Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 - Q

For the quarterly period ended June 30, 2004

For the transition period from              to             

Commission file number 0-33045

SERACARE LIFE SCIENCES, INC.

(Exact name of Registrant as specified in its charter)

Registrant’s Telephone Number: (760) 806-8922

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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of July 30, 2004, 8,880,116 shares of the Registrant’s common stock, no par value, were outstanding.

Table of Contents

SeraCare Life Sciences, Inc.

Table of Contents

2

Table of Contents

SeraCare Life Sciences, Inc.

Balance Sheets

(unaudited)

(in thousands, except for share data)

See accompanying notes to financial statements

3

Table of Contents

SeraCare Life Sciences, Inc.

Statements of Income

(unaudited)

(in thousands, except per share data)

See accompanying notes to financial statements

4

Table of Contents

SeraCare Life Sciences, Inc.

Statements of Cash Flows

(unaudited)

(in thousands)

See accompanying notes to financial statements

5

Table of Contents

SeraCare Life Sciences, Inc.

Notes to Financial Statements

Unaudited

1. Basis of Presentation

The information contained herein has been prepared in accordance with instructions for Form 10-Q and Rule 10-01 of Regulation S-X. The information as of June 30, 2004 and for the three and nine months ended June 30, 2004 and 2003 are unaudited. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal and recurring accruals) necessary to present fairly the financial position of SeraCare Life Sciences, Inc. (the “Company” or “we”) as of June 30, 2004, the results of its operations for the three and nine months ended June 30, 2004 and 2003, and cash flows for the nine months ended June 30, 2004 and 2003. These results have been determined on the basis of accounting principles generally accepted in the United States of America and applied consistently with those used in the preparation of the audited financial statements for the fiscal year ended September 30, 2003 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The results of operations for the three and nine months ended June 30, 2004 are not necessarily indicative of the results to be expected for any other period or for the entire current fiscal year.

Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the applicable rules to Form 10-Q. The accompanying financial statements should be read in conjunction with our audited financial statements and notes thereto for the fiscal year ended September 30, 2003.

Certain amounts in prior period financial statements have been reclassified to conform to current period classifications.

2. Stock-Based Compensation

At June 30, 2004, the Company’s stock-based employee and director incentive compensation plan is accounted for under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees” and related interpretations. The following table illustrates the effect on net income and earnings per share if the Company had applied the “fair value” recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee and director compensation.

6

Table of Contents

The fair value of the stock options were estimated at the date of grant using the “Black-Scholes” method for option pricing and the following weighted average assumptions were used for grants made during the three and nine months ended June 30, 2004 and 2003, respectively:

3. Earnings Per Share

Basic net income per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed based on the weighted average number of common shares outstanding during the period increased by the effect of dilutive stock options and warrants, using the treasury stock method. The computations for basic and diluted earnings per share are as follows:

4. Income Taxes

The realization of deferred tax assets is dependent upon the Company’s ability to generate taxable income in future periods. During the quarter ended December 31, 2003, management determined that it was more likely than not that the net operating loss carryforward (“NOL”) related to the deferred tax assets would be realized. As set forth in SFAS No. 109, “Accounting for Income Taxes,” a deferred tax asset of $298,000 for California net operating loss carryforwards was recorded as of December 31, 2003. There was no change in this deferred tax asset as of June 30, 2004. The California NOL deferred tax asset is not expected to be utilized until 2005 due to a two-year state imposed moratorium on the use of these NOLs.

The Federal net operating loss carryforward is expected to be used during fiscal 2004 and therefore, in accordance with SFAS No. 109, the effective tax rate for 2004 assumes the use of all the federal net operating losses during fiscal 2004. For the nine months ended June 30, 2004, the Company accrued income tax at the rate of approximately 10%. At September 30, 2003, the Company had federal and California state net operating loss carryforwards of $1.7 million and $3.6 million, respectively.

5. Related Party Relationships and Transactions

The Company is party to an agreement with Biomat USA, Inc. (our former parent and a subsidiary of Probitas Pharma S.A.) which sets forth the terms and conditions pursuant to which Biomat USA, Inc. (“Biomat”) will supply the Company with certain plasma products until January 2006 at prices which will be agreed upon on an annual basis. Under this agreement, Biomat also

7

Table of Contents

provides plasmapheresis services on donors referred by the Company, including collecting, testing and delivering the plasma to us. The plasma products provided by Biomat to the Company under this agreement are subject to minimum quality specifications set forth in the agreement and are subject to specifications for delivery, storage and handling of the plasma in accordance with applicable laws, industry standards and good manufacturing practices.

The Company is also a party to an agreement with Instituto Grifols, S.A. (also a subsidiary of Probitas Pharma S.A.), under which Instituto Grifols, S.A. (“Instituto Grifols”) supplies the Company with Human Serum Albumin, which the Company then distributes to various biotech companies. Under this agreement, Instituto Grifols also supplies the Company with Human Serum Albumin for use in diagnostic products. The Company obtains a substantial portion of our revenue and operating margin from sales of products incorporating the Human Serum Albumin supplied to us by Instituto Grifols under this agreement. The agreement was amended in 2001 to extend its term until March 31, 2006. In connection with an agreement for the supply of Human Serum Albumin that the Company entered into with one of the Company’s significant customers, the Company also amended the terms of our agreement with Instituto Grifols to conform certain aspects of the agreement with the significant customer’s contract.

Probitas Pharma S.A. (“Probitas Pharma”) currently holds a five year warrant to purchase 563,347 shares of our common stock. On September 25, 2001, Probitas Pharma, through its subsidiary Instituto Grifols, acquired Biomat, our former parent. The Company purchased from Biomat during the three months ended June 30, 2004 and 2003, human blood plasma and services totaling $190,000 and $755,000, respectively. During the nine months ended June 30, 2004 and 2003, the Company purchased $1.1 million and $1.8 million in human blood plasma and services, respectively, from Biomat. During the three months ended June 30, 2004 and 2003, the Company purchased plasma products from other subsidiaries of Probitas Pharma totaling $903,000 and $1.4 million, respectively. During the nine months ended June 30, 2004 and 2003, the Company purchased plasma products from other subsidiaries of Probitas Pharma totaling $2.4 million and $5.6 million, respectively. As of June 30, 2004 and September 30, 2003, the Company had accounts payable owed to Instituto Grifols and related subsidiaries totaling $1.1 million and $2.2 million, respectively. These amounts are classified with accounts payable to related parties in the accompanying balance sheets.

Mr. Barry D. Plost is currently Chairman of our Board of Directors. Mr. Plost is also President of Biomat USA, Inc. and serves as a director of Probitas Pharma S.A.

Mr. Jerry L. Burdick is currently our Secretary as well as a member of our Board of Directors. Mr. Burdick became a consultant to Biomat USA, Inc., in August 2004. Prior to being a consultant, Mr. Burdick was the Executive Vice President, Secretary and Chief Financial Officer of Biomat USA, Inc.

Mr. Samuel Anderson, a current Board Member, became a consultant to the Company effective April 15, 2002. The Company pays Mr. Anderson an annual consulting fee of $56,000.

As of June 30, 2004 and September 30, 2003, the Company had approximately $130,000 and $178,000, respectively, in accounts payable relating to a computer hardware and software system that resulted from a previous transaction in 2002 with a company in which one of the Company’s Directors serves as an officer. This transaction was deemed to have been arms length and the amount is classified within accounts payable to related parties in the accompanying balance sheets.

In July 2003, the Company borrowed $2.5 million from Mr. Plost to fund a cash portion of the purchase of the assets of BioMedical Resources, Inc. During October 2003, the Company repaid the short-term loan in full plus interest of approximately $9,000.

For services on the Scientific Advisory Board relating primarily to merger and acquisitions, one Board Member was granted an option in October 2003 to purchase 25,000 shares of common stock at an exercise equal to the fair market value of the stock at the date of grant. The fair value of the options was determined using the Black-Scholes model, and $39,000 was recorded and is reflected in the accompanying balance sheet as an other asset as of June 30, 2004. The fair value of the option grant was determined using the following assumptions: a risk free interest rate of 2%; dividend yield of zero; volatility of the expected market price of the Company’s common stock of 30%, and a weighted average expected life of the option of 3 years.

6. Acquisitions

Boston Biomedica, Inc.

In April 2004, the Company entered into an agreement to purchase substantially all of the assets of the BBI Diagnostics and BBI Biotech Research Laboratories divisions of Boston Biomedica, Inc., for $30 million in cash plus the assumption of certain liabilities (the “BBI Acquisition”). The purchase price is subject to adjustment based on the amount of net assets at the closing.

8

Table of Contents

In July 2004, the Company entered into definitive agreements to raise approximately $8.2 million in gross proceeds from a private placement of its common stock to institutional and accredited investors. The closing of the private placement is contingent on the closing of the BBI Acquisition. The investors in the private placement have funded the full $8.2 million in escrow pending the satisfaction of this condition. The proceeds of the private placement will be used by the Company to fund a portion of the purchase price for the BBI Acquisition. In the event the BBI Acquisition is not consummated, the escrowed funds will be returned in full to the investors and neither the investors nor the Company will have further obligations to each other under the definitive agreements.

Genomics Collaborative, Inc.

On June 3, 2004, the Company entered into an Asset Purchase Agreement, dated as of June 3, 2004, with Genomics Collaborative, Inc., (“GCI”) pursuant to which the Company acquired substantially all of the assets of GCI for a combination of stock, cash and the assumption of certain liabilities (the “GCI Acquisition”). GCI was a privately-held company based in Cambridge, Massachusetts, that provided clinical samples for commercial sale and applying human genetics to target validation for drug discovery as a commercial service. Target validation is the process of determining that a molecular target is critically involved in a disease process. It is one of the initial steps in the drug discovery process.

The purchase price paid by the Company in the GCI Acquisition was $14.2 million (excluding transaction costs of $404,000), which was determined as a result of arms’ length negotiations and consisted of 1,065,683 shares of the Company’s common stock having an aggregate value of $13.1 million (based on the closing price per share of $12.25 of the Company’s stock at the date of the GCI Acquisition) as well as a cash payment of $1.2 million (offset by cash acquired in the GCI Acquisition of $347,000). The Company borrowed $833,000 to fund a portion of the cash payment. In addition, as partial consideration for the GCI Acquisition, the Company agreed to pay to GCI certain earn-out payments over a two year period pursuant to a formula set forth in the underlying asset purchase agreement.

The results of operations from the period June 4, 2004 through June 30, 2004 are reflected in the Company’s statement of operations for the three and nine months ended June 30, 2004, respectively, and the Company’s statement of cash flows for the nine months ended June 30, 2004.

Based on the Company’s evaluation, a summary of the preliminary allocation of the purchase price for the GCI Acquisition is as follows as of the date of the GCI Acquisition.

The entire amount of goodwill of $5.9 million is expected to be tax deductible for tax purposes over 15 years.

9

Table of Contents

Pro forma Information – pro forma data combines the financial results of the Company and the financial data of Genomics Collaborative, Inc., as if they had been combined at the beginning of the periods presented. Pro forma data is not necessarily indicative of future results. Pro forma results are shown below.

7. Segment Information and Significant Customers

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires the reporting of information about operating segments in annual financial statements and requires selected information in interim financial reports. Selected financial information for the three months and nine months ended June 30, 2004 and 2003 is as follows:

Income from operations is defined as income before income taxes, interest, and other non-operating income and expenses. “Corporate and other” includes selling, general and administrative corporate expenses other than those directly attributable to an operating segment. The Company had no inter-segment sales during the nine months ended June 30, 2004 and 2003.

10

Table of Contents

During the three and nine months ended June 30, 2004 and 2003, the Company had sales to specific customers representing 10% or more of sales during the respective periods as follows.

As of June 30, 2004 and September 30, 2003, one customer had balances owed to the Company representing 22.7% and two customers had balances representing 50% of net accounts receivable, respectively.

8. Borrowings

During October 2003, the Company entered into a two-year, $10.0 million secured line of credit. The line of credit is secured by the Company’s assets. There was a 1.25% origination fee on the total commitment amount which was paid at the time of closing and is amortized as interest expense over the term of the line of credit. The Company can select an annual interest rate of prime plus 0.50% or LIBOR plus 3.50% on amounts borrowed on the line of credit. As of June 30, 2004, the interest rate was 4.5%. Interest payments on funded amounts are due quarterly and any unpaid principal and interest is payable October 2005. An annual interest rate of 0.50% is charged on unfunded amounts and payable quarterly. The line of credit also requires that certain financial covenants be maintained by the Company. There are financial covenants that limit the Company’s level of debt and capital expenditures and covenants that require minimum levels of liquidity and profitability. The Company is in compliance with all covenants as of June 30, 2004 except for a liquidity covenant termed “quick ratio” which is defined as the sum of all cash, cash equivalents, and accounts receivable divided by current liabilities. Terms of the borrowing agreement require a quick ratio of 1.25 to 1.0. As of June 30, 2004, the quick ratio was 1.0 to 1.0. The Company received a waiver for this financial covenant as of June 30, 2004. During the nine months ended June 30, 2004, the Company borrowed $3.7 million and repaid $365,000 on the line of credit. As of June 30, 2004, the outstanding balance totaled $3.3 million and $6.7 million was available for future borrowings.

9. Commitments and Contingencies

Litigation

There are no material pending legal proceedings to which we are a party, other than routine litigation occurring in the normal course of our operations.

Guarantees

The Company indemnifies directors and officers for third-party claims alleging certain breaches of their fiduciary duties as directors or officers. Certain costs incurred for providing such indemnification may be recovered under various insurance policies. The Company has not incurred obligations under these indemnification arrangements historically and does not expect to incur significant obligations in the future. Accordingly, the Company does not maintain accruals for potential director or officer indemnification obligations. The maximum potential amount of future payments that the Company could be required to make under the indemnification arrangements relating to officers and directors is unlimited.

Commitments

During January 2004, the Company entered into an exclusive agreement with SurModics, Inc. (“SurModics”) to distribute in vitro diagnostic stabilization products in the United States and Puerto Rico. The Company is committed to purchase a minimum of $7.7 million in products from SurModics between January 2004 and March 2007, the termination date of the agreement. As of June 30, 2004, the Company had a remaining commitment of $7.1 million.

As part of the Genomics Collaborative acquisition, the Company assumed GCI’s facility lease with remaining amounts due totaling $1.9 million through December 2008 as follows.

11

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We caution you that this document contains disclosures that are forward-looking statements. All statements regarding SeraCare Life Sciences, Inc.’s expected future financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, projected costs or cost savings, capital expenditures, competitive positions, growth opportunities for existing products or products under development, plans and objectives of management for future operations and markets for stock are forward-looking statements. In addition, forward-looking statements include statements in which we use words such as “expect,” “believe,” “anticipate,” “intend,” or similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure you that these expectations will prove to be correct, and actual results may differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to differences are discussed under the caption “Risk Factors” as described in our Annual Report on Form 10-K for the year ended September 30, 2003. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We disclaim any intent or obligation to update these forward-looking statements.

RESULTS OF OPERATIONS

Overview

We are a manufacturer and marketer of human and animal based diagnostic, therapeutic, and research products based in Oceanside, California, with satellite offices in Hatboro, Pennsylvania and Cambridge, Massachusetts and distributors in Europe, Japan, and South Korea. We are a vendor-approved supplier to over 500 pharmaceutical and healthcare companies, and are listed as an exclusive supplier in many customers’ regulatory filings with the Food and Drug Administration. Our primary focus is the development and sale of human and animal blood-based diagnostic, therapeutic, and research products to domestic and international customers. Through our strategic alliances with Biomat USA, Inc. and other suppliers, we have access to a nationwide network of donor centers. This has historically provided the basis for our development of human plasma-based products and services. Through our strategic alliance with Proliant, Inc., we have access to bovine serum albumin, which has provided the basis for our development of bovine serum-based products. We also provide antibody-based products, which are used as active ingredients in therapeutic products (generally, drugs used to treat and manage diseases) and in diagnostic products (generally, diagnostic tests and test kits).

We focus on product development, the solidification of customer relationships, and improvement of our operational systems in California, Pennsylvania, and Massachusetts. We have increased the variety, and improved the quality, of products that we manufacture and sell. Management believes our strategy will aid our long-term success in the highly regulated and competitive industry in which we operate. During the course of our corporate evolution, we have helped many customers develop internal protocols and standards, established quality control benchmarks, and have performed various other value-added services for our customers in order to establish solid relationships. We have made significant progress as a major supplier of protein and media products to several pharmaceutical and biotechnology companies.

Quarter Ended June 30, 2004 vs Quarter Ended June 30, 2003

Net Sales

Net sales totaled $6.4 million for each of the three months ended June 30, 2004 and 2003. Diagnostic segment product sales totaled $3.7 million and $2.6 million for the three months ended June 30, 2004 and 2003, respectively. This increase in diagnostic segment product sales is primarily due to the acquisition of BioMedical Resources, Inc. (“BMR”) and its related customer base and to sales generated through the distribution agreement entered into in January 2004 with SurModics. Biopharmaceutical segment product sales totaled $2.7 million and $3.8 million for the three months ended June 30, 2004 and 2003, respectively. The decline in biopharmaceutical segment product sales was due primarily to the loss of sales to one large customer.

12

Table of Contents

Gross Profit

The gross profit and gross margin totaled $2.4 million and 38% for the three months ended June 30, 2004 compared to $1.9 million and 29% for the three months ended June 30, 2003. The increase in gross profit is the direct result of improved margins generated by a shift in product mix in both the biopharmaceutical and diagnostic segments. The customer base shifted from fewer and more significant customers to a more diversified customer base with customers that had lower average sales and higher profit margins in both the biopharmaceutical and diagnostic segments.

Selling, General and Administrative Expenses

Selling, general and administrative expenses totaled $1.2 million for each of the three months ended June 30, 2004 and 2003. Selling, general and administrative expenses remained stable as a result of cost control efforts during the quarter ended June 30, 2004.

Other (Expense) Income

Other expense totaled $50,000 for the three months ended June 30, 2004 compared to other income of $7,000 for the same period in 2003. The increase in other expense is primarily due to interest expense incurred on a line of credit that was established in October 2003.

Income Tax Expense

Income tax expense totaled $268,000 and $69,000 for the three months ended June 30, 2004 and 2003, respectively. The effective tax rate was 22.9% and 9.8% for the quarters ended June 30, 2004 and 2003, respectively. The provision for income taxes during interim quarterly reporting periods is based on estimates of the effective tax rates for the respective full fiscal year.

Nine Months Year to Date Ended June 30, 2004 vs Nine Months Year to Date Ended June 30, 2003

Net Sales

Net sales totaled $17.8 million and $18.3 million for the nine months ended June 30, 2004 and 2003, respectively. The decrease in sales for the nine months ended June 30, 2004 is attributed to the decline in biopharmaceutical segment product sales, which was partially offset by the increase in diagnostic segment product sales. Diagnostic segment product sales totaled $11.0 million and $7.4 million for the nine months ended June 30, 2004 and 2003, respectively. This increase in diagnostic segment product sales is primarily due to the acquisition of BMR and its related customer base and to sales generated through the distribution agreement entered into in January 2004 with SurModics. Biopharmaceutical segment product sales totaled $6.8 million and $10.9 million for the nine months ended June 30, 2004 and 2003, respectively. The decline was largely due to the loss of sales to one large customer.

Gross Profit

The gross profit and gross margin totaled $6.5 million and 37% for the nine months ended June 30, 2004 compared to $5.4 million and 30% for nine months ended June 30, 2003. The increase in gross profit is the direct result of improved margins generated by a shift in product mix in both the biopharmaceutical and diagnostic segments. Additionally, the customer base shifted from fewer and more significant customers to a more diversified customer base with customers that had lower average sales and higher profit margins in both the biopharmaceutical and diagnostic segments.

Selling, General and Administrative Expenses

Selling, general and administrative expenses totaled $3.6 million and $3.1 million for the nine months ended June 30, 2004 and 2003, respectively. The increase in selling, general and administrative expenses is primarily the result of additional headcount and corresponding personnel costs combined with increased expenditures associated with compliance with SEC reporting requirements and related activities.

Other (Expense) Income

Other expense totaled $118,000 for the nine months ended June 30, 2004 compared to other income of $30,000 for the same period in 2003. The increase in other expense is primarily due to interest expense incurred on a line of credit that was established in October 2003.

13

Table of Contents

Income Tax Expense

Income tax expense totaled $277,000 and $233,000 for the nine months ended June 30, 2004 and 2003, respectively. The effective tax rate was 9.8% for each of the nine months ended June 30, 2004 and 2003. The provision for income taxes during interim quarterly reporting periods is based on estimates of the effective tax rates for the respective full fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2004, the Company’s current assets exceeded current liabilities by $21.9 million compared to $12.3 million as of September 30, 2003, which translates into a current ratio of 4.1 to 1 as of June 30, 2004 compared to 2.7 to 1 as of September 30, 2003. Total liabilities as of June 30, 2004 were $10.4 million compared to $7.4 million as of September 30, 2003. The total debt to equity ratio as of June 30, 2004 was 0.29 compared to 0.36 as of September 30, 2003.

The increase in the current ratio and decrease in the total debt to equity ratio as of June 30, 2004 compared to the same ratios for the year ended September 30, 2003 is largely due to the GCI Acquisition which was paid for primarily by the issuance of the Company’s common stock.

Net cash used in operating activities totaled $26,000 during the nine months ended June 30, 2004 compared to $1.2 million during the same prior year period. The decrease in cash used in operating activities is largely due to the additional net income and increased accounts payable for the nine months ended June 30, 2004 compared to the same period prior year.

Net cash used in investing activities for the nine months ended June 30, 2004 totaled $1.0 million compared to $209,000 for the comparable prior year period. The increase in net cash used in investing activities is primarily related to the GCI Acquisition. Acquisition costs of $14.6 million, including transaction costs of $404,000, were funded by cash payments of $833,000 along with the issuance of 1.1 million shares of the Company’s common stock.

Net cash used in financing activities for the nine months ended June 30, 2004 totaled $1.4 million which resulted primarily from the repayment of $2.5 million short-term bridge note. Loan proceeds of $3.7 million from the Company’s line of credit were offset by the repayment of $2.3 million in a loan assumed during the GCI Acquisition and repayment of $365,000 on the Company’s line of credit. Cash flows provided by financing activities totaled $36,000 during the nine months ended June 30, 2003 resulting from the exercise of options and warrants.

Going forward, we expect to generate positive cash flows from operations for the foreseeable future. Accordingly, management expects internally generated cash flow to be adequate for the foreseeable future to cover operations as well as our noncancelable leases, purchase commitments, and line of credit as described in notes to the financial statements numbered 5, 8, and 17 included in the audited financial statements for the fiscal year ended September 30, 2003 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission and note 9 to the financial statements of this Form 10-Q, unless we execute a material expansion or make a significant acquisition, and except for the financing contemplated by the BBI Acquisition. With respect to the BBI Acquisition, we currently expect to finance the $30 million cash purchase price (plus assumption of certain liabilities) primarily with debt, along with some equity. The Company expects to complete this acquisition during its fiscal 2004 fourth quarter ending September 30, 2004, subject to the receipt of financing for the acquisition, as well as the satisfaction of customary closing conditions. No assurances can be given that we will be able to successfully obtain the financing necessary to fund the acquisition on satisfactory terms, or at all. The terms of any debt financing are likely to include restrictive covenants on us, and any equity financing is likely to result in dilution to our shareholders.

In July 2004, the Company entered into definitive agreements to raise approximately $8.2 million in gross proceeds from a private placement of its common stock to institutional and accredited investors relating to the BBI Acquisition. The closing of the private placement is contingent on the closing of the BBI Acquisition. The investors in the private placement have funded the full $8.2 million in escrow pending the satisfaction of this condition. The proceeds of the private placement will be used by the Company to fund a portion of the purchase price for the BBI Acquisition. In the event the BBI Acquisition is not consummated, the escrowed funds will be returned in full to the investors and neither the investors nor the Company will have further obligations to each other under the definitive agreements.

CRITICAL ACCOUNTING POLICIES

To prepare the financial statements in conformity with accounting principles generally accepted in the United States, management is required to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure

14

Table of Contents

of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In particular, we provide for estimates regarding revenue recognition, returns, the collectibility of accounts receivable, the net realizable value of our inventory, the recoverability of long-lived assets, as well as our deferred tax asset valuation allowance. On an ongoing basis, we evaluate our estimates based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Future financial results could differ materially from current financial results based on management’s current estimates.

Revenue Recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition, Corrected Copy,” (SAB 104). SAB 104 requires that four basic criteria be met before revenue can be recognized: (1) pervasive evidence that an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. We record any material up-front payments as deferred revenue in accrued expenses on the balance sheet and recognize revenue upon shipment of the product to the customer and when the four criteria noted above are met.

Returns. We will accept return of goods, if prior to returning goods, the purchaser contacts us and requests a Return Authorization Number, clearly stating the reason for the return. Request for replacements or credit must be received within 10 days after shipment. We are not liable for products that become unusable due to improper storage, improper treatment, or expiration. Certain returns are subject to a 15% handling and restocking charge. Biopharmaceutical products will only be accepted with a Return Authorization Number and a letter stating adherence to Prescription Drug Marketing Act Storage Compliance. Items that are nonreturnable include frozen items, custom orders, products that have been altered in any manner from their original state or not in their original containers, and biopharmaceutical items for use by diagnostic customers. Returns are estimated and accrued at the time information is available.

Accounts receivable. We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and the customers’ current buying habits. We monitor collections and payments from our customers and maintain a provision for estimated credit losses based on historical experience and any specific customer collection issues that have been identified.

Inventory. Inventory is carried at the lower of cost or market. We review inventory for estimated obsolescence or unmarketable inventory and provide an amount to reduce inventory to its net realizable value based on the assumptions about future demand and market conditions. If actual market conditions are less favorable than those conditions assumed by management, additional inventory provisions may be required.

Long-lived assets. We periodically assess the impairment of long-lived assets, including goodwill, to be held for use whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held for use is based on expectations of future undiscounted cash flows from the related operations, and when circumstances dictate, we adjust the asset to the extent the carrying value exceeds the fair value of the asset. Our judgments related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could cause us to realize a material impairment charge, which would result in decreased results of operations, and potentially decrease the carrying value of these assets.

INFLATION

Management believes that inflation generally causes an increase in sales prices with an offsetting unfavorable effect on the cost of products sold and other operating expenses. Accordingly, with the possible exception of the impact on interest rates, management believes that inflation will have no significant effect on our results of operations or financial condition.

OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any off-balance sheet arrangements, do not engage in trading activities involving non-exchange traded contracts, and are not a party to any transaction with persons or activities that derive benefits, except as disclosed herein, from their non-independent relationships with us.

15

Table of Contents

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46), “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51. FIN No. 46 requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Variable interest entities that effectively disperse risk will not be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. FIN No. 46 also requires enhanced disclosure requirements related to variable interest entities. FIN No. 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period ending after December 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material impact on our financial statements.

In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities,” which supersedes FIN 46. Application of the revised interpretation is required in the financial statements of companies that have interests in special purpose entities for periods ending after December 15, 2003. The adoption of FIN 46R did not have a material impact on our financial statements.

16

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not believe that we have material exposure to interest rate, foreign currency exchange rate or other relevant market risks.

Interest Rate and Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. As of June 30, 2004 our investment portfolio consisted primarily of cash and cash equivalents, substantially all of which are invested in US Government Treasury Bills. We do not use derivative financial instruments in our investment portfolio. We are also subject to interest rate risk related to our line of credit which had a variable interest rate of 4.5% at June 30, 2004. To the extent that general market interest rates fluctuate, the fair value of this line of credit may increase or decrease. Based on the outstanding balance of $3.3 million as of June 30, 2004, a one percentage point change in interest rates would have an immaterial impact on operations.

Foreign Currency Exchange Risk

We do not believe we currently have material exposure to foreign currency exchange risk because contracts and sales are currently all denominated in US dollars. We intend to assess the need to use financial instruments to hedge currency exposure if appropriate in the future.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the fiscal quarter ended June 30, 2004, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2004 to ensure that information required to be disclosed by us in reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal controls over financial reporting during our fiscal quarter ended June 30, 2004 that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

17

Table of Contents

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER REPURCHASES OF EQUITY SECURITIES

ISSUER PURCHASES OF EQUITY SECURITIES

On June 3, 2004, the Company acquired substantially all of the assets of Genomics Collaborative, Inc. The purchase price paid by the Company for the assets included the issuance by the Company of 1,065,683 shares of the Company’s common stock having an aggregate value of $13.1 million (based on the closing price per share of $12.25 of the Company’s stock on the date of the acquisition) to Genomics Collaborative, Inc. and two of its equity holders. The securities were issued pursuant to an exemption from registration provided by Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”).

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

18

Table of Contents

On April 16, 2004, we filed a current report on Form 8-K to report that we had entered into an agreement to purchase substantially all of the assets of the BBI Diagnostics and BBI Research Laboratories divisions of Boston Biomedica, Inc.

On May 7, 2004, we furnished a current report on Form 8-K to furnish our press release dated May 7, 2004, announcing financial information for the fiscal quarter ended March 31, 2004.

On June 4, 2004, we filed a current report on Form 8-K to report that we had acquired substantially all of the assets of Genomics Collaborative, Inc.

19

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INDEX OF EXHIBITS

20