**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                                                                             | ** **                                                                                                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                 | ** **                                                                                                             |
| ý                                                                                                                                                                                                                                     | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                       | ** **                                                                                                             |
| **For the quarterly period ended July 3,  2005**                                                                                                                                                                                      |
| ** **                                                                                                                                                                                                                                 | ** **                                                                                                             |
| **OR**                                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                                 | ** **                                                                                                             |
| o                                                                                                                                                                                                                                          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**     |
|                                                                                                                                                                                                                                       | ** **                                                                                                             |
| **For the transition period from                    to                 .** |

 

**Commission file Number: 0-26126**

 

**SEROLOGICALSCORPORATION**

(Exact Name of Registrant as Specified in itsCharter)

 
| **Delaware**                                                     | ** ** | **58-2142225**                          |
|------------------------------------------------------------------|------------|-----------------------------------------|
| (State or other jurisdiction of  incorporation or  organization) | ** ** | (I.R.S. Employer Identification Number) |
|                                                             | ** ** |                                    |
| **5655 Spalding Drive  Norcross, Georgia**                       | ** ** | **30092**                               |
| (Address of principal executive offices)                         | ** ** | (Zip Code)                              |
|                                                             | ** ** |                                    |
| **(678) 728-2000**                                          |
| (Registrant’s Telephone Number Including  Area Code)        |

 

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

 
| **Class**                               | ** ** | **Outstanding  at August 3, 2005** |
|-----------------------------------------|------------|-----------------------------------------|
| Common Stock, $0.01 par value per share |       | 34,980,799                              |

 

 

----

 

**INDEX**

 

**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

 
|                                                                                                                               | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------|----------|
| PART I.                                                                                                                       | 3        |
| Item 1. Condensed Consolidated Financial Statements:                                                                               | 3        |
| Unaudited Condensed Consolidated Balance Sheets-July 3, 2005 and  January 2, 2005                                        | 3        |
| Unaudited Condensed Consolidated Statements of Income-For the three  and six months ended July 3, 2005 and June 27, 2004 | 4        |
| Unaudited Condensed Consolidated Statements of Cash Flows-For the six  months ended July 3, 2005 and June 27, 2004       | 5        |
| Unaudited Notes to Condensed Consolidated Financial Statements                                                                     | 6        |
| Item 2. Management’s Discussion and Analysis of Financial Condition  and Results of Operations                                | 16       |
| Item 3. Quantitative and Qualitative Disclosures about Market Risk                                                                 | 22       |
| Item 4. Controls and Procedures                                                                                                    | 23       |
|                                                                                                                               |     |
| PART II.                                                                                                                      | 23       |
| Item  1. Legal Proceedings                                                                                                         | 23       |
| Item 2. Unregistered Sale of  Equity Securities and Use of Proceeds                                                                | 23       |
| Item 4. Submission of Matters  to a Vote of Security Holders                                                                       | 23       |
| Item 6.  Exhibits                                                                                                                  | 24       |
| SIGNATURES                                                                                                                         | 25       |

 

2

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**PART I.**

 

**Item 1. Financial Statements**

 

**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                        | ** ** | **July 3, 2005** | ** ** | **January 2, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                                                                                                        |       |                  |       |                     |       |
| **CURRENT ASSETS:**                                                                                                                                                               |       |                  |       |                     |       |
| Cash and cash equivalents                                                                                                                                                         |       | $                     | 28,703     |                     | $          | 33,024 |   |
| Short-term investments                                                                                                                                                            |       | 24,895                |       | 29,030                   |       |
| Trade accounts receivable, net                                                                                                                                                    |       | 37,249                |       | 46,899                   |       |
| Inventories                                                                                                                                                                       |       | 53,407                |       | 49,846                   |       |
| Other current assets                                                                                                                                                              |       | 19,681                |       | 15,226                   |       |
| Total current assets                                                                                                                                                              |       | 163,935               |       | 174,025                  |       |
| **PROPERTY AND EQUIPMENT, NET**                                                                                                                                                   |       | 96,944                |       | 96,887                   |       |
| **GOODWILL**                                                                                                                                                                      |       | 244,696               |       | 241,038                  |       |
| **INTANGIBLE ASSETS, NET**                                                                                                                                                        |       | 122,703               |       | 121,647                  |       |
| **OTHER ASSETS**                                                                                                                                                                  |       | 3,533                 |       | 6,210                    |       |
| Total assets                                                                                                                                                                      |       | $                     | 631,811    |                     | $          | 639,807 |   |
|                                                                                                                                                                              |       |                  |       |                     |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |       |                  |       |                     |       |
| **CURRENT LIABILITIES:**                                                                                                                                                          |       |                  |       |                     |       |
| Accounts payable                                                                                                                                                                  |       | $                     | 5,548      |                     | $          | 11,827 |   |
| Accrued liabilities                                                                                                                                                               |       | 27,389                |       | 37,336                   |       |
| Current maturities on capital lease  obligations                                                                                                                                  |       | 2,211                 |       | 2,419                    |       |
| Total current liabilities                                                                                                                                                         |       | 35,148                |       | 51,582                   |       |
| **CONVERTIBLE SUBORDINATED DEBENTURES**                                                                                                                                           |       | 129,887               |       | 130,395                  |       |
| **CAPITAL LEASE OBLIGATION LESS CURRENT  MATURITIES**                                                                                                                             |       | 808                   |       | 2,194                    |       |
| **DEFERRED INCOME TAXES**                                                                                                                                                         |       | 41,311                |       | 38,012                   |       |
| **OTHER LIABILITIES**                                                                                                                                                             |       | 1,016                 |       | 1,093                    |       |
| Total liabilities                                                                                                                                                                 |       | 208,170               |       | 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, 38,105,892 and 37,752,120 shares issued at  July 3, 2005 and January 2, 2005, respectively |       | 381                   |       | 377                      |       |
| Additional paid-in capital                                                                                                                                                        |       | 341,039               |       | 334,429                  |       |
| Retained earnings                                                                                                                                                                 |       | 98,112                |       | 91,378                   |       |
| Accumulated other comprehensive income                                                                                                                                            |       | 7,882                 |       | 11,046                   |       |
| Less:                                                                                                                                                                             |       |                  |       |                     |       |
| Common stock held in treasury                                                                                                                                                     |       | (22,859               | )          | (20,347                  | )          |
| Deferred compensation                                                                                                                                                             |       | (914                  | )          | (352                     | )          |
| Total stockholders’ equity                                                                                                                                                   |       | 423,641               |       | 416,531                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                   |       | $                     | 631,811    |                     | $          | 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)**

 
| ** **                                                | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** |
| ** **                                                | ** ** | ** **            | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **NET REVENUES****.**                                     | ** ** | **$**                 | **64,208** |                   | $          | 43,963 | ** ** | **$** | **120,843** |   | $ | 80,467 |   |
| **COST OF REVENUES**                                      |       | 27,495                |       | 19,032                 |       | 53,292 |   | 36,066 |   |
| Gross profit                                              |       | 36,713                |       | 24,931                 |       | 67,551 |   | 44,401 |   |
| **OPERATING EXPENSES:**                                   |       |                  |       |                   |       |   |   |   |   |
| Selling, general and administrative                       |       | 22,574                |       | 13,346                 |       | 42,867 |   | 25,032 |   |
| Research and development                                  |       | 4,328                 |       | 2,216                  |       | 8,812 |   | 4,182 |   |
| Amortization of intangibles                               |       | 1,743                 |       | 753                    |       | 3,506 |   | 1,409 |   |
| **OPERATING INCOME**                                      |       | 8,068                 |       | 8,616                  |       | 12,366 |   | 13,778 |   |
| Other expenses (income), net                              |       | (28                   | )          | (100                   | )          | 72 |   | (256 | ) |
| Interest expense                                          |       | 1,918                 |       | 1,189                  |       | 3,722 |   | 2,246 |   |
| Interest (income)                                         |       | (647                  | )          | (166                   | )          | (935 | ) | (357 | ) |
| **INCOME BEFORE INCOME TAXES**                            |       | 6,825                 |       | 7,693                  |       | 9,507 |   | 12,145 |   |
| **PROVISION FOR INCOME TAXES**                            |       | 1,979                 |       | 2,295                  |       | 2,757 |   | 3,764 |   |
| **NET INCOME**                                            | ** ** | **$**                 | **4,846**  |                   | $          | 5,398 | ** ** | **$** | **6,750** |   | $ | 8,381 |   |
|                                                      |       |                  |       |                   |       |   |   |   |   |
| **NET INCOME PER SHARE:**                                 |       |                  |       |                   |       |   |   |   |   |
| Basic                                                     | ** ** | **$**                 | **0.14**   |                   | $          | 0.22 | ** ** | **$** | **0.19** |   | $ | 0.34 |   |
| Diluted                                                   | ** ** | **$**                 | **0.14**   |                   | $          | 0.18 | ** ** | **$** | **0.19** |   | $ | 0.29 |   |
|                                                      |       |                  |       |                   |       |   |   |   |   |
| **WEIGHTED AVERAGE SHARES OF COMMON STOCK  OUTSTANDING:** | ** ** | ** **            | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                     |       | 34,774,727            |       | 24,964,476             |       | 34,677,309 |   | 24,897,523 |   |
| Diluted                                                   |       | 44,059,284            |       | 34,349,832             |       | 35,232,929 |   | 34,263,131 |   |

 

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)**

 
| ** **                                                                                         | ** ** | **Six Months Ended**  | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** |
| **CONTINUING OPERATIONS:**                                                                         |       |                  |       |   |   |
| **OPERATING ACTIVITIES:**                                                                          |       |                  |       |   |   |
| Net income                                                                                         |       | $                     | 6,750      |   | $ | 8,381 |   |
| Adjustments to reconcile net income from  operations to net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation and amortization                                                                      |       | 7,645                 |       | 5,379 |   |
| Tax benefit from exercise of stock options                                                         |       | 2,855                 |       | 596 |   |
| Deferred and other compensation                                                                    |       | 113                   |       | 28 |   |
| Deferred income tax provision                                                                      |       | 10                    |       | 3,988 |   |
| Other, net                                                                                         |       | 104                   |       | — |   |
| Changes in operating assets and  liabilities, net of acquisition of business:                      |       |                  |       |   |   |
| Trade accounts receivable, net                                                                     |       | 9,550                 |       | 5,854 |   |
| Inventories                                                                                        |       | (2,373                | )          | (4,037 | ) |
| Other current assets                                                                               |       | (5,553                | )          | (271 | ) |
| Accounts payable                                                                                   |       | (6,338                | )          | 362 |   |
| Accrued liabilities                                                                                |       | (10,060               | )          | (6,298 | ) |
| Other, net                                                                                         |       | 2,178                 |       | 216 |   |
| Total adjustments                                                                                  |       | (1,869                | )          | 5,817 |   |
| **Net cash provided by operating activities**                                                      |       | 4,881                 |       | 14,198 |   |
| **INVESTING ACTIVITIES:**                                                                          |       |                  |       |   |   |
| Purchases of short-term investments                                                                |       | (34,315               | )          | (40,350 | ) |
| Proceeds from sale of short-term  investments                                                      |       | 38,450                |       | 26,600 |   |
| Purchases of property and equipment                                                                |       | (5,185                | )          | (10,795 | ) |
| Proceeds on principal portion of note  receivable                                                  |       | 816                   |       | 3,500 |   |
| Purchase of business, net of cash acquired                                                         |       | (6,830                | )          | 464 |   |
| Other, net                                                                                         |       | 29                    |       | (87 | ) |
| **Net cash used in investing activities**                                                          |       | (7,035                | )          | (20,668 | ) |
| **FINANCING ACTIVITIES:**                                                                          |       |                  |       |   |   |
| Purchase of common shares                                                                          |       | (2,513                | )          | — |   |
| Payments on capital lease obligations                                                              |       | (1,489                | )          | — |   |
| Proceeds from issuance of stock under stock  plans                                                 |       | 3,083                 |       | 2,081 |   |
| **Net cash (used) provided by financing  activities**                                              |       | (919                  | )          | 2,081 |   |
| **DISCONTINUED OPERATIONS:**                                                                       |       |                  |       |   |   |
| **OPERATING ACTIVITIES**                                                                           |       | —                |       | (2,500 | ) |
| **INVESTING ACTIVITIES**                                                                           |       | —                |       | 737 |   |
| Net cash used by discontinued operations:                                                          |       | —                |       | (1,763 | ) |
| Effects of exchange rate changes on cash  and cash equivalents                                     |       | (1,248                | )          | 282 |   |
| Net decrease in cash and cash equivalents                                                          |       | (4,321                | )          | (5,870 | ) |
| Cash and cash equivalents, beginning of  period                                                    |       | 33,024                |       | 21,479 |   |
| Cash and cash equivalents, end of period                                                           |       | $                     | 28,703     |   | $ | 15,609 |   |
|                                                                                               |       |                  |       |   |   |
| **SUPPLEMENTAL DISCLOSURE:**                                                                       |       |                  |       |   |   |
| Cash paid during the period for:                                                                   |       |                  |       |   |   |
| Interest paid, net of amounts capitalized                                                          |       | $                     | 3,043      |   | $ | 2,005 |   |
| Income taxes paid                                                                                  |       | $                     | 3,255      |   | $ | 1,859 |   |
| Non-cash investing and financing  activities:                                                      |       |                  |       |   |   |
| Acquisition earnout payable                                                                        |       | $                     | 272        |   | $ | 54 |   |

 

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**

**July 3, 2005**

**(UNAUDITED)**

 

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

 

*Organization*

 

Serologicals Corporation, a Delaware corporation, (together with itssubsidiaries, “we”, “our”, the “Company” or “Serologicals”), with facilities inNorth America, Europe and Australia, is a global provider of consumablebiological products, enabling technologies and services to a diverse customerbase that includes major life science companies and leading researchinstitutions. Our customers use our products, technologies and services in awide variety of their activities, including basic research, drug discovery,diagnosis and biomanufacturing. Our products, technologies and services areessential tools for research in key disciplines, including neurology, oncology,hematology, immunology, cardiology, proteomics, infectious diseases, cellsignaling, stem cell research and molecular biology. In addition, we provide acomprehensive range of monoclonal antibodies for the blood typing industry.

 

*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. The interim financial statementsshould be read in conjunction with the audited consolidated financialstatements as of January 2, 2005 and the notes thereto included in theCompany’s Annual Report on Form 10-K for 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 July 3, 2005 and January 2, 2005 consisted ofthe following (in thousands):

 
| ** **      | ** ** | **July 3, 2005** | ** ** | **January 2, 2005** | ** ** |
|-----------------|------------|-----------------------|------------|--------------------------|------------|
|            |       |                  |       |                     |       |
| Raw materials   |       | $                     | 7,315      |                     | $          | 10,950 |   |
| Work in process |       | 17,609                |       | 12,995                   |       |
| Finished goods  |       | 28,483                |       | 25,901                   |       |
|            |       | $                     | 53,407     |                     | $          | 49,846 |   |

 

*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.

 

6

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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 sheets.

 

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

 
| ** **                                             | ** ** | **July 3, 2005** | ** ** | **January 2, 2005** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
|                                                   |       |                  |       |                     |       |
| Face value of Debentures                               |       | $                     | 130,000    |                     | $          | 130,000 |   |
| Mark-to-market value of interest rate swap  agreements |       | (113                  | )          | 395                      |       |
| Carrying value of Debentures                           |       | $                     | 129,887    |                     | $          | 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 the after-tax interest expense onthe Debentures, when they are dilutive, and the weighted average number ofshares includes the dilutive effect of stock options, stock awards, and the Debentures.The Debentures were anti-dilutive for the six months ended July 3, 2005and, accordingly, were excluded from the calculation of diluted earnings pershare. They were, however, dilutive and included in diluted earnings per sharefor the three months ended July 3, 2005 and the three and six months endedJune 27, 2004.

 

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

 
| ** **                                                                    | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended**   | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                    | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** |
| Numerator:                                                                    |       |                  |       |                   |       |   |   |   |   |
| Net income                                                                    |       | $                     | 4,846      |                   | $          | 5,398 |   | $ | 6,750 |   | $ | 8,381 |   |
| Add back: interest expense on convertible  debentures, net of income taxes    |       | 1,289                 |       | 805                    |       | — |   | 1,496 |   |
| Numerator for diluted earnings per share  attributable to common stockholders |       | $                     | 6,135      |                   | $          | 6,203 |   | $ | 6,750 |   | $ | 9,877 |   |
|                                                                          |       |                  |       |                   |       |   |   |   |   |
| Denominator:                                                                  |       |                  |       |                   |       |   |   |   |   |
| Basic earnings per share - weighted average  shares outstanding               |       | 34,775                |       | 24,964                 |       | 34,677 |   | 24,898 |   |
| Effect of dilutive securities:                                                |       |                  |       |                   |       |   |   |   |   |
| Stock options                                                                 |       | 403                   |       | 566                    |       | 474 |   | 547 |   |
| Convertible debentures                                                        |       | 8,790                 |       | 8,790                  |       | — |   | 8,790 |   |
| Common stock awards                                                           |       | 92                    |       | 30                     |       | 82 |   | 28 |   |
| Diluted earnings per share - weighted  average shares outstanding             |       | 44,060                |       | 34,350                 |       | 35,233 |   | 34,263 |   |
|                                                                          |       |                  |       |                   |       |   |   |   |   |
| Basic earnings per share                                                      |       | $                     | 0.14       |                   | $          | 0.22 |   | $ | 0.19 |   | $ | 0.34 |   |
| Diluted earnings per share                                                    |       | $                     | 0.14       |                   | $          | 0.18 |   | $ | 0.19 |   | $ | 0.29 |   |

 

The following shares issuable under stock option agreements and the Debentureswere excluded from the calculation of diluted earnings per share for theperiods indicated because either the option price exceeded the average marketprice for the Company’s stock or the conversion of the Debentures would have beenantidilutive (in thousands):

 
| ** ** | ** **              | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended**   | ** ** |
|------------|-------------------------|------------|-----------------------|------------|------------------------|------------|
| ** ** | **(in  thousands)**     | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** |
|       |                    |       |                  |       |                   |       |   |   |   |   |
|       | Stock  options          |       | 141                   |       | 384                    |       | 141 |   | 551 |   |
|       | Convertible  debentures |       | —                |       | —                 |       | 8,790 |   | — |   |

 

7

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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. No stock-based employee compensation cost, other thanamortization of restricted stock, was reflected in net income, as all optionsgranted under these plans had an exercise price equal to the market value ofthe underlying common stock on the date of grant. The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation,” to stock-based employee compensation (inthousands, except per share amounts):

 
| ** **                                                                                                                   | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                   | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** |
|                                                                                                                         |       |                  |       |                   |       |   |   |   |   |
| Net income as reported                                                                                                       |       | $                     | 4,846      |                   | $          | 5,398 |   | $ | 6,750 |   | $ | 8,381 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of tax                                  |       | 71                    |       | 39                     |       | 143 |   | 55 |   |
| Deduct: Total stock-based employee compensation  expense determined under fair value-based method for all awards, net of tax |       | (706                  | )          | (640                   | )          | (1,413 | ) | (1,142 | ) |
| Pro forma net income                                                                                                         |       | $                     | 4,211      |                   | $          | 4,797 |   | $ | 5,480 |   | $ | 7,294 |   |
|                                                                                                                         |       |                  |       |                   |       |   |   |   |   |
| Earnings per share:                                                                                                          |       |                  |       |                   |       |   |   |   |   |
| Basic - as reported                                                                                                          |       | $                     | 0.14       |                   | $          | 0.22 |   | $ | 0.19 |   | $ | 0.34 |   |
| Basic - pro forma                                                                                                            |       | $                     | 0.12       |                   | $          | 0.19 |   | $ | 0.16 |   | $ | 0.29 |   |
|                                                                                                                         |       |                  |       |                   |       |   |   |   |   |
| Diluted - as reported                                                                                                        |       | $                     | 0.14       |                   | $          | 0.18 |   | $ | 0.19 |   | $ | 0.29 |   |
| Diluted - pro forma                                                                                                          |       | $                     | 0.12       |                   | $          | 0.16 |   | $ | 0.16 |   | $ | 0.26 |   |

 

Convertible debentures are antidilutive and excluded from the pro formadiluted earnings per share calculation for the three and six months ended July 3,2005.

 

During the six months ended July 3, 2005 the Company issued 28,210deferred stock units in lieu of cash to certain non-employee directors for directorfees and certain executive officers for voluntary deferral of 2004 bonuses. TheCompany recorded compensation expense related to the issuance of these deferredstock units of $0.1 million net of tax.

 

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.

 

*Comprehensive Income*

 

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

 
| ** **                               | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended**   | ** ** |
|------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                               | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** |
|                                     |       |                  |       | **(As restated)**      |       |   |   | **(As restated)** |   |
| Net income, as reported                  |       | $                     | 4,846      |                   | $          | 5,398 |   | $ | 6,750 |   | $ | 8,381 |   |
| Other comprehensive income:              |       |                  |       |                   |       |   |   |   |   |
| Foreign currency translation adjustments |       | (2,443                | )          | (1,098                 | )          | (3,164 | ) | (723 | ) |
| Comprehensive income                     |       | $                     | 2,403      |                   | $          | 4,300 |   | $ | 3,586 |   | $ | 7,658 |   |

 

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 endedJanuary 2, 2005. As a result, the Company restated the previously reportedforeign currency translation adjustments from $0.7 million to $1.1 million

 

8

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and from $0.5 million to $0.7 million for thesecond quarter and for the first six months of 2004, respectively.

 

**2.****             ACQUISITIONS**

 

***Specialty Media***

 

On February 22, 2005, theCompany completed the acquisition of Specialty Media, a division of Cell &Molecular Technologies, Inc., wholly owned by Sentigen HoldingCorporation. Specialty Media, based in Phillipsburg, New Jersey, develops andsupplies a variety of specialty stem cell culture media formulations andsupplements, cells and research reagent tools to the life sciences industry.Serologicals acquired all of the assets of Specialty Media for $6.5 million incash and assumption of certain liabilities. The Specialty Media acquisitionprovides a number of important strategic additions for our Research segment, ****most significantly, itsproducts extend Chemicon’s stem cell product portfolio.****

 

The results of Specialty Mediawere not material to the results of operations for the three and six monthsended July 3, 2005 and June 27, 2004; accordingly, no pro formadisclosure is presented.

 

The components of the purchase price were (inthousands):

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

 

The Company has not completed its valuation of the fair market value ofthe underlying assets acquired; however at July 3, 2005 the preliminarysummary allocation of assets acquired 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 six months ended July 3,2005, the Company continued to revise its evaluation of the purchase priceallocation of Upstate Group, Inc., which it acquired in October 2004,based on the estimated fair values of the assets and liabilities assumedas of the date of purchase. The components of the purchase price are as follows(in thousands):

 

9

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| ** **                                 | ** ** | **Original Purchase  Price** | ** ** | **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                       |       | 4,062           |       | 38,843                       |       |
| Total consideration and acquisition costs  |       | $                            | 242,104    |            | $          | 4,062                        |       | $ | 246,166 |   |

 

Duringthe six months ended July 3, 2005, the Company completed its analysis ofthe 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 $0.9 million and a corresponding increase in goodwill of$4.1 million. The adjusted allocation of purchase price to the underlyingassets is as follows (in thousands):

 
| ** **                                     | ** ** | **Original  Allocation** | ** ** | **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                  |       | (2,599          | )          | 132,559                  |       | Indefinite                                   |       |
|                                           |       | $                        | 242,104    |            | $          | 4,062                    |       | $                                            | 246,166    |   |   |   |
|                                                |            |                          |            |                 |            |                          |            |                                              |            |  |  |  |  |  |  |

 

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 and Scotland. Such costs have been recognized as liabilitiesassumed in the acquisition. In the first six months of 2005, the Companyrecorded $0.9 million in additional liability related to the acquisition with acorresponding adjustment to goodwill. At July 3, 2005, the Company had $2.1million in accrued expenses and other current liabilities in the accompanyingbalance 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  July 3,  2005** | ** ** |
|-------------------------------|------------|--------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|--------------------------|------------|-------------------|------------|------------------------------------|------------|
|                          |       |                           |       |                          |       |                                  |       |                     |       |              |       |                               |       |
| Severance and relocation cost |       | $                              | 293        |                          | $          | (185                                  | )          | $                        | 108        |              | $          | 628                                |       | $ | (161 | ) | $ | 575 |   |
| Facility closure              |       | 1,470                          |       | (10                           | )          | 1,460                                 |       | 136                      |       | (305              | )          | 1,291                              |       |
| Other                         |       | 530                            |       | —                        |       | 530                                   |       | 121                      |       | (375              | )          | 276                                |       |
|                          |       | $                              | 2,293      |                          | $          | (195                                  | )          | $                        | 2,098      |              | $          | 885                                |       | $ | (841 | ) | $ | 2,142 |   |

 

In July 2005 the Company announced that it has accelerated its integrationplan for Upstate. The Company expects to incur additional costs ofapproximately $2.0 million to $3.0 million in connection with this program asthe result of severance cost, retention payments and relocation costs that willbe recorded in the third quarter ending October 2, 2005.

 

***Chemicon International, Inc.***

 

Effective April 1, 2003, Serologicals completed the acquisition of100% of the outstanding common stock of Chemicon. During the first quarter of2004, the Company completed its evaluation of a restructuring of certaincomponents of

 

10

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Chemicon’s operations, whichwas contemplated at the date of acquisition. As a result, the Company accrued$1.8 million related to lease terminations and site relocation costs. Thisamount was recorded to goodwill in the first quarter of 2004 as an adjustmentto the purchase price of Chemicon in accordance with EITF 95-3. At July 3,2005, the Company had $1.7 million remaining in accrued expenses and othercurrent liabilities in the accompanying balance sheet related to thisintegration.  The Company expects tocomplete the activities associated with this restructuring in 2006. Activity ofaccrued acquisition and business integration costs for all periods presentedsubsequent to the acquisition date is as follows (in thousands):

 
| ** **       | ** ** | **Original  amount  recorded** | ** ** | **Prior year  amounts  paid** | ** ** | **Balance at  January 2,  2005** | ** ** | **Additional  accruals** | ** ** | **Amounts  paid** | ** ** | **Balance at  July 3,  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 its divestiture of its former therapeutic plasma business on January 15,2004, effective December 28, 2003. Under the provisions of Statement ofFinancial Accounting Standards No. 144, “Impairment of Long-Lived Assetsand Discontinued Operations” (“SFAS 144”), this business was classified asa discontinued operation. The results of operations for this business were classifiedas discontinued operations in all periods presented. There are no results fromor assets related to discontinued operations included in the 2005 financialstatements.

 

Part of the sale proceeds consisted of secured promissory notes,which were recorded at their 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 bears interest at the applicable federal long-term taxexempt rate and is payable in variable quarterly installments through December 2007.The note is secured by the underlying assets of the business acquired and isguaranteed by the buyer’s parent corporation. The Company recorded an imputedinterest charge on this new note in December 2004 because the statedinterest rate on the new note was considered below market.

 

Following is a summary of the new note receivable at July 3, 2005 andJanuary 2, 2005 (in thousands):

 
| ** **                    | ** ** | **July 3, 2005** | ** ** | **January 2, 2005** | ** ** |
|-------------------------------|------------|-----------------------|------------|--------------------------|------------|
|                          |       |                  |       |                     |       |
| Note receivable at face value |       | $                     | 6,800      |                     | $          | 7,800 |   |
| Less imputed interest         |       | (367                  | )          | (551                     | )          |
|                          |       |                  |       |                     |       |
| Net present value of note     |       | 6,433                 |       | 7,249                    |       |
| Less current portion          |       | (3,850                | )          | (1,948                   | )          |
|                          |       |                  |       |                     |       |
| Long term portion             |       | $                     | 2,583      |                     | $          | 5,301 |   |

 

Thecurrent and long term portions of the new note are included in other currentassets and other assets, respectively, in the accompanying balance sheets.

 

The Company has guaranteed real estate lease obligations totalingapproximately $3.5 million related to the therapeutic plasma business. If thebuyer defaults on the lease payments, the Company would be required to assumethese leases. The Company has accrued a stand ready obligation of$0.1 million in accordance with FASB Interpretation No. 45, “GuarantorAccounting and Disclosure Requirement for Guarantees” for these guarantees.

 

11

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

 

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

 

On May 11, 2005, theCompany’s shareholders approved an amendment to Article Four of theCompany’s Amended and Restated Certificate of Incorporation that increased thenumber of authorized shares of Common Stock from 50,000,000 shares to115,000,000 shares.

 

***Restricted stock***

 

Periodically the Company has awardedrestricted common stock and restricted stock units to eligible key employees underthe Company’s equity-based incentive plans. These awards have restrictionperiods tied primarily to employment and service. The awards are recorded atmarket value on the date of the grant to unearned compensation; compensationexpense is recognized over the restriction period on a straight-line basis, netof forfeitures. In the six months ended July 3, 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.

 

***Approvalof the 2005 Incentive Plan***

 

On May 11, 2005, theCompany’s shareholders approved the Serologicals Corporation 2005 IncentivePlan (the “2005 Incentive Plan”), under which 10,000,000 shares of Common Stockare reserved for issuance. The 2005 Incentive Plan provides specific limitationson the size of grants in any year that any one participant in the 2005Incentive Plan may be granted in any calendar year. 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 replacedand superseded the Serologicals Corporation Stock Incentive Plan, which was approvedby shareholders on May 8, 2001 (the “Prior Plan”). The Prior Planautomatically terminated as of the date the shareholders approved the 2005Incentive Plan, except that such termination does not affect any grants orawards outstanding under the Prior Plan.  Shares previously reserved for issuance underthe Prior Plan that remained available for grants under the Prior Plan and anyshares subject to awards under the Prior Plan that subsequently are forfeited,cancelled or expire unexercised are available for issuance under the 2005Incentive Plan.

 

***TreasuryStock***

 

On June 10, 2005 theCompany announced that its Board of Directors authorized a stock repurchaseprogram to repurchase up to 2.0 million shares of the Company’s common stockover the next three years ending in June 2008. The program is intended tobe implemented through purchases made from time to time in the open market orthrough private transactions in accordance with applicable securitieslaws.  The timing, pricing and size ofpurchases will depend on market conditions, prevailing stock prices and otherconsiderations.  As of July 3, 2005,the Company had repurchased approximately 125,000 shares of common stock for$2.5 million.

 

**5.****             SEGMENTINFORMATION**

 

SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information” (“SFAS No. 131”),defines operating segments to be those components of a business for whichseparate financial information is available that is regularly evaluated bymanagement in making operating decisions and in assessing performance. SFAS No. 131further requires that segment information be presented consistently with thebasis and manner in which management internally disaggregates financialinformation for the purposes of assisting in making internal operatingdecisions.

 

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We report operating results in two business segments, “BioprocessingProducts and Services” and “Research Products and Services.” The operations ofCellianceTM represent the Bioprocessing segment and the operations of Chemicon®and Upstate® represent the Research segment.

 

Our Research segment sells a broad range of research products,including specialty reagents, kits, antibodies and molecular biology tools toresearch customers working in the areas of neuroscience, infectious disease,oncology, stem cell research and cell signaling. We are also a leading supplierof monoclonal antibodies, 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.

 

Our Bioprocessing segment sells a variety of cell culture products,including highly purified proteins and tissue culture media components. Theseproducts are used primarily by biopharmaceutical and biotechnology companies asnutrient additives in cell culture media. Our most significant product withinthe Cell Culture segment is EX-CYTE®, a patented serum-free solution ofcholesterol, lipoproteins and fatty acids. EX-CYTE® is used, in combinationwith other cell culture supplements, to reduce or replace animal serum in cellculture processes. We also provide a range of serum-based products in thissegment, including Bovine Serum Albumin (“BSA”), under the brand name “ProbuminTM”,for which we are the world’s leading supplier. We also sell recombinant humaninsulin, under the brand name of “IncelligentTM”, for use as a media supplement.In addition, we provide contract research services in the areas of cell-linedevelopment, process development, protein expression, in vivo research andmolecular biology optimization and media formulation. We market all of our cellculture products and services under our CellianceTM brand name. This segment alsomanufactures and sells monoclonal antibodies that are used in products such asblood typing reagents and in controls for diagnostic tests for certaininfectious diseases. We believe these products comprise the world’s mostcomprehensive range of commercially available human monoclonal antibodies forblood grouping. These products are also marketed under our CellianceTM brandname.

 

In 2004, our business was organized in threebusiness segments: Research, Cell Culture and Diagnostics. These segments werebased primarily on the differing production, manufacturing and other value-addedprocesses that we performed with respect to our products and, to a lesserextent, the differing nature of the ultimate end use of our products. Allamounts in this Quarterly Report on Form 10-Q reflect the restatement ofthe 2004 segments so that they are consistent with the current yearpresentation.

 

The Company’s segment net revenues and grossprofit for the three and six months ended July 3, 2005 and June 27,2004 were as follows (in thousands):

 
| ** **        | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended**   | ** ** |
|-------------------|------------|-----------------------|------------|------------------------|------------|
| ** **        | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** |
| ** **        | ** ** | ** **            | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net revenues:** | ** ** | ** **            | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research          |       | $                     | 35,489     |                   | $          | 15,296 |   | $ | 67,673 |   | $ | 30,467 |   |
| Bioprocessing     |       | 28,719                |       | 28,667                 |       | 53,170 |   | 50,000 |   |
| **Total**         |       | $                     | 64,208     |                   | $          | 43,963 |   | $ | 120,843 |   | $ | 80,467 |   |
|              |       |                  |       |                   |       |   |   |   |   |
| **Gross Profit:** |       |                  |       |                   |       |   |   |   |   |
| Research          |       | $                     | 22,618     |                   | $          | 10,360 |   | $ | 42,941 |   | $ | 19,667 |   |
| Bioprocessing     |       | 14,095                |       | 14,571                 |       | 24,610 |   | 24,734 |   |
| **Total**         |       | $                     | 36,713     |                   | $          | 24,931 |   | $ | 67,551 |   | $ | 44,401 |   |

 

Prior to 2005, the Company did not determine operatingincome and income before income taxes or segregate assets by segment because asignificant portion of selling, general and administrative expenses, researchand development 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 as follows(in thousands); however, comparable information for 2004 is not meaningful andas a result not presented:

 

13

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| ** **                                    | ** ** | **Quarter Ended July 3, 2005**    | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **Research**                           | ** ** | **Bioprocessing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Gross profit                                  |       | $                                      | 22,618     |   | $ | 14,095 |   | $ | — |   | $ | 36,713 |   |
| Selling, general and administrative  expenses |       | 14,700                                 |       | 3,937 |   | 3,937 |   | 22,574 |   |
| Research and development                      |       | 3,284                                  |       | 907 |   | 137 |   | 4,328 |   |
| Amortization                                  |       | 1,486                                  |       | 257 |   | — |   | 1,743 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Operating income (loss)                       |       | 3,148                                  |       | 8,994 |   | (4,074 | ) | 8,068 |   |
| Other expense (income), net                   |       | 140                                    |       | (28 | ) | 1,131 |   | 1,243 |   |
| Income (loss) before income tax               |       | $                                      | 3,008      |   | $ | 9,022 |   | $ | (5,205 | ) | $ | 6,825 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| ** **                                    | ** ** | **Six Months Ended July 3, 2005** | ** ** |
| ** **                                    | ** ** | **Research**                           | ** ** | **Bioprocessing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Gross profit                                  |       | $                                      | 42,941     |   | $ | 24,610 |   | $ | — |   | $ | 67,551 |   |
| Selling, general and administrative  expenses |       | 26,593                                 |       | 7,797 |   | 8,477 |   | 42,867 |   |
| Research and development                      |       | 6,713                                  |       | 1,723 |   | 376 |   | 8,812 |   |
| Amortization                                  |       | 2,972                                  |       | 534 |   | — |   | 3,506 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Operating income (loss)                       |       | 6,663                                  |       | 14,556 |   | (8,853 | ) | 12,366 |   |
| Other expense (income), net                   |       | 257                                    |       | (57 | ) | 2,659 |   | 2,859 |   |
| Income (loss) before income tax               |       | $                                      | 6,406      |   | $ | 14,613 |   | $ | (11,512 | ) | $ | 9,507 |   |
|                                          |       |                                   |       |   |   |   |   |   |   |
| Assets at July 3, 2005                   |       | $                                      | 380,288    |   | $ | 189,255 |   | $ | 62,268 |   | $ | 631,811 |   |

 

**6.****             SUBSEQUENTEVENT**

 

In July 2005, the Company settled a contractual claim against acustomer of the Company’s former therapeutic plasma business for net cashproceeds of $3.1 million.  The settlementwill be recorded as income, net of approximately $0.6 million in expenses, inthe third quarter ending October 2, 2005.

 

14

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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-lookingstatements made in this Report. Among the factors that could cause our actualresults to differ 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 customers, including reductions ordelays in research and development budgets and in government funding on whichour customers may depend;*

 

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

 

15

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•      *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**

 

We are a global provider of consumable biological products, enablingtechnologies and services to a diverse customer base that includes major lifescience companies and leading research institutions. Our customers use ourproducts, technologies and services in a wide variety of their activities,including basic research, drug discovery, diagnosis and biomanufacturing. Ourproducts, technologies and services are essential tools for research in keydisciplines, including neurology, oncology, hematology, immunology, cardiology,proteomics, infectious diseases, cell signaling, stem cell research andmolecular biology. In addition, we provide a comprehensive range of monoclonalantibodies for the blood typing industry.

 

We report operating results in two business segments, “BioprocessingProducts and Services” and “Research Products and Services.” The operations ofCellianceTM represent the Bioprocessing segment and the operations of Chemicon®and Upstate® represent the Research segment.

 

Our Research segment sells a broad range of research products,including specialty reagents, kits, antibodies and molecular biology tools toresearch customers working in the areas of neuroscience, infectious disease,oncology, stem cell research and cell signaling. We are also a leading supplierof monoclonal antibodies, conjugates, antibody blends and molecularbiology-based detection kits for use in diagnostic laboratories. In addition,we are one of the leading suppliers of tools for kinase research and one of theleading providers of drug discovery services to pharmaceutical companiestargeting kinase biology-based drugs. We market our research products andservices under our Chemicon® and Upstate® brand names.

 

Our Bioprocessing segment sells a variety of cell culture products,including highly purified proteins and tissue culture media components. Theseproducts are used primarily by biopharmaceutical and biotechnology companies asnutrient additives in cell culture media. Our most significant product withinthe Bioprocessing segment is EX-CYTE®, a patented serum-free solution ofcholesterol, lipoproteins and fatty acids. EX-CYTE® is used, in combinationwith other cell culture supplements, to reduce or replace animal serum in cellculture processes. We also provide a range of serum-based products in thissegment, including BSA, under the brand name “ProbuminTM”, for which we are theworld’s leading supplier. We also sell recombinant human insulin, under thebrand name of “IncelligentTM”, for use as a media supplement. In addition, weprovide contract research services in the areas of cell-line development,process development, protein expression, in vivo research and molecular biologyoptimization and media formulation. We market all of our cell culture productsand services under our CellianceTM brand name. 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 also marketed under our CellianceTM brand name.

 

In 2004, our business was organized in threebusiness segments: Research, Cell Culture and Diagnostics. These segments werebased primarily on the differing production, manufacturing and other value-addedprocesses that we perform with respect to the products and, to a lesser extent,the differing nature of the ultimate end use of our products. Allamounts in this Quarterly Report on Form 10-Q reflect the restatement ofthe 2004 segments so that they are consistent with the current yearpresentation.

 

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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:

 
| ** **                                    | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** |
|                                          |       |                  |       |                   |       |   |   |   |   |
| Net revenues                                  |       | 100.0                 | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Gross profit                                  |       | 57.2                  | %          | 56.7                   | %          | 55.9 | % | 55.2 | % |
| Selling, general and administrative  expenses |       | 35.2                  | %          | 30.4                   | %          | 35.5 | % | 31.1 | % |
| Research and development expenses             |       | 6.7                   | %          | 5.0                    | %          | 7.3 | % | 5.2 | % |
| Amortization of intangibles                   |       | 2.7                   | %          | 1.7                    | %          | 2.9 | % | 1.8 | % |
| Operating income                              |       | 12.6                  | %          | 19.6                   | %          | 10.2 | % | 17.1 | % |
| Net income                                    |       | 7.5                   | %          | 12.3                   | %          | 5.6 | % | 10.4 | % |

 

The following tables set forth a breakdown of revenue and gross profitcontributed by segment for the three and six months ended July 3, 2005 andJune 27, 2004 (dollars in thousands):

 
| ** **          | ** ** | **Quarter Ended**      | ** ** |
|---------------------|------------|------------------------|------------|
| ** **          | ** ** | **July 3, 2005**  | ** ** | **June 27, 2004** | ** ** |
| ** **          | ** ** | **Actual**             | ** ** | **% Total** | ** ** | **Actual** | ** ** | **% Total** | ** ** |
| ***Revenue:***      |       |                   |       |   |   |   |   |   |   |
| Research            |       | $                      | 35,489     |   | 55.3 | % | $ | 15,296 |   | 34.8 | % |
| Bioprocessing       |       | 28,719                 |       | 44.7 | % | 28,667 |   | 65.2 | % |
|                |       | $                      | 64,208     |   | 100.0 | % | $ | 43,963 |   | 100.0 | % |
|                |       |                   |       |   |   |   |   |   |   |
| ** **          | ** ** | **Quarter  Ended**     | ** ** |
| ** **          | ** ** | **July 3,  2005** | ** ** | **June 27,  2004** | ** ** |
| ** **          | ** ** | **Actual**             | ** ** | **Gross  Margin %** | ** ** | **Actual** | ** ** | **Gross  Margin %** | ** ** |
| ***Gross Profit:*** |       |                   |       |   |   |   |   |   |   |
| Research            |       | $                      | 22,618     |   | 63.7 | % | $ | 10,360 |   | 67.7 | % |
| Bioprocessing       |       | 14,095                 |       | 49.1 | % | 14,571 |   | 50.8 | % |
|                |       | $                      | 36,713     |   | 57.2 | % | $ | 24,931 |   | 56.7 | % |

 

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| ** **          | ** ** | **Six  Months Ended**  | ** ** |
|---------------------|------------|------------------------|------------|
| ** **          | ** ** | **July 3,  2005** | ** ** | **June 27,  2004** | ** ** |
| ** **          | ** ** | **Actual**             | ** ** | **% Total** | ** ** | **Actual** | ** ** | **% Total** | ** ** |
| ***Revenue:***      |       |                   |       |   |   |   |   |   |   |
| Research            |       | $                      | 67,673     |   | 56.0 | % | $ | 30,467 |   | 37.9 | % |
| Bioprocessing       |       | 53,170                 |       | 44.0 | % | 50,000 |   | 62.1 | % |
|                |       | $                      | 120,843    |   | 100.0 | % | $ | 80,467 |   | 100.0 | % |
|                |       |                   |       |   |   |   |   |   |   |
| ** **          | ** ** | **Six  Months Ended**  | ** ** |
| ** **          | ** ** | **July 3,  2005** | ** ** | **June 27,  2004** | ** ** |
| ** **          | ** ** | **Actual**             | ** ** | **Gross  Margin %** | ** ** | **Actual** | ** ** | **Gross  Margin %** | ** ** |
| ***Gross Profit:*** |       |                   |       |   |   |   |   |   |   |
| Research            |       | $                      | 42,941     |   | 63.5 | % | $ | 19,667 |   | 64.6 | % |
| Bioprocessing       |       | 24,610                 |       | 46.3 | % | 24,734 |   | 49.5 | % |
|                |       | $                      | 67,551     |   | 55.9 | % | $ | 44,401 |   | 55.2 | % |

 

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

 

*Consolidated. *** **Consolidatednet revenues increased 46.1%, to $64.2 million, in the three months ended July 3,2005, compared to $44.0 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 six monthsended July 3, 2005 increased 50.2% to $120.8 million, compared to $80.5million for the same period last year. Consolidated gross profits increasedfrom $24.9 million in the second quarter of 2004 to $36.7 million in the secondquarter of 2005, primarily due to the inclusion of Upstate in the secondquarter of 2005. Consolidated gross profit increased from $44.4 million in thesix months ended June 27, 2004 to $67.6 million in the six months ended July 3,2005, primarily due to the inclusion of Upstate in the six months ended July 3,2005.  Gross margin remained at 57.2% inthe second quarter of 2005 compared to the prior year quarter, and was favorablyimpacted by the inclusion of higher margins of Upstate in 2005, but was offsetby lower margins arising from the Bioprocessing product mix. Gross marginincreased to 55.9% in the six months ended July 3, 2005 compared to 55.2%in the same period last year primarily due to the higher margin in the firstquarter of 2005, but was partly offset by lower margins arising from the Bioprocessingproduct mix.

 

*Research*.  Net revenue in the second quarter of 2005increased $20.2 million, or 132%, over the prior year quarter. Net revenue forthe six months ended July 3, 2005 increased $37.2 million, or 122%, overthe same period last year. In addition to the increased revenue recorded as theresult of the Upstate acquisition, Chemicon achieved revenue growth of 20.2% inthe second quarter of 2005, compared to prior year quarter, which was driven bycontributions in the areas of neuroscience, stem cells, bulk reagents and customservices. Upstate revenue, while not included in our second quarter of 2004operating results, grew 23.9% compared to the second quarter of 2004. Upstate revenuegrowth in the second quarter of 2005 was driven primarily by stronger revenuesin drug discovery services as well as product sales in the areas of nuclearfunction and multiplex Beadlyte® assays. Upstate growth in the first half of2005 was driven primarily by increases in revenue from kinase profilingservices. In the second quarter of 2005, Research revenue increased 19.0% inAsia, 15.0% in Europe and 25.0% in North America, compared to the same periodin 2004. In the first six months of 2005, Research revenue increased 25.0% inAsia, 17.0% in Europe and 16.0% in North America, compared to the same periodin 2004.

 

Gross margins for the three and six months ended July 3, 2005decreased by 4.0 and 2.0 percentage points to 63.7% and 63.5%, respectively,compared to the same period in prior year. Gross margins for the Researchsegment were higher in 2004 because of a one-time benefit related to thesettlement of a dispute over a licensing arrangement.  This settlement increased Research grossmargins by 6.0 percentage points for the second quarter of 2004 and 3.3percentage points for the first six months of 2004. Research gross margin forthe six months ended July 3, 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.

 

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Changes in foreign currency exchange rates wereimmaterial to Research segment revenues for the three and six months ended July 3,2005 and June 27, 2004. Gross margins in the Research segment wereunaffected by currency rates in the second quarter and for the first six monthsof 2005 compared to a one percentage point reduction in gross margins in boththe second quarter and for the first six months of 2004. Recognized losses onforeign exchange transactions were immaterial for the three and six monthsended July 3, 2005 and June 27, 2004.

 

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

 
| ** **                   | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended**   | ** ** |
|------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                   | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** | **July 3, 2005** | ** ** | **June 27, 2004** | ** ** |
|                         |       |                  |       |                   |       |   |   |   |   |
| EX-CYTE®                |       | $                     | 9,194      |                   | $          | 9,733 |   | $ | 11,948 |   | $ | 13,416 |   |
| ProbuminTM BSA           |       | 5,275                 |       | 4,807                  |       | 9,719 |   | 9,152 |   |
| IncelligentTM            |       | 4,317                 |       | 2,316                  |       | 11,090 |   | 7,472 |   |
| Monoclonal antibodies        |       | 6,011                 |       | 6,962                  |       | 12,477 |   | 12,351 |   |
| Other bioprocessing products |       | 3,922                 |       | 4,849                  |       | 7,936 |   | 7,609 |   |
|                         |       |                  |       |                   |       |   |   |   |   |
|                         |       | $                     | 28,719     |                   | $          | 28,667 |   | $ | 53,170 |   | $ | 50,000 |   |

 

Bioprocessing revenue was the same at $28.7 million in the secondquarter 2005 compared to the prior year quarter. Bioprocessing revenueincreased by $3.2 million to $53.2 million in first six months of 2005,compared to $50.0 million in the same period last year. The majority of therevenue fluctuations in this segment between comparable periods are due to volumeassociated with customer ordering patterns. We expect sales volumes for theseproducts to increase in the second half of 2005 over both the first half of2005 and the comparable periods of 2004. Revenues in 2005 reflect modest priceincreases over the prior year.

 

In the second quarter of 2005, Bioprocessing sales were the same inNorth America and Europe compared to the same period in 2004. In the first sixmonths of 2005, Bioprocessing revenue increased 7.0% in North America and 6.0% inEurope compared to the same period in 2005. Revenue from these two geographic regionsrepresented 97.0% and 96.0% of all Bioprocessing revenue in the second quarterand first six months of 2005, respectively. Sales to the rest of the world increased12.0% and 6.0% the second quarter and first six months of 2005, respectively,compared to the same periods of 2004.

 

Bioprocessing margins for the second quarter and first six months of 2005decreased by approximately 2.0 and 3.0 percentage points, respectively,compared to the same periods in 2004 primarily as the result of product mix andhigher manufacturing costs at certain facilities. Gross margins for the firstsix months of 2005 also included $0.3 million in one time employee terminationcosts arising from lean manufacturing initiatives intended to lower productioncosts.

 

Bioprocessing gross margins during the first sixmonths of 2004 included a charge of approximately $0.5 million, or 1.0% ofBioprocessing revenue, related to a production halt at our Toronto facilityearly in the first quarter of 2004 due to a “mad-cow” disease scare inWashington State. The production halt resulted from our inability to transportraw materials from our U.S. supplier to our facility in Toronto. As a result,much of our Toronto plant was idle for approximately one month in 2004 untilall of the importation clearances from the Canadian government were obtained.The plant became fully operational and has been running near capacity since itreopened in early 2004.

 

Gross margins in the Bioprocessing segment were adversely affected by0.5 and 0.7 of a percentage point due to currency rates in the second quarterand for the first six months of 2005, respectively, compared to an adverseaffect of 2.0 and 2.3 percentage points in same periods of 2004. Recognizedlosses on foreign exchange transactions were immaterial in the second quarterand first six months of 2005 and 2004.

 

**Selling, General and Administrative Expenses**

 

Consolidated selling, general and administrative (“SG&A”) expenseswere $22.6 million, or 35.2%, of revenues in the second quarter of 2005,compared to $13.3 million, or 30.4%, of revenues in the second quarter of2004. SG&A expenses

 

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were $42.9 million, or35.5%, of revenues in the first six months of 2005, compared to $25.0 million,or 31.1%, of revenues in the first six months of 2004.

 

SG&A during the second quarter and first six months of 2005increased by $9.2 million and $17.8 million, respectively, compared to the sameperiods in 2004 primarily due to the inclusion of Upstate in 2005.Additionally, SG&A expenses in the first six months of 2005 included $1.5million 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 expenses in the second quarter of 2005included $1.9 million in expenditures incurred in conjunction with the printingand publishing of the Chemicon catalogue and related marketing collateralmaterials. SG&A expense for the second quarter of 2005 also included $0.7million in one time employee termination costs associated with reorganization activitiesin the Bioprocessing segment and at our corporate headquarters. ExcludingUpstate related integration costs and reorganization costs at Bioprocessing andcorporate, SG&A in 2005 would have been 33.5% of revenues compared to 31.1%in the first six months of 2004.

 

**Research and Development Expenses**

 

Consolidated research and development expense increased to$4.3 million, or 6.7% of revenue, during the second quarter of 2005, ascompared to $2.2 million, or 5.0% of revenue, during the second quarter of 2004.Research and development expense also increased during the first six months of2005 to $8.8 million, or 7.3% of revenue, from $4.2 million, or 5.2% of revenue,in the same period in the prior year. Research and development expensesincreased in the second quarter and first six months of 2005 compared to thesame periods in 2004 primarily due to the inclusion of Upstate.

 

Our Research segment introduced 681 and 1,065 new products during thesecond quarter and first six months of 2005, respectively, including newChemicon assays and reagents focused in the areas of neuroscience and stem cellresearch and a range of new Upstate kinases and multiplex Beadlyte® assays andthe addition of 182 products in connection with the Specialty Mediaacquisition. Upstate continues to expand its industry position by providingclose to 250 kinases in their selectivity panel.

 

During the quarter, Upstate continued to expandits product portfolio with continued emphasis on new products to support drugdiscovery activities with particular emphasis on cell biology-based products.This included the launch of a new Catch and Release® immunoprecipitationproduct, a new chromatin immunoprecipitation product (EZ-ChIPTM) anda new red-shifted assay to the company’s fluorescence polarization productsplatform.  In addition, Upstate announceda collaboration to establish a battery of in vitro screens to select candidatemolecules for further development. The screening platform will utilizepredictive toxicity and drug metabolism screens to profile compounds in variouscell-based and in vitro assays.

 

During 2005, we continued to advance variousprojects in the Bioprocessing segment related to the characterization andperformance of EX-CYTE® and development of new cell culture supplements. Thissegment recently introduced Hybri-CYTETM, a serum-free cellculture supplement designed for use with hybridoma cell lines.  Hybri-CYTETM is the first in a new line of supplements thatare designed specifically to eliminate the use of fetal bovine serum whileincorporating a number of Celliance’s proprietary cell culture productsincluding EX-CYTE®, ProbuminTM BSA and IncelligentTM animal-free insulin.  A patent has been filed for Hybri-CYTETM.

 

In addition, Celliance recently announced theintroduction of Onco-CYTETM. Onco-CYTETM is a serum-free, ready-to-useformulation that replaces fetal bovine serum in suspension culture for avariety of cancer cell lines in research and bioprocessing applications.  Onco-CYTETM is the second product to be added to theEX-CYTE® family of products.

 

Celliance also launched, during the quarter, a new bovine albuminmanufactured exclusively from raw material sourced from animals raised inAustralia. This product combines the qualities of its premium albumin gradeswith the benefits of sourcing the raw material from Australia, a countryclassified as Bovine Spongiform Encephalopathy-free.

 

**Amortization of Intangibles**

 

Amortization of intangibles increased from$1.4 million during the first six months of 2004 to $3.5 million for thesame period in 2005 due to the acquisition of Upstate.

 

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**Other Expenses (Income), Net**

 

Other expenses (income), net in 2005 includes gains and losses fromforeign currency transactions. Recognized losses on foreign exchangetransactions were $0.2 million and $0.3 million during the second quarter andfirst six months of 2005, respectively, compared to $0.1 million and $0.3million during the same periods in 2004. Additionally, included in otherexpense (income) during the second quarter and first six months of 2005 is a $0.2million gain related to interest rate swap ineffectiveness (see Note 1 tocondensed consolidated financial statements). In 2004 other expenses (income), netincluded income from providing certain administrative transition services forthe buyer of our former therapeutic plasma business. Income fromtransition services was $0.4 million in the second quarter of 2004 and$0.7 million in the first six months of 2004. We did not earn any additionalincome from transition services subsequent to the second quarter of 2004.

 

**Interest Expense**

 

Interest expense increased during the second quarter and first sixmonths of 2005 to $1.9 million and $3.7 million, respectively, compared to $1.2million and $2.2 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 million of our Debentures to a variable interest rate based on6-month LIBOR at the end of each interest period plus a spread of 66 basispoints. Over the period in which the swaps were in place, we estimate that weachieved an interest expense savings of approximately $1.8 million. In thesecond quarter and first six months of 2005, we capitalized a negligible amountof interest on construction in process (CIP) compared to $0.3 million and $0.5million, respectively, in the same periods of 2004. The decrease in capitalizedinterest in 2005 was due to lower balances in CIP during the comparable periodsdue primarily to the completion of the construction phase of our newbioprocessing plant in Lawrence, Kansas.

 

**Interest Income**

 

Interest income increased during the second quarter of 2005 compared tothe same period in 2004 due to the increase in average balance held in shortterm investments versus in cash. Interest income increased during the first sixmonths of 2005 compared to the same period in 2004 due to higher interest rateson cash, cash equivalents and short term investments. Our average balances forthese categories during the second quarter and first six months of 2005 were $52.8million and $55.8 million, respectively, compared to $56.5 million and $57.6million, respectively, during the same periods of 2004. Included in interestincome for the first six months of 2005 is $0.3 million in interest income onthe note receivable from the buyer of our former therapeutic plasma business(see Note 3 to condensed consolidated financial statements).

 

**Provision for Income Taxes**

 

Our consolidated effective tax rate for the second quarter and firstsix months of 2005 was 29.0%, compared to 29.8% and 31.0%, respectively, in thesame periods of 2004. We expect our rate for the full 2005 fiscal year to be 29.0%compared to 31.0% for the full year in 2004. The lower expected rate is aresult of the generation of more of our income in lower tax jurisdictions,increases in research and development activities and higher tax credits.

 

**Liquidity and Capital Resources**

 

The following table sets forth certain indicators of financialcondition and liquidity as of July 3, 2005 and January 2, 2005 (dollarsin thousands):

 
| ** **                                              | ** ** | **July 3, 2005** | ** ** | **January 2, 2005** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
|                                                    |       |                  |       |                     |       |
| Cash, cash equivalents and marketable  securities       |       | $                     | 53,598     |                     | $          | 62,054 |   |
| Working capital                                         |       | $                     | 128,786    |                     | $          | 122,443 |   |
| Long term debt and convertible subordinated  debentures |       | $                     | 132,906    |                     | $          | 135,008 |   |
| Stockholders’ equity                               |       | $                     | 423,641    |                     | $          | 416,531 |   |
| Total debt to equity                                    |       | 31.4                  | %          | 32.4                     | %          |

 

We have three principal sources of near-termliquidity: (1) existing cash, cash equivalents and marketable securities; (2) cashgenerated by operations; and (3) available borrowing capacity under ourfive-year revolving credit facility (“Revolver”), which provides for a maximumborrowing capacity of $45 million. As of July 3, 2005, we had$45 million

 

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available under the Revolver.We believe that our liquidity and capital resources are sufficient to meet our workingcapital, capital expenditure and other anticipated normal operating cashrequirements over the next twelve months.

 

Net cash provided by operating activities was $4.9 million and$14.2 million during the first six months of 2005 and 2004, respectively.Changes in operating assets and liabilities used $1.9 million in cash in thefirst six months of 2005, compared to cash generated of $5.8 million in thefirst six months of 2004. Accounts receivable declined $9.6 million and$5.9 million during the first six months of 2005 and 2004, respectively,because the first and second quarters of each year had lower sales than thefourth quarter of the preceding year. Inventories increased $2.4 millionin the 2005 period compared to an increase of $4.0 million in the 2004period as we produce product for anticipated higher sales in later quarters ofeach year. Accounts payable and accrued liabilities decreased $16.4 millionand $5.9 million during the first six months of 2005 and 2004,respectively, due to accrued interest on the Debentures, accrued royalties andincome taxes. The remaining changes in cash provided by operating activities aredue to $1.6 million lower net income, increased depreciation and amortizationand increased tax benefit from exercise of stock options. Depreciation andamortization increased in the first six months of 2005 compared to the sameperiod in 2004 due to the acquisition of Upstate effective October 1, 2004.

 

Net cash used in investing activities during the first six months of2005 was $7.0 million, compared with $20.7 million during the first sixmonths of 2004. Capital expenditures during the first six months of 2005 were$5.2 million compared to $10.8 million in the same period of 2004. Expendituresin 2005 consisted primarily of manufacturing facility improvements andcapitalization of certain costs associated with the implementation of the newenterprise resource planning (“ERP”) system at Chemicon, which was completed inJune 2005. In 2004, our capital expenditures consisted primarily of theconstruction of the new Lawrence, Kansas, facility.

 

We anticipate capital expenditures for the remainder of the year tototal approximately $8.0 million to $10.0 million. The mostsignificant capital expenditures anticipated for the remainder of 2005 areimplementation of our ERP system at Upstate, which began in July 2005,final validation of our new Lawrence, Kansas facility and continued improvementsat manufacturing sites. During the second quarter of 2005, we also commencedthe final phases of production validation at our Lawrence plant. This phase ofvalidation is continuing successfully and is expected to take approximately sixmonths to complete based on scheduling commitments and testing requirements.Full manufacturing operations are expected to commence in early 2006. Duringthe first six months of 2005, net cash used in investing activities included$6.8 million related primarily to the acquisition of Specialty Media. Investingactivities included $0.8 million, representing proceeds received on the principalportion of the note receivable from the buyer of our former therapeutic plasmabusiness (see Note 3 to condensed consolidated financial statements). Duringthe first six months of 2004, we received the initial cash payment of$3.5 million from the sale of the therapeutic plasma business. Netinvestments in short term securities, principally auction-rate securities,decreased by $4.1 million during the first six months of 2005 and increased by$13.7 million for the comparable period in 2004 based on the cash requirementsof the business.

 

Net cash used by financing activities in the first six months of 2005was $0.9 million, compared with net cash provided by financing activitiesof $2.1 million in the first six months of 2004. Financing activities inthe first six months of 2005 consisted of cash used to purchase 125,120 sharesof our Common Stock for approximately $2.5 million and payments of capitallease obligations of $1.5 million, partly offset by the proceeds from theexercise of stock options of $3.1 million. Financing activities in the first sixmonths of 2004 consisted of proceeds from the exercise of stock options of $2.1million.

 

As of August 8, 2005, we had approximately $57.0 million in cash,cash equivalents and short-term investments.

 

There have been no material changes regarding our contractualobligations from the information provided in our Annual Report on Form 10-Kfor the fiscal year ended January 2, 2005 except that, in June 2005,we terminated our interest rate swap agreements (see Note 1 to condensedconsolidated financial statements). The contractual obligations are discussedunder the caption “Liquidity and Capital Resources” in “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations,”contained in the 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.

 

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**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**

 

We are involved in certain litigation arising in the ordinary course ofbusiness. In management’s opinion, the ultimate resolution of these matterswill not have a material adverse effect on our financial position or results ofoperations.

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

Thefollowing table provides information about our purchases during the quarterended July 3, 2005 of our equity securities that are registered pursuantto Section 12 of the Securities Exchange Act of 1934, as amended:

 
| **Period**                                  | ** ** | **Total  Number of  Shares  Purchased(1)** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number  of  Shares  Purchased as  Part of Publicly  Announced  Program(2)** | ** ** | **Maximum  Number of  Shares  that May Yet  Be  Purchased  Under  the Program** | ** ** |
|---------------------------------------------|------------|--------------------------------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| June 1, 2005 through July 3, 2005 |       | 125,120                                    |       | $                                  | 20.03      |                                                                                     | 125,120    |                                                                                 | $          | 1,874,880 |   |
|                                             |            |                                            |            |                                    |            |                                                                                          |            |                                                                                      |            |  |  |

 

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(1)  We repurchased a total of 125,120 shares of our Common Stockpursuant to a stock repurchase program (the “Program”). In addition torepurchases pursuant to the Program, pursuant to the Serologicals Corporation2005 Incentive Plan and the predecessor plans (collectively, the “Plan”),participants may exercise stock options by surrendering shares of our Common Stockthat the participants already own as payment of the exercise price. Planparticipants may also surrender shares of our Common Stock as payment ofapplicable tax withholding on the vesting or exercise of awards.  Shares so surrendered by participants in thePlan are repurchased pursuant to the terms of the Plan and applicable awardagreement and not pursuant to publicly announced share repurchaseprograms.  No shares of our Common Stockwere surrendered by participants in the Plan during the quarter ended July 3,2005.

 

(2)  On June 10, 2005, our Board of Directors approved therepurchase by us of up to 2,000,000 shares of our Common Stock pursuant to theProgram.  The Program expires on June 30,2008.

 

**Item 4. Submission of Matters to a Vote of Security Holders**

 

We held our Annual Meeting of Stockholders on May 11, 2005.  At the Annual Meeting, our stockholders (1) re-electedthree directors in Class 3, as follows: Robert J. Clanin, Gerard M. Moufflet and Lawrence Tilton; (2) approvedthe Serologicals Corporation 2005 Incentive Plan; (3) approved anamendment to our Amended and Restated Certificate of Incorporation to increasethe number of authorized shares of our common stock, par value $0.01 per share,from 50,000,000 to 115,000,000; and (4) ratified the appointment ofDeloitte & Touche LLP as our independent registered public accountingfirm for fiscal 2005.

 

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The following table sets forth the votes castwith respect to each of these matters:

 
| **MATTER**                                                                                                                                          | ** ** | **FOR**    | ** ** | **AGAINST** | ** ** | **WITHHELD** | ** ** | **ABSTAIN** | ** ** | **BROKER  NON-VOTES** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|-------------|------------|-----------------------|------------|
| Re-election of Robert J. Clanin                                                                                                                     |       | 30,949,295 |       | —      |       | 1,290,575    |       | —      |       | —                |       |
| Re-election of Gerard M. Moufflet                                                                                                                   |       | 30,064,107 |       | —      |       | 2,175,766    |       | —      |       | —                |       |
| Re-election of Lawrence E. Tilton                                                                                                                   |       | 30,066,362 |       | —      |       | 2,173,511    |       | —      |       | —                |       |
| Approval of Serologicals Corporation 2005  Incentive Plan                                                                                           |       | 16,067,107 |       | 12,664,501  |       |         |       | 10,422      |       | 3,497,843             |       |
| Approval of Amendment to Amended and  Restated Certificate of Incorporation                                                                         |       | 25,264,502 |       | 6,941,365   |       |         |       | 34,006      |       | —                |       |
| Ratification of appointment of  Deloitte & Touche LLP as the Company’s independent registered public  accounting firm for fiscal 2005 |       | 31,645,907 |       | 590,546     |       | —       |       | 3,420       |       | —                |       |

 

**Item6.  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, |

 

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|   | 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).                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 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

 

**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: August 12, 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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