**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý****          ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**For the quarterly period ended October 2,2005**

 

**OR**

 

**o****          ****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**For the transition period from                to                .**

 

**Commission file Number: 0-26126**

 

**SEROLOGICALSCORPORATION**

(Exact Name of Registrant as Specified in itsCharter)

 
| **Delaware**                                      | ** ** | **58-2142225**                          |
|---------------------------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction of  incorporation or |       | (I.R.S. Employer Identification Number) |
| organization)                                     |       | ** **                              |
|                                              |       |                                    |
| **5655 Spalding Drive**                           | ** ** | ** **                              |
| **Norcross, Georgia**                             | ** ** | **30092**                               |
| (Address of principal executive offices)          |       | (Zip Code)                              |

 

**(678) 728-2000**

(Registrant’s Telephone Number Including AreaCode)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days. Yes ý  No o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Exchange Act Rule 12b-2). Yes ý  No o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Exchange Act Rule 12b-2). Yes o  No ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:

 
| **Class**                               | ** ** | **Outstanding  at November 4, 2005** |
|-----------------------------------------|------------|-------------------------------------------|
| Common Stock, $0.01 par value per share |       | 34,594,946                                |

 

 

----

 

**INDEX**

 

**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

 
| PART I.                                                                                                                                | 3      |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Condensed Consolidated Financial  Statements:                                                                                       | 3      |
| Unaudited Condensed Consolidated Balance  Sheets-October 2, 2005 and January 2, 2005                                              | 3      |
| Unaudited Condensed Consolidated Statements of Income-For the three  and nine months ended October 2, 2005 and September 26, 2004 | 4      |
| Unaudited Condensed Consolidated Statements of Cash Flows-For the  nine months ended October 2, 2005 and September 26, 2004       | 5      |
| Unaudited Notes to Condensed Consolidated Financial Statements                                                                              | 6      |
| Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                         | 18     |
| Item 3. Quantitative and Qualitative  Disclosures about Market Risk                                                                         | 25     |
| Item 4. Controls and Procedures                                                                                                             | 25     |
|                                                                                                                                        |   |
| PART II.                                                                                                                               | 25     |
| Item 1. Legal Proceedings                                                                                                                   | 25     |
| Item 6. Exhibits                                                                                                                            | 26     |
| SIGNATURES                                                                                                                                  | 28     |

 

2

----

 

**PART I.**

 

**Item 1. Financial Statements**

 

**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Unaudited and in thousands except share amounts)**

 
| ** **                                                                                                                                                                           | ** ** | **October 2, 2005** | ** ** | **January 2, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                                                                                                           |       |                     |       |                     |       |
| **CURRENT  ASSETS:**                                                                                                                                                                 |       |                     |       |                     |       |
| Cash and cash equivalents                                                                                                                                                            |       | $                        | 30,630     |                     | $          | 33,024 |   |
| Short-term investments                                                                                                                                                               |       | 34,320                   |       | 29,030                   |       |
| Trade accounts receivable, net                                                                                                                                                       |       | 43,358                   |       | 46,899                   |       |
| Inventories                                                                                                                                                                          |       | 56,576                   |       | 49,846                   |       |
| Other current assets                                                                                                                                                                 |       | 15,056                   |       | 15,226                   |       |
| Total current assets                                                                                                                                                                 |       | 179,940                  |       | 174,025                  |       |
| **PROPERTY  AND EQUIPMENT, NET**                                                                                                                                                     |       | 97,672                   |       | 96,887                   |       |
| **GOODWILL**                                                                                                                                                                         |       | 246,824                  |       | 241,038                  |       |
| **INTANGIBLE  ASSETS, NET**                                                                                                                                                          |       | 119,261                  |       | 117,997                  |       |
| **OTHER ASSETS**                                                                                                                                                                     |       | 3,780                    |       | 9,860                    |       |
| Total assets                                                                                                                                                                         |       | $                        | 647,477    |                     | $          | 639,807 |   |
|                                                                                                                                                                                 |       |                     |       |                     |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                        |       |                     |       |                     |       |
| **CURRENT  LIABILITIES:**                                                                                                                                                            |       |                     |       |                     |       |
| Accounts payable                                                                                                                                                                     |       | $                        | 7,081      |                     | $          | 11,827 |   |
| Accrued liabilities                                                                                                                                                                  |       | 27,186                   |       | 37,336                   |       |
| Current maturities on capital lease  obligations                                                                                                                                     |       | 1,655                    |       | 2,419                    |       |
| Total current liabilities                                                                                                                                                            |       | 35,922                   |       | 51,582                   |       |
| **CONVERTIBLE  SUBORDINATED DEBENTURES**                                                                                                                                             |       | 129,896                  |       | 130,395                  |       |
| **CAPITAL  LEASE OBLIGATION LESS CURRENT MATURITIES**                                                                                                                                |       | 648                      |       | 2,194                    |       |
| **DEFERRED INCOME TAXES**                                                                                                                                                            |       | 41,311                   |       | 38,012                   |       |
| **OTHER LIABILITIES**                                                                                                                                                                |       | 1,014                    |       | 1,093                    |       |
| Total liabilities                                                                                                                                                                    |       | 208,791                  |       | 223,276                  |       |
|                                                                                                                                                                                 |       |                     |       |                     |       |
| **COMMITMENTS  AND CONTINGENCIES**                                                                                                                                                   |       |                     |       |                     |       |
|                                                                                                                                                                                 |       |                     |       |                     |       |
| **STOCKHOLDERS’  EQUITY:**                                                                                                                                                      |       |                     |       |                     |       |
| Preferred stock, $.01 par value; 1,000,000  shares authorized, no shares issued                                                                                                      |       | —                   |       | —                   |       |
| Common stock, $.01 par value; 115,000,000  and 50,000,000 shares authorized, 38,519,130 and 37,752,120 shares issued at October 2,  2005 and January 2, 2005, respectively |       | 385                      |       | 377                      |       |
| Additional paid-in capital                                                                                                                                                           |       | 346,623                  |       | 334,429                  |       |
| Retained earnings                                                                                                                                                                    |       | 105,767                  |       | 91,378                   |       |
| Accumulated other comprehensive income                                                                                                                                               |       | 9,489                    |       | 11,046                   |       |
| Less:                                                                                                                                                                                |       |                     |       |                     |       |
| Common stock held in treasury                                                                                                                                                        |       | (22,859                  | )          | (20,347                  | )          |
| Deferred compensation                                                                                                                                                                |       | (719                     | )          | (352                     | )          |
| Total stockholders’ equity                                                                                                                                                      |       | 438,686                  |       | 416,531                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                      |       | $                        | 647,477    |                     | $          | 639,807 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

3

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**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited and in thousands, except share and pershare amounts)**

 
| ** **                                                | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**       | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
| ** **                                                | ** ** | ** **               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NET REVENUES**                                          | ** ** | $                        | 66,969     |                        | $          | 46,294 | ** ** | $ | 187,812 |   | $ | 126,761 |   |
| **COST OF  REVENUES**                                     |       | 28,743                   |       | 21,313                      |       | 82,034 |   | 57,379 |   |
| Gross profit                                              |       | 38,226                   |       | 24,981                      |       | 105,778 |   | 69,382 |   |
| **OPERATING  EXPENSES:**                                  |       |                     |       |                        |       |   |   |   |   |
| Selling, general and administrative                       |       | 19,346                   |       | 12,997                      |       | 62,212 |   | 38,029 |   |
| Research and development                                  |       | 4,429                    |       | 1,930                       |       | 13,241 |   | 6,112 |   |
| Amortization of intangibles                               |       | 1,823                    |       | 655                         |       | 5,329 |   | 2,064 |   |
| **OPERATING  INCOME**                                     |       | 12,628                   |       | 9,399                       |       | 24,996 |   | 23,177 |   |
| Other expenses (income), net                              |       | 500                      |       | 25                          |       | 574 |   | (231 | ) |
| Interest expense                                          |       | 1,824                    |       | 1,281                       |       | 5,545 |   | 3,527 |   |
| Interest (income)                                         |       | (477                     | )          | (225                        | )          | (1,412 | ) | (582 | ) |
| **INCOME  BEFORE INCOME TAXES**                           |       | 10,781                   |       | 8,318                       |       | 20,289 |   | 20,463 |   |
| **PROVISION  FOR INCOME TAXES**                           |       | 3,127                    |       | 2,579                       |       | 5,884 |   | 6,343 |   |
| **NET INCOME**                                            | ** ** | $                        | 7,654      |                        | $          | 5,739 |   | $ | 14,405 |   | $ | 14,120 |   |
|                                                      |       |                     |       |                        |       |   |   |   |   |
| **NET  INCOME PER SHARE:**                                |       |                     |       |                        |       |   |   |   |   |
| Basic                                                     | ** ** | $                        | 0.22       |                        | $          | 0.23 |   | $ | 0.41 |   | $ | 0.57 |   |
| Diluted                                                   | ** ** | $                        | 0.20       |                        | $          | 0.19 |   | $ | 0.41 |   | $ | 0.48 |   |
|                                                      |       |                     |       |                        |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES OF COMMON STOCK OUTSTANDING:** | ** ** | ** **               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                     |       | 34,925,778               |       | 25,034,437                  |       | 34,760,132 |   | 24,943,488 |   |
| Diluted                                                   |       | 44,259,086               |       | 34,428,253                  |       | 44,163,000 |   | 34,305,938 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

4

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**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited and in thousands)**

 
| ** **                                                                                         | ** ** | **Nine Months Ended**    | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                         | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
| **CONTINUING  OPERATIONS:**                                                                        |       |                     |       |   |   |
| **OPERATING  ACTIVITIES:**                                                                         |       |                     |       |   |   |
| Net income                                                                                         |       | $                        | 14,405     |   | $ | 14,120 |   |
| Adjustments to reconcile net income from  operations to net cash provided by operating activities: |       |                     |       |   |   |
| Depreciation and amortization                                                                      |       | 11,502                   |       | 7,919 |   |
| Tax benefit from exercise of stock options                                                         |       | 4,098                    |       | 1,281 |   |
| Deferred and other compensation                                                                    |       | 377                      |       | 35 |   |
| Deferred income tax provision                                                                      |       | —                   |       | 1,299 |   |
| Other, net                                                                                         |       | 836                      |       | — |   |
| Changes in operating assets and  liabilities, net of acquisition of business:                      |       |                     |       |   |   |
| Trade accounts receivable, net                                                                     |       | 3,478                    |       | 3,109 |   |
| Inventories                                                                                        |       | (5,297                   | )          | (5,208 | ) |
| Other current assets                                                                               |       | (1,865                   | )          | (55 | ) |
| Accounts payable                                                                                   |       | (4,829                   | )          | 887 |   |
| Accrued liabilities                                                                                |       | (11,812                  | )          | (1,928 | ) |
| Other, net                                                                                         |       | (467                     | )          | (204 | ) |
| Total adjustments                                                                                  |       | (3,979                   | )          | 7,135 |   |
| **Net cash  provided by operating activities**                                                     |       | 10,426                   |       | 21,255 |   |
| **INVESTING  ACTIVITIES:**                                                                         |       |                     |       |   |   |
| Purchases of short-term investments                                                                |       | (56,310                  | )          | (87,300 | ) |
| Proceeds from sale of short-term  investments                                                      |       | 51,020                   |       | 78,510 |   |
| Purchases of property and equipment and  intangible assets                                         |       | (9,516                   | )          | (14,767 | ) |
| Proceeds from collection of principal  portion of note receivable                                  |       | 7,249                    |       | 3,500 |   |
| Purchase of business, net of cash acquired                                                         |       | (6,752                   | )          | (12,440 | ) |
| Other, net                                                                                         |       | 46                       |       | (164 | ) |
| **Net cash  used in investing activities**                                                         |       | (14,263                  | )          | (32,661 | ) |
| **FINANCING  ACTIVITIES:**                                                                         |       |                     |       |   |   |
| Purchase of common shares                                                                          |       | (2,513                   | )          | — |   |
| Proceeds (payments) on capital lease  obligations                                                  |       | (2,201                   | )          | 3,304 |   |
| Proceeds from issuance of common shares  under stock plans                                         |       | 7,360                    |       | 3,118 |   |
| **Net cash  provided by financing activities**                                                     |       | 2,646                    |       | 6,422 |   |
| **DISCONTINUED  OPERATIONS:**                                                                      |       |                     |       |   |   |
| **OPERATING  ACTIVITIES**                                                                          |       | —                   |       | (2,500 | ) |
| **INVESTING  ACTIVITIES**                                                                          |       | —                   |       | 962 |   |
| **Net cash  used by discontinued operations:**                                                     |       | —                   |       | (1,538 | ) |
| Effects of exchange rate changes on cash  and cash equivalents                                     |       | (1,203                   | )          | (475 | ) |
| Net decrease in cash and cash equivalents                                                          |       | (2,394                   | )          | (6,997 | ) |
| Cash and cash equivalents, beginning of  period                                                    |       | 33,024                   |       | 21,479 |   |
| Cash and cash equivalents, end of period                                                           |       | $                        | 30,630     |   | $ | 14,482 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

5

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**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**October 2, 2005**

**(UNAUDITED)**

 

**1.****             ORGANIZATIONAND BASIS OF PRESENTATION**

 

*Organization*

 

SerologicalsCorporation, a Delaware corporation (together with its subsidiaries, “we”, “our”,the “Company” or “Serologicals”), with facilities in North America, Europe andAustralia, is a global leader in developing and commercializing consumablebiological products, enabling technologies and services in support ofbiological research, drug discovery, and the bioprocessing of life-enhancingproducts. Serologicals’ customers include researchers at major life sciencecompanies and leading research institutions involved in key disciplines, suchas neurology, oncology, hematology, immunology, cardiology, proteomics, infectiousdiseases, cell signaling and stem cell research. In addition, Serologicals isthe world’s leading provider of monoclonal antibodies for the blood typingindustry.

 

*Basis of Presentation*

 

The accompanying unaudited condensed consolidated financial statementsinclude the accounts of Serologicals and its subsidiaries. All significantintercompany accounts and transactions have been eliminated in consolidation.The accompanying statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and the instructions to Form 10-Q of the SecuritiesExchange Act of 1934, as amended. Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements. In theopinion of management, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments, which are of a normal recurringnature, considered necessary to present fairly Serologicals’ financialposition, results of operations and cash flows at the dates and for the periodspresented. Interim results of operations are not necessarily indicative ofresults to be expected for the full year. Certain prior year amounts in theaccompanying condensed balance sheet have been reclassified to conform withcurrent year presentation. The interim financial statements should be read inconjunction with the audited consolidated financial statements as of January 2,2005 and the notes thereto included in the Company’s Annual Report on Form 10-Kfor the year ended January 2, 2005.

 

*Inventories*

 

Inventories are stated at the lower of cost or market, cost beingdetermined on a first-in, first-out basis. Market for inventories isreplacement cost for raw materials or net realizable value for all othercategories.

 

Inventories at October 2, 2005 and January 2, 2005 consistedof the following (in thousands):

 
| ** **      | ** ** | **October 2, 2005** | ** ** | **January 2, 2005** | ** ** |
|-----------------|------------|--------------------------|------------|--------------------------|------------|
|            |       |                     |       |                     |       |
| Raw materials   |       | $                        | 7,382      |                     | $          | 10,950 |   |
| Work in process |       | 18,515                   |       | 12,995                   |       |
| Finished goods  |       | 30,679                   |       | 25,901                   |       |
|            |       | $                        | 56,576     |                     | $          | 49,846 |   |

 

6

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*Intangible Assets*

 

Intangible assets at October 2, 2005 and January 2, 2005consisted of the following (in thousands):

 
| ** **                              | ** ** | **Weighted**      | ** ** | **October 2, 2005** | ** ** | **January 2, 2005**      | ** ** |
|-----------------------------------------|------------|-------------------|------------|--------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **Average  Life** | ** ** | **Gross**                | ** ** | **Accumulated  Amortization** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** |
| **Finite lived intangible assets:**     |       |              |       |                     |       |                          |       |   |   |   |   |
| Developed products                      |       | 17.4 years        |       | $                        | 77,333     |                          | $          | (6,452 | ) | $ | 78,175 |   | $ | (3,341 | ) |
| Patents and property know-how           |       | 15 years          |       | 13,099                   |       | (3,170                        | )          | 11,362 |   | (2,333 | ) |
| Customer relationships                  |       | 15.9 years        |       | 20,200                   |       | (1,560                        | )          | 14,700 |   | (588 | ) |
| Other intangible                        |       | 6.5 years         |       | 2,143                    |       | (1,132                        | )          | 2,272 |   | (1,050 | ) |
|                                    |       |              |       | 112,775                  |       | (12,314                       | )          | 106,509 |   | (7,312 | ) |
| **Indefinite lived intangible assets:** |       |              |       |                     |       |                          |       |   |   |   |   |
| Trademarks                              |       |              |       | 18,800                   |       | —                        |       | 18,800 |   | — |   |
| Total intangible assets                 |       |              |       | $                        | 131,575    |                          | $          | (12,314 | ) | $ | 125,309 |   | $ | (7,312 | ) |

 

Recorded intangible asset amortization expense for the three and ninemonths ended October 2, 2005 was $1.8 million and $5.3 million,respectively.  Recorded intangible asset amortization expense for thethree and nine months ended September 26, 2004 was $0.7 million and $2.1million, respectively. Estimated aggregate amortization expense isexpected to be $1.9 million for the remainder of fiscal year 2005, and $7.2million in fiscal years 2006 and 2007 and $7.1 million, $6.9 million in fiscalyears 2008 and 2009, respectively.

 

*Derivative Financial Instruments*

 

In October 2003, the Company entered into interest rate swapagreements with the objective of converting $70.0 million principal amount ofits 4.75% Convertible Senior Debentures (the “Debentures”) due August 15,2033 to a variable interest rate based on the 6-months LIBOR rate at the end ofeach interest period plus a spread of 66 basis points.

 

On June 2, 2005 the Company terminated its interest rate swapagreements and received $0.1 million in cash proceeds.

 

The interest rate swaps were designated and qualified as fair valuehedges in accordance with Statement of Financial Accounting Standards No. 133,“Accounting for Derivatives and Hedging Activities” and related interpretationsand amendments. Accordingly, the portion of the Debentures hedged was adjustedby the fair value of the changes related to the swaps. On June 2,2005, the Company adjusted the swap values by marking-to-market the swaps sothat they equaled the net proceeds received on the termination. Simultaneously,the Company recorded a $0.2 million gain in hedge ineffectiveness. Theresulting net adjustment to the carrying value of the Debentures of $0.1million will be accreted as additional interest expense over the remainingestimated life of the Debentures.

 

AtJanuary 2, 2005, the fair market value of the interest rate swaps was anasset of $0.4 million and was included in “Other assets” in theaccompanying balance sheet.

 

7

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The Company has presented the carrying value of the Debentures asfollows (in thousands):

 
| ** **                                                        | ** ** | **October 2, 2005** | ** ** | **January 2, 2005** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                                              |       |                     |       |                     |       |
| Face value of Debentures                                          |       | $                        | 130,000    |                     | $          | 130,000 |   |
| Mark-to-market value as a result of interest rate swap agreements |       | (104                     | )          | 395                      |       |
| Carrying value of Debentures                                      |       | $                        | 129,896    |                     | $          | 130,395 |   |

 

*Earnings per Share*

 

Basic earnings per share are calculated by dividing net income by theweighted average number of common shares outstanding during the period. Thecalculation of diluted earnings per share is similar to basic earnings pershare, except that net income is adjusted by adding back the after-tax interestexpense on the Debentures, when they are dilutive, and the weighted averagenumber of shares includes the dilutive effect of stock options, stock awards,and the Debentures. The Debentures were dilutive in all periods presented.

 

The following table sets forth the calculation of basic and dilutedearnings per share (in thousands, except per share amounts):

 
| ** **                                                                    | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**       | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                    | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
| Numerator:                                                                    |       |                     |       |                        |       |   |   |   |   |
| Net income                                                                    |       | $                        | 7,654      |                        | $          | 5,739 |   | $ | 14,405 |   | $ | 14,120 |   |
| Add back: interest expense on convertible  debentures, net of income taxes    |       | 1,219                    |       | 807                         |       | 3,698 |   | 2,303 |   |
| Numerator for diluted earnings per share  attributable to common stockholders |       | $                        | 8,873      |                        | $          | 6,546 |   | $ | 18,103 |   | $ | 16,423 |   |
|                                                                          |       |                     |       |                        |       |   |   |   |   |
| Denominator:                                                                  |       |                     |       |                        |       |   |   |   |   |
| Basic earnings per share - weighted average  shares outstanding               |       | 34,926                   |       | 25,034                      |       | 34,760 |   | 24,943 |   |
| Effect of dilutive securities:                                                |       |                     |       |                        |       |   |   |   |   |
| Stock options                                                                 |       | 454                      |       | 575                         |       | 529 |   | 541 |   |
| Convertible debentures                                                        |       | 8,790                    |       | 8,790                       |       | 8,790 |   | 8,790 |   |
| Common stock awards                                                           |       | 90                       |       | 29                          |       | 85 |   | 32 |   |
| Diluted earnings per share - weighted  average shares outstanding             |       | 44,260                   |       | 34,428                      |       | 44,164 |   | 34,306 |   |
|                                                                          |       |                     |       |                        |       |   |   |   |   |
| Basic earnings per share                                                      |       | $                        | 0.22       |                        | $          | 0.23 |   | $ | 0.41 |   | $ | 0.57 |   |
| Diluted earnings per share                                                    |       | $                        | 0.20       |                        | $          | 0.19 |   | $ | 0.41 |   | $ | 0.48 |   |

 

The following shares issuable under stock option agreements wereexcluded from the calculation of diluted earnings per share for the periodsindicated because the option price exceeded the average market price for theCompany’s stock (in thousands):

 
| ** ** | ** **    | **Three Months Ended**   | ** ** | **Nine Months Ended**       | ** ** |
|------------|---------------|--------------------------|------------|-----------------------------|------------|
| ** ** | ** **    | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
|       |          |                     |       |                        |       |   |   |   |   |
|       | Stock options |                     | 30         |                        | 363        |   | 30 |   | 378 |   |
|            |               |                          |            |                             |            |  |  |  |  |  |

 

8

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*Stock-Based Compensation Plan*

 

The Company accounts for stock-based employee compensation plans underthe recognition and measurement principles of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. The following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” tostock-based employee compensation (in thousands, except per share amounts):

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**       | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                    | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
|                                                                                                                                          |       |                     |       |                        |       |   |   |   |   |
| Net income as reported                                                                                                                        |       | $                        | 7,654      |                        | $          | 5,739 |   | $ | 14,405 |   | $ | 14,120 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                                   |       | 293                      |       | 43                          |       | 436 |   | 99 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value-based method for all awards,  net of related tax effects |       | (924                     | )          | (776                        | )          | (2,329 | ) | (1,984 | ) |
| Pro forma net income                                                                                                                          |       | $                        | 7,023      |                        | $          | 5,006 |   | $ | 12,512 |   | $ | 12,235 |   |
|                                                                                                                                          |       |                     |       |                        |       |   |   |   |   |
| Earnings per share:                                                                                                                           |       |                     |       |                        |       |   |   |   |   |
| Basic - as reported                                                                                                                           |       | $                        | 0.22       |                        | $          | 0.23 |   | $ | 0.41 |   | $ | 0.57 |   |
| Basic - pro forma                                                                                                                             |       | $                        | 0.20       |                        | $          | 0.20 |   | $ | 0.36 |   | $ | 0.49 |   |
|                                                                                                                                          |       |                     |       |                        |       |   |   |   |   |
| Diluted - as reported                                                                                                                         |       | $                        | 0.20       |                        | $          | 0.19 |   | $ | 0.41 |   | $ | 0.48 |   |
| Diluted - pro forma                                                                                                                           |       | $                        | 0.19       |                        | $          | 0.17 |   | $ | 0.35 |   | $ | 0.43 |   |

 

The Debentures were antidilutive and excluded from the pro forma dilutedearnings per share calculation for the nine months ended October 2, 2005.

 

Reflected in net income for the three and nine month periods ended October 2,2005 was $0.2 million, in net of tax compensation expense related toperformance shares issued under the 2005 Incentive Plan (see Note 4 tocondensed consolidated financial statements). Reflected in net income for the three and nine month periods ended October 2,2005 was also $0.1 million and $0.2 million, respectively, in net of taxamortization expense of restricted shares. No other stock-based employeecompensation cost was reflected in net income for the three and nine monthperiods ended October 2, 2005, respectively, as all options granted underthese plans had an exercise price equal to the market value of the underlyingcommon stock on the date of grant. During the three and nine month periodsended October 2, 2005, the Company issued approximately 327,000 and690,000 shares, respectively, in conjunction with exercises of stock options.

 

Under SFAS No. 123, the fair value of stock-based awards iscalculated through the use of option-pricing models, even though such modelswere developed to estimate the fair value of freely tradable, fullytransferable options without vesting restrictions, which differ significantlyfrom the Company’s stock option grants. These models also require subjectiveassumptions, including future stock price volatility and expected lives of eachoption grant. There were no changes in these assumptions from those disclosedin our Annual Report on Form 10-K for the fiscal year ended January 2,2005. The impact of the adoption of SFAS No. 123 (revised 2004), “ShareBased Payment” (“SFAS 123R”), which is a revision of SFAS No. 123, on theCompany’s results of operations in 2006 and subsequent periods has not beendetermined.

 

*Comprehensive Income*

 

The following table sets forth the calculation of comprehensive incomefor the periods indicated below (in thousands):

 
| ** **                               | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**       | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
|                                     |       |                     |       | **(As restated)**           |       |   |   | **(As restated)** |   |
|                                     |       |                     |       | ** **                  |       |   |   | ** ** |   |
| Net income, as reported                  |       | $                        | 7,654      |                        | $          | 5,739 |   | $ | 14,405 |   | $ | 14,120 |   |
| Other comprehensive income:              |       |                     |       |                        |       |   |   |   |   |
| Foreign currency translation adjustments |       | 1,607                    |       | 260                         |       | (1,557 | ) | (463 | ) |
| Comprehensive income                     |       | $                        | 9,261      |                        | $          | 5,999 |   | $ | 12,848 |   | $ | 13,657 |   |

 

9

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As previously disclosed in the Company’sAnnual Report on Form 10-K for the year ended January 2, 2005, theCompany determined that foreign currency translation adjustments wereincorrectly presented net of tax for periods prior to the year ended January 2,2005. As a result, the Company restated the previously reported foreigncurrency translation adjustments from $0.8 million to $0.3 million and from $0.3million to ($0.5) million for the third quarter and for the first nine monthsof 2004, respectively.

 

**2.****             ACQUISITIONS**

 

***Specialty Media***

 

On February 22, 2005, the Company completed theacquisition of Specialty Media, a division of Cell & MolecularTechnologies, Inc., wholly owned by Sentigen Holding Corporation.Specialty Media, based in Phillipsburg, New Jersey, develops and supplies avariety of specialty stem cell culture media formulations and supplements,cells and research reagent tools to the life sciences industry. Serologicalsacquired all of the assets of Specialty Media for $6.5 million in cash andassumption of certain liabilities. The Specialty Media acquisition provides anumber of important strategic additions for our Research segment, ****most significantly, itsproducts extend Chemicon’s stem cell product portfolio.****

 

The results of Specialty Media were not material to theresults of operations for the three and nine months ended October 2, 2005and September 26, 2004; accordingly, no pro forma disclosure is presented.

 

The components of the purchase price were (in thousands):

 
| Cash paid                 |   | $ | 6,500 |   |
|---------------------------|--------|---|-------|--------|
| Direct costs              |   | $ | 84    |   |
| Mortgage debt assumed     |   | $ | 245   |   |
| Other liabilities assumed |   | $ | 340   |   |
|                      |   | $ | 7,169 |   |

 

The Company has completed its valuation of the fair market value of theunderlying assets acquired and at October 2, 2005 the allocation of assetsacquired was as follows (in thousands):

 
| Current assets                    |   | $     | 630    |   |
|-----------------------------------|--------|-------|--------|--------|
| Property and equipment            |   | 509   |   |
| Intangibles, principally goodwill |   | 6,030 |   |
|                              |   | $     | 7,169  |   |

 

TheCompany believes the depreciation expense on the fair value assigned toproperty and equipment and the amortization of intangible assets and goodwillwill be deductible for federal income tax purposes.

 

***Upstate Group, Inc***

 

During the nine months ended October 2, 2005, the Companyfinalized its evaluation of the purchase price allocation of Upstate Group, Inc.,which it acquired in October 2004, based on the estimated fairvalues of the assets and liabilities assumed as of the date of purchase.

 

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Thecomponents of the purchase price are as follows (in thousands):

 
| ** **                                 | ** ** | **As Originally  Reported** | ** ** | **Adjustments** | ** ** | **Adjusted Purchase  Price** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------|------------|------------------------------|------------|
|                                       |       |                        |       |            |       |                         |       |
| Stock issued and cash paid to shareholders |       | $                           | 203,325    |            | $          | —                       |       | $ | 203,325 |   |
| Direct costs of acquisition                |       | 3,998                       |       | —          |       | 3,998                        |       |
| Liabilities assumed                        |       | 34,781                      |       | 6,089           |       | 40,870                       |       |
| Total consideration and acquisition costs  |       | $                           | 242,104    |            | $          | 6,089                        |       | $ | 248,193 |   |

 

Duringthe nine months ended October 2, 2005, the Company completed its analysisof the fair market value at the date of acquisition of the finished goodsinventory and certain intangible assets, resulting in a net increase in theseassets and a corresponding net decrease in goodwill of $6.7 million. TheCompany also completed the analysis of deferred income taxes and preacquisitionliabilities arising from the Upstate acquisition, resulting in additional long-termdeferred income tax liabilities of $3.2 million, additional liabilities assumedat the acquisition of $2.9 million and a corresponding increase in goodwill of$6.1 million. Included in the additional liabilities assumed at the acquisitionin the third quarter of 2005 is $0.7 million related to a working capitalsettlement and $1.3 million in severance and relocation costs in conjunctionwith the acquisition. The adjusted allocation of purchase price to theunderlying assets is as follows (in thousands):

 
| ** **                                     | ** ** | **As Originally  Reported** | ** ** | **Adjustments** | ** ** | **Adjusted  Allocation** | ** ** | **Intangible Weighted  Average Useful Life** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-----------------|------------|--------------------------|------------|----------------------------------------------|------------|
|                                           |       |                        |       |            |       |                     |       |                                         |       |
| Cash and cash equivalents                      |       | $                           | 1,238      |            | $          | —                   |       | $                                            | 1,238      |   |   |   |
| Accounts receivable, net                       |       | 6,403                       |       | —          |       | 6,403                    |       |                                         |       |
| Inventory                                      |       | 9,420                       |       | 2,361           |       | 11,781                   |       |                                         |       |
| Other current assets                           |       | 1,907                       |       | —          |       | 1,907                    |       |                                         |       |
| Property and equipment                         |       | 9,515                       |       | —          |       | 9,515                    |       |                                         |       |
| Developed products                             |       | 53,200                      |       | (1,200          | )          | 52,000                   |       | 17 years                                     |       |
| Trademarks and trade name                      |       | 9,800                       |       | —          |       | 9,800                    |       | Indefinite                                   |       |
| Other intangible assets                        |       | 12,200                      |       | 5,500           |       | 17,700                   |       | 15 years                                     |       |
| Purchased in-process research and  development |       | 3,263                       |       | —          |       | 3,263                    |       | Expensed in 2004                             |       |
| Goodwill                                       |       | 135,158                     |       | (572            | )          | 134,586                  |       | Indefinite                                   |       |
|                                           |       | $                           | 242,104    |            | $          | 6,089                    |       | $                                            | 248,193    |   |   |   |

 

The Company is continuing its plan of integration of certain activitiesat Upstate. These activities are accounted for in accordance with EITF 95-3, “Recognitionof Liabilities in Connection with a Purchase Business Combination” (“EITF 95-3”).They primarily include the closure of facilities, the abandonment orredeployment of equipment, employee terminations and other activities in theUnited States. Such costs have been recognized as liabilities assumed in theacquisition. In the first nine months of 2005, the Company recorded a$2.2 million liability as a result of severance cost and relocation costs relatedto the acquisition with a corresponding adjustment to goodwill and $0.2 millionin accrued retention bonuses with the corresponding adjustment to currentperiod expense. At October 2, 2005, the Company had $3.0 million inaccrued expenses and other current liabilities in the accompanying condensedbalance sheet related to this integration. Changes in accrued acquisition andbusiness integration costs for all periods presented subsequent to theacquisition date are as follows (in thousands):

 
| ** **                    | ** ** | **Original  amount  recorded** | ** ** | **Prior year  amounts  paid** | ** ** | **Balance at  January 2,  2005** | ** ** | **Additional  accruals** | ** ** | **Amounts  paid** | ** ** | **Balance at  October 2,  2005** | ** ** |
|-------------------------------|------------|--------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|--------------------------|------------|-------------------|------------|---------------------------------------|------------|
|                          |       |                           |       |                          |       |                                  |       |                     |       |              |       |                                  |       |
| Severance and relocation cost |       | $                              | 293        |                          | $          | (185                                  | )          | $                        | 108        |              | $          | 1,916                                 |       | $ | (505 | ) | $ | 1,519 |   |
| Facility closure              |       | 1,470                          |       | (10                           | )          | 1,460                                 |       | 136                      |       | (383              | )          | 1,213                                 |       |
| Other                         |       | 530                            |       | —                        |       | 530                                   |       | 121                      |       | (375              | )          | 276                                   |       |
|                          |       | $                              | 2,293      |                          | $          | (195                                  | )          | $                        | 2,098      |              | $          | 2,173                                 |       | $ | (1,263 | ) | $ | 3,008 |   |

 

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***Chemicon International, Inc.***

 

EffectiveApril 1, 2003, Serologicals completed the acquisition of 100% of theoutstanding common stock of Chemicon. During the first quarter of 2004, theCompany completed its evaluation of a restructuring of certain components of Chemicon’soperations, which was contemplated at the date of acquisition. As a result, theCompany accrued $1.8 million related to lease terminations and siterelocation costs. This amount was recorded to goodwill in the first quarter of2004 as an adjustment to the purchase price of Chemicon in accordance with EITF95-3. At October 2, 2005, the Company had $1.7 million remaining inaccrued expenses and other current liabilities in the accompanying condensedbalance sheet related to this integration.  The Company expects to complete the activitiesassociated with this restructuring in 2006. Activity of accrued acquisition andbusiness integration costs for all periods presented subsequent to theacquisition date is as follows (in thousands):

 
| ** **       | ** ** | **Original  amount  recorded** | ** ** | **Prior year  amounts  paid** | ** ** | **Balance at  January 2,  2005** | ** ** | **Additional  accruals** | ** ** | **Amounts  paid** | ** ** | **Balance at  October 2,  2005** | ** ** |
|------------------|------------|--------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|--------------------------|------------|-------------------|------------|---------------------------------------|------------|
|             |       |                           |       |                          |       |                                  |       |                     |       |              |       |                                  |       |
| Facility closure |       | $                              | 1,250      |                          | $          | (46                                   | )          | $                        | 1,204      |              | $          | —                                |       | $ | — |   | $ | 1,204 |   |
| Other            |       | 503                            |       | (46                           | )          | 457                                   |       | —                   |       | (3                | )          | 454                                   |       |
|             |       | $                              | 1,753      |                          | $          | (92                                   | )          | $                        | 1,661      |              | $          | —                                |       | $ | (3 | ) | $ | 1,658 |   |

 

**3.****             DISCONTINUEDOPERATIONS**

 

TheCompany completed the sale and divestiture of its former therapeutic plasmabusiness on January 15, 2004, effective December 28, 2003.

 

Part ofthe sale proceeds consisted of secured promissory notes, which were recorded attheir estimated net realizable value of $7.9 million.  In December 2004, the Companyrenegotiated the terms of the promissory notes, combining them into one securedpromissory note (“new note”) with a stated face value of $7.8 million. Thenew note receivable bore interest at the applicable federal long-term taxexempt rate and was payable in variable quarterly installments through December 2007.The note was secured by the underlying assets of the business acquired and wasguaranteed by the buyer’s parent corporation. The Company recorded an imputedinterest charge on this new note in December 2004 because the stated interestrate on the new note was considered below market.

 

In September 2005, the buyer prepaid the entire remainingoutstanding principal balance on the note. Under the terms of the transaction,the remaining debt balance of $6.8 million was settled for $6.0 million in cashand a royalty-bearing, non-exclusive commercial license to a purificationtechnology. The amount of the discount, less unamortized imputed interestincome, was reported as a $0.5 million charge and is included in other expenseline item in the accompanying condensed income statement for the three and ninemonths ended October 2, 2005.

 

Thecurrent portion, $1.9 million, and long term portion, $5.3 million, of the notewere included in other current assets and other assets, respectively, in the January 2,2005 accompanying condensed balance sheet.

 

TheCompany has guaranteed real estate lease obligations totaling approximately $3.4 millionrelated to the therapeutic plasma business. If the buyer defaults on the leasepayments, the Company would be required to assume these leases. The Company hasaccrued a stand ready obligation of $0.1 million in accordance with FASBInterpretation No. 45, “Guarantor Accounting and Disclosure Requirementfor Guarantees” for these guarantees.

 

12

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**4.****             STOCKHOLDERS’EQUITY AND STOCK COMPENSATION PLAN**

 

***Increase in number of authorized shares ofcommon stock***

 

On May 11, 2005, the Company’s shareholders approved an amendmentto Article Four of the Company’s Amended and Restated Certificate ofIncorporation that increased the number of authorized shares of Common Stockfrom 50,000,000 shares to 115,000,000 shares.

 

***Restricted stock***

 

Periodically the Company has awarded restricted common stock andrestricted stock units to eligible key employees under the Company’sequity-based incentive plans. These awards have restriction periods tiedprimarily to employment and service. The awards are recorded at market value onthe date of the grant to unearned compensation; compensation expense isrecognized over the restriction period on a straight-line basis, net offorfeitures. In the nine months ended October 2, 2005, the Company issuedshares under this program to certain key employees, which were recorded attheir fair market value on date of issue, $0.7 million. These restrictedshares cliff vest over three to five years from date of issuance. The Companyrecorded these shares as outstanding with an offsetting entry to DeferredCompensation, a component of stockholders’ equity.

 

***Approval of the 2005 Incentive Plan***

 

On May 11, 2005, the Company’s shareholders approved theSerologicals Corporation 2005 Incentive Plan (the “2005 Incentive Plan”), underwhich 10,000,000 shares of Common Stock are reserved for issuance. The 2005 IncentivePlan provides specific limitations on the size of grants that any oneparticipant in the 2005 Incentive Plan may be granted. Pursuant to the 2005Incentive Plan, the Committee is authorized to issue awards consisting of stockoptions, deferred stock units, performance share units, restricted stock,restricted stock units, stock appreciation rights (“SARs”) and otherstock-based awards and cash payments. The purposes of the 2005 Incentive Plan areto encourage ownership of the Company’s Common Stock by key persons whoselong-term employment and service are considered essential to the Company’scontinued progress and to provide cash awards to such persons based on theincrease in the value of the Company’s Common Stock.  Such awards are intended to alignparticipants’ and shareowners’ interests.

 

The 2005 Incentive Plan replaced and superseded theSerologicals Corporation Stock Incentive Plan, which was approved by shareholderson May 8, 2001 (the “Prior Plan”). The Prior Plan automatically terminatedas of the date the shareholders approved the 2005 Incentive Plan, except thatsuch termination does not affect any grants or awards outstanding under thePrior Plan.  Shares previously reservedfor issuance under the Prior Plan that remained available for grants under thePrior Plan and any shares subject to awards under the Prior Plan thatsubsequently are forfeited, cancelled or expire unexercised are available forissuance under the 2005 Incentive Plan.

 

Under the 2005 Incentive Plan the Company granted performanceshares to certain employees. The vesting of performance shares is based onachieving certain performance targets. Included in net income for the three andnine month periods ended October 2, 2005 is $0.3 million in compensationexpense related to performance shares.

 

***Treasury Stock***

 

On June 10, 2005 the Company announced that its Board ofDirectors authorized a stock repurchase program to repurchase up to 2.0 millionshares of the Company’s common stock over the next three years ending in June 2008.The program is intended to be implemented through purchases made from time totime in the open market or through private transactions in accordance withapplicable securities laws.  The timing,pricing and size of purchases will depend on market conditions, prevailingstock prices and other considerations.  Asof October 2, 2005, the Company had repurchased approximately 125,000shares of common stock for $2.5 million. There were no repurchases of sharesduring the three months ended October 2, 2005. Subsequent to October 2,2005 the Company has acquired an additional 532,000 shares for $10.6 million.

 

**5.****             SEGMENTINFORMATION**

 

SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information” (“SFAS No. 131”), defines operating segments to bethose components of a business for which separate financial information isavailable that is regularly evaluated by

 

13

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management in making operating decisions and in assessing performance.SFAS No. 131 further requires that segment information be presentedconsistently with the basis and manner in which management internallydisaggregates financial information for the purposes of assisting in makinginternal operating decisions.

 

Wereport operating results in two business segments, “Bioprocessing Products andServices” and “Research Products and Services.” The operations of CellianceTMrepresent the Bioprocessing segment and the operations of Chemicon® andUpstate® represent the Research segment.

 

OurResearch segment sells a broad range of research products, including specialtyreagents, kits, antibodies and molecular biology tools to research customersworking in the areas of neuroscience, infectious disease, oncology, stem cellresearch and cell signaling. We are also a leading supplier of monoclonalantibodies, conjugates, antibody blends and molecular and cell biology-baseddetection kits for use in diagnostic laboratories. In addition, we are one ofthe leading suppliers of tools for kinase research and one of the leadingproviders of drug discovery services to pharmaceutical companies targetingkinase biology-based drugs. We market our research products and services underour Chemicon® and Upstate® brand names.

 

OurBioprocessing segment sells a variety of cell culture products, includinghighly purified proteins and tissue culture media components. These productsare used primarily by biopharmaceutical and biotechnology companies as nutrientadditives in cell culture media. Our most significant product within the CellCulture segment is EX-CYTE®, a patented serum-free solution of cholesterol,lipoproteins and fatty acids. EX-CYTE® is used, in combination with other cellculture supplements, to reduce or replace animal serum in cell cultureprocesses. We also provide a range of serum-based products in this segment,including Bovine Serum Albumin (“BSA”), under the brand name “ProbuminTM”, forwhich we are the world’s leading supplier. We also sell recombinant humaninsulin, under the brand name of “IncelligentTM”, for use as a media supplement.This segment also manufactures and sells monoclonal antibodies that are used inproducts such as blood typing reagents and in controls for diagnostic tests forcertain infectious diseases. We believe these products comprise the world’smost comprehensive range of commercially available human monoclonal antibodiesfor blood grouping. These products are marketed under our CellianceTM brandname.

 

In 2004, our business was organized in three business segments:Research, Cell Culture and Diagnostics. These segments were based primarily onthe differing production, manufacturing and other value-added processes that weperformed with respect to our products and, to a lesser extent, the differingnature of the ultimate end use of our products. All amounts in thisQuarterly Report on Form 10-Q reflect the restatement of the 2004 segmentsso that they are consistent with the current year presentation.

 

The Company’s segment net revenues and gross profit for the three andnine months ended October 2, 2005 and September 26, 2004 were asfollows (in thousands):

 
| ** **        | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**       | ** ** |
|-------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
| ** **        | ** ** | ** **               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net revenues:** | ** ** | ** **               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research          |       | $                        | 33,543     |                        | $          | 15,246 |   | $ | 101,216 |   | $ | 45,713 |   |
| Bioprocessing     |       | 33,426                   |       | 31,048                      |       | 86,596 |   | 81,048 |   |
| **Total**         |       | $                        | 66,969     |                        | $          | 46,294 |   | $ | 187,812 |   | $ | 126,761 |   |
|              |       |                     |       |                        |       |   |   |   |   |
| **Gross Profit:** |       |                     |       |                        |       |   |   |   |   |
| Research          |       | $                        | 20,798     |                        | $          | 9,759 |   | $ | 63,739 |   | $ | 29,426 |   |
| Bioprocessing     |       | 17,428                   |       | 15,222                      |       | 42,039 |   | 39,956 |   |
| **Total**         |       | $                        | 38,226     |                        | $          | 24,981 |   | $ | 105,778 |   | $ | 69,382 |   |

 

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Prior to 2005, the Company did not determine operating income andincome before income taxes or segregate assets by segment because a significantportion of selling, general and administrative expenses, research anddevelopment expenses and assets were shared and not allocated to operatingunits. Beginning in 2005, with the decision to change from a companyorganized primarily by functional organizational units to a company withdistinct operating units in two business segments and a separate corporategroup, we are able to provide additional segment information for 2005; however,comparable information for 2004 is not available and as a result not presented.The additional segment information for 2005 is as follows (in thousands):

 
| ** **                                   | ** ** | **Three Months Ended October 2, 2005** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **Research**                                | ** ** | **Bioprocessing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|                                         |       |                                        |       |   |   |   |   |   |   |
| Gross profit                                 |       | $                                           | 20,798     |   | $ | 17,428 |   | $ | — |   | $ | 38,226 |   |
| Selling, general and administrative expenses |       | 11,320                                      |       | 3,586 |   | 4,440 |   | 19,346 |   |
| Research and development                     |       | 3,358                                       |       | 806 |   | 265 |   | 4,429 |   |
| Amortization                                 |       | 1,567                                       |       | 256 |   | — |   | 1,823 |   |
|                                         |       |                                        |       |   |   |   |   |   |   |
| Operating income (loss)                      |       | 4,553                                       |       | 12,780 |   | (4,705 | ) | 12,628 |   |
| Other expense (income), net                  |       | 8                                           |       | (57 | ) | 1,896 |   | 1,847 |   |
| Income (loss) before income tax              |       | $                                           | 4,545      |   | $ | 12,837 |   | $ | (6,601 | ) | $ | 10,781 |   |

 
| ** **                                   | ** ** | **Nine Months Ended October 2, 2005** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **Research**                               | ** ** | **Bioprocessing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|                                         |       |                                       |       |   |   |   |   |   |   |
| Gross profit                                 |       | $                                          | 63,739     |   | $ | 42,039 |   | $ | — |   | $ | 105,778 |   |
| Selling, general and administrative expenses |       | 37,913                                     |       | 11,426 |   | 12,873 |   | 62,212 |   |
| Research and development                     |       | 10,071                                     |       | 2,528 |   | 642 |   | 13,241 |   |
| Amortization                                 |       | 4,539                                      |       | 790 |   | — |   | 5,329 |   |
|                                         |       |                                       |       |   |   |   |   |   |   |
| Operating income (loss)                      |       | 11,216                                     |       | 27,295 |   | (13,515 | ) | 24,996 |   |
| Other expense (income), net                  |       | 265                                        |       | (115 | ) | 4,557 |   | 4,707 |   |
| Income (loss) before income tax              |       | $                                          | 10,951     |   | $ | 27,410 |   | $ | (18,072 | ) | $ | 20,289 |   |
|                                         |       |                                       |       |   |   |   |   |   |   |
| Assets at October 2, 2005               |       | $                                          | 386,115    |   | $ | 198,339 |   | $ | 63,023 |   | $ | 647,477 |   |

 

**6.****             CONTINGENCY**

 

The Company is involved in a lawsuit that arose out of the acquisitionof Chemicon International, Inc. in 2003. In the lawsuit, an employee ofChemicon and a former employee of Chemicon sued Chemicon, the Company andcertain others, including the founders of Chemicon, for amounts allegedly owedthem pursuant to bonus agreements they entered into with Chemicon. They allegein the lawsuit that the Company’s acquisition of Chemicon gave rise to theirright to receive bonuses.  They alsoallege that Chemicon breached the bonus agreements and that the Company and thefounders of Chemicon tortiously interfered with Chemicon’s obligations pursuantto the bonus agreements.  The Company isdefending the suit and believes that it has meritorious defenses to theplaintiffs’ allegations.  Furthermore,the Company is indemnified by the founders of Chemicon and certain othersagainst liability for the amount of these bonuses.  At the time of the acquisition of Chemicon,the Company paid $19 million of the purchase price directly into an escrowaccount to secure its indemnification right. Management believes that the indemnification and the escrow will preventthe Company from incurring material liability as a result of this litigation ifit is found that the Company or Chemicon is liable to the plaintiffs.  In management’s opinion, the ultimateresolution of this matter will not have a material adverse effect on theCompany’s financial position or results of operations.

 

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**7.****             SUBSEQUENTEVENT**

 

In October 2005, the Company received $3.1million in connection with a contractual claim against a customer of theCompany's former therapeutic plasma business. The payment will be reported, net of income taxes and collectionexpenses totaling approximately $1.3 million, as Income from DiscontinuedOperations during the fourth quarter of 2005.

 

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**Forward-Looking Statements**

 

*This Quarterly Report on Form 10-Q**contains certain “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995 about Serologicals Corporation and its subsidiaries (collectively, “Serologicals”or the “Company,” “we,” “our” or “us”) that are subject to risks anduncertainties. Statements that are not historical facts, including statementsabout our beliefs and expectations, are forward-looking statements.Forward-looking statements may be identified by the use of words such as “may,”“will,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “believe,” or “continue”and other words of similar meaning or future or conditional verbs such as “should,”“would” and “could.” Forward-looking statements include discussions of ourexpected business outlook, future operations, financial performance, pendingacquisitions, financial strategies, future working capital needs and projectedindustry trends, as well as our strategies for growth, product development,regulatory approvals and compliance, market position and expenditures.*

 

*Forward-looking statements are only predictions and are not guaranteesof performance. Forward-looking statements are based on current expectations offuture events and are based on our current views and assumptions regardingfuture events and operating performance. These assumptions could proveinaccurate, or unknown risks or uncertainties could materialize, which couldcause our actual results to differ materially from our expectations orpredictions. Many of these factors are beyond our ability to control orpredict.*

 

*All forward-looking statements contained in this Quarterly Report on Form 10-Q**are qualified in their entiretyby reference to the factors discussed throughout this Report. The followingcautionary statements identify important factors that could cause our actualresults to differ materially from those discussed in the forward-looking statementsmade in this Report. Among the factors that could cause our actual results todiffer materially are:*

 

•      *our ability to implement our growth strategy;*

 

•      *our ability to complete the integration of a significant acquisitionmade in 2004;*

 

•      *our ability to manage our growth;*

 

•      *our ability to raise capital;*

 

•      *our ability to compete effectively within our industry;*

 

•      *the availability and cost of raw materials;*

 

•      *our dependence on a supply ofrecombinant human insulin from a third party for a significant portion of therevenues in our Bioprocessing segment;*

 

•      *our dependence on the success of the customers of our EX-CYTE® productin developing and marketing new drugs using the product;*

 

•      *our ability to comply with governmental, customer and industry laws,regulations and guidelines, including those related to environmental complianceand remediation;*

 

•      *our dependence on the success of our research and development efforts;*

 

•      *our ability to identify new licensing opportunities and to develop newproducts, services and technologies;*

 

•      *our ability to protect our intellectual property;*

 

•      *the effect on our results of operations of the loss of any significantcustomers or reduced orders from significant*

 

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*customers, including reductions or delays in research and developmentbudgets and in government funding on which our customers may depend;*

 

•      *adoption of, or changes in, domestic and foreign laws and regulationsthat could affect our ability to maintain existing regulatory licenses andapprovals;*

 

•      *the risks associated with our international operations; and*

 

•      *the other risks described under the caption “Cautionary Statements” in ourAnnual Report on Form 10K for the fiscal year ended January 2, 2005.*

 

*You should not place undue reliance on any forward-looking statements,which are based on current expectations. Forward-looking statements speak onlyas of the date they are made, and we undertake no obligation to update any ofthem in light of new information or future events. The factors listed above (inaddition to other possible factors not listed) could affect our actual resultsand cause these results to differ materially from those expressed inforward-looking statements made by us or on our behalf.*

 

**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Overview**

 

Weare a global leader in developing and commercializing consumable biologicalproducts, enabling technologies and services in support of biological research,drug discovery, and the bioprocessing of life-enhancing products. Serologicals’customers include researchers at major life science companies and leadingresearch institutions involved in key disciplines, such as neurology, oncology,hematology, immunology, cardiology, proteomics, infectious diseases, cellsignaling and stem cell research. In addition, Serologicals is the world’sleading provider of monoclonal antibodies for the blood typing industry.

 

Wereport operating results in two business segments, “Bioprocessing Products andServices” and “Research Products and Services.” The operations of CellianceTMrepresent the Bioprocessing segment and the operations of Chemicon® and Upstate®represent the Research segment.

 

OurResearch segment sells a broad range of research products, including specialtyreagents, kits, antibodies and molecular biology tools to research customersworking in the areas of neuroscience, infectious disease, oncology, stem cellresearch and cell signaling. We are also a leading supplier of monoclonalantibodies, conjugates, antibody blends and molecular biology-based detectionkits for use in diagnostic laboratories. In addition, we are one of the leadingsuppliers of tools for kinase research and one of the leading providers of drugdiscovery services to pharmaceutical companies targeting kinase biology-baseddrugs. We market our research products and services under our Chemicon® andUpstate® brand names.

 

OurBioprocessing segment sells a variety of cell culture products, includinghighly purified proteins and tissue culture media components. These productsare used primarily by biopharmaceutical and biotechnology companies as nutrientadditives in cell culture media. Our most significant product within the Bioprocessingsegment is EX-CYTE®, a patented serum-free solution of cholesterol,lipoproteins and fatty acids. EX-CYTE® is used, in combination with other cellculture supplements, to reduce or replace animal serum in cell cultureprocesses. We also provide a range of serum-based products in this segment,including BSA, under the brand name “ProbuminTM”, for which we are the world’sleading supplier. We also sell recombinant human insulin, under the brand nameof “IncelligentTM”, for use as a media supplement. This segment also manufacturesand sells monoclonal antibodies that are used in products such as blood typingreagents and in controls for diagnostic tests for certain infectious diseases.We believe these products comprise the world’s most comprehensive range ofcommercially available human monoclonal antibodies for blood grouping. These productsare marketed under our CellianceTM brand name.

 

In 2004, our business was organized in three business segments:Research, Cell Culture and Diagnostics. These segments were based primarily onthe differing production, manufacturing and other value-added processes that weperform with respect to the products and, to a lesser extent, the differingnature of the ultimate end use of our products. All amounts in thisQuarterly Report on Form 10-Q reflect the restatement of the 2004 segmentsso that they are consistent with the current year presentation.

 

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**Critical Accounting Policies**

 

There have been no material changes to our critical accounting policiesfrom those discussed under the caption “Critical Accounting Policies” in “Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations” in our Annual Report on Form 10-Kfor the fiscal year ended January 2, 2005.

 

**Results of Operations**

 

***Overview***

 

The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with the unauditedCondensed Consolidated Financial Statements and Notes thereto included in thisQuarterly Report on Form 10-Q.

 

The following table sets forth certain consolidated operating data as apercentage of net revenues for the periods indicated below:

 
| ** **                                   | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**       | ** ** |
|----------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
|                                         |       |                     |       |                        |       |   |   |   |   |
| Net revenues                                 |       | 100.0                    | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |
| Gross profit                                 |       | 57.1                     | %          | 54.0                        | %          | 56.3 | % | 54.7 | % |
| Selling, general and administrative expenses |       | 28.9                     | %          | 28.1                        | %          | 33.1 | % | 30.0 | % |
| Research and development expenses            |       | 6.6                      | %          | 4.2                         | %          | 7.1 | % | 4.8 | % |
| Amortization of intangibles                  |       | 2.7                      | %          | 1.4                         | %          | 2.8 | % | 1.6 | % |
| Operating income                             |       | 18.9                     | %          | 20.3                        | %          | 13.3 | % | 18.3 | % |
| Net income                                   |       | 11.4                     | %          | 12.4                        | %          | 7.7 | % | 11.1 | % |

 

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The following tables set forth a breakdown of revenue and gross profitcontributed by segment for the three and nine months ended October 2, 2005and September 26, 2004 (dollars in thousands):

 
| ** **     | ** ** | **Three Months Ended**   | ** ** |
|----------------|------------|--------------------------|------------|
| ** **     | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
| ** **     | ** ** | **Revenue**              | ** ** | **% Total** | ** ** | **Revenue** | ** ** | **% Total** | ** ** |
| ***Revenue:*** |       |                     |       |   |   |   |   |   |   |
| Research       |       | $                        | 33,543     |   | 50.1 | % | $ | 15,246 |   | 32.9 | % |
| Bioprocessing  |       | 33,426                   |       | 49.9 | % | 31,048 |   | 67.1 | % |
|           |       | $                        | 66,969     |   | 100.0 | % | $ | 46,294 |   | 100.0 | % |

 
| ** **          | ** ** | **Three Months Ended**   | ** ** |
|---------------------|------------|--------------------------|------------|
| ** **          | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
| ** **          | ** ** | **Gross Profit**         | ** ** | **Gross Margin %** | ** ** | **Gross Profit** | ** ** | **Gross Margin %** | ** ** |
| ***Gross Profit:*** |       |                     |       |   |   |   |   |   |   |
| Research            |       | $                        | 20,798     |   | 62.0 | % | $ | 9,759 |   | 64.0 | % |
| Bioprocessing       |       | 17,428                   |       | 52.1 | % | 15,222 |   | 49.0 | % |
|                |       | $                        | 38,226     |   | 57.1 | % | $ | 24,981 |   | 54.0 | % |

 
| ** **     | ** ** | **Nine Months Ended**    | ** ** |
|----------------|------------|--------------------------|------------|
| ** **     | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
| ** **     | ** ** | **Revenue**              | ** ** | **% Total** | ** ** | **Revenue** | ** ** | **% Total** | ** ** |
| ***Revenue:*** |       |                     |       |   |   |   |   |   |   |
| Research       |       | $                        | 101,216    |   | 53.9 | % | $ | 45,713 |   | 36.1 | % |
| Bioprocessing  |       | 86,596                   |       | 46.1 | % | 81,048 |   | 63.9 | % |
|           |       | $                        | 187,812    |   | 100.0 | % | $ | 126,761 |   | 100.0 | % |

 
| ** **          | ** ** | **Nine Months Ended**    | ** ** |
|---------------------|------------|--------------------------|------------|
| ** **          | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
| ** **          | ** ** | **Gross Profit**         | ** ** | **Gross Margin %** | ** ** | **Gross Profit** | ** ** | **Gross Margin %** | ** ** |
| ***Gross Profit:*** |       |                     |       |   |   |   |   |   |   |
| Research            |       | $                        | 63,739     |   | 63.0 | % | $ | 29,426 |   | 64.4 | % |
| Bioprocessing       |       | 42,039                   |       | 48.5 | % | 39,956 |   | 49.3 | % |
|                |       | $                        | 105,778    |   | 56.3 | % | $ | 69,382 |   | 54.7 | % |

 

**Net Revenues, Gross Profit and Gross Margin**

 

*Consolidated.*** **Consolidatednet revenues increased 44.7%, to $67.0 million, in the three months ended October 2,2005, compared to $46.3 million in the same period last year, primarily fromthe inclusion of Upstate in 2005 and overall increased sales volumes in certainkey products as discussed below. Consolidated net revenues for the nine monthsended October 2, 2005 increased 48.2% to $187.8 million, compared to$126.8 million for the same period last year. Consolidated gross profitsincreased from $25.0 million in the third quarter of 2004 to $38.2 million in thethird quarter of 2005, primarily due to the inclusion of Upstate in the thirdquarter of 2005. Consolidated gross profit increased from $69.4 million in thenine months ended September 26, 2004 to $105.8 million in the nine monthsended October 2, 2005, primarily due to the inclusion of Upstate in thenine months ended October 2, 2005.  Grossmargin increased to 57.1% in the third quarter of 2005 compared to 54.0% in theprior year quarter, and was favorably impacted

 

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by the inclusion of higher margins of Upstate in 2005. Gross marginincreased to 56.3% in the nine months ended October 2, 2005 compared to 54.7%in the same period last year primarily due to the higher margins of Upstate in2005, but was partly offset by lower margins arising from the Bioprocessingproduct mix.

 

*Research*.  Net revenue in the third quarter of 2005increased $18.3 million, or 120.0%, over the prior year quarter. Net revenuefor the nine months ended October 2, 2005 increased $55.5 million, or121.4%, over the same period last year. In addition to the increased revenuerecorded as the result of the Upstate acquisition, Chemicon achieved revenuegrowth of 15.4% in the third quarter of 2005, compared to the prior yearquarter, which was driven by increased volumes in the areas of neuroscience,stem cells, bulk reagents and diagnostic products. Upstate revenue, while notincluded in our third quarter of 2004 operating results, grew 18.6% compared tothe third quarter of 2004. Upstate revenue growth in the third quarter andfirst nine months of 2005 was driven primarily by stronger volumes in drugdiscovery services as well as product sales in the areas of nuclear functionand multiplex Beadlyte® assays. Geographically, Research revenue increased 36.0%in Asia, 20.0% in Europe and 13.0% in North America in the third quarter of2005 compared to the same period in 2004. In the first nine months of 2005,Research revenue increased 28.0% in Asia, 18.0% in Europe and 15.0% in North America,compared to the same period in 2004. These geographical increases were drivenby increased market share.

 

Gross margins for the three and nine months ended October 2, 2005decreased by 2.0 and 1.4 percentage points to 62.0% and 63.0%, respectively,compared to the same period in prior year. Gross margins in 2005 for theResearch segment were lower than 2004 due to product mix when compared to prioryear. In addition, gross margins for the Research segment were higher in 2004as a result of a second quarter 2004 one-time benefit related to the settlementof a dispute over a licensing arrangement. This settlement increased Research gross margin by approximately 2.0 percentagepoints for the first nine months of 2004. Research gross margin for the ninemonths ended October 2, 2005 was also reduced by a one time charge ofapproximately $0.5 million in the first quarter of 2005 resulting frompurchase price adjustments to inventory arising from the acquisition ofUpstate.

 

Changes in foreign currency exchange rates were immaterial to Researchsegment revenues for the three and nine months ended October 2, 2005 and September 26,2004. In the Research segment currency rate fluctuations had a negligibleaffect on gross margins in both the third quarter and for the first nine monthsof 2005 and had less than a 1.0 percentage point reduction in gross margins inboth the third quarter and for the first nine months of 2004.

 

*Bioprocessing. *Thefollowing table sets forth a breakdown of net revenue for the key products inthe Bioprocessing segment (in thousands):

 
| ** **                   | ** ** | **Quarter Ended**        | ** ** | **Nine Months Ended**       | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** | **October 2, 2005** | ** ** | **September 26, 2004** | ** ** |
|                         |       |                     |       |                        |       |   |   |   |   |
| EX-CYTE®                |       | $                        | 9,397      |                        | $          | 7,548 |   | $ | 21,344 |   | $ | 20,879 |   |
| ProbuminTM BSA           |       | 5,477                    |       | 4,123                       |       | 15,196 |   | 12,823 |   |
| IncelligentTM            |       | 8,188                    |       | 7,986                       |       | 19,278 |   | 15,456 |   |
| Monoclonal antibodies        |       | 6,431                    |       | 6,837                       |       | 18,908 |   | 19,188 |   |
| Other bioprocessing products |       | 3,933                    |       | 4,554                       |       | 11,870 |   | 12,702 |   |
|                         |       |                     |       |                        |       |   |   |   |   |
|                         |       | $                        | 33,426     |                        | $          | 31,048 |   | $ | 86,596 |   | $ | 81,048 |   |

 

Bioprocessing revenue was $33.4 million in the third quarter 2005compared to $31.0 million the prior year quarter, an increase of 7.7%. Bioprocessingrevenue increased by $5.5 million to $86.6 million in first nine months of 2005,an increase of 6.8%. The majority of the revenue fluctuations in this segmentbetween comparable periods are due to volume associated with customer orderingpatterns. Revenues in 2005 reflect modest price increases over the prior year.

 

In the third quarter of 2005, Bioprocessing sales increased 106% inEurope and declined 12% in North America compared to the same period in 2004.In the first nine months of 2005, Bioprocessing revenue increased 39% in Europeand declined 3% in North America compared to the same period in 2004. Revenuefrom these two geographic regions represented 98.0% and 97.0% of all Bioprocessingrevenue in the third quarter and first nine months of 2005, respectively.

 

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Bioprocessing margins for the third quarter of 2005 increased byapproximately 3.1 percentage points compared to the same periods in 2004primarily as the result of higher EX-CYTE® volumes, slightly higherIncelligentTM sales and higher manufacturing productivity, which resulted inlower unit production costs.**Bioprocessingmargins for the first nine months of 2005 decreased by approximately 0.8percentage points compared to the same periods in 2004 primarily as a result ofproduct mix.

 

Bioprocessing gross margins during the first nine months of 2004included a charge of approximately $0.5 million, or 0.6% of Bioprocessing revenue,related to a production halt at our Toronto facility early in the first quarterof 2004 due to a “mad-cow” disease scare in Washington State. The productionhalt resulted from our inability to transport raw materials from our U.S.supplier to our facility in Toronto. As a result, much of our Toronto plant wasidle for approximately one month in 2004 until all of the importationclearances from the Canadian government were obtained. Bioprocessing grossmargins for the three and nine month period ended October 2, 2005 includedcertain reorganization and lease termination costs of $0.5 million and $0.8million, respectively.

 

In the Bioprocessing segment, currency rate fluctuations had anegligible affect on revenues and gross margins in both the third quarter andfor the first nine months of 2005. Gross margins in the Bioprocessing segmentwere adversely affected by 1.0 percentage point in the third quarter and theeffect was negligible for the first nine months of 2004, respectively.

 

**Selling, General and Administrative Expenses**

 

Consolidated selling, general and administrative (“SG&A”) expenseswere $19.3 million, or 28.9% of revenues in the third quarter of 2005,compared to $13.0 million, or 28.1%, of revenues in the third quarter of2004. SG&A expenses were $62.2 million, or 33.1%, of revenues in thefirst nine months of 2005, compared to $38.0 million, or 30.0%, ofrevenues in the first nine months of 2004.

 

SG&A during the third quarter and first nine months of 2005increased by $6.3 million and $24.2 million, respectively, compared to the sameperiods in 2004, primarily due to the inclusion of Upstate in 2005.Additionally, SG&A expenses in the first nine months of 2005 included $2.2million in costs incurred for the continued integration of Upstate. The majorityof these integration costs were incurred in cross training our sales force to sellall product offerings and integration of various Research selling, customerservice and marketing efforts. SG&A expense for the first nine months of2005 also included $1.1 million in employee termination costs associated with reorganizationactivities in the Bioprocessing segment and at our corporate headquarters. ExcludingUpstate related integration costs and reorganization costs at Bioprocessing andcorporate, SG&A would have been 31.3% compared to 30.0% of revenues in the firstnine months of 2005 and 2004, respectively.

 

**Research and Development Expenses**

 

Consolidated research and development expense increased to $4.4 million,or 6.6% of revenue, during the third quarter of 2005, as compared to $1.9million, or 4.2% of revenue, during the third quarter of 2004. Research anddevelopment expense also increased during the first nine months of 2005 to$13.2 million, or 7.1% of revenue, from $6.1 million, or 4.8% of revenue, inthe same period in the prior year. Research and development expenses increasedin the third quarter and first nine months of 2005 compared to the same periodsin 2004 primarily due to the inclusion of Upstate. Included in research anddevelopment expenses for the three and nine month period ended October 2,2005, respectively, is $0.2 million for integration costs at Upstate.

 

Our Research segment introduced 520 and over 1,500 new products duringthe third quarter and first nine months of 2005, respectively. These newproducts included new Chemicon assays and reagents focused in the areas ofneuroscience and stem cell research and a range of new Upstate kinases andmultiplex Beadlyte® assays, as well as the addition of 182 products in connectionwith the Specialty Media acquisition. Upstate continues to expand its industryposition by providing over 250 kinases with an aggressive plan to furtherincrease its kinase panel by the end of 2005, continuing into 2006.

 

During the quarter, Upstate continued to expand its product portfoliowith continued emphasis on new products to support drug discovery activitieswith particular emphasis on cell biology-based products. This included thelaunch of a new, more cost efficient Western blotting detection kit and theexpansion of its KinEASETM FP production line to include each of the 80individual kinases that have been validated in the assay. Upstate continues itscommitment to support drug discovery research by continuing to develop andintroduce new products and services using cell signaling technologies.

 

Chemicon also continues to expand its product portfolio and added anumber of co-development opportunities. This includes

 

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the introduction of an innovative infectious disease detection productutilizing Chemicon’s patented fluorescent detection technology, Amplifluor®.Chemicon also entered into an exclusive manufacturing and marketing agreementthat will transfer patented technology and expertise to Chemicon to allow it tomanufacture fully formulated, serum-free embryonic stem cell media for theresearch market. In addition, Chemicon signed an exclusive agreement toco-develop new antibody markers from proprietary human embryonic stem celllines further demonstrating the commitment by Chemicon to maintain itsleadership position in the support of stem cell research.

 

Our Celliance business unit also expanded its product portfolio duringthe third quarter by introducing a new line of peptones under the brand name ofLucraToneTM. The initial launch includes eight animal-free products that arecritical components in cell culture and fermentation. In addition, Cellianceacquired the UCOE (ubiquitous chromatin opening element) gene expressiontechnology that improves the yield, consistency and stability of protein productionin cultured mammalian cells.

 

**Amortization of Intangibles**

 

Amortization of intangibles increased from $2.1 million during thefirst nine months of 2004 to $5.3 million for the same period in 2005 primarilydue to the acquisition of Upstate.

 

**Other Expenses (Income), Net**

 

Other expenses (income), net in 2005 includes gains and losses fromforeign currency transactions. Recognized losses on foreign exchangetransactions were negligible in the third quarter of 2005 and 2004 and $0.3million for the first nine months of 2005 and 2004, respectively. Included inother expense (income) during the third quarter of 2005 is a $0.5 millioncharge in connection with the collection of the note from the Buyer of ourformer therapeutic plasma business (see Note 3 to condensed consolidatedfinancial statements). Additionally, included in other expense (income) duringthe first nine months of 2005 is a $0.2 million gain related to interest rateswap ineffectiveness (see Note 1 to condensed consolidated financial statements).In 2004 other expenses (income), net included income from providing certainadministrative transition services for the buyer of our former therapeuticplasma business. Income from transition services was $0.7 millionin the first nine months of 2004. We did not earn any additional incomefrom transition services subsequent to the second quarter of 2004.

 

**Interest Expense**

 

Interest expense increased during the third quarter and first ninemonths of 2005 to $1.8 million and $5.5 million, respectively, compared to $1.3million and $3.5 million, respectively, in the same periods of 2004 due toincreases in the variable interest rates through June 2005 when the swapagreements were terminated (see Note 1 to condensed consolidated financialstatements). Prior to termination, the swaps converted the 4.75% fixedrate on $70.0 million of our Debentures to a variable interest rate basedon 6-month LIBOR at the end of each interest period plus a spread of 66 basispoints. In the third quarter and first nine months of 2005, we capitalized a negligibleamount of interest on construction in process (CIP) compared to $0.3 millionand $0.8 million, respectively, in the same periods of 2004. The decrease incapitalized interest in 2005 was due to lower balances in CIP during thecomparable periods due primarily to the completion of the construction phase ofour bioprocessing plant in Lawrence, Kansas.

 

**Interest Income**

 

Interest income increased during the third quarter and first ninemonths of 2005 compared to the same periods in 2004, primarily due to theincrease in average balance held in short term investments. Interest income alsoincreased during the first nine months of 2005 compared to the same period in2004 due to higher interest rates on cash, cash equivalents and short terminvestments. Our average balances for these categories during the third quarterand first nine months of 2005 were $60.0 million and $57.2 million,respectively, compared to $54.9 million and $56.7 million, respectively, duringthe same periods of 2004. Included in interest income for the three and firstnine months ended October 2, 2005 is $0.1 million and $0.4 million,respectively, in interest income on the note receivable from the Buyer of ourformer therapeutic plasma business (see Note 3 to condensed consolidatedfinancial statements).

 

**Provision for Income Taxes**

 

Our consolidated effective tax rate for the third quarter and firstnine months of 2005 was 29.0%, compared to 31.0% in the same periods of 2004. Weexpect our rate for the full 2005 fiscal year to be 29.0% compared to 31.0% forthe full year in 2004. The lower expected rate is a result of the generation ofmore of our income in lower tax jurisdictions, increases in research and

 

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development activities and higher tax credits.

 

**Liquidity and Capital Resources**

 

The following table sets forth certain indicators of financialcondition and liquidity as of October 2, 2005 and January 2, 2005 (dollarsin thousands):

 
| ** **                                             | ** ** | **October 2, 2005** | ** ** | **January 2, 2005** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                                   |       |                     |       |                     |       |
| Cash, cash equivalents and marketable securities       |       | 64,950                   |       | 62,054                   |       |
| Working capital                                        |       | 144,018                  |       | 122,443                  |       |
| Long term debt and convertible subordinated debentures |       | 132,199                  |       | 135,008                  |       |
| Stockholders equity                                    |       | 438,686                  |       | 416,531                  |       |
| Total debt to equity                                   |       | 30.1                     | %          | 32.4                     | %          |

 

We have three principal sources of near-term liquidity: (1) existingcash, cash equivalents and marketable securities; (2) cash generated byoperations; and (3) available borrowing capacity under our revolvingcredit facility (“Revolver”), which provides for a maximum borrowing capacity of$45 million. As of October 2, 2005, we had $45 million availableunder the Revolver. We believe that our liquidity and capital resources aresufficient to meet our working capital, capital expenditure and otheranticipated normal operating cash requirements over the next twelve months.

 

Net cash provided by operating activities was $10.4 million and$21.3 million during the first nine months of 2005 and 2004, respectively.Changes in operating assets and liabilities used $20.8 million and $3.4 millionin cash in the first nine months of 2005 and 2004, respectively. Accountsreceivable decreased $3.5 million and $3.1 million during the first ninemonths of 2005 and 2004, respectively, because the third quarter of each yearhad lower sales than the fourth quarter of the preceding year. Inventoriesincreased $5.3 million and $5.2 million in the first nine months of 2005and 2004, respectively, due to the inventory buildup in anticipation of higherfourth quarter sales. Accounts payable and accrued liabilities decreased $16.6 millionand $1.0 million during the first nine months of 2005 and 2004,respectively, due to reductions in accrued payroll expense and deferredrevenues, timing of purchases of raw materials and timing of payments for bonuses,interest on the Debentures, commissions, royalties and income taxes. Theremaining changes in cash provided by operating activities are due to $0.3million higher net income, increased depreciation and amortization of $3.6million and increased tax benefit from exercise of stock options of $2.8million. Depreciation and amortization increased in the first nine months of2005 compared to the same period in 2004 due to the acquisition of Upstate effectiveOctober 1, 2004.

 

Net cash used in investing activities during the first nine months of2005 was $14.3 million, compared with $32.7 million during the first ninemonths of 2004. Capital expenditures during the first nine months of 2005 were$9.5 million compared to $14.8 million in the same period of 2004. Expendituresin 2005 consisted primarily of manufacturing facility improvements andcapitalization of certain costs associated with the implementation of ourenterprise resource planning (“ERP”) system in our Research segment. Includedin the purchase of property and equipment and intangible assets for the firstnine months of 2005 is $1.6 million related to the purchases of intangibleassets, $1.3 million of which was related to the acquisition of UCOE(ubiquitous chromatin opening element) gene expression technology that improvesthe yield, consistency and stability of protein production in culturedmammalian cells.  In 2004, our capitalexpenditures consisted primarily of the construction of the Lawrence, Kansasfacility.

 

We anticipate capital expenditures for the remainder of the year tototal approximately $8.0 million. The most significant capitalexpenditures anticipated for the remainder of 2005 are continued implementationcosts associated with the installation of our ERP system in our Researchsegment, final validation of our Lawrence, Kansas facility and continued improvementsat manufacturing sites. During the second quarter of 2005, we commenced thefinal phases of production validation at our Lawrence plant. This phase ofvalidation is continuing and is expected to take approximately six more monthsto complete based on scheduling commitments and testing requirements. Duringthe first nine months of 2005, net cash used in investing activities included$6.8 million related primarily to the acquisition of Specialty Media. Investingactivities for the first nine months of 2005 included $7.2 million, representingproceeds received on the principal portion of the note receivable from the buyerof our former therapeutic plasma business (see Note 3 to condensed consolidatedfinancial statements). During the first nine months of 2004, we received theinitial cash payment of $3.5 million from the sale of the therapeuticplasma business. Net investments in short term securities, principally auction-ratesecurities, decreased by $5.3 million and $8.8 million during the first nine monthsof 2005 and 2004, respectively, based on the cash

 

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requirements of the business.

 

Net cash provided by financing activities in the first nine months of2005 and 2004 was $2.6 million and $6.4 million, respectively. Financingactivities in the first nine months of 2005 consisted of cash used to purchase125,120 shares of our Common Stock for approximately $2.5 million and paymentsof capital lease obligations of $2.2 million, more than offset by the proceedsfrom the exercise of stock options of $7.4 million. Financing activities in thefirst nine months of 2004 consisted of proceeds from the exercise of stockoptions of $3.1 million and net proceeds on capital lease obligations of $3.3million.

 

As of November 3, 2005, we had approximately $71.6 million in cash,cash equivalents and short-term investments.

 

There have been no material changes in our contractual obligations fromthe information provided in our Annual Report on Form 10-K for the fiscalyear ended January 2, 2005 except that, in June 2005, we terminatedour interest rate swap agreements (see Note 1 to condensed consolidatedfinancial statements). The contractual obligations are discussed under thecaption “Liquidity and Capital Resources” in “Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations,” contained inthe Form 10-K.

 

**Item 3.  Quantitative and Qualitative Disclosures AboutMarket Risk**

 

There have been no material changes regarding our market risk positionfrom the information provided in our Annual Report on Form 10-K for thefiscal year ended January 2, 2005 except that, in June 2005, we terminatedour interest rate swap agreements (see Note 1 to condensed consolidatedfinancial statements). The quantitative and qualitative disclosures aboutmarket risk are discussed under the caption “Market Risk” in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” contained in the Form 10-K.

 

**Item 4.  Controls and Procedures**

 

As of the end of the period covered by this report, we carried out anevaluation, under the supervision and with the participation of our principalexecutive officer and principal financial officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures. Based on thisevaluation, our principal executive officer and principal financial officerconcluded that our disclosure controls and procedures are effective in timelyalerting them to material information required to be included in our periodicreports filed with the Securities and Exchange Commission. There were nosignificant changes in our internal control over financial reporting thatoccurred during our last fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PART II.**

 

**Item1.  Legal Proceedings**

 

The Company is involved in a lawsuit that arose out of the acquisitionof Chemicon International, Inc. in 2003. In the lawsuit, an employee ofChemicon and a former employee of Chemicon sued Chemicon, the Company andcertain others, including the founders of Chemicon, for amounts allegedly owedthem pursuant to bonus agreements they entered into with Chemicon. They allegein the lawsuit that the Company’s acquisition of Chemicon gave rise to theirright to receive bonuses.  They alsoallege that Chemicon breached the bonus agreements and that the Company and thefounders of Chemicon tortiously interfered with Chemicon’s obligations pursuantto the bonus agreements. The lawsuit was filed on May 15, 2003 and hasbeen amended several times. The lawsuit is pending in a state court inRiverside County, California. The Company is defending the suit and believesthat it has meritorious defenses to the plaintiffs’ allegations.  Furthermore, the Company is indemnified bythe founders of Chemicon and certain others against liability for the amount ofthese bonuses.  At the time of theacquisition of Chemicon, the Company paid $19 million of the purchase pricedirectly in an escrow account to secure its indemnification right.  Management believes that the indemnificationand the escrow will prevent the Company from incurring material liability as aresult of this litigation if it is found that the Company or Chemicon is liableto the plaintiffs.  In management’sopinion, the ultimate resolution of this matter will not have a materialadverse effect on the Company’s financial position or results of operations.

 

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**Item 6.  Exhibits**

 

Exhibits (numbered in accordance with Item 601 of Regulation S-K):

 
| 3.1.1  |   | Amended and Restated Certificate of Incorporation (Exhibit 3.1  to the Company’s Annual Report on Form 10-K for the year ended December 29,  2002 is hereby incorporated by reference).                                                                                                                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1.2  |   | Certificate of Amendment of Amended and Restated Certificate of  Incorporation. (Exhibit 3.2.2 to the Company’s Quarterly Report on Form 10-Q  for the quarter ended April 3, 2005 is hereby incorporated by  reference).                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2.1  |   | 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).                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1.1  |   | 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).                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1.2  |   | Specimen Form of Rights Certificate (Exhibit 2.1 to the  Company’s Registration Statement on Form 8-A filed August 10, 1999,  is hereby incorporated by reference).                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1.3  |   | Form of Rights Agreement, dated as of August 2, 1999,  between the Company and State Street Bank & Trust Company, N.A. (Exhibit 2.2  to the Company’s Registration Statement on Form 8-A filed August 10,  1999, is hereby incorporated by reference).                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1.4  |   | Form of Certificate of Designation of Preferences and Rights of Series B  Preferred Stock (Exhibit 2.3 to the Company’s Registration Statement on Form 8-A  filed August 10, 1999, is incorporate by reference).                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1.5. |   | Summary of Rights Plan (Exhibit 2.4 to the Company’s  Registration Statement on Form 8-A filed August 10, 1999, is hereby  incorporated by reference).                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2.1  |   | Indenture, dated as of August 20, 2003, between Serologicals  Corporation and The Bank of New York, as Trustee, for the 4.75% Convertible  Senior Subordinated Debentures due 2033, including the form of 4.75%  Convertible Senior Subordinated Debenture due 2033 (Exhibit 4.1 to the  Company’s Current Report on Form 8-K, dated August 21, 2003, is  hereby incorporated by reference).                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2.2  |   | Registration Rights Agreement, dated August 20, 2003, by and  among Serologicals Corporation and Banc of America Securities LLC, J.P.  Morgan Securities Inc. and UBS Securities LLC, as initial purchasers of the  Company’s 4.75% Convertible Senior Subordinated Debentures due 2003 (Exhibit 4.2  to the Company’s Current Report on Form 8-K, dated August 21, 2003,  is hereby incorporated by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1   |   | Serologicals Corporation Amended and Restated 2005 Incentive Plan (Exhibit 99.1  to the Company’s Current Report on Form 8-K, dated June 6, 2005, is  hereby incorporated by reference).                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2   |   | Serologicals Corporation Non-Employee Directors Compensation  Arrangements (Exhibit 99.2 to the Company’s Current Report on Form 8-K,  dated May 17, 2005, is hereby incorporated by reference).                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3   |   | Letter Agreement, dated September 27, 2005, between the Company  and Life Therapeutics, Ltd.*                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1   |   | Certification of the Chief Executive Officer Pursuant to Rule 13a-14  (a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.*                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2   |   | Certification of the Chief Financial Officer Pursuant to Rule 13a-14  (a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.*                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1   |   | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of                                                                                                                                                                                                                                                                                                              |

 

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|   |   | Sarbanes- Oxley Act of 2002.*                                                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                            |
| 32.2   |   | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of Sarbanes- Oxley Act of 2002.* |

 

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*              Filed herewith

 

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**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 theundersigned thereunto duly authorized.

 
|                         | SEROLOGICALS CORPORATION |
|------------------------------|--------------------------|
|                         | (Registrant)             |
| Date: November 10, 2005 |                     |
|                         | BY:                      | /s/ HAROLD W. INGALLS |   |
|                         |                     | Harold W. Ingalls |   |
|                         |                     | Duly Authorized Officer of the Registrant, |   |
|                         |                     | Vice President, Finance and Chief Financial  Officer |   |
|                         |                     | (Principal Financial Officer) |   |

 

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