average shares: |
|||||||||||||||||
Basic |
24,485,369 | 24,339,675 | 24,469,451 | 24,303,005 | |||||||||||||
Diluted |
24,847,669 | 24,921,293 | 24,807,618 | 24,872,093 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
| Six Months Ended | ||||||||||||
| June 29, | June 30, | |||||||||||
| 2003 | 2002 | |||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 3,153 | $ | 6,490 | ||||||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||||||
Depreciation and amortization |
$ | 4,895 | $ | 3,328 | ||||||||
Loss on disposal of assets |
115 | — | ||||||||||
Tax benefit from exercise of stock options |
86 | 746 | ||||||||||
Non-cash special charges |
2,509 | 532 | ||||||||||
Deferred and other compensation |
38 | 117 | ||||||||||
Changes in operating assets and liabilities, net of effect
of business combination: |
||||||||||||
Trade accounts receivable, net |
7,040 | (3,010 | ) | |||||||||
Inventories |
(6,080 | ) | (2,811 | ) | ||||||||
Income tax receivable |
(398 | ) | 1,843 | |||||||||
Other assets |
43 | (3,175 | ) | |||||||||
Accounts payable |
(2,770 | ) | (342 | ) | ||||||||
Accrued liabilities |
1,966 | (3,152 | ) | |||||||||
Deferred revenue |
(557 | ) | 1,187 | |||||||||
Other, net |
762 | 873 | ||||||||||
Total adjustments |
7,648 | (3,864 | ) | |||||||||
Net cash provided by operating activities |
10,802 | 2,626 | ||||||||||
Investing activities: |
||||||||||||
Purchases of property and equipment |
(6,641 | ) | (6,406 | ) | ||||||||
Purchase of business, net of cash received |
(97,097 | ) | — | |||||||||
Other |
— | (189 | ) | |||||||||
Net cash used in investing activities |
(103,738 | ) | (6,595 | ) | ||||||||
Financing activities: |
||||||||||||
Proceeds from term loan and revolving credit facility |
88,500 | — | ||||||||||
Payments on long-term debt and capital leases |
(378 | ) | (3,935 | ) | ||||||||
Proceeds from stock plans |
470 | 2,101 | ||||||||||
Payment of debt issuance costs |
(4,413 | ) | — | |||||||||
Other |
864 | (347 | ) | |||||||||
Net cash provided by (used in) financing activities |
85,043 | (2,181 | ) | |||||||||
Net decrease in cash and cash equivalents |
(7,893 | ) | (6,150 | ) | ||||||||
Cash and cash equivalents, beginning of period |
12,850 | 10,780 | ||||||||||
Cash and cash equivalents, end of period |
$ | 4,957 | $ | 4,630 | ||||||||
Supplemental Disclosures: |
||||||||||||
Interest paid, net of amounts capitalized |
$ | 534 | $ | — | ||||||||
Income taxes paid |
$ | 1,711 | $ | 2,777 | ||||||||
Non-Cash Investing and Financing Activities: |
||||||||||||
Contingent consideration payable |
$ | — | $ | 327 | ||||||||
Stock acquired by employees in lieu of cash bonus |
$ | 138 | $ | 212 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Serologicals Corporation, a Delaware corporation, (together with its subsidiaries, The “Company” or “Serologicals”) is a global provider of biological products and enabling technologies to life science companies. Our products are essential for the research, development and manufacturing of biologically based life science products. Our products and technologies are used in a wide variety of applications within the areas of oncology, hematology, immunology, cardiology and infectious diseases, as well as in the study of molecular biology. Our customers include many of the leading life science companies throughout the world.
Our operations have historically been organized into four primary operating segments: cell culture products, diagnostic products, research products and therapeutic plasma products. These segments are based primarily on the differing production, manufacturing and other value-added processes that we perform with respect to the products and, to a lesser extent, the differing nature of the ultimate end use of our products.
We manufacture our cell culture and diagnostics products in facilities located in North America and Europe. We operate protein fractionation facilities located in Kankakee, Illinois and Toronto, Ontario and have a third facility under construction in Lawrence, Kansas. These facilities provide a variety of highly purified proteins used in diagnostic reagents and cell culture media components for use in the development and manufacturing of biotechnology products. Additionally, these facilities produce a line of highly purified animal proteins known as tissue culture media components that are used primarily by biopharmaceutical and biotechnology companies as nutrient additives in cell culture media. We manufacture monoclonal antibodies in our Scotland facility which is used in diagnostic products such as blood typing reagents and in controls for diagnostic tests for certain infectious diseases. We operate a facility in Milford, Massachusetts that includes a central product distribution facility, as well as operations related to our human-sourced polyclonal antibody business and production of substrates for use in diagnostic assays.
We conduct the operations of our research segment primarily through Chemicon, which we acquired in April 2003 for $95.0 million in cash, plus assumed liabilities and direct costs related to the transaction. Chemicon provides a broad range of specialty reagents, kits, antibodies and molecular biology tools to biotechnology, pharmaceutical and academic research customers working in the areas of neuroscience, infectious disease, drug discovery, cancer research, stem cell research and proteomics. Chemicon is also a leading supplier of monoclonal antibodies, conjugates, antibody blends and kits for use in the diagnostic laboratory. Chemicon, headquartered in Temecula, California, has manufacturing and distribution operations in Temecula, California, Australia and the United Kingdom. Chemicon will operate as a stand alone division of the company, and will be reported in our research products segment.
The Company conducts its therapeutic products segment (or blood plasma operations) through a national network of 10 donor centers that specialize in the collection of hyper-immune human antibodies. As noted in Note 6, we have announced our intention to exit the therapeutic plasma business.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Serologicals and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, which are of a normal recurring nature, to present fairly Serologicals’ 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 the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements as of December 29, 2002 and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2002, as amended in Form 8-K filed on August 8, 2003.
Certain prior year amounts have been reclassified to conform to the current year presentation.
6
Inventories
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Market for work-in-process and finished goods inventories is net realizable value and for raw materials is replacement cost. The components of inventories are stated as follows (in thousands):
| June 29, | December 29, | ||||||||
| 2003 | 2002 | ||||||||
Raw materials |
$ | 10,529 | $ | 4,167 | |||||
Work in process |
8,754 | 4,132 | |||||||
Finished goods |
19,331 | 18,006 | |||||||
Total |
$ | 38,614 | $ | 26,305 | |||||
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 diluted earnings per share is similar to basic earnings per share, except the weighted average number of shares includes the dilutive effect of stock options and similar instruments.
The following table sets forth the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
| Three Months Ended | Six Months Ended | |||||||||||||||||
| June 29, | June 30, | June 29, | June 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Basic earnings per share: |
||||||||||||||||||
Net income |
$ | 1,131 | $ | 3,782 | $ | 3,153 | $ | 6,490 | ||||||||||
Weighted average shares of common stock outstanding |
24,485 | 24,340 | 24,469 | 24,303 | ||||||||||||||
Net income per share |
$ | 0.05 | $ | 0.16 | $ | 0.13 | $ | 0.27 | ||||||||||
Diluted earnings per share: |
||||||||||||||||||
Net income |
$ | 1,131 | $ | 3,782 | $ | 3,153 | $ | 6,490 | ||||||||||
Weighted average shares of common stock outstanding |
24,485 | 24,340 | 24,469 | 24,303 | ||||||||||||||
Effect of dilutive securities: |
||||||||||||||||||
Stock options and warrants |
344 | 567 | 321 | 556 | ||||||||||||||
Common stock awards |
19 | 14 | 18 | 13 | ||||||||||||||
Weighted average shares of common stock outstanding,
including dilutive instruments |
24,848 | 24,921 | 24,808 | 24,872 | ||||||||||||||