**UNITED STATESSECURITIES 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 April 2, 2006**                                                                                                                        |
| ** **                                                                                                                                                                   |
| **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**

 

**SEROLOGICALS CORPORATION**

(Exact Name of Registrant asSpecified in its Charter)

 

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

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer | ý | Accelerated filer | o | Non-accelerated file | o |
|-------------------------|--------|-------------------|---|----------------------|---|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yeso Noý

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date:

 
| **Class**                               | ** ** | **Outstanding at May 3, 2006** |
|-----------------------------------------|------------|--------------------------------|
| Common Stock, $0.01 par value per share |       | 34,177,798                     |

 

 

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**INDEX**

 

**SEROLOGICALSCORPORATION AND SUBSIDIARIES**

 
| PART I.                                                                                                           | 3      |
|-------------------------------------------------------------------------------------------------------------------|--------|
| Item 1. Condensed Consolidated Financial Statements                                                               | 3      |
| Unaudited  Consolidated Balance Sheets—April 2, 2006 and January 1, 2006                                     | 3      |
| Unaudited  Consolidated Statements of Income—For the three months ended April 2, 2006  and April 3, 2005     | 4      |
| Unaudited  Consolidated Statements of Cash Flows—For the three months ended April 2,  2006 and April 3, 2005 | 5      |
| Unaudited Notes  to Condensed Consolidated Financial Statements                                                   | 6      |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations              | 19     |
| Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                               | 26     |
| Item 4. Controls  and Procedures                                                                                  | 26     |
|                                                                                                              |   |
| PART II.                                                                                                          | 26     |
| Item 1. Legal Proceedings                                                                                         | 26     |
| Item 1 A. Risk Factors                                                                                            | 27     |
| Item 6. Exhibits                                                                                                  | 27     |
| SIGNATURES                                                                                                        | 29     |

 

2

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**PART I.**

 

**Item 1. Financial Statements**

 

**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(Unaudited and in thousands)**

 
| ** **                                       | ** ** | **April 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|---------------------|------------|
| **ASSETS**                                       | ** ** | ** **        | ** ** | ** **          | ** ** |
| **CURRENT ASSETS:**                              | ** ** | ** **        | ** ** | ** **          | ** ** |
| Cash and cash equivalents                        |       | $                 | 43,061     |                | $          | 21,227 |   |
| Short-term investments                           |       | —            |       | 17,225              |       |
| Trade accounts receivable, net                   |       | 36,048            |       | 64,172              |       |
| Inventories                                      |       | 67,715            |       | 59,418              |       |
| Assets held for sale                             |       | 22,017            |       | 695                 |       |
| Other current assets                             |       | 13,260            |       | 15,103              |       |
| Total current assets                             |       | 182,102           |       | 177,840             |       |
| **PROPERTY AND EQUIPMENT, NET**                  |       | 66,327            |       | 70,015              |       |
| **GOODWILL**                                     |       | 244,756           |       | 239,520             |       |
| **INTANGIBLE ASSETS, NET**                       |       | 117,275           |       | 120,027             |       |
| **OTHER ASSETS**                                 |       | 3,289             |       | 16,217              |       |
| Total assets                                     |       | 613,749           |       | $                   | 623,619    |   |
|                                             |       |              |       |                |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**   | ** ** | ** **        | ** ** | ** **          | ** ** |
| **CURRENT LIABILITIES:**                         | ** ** | ** **        | ** ** | ** **          | ** ** |
| Accounts payable                                 |       | $                 | 13,322     |                | $          | 17,377 |   |
| Accrued liabilities                              |       | 29,733            |       | 41,757              |       |
| Current maturities on capital lease  obligations |       | 792               |       | 1,081               |       |
| Total current liabilities                        |       | 43,847            |       | 60,215              |       |
| **CONVERTIBLE SUBORDINATED DEBENTURES**          |       | 129,914           |       | 129,905             |       |
| **LONG TERM DEBT LESS CURRENT MATURITIES**       |       | 447               |       | 476                 |       |
| **DEFERRED INCOME TAXES**                        |       | 25,736            |       | 25,736              |       |
| **OTHER LIABILITIES**                            |       | 932               |       | 910                 |       |
| Total liabilities                                |       | 200,875           |       | 217,242             |       |
|                                             |       |              |       |                |       |
| **COMMITMENTS AND CONTINGENCIES**                | ** ** | ** **        | ** ** | ** **          | ** ** |
|                                             |       |              |       |                |       |
| **STOCKHOLDERS’ EQUITY:**                   | ** ** | ** **        | ** ** | ** **          | ** ** |
| Preferred stock                                  |       | —            |       | —              |       |
| Common stock                                     |       | 386               |       | 385                 |       |
| Additional paid-in capital                       |       | 350,302           |       | 347,183             |       |
| Retained earnings                                |       | 96,919            |       | 94,077              |       |
| Accumulated other comprehensive income           |       | 8,738             |       | 8,854               |       |
| Less:                                            |       |              |       |                |       |
| Common stock held in treasury                    |       | (43,472           | )          | (43,472             | )          |
| Deferred compensation                            |       | —            |       | (650                | )          |
| Total stockholders’ equity                  |       | 412,873           |       | 406,377             |       |
| Total liabilities and stockholders’ equity  |       | $                 | 613,749    |                | $          | 623,619 |   |

 

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

 

3

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**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

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

 
| ** **                                                | ** ** | **For the three months ended** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                | ** ** | **April 2, 2006**              | ** ** | **April 3, 2005** | ** ** |
| ** **                                                | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **NET REVENUES**                                          |       | $                              | 55,028     |   | $ | 56,635 |   |
| **COST OF  REVENUES**                                     |       | 23,412                         |       | 25,796 |   |
| Gross profit                                              |       | 31,616                         |       | 30,839 |   |
| **OPERATING  EXPENSES:**                                  | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Selling, general and administrative                       |       | 19,888                         |       | 20,293 |   |
| Research and development                                  |       | 4,999                          |       | 4,485 |   |
| Amortization of intangibles                               |       | 1,845                          |       | 1,763 |   |
| Impairment and exiting costs                              |       | 845                            |       | — |   |
| Gain on sale of long-lived assets                         |       | (1,184                         | )          | — |   |
| **OPERATING  INCOME**                                     |       | 5,223                          |       | 4,298 |   |
| Other expenses (income), net                              |       | (223                           | )          | 101 |   |
| Interest expense                                          |       | 1,812                          |       | 1,803 |   |
| Interest (income)                                         |       | (312                           | )          | (288 | ) |
| **INCOME  BEFORE INCOME TAXES**                           |       | 3,946                          |       | 2,682 |   |
| **PROVISION  FOR INCOME TAXES**                           |       | 1,105                          |       | 778 |   |
| **NET INCOME**                                            |       | $                              | 2,841      |   | $ | 1,904 |   |
|                                                      |       |                           |       |   |   |
| **NET  INCOME PER SHARE:**                                | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Basic                                                     |       | $                              | 0.08       |   | $ | 0.06 |   |
| Diluted                                                   |       | $                              | 0.08       |   | $ | 0.05 |   |
|                                                      |       |                           |       |   |   |
| **WEIGHTED  AVERAGE SHARES OF COMMON STOCK OUTSTANDING:** | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Basic                                                     |       | 34,129,372                     |       | 34,580,700 |   |
| Diluted                                                   |       | 34,437,333                     |       | 35,269,805 |   |

 

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

 

4

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**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited and in thousands)**

 
| ** **                                                                         | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **April 2, 2006**              | ** ** | **April 3, 2005** | ** ** |
| **OPERATING  ACTIVITIES:**                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                              | 2,841      |   | $ | 1,904 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                      |       | 3,814                          |       | 3,930 |   |
| Gain on sale of long-lived assets                                                  |       | (1,184                         | )          | — |   |
| Equity-based compensation                                                          |       | 1,220                          |       | 39 |   |
| Tax benefit from exercise of stock options                                         |       | —                         |       | 2,223 |   |
| Other, net                                                                         |       | (196                           | )          | 68 |   |
| Changes in operating assets and  liabilities, net of acquisition of business:      |       |                           |       |   |   |
| Trade accounts receivable, net                                                     |       | 28,220                         |       | 13,068 |   |
| Inventories                                                                        |       | (8,642                         | )          | (2,338 | ) |
| Other current assets                                                               |       | 1,272                          |       | (1,140 | ) |
| Accounts payable                                                                   |       | (4,492                         | )          | (2,746 | ) |
| Accrued liabilities                                                                |       | (11,083                        | )          | (14,551 | ) |
| Other, net                                                                         |       | —                         |       | (214 | ) |
| Total adjustments                                                                  |       | 8,929                          |       | (1,661 | ) |
| **Net cash provided by operating activities**                                      |       | 11,770                         |       | 243 |   |
| **INVESTING  ACTIVITIES:**                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Purchase of business, net of cash acquired                                         |       | (7,357                         | )          | (6,830 | ) |
| Purchases of property and equipment and  intangibles                               |       | (18,374                        | )          | (2,904 | ) |
| Purchases of short-term investments                                                |       | (23,925                        | )          | (20,935 | ) |
| Proceeds from sale of short-term  investments                                      |       | 41,150                         |       | 15,835 |   |
| Proceeds from sale of long-lived assets                                            |       | 3,312                          |       | — |   |
| Restricted cash held in escrow                                                     |       | 14,505                         |       | — |   |
| Other, net                                                                         |       | (167                           | )          | — |   |
| **Net cash provided by (used in) investing  activities**                           |       | 9,144                          |       | (14,834 | ) |
| **FINANCING  ACTIVITIES:**                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Payments on capital lease obligations                                              |       | (324                           | )          | (813 | ) |
| Excess tax benefit from exercise of stock  options                                 |       | 156                            |       | — |   |
| Proceeds from issuance of common stock  under equity-based plans                   |       | 1,305                          |       | 2,005 |   |
| **Net cash provided by financing activities**                                      |       | 1,137                          |       | 1,192 |   |
| Effects of  exchange rate changes on cash and cash equivalents                     |       | (217                           | )          | (46 | ) |
| Net increase  (decrease) in cash and cash equivalents                              |       | 21,834                         |       | (13,445 | ) |
| Cash and  cash equivalents, beginning of period                                    |       | 21,227                         |       | 33,024 |   |
| Cash and  cash equivalents, end of period                                          |       | $                              | 43,061     |   | $ | 19,579 |   |
|                                                                               |       |                           |       |   |   |
| **SUPPLEMENTAL  DISCLOSURE:**                                                      | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash paid  during the period for:                                                  |       |                           |       |   |   |
| Interest paid, net of amounts capitalized                                          |       | $                              | 3,015      |   | $ | 2,736 |   |
| Income taxes paid                                                                  |       | $                              | 1,863      |   | $ | 994 |   |
| Non-cash  investing and financing activities:                                      |       |                           |       |   |   |
| Accrued acquistion consideration                                                   |       | $                              | 99         |   | $ | 134 |   |
| Accrued purchase of property and equipment                                         |       | $                              | 269        |   | $ | — |   |

 

The accompanying notes are anintegral part of these condensed consolidated financial statements.

 

5

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**SEROLOGICALS CORPORATION AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**April 2, 2006**

**(UNAUDITED)**

 

**1.**                                      ORGANIZATIONAND BASIS OF PRESENTATION

 

*Organization*

 

Serologicals Corporation, aDelaware corporation, (together with its subsidiaries, “we”, “our”, the “Company”or “Serologicals”), with facilities in North America, Europe and Australia, isa global leader in developing and commercializing consumable biologicalproducts, enabling technologies and services in support of biological research,drug discovery and the bioprocessing of life-enhancing products. Our customersinclude major life science companies and leading research institutions involvedin key disciplines, such as neurology, oncology, hematology, immunology,cardiology, proteomics, infectious diseases, cell signaling and stem cellresearch. In addition, we are the world’s leading provider of monoclonalantibodies for the blood typing industry. We report operating results in twobusiness segments, “Research” and “Bioprocessing.” The operations of Celliancerepresent the Bioprocessing segment and the operations of Chemicon and Upstaterepresent the Research segment.

 

*Basis ofPresentation*

 

The accompanying unaudited condensedconsolidated financial statements include the accounts of Serologicals and itssubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation. The accompanying statements have been prepared inaccordance with accounting principles generally accepted in the United States forinterim financial information and the instructions to Form 10-Q of theSecurities Exchange Act of 1934. Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements. The accompanyingunaudited condensed consolidated financial statements reflect all adjustments,which are of a normal recurring nature, considered necessary to present fairlySerologicals’ financial position, results of operations and cash flows at thedates and for the periods presented. Interim results of operations are notnecessarily indicative of results to be expected for the full year. The interimfinancial statements should be read in conjunction with the audited consolidatedfinancial statements as of January 1, 2006 and the notes thereto included inthe Company’s Annual Report on Form 10-K for the year ended January 1,2006.

 

*Inventories*

 

Inventories are stated at thelower of cost or market, cost being determined on a first-in, first-out basis.Market for inventories is replacement cost for raw materials or net realizablevalue for all other categories.

 

Inventories at April 2, 2006and January 1, 2006 consisted of the following (in thousands):

 
| ** **       | ** ** | **April 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|------------------|------------|-------------------|------------|---------------------|------------|
|             |       |              |       |                |       |
| Raw  materials   |       | $                 | 7,545      |                | $          | 7,157 |   |
| Work in  process |       | 25,484            |       | 21,999              |       |
| Finished  goods  |       | 34,686            |       | 30,262              |       |
|             |       | $                 | 67,715     |                | $          | 59,418 |   |

 

*Assets Held for Sale*

 

Management classifies certainassets as held for sale based on criteria set forth in Statement of FinancialAccounting Standards No. 144 “Accounting for Impairment or Disposal ofLong-Lived Assets.” At April 2, 2006, certain assets were held for sale, werenot in service and are carried at their estimated net realizable value at January1, 2006.

 

6

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Assets held for sale at April2, 2006 and January 1, 2006 consisted of the following (in thousands):

 
| ** **                     | ** ** | **April 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|--------------------------------|------------|-------------------|------------|---------------------|------------|
|                           |       |              |       |                |       |
| Facilities  in Lawrence, KS    |       | $                 | 15,990     |                | $          | — |   |
| Facilities  in Lake Placid, NY |       | 6,027             |       | —              |       |
| Facilities  in Milford, MA     |       | —            |       | 695                 |       |
|                           |       | $                 | 22,017     |                | $          | 695 |   |

 

Facilities in Lawrence, KS andMilford, MA are held in our Bioprocessing segment; Lake Placid, NY is held inour Research segment. The Company has engaged real estate brokers to handlethese sales and has had discussions with several interested parties. TheCompany continues to evaluate the value of these assets as well as to pursue anorderly disposition of its assets held for sale. There can be no assurance ifor when sales will be completed or whether such sales will be completed onterms that will enable the Company to realize the full carrying value of theseassets.

 

*Derivative Financial Instruments*

 

In October 2003, theCompany entered into interest rate swap agreements with the objective ofconverting $70.0 million principal amount of its Debentures to a variableinterest rate based on the 6-month LIBOR rate at the end of each interestperiod plus a spread of 66 basis points. In June 2005, the Companyterminated its interest rate swap agreements and received $0.1 million in cashproceeds.

 

The interest rate swaps weredesignated and qualified as fair value hedges in accordance with Statement ofFinancial Accounting Standards No. 133, “Accounting for Derivatives andHedging Activities” and related interpretations and amendments. Accordingly,the portion of the Debentures hedged was adjusted by the fair value of thechanges related to the swaps. In June 2005, the Company adjusted the swapvalues by marking-to-market the swaps so that they equaled the net proceedsreceived on the termination. The resulting net adjustment to the carrying valueof the Debentures of $0.1 million will be accreted as additional interestexpense over the remaining estimated life of the Debentures.

 

The carrying value of the Debenturesat April 2, 2006 and January 1, 2006 is as follows (in thousands):

 
| ** **                             | ** ** | **April 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|----------------------------------------|------------|-------------------|------------|---------------------|------------|
|                                   |       |              |       |                |       |
| Face value  of Debentures              |       | $                 | 130,000    |                | $          | 130,000 |   |
| Unamortized  discount on sale of swaps |       | (86               | )          | (95                 | )          |
| Carrying  value of Debentures          |       | $                 | 129,914    |                | $          | 129,905 |   |

 

*Earnings per Share*

 

Basic earnings per share arecalculated by dividing net income by the weighted average number of commonshares outstanding during the period. The calculation of diluted earnings pershare is similar to basic earnings per share, except that net income isadjusted by the after-tax interest expense on the Debentures when they aredilutive and the weighted average number of shares includes the dilutive effectof stock options, stock awards, and the Debentures if converted. The Debentureswere anti-dilutive for the three months ended April 2, 2006 and April 3, 2005and, accordingly, were excluded from the calculation of diluted earnings pershare.

 

7

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The following table sets forththe calculation of basic and diluted earnings per share (in thousands, exceptper share amounts):

 
| ** **                                                                    | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| Numerator:                                                                    |       |              |       |              |       |
| Net income                                                                    |       | $                 | 2,841      |              | $          | 1,904 |   |
| Add back: interest expense on convertible  debentures, net of income taxes    |       | —            |       | $                 | —     |   |
| Numerator for diluted earnings per share  attributable to common stockholders |       | $                 | 2,841      |              | $          | 1,904 |   |
|                                                                          |       |              |       |              |       |
| Denominator:                                                                  |       |              |       |              |       |
| Basic earnings per share - weighted average  shares outstanding               |       | 34,129            |       | 34,581            |       |
| Effect of dilutive securities:                                                |       |              |       |              |       |
| Stock options                                                                 |       | 232               |       | 615               |       |
| Convertible debentures                                                        |       | —            |       | —            |       |
| Common stock awards                                                           |       | 76                |       | 74                |       |
| Diluted earnings per share - weighted  average shares outstanding             |       | 34,437            |       | 35,270            |       |
|                                                                          |       |              |       |              |       |
| Basic earnings per share                                                      |       | $                 | 0.08       |              | $          | 0.06 |   |
| Diluted earnings per share                                                    |       | $                 | 0.08       |              | $          | 0.05 |   |

 

The following shares issuableunder stock option agreements and the Debentures were excluded from thecalculation of diluted earnings per share for the periods indicated due totheir anti-dilutive effect (in thousands):

 
| ** **             | ** ** | **Quarter Ended** | ** ** |
|------------------------|------------|-------------------|------------|
| ** **             | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
|                   |       |              |       |   |   |
| Stock options          |       | 41                |       | 40 |   |
| Convertible debentures |       | 8,790             |       | 8,790 |   |

 

*Comprehensive Income*

 

The following table sets forththe calculation of comprehensive income for the periods indicated below (inthousands):

 
| ** **                               | ** ** | **Quarter Ended** | ** ** |
|------------------------------------------|------------|-------------------|------------|
| ** **                               | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
|                                     |       |              |       |   |   |
| Net income,  as reported                 |       | $                 | 2,841      |   | $ | 1,904 |   |
| Other  comprehensive income (loss):      |       |              |       |   |   |
| Foreign currency translation adjustments |       | (116              | )          | 720 |   |
| Comprehensive  income                    |       | $                 | 2,726      |   | $ | 2,624 |   |

 

**2.**                                      EQUITY- BASED COMPENSATION

 

On January 2, 2006, we adopted,using the modified prospective application, SFAS 123(R), “Share-Based Payment”(“SFAS 123(R)”). SFAS 123(R) requires all share-based payments to employees,including grants of employee stock options and shares purchased under anemployee stock purchase plan (if certain parameters are not met), to berecognized in the financial statements based on their fair values and did not changethe accounting guidance for share-based payment transactions with parties otherthan employees provided in SFAS 123, “Accounting for Stock Based Compensation”(“SFAS

 

8

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123”), as originally issued and Emerging Issues Task Force (“EITF”)96-18, “Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services.”

 

Upon our adoption of SFAS123(R), we began recording compensation cost related to the continued vestingof all stock options that remained unvested as of January 2, 2006, as wellas for all new stock option grants after our adoption date. The compensationcost to be recorded is based on the fair value at the grant date. The adoptionof SFAS 123(R) did not have a material effect on our recognition ofcompensation expense relating to the vesting of restricted stock grants or onour performance share awards, which are considered liability awards. SFAS123(R) required the elimination of unearned compensation (contra-equityaccount) related to earlier awards against the appropriate equity accountseffective upon our adoption.

 

Prior to the adoption of SFAS123(R), cash flows resulting from the tax benefit related to equity-based compensationwas presented in our operating cash flows, along with other tax cash flows, inaccordance with the provisions of EITF 00-15, “Classification in the Statementof Cash Flows of the Income Tax Benefit Received by a Company upon Exercise ofa Nonqualified Employee Stock Option,” (“EITF 00-15”). SFAS 123(R) supersededEITF 00-15, amended SFAS 95, “Statement of Cash Flows,” and requires taxbenefits relating to excess equity-based compensation deductions to beprospectively presented in our statement of cash flows as financing cashinflows.

 

The effect of adopting SFAS123(R) on our income from operations, income before income taxes, net income,net cash provided by operating activities, net cash provided by financingactivities, and basic and diluted earnings per share for the three-month periodended April 2, 2006, is as follows (in thousands, except per share data):

 
| Income from operations, as reported                                                       |   | $      | 5,223  |   |
|-------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Effect of  adopting SFAS 123(R)                                                           |   | 944    |   |
| Income from  operations, excluding the effect of adopting SFAS 123(R)                     |   | $      | 6,167  |   |
|                                                                                      |   |   |   |
| Income  before income taxes, as reported                                                  |   | $      | 3,946  |   |
| Effect of  adopting SFAS 123(R)                                                           |   | 944    |   |
| Income  before income taxes, excluding the effect of adopting SFAS 123(R)                 |   | $      | 4,890  |   |
|                                                                                      |   |   |   |
| Net income,  as reported                                                                  |   | $      | 2,841  |   |
| Effect of  adopting SFAS 123(R)                                                           |   | 680    |   |
| Net income,  excluding the effect of adopting SFAS 123(R)                                 |   | $      | 3,521  |   |
|                                                                                      |   |   |   |
| Net cash  provided by operating activities, as reported                                   |   | $      | 11,480 |   |
| Effect of  adopting SFAS 123(R)                                                           |   | 944    |   |
| Net cash  provided by operating activities, excluding the effect of adopting SFAS  123(R) |   | $      | 12,424 |   |
|                                                                                      |   |   |   |
| Net cash  provided by financing activities, as reported                                   |   | $      | 679    |   |
| Effect of  adopting SFAS 123(R)                                                           |   | 290    |   |
| Net cash  provided by financing activities, excluding the effect of adopting SFAS 123(R)  |   | $      | 969    |   |
|                                                                                      |   |   |   |
| Net income  per share, as reported:                                                       |   |   |   |
| Basic                                                                                     |   | $      | 0.08   |   |
| Diluted                                                                                   |   | $      | 0.08   |   |
|                                                                                      |   |   |   |
| Effect of  adopting SFAS 123(R) on net income per share, basic and diluted                |   | $      | 0.02   |   |
|                                                                                      |   |   |   |
| Net income  per share, excluding the effect of adopting SFAS 123(R) :                     |   |   |   |
| Basic                                                                                     |   | $      | 0.10   |   |
| Diluted                                                                                   |   | $      | 0.10   |   |

 

9

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Prior to our adoption of SFAS123(R), we accounted for equity-based compensation under the provisions andrelated interpretations of Accounting Principles Board 25, “Accounting forStock Issued to Employees” (“APB 25”). Accordingly, we were not required torecord compensation expense when stock options were granted to our employees aslong as the exercise price was not less than the fair market value of the stockat the grant date. In addition, we were not required to record compensationexpense when we issued common stock under the Serologicals Corporation 2005Stock Incentive Plan (“2005 Incentive Plan”), and the various Plans thatpreceded it, as long as the purchase price was not less than 85% of the fairmarket value of our common stock on the grant date. In October 1995, FASBissued SFAS 123, which allowed us to continue to follow the guidelines of APB25, but required pro-forma disclosures of net income and earnings per share asif we had adopted the provisions of SFAS 123. In December 2002, the FASBissued SFAS 148, “Accounting for Stock-Based Compensation — Transition andDisclosure — an Amendment of FASB 123,” which provided alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for equity-based employee compensation. We continued toaccount for equity-based compensation under the provisions of APB 25 using theintrinsic value method.

 

Had compensation cost for ourequity-based compensation plans been determined based on the fair value at thegrant dates for awards under those plans in accordance with the provisions ofSFAS 123, our net income and net income per share for the three-month periodended April 3, 2005, would have been as follows (in thousands, except pershare data):

 
| ** **                                                                                                                                                | ** ** | **April 3, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
|                                                                                                                                                      |       |              |       |
| Net income as reported                                                                                                                                    |       | $                 | 1,904      |   |
| Deduct: Total incremental stock-based  employee compensation expense determined under fair value-based method for  all awards, net of related tax effects |       | (872              | )          |
| Pro forma net income                                                                                                                                      |       | $                 | 1,032      |   |
|                                                                                                                                                      |       |              |       |
| Earnings per share:                                                                                                                                       |       |              |       |
| Basic - as reported                                                                                                                                       |       | $                 | 0.06       |   |
| Basic - pro forma                                                                                                                                         |       | $                 | 0.03       |   |
|                                                                                                                                                      |       |              |       |
| Diluted - as reported                                                                                                                                     |       | $                 | 0.05       |   |
| Diluted - pro forma                                                                                                                                       |       | $                 | 0.03       |   |

 

Our net income for the threemonths ended April 2, 2006 includes $1.2 million of equity-based compensation expenseand $0.4 million of income tax benefits related to these compensationarrangements. All of this expense was included in Selling, general and administrativeexpenses in the Consolidated Statement of Income. There were no equity-basedawards made during the three months ended April 2, 2006. During the threemonths ended April 3, 2005, we did not recognize any material equity-basedcompensation in our statement of income.

 

As of January 2, 2006, we had fourprincipal types of equity-based payment arrangements with our employees andnon-employee directors: stock options, performance shares, restricted stock andemployee stock purchase plans.

 

*Stock Options*

 

In the quarter ended April 2,2006, we recognized equity-based compensation expense of approximately $0.8million related to the vesting of stock options and the related tax benefit ofapproximately $0.3 million. As of April 2, 2006, we had approximately $9.6million of nonvested stock options, which we will record in our statements of incomeover a weighted average recognition period of approximately 4.8 years. No stockoption grants were awarded during the three months ended April 2, 2006. Thefollowing table summarizes the activity of stock options under our 2005Incentive Plan, from January 2, 2006 to April 2, 2006:

 

10

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| ** **                           | ** ** | **Number of  Options** | ** ** | **Weighted Average Remaining Term** | ** ** | **Weighted Average Exercise Price** | ** ** | **Aggregate Intrinsic  Value** | ** ** |
|--------------------------------------|------------|------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|--------------------------------|------------|
|                                 |       |                   |       |                                |       |                                |       |                           |       |
| Outstanding, January 2, 2006         |       | 2,212,663              |       |                                |       | $                                   | 16.83      |                           |       |   |
| Granted                              |       | —                 |       |                                |       | $                                   | —     |                           |       |   |
| Exercised                            |       | (61,482                | )          |                                |       | $                                   | 16.88      |                           | $          | 445,976 |   |
| Canceled                             |       | (155,858               | )          |                                |       | $                                   | 18.97      |                           |       |   |
| Outstanding, April 2, 2006           |       | 1,995,323              |       | 3.98 years                          |       | $                                   | 18.33      |                           | $          | 12,231,330 |   |
|                                 |       |                   |       |                                |       |                                |       |                           |       |
| Options exercisable at April 2, 2006 |       | 811,201                |       | 2.75 years                          |       | $                                   | 17.42      |                           | $          | 5,714,359 |   |
|                                      |            |                        |            |                                     |            |                                     |            |                                |            |  |  |  |  |

 

*Performance Shares*

 

We awarded performance shareunits to our senior management as part of their long-term, equity-based incentive compensationfor fiscal 2005. We had not previously awarded performance share units. Theunits vest over two years, subject to our performance against pre-establishedtargets, including the compound growth rate of consolidated revenues and earningsper share during the two-year period. Revenue growth comprises 55% of theperformance goal and earnings per share comprise the remainder. The actualpayout under these awards may vary based on our actual performance over thetwo-year performance period. The number of performance share units awarded wasdetermined by dividing the value of the performance share units granted to eachemployee by the fair market value of a share of our common stock onMay 11, 2005. These awards have been accounted for as liability awardsunder SFAS 123(R) because they are payable in either cash or common stock atthe election of the participant. We record the liability for these awards atmarket value based on our best estimate of achieving the stated performancegoal for the performance period at the end of each quarter in the performanceperiod. During the first quarter ended April 2, 2006, no new performance shareswere awarded. We recognized $0.2 million in equity-based compensation expense and$0.1 million of income tax benefits related to this compensation arrangement inthe three months ended April 2, 2006. We have an accrued liability of $0.6million at April 2, 2006, which if earned, would be payable in the firstquarter of 2007. The following table summarizes the activity of equity-basedpayment arrangements under our performance share award plan, from January 2,2006 to April 2, 2006:

 
| ** **                    | ** ** | **Number of Performance  Shares** | ** ** | **Grant Date  Fair Value** | ** ** | **Aggregate Intrinsic Value** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|----------------------------|------------|-------------------------------|------------|
|                          |       |                              |       |                       |       |                          |       |
| Outstanding,  January 2, 2006 |       | 98,231                            |       |                       |       |                          |       |
| Granted                       |       | —                            |       |                       |       |                          |       |
| Exercised                     |       | —                            |       |                       |       |                          |       |
| Canceled                      |       | (6,609                            | )          |                       |       |                          |       |
| Outstanding,  April 2, 2006   |       | 91,622                            |       | $                          | 21.39      |                          | $          | 2,241,074 |   |
|                               |            |                                   |            |                            |            |                               |            |  |  |

 

*Restricted Stock*

 

Periodically the Company hasawarded restricted common stock and restricted stock units to eligible keyemployees under our 2005 Incentive Plan. These awards have restriction periodstied primarily to employment and service. The awards are recorded at fair marketvalue on the date of the grant as unearned compensation and compensationexpense is recognized over the restriction period on a straight-line basis, netof forfeitures. In the three months ended April 2, 2006, equity-based

 

11

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compensationexpense related to the vesting of restricted stock was immaterial.  As of April 2, 2006, we had approximately $0.4million of nonvested restricted stock which we will record in our statement ofoperations over a weighted average recognition period of approximately 2.9years. The following table summarizes the activity of equity-based paymentarrangements under restricted awards from January 2, 2006 to April 2, 2006:

 
| ** **                    | ** ** | **Number of Restricted  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Aggregate Intrinsic Value** | ** ** |
|-------------------------------|------------|----------------------------------|------------|-----------------------------------------------|------------|-------------------------------|------------|
|                          |       |                             |       |                                          |       |                          |       |
| Outstanding,  January 2, 2006 |       | 29,939                           |       | $                                             | 23.37      |                          |       |   |
| Granted                       |       | —                           |       | $                                             | —     |                          |       |   |
| Vested                        |       | (1,623                           | )     | $                                             | 22.56      |                          | $          | 39,699 |   |
| Canceled                      |       | (6,377                           | )     | $                                             | 22.62      |                          |       |   |
| Outstanding,  April 2, 2006   |       | 21,939                           |       | $                                             | 23.66      |                          |       |   |
|                               |            |                                  |            |                                               |            |                               |            |  |  |

 

*Employee Stock Purchase Plans*

* *

The Company has two employeestock purchase plans, one for employees based in North America (the “US PurchasePlan”) and one for employees based in the United Kingdom (the “UK Plan”). Bothplans allow employees to purchase shares of the Company’s common stock througha payroll deduction program. Participants in the US Purchase Plan may have upto 25% of their compensation withheld to purchase shares at a price equal to85% of the lower of the closing price on the first or last day of eachsuccessive three-month purchase period.  Participants in the UK Plan may have up to 10%of their compensation withheld to purchase shares of the Company’s common stockat the lower of fair market value at the beginning of the accumulation periodor the acquisition date, as defined in the UK Plan. The Company matches 1 sharefor every 6 shares purchased in an accumulation period by participants in theUK Plan. Participants in the UK plan are required to hold these matching sharesfor a period of at least 3 years. During the three months ended April 2,2006, in accordance with the provisions of SFAS 123(R), we recognized $0.1 millionin equity-based compensation for these Plans. No equity-based compensation wasrecognized prior to the adoption of SFAS 123(R).

 

**3.****                                      ACQUISITIONS**

 

***Cytomyx, Ltd***

 

On March 31, 2006, the Companycompleted the acquisition of Cytomyx Ltd., a wholly owned subsidiary of CytomyxHoldings Plc (AIM: CYX). Based in Cambridge, U.K., Cytomyx Ltd. is a leadingprovider of ion channel cell lines and drug discovery services. With 23distinct ion channel cell lines commercially available, and more in itspipeline, Cytomyx Ltd. offers the largest portfolio of distinct ion channelcell lines in the marketplace today. The Company acquired all of theoutstanding stock of Cytomyx for $7.0 million in cash. The Cytomyx acquisitionprovides a number of important strategic additions for our Research segment; ****most significantly, itsproducts extend the Company’s drug discovery profiling portfolio.****

 

The results of Cytomyx were notmaterial to the results of operations for the three months ended April 2, 2006or April 3, 2005; accordingly, no pro forma disclosure is presented.

 

The components of the purchaseprice were (in thousands):

 

12

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| Cash paid                  |   | $   | 7,000  |   |
|----------------------------|--------|-----|--------|--------|
| Direct costs               |   | 375 |   |
| Other  liabilities assumed |   | 806 |   |
|                       |   | $   | 8,181  |   |

 

The Company has not completedits valuation of the fair market value of the underlying assets acquired; however,at April 2, 2006 the preliminary summary allocation of assets acquired was asfollows (in thousands):

 
| Current assets                    |   | $     | 618    |   |
|-----------------------------------|--------|-------|--------|--------|
| Property and equipment            |   | 931   |   |
| Other assets                      |   | 105   |   |
| Intangibles, principally goodwill |   | 6,527 |   |
|                              |   | $     | 8,181  |   |

 

Changes in Goodwill arising from acquisition activity duringthe three months ended April 2, 2006 were as follows (in thousands):

 
| Balance, January1, 2006                        |   | $      | 239,520 |   |
|------------------------------------------------|--------|--------|---------|--------|
| Cytomyx  acquisition                           |   | 6,505  |    |
| Acquisition  Earnout                           |   | 99     |    |
| Settlement  of Chemicon indemnification claims |   | (1,368 | )       |
| Balance,  April 2, 2006                        |   | $      | 244,756 |   |

 

13

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The Company has accounted forits plans of integration and exiting of certain activities arising from its previousacquisitions of Chemicon and Upstate in accordance with EITF 95-3, “Recognitionof Liabilities in Connection with a Purchase Business Combination”. Changes inaccrued acquisition and business integration costs for these acquisitionsduring the three months ended April 2, 2006 were as follows (in thousands):

 

Chemicon:

 
| ** **        | ** ** | **Original amount recorded** | ** ** | **Prior year amounts  paid** | ** ** | **Balance at January 1, 2006** | ** ** | **Amounts  paid** | ** ** | **Balance at  April 2,  2006** | ** ** |
|-------------------|------------|------------------------------|------------|------------------------------|------------|--------------------------------|------------|-------------------|------------|--------------------------------|------------|
|              |       |                         |       |                         |       |                           |       |              |       |                           |       |
| Facility  closure |       | $                            | 1,250      |                         | $          | (46                            | )          | $                 | 1,204      |                           | $          | — |   | $ | 1,204 |   |
| Other             |       | 503                          |       | (49                          | )          | 454                            |       | (57               | )          | $                              | 397        |   |
|              |       | $                            | 1,753      |                         | $          | (95                            | )          | $                 | 1,658      |                           | $          | (57 | ) | $ | 1,601 |   |
|                   |            |                              |            |                              |            |                                |            |                   |            |                                |            |  |  |  |  |  |  |

 

Upstate: 

 
| ** **                     | ** ** | **Original amount recorded** | ** ** | **Prior year amounts paid** | ** ** | **Balance at January 1, 2006** | ** ** | **Amounts paid** | ** ** | **Balance at April 2,  2006** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------------|------------|
|                           |       |                         |       |                        |       |                           |       |             |       |                          |       |
| Severance  and relocation cost |       | $                            | 2,209      |                        | $          | (1,199                         | )          | $                | 1,010      |                          | (556       | ) | $ | 454 |   |
| Facility  closure              |       | 1,606                        |       | (440                        | )          | 1,166                          |       | (118             | )          | $                             | 1,048      |   |
| Other                          |       | 651                          |       | (375                        | )          | 276                            |       | —           |       | $                             | 276        |   |
|                           |       | $                            | 4,466      |                        | $          | (2,014                         | )          | $                | 2,452      |                          | $          | (674 | ) | $ | 1,778 |   |
|                                |            |                              |            |                             |            |                                |            |                  |            |                               |            |  |  |  |  |  |

 

**4.              IMPAIRMENT AND EXITING COSTS**

 

As a result of the Company’songoing plant consolidation and rationalization initiatives, inJanuary 2006 the Company announced a plan to rationalize, integrate andalign the resources of the Company’s Bioprocessing segment. Thisrationalization program includes workforce reduction, impairment of certainfacilities, and other charges. The expected completion of the program isanticipated to occur in the first quarter of 2007. The Company recorded acharge for impairment and exiting costs in its statement of income for itsfiscal year ended January 1, 2006. During the three months ended April 2, 2006,the rationalization program resulted in an additional charge of $0.8 million forcertain non-impairment related costs incurred primarily for workforce reductionand other miscellaneous exit costs.

 

14

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A summary of impairmentand exiting costs recognized in the three months ended April 2, 2006 andthe accrued liability associated with the exiting plan at April 2, 2006,consisted of the following (in thousands):

 
| ** **                                                       | ** ** | **Workforce** | ** ** | **Lease**            | ** ** | **Other**           | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|---------------|------------|----------------------|------------|---------------------|------------|------------|------------|
| ** **                                                       | ** ** | **Reduction** | ** ** | **Term. Costs** | ** ** | **Exit Costs** | ** ** | **Total**  | ** ** |
|                                                             |       |          |       |                 |       |                |       |       |       |
| Balance at January 1, 2006                                  |       | $             | 1,016      |                 | $          | 205                 |       | $          | 3,965      |   | $ | 5,186 |   |
|                                                             |       |          |       |                 |       |                |       |       |       |
| Additional  charges in the three months ended April 2, 2006 |       | 643           |       | —               |       | 201                 |       | 844        |       |
|                                                             |       |          |       |                 |       |                |       |       |       |
| Payments                                                         |       | (1,286        | )          | (205                 | )          | (660                | )          | (2,151     | )          |
|                                                             |       |          |       |                 |       |                |       |       |       |
| Balance at April 2, 2006                                    |       | $             | 373        |                 | $          | —              |       | $          | 3,506      |   | $ | 3,879 |   |

 

The remaining accruedliabilities at April 2, 2006 are expected to be paid through the firstquarter of 2007.

 

**5.****                                      GAINON SALE OF LONG-LIVED ASSETS**

 

OnJanuary 13, 2006, the Company completed the sale of its diagnosticproduction facility and distribution warehouse based in Milford, MA for cashproceeds of $3.3 million. The Company recorded a gain on the sale ofapproximately $1.2 million in the first quarter of 2006.

 

**6.****                                      SEGMENTINFORMATION**

 

SFASNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation” (“SFAS No. 131”), defines operating segments to be thosecomponents of a business for which separate financial information is availablethat is regularly evaluated bymanagementin 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.

 

Wereport operating results in two business segments, “Research” and “Bioprocessing.”The operations of Celliance represent the Bioprocessing segment and theoperations of Chemicon and Upstate represent the Research segment.

 

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

 

OurBioprocessing segment sells a variety of cell culture products, includinghighly purified proteins and tissue culture media components. These productsare used primarily by biopharmaceutical and biotechnology companies as nutrientadditives in cell culture media. One of our most significant products withinthe Bioprocessing segment is EX-CYTE®, a patented serum-freesolution of cholesterol, lipoproteins and fatty acids. EX-CYTE® isused, in combination with other cell culture supplements, to reduce or replaceanimal serum in cell culture processes. We also provide a range of serum-basedproducts in this segment, including Bovine Serum Albumin (“BSA”), under thebrand name “ProbuminTM”, for which we are the world’s leading supplier. We alsosell recombinant human insulin, under the brand name of “IncelligentTM”, for useas a media supplement. This segment also manufactures and sells monoclonalantibodies, under the brand name “MonoSeraTM”, that are used in products such asblood typing reagents and in 

 

15

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controlsfor diagnostic tests for certain infectious diseases. We believe these productscomprise the world’s most comprehensive range of commercially available humanmonoclonal antibodies for blood typing.

 

TheCompany’s senior management utilizes multiple forms of analysis of operatingand financial data to assess segment performance and to make operatingdecisions with respect to the segments. The Company’s segment information for thethree months ended April 2, 2006 and April 3, 2005 was as follows (inthousands):

 
|                                          |       | **Quarter ended April 2,  2006** |       |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **Research**                          | ** ** | **Bioprocessing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|                                          |       |                                  |       |   |   |   |   |   |   |
| Net revenues                                  |       | $                                     | 34,920     |   | $ | 20,108 |   | $ | — |   | $ | 55,028 |   |
| Cost of revenues                              |       | 13,582                                |       | 9,830 |   | — |   | 23,411 |   |
| Gross Profit                                  |       | 21,338                                |       | 10,278 |   | — |   | 31,617 |   |
|                                          |       |                                  |       |   |   |   |   |   |   |
| Selling, general and administrative  expenses |       | 12,695                                |       | 2,884 |   | 4,309 |   | 19,888 |   |
| Research and development                      |       | 4,141                                 |       | 375 |   | 483 |   | 5,000 |   |
| Amortization                                  |       | 1,592                                 |       | 253 |   | — |   | 1,845 |   |
| Impairment and exiting costs                  |       | —                                |       | 727 |   | 118 |   | 845 |   |
| Gain on sale of long-lived assets             |       | —                                |       | (1,184 | ) | — |   | (1,184 | ) |
| Operating  income (loss)                      |       | 2,910                                 |       | 7,223 |   | (4,910 | ) | 5,223 |   |
| Other expense (income), net                   |       | (180                                  | )          | (45 | ) | 2 |   | (223 | ) |
| Interest expense(income), net                 |       | 5                                     |       | (23 | ) | 1,518 |   | 1,500 |   |
| Income (loss  before income tax)              |       | $                                     | 3,085      |   | $ | 7,291 |   | $ | (6,430 | ) | $ | 3,946 |   |
|                                          |       |                                  |       |   |   |   |   |   |   |
| Assets at April 2, 2006                  |       | $                                     | 409,132    |   | $ | 162,724 |   | $ | 41,893 |   | $ | 613,749 |   |
|                                               |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

 
|                                          |       | **Quarter ended April 3,  2005** |       |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **Research**                          | ** ** | **Bioprocessing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
|                                          |       |                                  |       |   |   |   |   |   |   |
| Net revenues                                  |       | $                                     | 32,161     |   | $ | 24,474 |   | $ | — |   | $ | 56,635 |   |
| Cost of revenues                              |       | 11,860                                |       | 13,936 |   | — |   | 25,796 |   |
| Gross Profit                                  |       | 20,301                                |       | 10,538 |   | — |   | 30,839 |   |
|                                          |       |                                  |       |   |   |   |   |   |   |
| Selling, general and administrative  expenses |       | 11,892                                |       | 3,861 |   | 4,540 |   | 20,293 |   |
| Research and development                      |       | 3,430                                 |       | 815 |   | 240 |   | 4,485 |   |
| Amortization                                  |       | 1,486                                 |       | 277 |   | — |   | 1,763 |   |
| Operating  income (loss)                      |       | 3,493                                 |       | 5,585 |   | (4,780 | ) | 4,298 |   |
| Other expense (income), net                   |       | 88                                    |       | 13 |   | — |   | 101 |   |
| Interest expense(income), net                 |       | 28                                    |       | (41 | ) | 1,528 |   | 1,515 |   |
| Income (loss  before income tax)              |       | $                                     | 3,376      |   | $ | 5,613 |   | $ | (6,308 | )  | $ | 2,682 |   |
|                                          |       |                                  |       |   |   |   |   |   |   |
| Assets at April 3, 2005                  |       | $                                     | 375,683    |   | $ | 190,407 |   | $ | 64,373 |   | $ | 630,462 |   |

 

**7**.                                      **SUBSEQUENT EVENTS**

 

*Pending acquisition of Serologicals by MilliporeCorporation*

 

On April 25, 2006, Millipore Corporation (NYSE:MIL), located in Billerica, MA, its wholly owned subsidiary, CharlestonAcquisition Corp., and Serologicals signed a definitive Agreement and Plan ofMerger (the “Merger Agreement”) whereby Millipore will acquire Serologicals.Under the terms of the agreement, Serologicals’ shareholders will receive$31.55 in cash for each share of Serologicals common stock they own. The totalvalue of the transaction, including the assumption of the projected debt atclosing, is estimated at approximately $1.4 billion. The transaction, whichMillipore expects to close by June 30, 2006, is subject to approval bySerologicals’ stockholders, customary regulatory approvals, and otherconditions in the merger agreement.

 

16

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*Linco Acquisition*

 

On May 2, 2006, the Company acquired all the issued andoutstanding common stock of Linco Research, Incorporated (“LRI”) and LINCODiagnostic Services, Inc. (“LDS”). The acquisition of LRI and LDS waseffected pursuant to that certain Stock Purchase Agreement, dated as of March 23,2006 (the “Stock Purchase Agreement”), among the Company and The Ronald L.Gingerich Revocable Living Trust dated May 23, 1995 (the “Trust”) and Mr. RonaldL. Gingerich. Pursuant to the Stock Purchase Agreement, the Company paid theTrust approximately $47.9 million, representing the adjusted base purchaseprice of $65.2 million, less approximately $4.5 million, which was placed inescrow to secure the Trust’s indemnification obligations to the Company, and$12.8 million, which was applied to the repayment of the indebtedness of LRIand LDS and to payment of transaction costs.

 

Simultaneously with the closing of the acquisition of LRI andLDS, the Company purchased three parcels of improved real estate that wereleased by LRI and LDS. We acquired the real estate pursuant to a definitivePurchase and Sale Agreement with Paragon Properties, L.C., and an affiliate of Mr. RonaldL. Gingerich. We paid approximately $10.3 million for this real estate.

 

*New credit facility*

 

On May 2, 2006, the Company entered into a new$100.0 million credit agreement with a bank syndicate consisting of a$50.0 million six-year term loan and a $50.0 million six-yearrevolving credit facility, which replaced our existing $45.0 millionrevolving credit facility. The Revolver has an on-demand commitment upsize,which would increase the total available to $100.0 million. The Company usedthe proceeds of the $50.0 million term loan, $25.0 million advancedpursuant to the revolving credit facility and cash on hand to finance theacquisition of LRI and LDS. The term loan is repayable in twenty-threeconsecutive quarterly principal installments commencing on September 30,2006, as follows:  three installmentseach in the amount of $1.7 million; four installments each for $1.3 million;eight installments each for $1.9 million; four installments each for $2.5million; and four installments each for $3.8 million. Loans under the creditagreement bear interest payable quarterly at a floating rate of interestdetermined by reference to a base rate or to Eurodollar interest rates, plus amargin. The margin, determined from a price grid in the credit agreement, onbase rate loans ranges from 0.0% to 0.875%. The margin on Eurodollar loansranges from 1.0% to 1.875 %. Serologicals is required to pay a commitment feewith respect to the unused amount of the revolving credit facility ranging from0.225% to 0.450 %. The applicable margins and commitment fees are subject toadjustment on future adjustment dates based on the consolidated leverage ratioof Serologicals on the adjustment dates. The Company’s obligations under thecredit agreement have been guaranteed by all of its U.S. subsidiaries. The Company’sobligations and the subsidiaries’ guarantees are secured by substantially allof their respective personal property. The credit agreement contains certainfinancial covenants that require the maintenance of a minimum fixed chargecoverage ratio and maximum leverage and senior debt ratios. Furthermore, underthe terms of the credit agreement there are covenants imposing limitations onindebtedness, liens, acquisitions and other investments, disposition ofproperty, repurchasing common stock and our ability to pay dividends.

 

The Company may prepay the indebtedness outstandingunder the credit agreement at any time, in whole or in part, without premium orpenalty. We believe the debt will be repaid simultaneously with the closing ofthe transaction contemplated by the Merger Agreement.

 

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**Forward-Looking Statements**

 

*This QuarterlyReport on Form 10-Q**contains certain “forward-looking statements” within the meaning ofthe Private Securities Litigation Reform Act of 1995 about SerologicalsCorporation and its subsidiaries (collectively, “Serologicals” or the “Company,”“we,” “our” or “us”) that are subject to risks and uncertainties. Statementsthat are not historical facts, including statements about our beliefs andexpectations, are forward-looking statements. Forward-looking statements may beidentified by the use of words such as “may,” “will,” “expect,” “anticipate,” “intend,”“estimate,” “plan,” “believe,” or “continue” and other words of similar meaningor future or conditional verbs such as “should,” “would” and “could.”Forward-looking statements include discussions of our expected businessoutlook, future operations, financial performance, pending acquisitions,financial strategies, future working capital needs and projected industrytrends, as well as our strategies for growth, product development, regulatoryapprovals 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:*

 

•                  *theconsummation of our pending acquisition by Millipore Corporation;*

 

•                  *ourability to implement our growth strategy;*

 

•                  *ourability to integrate recent significant acquisitions;*

 

•                  *our ability to manage our growth;*

 

•                  *our ability to raise capital;*

 

•                  *our ability to complete the sale of the assets held forsale in a timely manner on terms that will enable the Company to realize thefull carrying value of these assets.*

 

•                  *ourability to compete effectively within our industry;*

 

•                  *theavailability 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;*

 

•                  *ourdependence on the success of the customers of our EX-CYTE® product indeveloping and marketing new drugs using the product;*

 

•                  *ourability to comply with governmental, customer and industry laws, regulations andguidelines, including those related to environmental compliance andremediation;*

 

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

 

•                  *ourability to identify new licensing opportunities and to develop new products,services and technologies;*

 

•                  *ourability to protect our intellectual property;*

 

•                  *theeffect on our results of operations of the loss of any significant customers orreduced orders from*

 

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

 

•                  *adoptionof, or changes in, domestic and foreign laws and regulations that could affectour ability to maintain existing regulatory licenses and approvals;*

 

•                  *therisks associated with our international operations; and*

 

•                  *theother risks described under the caption “Risk Factors” in our Annual Report on Form 10Kfor the fiscal year ended January 2, 2005.*

 

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

 

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

 

**Overview**

 

Weare a global leader in developing and commercializing consumable biologicalproducts, enabling technologies and services in support of biological research,drug discovery and the bioprocessing of life-enhancing products. Our customersinclude major life science companies and leading research institutions involvedin key disciplines, such as neurology, oncology, hematology, immunology,cardiology, proteomics, infectious diseases, cell signaling and stem cellresearch. In addition, we are the world’s leading provider of monoclonalantibodies for the blood typing industry.

 

Wereport operating results in two business segments, “Research” and “Bioprocessing.”The operations of Celliance represent the Bioprocessing segment and theoperations of Chemicon and Upstate represent the Research segment.

 

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

 

OurBioprocessing segment sells a variety of cell culture products, includinghighly purified proteins and tissue culture media components. These productsare used primarily by biopharmaceutical and biotechnology companies as nutrientadditives in cell culture media. One of our most significant products withinthe Bioprocessing segment is EX-CYTE®, a patentedserum-free solution of cholesterol, lipoproteins and fatty acids. EX-CYTE® is used, in combination with other cellculture supplements, to reduce or replace animal serum in cell cultureprocesses. We also provide a range of serum-based products in this segment,including BSA, under the brand name “ProbuminTM”, for which we are the world’sleading supplier. We also sell recombinant human insulin, under the brand name “IncelligentTM”,for use as a media supplement. This segment also manufactures and sellsmonoclonal antibodies, under the brand name “MonoSeraTM”, that are used inproducts such as blood typing reagents and in controls for diagnostic tests forcertain infectious diseases. We believe these products comprise the world’smost comprehensive range of commercially available human monoclonal antibodies forblood typing.

 

**Recent Events**

 

*Pending acquisition of Serologicals byMillipore Corporation*

 

On April 25, 2006, Millipore Corporation (NYSE:MIL), located in Billerica, MA, its wholly owned subsidiary, CharlestonAcquisition Corp., and Serologicals signed a definitive Agreement and Plan ofMerger (the “Merger Agreement”) whereby Millipore will acquire Serologicals.Under the terms of the agreement, Serologicals’ stockholders will receive$31.55 in cash for each share of Serologicals common stock they own. The totalvalue of the transaction, including the assumption of 

 

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theprojected debt at closing, is estimated at approximately $1.4 billion. Thetransaction, which Millipore expects to close by June 30, 2006, is subjectto approval by Serologicals’ stockholders, customary regulatory approvals, andother conditions in the Merger Agreement. Upon the consummation of theacquisition of the Company by Millipore, the Company will become a wholly ownedsubsidiary of Millipore. As a result, the Company will no longer report itsresults of operations to the public. Instead, its results will be included withthose of Millipore on a consolidated basis.

 

*OperationanlActivities*

 

In March 2006,the Company completed the accelerated integration program for our Upstateoperations and the transfer of all Lake Placid, NY operations and researchactivities to Temecula, CA. We expect to complete a relocation of Upstatemarketing, customer service and research functions in Charlottesville, VA toTemecula, CA and St. Louis, MO upon completion of the Linco acquisition, by theend of 2006.

 

In March 2006, Celliance announced theexecution of an expanded four-year supply agreement with Novo Nordisk A/S thatprovides Celliance the worldwide exclusive right to distribute Novo Nordisk’srecombinant human insulin in the cell culture market. Celliance announced theopening of a new state of the art 18,000 square foot Global Distribution Centernear its largest production facility in Kankakee, Illinois. In addition,Celliance completed a sale of its diagnostic production facility anddistribution warehouse based in Milford, Massachusetts for cash proceeds of$3.3 million, resulting in a gain on the sale of approximately $1.2 million in thefirst quarter of 2006.

 

*Cytomyx Acquisition*

 

On March 31, 2006, the Company completed the acquisitionof Cytomyx Ltd., a wholly owned subsidiary of Cytomyx Holdings Plc (AIM: CYX).Based in Cambridge, U.K., Cytomyx Ltd. is a leading provider of ion channelcell lines and drug discovery services. With 23 distinct ion channel cell linescommercially available, and more in its pipeline, Cytomyx Ltd. offers thelargest portfolio of distinct ion channel cell lines in the marketplace today.Serologicals acquired all of the outstanding stock of Cytomyx for $7.0 millionin cash. The Cytomyx acquisition provides a number of important strategicadditions for our Research segment; ****mostsignificantly, its products extend the Company’s drug discovery profilingportfolio.****

 

*Linco Acquisition*

 

On May 2, 2006, the Company acquired all the issued andoutstanding common stock of Linco Research, Incorporated (“LRI”) and LINCODiagnostic Services, Inc. (“LDS”). The acquisition of LRI and LDS waseffected pursuant to a Stock Purchase Agreement, dated as of March 23,2006 (the “Stock Purchase Agreement”), among Upstate and The Ronald L.Gingerich Revocable Living Trust dated May 23, 1995 (the “Trust”) and Mr. RonaldL. Gingerich. Pursuant to the Stock Purchase Agreement, the Company paid theTrust approximately $47.9 million, representing the adjusted base purchaseprice of $65.2 million, less approximately $4.5 million, which was placed inescrow to secure the Trust’s indemnification obligations to the Company, and$12.8 million, which was applied to the repayment of the indebtedness of LRIand LDS and to payment of transaction costs.

 

Simultaneously with the closing of the acquisition of LRI andLDS, we purchased three parcels of improved real estate that were leased by LRIand LDS. The Company acquired the real estate pursuant to a definitive Purchaseand Sale Agreement with Paragon Properties, L.C., and an affiliate of Mr. RonaldL. Gingerich. The Company paid approximately $10.3 million for this realestate.

 

*New credit facility*

 

On May 2, 2006, the Company entered into a new$100.0 million credit agreement with a bank syndicate consisting of a$50.0 million six-year term loan and a $50.0 million six-yearrevolving credit facility, which replaced the Company’s existing$45.0 million revolving credit facility. The Revolver has an on-demandcommitment upsize, which would increase the total available to $100.0 million.The Company used the proceeds of the $50.0 million term loan, $25.0advanced pursuant to the revolving credit facility and cash on hand to financethe acquisition of LRI and LDS. The term loan is repayable in twenty-threeconsecutive quarterly principal installments commencing on September 30,2006, as follows:  three 

 

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installmentseach in the amount of $1.7 million; four installments each for $1.3 million;eight installments each for $1.9 million; four installments each for $2.5million; and four installments each for $3.8 million. Loans under the creditagreement bear interest payable quarterly at a floating rate of interestdetermined by reference to a base rate or to Eurodollar interest rates, plus amargin. The margin, determined from a price grid in the credit agreement, onbase rate loans ranges from 0.0% to 0.875%. The margin on Eurodollar loansranges from 1.0% to 1.875%. The Company is required to pay a commitment feewith respect to the unused amount of the revolving credit facility ranging from0.225% to 0.450%. The applicable margins and commitment fees are subject toadjustment on future adjustment dates based on the consolidated leverage ratioof the Company on the adjustment dates. Our obligations under the creditagreement have been guaranteed by all of our U.S. subsidiaries. The Company’sobligations and the subsidiaries’ guarantees are secured by substantially allof their respective personal property. The credit agreement contains certainfinancial covenants that require the maintenance of a minimum fixed chargecoverage ratio and maximum leverage and senior debt ratios. Furthermore, underthe terms of the credit agreement there are covenants imposing limitations onindebtedness, liens, acquisitions and other investments, disposition ofproperty, repurchasing common stock and the Company’s ability to pay dividends.

 

The Company may prepay the indebtedness outstandingunder the credit agreement at any time, in whole or in part, without premium orpenalty. We believe the debt will be repaid simultaneously with the closing ofthe transaction contemplated by the Merger Agreement.

 

**Critical Accounting Policies**

 

There have been no material changes to theCompany’s critical accounting policies from those discussed under the caption “CriticalAccounting Policies” in “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in the Company’s Annual Reporton Form 10-K for the fiscal year ended January 1, 2006, except asdiscussed below.

 

Effective January 2, 2006, the Companyaccounted for equity-based compensation in accordance with SFAS No. 123(R),“Share-Based Payment.” Underthe fair value recognition provisions of this statement, share-basedcompensation cost is measured at the grant date based on the value of the awardand is recognized as expense over the vesting period. Determining the fairvalue of share-based awards at the grant date requires judgment, includingestimating expected dividends and predicting risk-free interest rates and stockvolatility. In addition, judgment is also required in estimating the amount ofshare-based awards that are expected to be forfeited. If actual results differsignificantly from these estimates, stock-based compensation expense and theCompany’s results of operations could be materially impacted. There were noequity-based awards made during the three months ended April 2, 2006. See “Notesto Condensed Consolidated Financial Statements, Note 2. — Equity-BasedCompensation” in this QuarterlyReport on Form 10-Qfor more comprehensive discussions on the qualitative and quantitative applicationof FAS 123(R).

 

**Results of Operations**

 

***Overview***

 

The following discussion and analysis ofSerologicals’ financial condition and results of operations should be read inconjunction with the unaudited Condensed Consolidated Financial Statements andNotes thereto included in this Quarterly Report on Form 10-Q.

 

The following table sets forth certainconsolidated operating data as a percentage of net revenues for the periodsindicated below:

 

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| ** **                                    | ** ** | **Quarter Ended**      | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
| ** **                                    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net revenues                                  |       | 100.0                       | %          | 100.0 | % |
| Gross profit                                  |       | 57.5                        | %          | 54.5 | % |
| Selling, general and administrative  expenses |       | 36.1                        | %          | 35.8 | % |
| Research and development expenses             |       | 9.1                         | %          | 7.9 | % |
| Amortization of intangibles                   |       | 3.4                         | %          | 3.1 | % |
| Impairment and exiting costs                  |       | 1.5                         | %          | 0.0 | % |
| Gain on sale of long-lived assets             |       | -2.2                        | %          | 0.0 | % |
| Operating income                              |       | 9.5                         | %          | 7.6 | % |
| Net income                                    |       | 5.2                         | %          | 3.4 | % |

 

The following tables set forth a breakdown ofrevenue and gross profit contributed by segment for the three months ended April 2,2006 and April 3, 2005 (dollars in thousands):

 

 
| ** **     | ** **   | **Quarter Ended**      | ** **   |
|----------------|--------------|-----------------------------|--------------|
| ** **     | ** **   | **April 2, 2006** | ** **   | **April 3, 2005** | ** ** |
| ** **     | ** **   | **Actual **            | ** **   | % **Total** | ** ** | **Actual** | ** ** | % **Total** | ** ** |
| ***Revenue:*** | *** *** | *** ***                | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Research       |         | $                           | 34,920       |   | 63.5 | % | $ | 32,161 |   | 56.8 | % |
| Bioprocessing  |         | 20,108                      |         | 36.5 | % | 24,474 |   | 43.2 | % |
|           |         | $                           | 55,028       |   | 100.0 | % | $ | 56,635 |   | 100.0 | % |

 
| ** **          | ** **   | **Quarter Ended**      | ** **   |
|---------------------|--------------|-----------------------------|--------------|
| ** **          | ** **   | **April 2, 2006** | ** **   | **April 3, 2005** | ** ** |
| ** **          | ** **   | **Actual**                  | ** **   | **Gross Margin %** | ** ** | **Actual** | ** ** | **Gross Margin %** | ** ** |
| ***Gross Profit:*** | *** *** | *** ***                | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Research            |         | $                           | 21,338       |   | 61.1 | % | $ | 20,301 |   | 63.1 | % |
| Bioprocessing       |         | 10,278                      |         | 51.1 | % | 10,538 |   | 43.1 | % |
|                |         | $                           | 31,616       |   | 57.5 | % | $ | 30,839 |   | 54.5 | % |

 

**Net Revenues, GrossProfit and Gross Margin**

 

*Consolidated.*Consolidatedrevenues for the first quarter of 2006 totaled $55.0 million, compared to $56.6million in the first quarter of 2005, a decrease of 2.8%. The decrease inrevenues is a result of customer buying patterns in our Bioprocessing segmentand the sale of certain Bioprocessing product lines, principally human plasmaused in diagnostic applications, in connection with the sale of the assets atour former facility in Milford, MA. This decrease was partially offset byincreased revenues in our Research segment.

 

Consolidated gross profits grew from $30.8million in the first quarter of 2005 to $31.6 million in the first quarter of2006, primarily due to gross margins on higher Research segment sales. Grossmargins increased to 57.5% in the first quarter of 2006 compared to 54.5% inthe prior year quarter. This resulted because a higher percentage of sales werederived from the Research segment, which has higher overall gross margins thanthe Bioprocessing segment. In addition, the Company experienced higher marginsfrom the Bioprocessing segment in 2006, primarily as the result of morefavorable product mix and higher manufacturing productivity resulting in lowermanufacturing costs. First quarter 2006 gross profits included a one-timecharge of approximately $0.2 million, primarily resulting from integrationactivities in the Research segment. First quarter 2005 gross profits included aone-time charge of approximately $0.6 million, primarily resulting fromadjustments to inventory arising from the acquisition of Upstate.

 

*Research*. Researchrevenue in the first quarter of 2006 increased approximately $2.8 million, or 8.6%,over the prior year quarter. The net increase was driven by growth in the areasof stem cells, multiplex assays, neuroscience and 

 

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diagnostic assays, partially offset by a temporary decline in drug discoveryrevenues of 11.2%. The decrease in drug discovery revenues was attributable tothe timing of customer orders for bulk enzyme products. In addition, theSpecialty Media line of stem cell products was included in the revenues for allthree months during the first quarter of 2006 and only for approximately onemonth in the first quarter of 2005. Geographically, Research revenues increasedover the prior year quarter by 17.0% in Asia, 15.8% in Europe and 4.9% in theAmericas. Growth in Asia and Europe was attributable to our strategy ofbuilding a local sales presence in Asia and the conversion of distributordriven sales in France and Germany to a direct sales force model. Revenue inthe Americas was affected by the decrease in sales of bulk enzyme products.

 

Gross margins for the first quarter of 2006declined by 2 percentage points over the prior year quarter to 61.1%,primarily due to product mix, with higher bulk reagents which have slightlylower margins and lower bulk enzymes which have slightly higher margins thanother Research segment products. Additionally, due to the timing of thecustomer order patterns in our bulk enzyme products, the Research segmentexperienced lower manufacturing productivity resulting in higher manufacturingcosts at our drug discovery manufacturing site in Dundee, Scotland. Firstquarter 2006 gross profits included a one-time charge of approximately$0.2 million resulting from continuing acquisition integration activities,primarily severance related, in the Research segment. First quarter 2005 grossprofits included a one-time charge of approximately $0.5 million,primarily resulting from adjustments to inventory arising from the acquisitionof Upstate.

 

Changes in foreign currency exchange rateswere immaterial to foreign-currency denominated Research segment revenues inthe first quarter of 2006 and 2005. Gross margins and recognized losses onforeign exchange transactions in the Research segment were unaffected bycurrency rates in the first quarter of 2006 and 2005.

 

*Bioprocessing.*Bioprocessing revenue was $20.1million during the first quarter of 2006 compared to $24.5 million in the firstquarter of 2005, a decrease of 17.8%. The decrease in revenues is primarily aresult of the sale of certain Bioprocessing product lines, principally humanplasma used in diagnostic applications, in connection with the sale of theassets at the Bioprocessing segment’s former facility in Milford, MA and to alesser degree customer buying patterns in the Bioprocessing segment. The followingtable sets forth a breakdown of net revenue for the key products in theBioprocessing segment (in thousands):

 
| ** **                   | ** ** | **Quarter Ended**      | ** ** |
|------------------------------|------------|------------------------|------------|
| ** **                   | ** ** | **April 2, 2006** | ** ** | **April 3, 2005** | ** ** |
|                         |       |                   |       |   |   |
| EX-CYTE®                |       | $                      | 2,809      |   | $ | 2,752 |   |
| IncelligentTM            |       | 6,336                  |       | $ | 6,771 |   |
| Other bioprocessing products |       | 10,963                 |       | $ | 14,951 |   |
|                         |       |                   |       |   |   |
|                         |       | $                      | 20,108     |   | $ | 24,474 |   |
|                              |            |                        |            |  |  |  |  |  |

 

Bioprocessing gross margin in the firstquarter of 2006 increased to 51.1% from 43.1% in the first quarter of 2005. TheBioprocessing segment generated higher margins in 2006, primarily as the resultof more favorable product mix (higher margin MonoSeraTM volumes andhigher EX-CYTE® sales as a percentage of total revenues) and highermanufacturing productivity resulting in lower manufacturing costs. Revenues inthe first quarter of 2006 also included approximately $0.2 million related tolicensing fees and $0.2 million of commissions earned on distributed products,which have no cost associated with them. During the first quarter of 2006, theBioprocessing segment incurred $0.5 million in costs associated withmaintaining the Lawrence facility while the Company seeks a buyer for thefacility. In 2005, the costs of Lawrence were capitalized, while validation ofthe plant was continuing. Gross margin for the first quarter of 2005 werereduced by a one-time $0.1 million severance charge.

 

Changes in foreign currency exchange rateswere immaterial to foreign-denominated Bioprocessing segment revenues in thefirst quarter of 2006 and 2005. Currency rates reduced gross margins in theBioprocessing segment by approximately 2% in the first quarter of 2006 and2005. Recognized losses on foreign exchange transactions were immaterial in thefirst quarter of 2006 and 2005.

 

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**Selling, General andAdministrative Expenses**

 

Consolidated selling, general andadministrative costs (“SG&A”) for the first quarter of 2006 were $19.9million compared to $20.3 million for the first quarter of 2005. The majorityof the decrease in spending was due to continued focus on cost controlsthroughout the Company, in particular on reductions in personnel-relatedexpenses. SG&A in the first quarter of 2006 as a percentage of sales was36.1% of consolidated revenues compared to 35.8% of consolidated revenues forthe same quarter in 2005. While overall spending in dollars decreased, SG&Aincreased as a percentage of sales due to lower sales in 2006 compared to 2005.SG&A in the first quarter of 2006 included $0.3 million associated withacquisition integration and reorganization expenses and $1.2 million inequity-based compensation recorded upon our adoption of SFAS 123(R). SG&Ain the first quarter of 2005 included of $1.0 million associated acquisitionintegration and reorganization expenses.

 

**Research andDevelopment Expenses**

 

Consolidatedresearch and development expense increased to $5.0 million or 9.1% of revenuesduring the first quarter of 2006 compared to $4.5 million, or 7.9% of revenues,during the same quarter in 2005. The Company has an R&D staff in excess of150 people and continues to increase its R&D investment in criticalpersonnel and collaborations. Portfolio development is one of the Company’smajor priorities today. The Company created a scientific sourcing team whichcalls on academic institutions in different parts of the world in identifyingfuture new business opportunities. Their focus is on a three to five-yearhorizon.

 

The Research segment introduced 405 newproducts during the first quarter of 2006. The new products include 59 GPCRcell lines and membranes, 39 stem cell kits and media formulations and over 300antibodies and kits focused in the areas of neuroscience, cell signaling andnuclear function.

 

We completed a number of significant co-developmentopportunities during the first quarter. We entered into a research anddevelopment agreement to commercialize a cytotoxicity-profiling panel andservices designed with our market-leading cellular assay reagents andcollaborator’s system cell biology approach. We obtained exclusive rights tocommercialize, market and distribute stem cell reagents including a novel andproprietary stem cell isolation kit, various proteins and antibodies.

 

**Amortization of Intangibles**

 

Amortization of intangibles was relatively unchangedat approximately $1.8 million during the first quarter of 2006 and 2005.

 

**Operating Income, Impairment and Exiting Costs and Gain on Sale ofLong-Lived Assets**

 

Operating income in the first quarter of fiscal 2006was $5.2 million, or 9.5% of revenue, compared to operating income of $4.3million, or 7.6% of revenue, in the first quarter of fiscal 2005. Operatingincome in the first quarter of 2006 included one-time charges totaling $0.8million for impairment and exiting costs arising from the decision, announcedin the fourth quarter of 2005, to close the Toronto facility and not to openthe Lawrence facility. It also included a one-time gain of $1.2 from the saleof the Milford, MA assets for $3.3 million in cash.

 

**Other Expenses (Income), Net**

 

Other expenses (income), net in 2006 and 2005consisted primarily of recognized gains and losses from commercial transactionsin foreign currency.

 

**Interest Expense**

 

Interest expense was approximately $1.8 million inthe first quarter of 2006 and 2005. Interest expense primarily arises frominterest on our 4.75% fixed rate Debentures. In 2006, interest was calculatedat the stated fixed rate. In the first quarter of 2005, we had interest rateswaps in place converting $70.0 million of the fixed rate exposure to a variableinterest rate based on 6-month LIBOR at the end of each interest period plus aspread of 66 basis points. Variable rates rose during 2005 and approached thefixed rate, decreasing the benefit received on the swap in the first quarter of2005; as a result, we 

 

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soldthe swaps in the second quarter of 2005. Capitalized interest on constructionin process was negligible in the first quarter of 2006 and 2005.

 

**Interest Income**

 

Interest income was approximately $0.3 millionduring the first quarter of 2006 and 2005. While investment interest rates werehigher in 2006 than in 2005, the Company maintained lower average balances incash, cash equivalents and short-term investments during the first quarter of2006 compared to 2005. The average balances for these categories during thefirst three months of 2006 were $50.0 million compared to $64.7 million duringthe same three months of 2005.

 

**Provision for Income Taxes**

 

Theconsolidated effective income tax rate for the first quarter of 2006 was 28%,compared with 29% in the first quarter of 2005. We expect our income tax ratefor the full 2006 fiscal year to be 28% compared to 29% for the full year in2005. The lower expected rate is a result of foreign tax credits, research anddevelopment credits and generation of taxable income in lower taxjurisdictions.

 

**Liquidity and Capital Resources**

 

The following table sets forth certain indicators offinancial condition and liquidity as of April 2, 2006 and January 1,2006 (dollars in thousands):

 
| ** **                                              | ** ** | **April 2, 2006** | ** ** | **January 1, 2006** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|--------------------------|------------|
|                                                    |       |                   |       |                     |       |
| Cash, cash equivalents and short term  investments      |       | $                      | 43,061     |                     | $          | 38,452 |   |
| Working capital                                         |       | $                      | 138,254    |                     | $          | 117,625 |   |
| Long term debt and convertible subordinated  debentures |       | $                      | 131,152    |                     | $          | 131,462 |   |
| Stockholders equity                                     |       | $                      | 412,873    |                     | $          | 406,377 |   |
| Total debt to equity                                    |       | 31.8                   | %          | 32.3                     | %          |

 

The Company has three principal sources of near-termliquidity: (1) existing cash, cash equivalents and marketable securities; (2) cashgenerated by operations; and (3) available borrowing capacity under itsnew six-year revolving credit facility (“Revolver”), which provides for aborrowing capacity of $50.0 million. The Revolver has an on-demandcommitment upsize, which would increase the total available to $100.0 million.As of May 5, 2006, the Company had $75 million available under theRevolver and the upsize commitment and approximately $41.7 million in cash,cash equivalents and short-term investments.

 

Net cash provided by operating activities was$11.8 million during the first three months of 2006 compared to$0.2 million for the same period in 2005. Changes in operating assets andliabilities provided $5.3 million in cash in the first three months of 2006,compared to cash used of $7.9 million in the first three months of 2005.Accounts receivable decreased $28.2 million and $13.1 million during thefirst quarter of 2006 and 2005, respectively, because the first quarter of eachyear had lower sales than the fourth quarter of the preceding year. Inventoriesincreased $8.6 million in the 2006 period compared to an increase of$2.3 million in the 2005 period because the Research segment increasedproduction of inventory in contemplation of the closing of the Lake Placidfacility and, as in prior years, produced product for anticipated higher salesin later quarters of the year. Accounts payable and accrued liabilitiesdeclined $15.6 million and $17.3 million during the first three months of2005 and 2004, respectively, due to payments of incentive compensation, intereston our Debentures, accrued royalties and income taxes during both years. Netcash provided by operating activities in 2006 was increased by the add back of$1.2 million in equity-based compensation arising from the adoption of SFAS123(R) offset by a $1.2 million gain on sale of long-lived assets at theMilford, MA location.

 

Net cash provided by investing activities during thefirst three months of 2006 was $9.1 million, compared with net cash used ininvesting activities of $14.8 million during the first three months of2005. Capital expenditures during the first three months of 2006 were $18.4million, consisting primarily of the purchase of the Research segmentfacilities in Temecula from the former owner of Chemicon for $14.5 million cashplus settlement of certain indemnity claims totaling approximately 

 

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$2.1million. Capital expenditures during the first three months of 2005 were $2.9million for manufacturing facility improvements throughout the company andcapitalization of certain costs associated with the implementation of the newenterprise resource planning (“ERP”) system at Chemicon. We anticipate capitalexpenditures for the remainder of the year to total approximately$17 million to $19 million. The most significant capital expendituresanticipated for the remainder of 2006 are the continued implementation of ourERP system at Upstate and Linco, continued improvements at manufacturing sitesthroughout the company and E-commerce initiatives. During the first threemonths of 2006 and 2005, net cash used in investing activities included $7.4million and $6.8 million related primarily to the acquisitions of Cytomyx andSpecialty Media, respectively. During the first three months of 2006, theCompany received $3.3 million cash from the sale of the Milford, MAfacility and certain Bioprocessing product lines produced in that location. Netinvestments in short term securities, principally auction-rate securities,decreased $17.2 million during the first three months of 2006 because theseinvestments were converted into cash equivalents at comparable interest ratescompared to an increase of $5.1 million during the first three months of 2005.

 

Net cash provided by financing activities in thefirst three months of 2006 was $1.1 million, compared with$1.2 million in the first three months of 2005. Financing activities inthe first three months of 2006 and 2005 consist primarily of proceeds from theissuance of common stock under equity-based plans and payments on capitalleases.

 

There have been no material changes regarding ourcontractual obligations from the information provided in our Annual Report on Form 10-Kfor the fiscal year ended January 1, 2006. The contractual obligations arediscussed under 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 about Market Risk**

 

There have been no material changes regarding ourmarket risk position from the information provided in our Annual Report on Form 10-Kfor the fiscal year ended January 1, 2006. The quantitative andqualitative disclosures about market risk are discussed under the caption “MarketRisk” in “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” contained in the Form 10-K.

 

**Item 4.****          ****Controls and Procedures**

 

As of the end of the period covered by this report,the Company carried out an evaluation, under the supervision and with theparticipation of its principal executive officer and principal financialofficer, of the effectiveness of the design and operation of its disclosurecontrols and procedures. Based on this evaluation, the Company’s principalexecutive officer and principal financial officer concluded that our disclosurecontrols and procedures are effective in timely alerting them to materialinformation required to be included in its periodic reports filed with the Securitiesand Exchange Commission. There were no significant changes in the Company’sinternal control over financial reporting that occurred during its last fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, its internal control over financial reporting.

 

**PART II.**

 

**Item 1.****          ****Legal Proceedings**

 

The Company is involved in a lawsuit that arose outof the acquisition of Chemicon in 2003. In the lawsuit, former employees ofChemicon sued Chemicon, the Company and certain others, including the foundersof Chemicon, for amounts allegedly owed them pursuant to bonus agreements theyentered into with Chemicon. They alleged that Chemicon breached the bonusagreements and that the Company and the founders of Chemicon tortiously interferedwith Chemicon’s obligations pursuant to the bonus agreements. The caseproceeded to trial before the Court (sitting without a jury) in November 2005.During the third week of trial, the plaintiffs agreed to dismiss their claimsagainst the Company in exchange for the Company’s agreement not to seek torecover attorneys’ fees from the plaintiffs. Trial continued against Chemiconand the other defendants.

 

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On January 10, 2006, the Court issued a TentativeDecision finding that: (1) the plaintiffs’ bonus calculation should exclude theapproximately $14.0 million paid by the Company for Chemicon Europe Ltd; (2)the plaintiffs’ bonus calculation should exclude the approximately $17 millionpaid by the Company at closing to retire Chemicon’s debt; (3) Chemicon breachedthe bonus agreements by not tendering payment in May 2003; and (4) nodefendants engaged in tortious conduct. On March 10, 2006, the Courtconducted a hearing at which the parties submitted their respectivecalculations of the bonus amounts, interest and attorneys’ fees based on the TentativeDecision. At the outset of that hearing, the Court advised that it had changedits mind regarding item (2) above and that it now believed that the plaintiffs’bonus calculation should include amounts paid by the Company at the closing toretire Chemicon’s debt.  The Court’sfinal Statement of Decision reflected this change, effectively adding $17million to the base upon which the plaintiffs’ bonuses are to becalculated.  The Statement of Decisionalso declared the plaintiffs to be the “prevailing parties” on their contractclaims, entitling them to an award of reasonable attorneys’ fees under theirbonus agreements.

 

The founders of Chemicon havealready paid the plaintiffs $4.2 million. The total amount remaining to bepaid is uncertain due to unanswered questions regarding attorneys’ fees andpossible appeals. The amount remaining to be paid will likely be $5.6 millionin bonus monies (including interest), plus attorneys’ fees of between $900,000and $2.7 million. Chemicon is indemnified by the founders of Chemicon andcertain others against liability for the amount of this verdict. At the time itacquired Chemicon, the Company paid $19.0 million of the purchase pricedirectly into an escrow account to secure the obligations of the indemnifyingparties. The Company believes that the amount on deposit in the escrow accountwill be sufficient to discharge the remaining obligation to the plaintiffs.

 

The Company is also involved incertain litigation that arose in the ordinary course of business. The Companydoes not believe that the ultimate resolution of these matters will have amaterial adverse effect on its financial position or results of operations.

 

**Item 1A. Risk Factors**

 

In addition tothe other information set forth in this report, you should carefully considerthe factors discussed in Part I, “Item 1A. Risk Factors” in our AnnualReport on Form 10-K for the fiscal year ended January 1, 2006, whichcould materially affect our business, financial condition or future results. Therisks described in our Annual Report on Form 10-K are not the only risksfacing the Company. Additional risks and uncertainties not currently known tothe Company or that the Company currently deems to be immaterial also may materiallyadversely affect the Company’s business, financial condition and/or operatingresults.

 

**Item 6.  Exhibits**

 

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

 
| 2.1.1  |   | Agreement and Plan of  Merger, dated April 25, 2006, by and among Millipore Corporation,  Charleston Acquisition Corp. and Serologicals Corporation (Exhibit 2.1  to the Company’s Current Report on Form 8-K, dated April 25, 2006,  is hereby incorporated by reference).                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 2.1.2  |   | Stock Purchase Agreement,  dated March 23, 2006, by and among Upstate Group, L.L.C., The Ronald L.  Gingerich Revocable Living Trust dated May 23, 1995 and Ronald L.  Gingerich (Exhibit 2.2 to the Company’s Current Report on Form 8-K,  dated March 27, 2006, is hereby incorporated by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 2.1.3  |   | Purchase and Sale  Agreement, dated as of March 23, 2006, by and between Upstate Group,  L.L.C. and Paragon Properties, L.C. (Exhibit 2.2 to the Company’s  Current Report on Form 8-K, dated March 27, 2006, is hereby  incorporated by reference).                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 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 3.1.2 to  the Company’s Quarterly Report on Form 10-Q for the quarter ending April 3,  2005 is hereby incorporated by reference).                                                                                         |

 

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| 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).                                                                                                                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.2.2  |   | Amendment of Section 6.1  of Amended and Restated By-laws (The Company’s Current Report on Form 8-K,  dated March 1, 2006, is hereby incorporated by reference).                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1.1  |   | Specimen Common Stock  Certificate (Exhibit 4.1 to the Company’s Registration Statement on Form S-1  (File No. 33-91176), effective June 14, 1995, is hereby  incorporated by reference).                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1.2  |   | Specimen Form of  Rights Certificate (Exhibit 2.1 to the Company’s Registration Statement  on Form 8-A filed August 10, 1999, is hereby incorporated by  reference).                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1.3  |   | Form of Rights  Agreement, dated as of August 2, 1999, between the Company and State  Street Bank & Trust Company, N.A. (Exhibit 2.2 to the Company’s  Registration Statement on Form 8-A filed August 10, 1999, is hereby  incorporated by reference).                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1.4  |   | Form of Certificate  of Designation of Preferences and Rights of Series B Preferred Stock (Exhibit 2.3  to the Company’s Registration Statement on Form 8-A filed August 10,  1999, is incorporate by reference).                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1.5. |   | Summary of Rights Plan (Exhibit 2.4  to the Company’s Registration Statement on Form 8-A filed August 10,  1999, is hereby incorporated by reference).                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2.1  |   | Indenture, dated as of August 20,  2003, between Serologicals Corporation and The Bank of New York, as Trustee,  for the 4.75% Convertible Senior Subordinated Debentures due 2033, including  the form of 4.75% Convertible Senior Subordinated Debenture due 2033 (Exhibit 4.1  to the Company’s Current Report on Form 8-K, dated August 21, 2003,  is hereby incorporated by reference).                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2.2  |   | Registration Rights Agreement,  dated August 20, 2003, by and among Serologicals Corporation and Banc of  America Securities LLC, J.P. Morgan Securities Inc. and UBS Securities LLC,  as initial purchasers of the Company’s 4.75% Convertible Senior Subordinated  Debentures due 2003 (Exhibit 4.2 to the Company’s Current Report on Form 8-K,  dated August 21, 2003 is hereby incorporated by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.1   |   | Serologicals Corporation  2005 Incentive Plan (Exhibit 99.1 to the Company’s Current Report on Form 8-K,  dated May 17, 2005, in 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, in 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

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                    | SEROLOGICALS CORPORATION  (Registrant) |
|-------------------------|---------------------------------------------|
| Date: May 12, 2006 |                                        |   |
|                    | 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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