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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number: 0-26126

SEROLOGICALS CORPORATION

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

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

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

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 (LOSS)
(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
SEPTEMBER 28, 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. The Company’s products are essential for the research, development and manufacturing of biologically based life science products. The Company’s 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. The Company’s customers include many of the leading life sciences companies throughout the world.

     The Company conducts manufacturing, distribution and research and development for its research products segment from facilities in California, Australia and the United Kingdom. The Company conducts manufacturing for its cell culture and diagnostic products segments at facilities located in North America and the United Kingdom. The Company’s protein fractionation facilities are located in Kankakee, Illinois and Toronto, Ontario. These facilities provide a variety of proteins used in diagnostic reagents and cell culture media components for use as additives in biotechnology-based products. The Company operates a monoclonal antibody manufacturing facility in Scotland that is engaged in the development and manufacturing of monoclonal antibody products for use in diagnostic products such as blood typing reagents and controls for tests used for diagnosing certain infectious diseases. The Company operates a facility in Milford, Massachusetts that includes a central product distribution facility, as well as operations related to production of substrates used in diagnostic assays.

     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 by the Company’s Current Report on Form 8-K filed on August 8, 2003.

     Financial statements for all periods presented have been reclassified to separately report results of discontinued operations from results of continuing operations (Note 3). Disclosures included herein pertain to the Company’s continuing operations unless otherwise noted.

     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 (loss) Per Share

     Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. The calculation of diluted earnings per share is similar to basic earnings (loss) 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 (loss) per share (in thousands, except per share amounts):

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     The following shares issuable under stock option agreements were excluded from the calculation of dilutive earnings (loss) 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 not have been dilutive (in thousands):

     The Company also excluded from the calculation of dilutive earnings (loss) per share approximately 8.8 million shares issuable upon conversion of the $130.0 million principal amount of the Company’s 4.75% Convertible Senior Subordinated Debentures due August 15, 2033 (“Debentures”) (Note 5). These shares were excluded from the calculation of dilutive earnings per share as the conversion requirements were not met during the third quarter of 2003 and thus their effect would not have been dilutive.

     Stock-Based Compensation Plan

     At September 28, 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 (loss), 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 (loss) and earnings (loss) 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.

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     Comprehensive Income (Loss)

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

     For the three months and nine months ended September 28, 2003 and September 29, 2002 there was no other comprehensive income (loss), net of tax for the discontinued operations.

     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 ending after December 15, 2003. The adoption of this standard did not have an 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 an impact on the Company’s financial statements.

     In 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. The adoption of this standard did not have an impact on the Company’s financial statements.

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 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 expands the Company’s range of products and customers within the research market. The purchase price of $95 million in cash was funded with the proceeds from an $82.5

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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.

     The components of the total purchase price are presented below (in thousands):

     The Company has preliminarily allocated the purchase price based on the estimated fair values of the assets and liabilities as follows (in thousands):

     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. 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 following table sets forth the weighted average lives for the intangible assets acquired:

     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

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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 nine months ended September 28, 2003 and September 29, 2002 as if the acquisition of Chemicon had occurred at the beginning of the 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.

DISCONTINUED OPERATIONS

     On July 10, 2003, the Company announced its intention to exit the Therapeutic Plasma business. As a result, during the third quarter, the Therapeutic Plasma business was classified as held for sale as it met the criteria prescribed by SFAS No. 144 Impairment of Long-Lived Assets and Discontinued Operations (“SFAS No. 144”). In October 2003, the Company entered into a non-binding letter of intent to sell its Therapeutic Plasma business, consisting of the Company’s ten plasma collection centers and its central testing laboratory. The Company expects that the buyer will retain the majority of the employees of this business. The Company expects to enter into a definitive agreement for the sale of the business by the end of 2003. The specific terms of the agreement and the identity of the buyer will not be disclosed until a definitive agreement is signed. Based on the current indication of value for this transaction, the Company recorded an impairment loss of $11.0 million during the third quarter with respect to the Therapeutic Plasma business, which is included as a component of the income (loss) from discontinued operations in the accompanying Consolidated Statement of Income (Loss).

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     Assets and liabilities of discontinued operations were as follows (in thousands):