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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

Commission File Number: 0-26126

SEROLOGICALS CORPORATION

(Exact Name of Registrant as Specified in its Charter)

(678) 728-2000
(Registrant’s Telephone Number Including Area Code)

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past (90) days.   Yes o   No o

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

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

INDEX

SEROLOGICALS CORPORATION AND SUBSIDIARIES

PART I.

Item 1. Financial Statements

SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands, except share and per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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SEROLOGICALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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SEROLOGICALS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

     Organization

     Serologicals Corporation, a Delaware corporation, (together with its subsidiaries, The “Company” or “Serologicals”) is a global provider of biological products and enabling technologies to life science companies. Our products are essential for the research, development and manufacturing of biologically based life science products. Our products and technologies are used in a wide variety of applications within the areas of oncology, hematology, immunology, cardiology and infectious diseases, as well as in the study of molecular biology. Our customers include many of the leading life science companies throughout the world.

     Our operations have historically been organized into four primary operating segments: cell culture products, diagnostic products, research products and therapeutic plasma products. These segments are based primarily on the differing production, manufacturing and other value-added processes that we perform with respect to the products and, to a lesser extent, the differing nature of the ultimate end use of our products.

     We manufacture our cell culture and diagnostics products in facilities located in North America and Europe. We operate protein fractionation facilities located in Kankakee, Illinois and Toronto, Ontario and have a third facility under construction in Lawrence, Kansas. These facilities provide a variety of highly purified proteins used in diagnostic reagents and cell culture media components for use in the development and manufacturing of biotechnology products. Additionally, these facilities produce a line of highly purified animal proteins known as tissue culture media components that are used primarily by biopharmaceutical and biotechnology companies as nutrient additives in cell culture media. We manufacture monoclonal antibodies in our Scotland facility which is used in diagnostic products such as blood typing reagents and in controls for diagnostic tests for certain infectious diseases. We operate a facility in Milford, Massachusetts that includes a central product distribution facility, as well as operations related to our human-sourced polyclonal antibody business and production of substrates for use in diagnostic assays.

     We conduct the operations of our research segment primarily through Chemicon, which we acquired in April 2003 for $95.0 million in cash, plus assumed liabilities and direct costs related to the transaction. Chemicon provides a broad range of specialty reagents, kits, antibodies and molecular biology tools to biotechnology, pharmaceutical and academic research customers working in the areas of neuroscience, infectious disease, drug discovery, cancer research, stem cell research and proteomics. Chemicon is also a leading supplier of monoclonal antibodies, conjugates, antibody blends and kits for use in the diagnostic laboratory. Chemicon, headquartered in Temecula, California, has manufacturing and distribution operations in Temecula, California, Australia and the United Kingdom. Chemicon will operate as a stand alone division of the company, and will be reported in our research products segment.

     The Company conducts its therapeutic products segment (or blood plasma operations) through a national network of 10 donor centers that specialize in the collection of hyper-immune human antibodies. As noted in Note 6, we have announced our intention to exit the therapeutic plasma business.

     Basis of Presentation

     The accompanying unaudited consolidated financial statements include the accounts of Serologicals and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, which are of a normal recurring nature, to present fairly Serologicals’ financial position, results of operations and cash flows at the dates and for the periods presented. Interim results of operations are not necessarily indicative of results to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements as of December 29, 2002 and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2002, as amended in Form 8-K filed on August 8, 2003.

     Certain prior year amounts have been reclassified to conform to the current year presentation.

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     Inventories

     Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Market for work-in-process and finished goods inventories is net realizable value and for raw materials is replacement cost. The components of inventories are stated as follows (in thousands):

     Earnings Per Share

     Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. The calculation of diluted earnings per share is similar to basic earnings per share, except the weighted average number of shares includes the dilutive effect of stock options and similar instruments.

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

     The following shares issuable under stock option agreements were excluded from the calculation of dilutive earnings per share for the periods indicated as the option price exceeded the average market price for the Company’s stock and thus their effect would have been anti-dilutive (in thousands):

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     Stock-Based Compensation Plan

     At June 29, 2003, the Company has one stock-based employee compensation plan. The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation (in thousands, except per share amounts):

     Under SFAS No. 123, the fair value of stock-based awards is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company’s stock option grants. These models also require subjective assumptions, including future stock price volatility and expected lives of each option grant.

     Comprehensive Income

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

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     Recent Accounting Pronouncements

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of this standard did not have any impact on the Company’s financial statements.

     In April 2003, the FASB issued SFAS No. 149, “Amendment to Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is applied prospectively and is effective for contracts entered into or modified after June 30, 2003, except for SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and certain provisions relating to forward purchases and sales on securities that do not yet exist. The adoption of this standard did not have any impact on the Company’s financial statements.

     During May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company anticipates that there will be no impact on its consolidated financial statements upon the adoption of SFAS 150.

2. ACQUISITION

     Acquisition of Chemicon

     Effective April 1, 2003, Serologicals completed the acquisition of 100% of the common stock of Chemicon International, Inc. (“Chemicon”), a privately-owned company based in Temecula, California. Chemicon has manufacturing, distribution and research and development operations in Temecula, California, Australia and the United Kingdom. Chemicon provides a broad range of specialty reagents, kits, antibodies and molecular biology tools to biotechnology, pharmaceutical and academic research customers working in the areas of neuroscience, infectious disease, drug discovery, cancer research, stem cell research and proteomics. Chemicon is also a leading supplier of monoclonal antibodies, conjugates, antibody blends and kits for use in the diagnostic laboratory. The acquisition of Chemicon greatly expanded the Company’s range of products and customers within the research market. The purchase price of $95.0 million in cash was funded with the proceeds from an $82.5 million five-year term loan and cash on hand. The results of operations of Chemicon are included in the Company’s financial statements beginning April 1, 2003.

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     The Company preliminarily allocated the purchase price to the fair value of identifiable long-lived assets and intangibles based on an independent third party appraisal. This allocation has not been finalized. Management expects to finalize the allocation by the end of the fourth quarter of 2003. None of the goodwill related to the acquisition of Chemicon is expected to be deductible for tax purposes. Chemicon is included in the research products segment. The preliminary purchase price allocation resulted in the following long-term asset classifications (in thousands):

     In connection with the allocation of the purchase price, and the results of the independent appraisal, the Company determined that none of the purchase price should be allocated to in-process research and development projects, since Chemicon’s research and development efforts are focused on developing applications and uses of existing technologies.

     In conjunction with the business combination, the Company is evaluating the consolidation of certain components of Chemicon’s operations. Any costs incurred related to a restructuring resulting from this effort will be included in the purchase price of Chemicon in accordance with Emerging Issues Task Force (“EITF”) 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” These costs may include termination benefits, relocation costs, asset impairments and lease commitments. The Company expects to complete its evaluation by the end of fiscal year 2003.

     The following table summarizes the results of Serologicals on a pro forma basis for the three and six months ended June 29, 2003 and June 30, 2002 as if the acquisition of Chemicon had occurred at the beginning of each period. The pro forma results exclude certain expenses totaling approximately $0.4 million that were recorded by Chemicon as a result of the acquisition. These costs primarily include professional and other fees paid as a direct result of the transaction. These results do not purport to represent what the results of operations for Serologicals would have actually been or to be indicative of the future results of operations of Serologicals (in thousands, except per share amounts).

3. SPECIAL CHARGES

     During the second quarter of 2003, the Company approved a plan to transfer the responsibility for manufacturing and distribution of research products from Gaithersburg, Maryland to the Chemicon division. This transfer is expected to provide a more competitive focus for the manufacturing, sales and distribution of these products and is anticipated to be complete by the end of the third quarter of 2003. In addition, during the quarter, the Company continued to review its infrastructure to ensure the staffing is optimal to focus on the primary growth areas related to the Company’s strategic plan. As a result of these efforts, including its ongoing

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product rationalization initiatives, the Company reduced its workforce at various locations including the Gaithersburg facility, the Kankakee facility, the Milford facility and the corporate office. As a result of these restructurings, the Company recorded $1.3 million in special charges in the accompanying consolidated statement of income. The components of the special charge included approximately $0.4 million for employee severance, $0.8 million related to the impairment of certain long-lived assets at Gaithersburg, Maryland and $0.1 million related to other restructuring costs. Employee termination costs are expected to be paid by the end of 2004. The Company estimates that the cost to complete the relocation of manufacturing and distribution of research products from Gaithersburg, Maryland, which will be expensed in the second half of 2003, will be approximately $0.2 to $0.3 million, primarily related to severance costs, moving and lease obligations.

     During the second quarter of 2003, the Company also incurred $0.9 million resulting from the Bovine Spongiform Encephalopathy (“BSE”) or “mad-cow” disease scare in Canada. This charge included costs associated with writing off certain inventory that had been sourced from Canadian raw materials and the cost of shutting down and cleaning a section of the Toronto manufacturing facility to prepare for the switchover to U.S.-sourced raw materials. Prior to the announcement that a single cow had tested positive for BSE, the Company procured certain bovine raw materials from Canadian sources. As a result of this issue, and after discussions with customers, the Company began sourcing all bovine raw materials used in the Toronto facility from the United States. The Toronto plant was partially shutdown for approximately one month during the quarter for cleaning and sterilization. Additionally, certain inventory that was manufactured in Canada and scheduled to be shipped to international customers was delayed by foreign governments. The United States Department of Agriculture ban on Canadian imports of bovine materials prevented the transfer of products from Toronto to our distribution facility in Massachusetts for part of the quarter.

     During the first quarter of 2003, the Company closed three of its thirteen donor centers, located in Birmingham, Alabama; Washington, D.C.; and Provo, Utah. The donor base for the Provo center was integrated into the Company’s Salt Lake City, Utah center. As a result of these closings, the Company recorded a charge of $0.8 million. The components of the charge included approximately $0.3 million for employee termination costs, $0.3 million for lease termination costs and $0.2 million related to write-off of certain long-lived assets. Employee termination costs related to the center closings and lease termination costs are expected to be paid by the end of 2003. The employee termination costs also includes employees terminated at the Company’s central testing laboratory.

     During the first quarter of 2003, the Company also incurred special charges of approximately $0.5 million. Subsequent to notifying the lender of our intent to terminate our then existing credit facility, the Company recorded a charge of approximately $0.4 million related to the write-off of debt issuance costs. Additionally, the Company recorded a charge of $0.1 million related to a loss associated with an equipment failure at the Toronto facility and other termination costs. These termination benefits were paid in full during the second quarter 2003.

     During the second quarter of 2002, the Company recorded a charge totaling approximately $1.3 million related to the closure of four of its donor centers. The decision to close the centers resulted from an extensive evaluation of the operations of the Therapeutics business segment. The charge consisted of severance payments, costs associated with lease obligations at the four centers, write-offs of certain assets, including leasehold improvements and equipment, and intangible assets related to the centers, such as FDA licenses and non-compete agreements.

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     The following table summarizes special charges by segment (in thousands):

     The following table summarizes the activity in the accrual for termination benefits and other costs for the six months ended June 29, 2003 (in thousands):

     The remaining accrual of $0.8 million is included in “Accrued liabilities” in the Consolidated Balance Sheets. All of these amounts are expected to be paid in 2003 and 2004.

4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

     Long-term debt and capital lease obligations at June 29, 2003 and December 29, 2002 consisted of the following (in thousands):

     On April 7, 2003, the Company entered into a new $82.5 million five-year term loan. This term loan, combined with a four-year revolving credit facility (“Revolver”) of $35 million, replaced the Company’s existing $65 million facility. The new credit facility bears interest at a floating rate of interest determined by reference to a base rate or to Eurodollar interest rates, plus a margin. The margin on base rate loans is 3.25% and 2.75% for the term loan and Revolver, respectively. The margin on Eurodollar loans is 4.25% and 3.75% for the term loan and Revolver, respectively. The Company is required to pay a commitment fee ranging from .5% to .75%, depending on the Company’s leverage and amounts borrowed under the revolving credit facility. The applicable margins and commitment fees on the unused portion of the Revolver are subject to adjustment on future adjustment dates based on the consolidated leverage ratio of the Company. The term loan and Revolver

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are secured by substantially all of the assets of the Company. The term loan and Revolver contain certain financial covenants that require the maintenance of a minimum interest coverage ratio, a fixed charge coverage ratio and earnings before interest, taxes, depreciation and amortization and that also provide for a maximum leverage ratio and limitations on capital expenditures. Furthermore, under the terms of the term loan and Revolver, there are restrictions dealing with acquisitions, repurchasing common stock and on the Company’s ability to pay dividends. The following table reflects the principal payments under the term loan and Revolver (in thousands):

     During the second quarter of 2003, the Company entered into an agreement to finance insurance premiums, pursuant to which it issued an unsecured promissory note in the amount of $0.9 million. The notes bears interest at 3.48% and requires that principal payments be made monthly according to a fixed payment schedule.

     The Company capitalizes interest on borrowings during the active construction period of major capital projects. During the three and six months ended June 29, 2003 the Company capitalized approximately $0.1 million in connection primarily with the construction of the new EX-CYTE® plant in Lawrence, Kansas. During the three months and six months ended June 30, 2002, the Company capitalized approximately $0.2 million and $0.3 million, respectively, in connection with various projects.

5. SEGMENT INFORMATION

     SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” requires the reporting of information about operating segments in annual financial statements and requires selected information in interim financial reports. Beginning in 2003, for management purposes the operations of the Company’s subsidiaries are organized into four primary operating segments: Research Products (“Research”), Cell Culture Products (“Cell Culture”), Diagnostic Products (“Diagnostics”) and Therapeutic Products (“Therapeutics”). These segments are based primarily on the differing production, manufacturing and other value-added processes performed by the Company with respect to the products and, to a lesser extent, the differing end use and customer bases to which each reportable segment sells its products. During 2002, the Company reported only three operating segments, Biotechnology and Molecular Biology Products, Therapeutic Products and Diagnostic Products. As a result of the Chemicon acquisition, the Company has developed a significant portfolio of products used in applications within the research products field.

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     The activities of the Research segment primarily include manufacturing and sales of reagents, cell-based assays, antibodies and molecular biology products. Key products within the Research segment are ESGRO®, Arthrogen-CIA® and Amplifuor®. The Cell Culture segment products consist of cell culture media and supplements for drug development, biomanufacturing and life science research. The Company’s flagship product within this segment is EX-CYTE®. Other key products within the Cell Culture segment include bovine serum albumin (“BSA”), recombinant insulin and other products used principally in mammalian cell culture. The key products within the Diagnostic segment are monoclonal antibodies used in blood typing reagents and diagnostic antibodies and certain human-sourced polyclonal antibodies. The key products within the Therapeutic segment are hyper immune antibodies. All of the comparisons discussed below reflect the restatement of the prior year segments so that they are consistent with the current year presentation.