UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
/X/ QUARTERLY REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended MAY 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________ to ____________.
Commission file number 0-21781
SERACARE, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 95-4343492
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1925 CENTURY PARK EAST, SUITE 1970
LOS ANGELES, CALIFORNIA 90067
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (310) 772-7777
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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. / X / Yes / / No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 13 or 15 (d) of the Securities Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court. Yes / X / No / /
As of June 30, 2000, the issuer had 8,519,418 shares of its common stock, $.001
par value issued and outstanding.
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS ARE PROVIDED AS FOLLOWS:
PAGE
NUMBER
SERACARE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidated Statements of Operations - (Unaudited)
For the three months ended May 31, 2000 and
For the three months ended May 31, 1999 3
Consolidated Balance Sheets -
as of May 31, 2000 (Unaudited) and
as of February 29, 2000 (Audited) 4
Consolidated Statements of Cash Flows - (Unaudited)
For the three month period ended May 31, 2000 and
For the three month period ended May 31, 1999 5
Notes to Consolidated Financial Statements 6
2
SERACARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN WHOLE DOLLARS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Three Months
Ended
--------------------------------
May 31, May 31,
2000 1999
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Revenues
Net sales $ 12,884,055 $ 15,899,546
Income from joint venture 0 189,890
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12,884,055 16,089,436
Cost of sales 9,921,802 11,755,652
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Gross profit 2,962,253 4,333,784
General and administrative expenses 1,628,470 1,523,413
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Income from operations 1,333,783 2,810,371
Interest expense (including $272,974 and $312,048
of noncash interest expense) 1,013,372 1,185,796
Other expense (income), net (14,351) (18,441)
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Income before income tax expense and
cumulative effect of change in accounting method 334,762 1,643,016
Income tax expense 50,284 101,867
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Income before cumulative effect of change
in accounting method 284,478 1,541,149
Cumulative effect of change in accounting method, net 0 (719,903)
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Net income $ 284,478 $ 821,246
============== ==============
Earnings per common share
Basic
Income before cumulative effect of change in
accounting method $ 0.03 $ 0.20
Cumulative effect of change in accounting method 0.00 (0.09)
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Net income $ 0.03 $ 0.11
============== ==============
Diluted
Income before cumulative effect of change in
accounting method $ 0.02 $ 0.13
Cumulative effect of change in accounting method 0.00 (0.06)
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Net income $ 0.02 $ 0.07
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Weighted average shares issued and outstanding
Basic 8,519,418 7,644,418
============== ==============
Diluted 11,811,470 12,013,022
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
SERACARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN WHOLE DOLLARS)
5-31-00 2-29-00
(UNAUDITED) (AUDITED)
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 597,589 $ 1,285,668
Cash held in escrow 1,675,000 5,406,515
Accounts receivable 9,132,662 11,963,823
Inventory 19,322,833 17,283,525
Prepaid expenses and other current assets 618,823 634,668
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Total current assets 31,346,907 36,574,199
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PROPERTY AND EQUIPMENT - NET 6,708,967 6,856,167
FDA LICENSES, less accumulated amortization
of $424,765 and $372,015 8,057,480 8,110,229
DONOR BASE AND RECORDS, less accumulated
amortization of $478,402 and $414,496 4,632,305 4,684,367
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCATED
TO IDENTIFIABLE ASSETS, less accumulated amortization
of $165,413 and $155,771 606,040 615,682
GOODWILL, less accumulated amortization of $814,231
and $716,662 6,528,920 6,626,489
DEFERRED BOND DISCOUNT, less accumulated
amortization of $2,053,198 and $1,807,235 4,673,304 4,919,268
OTHER ASSETS 1,283,433 1,192,514
============== ==============
TOTAL ASSETS $ 63,837,356 $ 69,578,915
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 13,963,200 $ 13,184,000
Accounts payable and accrued expenses 4,561,256 10,494,088
Accrued payroll and related expenses 371,685 484,281
Accrued expenses 2,319,561 3,487,405
Deferred income 799,059 278,429
Notes payable 285,966 288,447
Current portion of long-term debt 231,151 231,151
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Total current liabilities 22,531,878 28,447,801
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LONG-TERM DEBT 13,033,695 13,087,563
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STOCKHOLDERS' EQUITY
Series C convertible preferred stock, $.001
par value, 22,500 shares
authorized and outstanding
Liquidation value $100 per share 22 22
Common stock, $.001 par value, 25,000,000
shares authorized
8,519,418 issued and outstanding 8,519 8,519
Additional paid-in capital 26,224,316 26,224,316
Retained earnings 2,038,926 1,810,694
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Total stockholders' equity 28,271,783 28,043,551
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 63,837,356 $ 69,578,915
============== ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
SERACARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN WHOLE DOLLARS)
(UNAUDITED)
For the Three Months
Ended
--------------------------------
May 31, May 31,
INCREASE (DECREASE) IN CASH 2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 284,478 $ 821,246
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization 459,062 487,927
Income from joint venture 0 (189,890)
Non-cash interest expense 272,974 312,048
Non-cash general and administrative expense 5,355 5,355
(Increase) decrease from changes in:
Accounts receivable 2,831,161 (1,078,058)
Inventory (2,039,308) (6,020,880)
Prepaid expenses and other current assets 15,845 189,817
Other assets (123,285) 719,729
Accounts payable (5,932,824) 3,270,732
Accrued payroll and related expenses (112,596) 320,474
Accrued expenses (1,167,844) 848,904
Deferred income 520,630 0
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Net cash used in operating activities (4,986,352) (312,596)
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CASH FLOWS FROM INVESTING ACTIVITIES
Funds released from escrow 3,731,515 0
Purchases of property and equipment (88,000) (260,971)
Distributions from unconsolidated subsidiary 0 90,000
Additions to FDA licenses 0 (259,710)
Additions to donor base and records (11,843) (104,674)
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Net cash provided by (used in) investing activities 3,631,672 (535,355)
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CASH FLOWS FROM FINANCING ACTIVITIES
Advances under line of credit 779,200 1,100,000
Repayments of long-term debt (53,868) (90,398)
Repayments of notes payable (2,481) (2,235)
Payments on redemption of preferred stock 0 (44,930)
Borrowings under notes payable 0 100,000
Preferred dividend (56,250)
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Net cash provided by financing activities 666,601 1,062,437
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NET DECREASE IN CASH AND CASH EQUIVALENTS (688,079) 214,486
CASH AND CASH EQUIVALENTS, beginning of period 1,285,668 843,226
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CASH AND CASH EQUIVALENTS, end of period $ 597,589 $ 1,057,712
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
(a) Cash paid for:
Interest $ 1,011,620 $ 768,466
State income taxes $ 8,820 $ 16,045
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
SeraCare, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. STATEMENT OF INFORMATION FURNISHED
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, Inc. and
Subsidiaries as of May 31, 2000, and the results of their operations and cash
flows for the three months ended May 31, 2000 and 1999. These results have been
determined on the basis of generally accepted accounting principles and
practices applied consistently with those used in the preparation of the audited
financial statements included in the Company's Annual Report on Form 10-KSB for
the fiscal year ended February 29, 2000.
The results of operations for the three month period ended May 31, 2000 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 generally accepted accounting principles
have been condensed or omitted in accordance with the rules to Form 10-Q. The
accompanying financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended February 29,
2000, which is included herein by this reference.
2. EARNINGS PER SHARE
Basic earnings (loss) per common share amounts for the three months ended May
31, 2000 and 1999 have been calculated based upon the weighted average number of
shares actually outstanding during the period. Diluted earnings per share for
the same three-month periods were calculated by considering common stock
options, purchase warrants and convertible debt instruments which are deemed
common stock equivalents in such calculation.
3. DEFERRED INCOME
The Company receives cash advances from customers. The revenue related to these
advance payments has been deferred until actual shipment of the plasma.
6
SeraCare, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. INCOME TAXES
The difference between the reported tax provision and the statutory rate applied
to the pre-tax income for the three months ended May 31, 2000 is primarily the
result of the expected realization of deferred tax assets relating to the
utilization of certain loss carryforwards and the application of available loss
carryforwards in the calculation of an effective tax rate which was based upon
annualizing the financial results for the quarter.
5. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING METHOD, NET
Effective March 1, 1999, the Company adopted Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities" (SOP 98-5) issued by the
American Institute of Certified Public Accountants. SOP 98-5 requires that the
costs of start-up activities, including organization costs, be expensed as
incurred. Start-up activities are defined broadly as those one-time activities
related to opening a new facility, introducing a new product or service,
conducting business in a new territory, conducting business with a new class of
customer, initiating a new process in an existing facility, or commencing some
new operation.
As of May 31, 1999, the Company wrote off approximately $719,903 (net of $44,600
of tax benefit) of start-up costs that had been previously capitalized and
included in other assets. In accordance with SOP 98-5, the write-off of such
costs was reported as a cumulative effect of a change in accounting method.
6. CASH IN ESCROW
In conjunction with the sale of CTI's operating assets, $1,675,000 remains in
escrow and is being held pursuant to an adjustment provision in the Asset
Purchase Agreement.
7. BASIC EARNINGS PER SHARE CALCULATION
Basic earnings per share have been calculated for the current period by
deducting preferred dividends of $56,250 from net income of $284,478 to
determine net income available to common shareholders of $228,228.
8. LONG-TERM DEBT
As of May 31, 2000, the Company was in violation of one covenant pertaining
to the senior credit facility and is in discussions with this lender
regarding obtaining a waiver. In addition, the Company was in violation of one
covenant relating to the subordinated debentures. The lender has indicated
that the covenants would be amended so that the Company would be in
compliance with the note agreements in the future.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE STATEMENTS IN THIS
REPORT (INCLUDING WITHOUT LIMITATION, STATEMENTS INDICATING THAT THE COMPANY
"EXPECTS," "ESTIMATES," "ANTICIPATES," OR "BELIEVES" AND ALL OTHER STATEMENTS
CONCERNING FUTURE FINANCIAL RESULTS, PRODUCT OFFERINGS OR OTHER EVENTS THAT HAVE
NOT YET OCCURRED) ARE FORWARD-LOOKING STATEMENTS THAT ARE MADE PURSUANT TO THE
SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED. FORWARD-LOOKING STATEMENTS INVOLVE
KNOWN AND UNKNOWN FACTORS, RISKS AND UNCERTAINTIES WHICH MAY CAUSE THE COMPANY'S
ACTUAL RESULTS IN FUTURE PERIODS TO DIFFER MATERIALLY FROM FORECASTED RESULTS.
THOSE FACTORS, RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO: THE
POSITIONING OF THE COMPANY'S PRODUCTS IN THE COMPANY'S MARKET SEGMENT; THE
COMPANY'S ABILITY TO EFFECTIVELY MANAGE ITS VARIOUS BUSINESSES IN A RAPIDLY
CHANGING ENVIRONMENT; NEW COMPETITION FOR DONORS AND CUSTOMERS; THE INABILITY OF
THE COMPANY TO OBTAIN FDA APPROVAL OF NEWLY ESTABLISHED CENTERS; AND THE
INTRODUCTION OF SYNTHETIC PRODUCTS WHICH COULD ELIMINATE THE NEED FOR PLASMA
PRODUCTS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2000 AS COMPARED TO THREE MONTHS ENDED MAY 31, 1999
REVENUE
Net revenue of the Company decreased by 20%, or $3,205,381 to $12,884,055 during
the current year period. This decrease was primarily the result of lower revenue
relating to the Biologics Division and the sale of the operating assets of
Consolidated Technologies which generated $1.6 million in the prior year period.
The decrease in the Biologics Division was caused principally by the timing of
shipments to the Company's primary customer. Plasma collections for the current
quarter were up 13 percent from the fourth quarter, but were down seven percent
from the year earlier period.
GROSS PROFIT
Gross profit decreased by $1,371,531 or 32% in the current year period to
$2,962,253 mainly due to the sale of Consolidated Technologies and the decreased
revenues discussed above. The lower revenue of the Biologics division was
partially offset by the lower direct costs related to the decrease in the volume
of plasma collected.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses in the current quarter increased by $105,057
to $1,628,470, an increase of 7%. A significant increase in the cost of
compliance and quality control related to the plasma collection operations was
mostly offset by the absence of Consolidated Technologies in the current period.
Also increasing was the distribution operations as a result of higher
compensation costs associated with an expanded marketing and sales effort.
INTEREST EXPENSE
Interest expense during the current period decreased by $172,424 to $1,013,372
due primarily to the pay-down of long-term debt with the proceeds from the sale
of the operating assets of Consolidated Technologies and the write-off of the
related deferred bond discount costs. Non-cash interest for the current year
period was $272,974 and represents the amortization of the remaining deferred
bond discount associated with the February 1998 subordinated debenture issue.
8
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING METHOD
As a result of the above, income before the cumulative effect of a change in
accounting method for the three months ended May 31, 2000 was $284,478 compared
to $1,541,149 for the same prior year period.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING METHOD
Effective March 1, 1999, the Company adopted Statement of Position 98-5
"Reporting on the Costs of Start-Up Activities" (SOP 98-5) issued by the
American Institute of Certified Public Accountants. SOP 98-5 is effective for
fiscal years beginning after December 15, 1998, and requires that the costs of
start-up activities be expensed as incurred. Accordingly, the Company wrote off
$719,903 (net of $44,634 of tax benefit) of start-up costs that had been
previously capitalized and was included in other assets as of February 28, 1999.
In accordance with SOP 98-5, the write-off of such costs is being reported as a
cumulative effect of a change in accounting method and prior periods have not
been restated.
NET INCOME
As a result of the above, net income for the three months ended May 31, 2000
was $284,478 compared to $821,246 for the same prior year period.
LIQUIDITY AND CAPITAL RESOURCES
As of May 31, 2000 the Company's current assets exceeded current liabilities by
$8,815,029 compared to $8,126,398 as of February 29, 2000, which translates into
a current ratio as of May 31, 2000 of 1.4 to 1 compared to 1.3 to 1 as of
February 29, 2000. Total liabilities as of May 31, 2000 were $35,565,573
compared to $41,535,364 as of February 29, 2000. The total debt to equity ratio
as of May 31, 2000 was 1.3 compared to 1.5 as of February 29, 2000. In the
opinion of Management, the trends reflected in these ratio's and statistics are
very positive and show progress in improving the Company's financial position.
Net cash used in operating activities during the three-month period ended May
31, 2000 was $4,986,352 compared to $312,596 during the same prior year period.
The current year quarter results were due primarily to a decrease in accounts
payable.
Cash flows provided by investing activities for the three months ended May 31,
2000 was $3,631,672 compared to ($535,355) for the comparable prior year period.
The current period increase resulted primarily from the release of funds from
escrow related to the sale of CTI.
Cash flow provided by financing activities was $666,601 for the current year
period compared to $1,062,437 for the comparable period in the prior year. The
current quarter decrease was mostly due to fewer advances under the revolving
line of credit.
The use of cash during the quarter was consistent with the Company's strategic
plan for strong growth and the Company feels that progress has been made during
the period. With a continuation of a strategic focus on growth and optimum
positioning for the expected industry wide shortage of plasma, the short-term
impact on the Company's earnings and cash flow has been to defer significant
profitability and positive cash flows.
Much of fiscal year 2000 was spent establishing a structure which the Company
believes is necessary in order to insure long-term success in this highly
regulated industry. Primarily as a result of this focus on quality control and
compliance, the Company experienced an 18% decrease in the volume of plasma
collected during the fourth quarter versus the first quarter of the year ended
February 29, 2000. With the structure and training in place, the first quarter
of fiscal 2001 represented a period of re-establishing the programs and
incentives the Company believes are required to stimulate increased plasma
collections.
9
The result was a 13 % increase in plasma collected during the
quarter just ended compared to the quarter ended February 29, 2000. Consistent
with the Company's strategic plan of growth, recently established centers in
Allentown, PA, Reading, PA and Laredo, TX are continuing to ramp-up and newly
established centers in Danville, VA and Providence, RI are scheduled to open
during the second quarter. In addition, the manufacturing operations established
in the first quarter to provide bulk plasma based products and serums for
diagnostic customers has already reached capacity and the Company is evaluating
alternatives for expansion.
The Company believes that a rapidly evolving shortage of plasma and steadily
increasing demand for most plasma products will result in significant upward
momentum on plasma pricing as the Company renews contracts with it's customers
during the next two to three years. This shortage is mainly the result of
increased fractionation capacity, increased regulation of donor qualifications,
which disqualified many potential donors and the increased demand and uses for
products obtained from plasma. The Company further believes that recent
Company-wide efforts directed at quality control, compliance and increased
volumes have positioned the Company to benefit maximally from the economics of
the industry during the coming years.
Management believes that internally generated cash flow will be sufficient to
meet the ongoing working capital requirements of the Company's current
operations for the balance of fiscal 2001. However, any significant expansion or
acquisition, will need be funded externally by some combination of bridge
financing, private placement(s), and/or other capital infusion. The Company is
also exploring ways of reducing the interest charge to current operations
through refinancing, investment alternatives or some combination of both.
As of May 31, 2000, the Company was in violation of one covenant pertaining
to the senior credit facility and is in discussions with this lender
regarding obtaining a waiver. In addition, the Company was in violation of one
covenant relating to the subordinated debentures. The lender has indicated
that the covenants would be amended so that the Company would be in
compliance with the note agreements in the future.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
During the period March 1, 2000 through June 30, 2000, the Company received one
warning letter from the Food and Drug Administration relating to violations of
certain FDA procedures. The Company believes it has taken appropriate actions to
correct the observations cited in the warning letter and has notified the FDA of
such corrective actions in writing. As of the date hereof, the Company has
received no further correspondence from the FDA with respect to these matters.
There can be no assurances, however, that the corrective actions taken by the
Company will be deemed sufficient by the FDA or that the Company will not become
subject to further warnings or penalties with respect to these matters.
10
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
SERACARE, INC.
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(Registrant)
Dated: July 13, 2000 By: /s/ BARRY D. PLOST
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Barry D. Plost, President & CEO
By: /s/ JERRY L. BURDICK
------------------------------------
Jerry L. Burdick
Principal Accounting and
Finance Officer
11