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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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)
5655 SPALDING DRIVE, NORCROSS, GEORGIA 30092
(Address of principal executive offices) (Zip Code)
(Registrant telephone number including area code) (678) 728-2000
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
RIGHTS TO PURCHASE PREFERRED STOCK
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of common stock held by
non-affiliates (based upon the closing sale price on The Nasdaq Stock Market) on
March 23, 2001 was approximately $270,600,000. As of March 23, 2001, there were
23,407,748 shares of Common Stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the definitive proxy statement for the Annual Meeting of
Stockholders (which will be filed pursuant to Regulation 14A within 120 days of
the close of the Registrant's fiscal year ended December 31, 2000) shall be
deemed to be incorporated by reference in Part III.
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TABLE OF CONTENTS
PART I.
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 16
Item 3. Legal Proceedings........................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......... 16
Item 4A. Executive Officers and Key Employees of the Registrant...... 17
PART II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 28
Item 8. Financial Statements and Supplementary Data................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 29
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 29
Item 11. Executive Compensation...................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 29
Item 13. Certain Relationships and Related Transactions.............. 29
PART IV.
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................... 29
SIGNATURES............................................................ 33
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PART I.
This Annual Report on Form 10-K 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 forward-looking
terminology such as "may," "will," "expect," "intend," "estimate," "anticipate,"
"believe" or "continue" or the negative thereof or other variations thereon or
similar terminology, and/or which include without limitation, statements
regarding the following:
- Serologicals Corporation's (and its subsidiaries, collectively, the
"Company" or "Serologicals") internal and external growth strategies,
including the Company's long term growth prospects;
- the impact of competition, including increased competition for anti-D
antibodies and competition for blood proteins products and EX-CYTE(R);
- certain trends in the industry, including increased demand for and a
limited supply of antibodies and antibody-based products in general;
increased regulatory scrutiny by the Food and Drug Administration
("FDA"), in particular, Team Biologics, its effect on donors and
customers and the Company's ability to respond; changing customer
specifications and evolving industry and customer standards and customer
demand for higher quality and services and regulatory issues surrounding
bovine-derived products as a result of concerns about bovine spongiform
encephalopathy and new variant Creutzfeld-Jacob disease;
- the impact of the potential loss of donors due to the imposition of new
blood safety measures;
- demand for alternatives to antibiotics and vaccines for treatment and
management of diseases, including the demand for antibody-based products;
- increased demand for its Pentex(R) line of products, particularly
EX-CYTE(R) and bovine serum albumin;
- the ability to continue expansion of monoclonal product sales outside of
the United States, particularly in regards to OEM and branded
blood-typing reagents;
- the build-out of the monoclonal manufacturing facility in Scotland and
the effect thereof on the Company's ability to meet demand for monoclonal
antibodies;
- the ability to sell the remaining inventory of the non-specialty antibody
business which was divested in August 2000;
- the Company's competitive advantage over fully integrated diagnostic
product manufacturers as a result of the Company's broad range of
proprietary antibodies and state-of-the-art facilities;
- the Company's acquisition strategy;
- expansion of the Company's product development efforts and certain
potential product development efforts the Company may pursue or which are
currently underway and which may have opportunities for growth;
- the expected level of and purposes for capital expenditures in 2001 and
the sufficiency of capital and liquidity to meet working capital, capital
expenditure and other anticipated cash requirements over the next twelve
months;
- the renewal or early termination of certain long-term customer contracts;
and
- the Company's information technology initiatives.
These forward-looking statements are subject to certain risks,
uncertainties and other factors that could cause actual results to differ
materially, including but not limited to the cautionary statements included
throughout this Annual Report on Form 10-K and:
- the Company's ability to attract and retain qualified donors;
- the Company's ability to maintain and expand its customer base;
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- the Company's ability to generate sufficient cash flows to support its
internal and external growth strategies;
- the Company's ability to identify and consummate suitable acquisitions in
the future and to integrate and manage them;
- the Company's ability to comply with regulatory, customer and industry
regulations and guidelines;
- changes in laws and regulations that could affect the Company's ability
to maintain existing regulatory licenses and approvals;
- the effect of competition for customers, donors or otherwise;
- the effect of regulatory scrutiny;
- loss of any significant customers or reduced orders therefrom;
- potential future technologies that could lessen or eliminate the need for
antibodies and other plasma-based products;
- changes in industry trends, customer specifications and demand, market
demand in general and potential foreign restrictions of the importation
of the Company's products that could impact internal and external growth,
earnings and market share;
- the Company's dependence on a few major customers and suppliers and its
ability to maintain favorable supplier agreements and relationships with
them.
ITEM 1. BUSINESS
Serologicals is a worldwide provider of biological products to life science
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. As of March 23, 2001, the Company conducted its operations
through a national network of 17 donor centers that specialize in the collection
of specialty human antibodies. The Company also operates a protein fractionation
facility in Kankakee, Illinois ("Serologicals Proteins", or "Proteins") that
provides a variety of proteins used in diagnostic reagents and tissue culture
media components for use as additives in biotech products. This facility was
purchased by the Company in December 1998, and the results of operations are
included in the discussion below for the Company's fiscal years ended December
31, 2000 and December 26, 1999. Additionally, the Company operates two
monoclonal antibody manufacturing facilities in Scotland ("Serologicals Ltd.")
which are engaged in the development, manufacturing and sale of monoclonal
antibodies. Prior to August 2000, the Company, through its Seramed, Inc.
subsidiary ("Seramed"), owned and operated 47 donor centers that primarily
collected source plasma containing non-specialty antibodies from which a number
of products, primarily intravenous immune globulin, are derived. The Company
divested this business in August 2000. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Divestiture of Non-Specialty
Antibody Business."
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
sale of specialty human antibodies collected at the Company's network of donor
centers and used as the active ingredients in therapeutic products for the
treatment and management of various diseases. The activities of the Diagnostic
Products segment include the Company's monoclonal antibody production facilities
and certain human-sourced, polyclonal antibodies. The Diagnostic Products
segment also includes the activities of the Company's protein fractionation
facility located in Kankakee, Illinois. The antibodies and other proteins
provided by the
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Diagnostic Products segment are used in diagnostic products such as blood typing
reagents and diagnostic test kits and as nutrient additives in biotechnology
products.
INDUSTRY OVERVIEW
The industry that encompasses all of the Company's activities is generally
known as the life sciences industry. The life sciences industry includes the
specialized areas of blood products, diagnostics and biopharmaceuticals. These
three sectors of the life science industry are all concerned with either
diagnosing specific patient conditions, including infectious disease and blood
type, or in the provision of therapeutic agents for the treatment or prevention
of disease conditions.
The human blood products industry encompasses a number of markets, with
products ranging from whole blood, which is used for direct transfusions, to
blood components, such as source plasma, specialty and non-specialty antibodies
found in source plasma and other specialty biologic components. Source plasma,
the clear liquid portion of blood characterized by non-specific concentrations
of antibodies, is used to manufacture many products that treat a variety of
medical indications. Antibodies are soluble components contained in plasma which
are produced by the immune system to fight specific diseases. Other derivative
products of source plasma include albumin, used to treat shock and burn
patients, and clotting factors such as Factor VIII Concentrate and Factor IX
Concentrate, used primarily by hemophiliac patients.
The therapeutic blood products industry is generally divided into two
distinct sectors. The largest sector of the industry is comprised of non-profit
organizations, such as the American Red Cross and community blood banks, which
supply whole blood and other transfusible products to hospitals. Conversely, the
commercial sector of the industry is focused primarily on supplying source
plasma, specialty and non-specialty antibodies and specialty biologic components
to healthcare companies which further process these components into therapeutic
and diagnostic products.
The therapeutic segment of the commercial sector includes products
consisting of specialty antibodies and cells, as well as non-specific, or
non-specialty, antibodies and source plasma. Specialty therapeutic antibodies
are typically used to manufacture products for treating persons exposed to, or
at risk of, contracting a specific disease. Specialty antibodies used for
therapeutic purposes range from those used to treat medical indications such as
tetanus and rabies, which the Company believes generally sell for approximately
$90 to $280 per liter, to high-end products such as anti-D, an antibody used to
treat Rh incompatibility in newborns and anti-hepatitis, which the Company
believes generally sell for approximately $400 to $650 per liter. By comparison,
the Company believes the average industry gross price of source plasma, from
which IVIG and other products are derived, is approximately $90 to $100 per
liter.
Antibodies, both human sourced as well as those in monoclonal form, are
also used in the manufacture of diagnostic products used to screen patients for
prior exposure to a specific disease or to determine blood type. Polyclonal and
monoclonal antibodies used in diagnostic products such as blood typing reagents
and diagnostic test kits generally sell for $0.95 per milliliter to $8.00 per
milliliter, with some rare antibodies selling for as high as $15.00 per
milliliter. In addition to antibodies, there are also a variety of purified
blood proteins, often from bovine source, used in the manufacture of diagnostic
kits. These include proteins such as Bovine Serum Albumin ("BSA"), Bovine Gamma
Globulin ("BGG"), thrombin, fibrinogen and cholesterol. BSA, depending upon its
level of purity and specification, sells for approximately $200 per kilogram for
general grade to as much as $2,600 per kilogram for high end products.
The Company believes that there are a number of factors increasing the
demand for antibodies and antibody-based products in general. In the treatment
of certain diseases such as rabies and Rh incompatibility in newborns,
antibody-based products are recognized as the only generally accepted treatment
or prevention for such diseases. In addition, medical and scientific advances
are increasing the demand for antibodies for new indications and improved
therapies, such as the use of anti-D immune globulin in the treatment of
Idiopathic Thrombocytopenic Purpura, an autoimmune disease. The Company also
believes that cost containment in healthcare is spurring the demand for
alternatives to antibiotics and vaccines, such as the use of antibody-based
products for disease management. Additionally, increasing regulation and
concerns relating to blood safety are causing demand for a broader array of
antibody-based diagnostic tests used to evaluate
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blood samples. The demand for more diverse diagnostic tests is also increasing
as world population migration is spreading diseases, which were once confined to
specific geographic areas. This in turn is driving demand for the antibody and
protein components that the Company manufactures. There are diagnostic tests now
available, and that the Company expects to become increasingly available, that
do not use antibodies as the principal means of detection, but instead rely on
nucleic acid testing (NAT). This testing may ultimately replace some of the
current antibody-based tests, however, overall demand for antibodies is still
expected to increase. Furthermore, the manufacture of NAT systems uses other
products manufactured by the Company, such as BGG.
The Company believes that there are a number of factors that are generally
limiting the supply of commercially available human antibodies. The supply of
antibodies has been adversely affected by the more rigorous screening procedures
required by regulatory authorities, in particular the FDA and certain German
regulatory bodies, industry trade organizations and manufacturers of the various
end products. These procedures, which include a more extensive investigation
into a donor's background, new tests to detect the presence of disease-causing
organisms and other limitations on donors such as geographic and age
restrictions, have disqualified numerous potential donors and discouraged other
donors who may be reluctant to undergo the screening procedures. Also, as
customers require higher concentrations of specialty antibodies, the qualified
pool of donors is further reduced. These customer requirements have resulted in
an increasing need to boost the concentration of specialty antibodies in donors
through vaccination or immunization.
At times, the therapeutics industry has experienced critical shortages of
certain end products, most notably source plasma. The Company believes that in
addition to the factors discussed above, these shortages have been caused by
several company-specific manufacturing, regulatory or other issues facing the
manufacturers of these products as well as by recalls of product manufactured
with plasma obtained from donors who were subsequently discovered to have had
new variant Creutzfeld-Jakob disease ("nvCJD"). See "Government and Industry
Regulation" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
In recent years, the biopharmaceutical or biotechnology industry has seen
many advances in the commercialization of protein-based therapeutic products,
such as monoclonal antibodies and recombinant proteins. The Human Genome Project
and other areas of research such as proteomics are expected to result in further
additions to the pipeline of protein-based drugs in clinical trials. Many of
these candidate protein-based therapeutics are made in cell culture. which is
driving demand for cell culture media, including cell culture components. Many
of these cell culture components such as EX-CYTE(R), insulin, certain types of
BSA and transferrin are manufactured by the Company and are essential to cell
growth and product manufacture, leading to increased demand. While there may be
an increased demand for these components, it is anticipated that there will be a
shortage of manufacturing capacity to make the protein-based therapeutic
products, which may limit the rate at which cell culture components can be
consumed by biopharmaceutical companies or by contract manufacturing
organizations that operate the cell culture facilities. Another factor that
could impede the demand for certain of these cell culture components is concern
about some of these components being of animal, and more specifically, bovine in
origin. This is as a result of concern relating to the potential for the agent
causing Bovine Spongiform Encephalopathy ("BSE") to be present in the raw
materials used in the production process. (See "Government and Industry
Regulation").
In addition to the demand and supply factors discussed above, the
industries in which the Company operates continue to experience a number of
other trends. One such trend is the movement by healthcare companies towards
obtaining antibodies and other biologic products and services from a fewer
number of suppliers who can supply a wider array of products and services. The
resulting enhanced relationships between healthcare companies and these
suppliers have resulted in an increased tendency by some major healthcare
companies to outsource essential complex regulatory, testing and specialized
manufacturing activities. In addition, the increased regulatory environment, as
well as the increasing preference of customers for value-added services,
requires suppliers to have a high level of expertise and capital resources.
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OPERATIONS
As of March 23, 2001, the Company conducted its operations through a
national network of 17 donor centers and through laboratories located in the
United States and the United Kingdom, two monoclonal production facilities in
Scotland and a purified blood proteins fractionation facility in Kankakee, IL.
The Company's manufacturing facilities in Illinois and Scotland and its donor
center network are ISO 9000 certified.
THERAPEUTIC PRODUCTS
Donor Recruitment. The Company obtains the significant majority of its
specialty antibodies from donors with high concentrations of the antibodies
sought. The Company maintains an active communications network with medical
professionals and healthcare organizations nationwide to assist in identifying
these donors. The majority of the Company's 17 specialty donor centers are
strategically located on or near medical campuses, enhancing the Company's
ability to source specialty antibodies from medical community referrals. The
Company actively seeks to maintain and replenish its donor base for its
specialty therapeutic and diagnostic products and maintains an ongoing program
to recruit donors and make medical professionals aware of its capabilities and
needs.
Donor Screening and Product Collection. Each donor candidate undergoes a
process that includes an explanation of the donation procedure and how the
antibodies they are donating are subsequently used, extensive physiological and
biological screening, a physical examination and the collection of test samples.
In addition, donors of specialty antibodies undergo further qualification
profiling. Once a candidate is accepted as a donor, the Company may collect
antibodies from the donor at its donor centers through an FDA-approved
collection procedure known as plasmapheresis, which lasts between 40 and 60
minutes and is very similar to donating blood. However, since red blood cells
are returned to the donor by means of centrifugation, individuals may donate as
frequently as twice per week. Each donation is quarantined at the donor center
while test samples are sent to the Company's central testing laboratory for
FDA-mandated viral marker screening tests (e.g., hepatitis, HIV, etc.) and
characterization (i.e., special analytical tests to identify and measure the
quality and concentration of the targeted antibodies). Furthermore, voluntary
industry standards require that each first time donor's ("Applicant Donor")
donation be quarantined until such time that a second donation is received from
the Applicant Donor and appropriate test results are obtained on both donations.
If a second donation is not received from the Applicant Donor within six months,
the initial donation must be destroyed, or sold as a diagnostic product. Once
these two donations and their test results are complete and acceptable, the
Applicant Donor becomes a "qualified donor" and all future donations are
generally available for shipment once the mandated tests have been completed.
Product Characterization. The Company characterizes the specialty
antibodies it collects to ensure that the concentration of antibodies meets
customer specifications. The Company maintains extensive data on each of its
donors for both regulatory compliance and quality assurance. This database
enhances the Company's donor tracking and monitoring capabilities, which help
assure the quality of the antibodies for its customers. The ability to
accurately characterize and trace the source of antibodies adds value to the
products for the customer by replacing steps the customer might otherwise have
to perform.
Donor Management. Through communication and incentive programs and an
emphasis on customer service, the Company encourages full and continuing
participation by its donors. As an integral part of donor management, the
Company's staff continually communicates with donors to reinforce their
commitment. The Company has personnel and programs designed to make each visit
to the donor center a smooth, comfortable and safe experience. The Company's
expertise in donor management has enabled it to retain many donors for years of
repeated, regular donations, thereby enhancing the Company's profitability. The
Company's specialty donors typically donate once or twice per week, with many
having continued as donors for ten years or greater. A significant portion of
the Company's rare specialty antibody donors have entered into contracts with
the Company pursuant to which they have agreed to donate exclusively to the
Company for a three-year period.
Immunization. In response to customer demands for higher quality products
and in part due to the decreasing population of individuals with certain
naturally occurring antibodies, the Company's donor centers
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are actively involved in the immunization of the majority of their specialty
antibody donors. Immunization is the use of FDA-approved vaccines to stimulate
the development or heighten the concentration of specialty antibodies in the
donor. Although vaccines to conduct immunization for several of the Company's
products are commercially available, the Company believes it has a competitive
advantage through its existing inventory of, and ongoing ability to produce, its
own proprietary FDA-approved vaccine to produce anti-D antibodies in donors. In
some cases, antibody-producing white cells are also collected from immunized
donors and used to develop monoclonal products for diagnostic use.
DIAGNOSTIC PRODUCTS
Monoclonal Antibody Production. In addition to collecting antibodies from
its donors, the Company, through its Serologicals, Ltd. subsidiary, formerly
known as Bioscot, Ltd., produces monoclonal antibodies from over 45 cell lines.
The Company's FDA-licensed monoclonal manufacturing facilities in Edinburgh and
Livingston, Scotland produce monoclonal antibodies from cells derived through
the Company's donor network or acquired from other laboratories. Currently, all
monoclonal antibodies manufactured by the Company are used in diagnostic
products such as blood typing reagents. The monoclonal manufacturing operations
are divided into two principal operating processes: (i) primary production,
which involves the growing and initial processing of the antibodies; and (ii)
secondary production, during which the products go through a sterile filtering,
bottling, labeling and packing process. The primary production unit consists of
a cell culture laboratory that creates cell banks and raises initial cultures
for fermenters, as well as a fermentation plant housing up to ten fermenters
ranging in size from 25 liters to 230 liters in total volume. The primary
production unit also removes cell debris from the completed fermentation, and
concentrates and dialyzes the product. The bulk antibody reagents or other
solutions are sent to the secondary production unit for further processing. The
secondary production unit has a clean room in which sterile filtration is
carried out. The sterile filtered reagents are bottled and labeled in this clean
room in bottles ranging in size from two milliliters up to 20 liters. Through
this monoclonal manufacturing capability, the Company has been able to introduce
additional, second generation, human monoclonal products and continues to expand
the sale of its finished products outside the United States, such as its
value-added line of OEM and branded blood typing reagents. The Company also
produces at its monoclonal antibody facilities additional companion products to
its monoclonal blood typing range. These include reagent red cells, enzymes and
diluents that are used in blood typing laboratories.
Blood Protein Fractionation. The Company, through its manufacturing
facility in Kankakee, Illinois, isolates specific proteins contained primarily
in animal sera or plasma through specialized manufacturing processes known as
protein fractionation. The Company utilizes core technologies such as organic
solvent precipitation, heat shock, molecular and microporous filtration,
ion-exchange chromatography and salt precipitation to isolate and purify major
plasma protein classes (e.g., albumin, gamma globulin, transferrin, lipoproteins
and clotting factors). The resulting blood protein product line is sold
worldwide in over 25 countries, to healthcare companies that manufacture blood
typing or other diagnostic reagents, and increasingly to biopharmaceutical
companies for use in tissue culture media.
The primary raw material used by Serologicals Proteins, bovine serum, is
purchased almost exclusively from a single abattoir located in Illinois. During
1999, the Company entered into a long-term agreement with the supplier, pursuant
to which the Company is guaranteed certain minimum levels of serum.
Additionally, the contract provides the Company with certain rights in the event
of a change in control of this supplier. An inability of the supplier to meet
its obligations under the contract or any other material disruption in the
supply of serum could have an adverse effect on the Company.
Human-Sourced Antibodies. Through its donor center network used for the
collection of therapeutic products, the Company collects antibodies used in the
manufacture of clinical diagnostic test kit controls and in certain blood typing
reagents. The donor recruitment, product collection and donor management
processes are similar to those used in the collection of therapeutic products.
The Company is also able to identify and react rapidly to disease outbreaks in
order to recruit suitable donors for the specific antibodies created by such
specific diseases.
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PRODUCTS
Through its value-added services, the Company provides antibodies and other
biologic products for use in certain therapeutic and diagnostic products
manufactured by major life science companies. The Company's customers generally
further process these products. The Company also sells an increasing number of
certain antibodies for blood typing reagents as OEM or directly to end-users.
The Company also provides a full range of animal and human proteins that are
used in the manufacturing process of recombinant (genetically engineered)
therapeutic products and in diagnostic reagents. In 2000, the Company derived
approximately 69% of its net sales from therapeutic products, a substantial
majority of which related to anti-D, anti-hepatitis and non-specialty
antibodies, and approximately 31% of its net sales from diagnostic products, the
majority of which related to animal protein products for use in diagnostic
reagents and as tissue media components for use in biopharmaceutical therapeutic
products and antibodies used in blood typing reagents and diagnostic test kits.
The non-specialty antibody sales were primarily generated prior to August 2000,
when the Company completed the sale of Seramed, its non-specialty antibody
business. The Company retained inventory on hand as of the date of sale, which
it continued to sell during the remainder of 2000. The Company expects to sell
the remaining inventory or otherwise dispose of it during 2001.
Therapeutic Products
Therapeutic end products produced by the Company's customers for whom it
supplies the majority of its specialty antibodies include the following:
Anti-D Immune Globulin ("anti-D"). Since 1968, anti-D immune
globulin, also known as Rh immune globulin, has been prescribed by
obstetricians to prevent Rh incompatibility in newborns ("RhHDN"). This
sometimes-fatal condition affecting Rh positive infants born to Rh-negative
women is due to the incompatibility of the blood of an Rh-negative mother
and her Rh-positive child. Anti-D immune globulin is also used in the
treatment of Idiopathic Thrombocytopenic Purpura ("ITP") in
immunocompromised patients. ITP, which is common in HIV positive patients,
is a disease that is characterized by destruction of the patient's
platelets, which, if untreated, can result in internal hemorrhaging and
ultimately, death.
The Company believes that demand for anti-D antibodies used in the
treatment of RhHDN has generally followed the birth rate of developed
countries. The Company believes that, on a longer-term basis, worldwide
demand for anti-D antibodies could increase as its use as a treatment for
ITP becomes more widely accepted.
Anti-Hepatitis B Immune Globulin ("anti-HBs"). The traditional use
for anti-HBs is for the prevention of hepatitis in individuals who are at
risk of contracting, or have had recent exposure to, the hepatitis B virus.
In addition, anti-HBs is used for intensive treatment of liver transplant
patients.
Anti-Rabies Immune Globulin ("anti-rabies"). Anti-rabies immune
globulin therapy is prescribed for individuals suspected of recent exposure
to the rabies virus. Rabies is commonly transmitted by infectious saliva
from the bite of a rabid animal. Anti-rabies is administered as promptly as
possible after exposure and consists of antibodies directed against the
live virus particles with which the patient may be infected. In the
post-exposure treatment regimen, anti-rabies is administered in conjunction
with a rabies vaccine, which is used to provide the patient with an
additional active immunity to the rabies virus.
Prior to the divestiture of Seramed, the Company derived a substantial
amount of its revenues from the sale of source plasma, used in the manufacture
of intravenous immune globulin (a broad spectrum of non-specific antibodies used
in the treatment of many medical indications to help build the body's defense
against exposure to life threatening diseases), albumin and clotting factors.
The Company continues to provide limited quantities of source plasma.
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Diagnostic Products
The primary products produced and sold by the Company's diagnostic business
unit include the following:
Antibodies for Blood Typing Reagents. Blood typing reagents are used
by blood banks and hospital transfusion services worldwide to assure
compatibility between a recipient and a donor's blood type. There are many
blood types and highly accurate and specific antibodies are required to
determine blood type. Historically, blood typing reagents were made
primarily from human-sourced, or polyclonal, antibodies. Over the past
fifteen years, monoclonal antibodies have been developed to provide certain
high quality antibodies on a consistent basis, and many of these are FDA
approved for diagnostic purposes. Monoclonal antibodies have largely, but
not completely, replaced polyclonal antibodies for use in blood typing. The
Company currently provides over 80 different antibodies used in the
production of blood typing reagents that the Company believes provide it
with a competitive advantage in this market due to the desire of customers
to buy an entire panel of different antibodies for blood typing reagents
from one manufacturer. While the majority of antibodies sold by the Company
for use in blood typing reagents are in monoclonal form, the Company
continues to collect certain rare human-sourced polyclonal antibodies that
are used in diagnostic products.
Animal Blood Proteins. Through its acquisition of Proteins, the
Company provides a wide range of approximately 90 distinct animal protein
products. These products, such as BSA, are primarily supplied to life
science companies for use in blood typing and other diagnostic reagents.
One of the primary uses of bovine albumin is to enhance the detection of
blood group antibodies, a characteristic essential for the safe transfusion
of whole blood. The Company also provides a line of highly purified animal
proteins known as tissue culture media components that are used by
biotechnology and biopharmaceutical companies as nutrient additives in cell
culture media. Examples of these media components are Bovine EX-CYTE(R),
produced through a patented manufacturing process, and transferrin. Many of
the recombinant proteins currently used as therapeutic products are
genetically engineered in mammalian cells. In order for these cells to grow
and produce, they require nourishment that can be found from such sources
as Bovine EX-CYTE(R), which is rich in cholesterol, phospholipids and
essential fatty acids, and transferrin, a protein that provides the cells
with the iron required for proper cellular respiration to occur.
In order to meet current and expected demand for its line of
EX-CYTE(R) products, during 1999 the Company completed an expansion of its
protein fractionation facility in Kankakee, Illinois. Demand for EX-CYTE(R)
has increased significantly in recent years as the success rate of
genetically engineered proteins and other biotechnology products has
increased. Furthermore, the Pentex(R) brand of BSA has also seen recent
growth, generally following the growth rate of immunodiagnostic products
and for use in cell culture. During 2000, the Company completed a
significant expansion of its BSA manufacturing capacity to meet the current
and anticipated demand for this product.
Clinical Diagnostic Antibodies. Through its expertise in donor
recruiting, the Company is able to locate and recruit donors who can
provide antibodies and other biological specimens that are known to be
positive or negative for a specific disease or infection. The Company
provides these biological specimens for use in clinical diagnostic test kit
controls. The diseases for which the Company sources clinical diagnostic
antibodies include, among others, cytomegalovirus ("CMV"), rheumatoid
arthritis, toxoplasmosis, hepatitis and HIV. The Company's recruiting
capability is complemented by in-house experience in the laboratory
disciplines of immunohematology, immunology, serology and clinical
chemistry to characterize human specimens to meet manufacturers'
requirements.
PRODUCT DEVELOPMENT
Historically, the Company has carried out product development activities
through each of its operating units. The Company is in the process of
restructuring and centralizing product development activities within the
existing product development group located in Edinburgh, Scotland. This group
will manage all product development activities for the Company. The Company is
continuing its current product development activities, such as developing
monoclonal antibodies for use in diagnostic test kit controls using the same
approach that led to the Company's ability to commercialize monoclonal
antibodies for use in blood typing
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reagents. The Company has initially targeted certain monoclonal antibodies from
diseases from which appropriate polyclonal antibodies are difficult to obtain
and therefore command a premium in the market. Other projects include enhancing
existing product lines in blood typing, purified proteins and value-added
diagnostic plasma products. The Company intends to build a larger product
development function and initiate projects to identify new products targeted
principally at the diagnostic and cell culture market. The Company will continue
to use its existing technology in monoclonal antibodies and protein purification
as a platform for product development, although it will also seek new technology
to complement existing technology in the development process.
MARKETING AND CUSTOMERS
The Company markets its products to over 200 customers worldwide, including
many major life science companies. However, in 2000, 1999 and 1998, sales to the
Company's top ten customers accounted for approximately 80%, 78% and 84%,
respectively, of total net sales. One of the Company's customers, Bayer
Corporation ("Bayer"), accounted for approximately 33%, 41% and 40% of the
Company's net sales in 2000, 1999 and 1998, respectively, while another
customer, Aventis, accounted for 15% and 14% of net sales in 2000 and 1998,
respectively. Excluding sales to these customers from the Company's
non-specialty business, both Bayer and Aventis each would have represented
approximately 19% of the Company's 2000 net sales. During 1999, sales to Alpha
Therapeutic Corporation accounted for approximately 10% of net sales. During
2000, 1999 and 1998, no other single customer of the Company accounted for
greater than 10% of net sales. In 2000, 1999 and 1998, the Company's domestic
sales represented approximately 69%, 77% and 63%, respectively, of net sales.
Therapeutic Products
The majority of the Company's therapeutic products are sold through its own
sales force and, in limited markets, through independent brokers, to major
biological product manufacturers. While the Company sold its specialty
antibodies to seven customers during 2000, four of these accounted for
approximately 90% of total specialty therapeutic sales. The majority of the
Company's specialty antibodies for therapeutic use are sold pursuant to annual
or multi-year purchase agreements, with prices and volumes generally negotiated
annually. During 2000 the Company entered into several contracts for long-term
supply agreements with customers.
Diagnostic Products
The Company's monoclonal and polyclonal antibodies are sold to more than
100 manufacturers or suppliers of blood typing reagents and independent brokers.
While a large amount of the Company's monoclonal antibody sales are made
pursuant to supply agreements, the majority are regarded as spot sales. The
Company has OEM arrangements with several customers, the largest of which is
under a long-term contract. The polyclonal blood typing reagent market can be
characterized as a spot market with limited advance sales and commitments to
purchase typically made orally after the customer receives a sample. Due to the
technical nature of the product, monoclonal antibodies used to manufacture blood
typing reagents require a highly trained and technical sales staff. The
Company's sales and technical support staff for this product is located in
Scotland. The capabilities of the Company's facilities and staff allow for the
marketing of monoclonal antibodies for blood typing in many forms, from
unfinished product to finished, vialed and branded product.
The Company sells its Pentex(R) line of blood proteins products worldwide
to over 200 customers in more than 25 countries. These customers are generally
major biotechnology or biopharmaceutical companies that manufacture recombinant,
therapeutic biopharmaceutical products, media formulators or major diagnostics
companies that manufacture blood typing and other diagnostic reagents. A small
portion of the Company's sales of blood proteins is to the research market and
the veterinary market. The Company's marketing strategy involves identifying
candidate customers, maintaining intimate knowledge of next generation projects
of these companies and creating working relationships with the research teams of
such companies. The Company believes that by competing at the earliest
development stages, it increases its potential for being a sole source provider.
While sales of the EX-CYTE(R) product line have historically been made through
annual purchase
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orders, the Company is experiencing an increased desire of its customers to
enter into long-term supply agreements to ensure their access to the product.
During 2000 the Company entered into a long-term supply contract with a major
pharmaceutical company that under certain circumstances obligates the Company
and the customer to supply and buy, respectively, certain amounts of EX-CYTE(R)
products over the term of the contract.
The Company's clinical diagnostic antibodies are sold to more than 100
customers in over a dozen countries. Clinical diagnostic antibodies are
primarily sold to manufacturers of diagnostic test kits for incorporation as
controls or for use in product development projects. The Company maintains a
separate sales group dedicated to this product line due to the large number of
customers requiring personalized treatment and the special product knowledge
required. The Company sells a significant portion of its clinical diagnostic
antibodies pursuant to a supply contract with a customer that expires in 2003.
ACQUISITIONS
The Company intends primarily to pursue acquisitions of businesses that
provide services and products that are complementary to its existing diagnostic
and biotechnology businesses, such as the 1999 acquisition of Proteins. However,
there can be no assurance that the Company will be able to complete suitable
acquisitions in the future or successfully integrate any such acquisitions into
its existing operations.
QUALITY ASSURANCE
The Company maintains quality assurance programs designed to assure the
efficacy and safety of its products and compliance with the requirements of
regulatory authorities, industry trade associations and its customers. Through
the Company's Quality Assurance Program, an internally maintained regulatory
compliance program, the Company conducts periodic audits of each facility to
monitor staff adherence to regulations and protocols. These audits are designed
to ensure adherence to Company procedures and effectiveness of staff training
efforts. The Company subscribes to the Quality Plasma Program ("QPP"), which is
a donor center certification program administered by the American Blood
Resources Association ("ABRA"), an industry trade organization. ABRA certifies
only those facilities that meet its standards and provide the highest quality
products. Most of the Company's customers require their suppliers to be QPP
certified. All of the Company's donor center facilities are currently QPP
certified.
COMPETITION
Therapeutic Products
The Therapeutic Products segment is engaged in the business of providing
specialty antibodies, which is a competitive and continually changing field. The
Company competes for customers with other antibody suppliers on the basis of
price, reliability and quality of product, breadth of product line and the
ability to provide value-added services. While the Company believes that its
proprietary anti-D vaccination protocol and extensive donor base of individuals
with high concentrations of pre-existing anti-D antibodies provide it a
competitive advantage and allow it to offer a premium product in terms of
quality, in recent years the Company has experienced, and expects to continue to
experience, increased competition for anti-D antibodies from other independent
collection companies. The Company believes that future increases in the
production of anti-D antibodies by other suppliers could have an adverse effect
on the Company through decreased orders for its product or lower selling prices
per unit.
In certain markets, the Company competes for donors by means of financial
incentives which the Company offers for the donation of the antibodies it
collects, by providing donor services, by implementing programs designed to
attract and retain donors through education as to the uses for collected
antibodies, by encouraging groups to have their members become antibody donors
and by maintaining the attractiveness of the Company's donor centers. The
Company's anti-D antibodies are derived from donors with rare antibody
characteristics, resulting in increased competition for such donors. If the
Company is unable to maintain and expand its donor base, its business and future
prospects may be adversely affected.
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Furthermore, several companies are attempting to develop and market
products to treat diseases based upon technology that may lessen or eliminate
the need for certain antibodies or other plasma-based products. Such products,
if successfully developed and marketed, could adversely affect the demand for
antibodies and other plasma-based products.
The Company believes it takes up to 12 months to obtain the necessary
regulatory approvals in order to begin shipping product from a specialty donor
center that immunizes its donors. In addition to these regulatory requirements,
once the center is operational, a stable donor base must be established and
maintained as repeat donors are critical to success for both quality control and
profitability. A significant volume of donated antibodies and sophisticated
screening and immunization procedures also are necessary in order to provide the
diversity and quality of antibody products demanded by the market.
Diagnostic Products
The primary competition for monoclonal antibodies used in blood typing
reagents (both OEM and bulk material) comes from customers that are vertically
integrated, and thus provide antibodies for their own use, and smaller,
independent manufacturers that offer a more limited range of product than the
Company. Some fully integrated manufacturers also offer OEM and bulk services.
As the Company does not have a significant presence in the end market and is
thus seen as not being in direct competition with its customers, the Company
believes that it is generally favored over fully integrated manufactures who
offer OEM and bulk antibody. Additionally, the Company believes that its broad
range of proprietary antibodies and state of the art facilities provide it a
competitive advantage with respect to these competitors.
The Company faces competition in purified blood proteins, such as BSA, from
a number of sources. There are several established competitors of various sizes
both in the US and internationally. The geographic location with respect to the
source of raw materials (bovine serum) used for purification, the production
process itself, and the suitability of the various purified proteins for the
intended application are all factors that can have an effect on competition. The
Company believes it maintains a competitive advantage for these products due to
the high quality of the products it sells, as well as the high value of the
technical support that is provided to its customers. Due to the long established
product range, the quality of the technical support and recent investments in
current good manufacturing practices (cGMP) at its facilities, the Company
believes it is well positioned in its markets. The Company does not believe that
it currently faces significant competition for its EX-CYTE(R) product line.
The Company faces competition for its clinical diagnostic antibodies
primarily from other independent suppliers of antibodies that operate donor
centers. In addition, the Company faces some competition from companies or
brokers that independently source antibodies from donor centers.
There can be no assurance that competition for customers, donors,
end-products or otherwise will not adversely affect the Company.
GOVERNMENT AND INDUSTRY REGULATION
General. The Company's activities are subject to significant regulation by
numerous governmental authorities in the United States and internationally.
These regulatory authorities govern the collection, testing, manufacturing,
safety, efficacy, labeling, storage, record keeping, transportation, approval,
advertising and promotion of the Company's products, as well as the training of
its employees. The Company believes it is in substantial compliance with all
relevant laws and regulations.
The Company is subject to extensive FDA regulation, primarily through the
requirements of the Public Health Service Act and the Food, Drug and Cosmetic
Act. All of the Company's donor centers and the Company's monoclonal
manufacturing facilities hold FDA biologics licenses ("BLA") and the Company's
donor centers have numerous supplements to the source plasma license, permitting
the production and sale of specialty antibodies and the immunization of donors.
During 1998, the FDA issued regulations to create a single license for
biologic products, replacing the former establishment licenses and product
licenses, with the goal of reducing unnecessary burdens for the
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industry without diminishing public health protection. Under these regulations,
the FDA issues a single license to manufacturers of multiple biological
products, such as specialty antibodies and product derived from immunized
donors. Currently, the Company's 17 donor centers operate under a single
license. The Company believes that as a result of these new regulations, other
collectors might attempt to enter the specialty antibody market, as they will
generally be allowed to immunize donors at historically non-specialty donor
centers during the application process. However, the Company believes that its
extensive experience in immunization will be a competitive advantage, as it
expects the difficulty of the application and approval process to increase,
particularly for centers operated independently.
New facilities, products and operating procedures at the majority of the
Company's locations must undergo FDA approval processes. Significant changes to
existing facilities, products or operating procedures must also undergo FDA
review prior to implementation. The Company's FDA-licensed donor centers and
central testing laboratory in the United States and its monoclonal manufacturing
facilities in the U.K. are required to adhere to FDA current Good Manufacturing
Practices (cGMP) and are periodically inspected by the FDA. Furthermore, the
Company's protein fractionation site is a FDA-registered facility. Donor centers
must meet detailed standards for, among other things, the screening of donors,
obtaining informed consents from donors, the collection of antibodies, training
of personnel and the testing, handling and disposal of biologic products. If the
FDA believes that a facility is not in compliance with all applicable laws and
regulations, generally as a result of an on-site inspection, it typically issues
a deficiency notice known as a Form FDA-483. A warning letter may be issued for
serious deficiencies. If deficiencies are not adequately responded to or
addressed in an appropriate and timely manner, further action may be taken by
the FDA. These actions may include the detainment or seizure of products,
issuance of a recall, enjoinment of future operations and the assessment of
civil and criminal penalties against the Company, its officers or its employees.
In addition, approvals or licenses could be temporarily suspended or revoked in
certain circumstances. Failure to comply with regulatory requirements or a
significant adverse regulatory action could have a material adverse effect on
the Company.
Due in part to the implementation of an approach by the FDA known as "Team
Biologics", there has been an increasing level of regulatory scrutiny in the
biologics industry resulting in more detailed and frequent inspections, and what
the Company believes are a greater number of observations cited per inspection,
deficiency notices and warning letters. In the past, the Company has received
notifications and warning letters from the FDA of 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
material compliance with all relevant laws and regulations. However, since all
of the Company's operations have not yet been fully subjected to the FDA's more
intensive inspections, it is unable to determine what impact, if any, such
inspections will have on the Company and its operations when they occur.
The Company is also subject to additional inspections by customer quality
assurance auditors, ABRA auditors, the Health Care Financing Administration
("HCFA") and state health departments. HCFA regulates and certifies all clinical
testing performed at each donor center and the Company's central testing
laboratory under the Clinical Laboratories Improvement Act of 1988. The
Company's central testing laboratory in Atlanta, Georgia is licensed by the FDA
and the State of Georgia.
Outside the United States, sales of the Company's products are subject to
additional regulatory requirements, which vary widely from country to country.
In particular, much of Company's domestic plasma operations, including its
central testing laboratory, are subject to inspection and approval by various
German regulatory bodies, as a significant portion of its therapeutic antibody
products, including those sold to domestic affiliates of German companies, are
ultimately further manufactured or sold in Germany. These regulations, while
similar in scope to those promulgated by the FDA, are often more restrictive.
In the United Kingdom, the Company is subject to the U.K. Health and Safety
at Work Act, which regulates the safety precautions required of manufacturers in
the United Kingdom, and to various other regulations covering the use of
genetically engineered organisms in laboratory and manufacturing processes. In
certain countries, the Company's customers are subject to regulatory
requirements that require additional inspection and approval of the Company's
facilities prior to the shipment of products to such countries.
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Changes in existing federal, state or foreign laws or regulations, or the
Company's inability to comply with such regulations, could have an adverse
effect on the Company's business.
The Company is also subject to numerous industry and customer-mandated
standards. Industry groups such as ABRA and the Company's customers continually
evaluate their practices and procedures regarding new information or public
concerns over diseases which may be transmitted from donors through their blood
or blood components. Based upon such evaluation, a certain portion of the
population may be prohibited from donating in the future, or certain new testing
and screening procedures may be required to be performed with respect to certain
donors. The Company is also subject to routine inspections of its facilities by
its customers, whose approval must generally be obtained for each donor center
prior to shipping product.
One specific concern currently facing the industry is Creutzfeld-Jakob
disease ("CJD") and new variant CJD ("nvCJD"), an often fatal disease occurring
sporadically in the world which has been reportedly linked in some cases to
bovine spongiform encephalopathy ("BSE"), also known as "mad cow disease".
However, no evidence currently exists that CJD or nvCJD can be transmitted by
blood or plasma products and the risk, if any, is believed to be small and at
present only theoretical. While no acceptable testing or screening procedure
currently exists to detect CJD or nvCJD, CJD has generally been found to have a
higher incidence in the older population. In response to this concern and at the
request of several of its customers, the Company has ceased collecting certain
antibodies from donors over the age of 59 at certain of its donor centers. As a
further precaution against the theoretical transmission of nvCJD, the FDA has
issued guidance which the Company follows banning plasma and blood donations
from individuals that had spent extended periods of time in the United Kingdom
during the mad cow epidemic there from 1980 to 1996.
The Company produces certain bovine-derived products at its protein
fractionation facility in Kankakee, Illinois. All of these products are of the
lowest determinable risk, and are derived according to FDA, World Health
Organization (WHO) and European regulatory guidelines for the production of
bovine source components for use in the development of critical therapeutic
products. The Company takes additional measures to ensure that its
bovine-derived products will be free from BSE, including the use of a single
abattoir, which sources all cattle from the United States, which is currently
regarded as free from BSE. The Company will continue to monitor developments
regarding BSE and actively take steps to ensure its products are manufactured in
full compliance with current regulatory guidelines. The Company is also engaged
in developments that during the manufacturing process could reduce or inactivate
the BSE disease-causing agent if it were present.
Another standard voluntarily adopted by the industry relates to the
acceptance of new donors. In an effort to further minimize the potential that
infected plasma could enter the manufacturing process undetected, all first time
donors' plasma is excluded from shipment and further manufacture in therapeutic
products unless a second, negative set of test results is also obtained on a
second donation within six months, essentially precluding one-time donations.
Also, in order to further shorten the "window period" during which time a donor
is potentially infectious but is not detected as such by current screening tests
that measure antibody response to the viruses, certain of the Company's
therapeutic customers have implemented a testing method, Nucleic Acid
Amplification ("NAT"), sometimes known as Polymerase Chain Reaction ("PCR")
technology. PCR/NAT testing is a method used to detect the presence of genetic
material of problem viruses before antibodies against those viruses can be
formed. While the test is not yet required or approved by the FDA, certain of
the Company's customers perform testing for hepatitis C and, in most cases,
hepatitis B and HIV, as a further measure of safety.
Although the Company does not believe that these new standards will have a
material impact on its operating results, there is no assurance that the
long-term impact of these standards, or the imposition of other blood safety or
other measures, will not have a material adverse effect on future operations.
Certain of the products produced at the Company's protein fractionation
facility in Kankakee, Illinois are considered "medical devices" under the Food,
Drug and Cosmetic Act and, accordingly, are subject to its general control
provisions that include requirements for registration, listing of devices, cGMP,
labeling and prohibitions against misbranding and adulteration. These products,
which represent an insignificant amount of the Company's sales, nonetheless
subject the Company to FDA inspection and scrutiny. Furthermore, the
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FDA has indicated in certain guidance documents and in public meetings that it
intends to more closely regulate tissue culture media, such as the Company's
EX-CYTE(R) products, that are used in the manufacture of injectable products.
While there has been no indication as to how these products will be classified
and therefore with which standards they will need to comply, the FDA has
indicated that, at a minimum, manufacturers of tissue culture media should
adhere to cGMP standards. The Company currently produces EX-CYTE(R) in a
dedicated facility that was constructed to pharmaceutical cGMP standards. The
imposition of additional regulatory requirements for its protein fractionation
facility could adversely affect the Company.
Federal, state and foreign laws and regulations regarding the manufacture
and sale of the Company's products are subject to future change. The Company
cannot predict what impact, if any, such change might have on its business.
However, such changes could have a material impact on the Company's business.
Other. The Company is also subject to government regulations enforced
under the Environmental Protection Act, the Clean Air Act, the Clean Water Act,
the National Environmental Policy Act, the Toxic Substances Control Act, the
Resource Conservation and Recovery Act, the Medical Waste Tracking Act, and
other national, state or local restrictions. The Company is also subject to
workplace safety regulations under the Occupational Safety and Health Act
(OSHA). The Company believes that it is in substantial compliance with all
applicable regulations.
INFORMATION TECHNOLOGY
The Company is currently pursuing several information technology ("IT")
initiatives that it believes will streamline many of the tasks currently being
performed throughout its operations. The Company also believes that certain
automation initiatives could help mitigate a significant amount of risk
currently borne by the Company by operating in a highly regulated environment.
Most significant of these initiatives involves the automation of the Company's
donor center network. In October of 1999, the Company entered into a licensing
arrangement with a vendor for the use of its donor center management system.
This system has been configured and validated, and has been fully implemented at
all of the Company's donor centers as of March 26, 2001.
The Company is pursuing a number of other automation projects, including
sales order processing, electronic purchasing and centralized automated
invoicing. The Company anticipates that further IT expenditures may be
necessary, such as a manufacturing resource planning system for its monoclonal
antibody manufacturing and protein fractionation facilities.
There can be no assurance that the Company will be successful in its IT
efforts, or that the Company will achieve any of the anticipated benefits of its
various IT initiatives.
THIRD PARTY REIMBURSEMENT
In both domestic and foreign markets, sales by the Company's customers may
depend in part on the availability of reimbursement from third-party payors such
as government health administration authorities, private health insurers and
other similar organizations. Third-party payors are continually challenging the
price and cost-effectiveness of medical products and services. There can be no
assurance that pricing pressures which may be experienced by the Company's
customers will not adversely affect the Company because of a determination that
these products are not cost effective or because of inadequate third-party
reimbursement levels to such customers.
EMPLOYEES
As of March 14, 2001, the Company employed 542 persons, 434 of whom were
located in the United States and 108 of whom were located in the United Kingdom.
Of the Company's U.S.-based employees, 42 that are employed by Serologicals
Proteins are members of a collective bargaining unit. The Company believes that
its relationship with its employees is generally satisfactory.
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PRODUCT LIABILITY AND INSURANCE
The sourcing, processing, manufacturing and sale of the Company's products
involve a risk of product and professional liability claims. The Company has
obtained product liability insurance in an amount of $3.0 million per incident
and $3.0 million in the aggregate per annum for each of the Company's facilities
on an occurrence basis and professional liability insurance in the same amounts
on a claims made basis. The Company also has a $10.0 million excess liability
umbrella insurance policy. There can be no assurance that the coverage limits of
the Company's insurance policies and/or any rights of indemnification and
contribution that the Company may have will offset potential claims. A
successful claim against the Company in excess of insurance coverage and not
subject to indemnification could have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Company's 17 donor centers are located in 8 states and the District of
Columbia, including Florida (2), Georgia (2), South Carolina (3), Utah (2),
Alabama (3), North Carolina (2), Louisiana, and Pennsylvania. The donor centers
range in size from approximately 1,000 to 10,000 square feet and are generally
leased with five-year terms. The majority of these leases contain renewal
options that permit the Company to renew the leases for a five-year period at
the then fair rental value. The Company believes that in the normal course of
its business, it will be able to renew its existing leases or relocate its
operations subject to regulatory approval. See Item 1, "Business -- Operations."
The Company's central testing laboratory and worldwide headquarters are
located in two separate facilities in Atlanta, Georgia; its monoclonal research
and development laboratories and the Company's FDA licensed monoclonal antibody
manufacturing facilities are located in Edinburgh, Scotland (large scale
monoclonal production) and Livingston, Scotland (vialing and labeling). All of
these facilities are leased with terms expiring through 2021.
The Company's owned blood protein fractionation facility, acquired in the
Pentex transaction, is a 61,000 square foot facility located on five acres in
Kankakee, Illinois. The facility includes a 17,000 expansion completed during
1999 that is dedicated to the manufacturing of EX-CYTE(R).
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain litigation arising in the ordinary
course of business. In management's opinion, the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
During 2000, twelve complaints were filed against the Company and certain
of its current and former executive officers and directors which allege
violations of the Securities Exchange Act of 1934, including Sections 10(b) and
20(a) thereof and Rule 10b-5 promulgated thereunder. During the third quarter of
2000, the complaints were consolidated and a lead plaintiff was named. A
consolidated complaint was filed on October 10, 2000 which also seeks the
court's certification of the litigation as a class action on behalf of all
purchasers of the Company's stock between April 27, 1999 and April 10, 2000. On
November 30, 2000, the Company and the other defendants filed a motion to
dismiss the consolidated complaint. On January 17, 2001, the plaintiff filed an
opposition to the motion to dismiss. The Court has not yet ruled on the
defendants' motion to dismiss the complaint. Although the Company considers all
of the claims in the consolidated complaint to be without merit and intends to
defend the lawsuits vigorously, management is unable to predict at this time the
final outcome of these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year ended December 31, 2000.
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ITEM 4A. EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT
The following table sets forth the names, ages and all positions and
offices with the Company held by the Company's present executive officers:
NAME AGE POSITIONS AND OFFICES PRESENTLY HELD
- ---- --- ------------------------------------
David A. Dodd.............................. 51 President, Chief Executive Officer and Director
Sue Sutton-Jones........................... 48 Vice President, Worldwide Regulatory Affairs,
Quality Assurance and Compliance
Jeffrey D. Linton.......................... 38 Vice President, Business Development, Legal and
Public Affairs
Peter J. Pizzo, III........................ 34 Vice President, Finance, Chief Financial Officer,
Secretary and Treasurer
Toby L. Simon, M.D......................... 56 Vice President, Medical and Scientific Affairs
Keith J. Thompson.......................... 43 Vice President, Diagnostic Operations
David A. Dodd has served as President, Chief Executive Officer and a
director of the Company since June 2000. From August 1995 to June 2000, Mr. Dodd
served as President and Chief Executive Officer of Solvay Pharmaceuticals, Inc.,
and as a member of the Management Board for the Pharmaceutical Sector of Solvay
S.A. In addition, Mr. Dodd served as Chairman of the Board of Unimed
Pharmaceuticals, Inc., a subsidiary of Solvay, from July 1999 to June 2000.
Prior to joining Solvay, Mr. Dodd served in a number of management and executive
positions for major life science corporations, including American Home Products,
Bristol-Myers Squibb, and Abbott Laboratories. Mr. Dodd currently also serves on
the board of directors of one not-for-profit organization.
Sue Sutton-Jones has served as Vice President, Worldwide Regulatory
Affairs, Quality Assurance and Compliance of the Company since January 2001.
From July 1998 until December 2000, Ms. Jones served as Vice President,
Regulatory Compliance for Ortho-Clinical Diagnostics, a division of Johnson &
Johnson. From September 1997 until July 1998, Ms. Sutton-Jones served as
Executive Director, Quality and Compliance Services for Johnson & Johnson. From
August 1996 until August 1997, Ms. Sutton-Jones served as Vice President, West
Coast Operations for BRI Quality Regulatory Alliance, Inc., a provider of
regulatory and clinical affairs and quality system consulting products and
services to the healthcare industry. From 1994 to 1996, Ms. Sutton-Jones served
as Vice President, Regulatory Affairs, Quality Assurance and Regulatory
Compliance for Telectronics Pacing Systems.
Jeffrey D. Linton has served as Vice President, Business Development, Legal
and Public Affairs of the Company since October 2000. From June 1993 until
October 2000, Mr. Linton served in various capacities with Solvay America, Inc.
companies, most recently as Vice President of Law, Government, and Public
Affairs for Solvay Pharmaceuticals, Inc., from April 1999 until October 2000.
From December 1996 until April 1999, Mr. Linton served as Vice President, Human
Resources of Solvay Automotive, Inc., and from June 1993 until December 1996,
Mr. Linton served as Staff Attorney of Solvay America, Inc.
Peter J. Pizzo, III has served as Vice President, Finance, Chief Financial
Officer, Secretary and Treasurer since February 2000. From November 1999 until
February of 2000, he served as the Company's Acting Chief Financial Officer and
from October 1996 to November 1999 as its Director of Financial Reporting. From
March 1995 until August 1996, Mr. Pizzo served as Vice President of
Administration, Secretary, Treasurer and Controller of ValueMark Healthcare
Systems, Inc., a private chain of psychiatric hospitals. From July 1992 until
March of 1995, Mr. Pizzo served in various financial positions at Hallmark
Healthcare Corporation, a publicly traded hospital management company, most
recently as Treasurer.
Toby L. Simon, M.D. has served as Vice President, Medical and Scientific
Affairs since March 1997. From March 1990 until joining the Company, Dr. Simon
served in various capacities with Blood Systems, Inc., an organization of blood
and plasma centers ("BSI"), and its research affiliate, Blood Systems Foundation
("BSF"), most recently as President of BSF from March 1995 until March 1997 and
President and Chief Executive Officer of BSI from March 1991 until March 1995.
Dr. Simon is certified in internal
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medicine and hematology by the American Board of Internal Medicine and in blood
banking by the American Board of Pathology.
Keith J. Thompson has served as Vice President, Diagnostic Operations since
January 1998. Prior to his appointment as Vice President, Mr. Thompson served in
various capacities at Serologicals, Ltd. since 1985, including as Managing
Director from January 1995 until December 1997 and as Operations Director from
November 1992 until December 1994.
In addition, the following individual serves as a key employee of the
Company:
M. Dwain Wilcox, 33, has served as Vice President, Information Systems
since joining the Company in October 1998. Prior to joining the Company, Mr.
Wilcox held several positions at Lanier Worldwide, a subsidiary of Harris
Corporation, most recently as Director, Systems Integration from June 1996 until
October 1998 and Program Manager, System Integration from November 1993 until
June 1996.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock was initially offered to the public on June 15,
1995 at a price of $5.11 per share and trades on the Nasdaq Stock Market under
the symbol "SERO."
The Company declared a three-for-two split of its common stock effective
August 14, 1998 for shareholders of record on July 31, 1998. All price and share
amounts herein are adjusted to reflect the effect of such split.
On March 23, 2001, the closing price of the common stock was $11.56 per
share. As of March 23, 2001, there were 108 holders of record and approximately
6,600 beneficial holders of the Company's common stock.
The Company has not paid any cash dividends on its common stock to date.
The payment of cash dividends, if any, in the future is within the discretion of
the Board of Directors and will depend on the Company's earnings, its capital
requirements and financial condition. It is the present intention of the Board
of Directors to retain all earnings, if any, for use in the Company's business
operations and, accordingly, the Board of Directors does not expect to declare
or pay any cash dividends in the foreseeable future. In addition, under the
Company's Third Amended and Restated Credit Agreement dated as of October 28,
1999, with Bank of America, N.A., et al. there are limitations on the Company's
ability to pay cash dividends.
The following table sets forth the high and low sale prices for the
Company's common stock for the periods indicated as reported by Nasdaq.
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 2000
QUARTER ENDED
March 26.................................................. $12.50 $ 5.69
June 25................................................... 7.44 3.50
September 24.............................................. 8.50 3.75
December 31............................................... 16.88 5.75
YEAR ENDED DECEMBER 26, 1999
QUARTER ENDED
March 28.................................................. $30.75 $11.38
June 27................................................... 15.75 5.00
September 26.............................................. 10.00 3.22
December 26............................................... 8.75 3.25
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the
Consolidated Financial Statements of the Company. These data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and notes thereto included elsewhere in this Form 10-K. The statements
of operations data and balance sheet data as of and for the years ended December
31, 2000, December 26, 1999, December 27, 1998, December 28, 1997 and December
29, 1996 have been derived from the audited Consolidated Financial Statements of
the Company.
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $147,760 $129,744 $123,072 $ 97,534 $65,571
Costs and Expenses
Cost of sales.............................. 101,113 94,157 81,242 62,065 38,752
Selling, general and administrative
expenses................................ 22,487 18,041 14,948 14,222 11,636
Other expense, net......................... 2,376 4,513 2,696 2,713 1,847
Interest expense (income), net............. 1,233 543 (846) (532) 220
Special (credits) charges, net............. (414) 33,969 -- -- --
-------- -------- -------- -------- -------
Income (loss) before income taxes and
extraordinary loss......................... 20,965 (21,479) 25,032 19,066 13,116
Provision (benefit) for income taxes......... 8,048 (6,017) 8,687 7,064 4,866
-------- -------- -------- -------- -------
Income (loss) before extraordinary loss...... 12,917 (15,462) 16,345 12,002 8,250
Extraordinary loss on early retirement of
debt, net of income taxes.................. -- -- -- -- (14)
-------- -------- -------- -------- -------
NET INCOME (LOSS)............................ $ 12,917 $(15,462) $ 16,345 $ 12,002 $ 8,236
======== ======== ======== ======== =======
NET INCOME (LOSS) PER COMMON SHARE -- BASIC:
Income (loss) before extraordinary loss.... $ 0.57 $ (0.65) $ 0.68 $ 0.54 $ 0.41
Extraordinary loss......................... -- -- -- -- --
-------- -------- -------- -------- -------
Net income (loss).......................... $ 0.57 $ (0.65) $ 0.68 $ 0.54 $ 0.41
======== ======== ======== ======== =======
NET INCOME (LOSS) PER COMMON SHARE --DILUTED:
Income (loss) before extraordinary loss.... $ 0.56 $ (0.65) $ 0.63 $ 0.51 $ 0.38
Extraordinary loss......................... -- -- -- -- --
-------- -------- -------- -------- -------
Net income (loss).......................... $ 0.56 $ (0.65) $ 0.63 $ 0.51 $ 0.38
======== ======== ======== ======== =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic...................................... 22,815 23,617 24,001 22,249 20,210
======== ======== ======== ======== =======
Diluted.................................... 23,283 23,617 25,942 23,789 21,482
======== ======== ======== ======== =======
BALANCE SHEET DATA:
Working capital.............................. $ 56,790 $ 50,172 $ 56,164 $ 37,425 $20,705
Total assets................................. 131,495 156,898 147,331 123,492 80,837
Long-term debt, less current maturities...... -- 30,000 878 4,446 147
Stockholders' equity......................... 118,707 103,224 129,009 103,285 67,804
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
General
The Company is a worldwide provider of biological products to life science
companies. The Company's products are used in the further development of
diagnostic, vaccine and therapeutic products. 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. As of March 23, 2001, the Company
conducted its operations through a national network of 17 donor centers that
specialize in the collection of specialty human antibodies. The Company also
operates a protein fractionation facility in Kankakee, Illinois ("Serologicals
Proteins" or "Proteins") that provides a variety of proteins used in diagnostic
reagents and tissue culture media components for use as additives in biotech
products. A number of these products, such as bovine serum albumin (BSA), are
primarily supplied to healthcare companies for use in diagnostic reagents.
Proteins also provides 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. 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 purchased this facility in December 1998, and the results of operations
are included in the discussion below for the Company's fiscal years ended
December 31, 2000 and December 26, 1999. The Company also operates two
monoclonal antibody manufacturing facilities in Scotland ("Serologicals, Ltd")
which are engaged in the development, manufacturing and sale of monoclonal
antibodies and related products such as red cells.
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,
manufacturing 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 specialty human antibodies that are used as the active
ingredients in therapeutic products for the treatment and management of various
diseases. Prior to August 2000, the Company also operated 47 donor centers
specializing in the collection of non-specialty antibodies. In August 2000 the
Company divested substantially all of the long-term assets of its non-specialty
antibody business, the results of which are included in the Therapeutic Products
segment. The activities of the Diagnostic Products segment include the Company's
monoclonal antibody production facilities and certain human-sourced, polyclonal
antibodies. While an increasing number of Proteins' 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 biotech products.
Divestiture of Non-Specialty Antibody Business
On August 21, 2000, the Company completed the divestiture of substantially
all of the long-term assets of its Seramed, Inc. ("Seramed") subsidiary for net
cash consideration totaling approximately $20.1 million, of which approximately
$1.3 million related to the sale of certain working capital assets and other
settlements resulting from the divestiture. The Company retained working capital
of approximately $12.6 million. The sale represented substantially all of the
long-term assets associated with the Company's 47 non-specialty donor centers.
In connection with the divestiture, the Company recorded a gain on the
divestiture of Seramed totaling approximately $219,000, which is included in the
line item entitled "Special (credits) charges, net" in the Consolidated
Statements of Income (Loss). The net loss for 2000 (including charges for
termination benefits, lease termination costs, professional fees and an
impairment loss) associated with the divestiture of Seramed totaled
approximately $1.4 million.
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Litigation
During 2000, twelve complaints were filed against the Company and certain
of its current and former executive officers and directors which allege
violations of the Securities Exchange Act of 1934, including Sections 10(b) and
20(a) thereof and Rule 10b-5 promulgated thereunder. During the third quarter of
2000, the complaints were consolidated and a lead plaintiff was named. A
consolidated complaint was filed on October 10, 2000 which also seeks the
court's certification of the litigation as a class action on behalf of all
purchasers of the Company's stock between April 27, 1999 and April 10, 2000. On
November 30, 2000, the Company and the other defendants filed a motion to
dismiss the consolidated complaint. On January 17, 2001, the plaintiff filed an
opposition to the motion to dismiss. The Court has not yet ruled on the
defendants' motion to dismiss the complaint. Although we consider all of the
claims in the consolidated complaint to be without merit and intend to defend
the lawsuits vigorously, management is unable to predict at this time the final
outcome of these claims.
Insurance Settlement
During 1999, the Company was notified by one of its customers that certain
of the Company's shipments of anti-D antibodies in the prior year had included
several units of plasma that did not meet this customer's exact product
specifications. The customer indicated to the Company that the units had been
partially manufactured with other units of plasma and thus had affected a
substantial number of other units. In 1999, the Company agreed to reimburse this
customer for its cost of the product and recorded a liability and related
expense in the amount of approximately $2.0 million. The liability with the
customer was settled during the first quarter of fiscal year 2000. The Company
filed a claim for reimbursement from its product and professional liability
insurance carrier, and was notified in the fourth quarter of 2000 that the claim
had been approved for settlement. The Company recorded a receivable and the
related benefit totaling $1.95 million, which is included in the line item
entitled "Special (credits) charges, net" in the Consolidated Statements of
Income (Loss). As of December 31, 2000, the Company had received payment of
approximately $600,000 and reported the balance totaling approximately $1.4
million in the line item "Other current assets" in the Consolidated Balance
Sheets. The Company received the balance of the settlement in the first quarter
of 2001.
Industry Trends
Increasing regulatory scrutiny continues to be a significant factor shaping
the biologics industry, resulting in more detailed and frequent 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.
In the past, the Company has received notifications and warning letters
from the FDA related to possible deficiencies in the Company's compliance with
cGMP and other 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
all of the Company's operations have not yet been fully subjected to the FDA's
more intensive inspections, it is unable to determine what impact, if any, such
inspections will have on the Company and its operations when they occur.
21
23
Another trend the industry is currently experiencing is the continuing
imposition of more rigorous donor screening and other 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, which represents a
significant portion of the Company's sales. 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, restrictions on donors who have traveled to
certain foreign countries and the introduction of new testing techniques have
reduced the pool of, and increased the competition for, potential donors.
One specific concern currently facing the industry is Creutzfeld-Jakob
disease ("CJD") and new variant CJD ("nvCJD"), an often fatal disease occurring
sporadically in the world which has been reportedly linked in some cases to
bovine spongiform encephalopathy ("BSE"), also known as "mad cow disease".
However, no evidence currently exists that CJD can be transmitted by blood or
plasma products and the risk, if any, is believed to be small and at present
only theoretical. While no acceptable testing or screening procedure currently
exists to detect CJD, it has generally been found to have a higher incidence in
the older population. In response to this concern and at the request of several
of its customers, the Company has ceased collecting certain antibodies from
donors over the age of 59 at certain of its donor centers. As a further
precaution against the theoretical transmission of nvCJD, the FDA has issued
guidance banning plasma and blood donations from individuals that had spent
extended periods of time in the United Kingdom during the mad cow epidemic there
from 1980 to 1996.
The Company produces certain bovine derived products at its protein
fractionation facility in Kankakee, Illinois. All of the Company's products are
of the lowest determinable risk, and are derived according to FDA,World Health
Organization (WHO) and European regulatory guidelines for the production of
bovine source components for use in the development of critical therapeutic
products. The Company takes additional measures to ensure that its
bovine-derived products will be free from BSE, including the use of a single
abattoir, which performs tests for evidence of BSE both before and after
processing. The Company will continue to monitor developments regarding BSE and
actively take steps to ensure its products are manufactured in full compliance
with all of the regulatory guidelines.
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 Consolidated
Financial Statements and Notes thereto. The following table sets forth certain
consolidated operating data of the Company as a percentage of net sales for the
fiscal years indicated below.
2000 1999 1998
----- ----- -----
Net sales................................................... 100.0% 100.0% 100.0%
Gross profit................................................ 31.6% 27.4% 34.0%
Selling, general and administrative expenses................ 15.2% 13.9% 12.1%
Income before special (credits) charges, net and income
taxes..................................................... 13.9% 9.6% 20.3%
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 26, 1999
NET SALES
CONSOLIDATED
Consolidated net sales increased 14%, or approximately $18.0 million, from
$129.7 million in 1999 to $147.8 million in 2000. The increase was driven by
increased sales of both therapeutic products and diagnostic products over the
prior year. One factor contributing to the year over year increase was that in
1999 the Company was impacted by the cancellation of anti-D orders by two
customers. Excluding the results of Seramed, net sales increased approximately
$24.6 million, or 36%, from $68.1 million in 1999 to $92.8 million in 2000.
22
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THERAPEUTIC PRODUCTS
Net sales of Therapeutic Products increased approximately $11.3 million, or
12%, from $91.1 million in 1999 to $102.4 million in 2000. The increase was
primarily the result of an increase in sales of anti-D antibodies and other
specialty antibodies over the prior year, offset by decreased sales of
non-specialty antibodies resulting from the divestiture of that business in
2000. The 1999 sales were negatively impacted by order cancellations for anti-D
by two customers. During 2000, some of the lost business was recaptured, and
additionally the Company benefited from a large unexpected spot order for anti-D
during the fourth quarter. Total net sales of specialty antibodies increased
$16.7 million, or 54% over the prior year, driven primarily by significant
increases in anti-D and anti-hepatitis antibodies. Net sales of anti-hepatitis
antibodies increased over 200% over the prior year levels, primarily due to
additional market demand for the product, combined with some carryover shipments
from 1999 that were delayed due to issues at the Company's central testing
laboratory that were resolved in the fourth quarter of 1999. Additionally, sales
of anti-rabies antibodies increased 69% over the 1999 levels. Non-specialty
antibody sales decreased approximately $5.4 million, or 9%, as a result of the
sale of Seramed in the third quarter of 2000. Excluding Seramed, net sales of
Therapeutic Products increased approximately $17.9 million, or 61% from $29.5
million in 1999 to $47.4 million in 2000.
DIAGNOSTIC PRODUCTS
Net sales of Diagnostic Products increased approximately $7.5 million, or
20%, from $37.8 million in 1999 to $45.3 million in 2000. Sales of blood protein
products increased approximately $3.4 million, or 16%, from $21.0 million in
1999 to $24.4 million in 2000. The majority of the increase in blood proteins
was related to sales of EX-CYTE(R). Advances in the commercialization of the
Company's customers' end products by moving to later stage clinical trials drove
the majority of the increased demand for EX-CYTE(R). Total net sales of
monoclonal antibodies and related products increased $2.9 million, from $11.9
million in 1999 to $14.8 million in 2000. Sales of monoclonal antibodies
benefited from increased demand for certain products manufactured for a customer
under an outsourcing arrangement under which the Company began shipping in early
2000. The remaining net sales, primarily human-sourced antibodies used in blood
typing reagents and diagnostic test kits, increased approximately $1.2 million,
from $4.9 million in the prior year to $6.1 million in 2000.
GROSS PROFIT
CONSOLIDATED
Consolidated gross profit increased 31%, or approximately $11.0 million,
from $35.6 million in 1999 to $46.6 million in the current year. This increase
was primarily the result of increased sales, primarily of relatively higher
margin specialty antibodies in 2000 compared with 1999, as well as the increased
sales of the relatively higher margin EX-CYTE(R) products. Gross profit as a
percentage of net sales ("gross margin") increased from 27.4% in 1999 to 31.6%
in the current year, largely as a result of the sales mix reflecting the
increased sales of EX-CYTE(R) and the higher margin specialty antibodies,
combined with the decline in sales of the relatively low margin non-specialty
antibodies resulting from the disposition of the Seramed business. Excluding
Seramed, gross profit increased $12.8 million, or 38% from $33.3 million in 1999
to $46.1 million in 2000, and gross margin increased from 48.8% to 49.7%.
THERAPEUTIC PRODUCTS
Gross profit from Therapeutic Products increased approximately $5.2
million, or 32%, from $16.0 million in 1999 to $21.2 million in the current
year. This increase was primarily due to higher sales of relatively higher
margin anti-D antibodies, and other specialty antibodies including
anti-hepatitis. Additionally, gross profit on non-specialty antibodies sold by
Seramed decreased as a result of the sale of this business. Gross margin
increased from 17.6% in 1999 to 20.7% in 2000, primarily as a result of the
substantial increase in sales of specialty antibodies discussed above. Excluding
Seramed, gross profit on Therapeutic Products increased approximately $7
million, from $13.7 million in 1999 to $20.7 million in 2000, and gross margins
decreased from 46.4% in 1999 to 43.5% in 2000.
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DIAGNOSTIC PRODUCTS
Gross profit from Diagnostic Products increased approximately $5.4 million,
or 27%, from $20.1 million in 1999 to $25.5 million in 2000. The majority of
this increase was attributable to increased sales, primarily of the higher
margin EX-CYTE(R) product. Gross margin for the Diagnostic Products segment
increased from 53.3% to 56.1%, primarily due to product mix as EX-CYTE(R)
represented a significantly higher percentage of total Diagnostic Products sales
compared with the prior year. The Company also benefited from production
efficiencies at certain of its manufacturing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased 25%, or
$4.5 million, from $18.0 million in 1999 to $22.5 million in the current year.
The increase was primarily attributable to higher corporate expenses, which
included recruiting and other expenses associated with the hiring of certain
executives, increased professional and legal fees, increased expenses associated
with various incentive compensation programs and increased expenses associated
with the Company's quality and regulatory initiatives.
OTHER EXPENSE, NET
Consolidated other expense, net, which primarily consists of amortization
of goodwill and other intangible assets and gains and losses from foreign
currency translations, decreased approximately $2.1 million, or 47%, from $4.5
million in 1999 to $2.4 million in the current year. The decrease was almost
entirely due to a decrease in goodwill amortization resulting from the write-off
of $24.9 million of goodwill related to Seramed during the fourth quarter of
1999, and to the subsequent divestiture of this business in August 2000.
INTEREST EXPENSE (INCOME), NET
Consolidated interest expense increased approximately $690,000, from
$543,000 in 1999 to $1.2 million in 2000. The increase was primarily
attributable to higher average borrowings under the Company's line of credit,
which was used primarily in the repurchase of approximately $20.0 million of the
Company's common stock and to fund working capital during 1999 when the Company
experienced shipping delays for a significant number of its products.
The Company repaid all of the outstanding borrowings on the line of credit
during the third quarter of 2000 using proceeds from the sale of Seramed.
Additionally, the Company repaid its outstanding convertible debt during the
third quarter of 2000.
SPECIAL (CREDITS) CHARGES, NET
Special (credits) charges, net for 2000 consist of costs incurred related
to the divestiture of Seramed, and the $1.95 million benefit from an insurance
settlement of a product liability claim previously described. During the second
quarter of 2000, the Company recorded an asset impairment charge totaling
$276,000, along with approximately $1.3 million of charges associated with
termination benefits, lease termination costs, and other costs associated with
the divestiture of the non-specialty antibody business. The Company realized a
gain on the disposal of Seramed totaling approximately $219,000.
Special charges for 1999 consisted of the following items: i) a $2.0
million product liability claim previously described; ii) a $1.2 million
write-down of the Company's clinical trial site to fair market value less costs
to sell; iii) a write-off of $4.2 million of capitalized software costs as a
result of terminating a project; iv) a $1.6 million charge related to severance
and other benefits for the Company's former Chief Executive Officer and certain
other individuals; and v) a $24.9 million impairment charge related to Seramed
to write the assets down to their estimated fair market value.
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PROVISION (BENEFIT) FOR INCOME TAXES
The provision (benefit) for income taxes as a percentage of income (loss)
before income taxes increased from a benefit of 28% in 1999 to a provision of
38.4% in 2000. This increase was primarily due to the non-deductible portion of
goodwill written off during 1999.
YEARS ENDED DECEMBER 26, 1999 AND DECEMBER 27, 1998
NET SALES
CONSOLIDATED
Consolidated net sales increased 5%, or approximately $6.7 million, from
$123.1 million in 1998 to $129.7 million in 1999. Of the increase, approximately
$21.1 million was attributable to the acquisition of Proteins, which was offset
by a net decrease in sales from its other operations.
THERAPEUTIC PRODUCTS
Net sales of Therapeutic Products decreased approximately $11.0 million, or
11%, from $102.1 million in 1998 to $91.1 million in 1999. The decrease was
primarily the result of a decrease in sales of anti-D antibodies of
approximately $15.2 million, due in large part to the cancellation of sales from
two customers, offset by an increase in sales of non-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. Total net sales of specialty antibodies
decreased approximately $14.9 million, or 33%, from $45.7 million in 1998 to
$30.8 million in 1999, while sales of non-specialty antibodies increased $3.8
million, or 7%, from $56.4 million in 1998 to $60.2 million in 1999.
DIAGNOSTIC PRODUCTS
Net sales of Diagnostic Products increased approximately $17.7 million, or
88%, from $20.1 million in 1998 to $37.8 million in 1999. Substantially all of
the increase was attributable to the acquisition of Proteins. Total net sales of
monoclonal antibodies and related products decreased $823,000, or 8%, from $12.7
million in 1998 to $11.9 million in 1999. The remaining net sales, primarily
human-sourced antibodies used in blood typing reagents and diagnostic test kits,
decreased approximately $2.6 million, or 21%, from $7.4 million in 1998 to $4.8
million in 1999.
GROSS PROFIT
CONSOLIDATED
Consolidated gross profit decreased 15%, or approximately $6.2 million,
from $41.8 million in 1998 to $35.6 million in 1999. This decrease resulted
primarily from decreased gross profit resulting from decreased sales from
existing operations, offset by approximately $11.2 million resulting from the
acquisition of Proteins. Gross margin decreased from 34.0% in 1998 to 27.4% in
1999, largely as a result of lower production at many of the Company's primarily
non-specialty donor centers and production decreases of anti-D antibodies due to
reduced orders, resulting in decreased fixed cost absorption and a lower gross
profit per unit. Furthermore, the Company experienced increased costs of
regulatory compliance.
THERAPEUTIC PRODUCTS
Gross profit from Therapeutic Products decreased approximately $13.6
million, or 46%, from $29.6 million in 1998 to $16.0 million in 1999. This
decrease was primarily due to lower sales of relatively higher margin anti-D
antibodies and lower gross profit per unit due to planned production decreases
in light of reduced orders. Additionally, gross profit on non-specialty
antibodies decreased, primarily as a result of the level of non-specialty
antibody production. Gross margin decreased from 29.0% in 1998 to 17.6% in 1999,
primarily as a result of the increase in sales of non-specialty antibodies as a
percent of total Therapeutic Products sales, from 55% in 1998 to 66% in 1999.
Finally, gross margin was also impacted by the increase in
25
27
the percentage of non-specialty antibodies sold on a gross basis, as there was
relatively insignificant gross profit attributed to the additional revenue.
DIAGNOSTIC PRODUCTS
Gross profit from Diagnostic Products increased approximately $7.9 million,
or 64%, from $12.3 million in 1998 to $20.1 million in 1999. The majority of
this increase was attributable to the acquisition of Pentex at the beginning of
fiscal year 1999, offset by lower gross profit from existing operations. The
decrease in gross profit from existing operations was primarily a result of
lower sales of monoclonal antibodies, and to a lesser degree, lower gross profit
per unit of sales of certain diagnostic products. Gross margin for the
Diagnostic Products segment decreased from 61.1% to 53.3%, primarily due to
lower sales of relatively higher margin monoclonal antibodies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses increased 21%, or
$3.1 million, from $14.9 million in 1998 to $18.0 million in 1999. Of the
increase, approximately $2.3 million was attributable to ongoing selling,
general and administrative expenses incurred as a result of the Proteins
acquisition, while the remainder was due to increases in general corporate
overhead, offset by decreased product development expenses.
OTHER EXPENSE, NET
Consolidated other expense, net, which primarily consists of amortization
of goodwill and other intangible assets and gains and losses from foreign
currency translations, increased approximately $1.8 million, or 67%, from $2.7
million in 1998 to $4.5 million in 1999. Of the increase, approximately $784,000
was the result of additional amortization expense associated with a decrease in
the useful lives used in amortizing intangible assets of the Company's
non-specialty antibody business and approximately $772,000 was attributable to
amortization expense related to the Proteins acquisition completed at the
beginning of 1999.
INTEREST EXPENSE (INCOME), NET
Consolidated interest expense (income), net increased approximately $1.4
million, from net interest income of $846,000 in 1998 to net interest expense of
$543,000 in 1999. The increase was primarily attributable to the borrowings
under the Company's line of credit, used primarily in the repurchase of
approximately $17.0 million of the Company's common stock and to fund working
capital during the third and fourth quarters of 1999 when the Company
experienced shipping delays for a significant number of its products.
PROVISION (BENEFIT) FOR INCOME TAXES
The provision (benefit) for income taxes as a percentage of income (loss)
before income taxes decreased from 34.7% in 1998 to 28.0% in 1999. This change
was primarily due to the non-deductible portion of goodwill written off during
1999.
26
28
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain indicators of consolidated financial
condition and liquidity of the Company as of the following fiscal year ends (in
thousands):
2000 1999 1998
-------- -------- --------
Cash and cash equivalents.......................... $ 22,492 $ 3,294 $ 34,940
Working capital.................................... 56,790 50,172 56,164
Total debt and capital lease obligations........... 13 32,567 5,284
Stockholders' equity............................... 118,707 103,224 129,009
Total debt to equity ratio......................... -- 31.5% 4.1%
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 Company's revolving credit facility (the
"Revolver"), which provides for a maximum borrowing capacity of $75 million.
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.
Net cash provided by operating activities in 2000 was $44.2 million as
compared to net cash used of $4.8 million in 1999, an increase of $49.0 million.
This increase was primarily attributable to a decreased investment in working
capital of approximately $42.5 million versus the prior year and increased net
income of $28.4 million, offset by a decrease of $35.3 million of non-cash
special charges, and a non-cash deferred income tax provision of $6.5 million
versus a benefit of $8.0 million in 1999. The decreased investment in working
capital was primarily due to a $27.1 million larger decrease in inventory versus
the prior year, and a $23.0 million larger decrease in accounts receivable
versus the prior year, offset by a decrease of approximately $5.2 million in
accounts payable and other accrued liabilities. The significant decreases in
inventory and accounts receivable were largely due to the sale of Seramed during
the year and the eventual liquidation of the working capital, combined with the
fact that the Company had substantial sales at the end of 1999 that resulted in
a relatively higher accounts receivable balance at the end of 1999.
Net cash provided by investing activities in 2000 was $7.1 million as
compared with net cash used of $41.2 million in the previous year. Investing
activities in 2000 included net proceeds of $20.1 million from the sale of
Seramed, offset by a $3.5 million cash outflow representing partial payment of a
net asset settlement related to the Company's 1999 acquisition of Serologicals
Proteins, and capital expenditures totaling approximately $9.6 million.
Investing activities in 1999 consisted primarily of $28.7 million used for the
acquisition of Serologicals Proteins and capital expenditures of $16.3 million.
Capital expenditures in 2000 consisted primarily of the following major
projects: i) expansion of the bovine serum albumin manufacturing capacity in
Kankakee, Illinois; ii) the acquisition of a facility in Scotland that will be
used to expand the Company's monoclonal manufacturing operations, and iii) costs
associated with automating the Company's donor center network. The 1999
expenditures included expansion of the Company's protein fractionation facility
located in Kankakee, Illinois, development costs relating to a donor center
automation system and routine donor center expenditures including relocations
and renovations.
During 2001, the Company anticipates making capital expenditures of
approximately $10 million to $12 million, primarily comprised of (i) completion
of the buildout of the new monoclonal facility in Scotland which was purchased
in 2000; (ii) a proposed expansion of the administrative office facilities at
Serologicals Proteins; (iii) renovations or relocations of existing donor
centers and relocation of the Company's corporate headquarters to Norcross,
Georgia; and iv) various information systems initiatives.
Net cash used in financing activities in 2000 was approximately $32.1
million compared with net cash provided of approximately $14.4 million in the
prior year. Financing activities in 2000 primarily consisted of repayments of
borrowings under the Company's Revolver as well as the repayment of $2.5 million
of convertible debt, the repurchase of approximately 657,000 shares of common
stock for approximately $3.0 million, and proceeds from the exercise of stock
options. Financing activities in 1999 primarily consisted of
27
29
borrowings under the Revolver and proceeds from the exercise of stock options,
offset by repurchases of common stock.
As of December 31, 2000, the Company had no outstanding debt, and had
capital lease obligations totaling $13,000, compared with total debt and capital
lease obligations outstanding at December 26, 1999 of $32.6 million. As
previously discussed, the Company used the proceeds from the sale of Seramed to
repay the debt outstanding under the line of credit. Additionally, $2.5 million
of convertible debt was repaid upon maturity in September 2000.
MARKET RISK
The Company is exposed to market risk from changes in foreign currency
exchange rates and, to a lesser extent, interest rates, which could affect its
future results of operations and financial condition. The Company manages its
exposure to these risks through its regular operating and financing activities.
Foreign Currency Exchange Rates
The Company's foreign-based operations are conducted primarily through its
Serologicals, Ltd. subsidiary located in the United Kingdom. In 2000, 1999 and
1998, foreign-based operations accounted for approximately 10%, 9% and 10% of
net sales and approximately 16%, 29% and 21% of income from operations (sales
minus cost of sales and selling, general and administrative expenses),
respectively.
The functional currency of Serologicals, Ltd. is the British pound
sterling. Fluctuations in foreign exchange rates can impact operating results,
including net revenues and expenses, when translations of the subsidiary
financial statements are made in accordance with SFAS No. 52, "Foreign Currency
Translation." Furthermore, the Company transacts business in various foreign
currencies, subjecting it to exposure from movements in the exchange rates of
those countries. However, a large portion of the Company's sales to foreign
countries is denominated in U.S. currency, thus mitigating a significant portion
of this risk. It has not been the Company's practice to hedge its assets and
liabilities in the U.K. or its intercompany transactions and, accordingly, has
not used derivatives or other off-balance sheet items to manage any significant
foreign currency exchange risk. In 2000, 1999 and 1998, the Company recorded
foreign currency transaction gains (losses) of approximately $(63,000),
$(240,000) and $76,000, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 requires derivative instruments to be recorded on the
balance sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in values of derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting. In
June 1999, the FASB issued SFAS No. 137, which defers the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued SFAS No. 138 which modifies certain sections of SFAS No. 133. The Company
has completed its evaluation of the impact of SFAS No. 133, and as of December
31, 2000, the Company does not have any derivative instruments required to be
accounted for under SFAS No. 133. Therefore, the Company does not believe the
adoption of SFAS No. 133 on January 1, 2001 will have a material effect on the
financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements
("SAB 101")." This bulletin summarized certain of the SEC's views regarding the
application of generally accepted accounting principles to revenue recognition
in financial statements. SAB 101 did not have a material impact on the Company's
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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."
28
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is contained in the Company's
consolidated financial statements indicated in the Index on Page F-1 of this
Annual Report on Form 10-K and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Items 10, 11, 12 and 13 will be contained in
the Company's definitive proxy statement which the Company intends to file
within 120 days after the end of the Company's fiscal year ended December 31,
2000 and such information is incorporated herein by reference. Certain
information concerning the executive officers and certain key employees of the
Company is set forth in Part I under the caption "Executive Officers and Key
Employees of the Registrant."
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The financial statements listed in the accompanying Index to Financial
Statements are filed as part of this Annual Report on Form 10-K.
(a) (2) Financial Statement Schedules
Valuation and Qualifying Accounts
All other schedules have been omitted because the information is not
required or is not so material as to require submission of the schedule, or
because the information is included in the financial statements or the notes
thereto.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of the fiscal year ended December 31, 2000.
(c) Exhibits
2.1 Asset Purchase and Sale Agreement dated May 31, 2000, by and
between Serologicals Corporation and Aventis Bio-Services,
Inc. (Exhibit 2.1 to the Company's Quarterly Report on Form
10-Q for the period ended June 25, 2000 is hereby
incorporated by reference).
3.1 Amended and Restated Certificate of Incorporation (Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the
period ended June 29, 1997 is hereby incorporated by
reference).
3.2 Amended and Restated By-laws (Exhibit 3.4 to the Company's
Registration Statement on Form S-1 (File No. 33-91176),
effective June 14, 1995, is hereby incorporated by
reference).
29
31
4.1 Specimen Common Stock Certificate (Exhibit 4.1 to the
Company's Registration Statement on Form S-1 (File No.
33-91176), effective June 14, 1995, is hereby incorporated
by reference).
4.2.1 Specimen Form of Rights Certificate (incorporated herein by
reference to Exhibit 2.1 of the Registration Statement on
Form 8-A filed August 10, 1999).
4.2.2 Form of Rights Agreement, dated as of August 2, 1999,
between the Company and State Street Bank & Trust Company,
N.A. (incorporated herein by reference to Exhibit 2.2 of the
Registration Statement on Form 8-A filed August 10, 1999).
4.2.3 Form of Certificate of Designation, Preferences and Rights
of Series B Preferred Stock (incorporated herein by
reference to Exhibit 2.3 of the Registration Statement on
Form 8-A filed August 10, 1999).
4.2.4 Summary of Rights Plan (incorporated herein by reference to
Exhibit 2.4 of the Registration Statement on Form 8-A filed
August 10, 1999).
10.1 Third Amended and Restated Credit Agreement, dated as of
September 28, 1999, between the Company and Bank of America,
d/b/a NationsBank NA, Wachovia Bank, LaSalle National Bank
and National Bank of Canada, Atlanta (Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 26, 1999 is hereby incorporated by reference).
10.2 Warrant of the Company dated March 9, 1993 issued to State
Street Bank & Trust Company (Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (File No.
33-91176), effective June 14, 1995, is hereby incorporated
by reference).
10.2.1 Amendment to Warrant of the Company issued to State Street
Bank & Trust Company (Exhibit 10.10.1 to the Company's
Registration Statement on Form S-1 (File No. 33-91176),
effective June 14, 1995, is hereby incorporated by
reference).
10.2.2 Amendment to Warrant of the Company issued to State Street
Bank & Trust Company (Exhibit 10.10.2 to the Company's
Registration Statement on Form S-1 (File No. 33-91176),
effective June 14, 1995, is hereby incorporated by
reference).
10.3 Separation Agreement between the Company and Harold J.
Tenoso (Exhibit 10.6.1 to the Company's Annual Report on
Form 10-K for the period ended December 26, 1999 is hereby
incorporated by reference).+
10.4 1994 Second Amended and Restated Omnibus Incentive Plan, as
Amended (Exhibit 10.7.2 to the Company's Quarterly Report on
Form 10-Q for the period ended June 25, 2000 is hereby
incorporated by reference).+
10.5 Forms of Stock Option Agreement (Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (File No.
33-91176), effective June 14, 1995, is hereby incorporated
by reference).+
10.5.1 Forms of First Revised Stock Option Agreements (Exhibit
10.12.1 to the Company's Annual Report on Form 10-K for the
period ended December 31, 1995 is hereby incorporated by
reference).
10.5.2 Forms of Second Revised Stock Option Agreements (Exhibit
10.10.2 to the Company's Annual Report on Form 10-K for the
period ended December 29, 1996 is hereby incorporated by
reference).+
10.5.3 Forms of Third Revised Stock Option Agreements (Exhibit
10.8.3 to the Company's Annual Report on Form 10-K for the
period ended December 27, 1998 is hereby incorporated by
reference).+
10.6 Amended and Restated 1995 Non-Employee Directors' Stock
Option Plan, as Amended.+*
10.7 Form of Indemnification Agreement (Exhibit 10.16 to the
Company's Registration Statement on Form S-1 (File No.
33-91176), effective June 14, 1995, is hereby incorporated
by reference).
10.8 1996 Employee Stock Purchase Plan (Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the period ended
December 31, 1995 is hereby incorporated by reference).+
30
32
10.9 Employment Agreement between the Company and Charles P.
Harrison (Exhibit 10.19 to the Company's Annual Report on
Form 10-K for the period ended December 31, 1995 is hereby
incorporated by reference).+
10.10 Serologicals Corporation 1996 UK Sharesave Scheme (Exhibit
10.9 to the Company's Annual Report on Form 10-K for the
period ended December 29, 1996 is hereby incorporated by
reference).+
10.11 Transition Agreement between the Company and P. Anne Hoppe
(Exhibit 10.17.1 to the Company's Quarterly Report on Form
10-Q for the period ended March 26, 2000 is hereby
incorporated by reference).+
10.12 Employment Agreement between the Company and Toby L. Simon,
M.D. (Exhibit 10.2 to the Company's Quarterly Report on Form
10-Q for the period ended June 29, 1997 is hereby
incorporated by reference).+
10.13 Forms of Senior Executive Severance Agreement (Exhibit 10.20
to the Company's Annual Report on Form 10-K for the period
ended December 27, 1998 is hereby incorporated by
reference).
10.14 Forms of Executive Severance Agreement (Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the period ended
December 27, 1998 is hereby incorporated by reference).
10.15 Serologicals Corporation Compensation Plan for Non-Employee
Directors (Exhibit 10.22 to the Company's Annual Report on
Form 10-K for the period ended December 27, 1998 is hereby
incorporated by reference).+
10.16 Agreement of Purchase and Sale, dated November 30, 1998,
between Serologicals Corporation and Bayer Corporation
(Exhibit 2.1 to the Company's Current Report on Form 8-K,
dated January 12, 1999, is hereby incorporated by
reference).
10.16.1 First Amendment to the Agreement of Purchase and Sale, dated
December 29, 1998, between Serologicals Corporation and
Bayer Corporation (Exhibit 2.2 to the Company's Current
Report on Form 8-K, dated March 15, 1999, is hereby
incorporated by reference).
10.17 Employment Agreement between the Company and Desmond H.
O'Connell, Jr. (Exhibit 10.23 to the Company's Annual Report
on Form 10-K is hereby incorporated by reference).+
10.18 Letter Agreement between the Company and Desmond H.
O'Connell, Jr. (Exhibit 10.23.1 to the Company's Quarterly
Report on Form 10-Q for the period ending March 26. 2000, is
hereby incorporated by reference).+
10.19 Employment Agreement between the Company and Peter J. Pizzo,
III. (Exhibit 10.24 to the Company's Annual Report on Form
10-K for the period ended December 26, 1999 is hereby
incorporated by reference).+
10.20 Severance Agreement between the Company and Timm M. Hurst
(Exhibit 10.25 to the Company's Annual Report on Form 10-K
for the period ended December 26, 1999 is hereby
incorporated by reference).+
10.21 Letter Agreement between the Company and Samuel A.
Penninger, Jr. (Exhibit 10.26 to the Company's Quarterly
Report on Form 10-Q for the period ending March 26, 2000 is
hereby incorporated by reference).+
10.22 Amended and Restated Compensation Plan for Non-Employee
Directors (Exhibit 10.26 to the Company's Quarterly Report
on Form 10-Q for the period ended June 25, 2000 is hereby
incorporated by reference).+
10.23 Employment Agreement between the Company and David A. Dodd
(Exhibit 10.27 to the Company's Quarterly Report on Form
10-Q for the period ended June 25, 2000 is hereby
incorporated by reference).+
10.24 Employment Agreement between the Company and Jeffrey D.
Linton (Exhibit 10.28 to the Company's Quarterly Report on
Form 10-Q for the period ended September 24, 2000 is hereby
incorporated by reference).+
31
33
10.25 Lease Agreement dated October 6, 2000 between the Company
and Spalding Triangle, L.L.C. (Exhibit 10.29 to the
Company's Quarterly Report on Form 10-Q for the period ended
September 24, 2000 is hereby incorporated by reference).
10.26 Employment Agreement between the Company and Sue
Sutton-Jones.+*
21 Subsidiaries of the Company *
23.1 Consent of Arthur Andersen LLP.*
- ---------------
* Filed herewith
+ Compensatory Plan or Arrangement
32
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Serologicals Corporation has duly caused this annual
report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized on March 30, 2001.
SEROLOGICALS CORPORATION
(Registrant)
By: /s/ DAVID A. DODD
------------------------------------
David A. Dodd
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Serologicals
Corporation and in the capacities indicated on March 30, 2001:
SIGNATURE TITLE
--------- -----
/s/ DAVID A. DODD President (Chief Executive Officer)
- ---------------------------------------------------
David A. Dodd
/s/ PETER J. PIZZO, III Vice President/Chief Financial Officer (Principal
- --------------------------------------------------- Financial and Accounting Officer)
Peter J. Pizzo, III
/s/ DESMOND H. O'CONNELL Chairman of the Board of Directors
- ---------------------------------------------------
Desmond H. O'Connell
/s/ GEORGE M. SHAW, MD., PH.D. Director
- ---------------------------------------------------
George M. Shaw, MD., Ph.D.
/s/ LAWRENCE E. TILTON Director
- ---------------------------------------------------
Lawrence E. Tilton
/s/ MATTHEW C. WEISMAN Director
- ---------------------------------------------------
Matthew C. Weisman
/s/ SAMUEL A. PENNINGER, JR. Director
- ---------------------------------------------------
Samuel A. Penninger, Jr.
/s/ WADE FETZER, III Director
- ---------------------------------------------------
Wade Fetzer, III
33
35
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets -- December 31, 2000 and
December 26, 1999......................................... F-3
Consolidated Statements of Income (Loss) -- For the years
ended December 31, 2000, December 26, 1999 and December
27, 1998.................................................. F-4
Consolidated Statements of Stockholders' Equity -- For the
years ended December 31, 2000, December 26, 1999 and
December 27, 1998......................................... F-5
Consolidated Statements of Cash Flows -- For the years ended
December 31, 2000, December 26, 1999 and December 27,
1998...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Serologicals Corporation:
We have audited the accompanying consolidated balance sheets of
SEROLOGICALS CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of
December 31, 2000 and December 26, 1999 and the related consolidated statements
of income (loss), stockholders' equity and cash flows for each of the three
fiscal years in the period ended December 31, 2000. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Serologicals Corporation and
subsidiaries as of December 31, 2000 and December 26, 1999 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule included in Item 14 of the
Company's Form 10-K is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 28, 2001
F-2
37
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND DECEMBER 26, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2000 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 22,492 $ 3,294
Trade accounts receivable, less allowance for doubtful
accounts of $750 at December 31, 2000 and $1,034 at
December 26, 1999...................................... 13,127 29,559
Inventories............................................... 21,186 33,361
Income tax receivable..................................... 3,937 3,354
Other current assets...................................... 7,172 3,974
-------- --------
Total current assets................................... 67,914 73,542
-------- --------
PROPERTY AND EQUIPMENT, NET................................. 32,952 32,437
-------- --------
OTHER ASSETS:
Goodwill, net............................................. 28,628 39,987
Other, net................................................ 2,001 10,932
-------- --------
Total other assets..................................... 30,629 50,919
-------- --------
$131,495 $156,898
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and capital lease
obligations............................................ $ 13 $ 2,567
Accounts payable.......................................... 3,280 5,508
Accrued liabilities....................................... 7,798 13,910
Deferred revenue.......................................... 33 1,385
-------- --------
Total current liabilities.............................. 11,124 23,370
-------- --------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, LESS CURRENT
MATURITIES................................................ -- 30,000
-------- --------
DEFERRED INCOME TAXES....................................... 1,336 --
-------- --------
OTHER LIABILITIES........................................... 328 304
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued........................... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized, 26,088,795 and 24,912,823 shares issued and
outstanding at December 31, 2000 and December 26, 1999,
respectively........................................... 261 249
Additional paid-in capital................................ 97,420 91,383
Retained earnings......................................... 41,170 28,253
Accumulated other comprehensive (loss) income............. (144) 362
Less: common stock held in treasury (3,268,000 and
2,611,155 shares at December 31, 2000 and December 26,
1999, respectively).................................... (20,000) (17,023)
-------- --------
Total stockholders' equity............................. 118,707 103,224
-------- --------
$131,495 $156,898
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
38
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2000 1999 1998
----------- ----------- -----------
NET SALES............................................... $ 147,760 $ 129,744 $ 123,072
COSTS AND EXPENSES:
Cost of sales......................................... 101,113 94,157 81,242
Selling, general and administrative expenses.......... 22,487 18,041 14,948
Other expense, net.................................... 2,376 4,513 2,696
Interest expense (income), net........................ 1,233 543 (846)
Special (credits) charges, net........................ (414) 33,969 --
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES....................... 20,965 (21,479) 25,032
PROVISION (BENEFIT) FOR INCOME TAXES.................... 8,048 (6,017) 8,687
----------- ----------- -----------
NET INCOME (LOSS)....................................... $ 12,917 $ (15,462) $ 16,345
=========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic................................................. $ 0.57 $ (0.65) $ 0.68
=========== =========== ===========
Diluted............................................... $ 0.56 $ (0.65) $ 0.63
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................................. 22,814,855 23,617,489 24,001,326
=========== =========== ===========
Diluted............................................... 23,283,393 23,617,489 25,941,764
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-4
39
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY STOCK
------------------- PAID-IN RETAINED COMPREHENSIVE ---------------------
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) SHARES AMOUNT TOTAL
---------- ------ ---------- -------- ------------- ---------- -------- --------
BALANCE, DECEMBER 28, 1997....... 23,546,623 $235 $75,458 $ 27,370 $ 222 -- $ -- $103,285
Comprehensive income:
Net income....................... -- -- -- 16,345 -- -- -- 16,345
Foreign currency translation
adjustments, net of tax of
$9............................. -- -- -- -- (16) -- -- (16)
Unrealized losses on investments,
net of tax of $74.............. -- -- -- -- (138) -- -- (138)
---------- ---- ------- -------- ----- ---------- -------- --------
Comprehensive income (loss).... -- -- -- 16,345 (154) -- -- 16,191
---------- ---- ------- -------- ----- ---------- -------- --------
Conversion of promissory note.... 106,608 1 1,332 -- -- -- -- 1,333
Exercise of common stock
warrants....................... 50,000 1 76 -- -- -- -- 77
Exercise of stock options........ 643,528 6 5,454 -- -- -- -- 5,460
Tax effect of stock option
exercise....................... -- -- 2,530 -- -- -- -- 2,530
Shares issued through employee
stock purchase plan............ 8,563 -- 133 -- -- -- -- 133
---------- ---- ------- -------- ----- ---------- -------- --------
BALANCE, DECEMBER 27, 1998....... 24,355,322 243 84,983 43,715 68 -- -- 129,009
Comprehensive income (loss):
Net loss......................... -- -- -- (15,462) -- -- -- (15,462)
Foreign currency translation
adjustments, net of tax of
$84............................ -- -- -- -- 156 -- -- 156
Unrealized gains on investments,
net of tax of $197............. -- -- -- -- 366 -- -- 366
Less: reclassification adjustment
for gains included in net loss,
net of tax of $119............. -- -- -- -- (228) -- -- (228)
---------- ---- ------- -------- ----- ---------- -------- --------
Comprehensive (loss) income.... -- -- -- (15,462) 294 -- -- (15,168)
---------- ---- ------- -------- ----- ---------- -------- --------
Conversion of promissory note.... 213,219 2 2,665 -- -- -- -- 2,667
Exercise of stock options........ 307,044 3 1,586 -- -- -- -- 1,589
Shares issued through employee
stock purchase plan............ 37,238 1 237 -- -- -- -- 238
Tax effect of stock option
exercise....................... -- -- 1,912 -- -- -- -- 1,912
Repurchase of common stock....... -- -- -- -- -- (2,611,155) (17,023) (17,023)
---------- ---- ------- -------- ----- ---------- -------- --------
BALANCE, DECEMBER 26, 1999....... 24,912,823 249 91,383 28,253 362 (2,611,155) (17,023) 103,224
Comprehensive income (loss):
Net income....................... -- -- -- 12,917 -- -- -- 12,917
Foreign currency translation
adjustments, net of tax of
$278........................... -- -- -- -- (506) -- -- (506)
---------- ---- ------- -------- ----- ---------- -------- --------
Comprehensive income (loss).... -- -- -- 12,917 (506) -- -- 12,411
---------- ---- ------- -------- ----- ---------- -------- --------
Exercise of stock options........ 1,130,907 11 3,232 -- -- -- -- 3,243
Shares issued through employee
stock purchase plan............ 45,065 1 188 -- -- -- -- 189
Tax effect of stock option
exercise....................... -- -- 2,617 -- -- -- -- 2,617
Repurchase of common stock....... -- -- -- -- -- (656,845) (2,977) (2,977)
---------- ---- ------- -------- ----- ---------- -------- --------
BALANCE, DECEMBER 31, 2000....... 26,088,795 $261 $97,420 $ 41,170 $(144) (3,268,000) $(20,000) $118,707
========== ==== ======= ======== ===== ========== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-5
40
SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
(IN THOUSANDS)
2000 1999 1998
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 12,917 $(15,462) $ 16,345
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 7,472 8,637 5,627
Deferred income tax provision (benefit)................ 6,535 (8,032) 307
Non-cash special (credits) charges, net................ (1,386) 33,969 --
Changes in operating assets and liabilities, net of
acquisitions and dispositions of businesses
Trade accounts receivable, net......................... 16,432 (6,615) (11,503)
Inventories............................................ 11,045 (16,104) (3,073)
Income tax receivable.................................. (583) (3,354) --
Other assets........................................... (3,758) 1,756 132
Accounts payable....................................... (2,123) 990 677
Accrued liabilities.................................... (2,818) (738) 2,008
Deferred revenue....................................... (1,352) 193 (724)
Other, net............................................. 1,830 -- --
-------- -------- --------
Total adjustments................................. 31,294 10,702 (6,549)
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... 44,211 (4,760) 9,796
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (9,560) (16,291) (5,169)
Purchases of businesses, net of cash acquired............. (3,460) (28,736) (4,618)
Disposition of business, net of cash expenses paid........ 20,097 -- --
Other..................................................... -- 3,788 (2,370)
-------- -------- --------
Net cash provided by (used in) investing
activities...................................... 7,077 (41,239) (12,157)
-------- -------- --------
FINANCING ACTIVITIES:
Net (payments) borrowings on revolving line of credit..... (30,000) 30,000 --
Payments on long-term debt and capital lease
obligations............................................ (2,554) (50) (181)
Proceeds from stock plans and warrants.................... 3,432 1,827 5,670
Repurchase of common stock................................ (2,977) (17,023) --
Other..................................................... 9 (401) --
-------- -------- --------
Net cash (used in) provided by financing
activities...................................... (32,090) 14,353 5,489
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 19,198 (31,646) 3,128
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 3,294 34,940 31,812
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 22,492 $ 3,294 $ 34,940
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Accrued acquisition consideration......................... $ -- $ 1,520 $ --
Tax effect of stock option exercise....................... 2,617 1,912 2,530
Conversion of promissory note into common stock........... -- 2,667 1,333
The accompanying notes are an integral part of these consolidated statements.
F-6
41
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, DECEMBER 26, 1999 AND DECEMBER 27, 1998
1. ORGANIZATION AND BUSINESS OPERATIONS
Serologicals Corporation (a Delaware corporation) (together with its
subsidiaries, the "Company") is a worldwide provider of biological products to
life science companies. The Company's products are used in the further
development of diagnostic, vaccine and therapeutic products. The Company
provides value-added anti-body 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. Additionally,
the Company, through its protein fractionation facility in Kankakee, Illinois,
provides a variety of proteins used in the manufacturing of diagnostic reagents
and tissue culture media components for use as additives in biotech products.
On August 21, 2000, the Company completed the divestiture of its 47
non-specialty donor centers to Aventis Bio-Services, Inc. (together with its
affiliated companies, "Aventis"). The Company received net cash proceeds from
the sale of approximately $20.1 million, which included the purchase of certain
working capital assets. The proceeds are subject to adjustment based on the
final determination of the value of the assets purchased as of the sale date.
The Company retained working capital totaling approximately $12.6 million.
The Company operates a national network of 17 donor centers that specialize
in the collection of specialty antibodies. The Company also operates
laboratories in the United States and in Scotland, two U.S. Food and Drug
Administration ("FDA") licensed monoclonal antibody manufacturing facilities in
Scotland and a FDA-registered protein fractionation facility in Kankakee,
Illinois.
The industries in which the Company operates are subject to strict
regulation and licensing by the FDA and similar regulatory bodies in many of the
states and foreign countries where the Company or its customers conduct
business. Changes in existing federal, state or foreign laws or regulations
could have an adverse effect on the Company's business.
The industry in which the Therapeutic Products segment (Note 13) operates
is also characterized by sales to a relatively few major healthcare companies.
One of the Company's customers, Bayer Corporation ("Bayer"), accounted for
approximately 33% of the Company's net sales in 2000, and another, Aventis,
accounted for 15% of net sales for 2000 (Note 11). However, a substantial amount
of the sales to Bayer in 2000 were related to the non-specialty business that
the Company divested. Excluding sales from the non-specialty business, Bayer and
Aventis each accounted for approximately 19% of net sales.
Export sales from the United States represented approximately 24% of net
sales in 2000, and foreign sales originating in the United Kingdom accounted for
an additional 8% of net sales (Note 13). Concern over the safety of blood
products has led to movements in a number of countries, particularly those in
western Europe, to restrict the importation of blood and blood derivatives
collected outside the countries' borders or, in the case of certain European
countries, outside Europe. To date, these efforts have not led to any meaningful
restriction on the importation of blood and blood derivatives and have not
adversely affected the Company. However, there can be no assurance that the
impact of these or other efforts will not have a material adverse effect on the
Company or its operations.
The Company generates significant sales outside the United States and is
subject to risks generally associated with international operations. The
Company's Serologicals, Ltd. subsidiary, which accounted for approximately 10%
of the Company's net sales in 2000, generates certain net sales and incurs
expenses in foreign currencies. Accordingly, the Company's financial results
from international operations may be affected by fluctuations in currency
exchange rates.
F-7
42
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. The Company's
fiscal period end for financial reporting purposes is the last Sunday of each
period and the fiscal year ends on the Sunday closest to December 31. Fiscal
year 2000 included 53 weeks, while fiscal years 1999 and 1998 each included 52
weeks.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
Use of Estimates
The preparation of these consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis. Market for product inventories is net
realizable value and for supplies is replacement cost.
Inventories at December 31, 2000 and December 26, 1999 consisted of the
following (in thousands):
2000 1999
------- -------
Raw materials............................................... $ 2,085 $ 3,322
Work in process............................................. 2,926 2,430
Finished goods.............................................. 16,175 27,609
------- -------
$21,186 $33,361
======= =======
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives for financial reporting
purposes. For income tax purposes, the Company uses accelerated depreciation
methods. Depreciable lives for equipment, furniture and fixtures range from
three to ten years. Leasehold improvements are amortized over the shorter of the
lease term or the economic lives of the assets. Buildings and improvements are
depreciated over lives ranging from 20 to 32.5 years. Expenditures for
maintenance and repairs are charged to expense as incurred.
Software developed or acquired for internal use is accounted for in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
requires certain direct development costs associated with internal-use software
to be capitalized, including external direct costs of material and services and
payroll costs for employees devoting time to the software projects. Costs
incurred during the preliminary project stage, as well as for maintenance and
training are expensed as incurred. This standard currently applies to certain
costs related to the Company's donor center automation project. As of December
31, 2000, the Company has capitalized costs totaling approximately $2.3 million
related to this project, which is included in Construction in Progress.
F-8
43
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment at December 31, 2000 and December 26, 1999 consisted
of the following (in thousands):
2000 1999
-------- --------
Land, buildings and improvements............................ $ 10,284 $ 9,481
Leasehold improvements...................................... 4,849 8,132
Furniture, fixtures and equipment........................... 25,777 27,402
Construction in progress.................................... 6,283 1,369
-------- --------
Total property and equipment................................ 47,193 46,384
Accumulated depreciation and amortization................... (14,241) (13,947)
-------- --------
Property and equipment, net................................. $ 32,952 $ 32,437
======== ========
Construction in progress at December 31, 2000 relates primarily to
expenditures relating to the Company's donor center automation project and the
acquisition of a building to expand the Company's monoclonal manufacturing
facilities. Construction in progress at December 26, 1999 consisted primarily of
capital expenditures relating to an expansion of the Company's protein
fractionation facility, expenditures relating to its donor center automation
project and certain donor center renovations.
Consolidated depreciation expense was $4,727,000, $4,115,000 and $2,822,000
in 2000, 1999 and 1998, respectively.
Accrued Liabilities
Accrued liabilities at December 31, 2000 and December 26, 1999 consisted of
the following (in thousands):
2000 1999
------ -------
Accrued payroll, bonuses, severance and related benefits.... $2,738 $ 4,449
Accrued donor center automation project costs............... 1,196 1,369
Accrued insurance........................................... 642 678
Accrued product claim....................................... -- 2,015
Accrued acquisition consideration........................... -- 1,520
Other....................................................... 3,222 3,879
------ -------
$7,798 $13,910
====== =======
Revenue Recognition and Deferred Revenue
The Company's policy is to record revenue upon the shipment of its
products. On occasion, the Company receives advance payments from customers for
future delivery of specified products. The revenue related to these advance
payments is deferred until the specified products are shipped.
Cash Equivalents
For financial reporting purposes, the Company considers all investments
purchased with an original maturity of three months or less to be cash
equivalents.
Investments
The Company held certain investments in marketable securities as of
December 27, 1998 that were sold in fiscal 1999. The Company considered such
investments to be available-for-sale; therefore, the unrealized gain or loss on
such investments was reported as a component of accumulated other comprehensive
income within stockholders' equity.
F-9
44
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Operations
The financial statements of Serologicals Ltd. have been translated into
U.S. dollars in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation". Under SFAS No. 52, all balance
sheet accounts are translated at the exchange rate at year-end. Income statement
items are translated at the average exchange rate for the year. Translation
adjustments are not included in determining net income (loss) but are
accumulated and reported as a component of stockholders' equity and
comprehensive income (loss). Realized gains and losses, which result from
foreign currency transactions, are included in the accompanying consolidated
statements of income (loss).
Goodwill and Other Intangible Assets
Goodwill
The excess of cost over the fair market value of the net assets acquired
("goodwill") is being amortized on a straight-line basis over periods ranging
from 22 1/2 to 25 years. Prior to the divestiture of Seramed in 2000, the
Company amortized goodwill over periods ranging from 13 to 25 years. The
goodwill relates primarily to the acquisition of donor centers and the
acquisition of Serologicals Proteins (Note 4). In determining whether goodwill
is recoverable, the Company periodically reviews the carrying values assigned to
goodwill and other intangible assets based upon expectations of undiscounted
future cash flows from the use and eventual disposition of the underlying
assets. During 2000, goodwill decreased approximately $10.7 million due to the
sale of the Company's non-specialty antibody business.
During 1999 and pursuant to the provisions of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", the Company performed a recoverability review of its long-lived assets
relating to its non-specialty antibody business. While the review indicated that
no impairment existed, the Company determined that the useful lives used for
amortizing goodwill and other acquired intangible assets relating to its
non-specialty antibody business were no longer applicable. As a result, the
Company reduced the useful lives for amortizing the related goodwill and FDA
licenses from 25 years to 13 years. The impact of this change was an increase in
amortization expense for the year ended December 26, 1999 of $716,000.
Based on new information regarding the expected future cash flows of the
non-specialty antibody business, during the fourth quarter of 1999 the Company
reevaluated the recoverability review it had performed in the third quarter. In
connection with this reevaluation, the Company recorded a $24.9 million
impairment loss to write down long-lived assets used in its non-specialty
antibody business to their estimated fair value (Note 3), as the carrying value
of such assets exceeded their expected undiscounted future cash flows.
Debt Issuance Costs
In connection with the amendment of its revolving credit facility in 1999
(Note 7), the Company incurred certain costs. Such amounts were capitalized and
are being amortized to interest expense over three years, the term of the
related facility.
FDA Licenses
In connection with the acquisitions of donor centers (Note 4), the Company
acquired the related licenses of the FDA-approved donor centers. The estimated
fair values of the FDA licenses are capitalized and amortized on a straight-line
basis over a period of 25 years. Prior to the divestiture of Seramed in 2000,
the Company amortized FDA licenses over periods ranging from 13 to 25 years.
During 1999, the Company reduced the useful lives used to compute amortization
expense for the FDA licenses of its non-specialty antibody business from 25
years to 13 years. The impact of this change was an increase in amortization
expense for the year ended December 26, 1999 of $68,000.
F-10
45
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Non-Compete Agreements
In connection with certain of its acquisitions (Note 4), the Company
entered into non-compete agreements with the sellers. Such agreements are
recorded at their estimated fair market value and are being amortized on a
straight-line basis over the terms of the respective agreements, which range
from three to five years.
The consolidated amortization expense of all intangible assets was
$2,745,000, $4,522,000 and $2,805,000 in 2000, 1999 and 1998, respectively.
The following table sets forth the gross balance and accumulated
amortization of all intangible assets as of December 31, 2000 and December 26,
1999 (in thousands):
DECEMBER 31, 2000
--------------------------------
ACCUMULATED }
GROSS AMORTIZATION NET
------- ------------ -------
Goodwill.................................................... $32,456 $(3,828) $28,628
FDA Licenses................................................ 883 (163) 720
Non-Compete Agreements...................................... 375 (288) 87
Debt Issuance Costs......................................... 705 (291) 414
DECEMBER 26, 1999
--------------------------------
ACCUMULATED }
GROSS AMORTIZATION NET
------- ------------ -------
Goodwill.................................................... $51,642 $(11,655) $39,987
FDA Licenses................................................ 5,081 (802) 4,279
Non-Compete Agreements...................................... 1,697 (1,367) 330
Debt Issuance Costs......................................... 695 (57) 638
Earnings (Loss) Per Share
Basic earnings (loss) per share are calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. The calculation of the Company's diluted earnings (loss) per share is
similar to basic earnings (loss) 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. As the Company
incurred a loss in 1999, diluted shares outstanding excludes all potentially
dilutive securities, as their inclusion would have been anti-dilutive.
All share and per share data included herein have been adjusted to reflect
the three-for-two stock split effected in August of 1998 (Note 5).
The following table sets forth the calculation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
2000 1999 1998
------- -------- -------
Basic earnings (loss) per share:
Net income (loss)...................................... $12,917 $(15,462) $16,345
Weighted average shares of common stock outstanding.... 22,815 23,617 24,001
------- -------- -------
Net income (loss) per share......................... $ 0.57 $ (0.65) $ 0.68
======= ======== =======
F-11
46
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 1999 1998
------- -------- -------
Diluted earnings (loss) per share:
Net income (loss)...................................... $12,917 $(15,462) $16,345
Plus: interest expense on convertible indebtedness, net
of tax.............................................. 50 -- 93
------- -------- -------
Net income (loss), as adjusted...................... $12,967 $(15,462) $16,438
======= ======== =======
Weighted average shares of common stock outstanding...... 22,815 23,617 24,001
Effect of dilutive securities:
Stock options and warrants............................. 324 -- 1,604
Convertible indebtedness............................... 138 -- 337
Common stock awards.................................... 6 -- --
------- -------- -------
Weighted average shares of common stock outstanding,
including dilutive instruments......................... 23,283 23,617 25,942
------- -------- -------
Net income (loss) per share......................... $ 0.56 $ (0.65) $ 0.63
======= ======== =======
The diluted earnings per share calculation for 2000 excludes the effect of
options to purchase approximately 1.8 million shares as the option price
exceeded the average market price for the Company's stock during the period and
thus their effect was anti-dilutive. The diluted loss per share calculation for
1999 excludes the potentially dilutive effect of options and warrants to
purchase approximately 4.2 million shares of the Company's common stock, and
approximately 182,000 shares issuable upon the conversion of certain
indebtedness, as the Company incurred a loss and their inclusion would have been
anti-dilutive. The diluted earnings per share calculation for 1998 excludes the
effect of 562,500 shares issuable upon the conversion of certain indebtedness
and 26,250 shares issuable upon the exercise of stock options, respectively, as
their inclusion would have been anti-dilutive.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). The Company applies SFAS No. 123, "Accounting for
Stock-Based Compensation" for disclosures of its stock-based compensation plans.
SFAS No. 123 requires that companies that do not choose to account for
stock-based compensation as prescribed by the statement shall disclose the pro
forma effects on earnings and earnings per share as if SFAS No. 123 had been
adopted as of January 1, 1995. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS No. 123 (Note 6).
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 requires derivative instruments to be recorded on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in values of derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting, as defined. In
June 1999, the FASB issued SFAS No. 137, which defers the effective date of SFAS
No. 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued SFAS No. 138 which modifies certain sections of SFAS No. 133. The Company
has completed its evaluation of the impact of SFAS No. 133, and does not believe
the adoption of SFAS No. 133 on January 1, 2001 will have a material effect on
the financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements
("SAB 101")." This bulletin summarized certain of
F-12
47
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the SEC's views regarding the application of generally accepted accounting
principles to revenue recognition in financial statements. SAB 101 did not have
a material impact on the Company's financial statements.
3. DISPOSITION OF BUSINESS AND SPECIAL (CREDITS) CHARGES, NET
Seramed Divestiture
On August 21, 2000, the Company completed the sale of substantially all of
the long-term assets of its Seramed, Inc. subsidiary and its subsidiaries
(collectively, "Seramed") to Aventis. The Company received net cash proceeds
from the sale totaling approximately $20.1 million, and recognized a gain on the
disposal of approximately $219,000. The gross proceeds included $1.3 million
related to the purchase of certain working capital items and other settlements
resulting from the sale, and are subject to adjustment upon completion of a
final net asset settlement with Aventis. The Company retained working capital
totaling approximately $12.6 million. During 2000, upon reaching a definitive
agreement to sell the Seramed assets to Aventis, these assets were considered to
be "held for sale" in accordance with SFAS No. 121. Accordingly, in 2000 a
pre-tax asset impairment charge was recorded totaling $276,000 to write down the
assets to their fair value less costs to sell. During 1999, the Company
performed a review of the recoverability of its long-lived assets relating to
Seramed in accordance with SFAS No. 121. As a result of this review, along with
the determination of an estimated fair market value as a result of a competitive
bidding process for the possible sale of the business, an expense of $24.9
million was recorded in 1999 to write the assets down to their estimated fair
market value. These assets were previously reported in the Therapeutic Products
segment.
Additional costs related to the divestiture of Seramed were recorded during
2000 in accordance with Emerging Issues Task Force Consensus 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)". These charges
totaled $466,000 and consisted of $440,000 of lease termination costs and
$26,000 of employee termination benefits related to two employees, which have
been paid in full as of December 31, 2000.
During 1999, the Company entered into agreements with certain key employees
that provided for termination benefits to be paid to the employees in the event
that Seramed was sold, they were employed by the Company as of the closing of
the sale and met certain other requirements as outlined in the agreements. The
agreements covered sixty-five employees who were terminated from the Company
upon the sale of Seramed. In accordance with Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits," the
Company recorded a pre-tax charge of $764,000 in 2000 representing the amount of
employee termination benefits payable under these agreements. All of the
benefits payable under these arrangements were paid during 2000. Also during
2000, the Company recorded additional divestiture-related charges totaling
approximately $98,000 for other miscellaneous items.
Separation Benefits for Former Chief Executive Officer and Other Individuals
During 1999, the Company's chief executive officer resigned from that
position and as a director of the Company. The Company entered into separation
arrangements with this individual, its chairman of the board and approximately
12 other corporate-based employees. The Company recorded an expense of
approximately $1.6 million to cover the costs of the separation benefits payable
to those individuals. Additionally, in 2000, the Company recorded an expense of
$151,000 to cover the separation benefits payable to an additional employee. As
of December 31, 2000, there were five individuals who are continuing to receive
payments under these agreements.
Product Liability Claim
During 1999, the Company was notified by one of its customers that certain
of the Company's shipments of anti-D antibodies in the prior year had included
several units of plasma that did not meet this customer's exact product
specifications. The customer indicated to the Company that the units had been
partially manufactured with other units of plasma and thus had affected a
substantial number of other units. In 1999,
F-13
48
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company agreed to reimburse this customer for its cost of the product and
recorded a liability and related expense in the amount of approximately $2.0
million. The liability with the customer was settled during fiscal year 2000.
The Company filed a claim for reimbursement from its product and professional
liability insurance carrier, and was notified in the fourth quarter of 2000 that
the claim had been approved for settlement. As a result of this notification,
the Company recorded a receivable and the related benefit totaling $1.95
million. As of December 31, 2000, the Company had received payment of
approximately $600,000 and reported the balance totaling approximately $1.4
million in the line item "Other current assets" in the Consolidated Balance
Sheets. The Company received the balance of the settlement during the first
quarter of 2001.
Divestiture of Clinical Trial Site
In 1999, the Company recorded an expense of $1.2 million to write down its
clinical trial site to its estimated fair market value in accordance with "held
for sale" treatment under SFAS No. 121. In December 1999, the Company divested
substantially all of the assets of this site. In connection therewith, the
Company recorded an additional loss on the transaction in the amount of
$117,000. These assets were previously reported in the Corporate/Other segment.
Donor Center Software System Cost Write-off
During 1999, the Company terminated a contract with a third party software
vendor that had been developing a custom donor center operating system, in favor
of an alternative vendor. As a result of this decision, the Company wrote off
approximately $4.2 million of previously capitalized costs. These assets were
included in the Therapeutic Products segment.
The following table summarizes the activity in the accrual for termination
benefits and other costs for the periods ended December 31, 2000 and December
26, 1999, respectively (in thousands):
ADDITIONS TO
RESERVE
BALANCE, CHARGED TO CASH BALANCE,
DESCRIPTION 12/26/99 EXPENSE PAYMENTS OTHER 12/31/00
- ----------- -------- ------------ -------- ----- --------
Employee termination costs........................ $1,377 $941 $(1,813) $(35) $470
Lease termination costs........................... $ -- $440 $ (440) $ -- $ --
ADDITIONS TO
RESERVE
BALANCE, CHARGED TO CASH BALANCE,
DESCRIPTION 12/27/98 EXPENSE PAYMENTS OTHER 12/26/99
- ----------- -------- ------------ -------- ----- --------
Employee termination costs........................ $ -- $1,564 $ (187) $ -- $1,377
The remaining accrual of $470,000 at December 31, 2000 is included in
"Accrued liabilities" in the Consolidated Balance Sheets. The remaining
liability will be paid during 2001.
F-14
49
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the results of operations for Seramed as
included in the Consolidated Statements of Income (Loss) for the periods
indicated (in thousands):
TWELVE MONTHS ENDED
-------------------------------------
DECEMBER 31, DECEMBER 26,
2000 1999
----------------- -----------------
Net sales............................................ $54,974 $ 61,604
Gross profit......................................... 543 2,321
Selling, general and administrative expenses(1)...... 287 202
Other expense, net................................... 848 2,945
Special charges, net................................. 1,285 24,873
------- --------
Loss before income taxes............................. $(1,877) $(25,699)
======= ========
- ---------------
(1) Does not include allocation of corporate overhead.
The following table summarizes the results of the Company on a pro forma
basis for the year ended December 31, 2000 and December 26, 1999, respectively,
as if the sale of Seramed and receipt of proceeds occurred on December 28, 1998
(the first day of the Company's 1999 fiscal year). These results do not purport
to represent what the results of operations for the Company would actually have
been if the sale had occurred on the date referred to above or to be indicative
of the future results of operations of the Company.
TWELVE MONTHS ENDED
-------------------------------------
DECEMBER 31, DECEMBER 26,
2000 1999
----------------- -----------------
UNAUDITED
(IN THOUSANDS)
Net sales............................................ $92,786 $68,140
Gross profit......................................... 46,104 33,266
Selling, general and administrative expenses......... 22,200 17,839
Interest expense, net................................ 34 57
Other expense, net................................... 1,528 1,599
Special (credits) charges, net....................... (1,699) 9,096
------- -------
Income before income taxes........................... 24,041 4,675
Provision for income taxes........................... 8,655 1,529
------- -------
Net income........................................... $15,386 $ 3,146
======= =======
Net income per common share:
Basic.............................................. $ 0.67 $ 0.13
Diluted............................................ $ 0.66 $ 0.13
4. ACQUISITIONS
During 1998, the Company purchased the assets of four non-specialty donor
centers and the assets of a clinical trial site in two separate transactions for
aggregate consideration of approximately $5.5 million (net of cash acquired).
The acquisitions were each accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Accounting for Business
Combinations" ("APB No. 16"), and accordingly, the purchase price was allocated
to the net assets acquired based on the fair values as of the acquisition date.
The excess of the cost over the estimated fair value of the net assets acquired
was allocated to goodwill and certain other identifiable intangible assets.
During 1999, the Company divested the clinical trial site, and in 2000 the
Company divested the donor centers in connection with the Seramed divestiture
(Note 3).
On December 29, 1998, the Company purchased substantially all of the assets
of the Pentex Blood Proteins business of Bayer Corporation ("Proteins"). The
purchase price was $29 million, before transaction
F-15
50
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs and subject to adjustment based on the closing net assets, as defined, of
the acquired business as of the closing date. The Company paid approximately
$3.5 million during 2000 in settlement of the non-disputed elements of the post
closing adjustment, of which approximately $1.5 million had been previously
accrued, and the balance of approximately $2.0 million which resulted in an
increase to goodwill. The acquisition of Proteins was accounted for as a
purchase in accordance with APB No. 16 and, accordingly, the purchase price was
allocated to the net assets acquired based on the fair values as of the
acquisition date. The excess of the cost over the estimated fair value of the
net assets acquired was allocated to goodwill and certain other identifiable
intangible assets, which totaled approximately $20.8 million and is being
amortized over a weighted-average life of 22 1/2 years. Proteins is engaged in
the research, manufacturing, marketing and sale of a full line of high quality
purified blood protein products primarily to customers in the diagnostics,
biopharmaceutical and biotechnology industries in the United States and
approximately 25 other countries worldwide. The Company funded the acquisition
with cash on hand.
The following unaudited data summarize the pro forma results of operations
for the year ended December 27, 1998 as if the acquisition of Proteins had
occurred on the first fiscal day of such period. Pro forma results of operations
for the year ended December 26, 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 acquisition of Pentex 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................................................... $135,862
Net income.................................................. $ 17,051
Net income per common share:
Basic..................................................... $ 0.71
========
Diluted................................................... $ 0.66
========
5. STOCKHOLDERS' EQUITY
Stockholder Rights Plan
On July 26, 1999, the Board of Directors adopted a stockholder rights plan
(the "Rights Plan"), pursuant to which one preferred stock purchase right (a
"Right") was distributed for each outstanding share of common stock held of
record on August 25, 1999. Each Right represents a right to purchase, under
certain circumstances, one one-thousandth ( 1/1000) of a share of a new series
of preferred stock at an exercise price of $45.00. If any person or group
acquires 15% or more of the common stock of the Company (except in transactions
approved by the Board of Directors of the Company in advance), each Right will
then entitle its holder, other than the person or group owning 15% or such other
persons or groups, to acquire, at the exercise price, the Company's common stock
with a market value equal to twice the exercise price. The Company may elect,
however, to exchange a newly issued share of the Company's common stock for each
Right. If any person or group owns 15% or more of the Company's common stock,
and the Company is acquired in a merger or other business combination, or if 50%
of its earning power or assets are sold, each Right will entitle its holder,
other than the person or group owning 15%, to acquire, at the exercise price,
shares of the acquiring company's common stock with a market value of twice the
exercise price.
Persons owning 15% or more of Company's common stock on the date the plan
was adopted were exempt, so long as they do not acquire an additional number of
shares greater than 2% of the outstanding shares, other than in a transaction
approved by the Board of Directors of the Company in advance. The Rights expire
on August 2, 2009.
F-16
51
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Split
In July 1998, the Company's Board of Directors approved a 3-for-2 stock
split effected in the form of a stock dividend, whereby each shareholder of
record as of July 31, 1998 received on August 14, 1998 one-half additional share
of common stock for each share owned as of the record date.
All share and per share amounts herein have been restated to reflect this
stock split. Additionally, common stock and additional paid-in capital amounts
have been restated to reflect the issuance of the additional shares.
Common Stock Warrant
As of December 31, 2000, warrants to purchase 109,753 shares of the
Company's common stock at an exercise price of $1.53 per share were outstanding.
During the first quarter of 2001, the remaining outstanding warrants were
exercised.
Capital Stock
Under the terms of its amended and restated articles of incorporation, the
Company has authorized 50,000,000 shares of common stock and 1,000,000 shares of
preferred stock that may contain such preferences and rights as determined by
the Company's Board of Directors.
Common Shares Reserved for Issuance
Shares of common stock reserved for issuance at December 31, 2000 and
December 26, 1999 consisted of the following:
2000 1999
--------- ---------
Various stock option agreements............................. 4,493,183 5,697,365
Convertible notes........................................... -- 182,403
Employee stock purchase plans............................... 462,500 507,566
Warrants.................................................... 109,753 109,753
--------- ---------
5,065,436 6,497,087
========= =========
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 the Company's capital resources. During
2000 the repurchase program was completed as the Company repurchased
approximately 657,000 shares for consideration of approximately $3.0 million.
The Company repurchased a total of 3,268,000 shares under the repurchase
program.
6. STOCK COMPENSATION PLANS
Second Amended and Restated 1994 Omnibus Incentive Plan, as Amended
The Company's Second Amended and Restated 1994 Omnibus Incentive Plan, as
Amended (the "Omnibus Plan") provides for the issuance of up to 4,875,000 stock
options to key employees and directors. The exercise price of the options is the
fair market value of the common stock on the date of grant. Options granted
under the Omnibus Plan can have varying terms as determined by the Board of
Directors. Options granted through 2000 under the Omnibus Plan generally vest
ratably over three to four years or in full after three years and have terms of
six to ten years. Certain option grants have been eligible for accelerated
vesting upon the Company's achievement of certain predetermined performance
objectives that are approved by the Compensation Committee of the Company's
Board of Directors. Options held by terminated employees allow for exercise
periods ranging from 3 to 24 months following termination. As of December 31,
2000, options to
F-17
52
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase 2,660,470 shares were outstanding under the Omnibus Plan, 1,580,893 of
which were exercisable. As of December 31, 2000, the Company had 936,588 options
available for grant.
Amended and Restated 1995 Non-Employee Director Stock Option Plan, as Amended
The Company's Amended and Restated 1995 Non-Employee Directors' Stock
Option Plan, as Amended (the "Director Plan") provides for the issuance of up to
810,000 stock options to non-employee directors. Pursuant to the Director Plan,
each person who became a non-employee director of the Company prior to May 2000
was automatically granted an option to purchase 36,000 shares of the Company's
common stock on the date of adoption or on the day after such person's first
election to the Board of Directors. The exercise price of the options is the
fair market value of the common stock on the date of grant, and the options vest
over three years. During 2000, the Company amended the Director Plan, pursuant
to which each non-employee director is entitled to receive an automatic grant of
options annually to purchase 10,000 shares (15,000 shares for a non-executive
Chairman of the Board) on the day after the original lump-sum option becomes
vested, pro-rated to the first anniversary of the preceding Annual Meeting date.
Non-employee directors who have not fully vested in the initial 36,000 share
grant are not eligible for the automatic grant. Options granted under the
amended plan subsequent to May 2000 vest over a one-year period. Options granted
between 1996 and May 2000 under the Director Plan typically vest over a
four-year period, while options granted prior to 1996 were fully vested upon
issuance. As of December 31, 2000, options to purchase 325,500 shares were
outstanding under the Director Plan, 249,750 of which were exercisable. As of
December 31, 2000, the Company had 394,125 options available for grant under the
Director Plan.
Employment Stock Options
During 1997, the Company entered into employment agreements with four
individuals. As an integral part of these agreements, the individuals were
granted options to purchase an aggregate of 613,125 shares of the Company's
common stock. The options were each issued with an exercise price equal to the
fair market value of the Company's common stock on the date of grant. Each of
the options has a term of ten years, vests ratably over a four-year period and
contains other terms and conditions similar to options issued under the Omnibus
Plan. As of December 31, 2000, options to purchase 176,500 shares were
outstanding, 154,000 of which were exercisable.
Stock Option Activity
The following table summarizes the activity for all stock options
outstanding:
2000 1999 1998
---------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- --------- --------- --------- --------- ---------
Outstanding at beginning of
year........................... 4,108,095 $10.71 3,481,564 $ 8.65 4,069,229 $ 8.31
Granted.......................... 825,850 5.52 1,273,905 17.89 100,500 19.28
Exercised........................ (1,130,907) 2.87 (307,044) 6.87 (643,528) 7.97
Forfeited........................ (640,568) 15.43 (340,330) 20.06 (44,637) 11.07
---------- --------- ---------
Outstanding at end of year....... 3,162,470 11.20 4,108,095 10.71 3,481,564 8.65
========== ========= =========
Options exercisable at end of
year........................... 1,984,643 $11.48 2,492,421 $ 7.46 2,457,866 $ 6.88
========== ========= =========
F-18
53
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about all stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE -----------------------
REMAINING WEIGHTED- WEIGHTED-
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
RANGE OF AT LIFE EXERCISE AT EXERCISE
EXERCISE PRICES 12/31/2000 (YEARS) PRICE 12/31/2000 PRICE
- --------------- ----------- ----------- --------- ----------- ---------
$ 1.52 - $ 3.00 63,693 2.8 $ 1.82 63,693 $ 1.82
$ 3.01 - $ 6.00 1,092,100 4.8 5.23 324,648 5.23
$ 6.01 - $ 9.00 505,791 2.6 7.45 397,291 7.63
$ 9.01 - $12.00 141,000 5.4 11.66 116,250 11.66
$12.01 - $15.00 613,630 1.3 13.18 613,630 13.18
$15.01 - $18.00 406,856 3.3 15.60 369,506 15.52
$18.01 - $30.00 339,400 4.3 28.71 99,625 27.68
--------- ---------
3,162,470 3.5 $11.20 1,984,643 $11.48
========= =========
Employee Stock Purchase Plan
Pursuant to the terms of the Company's 1996 Employee Stock Purchase Plan
(the "Purchase Plan"), eligible employees are able to purchase up to 562,500
shares of the Company's common stock through a payroll deduction program.
Employees may have up to 25% of their compensation withheld to purchase shares
at a price equal to 85% of the lower of the closing price on the first or last
day of each successive three month purchase period. As of December 31, 2000,
approximately 100,000 shares had been acquired pursuant to the Purchase Plan.
Accounting for Stock Plans
The Company uses the intrinsic value-based method to account for its stock
plans, as provided by APB No. 25. Accordingly, no compensation expense has been
recognized for grants of stock options as all options were issued at their fair
market value on the date of the respective grants, or in the case of options
granted prior to the Company's initial public offering, their estimated fair
market value. Had compensation expense for the Company's stock-based
compensation plans been determined in accordance with the provisions of SFAS No.
123, the Company's net income (loss) and earnings (loss) per share would have
been in the pro forma amounts indicated below (in thousands, except per share
amounts):
2000 1999 1998
------- -------- -------
Net income (loss)
As reported............................................ $12,917 $(15,462) $16,345
Pro forma.............................................. 11,772 (18,776) 13,740
Net income (loss) per share -- basic
As reported............................................ $ 0.57 $ (0.65) $ 0.68
Pro forma.............................................. 0.52 (0.79) 0.57
Net income (loss) per share -- diluted
As reported............................................ $ 0.56 $ (0.65) $ 0.63
Pro forma.............................................. 0.52 (0.79) 0.54
The pro forma amounts reflected above are not representative of the effects
on reported net income in future years as SFAS No. 123 does not apply to grants
made prior to January 1, 1995 and additional awards are generally made each
year.
F-19
54
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under SFAS No. 123, the fair value of stock-based awards is calculated
through the use of option-pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which differ significantly from the Company's
stock option grants. These models also require subjective assumptions, including
future stock price volatility and expected lives of each option grant. The fair
value for each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
2000 1999 1998
---- ---- ----
Expected life (years)....................................... 4.6 4.1 4.6
Dividend yield.............................................. 0% 0% 0%
Expected stock price volatility............................. 85% 85% 65%
Risk-free interest rate..................................... 6.65% 5.29% 5.45%
Using these assumptions, the weighted average fair value of all options
granted in 2000, 1999 and 1998 was $3.81, $11.52 and $11.02 respectively.
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at December 31, 2000 and
December 26, 1999 consisted of the following (in thousands):
2000 1999
---- -------
Revolving credit facility................................... $-- $30,000
$2.55 million convertible subordinated note payable;
interest payable quarterly at 4.0%; maturing on September
23, 2000.................................................. -- 2,550
Capital lease obligations at varying interest rates and
terms, maturing in 2001................................... 13 17
--- -------
13 32,567
Less current maturities..................................... 13 2,567
--- -------
$-- $30,000
=== =======
The Company has a revolving credit facility with a syndicate of commercial
banks (the "Revolver") that was amended during 1999 to increase the total
maximum capacity from $35 million to $75 million. The Revolver is payable in
full on September 28, 2002 and bears interest at either a floating rate or
Eurodollar interest rate plus a margin that fluctuates based on the Company's
leverage ratio. The margin on the Eurodollar rate ranges from 1.25% to 2.0%, and
the margin on the floating rate option ranges from 0% to .5%. During 2000, the
Company used proceeds from the sale of its non-specialty antibody business to
repay outstanding borrowings under the Revolver. At December 31, 2000, the
Company had no outstanding borrowings under the Revolver. The Company is
required to pay a fee ranging from .3% to .5%, depending on the Company's
leverage, on the unused portion of the Revolver. The Revolver is secured by
substantially all of the assets of the Company and the stock of its domestic
subsidiaries. The Revolver also contains certain financial covenants that
require the maintenance of minimum levels of cash flow coverage, debt service
coverage and debt to net worth and also provides for maximum levels of debt to
cash flow, rent expense, and capital expenditures. Furthermore, under the terms
of the Revolver, there are limitations on the Company's ability to pay cash
dividends and to repurchases shares of the Company's common stock. As of
December 31, 2000, the Company was in compliance with all debt covenants.
In connection with the acquisition of two donor centers in 1997, the
Company issued one of the sellers a note, which bore interest at a rate of 4.0%
per annum through the earlier of the date of repayment, conversion or its
maturity on September 23, 2000. In September 2000, the note was repaid in full
at maturity.
The Company made interest payments of approximately $1,795,000, $696,000,
and $245,000 during 2000, 1999 and 1998, respectively.
F-20
55
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain office space, donor centers, laboratory and
manufacturing facilities and laboratory and other equipment under non-cancelable
operating lease agreements. Future minimum annual rental obligations under the
non-cancelable portion of operating leases as of December 31, 2000 were as
follows (in thousands):
2001........................................................ $ 3,006
2002........................................................ 2,429
2003........................................................ 1,973
2004........................................................ 1,667
2005........................................................ 1,473
2006 and thereafter......................................... 4,518
-------
$15,066
=======
Rent expense was approximately $3,734,000, $4,959,000, and $3,871,000
during 2000, 1999 and 1998, respectively.
Supply Contracts
As of December 31, 2000, the Company was party to several long-term supply
agreements for the sale of certain specialty antibodies, the exact quantities
and prices of which are generally negotiated annually. The Company expects to
meet its obligations under the supply contracts.
Litigation
The Company is involved in certain litigation arising in the ordinary
course of business. In management's opinion, the ultimate resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
During 2000, twelve complaints were filed against the Company and certain
of its current and former executive officers and directors which allege
violations of the Securities Exchange Act of 1934, including Sections 10(b) and
20(a) thereof and Rule 10b-5 promulgated thereunder. During the third quarter of
2000, the complaints were consolidated and a lead plaintiff was named. A
consolidated complaint was filed on October 10, 2000 which also seeks the
court's certification of the litigation as class action on behalf of all
purchases of the Company's stock between April 27, 1999 and April 10, 2000. On
November 30, 2000, the Company and the other defendants filed a motion to
dismiss the consolidated complaint. On January 17, 2001, the plantiff filed an
opposition to the motion to dismiss. The Court has not yet ruled on the
defendants' motion to dismiss the complaint. Although the Company considers all
of the claims in the consolidated complaint to be without merit and intends to
defend the lawsuits vigorously, management is unable to predict at this time the
final outcome of these claims.
9. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash Equivalents
The Company estimates that the fair value of cash equivalents approximates
carrying value due to the short maturity of these instruments.
Notes Payable
The Company estimates that the fair values of borrowings under the Revolver
approximate their carrying value due to their floating interest rates and
relatively short maturities. The Company estimates that the fair value of notes
payable approximates carrying value based upon its estimated current borrowing
rate for issuance of debt with similar terms and remaining maturities.
F-21
56
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Disclosure about the estimated fair value of financial instruments is based
on pertinent information available to management as of December 31, 2000 and
December 26, 1999. Although management is not aware of any factors that would
significantly affect the reasonable fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
the periods presented and current estimates of fair value may differ
significantly from the amounts presented herein.
10. INCOME TAXES
The income tax provision (benefit) for the years ended December 31, 2000,
December 26, 1999 and December 27, 1998 consisted of the following (in
thousands):
2000 1999 1998
------ ------- ------
Current:
U.S. federal and state................................ $ 258 $ 855 $7,230
Foreign............................................... 1,255 1,160 1,150
------ ------- ------
1,513 2,015 8,380
------ ------- ------
Deferred:
U.S. federal and state................................ 6,539 (8,028) 300
Foreign............................................... (4) (4) 7
------ ------- ------
6,535 (8,032) 307
------ ------- ------
Income tax provision (benefit).......................... $8,048 $(6,017) $8,687
====== ======= ======
The income tax provision (benefit) as reported in the accompanying
Consolidated Statements of Income (Loss) differs from the amounts computed by
applying federal statutory rates due to the following (in thousands):
2000 1999 1998
------ ------- ------
Federal income taxes at statutory rate...................... $7,338 $(7,518) $8,761
State income taxes, net of federal income tax benefit....... 618 (238) 826
Impact of foreign tax rates and credits..................... (778) (220) (642)
Non-deductible goodwill amortization and write-down......... 1,406 1,793 315
Other....................................................... (536) 166 (573)
------ ------- ------
$8,048 $(6,017) $8,687
====== ======= ======
F-22
57
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax assets and liabilities for 2000 and 1999 reflect the
impact of temporary differences between the amounts of assets and liabilities
for financial reporting and income tax reporting purposes. Temporary differences
which give rise to deferred tax assets and liabilities at December 31, 2000 and
December 26, 1999 were as follows (in thousands):
2000 1999
------- ------
Deferred tax assets:
Accruals and reserves..................................... $ 2,337 $2,091
Unearned compensation..................................... 125 599
Goodwill amortization and write-down...................... -- 5,733
Other..................................................... 99 31
------- ------
2,561 8,454
------- ------
Deferred tax liabilities:
Goodwill amortization..................................... (826) --
Excess tax depreciation................................... (510) (694)
------- ------
(1,336) (694)
------- ------
Net deferred tax asset...................................... $ 1,225 $7,760
======= ======
The Company did not record any valuation allowance against the deferred tax
asset at December 31, 2000 and December 26, 1999 as it believes it is more
likely than not that the deferred tax asset will be realizable through future
taxable income.
The Company made income tax payments of approximately $1,886,000,
$5,278,000, and $7,940,000 during 2000, 1999 and 1998, respectively. As of
December 31, 2000 and December 26, 1999, the Company had an income tax
receivable of $3,937,000 and $3,354,000, respectively.
11. SIGNIFICANT CUSTOMERS
The Company's ten largest customers accounted for approximately 80%, 78%
and 84% of total net sales for the years ended December 31, 2000, December 26,
1999 and December 27, 1998, respectively. Customers making up greater than 10%
of net sales of the Company during such periods are as follows:
2000 1999 1998
---- ---- ----
Bayer Corporation........................................... 33% 41% 40%
Aventis..................................................... 15% * 14%
Alpha Therapeutic Corporation............................... * 10% *
- ---------------
* Less than 10%.
The Therapeutic Products segment generated 99.5% and 97% of the sales to
Bayer during 2000 and 1999, respectively, while the Diagnostic Products segment
generated the remaining sales (Note 13). The Therapeutic Products segment
generated all sales to Bayer during 1998. All net sales to Aventis and Alpha
were generated from the Therapeutic Products segment. At December 31, 2000, the
Company's accounts receivable from Bayer and Aventis were approximately $3.3
million and $3.0 million, respectively. At December 26, 1999, the Company's
accounts receivable from Bayer and Alpha were approximately $17.6 million and
$186,000, respectively.
12. EMPLOYEE SAVINGS PLAN
The Company maintains a defined contribution 401(k) savings plan for all
eligible employees. Under the plan, the Company matches a specified percentage
of each participating employee's compensation. Employees
F-23
58
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
immediately become vested in the Company's contributions as they are made. The
Company's contributions were $567,000, $518,000 and $205,000 in 2000, 1999 and
1998, respectively.
13. SEGMENT AND GEOGRAPHIC INFORMATION
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") in 1998. SFAS No. 131 defines operating segments to be those components of
a business for which separate financial information is available that is
regularly evaluated by management in making operating decisions and in assessing
performance. SFAS No. 131 further requires that the segment information
presented be consistent with the basis and manner in which management internally
disaggregates financial information for the purposes of assisting in making
internal operating decisions. The Company's business activities are conducted
and managed primarily through two business segments, the Therapeutic Products
segment and the Diagnostic Products segment. These segments were determined
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
remainder of the Company's operations that do not otherwise fall into one of
these two segments, as well as general, unallocated corporate overhead expenses,
are reported in the category entitled "Corporate and Other."
The activities of the Therapeutic Products segment 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
Therapeutic Products segment also include the general operations of the
Company's central testing laboratory in Atlanta, Georgia. In August 2000, the
Company completed the divestiture of its non-specialty antibody business (Note
3). Because the sale of this business was not treated as discontinued operations
under generally accepted accounting principles, the results of operations of
this business are included in the Company's results of operations from
continuing operations through the date of sale. The results of operations of
this business are included in the Therapeutic Products segment. Additionally,
the Company has continued to report sales from inventory of the disposed
business that was on hand and remained with the Company as of the sale date. The
activities of the Diagnostic Products segment include the Company's protein
fractionation facility in Kankakee, Illinois, the monoclonal antibody production
facilities in the United Kingdom and the sales and marketing efforts related to
certain human-sourced, polyclonal antibodies. The antibodies provided by the
Diagnostic Products segment are used in diagnostic products such as blood typing
reagents and diagnostic test kits. The blood protein products manufactured by
the Company's fractionation facility in Kankakee, Illinois are generally sold
for use as cell culture media in biotechnology and biopharmaceutical products or
in diagnostic reagents. The Company's donor centers are generally classified and
managed as assets and operations of the Therapeutic Products segment which
provide, on an incremental basis and at cost, antibodies for sale by the
Diagnostic Products segment. Such sales are recorded as direct sales of the
Diagnostic Products segment; accordingly, no intersegment sales are recorded.
The Company's senior management utilizes multiple forms of analysis of
operating and financial data to assess segment performance and to make operating
decisions with respect to the segments. While segment financial statements are
prepared on the same basis as the Company's consolidated financial statements,
the primary focus of senior management is on gross profit, and, to a lesser
extent, segment operating income, defined as earnings before income taxes,
interest, amortization, foreign currency gains and losses, special charges and
credits and other non-operating expenses. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies (Note 2).
F-24
59
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's segment information as of and for the years ended December
31, 2000, December 26, 1999 and December 27, 1998 is as follows (in thousands):
2000 1999 1998
-------- -------- --------
Net sales-unaffiliated customers:
Therapeutic Products............................. $102,415 $ 91,101 $102,116
Diagnostic Products.............................. 45,345 37,812 20,111
Corporate/Other.................................. -- 831 845
-------- -------- --------
Total............................................ $147,760 $129,744 $123,072
======== ======== ========
Gross profit (loss):
Therapeutic Products............................. $ 21,202 $ 16,000 $ 29,572
Diagnostic Products.............................. 25,445 20,135 12,281
Corporate/Other.................................. -- (548) (23)
-------- -------- --------
Total............................................ $ 46,647 $ 35,587 $ 41,830
======== ======== ========
Depreciation expense:
Therapeutic Products............................. $ 1,860 $ 1,667 $ 1,353
Diagnostic Products.............................. 2,054 1,712 845
Corporate/Other.................................. 813 736 624
-------- -------- --------
Total............................................ $ 4,727 $ 4,115 $ 2,822
======== ======== ========
Segment operating income (loss):
Therapeutic Products............................. $ 15,258 $ 10,735 $ 27,530
Diagnostic Products.............................. 18,289 13,882 8,882
Corporate/Other.................................. (9,387) (7,071) (9,530)
-------- -------- --------
Total.................................... $ 24,160 $ 17,546 $ 26,882
======== ======== ========
Reconciling items:
Other expense, net............................... $ 2,376 $ 4,513 $ 2,696
Interest expense (income), net................... 1,233 543 (846)
Special (credits) charges, net................... (414) 33,969 --
-------- -------- --------
Income (loss) before income taxes................ $ 20,965 $(21,479) $ 25,032
======== ======== ========
Identifiable assets:
Therapeutic Products............................. $ 36,585 $ 83,738 $ 94,212
Diagnostic Products.............................. 64,879 58,681 12,016
Corporate/Other.................................. 30,031 14,479 41,103
-------- -------- --------
Total............................................ $131,495 $156,898 $147,331
======== ======== ========
Capital expenditures:
Therapeutic Products............................. $ 4,016 $ 1,691 $ 4,439
Diagnostic Products.............................. 5,291 14,600 730
Corporate/Other.................................. 253 -- --
-------- -------- --------
Total............................................ $ 9,560 $ 16,291 $ 5,169
======== ======== ========
"Corporate and Other" includes general corporate overhead expenses other
than those directly attributable to an operating segment and other operations
that do not otherwise meet the SFAS No. 131 criteria for disclosure.
Identifiable assets of each segment consist primarily of accounts receivable,
inventories, goodwill and other intangible assets and property and equipment.
Corporate assets generally consist of cash and cash equivalents and other
unallocated assets.
F-25
60
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC INFORMATION
The Company markets its products and services to numerous countries
worldwide and has operations in the United States and the United Kingdom. Other
than in the United States and Germany, the Company does not conduct business in
any one country in which its sales in that country are material to the Company
as a whole. However, the majority of the Company's remaining foreign sales is to
western Europe. Net sales are attributed to regions based on the country to
which the Company ships its products, which can differ from their ultimate
destination. The composition of the Company's net sales to unaffiliated
customers between those in the United States, Germany and other foreign
locations for each fiscal year is set forth below (in thousands):
2000 1999 1998
-------- -------- --------
Net sales to unaffiliated customers:
United States.................................... $101,192 $ 99,399 $ 77,596
Germany.......................................... 26,110 11,147 17,723
Other foreign.................................... 20,458 19,198 27,753
-------- -------- --------
$147,760 $129,744 $123,072
======== ======== ========
Long-lived assets:
United States.................................... $ 56,341 $ 72,113 $ 68,842
United Kingdom................................... 6,961 4,920 5,473
-------- -------- --------
$ 63,302 $ 77,033 $ 74,315
======== ======== ========
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for the fiscal years ended December 31,
2000 and December 26, 1999, respectively, are as follows (in thousands, except
per share amounts):
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
2000
Net sales......................................... $36,335 $41,896 $38,708 $30,821
Gross profit...................................... 10,002 11,909 12,014 12,722
Special (credits) charges, net (Note 3)........... 151 1,610 (550) (1,625)
Net income........................................ 2,373 2,004 3,778 4,762
Basic earnings per share(1)....................... 0.10 0.09 0.17 0.21
Diluted earnings per share(1)..................... 0.10 0.09 0.16 0.21
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
1999
Net sales......................................... $39,532 $32,108 $16,530 $41,574
Gross profit...................................... 11,911 9,190 3,829 10,657
Special charges, net (Note 3)..................... -- -- 8,575 25,394
Net income (loss)................................. 4,077 2,393 (6,767) (15,165)
Basic earnings (loss) per share(1)................ 0.17 0.10 (0.29) (0.68)
Diluted earnings (loss) per share(1).............. 0.16 0.10 (0.29) (0.68)
F-26
61
SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the quarterly pro forma results of
operations for the years ended December 31, 2000 and 1999, respectively as if
the sale of Seramed (Note 3) and receipt of proceeds from the sale occurred on
December 28, 1998 (the first day of the Company's 1999 fiscal year). These
results do not purport to represent what the results of operations for the
Company would actually have been if the sale had occurred on the date referred
to above or to be indicative of the future results of operations of the Company.
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000
Net sales......................................... $16,806 $23,197 $25,116 $27,667
Gross profit...................................... 8,905 11,883 11,664 13,652
Special (credits) charges, net (Note 3)........... 151 104 (5) (1,949)
Net income........................................ 2,307 3,562 3,546 5,971
Basic earnings per share(1)....................... 0.10 0.15 0.16 0.26
Diluted earnings per share(1)..................... 0.10 0.15 0.15 0.26
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999
Net sales......................................... $22,046 $17,120 $10,152 $18,822
Gross profit...................................... 11,283 8,517 4,437 9,029
Special charges, net (Note 3)..................... -- -- 8,575 521
Net income (loss)................................. 4,164 2,338 (5,740) 2,384
Basic earnings (loss) per share(1)................ 0.17 0.10 (0.25) 0.11
Diluted earnings (loss) per share(1).............. 0.16 0.09 (0.25) 0.10
- ---------------
(1) Basic and diluted earnings (loss) per share is computed independently for
each of the quarters presented. As such, the summation of the quarterly
amounts may not equal the total basic and diluted earnings (loss) per share
reported for the year.
F-27
62
SEROLOGICALS CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
An analysis of the allowance for doubtful accounts for the three years
ended December 31, 2000 is as follows (in thousands):
BALANCE AT CHARGED CHARGED BALANCE
BEGINNING OF TO COSTS TO OTHER AT END OF
PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ------------ -------- ---------- ---------
Year Ended December 31, 2000....... $1,034 -- -- (284) $ 750
Year Ended December 26, 1999....... 784 647 51(a) (448) 1,034
Year Ended December 27, 1998....... 532 252 -- -- 784
- ---------------
(a) Reserve established upon purchase of Serologicals Proteins on December 29,
1998