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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)

        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 ý    No o

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

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

INDEX

SEROLOGICALS CORPORATION AND SUBSIDIARIES

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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 amounts)

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 26, 2004
(UNAUDITED)

1.     ORGANIZATION AND BASIS OF PRESENTATION

Organization

        Serologicals Corporation, a Delaware corporation (together with its subsidiaries, "we", the "Company" or "Serologicals"), with facilities in North America, Europe, and Australia, is a global provider of biological products, enabling technologies and services to a diverse customer base that includes major life science companies and leading research institutions. Our customers use our products, technologies and services in a wide variety of their activities, including basic research, drug discovery, diagnosis and bio-manufacturing. Our products, technologies and services are essential tools for research in key disciplines, including neurology, oncology, hematology, immunology, cardiology, proteomics, infectious diseases, cell signaling and molecular biology. In addition, we believe we are the world's leading provider of monoclonal antibodies for the blood typing industry.

        The Company conducts operations of its Research segment through Chemicon International, Inc. ("Chemicon"), which was acquired in April 2003. Chemicon provides a broad range of specialty reagents, kits, antibodies and molecular biology tools to biotechnology, pharmaceutical and academic researchers working in the areas of neuroscience, infectious diseases, stem cell biology, cancer, drug discovery and proteomics. Chemicon is also a leading supplier of monoclonal antibodies, conjugates, antibody blends and kits for use in diagnostic laboratories. Chemicon, headquartered in Temecula, California, has manufacturing and distribution operations in California, Australia and the United Kingdom.

        The Company manufactures Cell Culture and Diagnostic products in facilities located in North America and the United Kingdom. The Company operates protein fractionation facilities located in Kankakee, Illinois and Toronto, Ontario and has a third facility in Lawrence, Kansas which is currently undergoing process validation. 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 cell culture media components that are used primarily by biopharmaceutical and biotechnology companies as nutrient additives in cell culture media. The Company's most significant product within the Cell Culture Segment is EX-CYTE®, which is produced through a patented manufacturing process. EX-CYTE® is a concentrated solution of cholesterol, lipoproteins and fatty acids that is used, in combination with other cell culture supplements, to reduce or replace animal serum in cell culture processes. Other key products within the Cell Culture segment include proprietary bovine serum albumin, human recombinant insulin and other products used principally in mammalian cell culture.

        In July 2004, the Company completed the acquisition of AltaGen Biosciences, Inc., the parent company of Sierra BioSource, Inc. (together referred to as "Sierra") (see Note 2, "Acquisitions", below). Sierra, based in Morgan Hill, California offers research and development services in the areas of cellular and molecular biology, immunology, animal pharmacology, monoclonal antibodies and recombinant proteins, as well as in specialty cell culture development and purification. Revenues and expenses associated with services provided to external customers are included in the Cell Culture segment. Certain internal research and development efforts undertaken by Sierra dedicated to internal cell culture applications are included in Operating Expenses under the category Research and Development Expense in the statements of income from the acquisition date.

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        The Company manufactures monoclonal antibodies in its Livingston, Scotland facility. The monoclonal antibodies are used in diagnostic products such as blood typing reagents and in controls for diagnostic tests for certain infectious diseases. The Company also operates a facility in Milford, Massachusetts that includes a central distribution facility as well as operations related to production of substrates used in diagnostic assays. The key products within the diagnostic segment are monoclonal antibodies used in blood typing reagents and diagnostic antibodies.

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 of the Securities Exchange Act of 1934. 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 28, 2003 and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 28, 2003, as amended by the Company's Annual Report on Form 10-K/A (Amendment No. 1) filed on June 4, 2004.

        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.

Inventories

        Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Market for product inventories is net realizable value.

        Inventories at September 26, 2004 and December 28, 2003 consisted of the following (in thousands):

Derivative Financial Instruments

        On October 17, 2003, the Company entered into interest rate swap agreements relating to $70.0 million principal amount of its 4.75% Convertible Senior Subordinated Debentures due August 15, 2033 (the "Debentures"). The objective of the swaps is to convert the 4.75% fixed interest rate on this portion of the Debentures to a variable interest rate based on the 6-month LIBOR at the end of each interest period plus a spread of 66 basis points. The gain or loss from changes in the fair value of the swaps is expected to offset the gain or loss from the changes in the fair value of the cash flows from the interest payments of 54% of the Debentures throughout the expected life of the

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Debentures. At September 26, 2004 and December 28, 2003, the fair market value of the interest rate swaps was an asset of $0.8 million and $0.9 million, respectively. The fair value of the interest rate swaps was included in "Other assets" at September 26, 2004 and December 28, 2003 in the accompanying Consolidated Balance Sheets. The Company analyzed ineffectiveness on the swaps as of September 26, 2004 and determined that ineffectiveness was immaterial. This interest rate swaps were designated and qualified as a fair value hedge in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" and related interpretations and amendments. The Company has presented the carrying value of the Debentures net of the fair value of the swaps 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 that net income is adjusted by the after-tax interest expense on the Debentures that are dilutive and the weighted average number of shares includes the dilutive effect of stock options, stock awards, and Debentures. The dilutive effect of the Debentures was included in diluted earnings per share for the three and nine months ended September 26, 2004.

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        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):

Stock-Based Compensation Plan

        The Company accounts for stock-based employee compensation plans 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 was reflected in net income, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the

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effect on net income and earnings per share if the Company had applied the fair value recognition provisions of 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 (loss) for the periods indicated below (in thousands):

2.     ACQUISITIONS

        On July 27, 2004, the Company completed the acquisition of 100% of the common stock of Sierra, a privately-owned company based in Morgan Hill, California. Sierra offers research and development services in the areas of cellular and molecular biology, immunology, animal pharmacology, monoclonal antibodies and recombinant proteins, as well as in specialty cell culture development and purification. The purchase price was $12.6 million in cash, less outstanding debt as of the closing date. Additional cash payments under an earn-out agreement may be due in December 2004. Sierra revenues totaled approximately $3.6 million during the first seven months of 2004, which included approximately $2.3 earned from research and development services provided to Serologicals prior to the acquisition. Revenues and expenses associated with services provided to external customers are included in the Cell Culture segment.

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        Components of the purchase price were:

        The Company has not completed its valuation of the fair market value of assets acquired, however a preliminary summary allocation of assets acquired is as follows:

        Effective April 1, 2003, Serologicals completed the acquisition of 100% of the common stock of Chemicon. The acquisition of Chemicon greatly expanded the Company's range of products and customers within the research market. The purchase price of $95 million in cash was initially funded with the proceeds from an $82.5 million five-year term loan, which was subsequently paid off from the proceeds received from issuance of the Debentures and cash on hand. The results of operations of Chemicon are included in the Company's financial statements beginning April 1, 2003.

        During the first quarter of 2004, the Company completed its evaluation of a restructuring of certain components of Chemicon's operations, which was contemplated at the date of acquisition. As a result, the Company accrued $1.8 million related to lease terminations and site relocation costs. This amount was recorded to goodwill in the first quarter of 2004 as an adjustment to the purchase price of Chemicon in accordance with Emerging Issues Task Force ("EITF") No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination." No significant costs have been incurred during the first nine months of 2004 as a result of this restructuring.

3.     DISCONTINUED OPERATIONS

        On January 15, 2004, the Company completed the divestiture of its therapeutic plasma business with a sale of that business to Gradipore Limited ("Gradipore"), a company based in Sydney, Australia, effective December 28, 2003. As a result, this business was classified as a discontinued operation as it met the criteria prescribed by SFAS No. 144, "Impairment of Long-Lived Assets and Discontinued Operations." The therapeutic plasma business consisted of the Company's ten plasma collection centers and a central testing laboratory. The Company received $3.5 million in cash at closing. Gradipore also assumed $1.3 million of current and long-term liabilities of the business. The balance of the proceeds consisted of two secured promissory notes: a short-term note in the amount of $1.5 million bearing interest at the London Interbank Offered Rate ("LIBOR") plus 5% due on December 31, 2004, and a long term note ("Long-Term Note"), which was recorded at its estimated net realizable value of $6.4 million. The Long-Term Note is non-interest bearing and includes payment terms of $1.0 million in July 2004 and quarterly payments of $1.1 million begining in April 2005 through July 2007. These payments may be partially deferred until July 2007 if certain revenue goals are not achieved by the therapeutic plasma business, as defined in the stock purchase agreement. The Long-Term Note also includes a 15% per annum discount for any amounts paid prior to their due date. In June 2004, the Company received notification that the therapeutic plasma business did not achieve its revenue goal for the second quarter of 2004. As a result, Gradipore elected to defer the $1.0 million payment due in July 2004 until maturity of the Long-Term Note in July 2007.

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        At December 28, 2003, the assets of discontinued operations have been reclassified on the accompanying Consolidated Balance Sheets to reflect the anticipated realization based on the maturities of the net realizable value of the total consideration. See Note 4 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 28, 2003, which presents the assets and liabilities of discontinued operations as of December 28, 2003. The following table presents results of operations from discontinued operations for the three and nine months ended September 28, 2003 (in thousands):

4.     CAPITAL LEASE OBLIGATION

        In July 2004, the Company entered into a lease for $3.6 million of production equipment at its new fractionation facility in Lawrence, Kansas. The Company accounted for this transaction as a capital lease in accordance with SFAS No. 13, "Accounting for Leases." The lease obligation requires eight quarterly payments of $0.5 million with a bargain purchase at the end of the lease in June 2006.

5.     SEGMENT INFORMATION

        SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" defines operating segments to be those components of a business for which separate financial information is available that is regularly evaluated by management in making operating decisions and in assessing performance. SFAS No. 131 further requires that the segment information presented be consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. The operations of the Company's subsidiaries are organized into three primary operating segments: Research, Cell Culture and Diagnostics. 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.

        The activities of the Research segment primarily include manufacturing and sales of reagents, cell-based assays, antibodies and molecular biology products. Products within the Cell Culture segment include cell culture media and supplements for drug development, bio-manufacturing and life science research. The Company's most significant product within this segment is EX-CYTE®. Other key products within the Cell Culture segment include proprietary bovine serum albumin, human 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.

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        The Company's segment information for the three and nine months ended September 26, 2004 and September 28, 2003 are as follows (in thousands):

6.     SUBSEQUENT EVENTS

        On October 14, 2004, effective as of October 1, 2004, the Company completed its acquisition of Upstate Group, Inc., a privately held company headquartered in Charlottesville, Virginia ("Upstate"). The acquisition was previously announced on September 7, 2004. The acquisition was effected pursuant to a definitive Agreement and Plan of Merger dated as of September 7, 2004 (the "Merger Agreement"), as amended by an Amendment to Agreement and Plan of Merger, dated October 14, 2004 (the "Amendment"), between Serologicals and Upstate. Serologicals acquired Upstate for total consideration of $205 million in Serologicals common stock and cash. In addition, Serologicals paid approximately $3.9 million in related transaction fees in connection with the acquisition.

        Upstate is a leading supplier of innovative cell signaling products, technologies, platforms and services. Founded in 1988, Upstate provides researchers at pharmaceutical and biotechnology companies, universities and government agencies with advanced tools to accelerate life science research and drug discovery. The Company expects to include Upstate's operations in its Research segment.

        Serologicals issued 4,333,315 unregistered shares of its common stock at an average price of $23.6539 per share, based on the average trading price of Serologicals' common stock as traded on NASDAQ during the 20 trading days between September 14, 2004 and October 11, 2004, to certain stockholders of Upstate as consideration for the acquisition, with the balance of the consideration funded in cash. Serologicals financed the cash portion of the consideration using a combination of cash on hand and proceeds from a new credit facility described below. Under a registration rights agreement signed in connection with the Merger Agreement, the Company is required to register with the Securities and Exchange Commission all of the shares of common stock issued as consideration within 20 days of receiving notice and executed stockholder questionnaires, but in any event no later than 60 days after the closing.

        On October 14, 2004, the Company entered into a new $125 million credit agreement with a bank syndicate consisting of an $80 million seven-year term loan and a $45 million five-year revolving credit facility, which replaced the Company's existing $30 million revolving credit facility. The Company used the proceeds of the $80 million term loan, less issuance costs of approximately $1.1 million, to assist in the financing of the Upstate acquisition referred to above. The term loan is repayable in quarterly principal installments of $200,000 commencing March 31, 2005 through December 31, 2009 and eight quarterly installments of $9.5 million commencing March 31, 2010 through October 31, 2011. Loans under the credit agreement bear interest payable quarterly at a floating rate of interest determined by

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reference to a base rate or to Eurodollar interest rates, plus a margin. The margin, determined from a price grid in the agreement, on base rate loans ranges from 1.25% to 1.5% and .5% to 1% for the term loan and revolver, respectively. The margin on Eurodollar loans ranges from 2.25% to 2.5% and 1.5% to 2% for the term loan and revolver, respectively. The Company is required to pay a commitment fee ranging from .375% to .50%, depending on the Company's leverage and amounts borrowed under the revolver. The applicable margins for the revolver 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 on the adjustment dates. The credit agreement is secured by substantially all of the assets of the Company. The credit agreement contains certain financial covenants that require the maintenance of fixed charge coverage ratios, maximum leverage ratios and a senior debt ratio. Furthermore, under the terms of the credit agreement there are covenants restricting acquisitions, disposition of property, repurchasing common stock and the Company's ability to pay dividends.

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Forward Looking Statements

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

        Forward-looking statements are only predictions and are not guarantees of performance. Forward-looking statements are based on current expectations of future events and are based on our current views and assumptions regarding future events and operating performance. These assumptions could prove inaccurate, or unknown risks or uncertainties could materialize, which could cause our actual results to differ materially from our expectations or predictions. Many of these factors are beyond our ability to control or predict.

Factors that could cause our actual results to differ materially include:

•

the risks and other factors described under the caption "Cautionary Statements" in the Company's Annual Report on Form 10-K for the year ended December 28, 2003, as amended by the Company's Annual Report on Form 10-K/A (Amendment No.1) filed on June 4, 2004;



•

our ability to implement our growth strategy;



•

our ability to manage our growth and expansion;



•

our ability to raise capital;



•

our ability to find acceptable acquisitions in the future and to integrate and manage them;



•

our ability to compete effectively within our industry;



•

the availability and cost of raw materials;



•

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



•

our dependence on a supply of recombinant human insulin from a third party for a significant portion of the revenues in our cell culture segment.



•

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



•

our ability to identify new commercial product opportunities and develop and introduce new products and technologies;



•

our ability to protect our intellectual property;



•

the effect on our results of operations of the loss of any significant customers or reduced orders from significant customers, including reductions or delays in research and development budgets and in government funding on which our customers may depend;



•

adoption of, or changes in, domestic and foreign laws and regulations that could affect our ability to maintain existing regulatory licenses and approvals;

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•

risks associated with transfer pricing issues and other tax issues arising as a result of operations in multiple taxing jurisdictions; and



•

risks associated with our international operations.

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        Serologicals, with facilities in North America, Europe, and Australia, is a global provider of biological products, enabling technologies and services to a diverse customer base that includes major life science companies and leading research institutions. Our customers use our products, technologies and services in a wide variety of their activities, including basic research, drug discovery, diagnosis and bio-manufacturing. Our products, technologies and services are essential tools for research in key disciplines, including neurology, oncology, hematology, immunology, cardiology, proteomics, infectious diseases, cell signaling and molecular biology. In addition, we believe we are the world's leading provider of monoclonal antibodies for the blood typing industry.

        Our business is organized into three operating segments: Research, Cell Culture and Diagnostics. 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. For the first two quarters of fiscal 2003, we reported a fourth operating segment, Therapeutics, with respect to a therapeutic plasma business that we sold in the first quarter of fiscal 2004. The therapeutic plasma business is reported as a discontinued operation. Disclosures included herein pertain to the Company's continuing operations unless otherwise noted.

        We currently conduct the operations of our Research segment through Chemicon International, Inc. ("Chemicon"), which was acquired in April 2003. Chemicon provides a broad range of specialty reagents, kits, antibodies and molecular biology tools to biotechnology, pharmaceutical and academic researchers working in the areas of neuroscience, infectious diseases, stem cell biology, cancer, drug discovery and proteomics. Chemicon is also a leading supplier of monoclonal antibodies, conjugates, antibody blends and molecular biology-based detection kits for use in diagnostic laboratories. Chemicon, headquartered in Temecula, California, has manufacturing and distribution operations in California, Australia and the United Kingdom.

        In October 2004, the Company completed its acquisition of Upstate Group, Inc., a privately held company headquartered in Charlottesville, Virginia ("Upstate"). Upstate, with primary operating facilities in Lake Placid, New York and Dundee, Scotland, is a leading supplier of innovative cell signaling products, technologies, platforms and services. Founded in 1988, Upstate provides researchers at pharmaceutical and biotechnology companies, universities and government agencies with advanced tools to accelerate life science research and drug discovery. The Company expects to include Upstate's results of operations in its Research segment.

        We manufacture our Cell Culture and Diagnostics products in facilities located in North America and the United Kingdom. We operate protein fractionation facilities located in Kankakee, Illinois and Toronto, Ontario and have a third facility in Lawrence, Kansas that is currently undergoing process validation. 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 cell

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culture media components that are used primarily by biopharmaceutical and biotechnology companies as nutrient additives in cell culture media. The Company's most significant product within the Cell Culture segment is EX-CYTE®, which is produced through a patented manufacturing process. EX-CYTE® is a concentrated solution of cholesterol, lipoproteins and fatty acids that is used, in combination with other cell culture supplements, to reduce or replace animal serum in cell culture processes. Other key products within the Cell Culture segment include proprietary bovine serum albumin ("BSA"), recombinant human insulin and other products used principally in mammalian cell culture.

        In July 2004, the Company completed the acquisition of AltaGen Biosciences, Inc., the parent company of Sierra BioSource, Inc., (together referred to as "Sierra"). Sierra, based in Morgan Hill, California offers research and development services in the areas of cellular and molecular biology, immunology, animal pharmacology, monoclonal antibodies and recombinant proteins, as well as in specialty cell culture development and purification. Revenues and expenses associated with custom services provided to external customers are included in the Cell Culture segment. Certain internal research and development efforts undertaken by Sierra dedicated to internal cell culture applications are included in Operating Expenses under the category Research and Development Expense in the statements of income from the acquisition date.

        We manufacture monoclonal antibodies in our Livingston, Scotland facility. These monoclonal antibodies are 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 distribution facility as well as operations related to production of substrates used in diagnostic assays. The key products within the Diagnostic Products segment are monoclonal antibodies used in blood typing reagents and diagnostic antibodies.

Critical Accounting Policies

        There have been no material changes regarding Serologicals' critical accounting policies from those discussed under the caption "Critical Accounting Policies" in "Item 7-Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Annual Report on Form 10-K for the year ended December 28, 2003, as amended by the Company's Annual Report on Form 10-K/A (Amendment No. 1) filed on June 4, 2004.

Results of Operations

        The following discussion and analysis of Serologicals' financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and Notes thereto.

        The following table sets forth certain operating data of Serologicals as a percentage of net revenues for the periods indicated below:

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        The following tables set forth a breakdown of revenue and gross profit contributed by segment for the three and nine months ended September 26, 2004 and September 28, 2003 (dollars in thousands):

        The Company has reclassified $0.9 million in the nine months ended September 28, 2003, which was included in Special charges to Cell Culture Cost of Revenues to conform to the current year presentation.

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NET REVENUES AND GROSS PROFIT

Consolidated

        Third quarter 2004 consolidated net revenues increased compared to third quarter 2003 primarily due to growth in revenue at Chemicon, higher monoclonal antibody sales and continued growth in human recombinant insulin sales. Gross margins declined slightly compared to the prior year quarter due to cell culture product mix and the impact of lower margins on diagnostic products resulting from product mix and lower utilization of the Livingston plant to more accurately match inventory levels to anticipated customer demand. Additionally, the third quarter of 2003 included a one time sale of licensing rights of approximately $0.6 million that had a gross margin of approximately 80%.

        Consolidated net revenues increased during the first nine months of 2004 compared to the first nine months of 2003 primarily due to the acquisition of Chemicon effective April 1, 2003, growth in revenues at Chemicon, higher EX-CYTE® and recombinant human insulin sales and growth in monoclonal antibody sales. Consolidated gross margins were 55% during the first nine months of 2004 and 54% during the first nine months of 2003. During the first nine months of 2004, margins were positively impacted in the second quarter by a $1 million one-time benefit related to a settlement of a dispute over a licensing arrangement offset by expenses associated with a production halt at our Toronto facility in the first quarter of 2004 due to a "mad-cow" disease scare in Washington state and the impact of operating our Livingston, Scotland facility at a lower utilization in order to more accurately match inventory levels to anticipated customer demand. Gross margins during the first nine months of 2003 were negatively impacted by a production halt at Toronto from a "mad cow" disease scare in Canada which resulted in a $0.9 million charge, or 1% of revenues. This charge included costs associated with writing off certain inventory that had been sourced from Canadian raw materials and the cost of temporarily shutting down and cleaning a section of the Toronto manufacturing facility during the second quarter of 2003.

Research

        Revenues and gross profit of our Research segment during the third quarter of 2004 increased $1 million, or 7%, and $0.7 million, or 8%, respectively, over the prior year quarter as a result of continued growth in most product lines. The prior year quarter included revenue of approximately $0.6 million related to the sale of marketing rights to a certain product line. Specific product lines with third quarter 2004 growth over third quarter 2003 included apoptosis, oncology, cell signaling, and diagnostic, as well as higher licensing revenues. Geographically, revenues for the third quarter of 2004 increased over third quarter 2003 by 12% in Asia, 8% in Europe and 12% in North America. Revenues from these three geographic regions represented approximately 87% of research product revenues for the third quarter of 2004. Gross margins for the third quarter 2004 improved approximately 1 percentage point over the prior year period primarily due to higher IP licensing revenues. Changes in foreign currency exchange rates increased dollar-denominated Research segment revenues by $0.3 million in the third quarter of 2004 as compared to the same period in 2003.

        Revenues and gross profit in our Research segment during the first nine months of 2004 increased $17.3 million and $11.9 million, respectively, compared to the same period in 2003 primarily as a result of the Chemicon acquisition which was effective April 1, 2003. Additionally, gross margins for the first nine months of 2004 were positively impacted during the second quarter by a one-time benefit related to settlement of a dispute over a licensing arrangement, partially offset by a provision for certain obsolete inventory. The net impact on our Research segment's gross margins was nearly a two percentage point increase during the first nine months of 2004. As a result of this settlement, the Company also negotiated a reduction in future minimum royalty payments to the licensor, which we believe will contribute an ongoing benefit to gross margins of approximately 1%. Changes in foreign currency exchange rates increased dollar-denominated Research revenues by $0.3 million and

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$0.5 million during the three and nine months September 26, 2004, respectively, as compared to the same periods in 2003. The negative impact of changes in foreign currency exchange rates on our Research segment's gross margins was one percentage point during the third quarter and nine months of 2004 compared to the same periods in 2003.

Cell Culture

        The following table sets forth a breakdown of revenue for the key products in the Cell Culture segment (in thousands):

        Cell Culture revenue increased 14% to $23.5 million over the third quarter of 2003. EX-CYTE® sales in the quarter were $7.5 million, compared to $8.6 million in the third quarter of 2003. Sales of the Company's proprietary BSA in the third quarter of 2004 were $4.1 million, compared to $3.8 million in the third quarter of 2003. Sales of recombinant human insulin were $8.0 million for the quarter compared with $4.2 million in the third quarter of 2003. The change in revenue for EX-CYTE® from third quarter 2004 compared to the third quarter of 2003 arose from the timing of shipments to certain key customers between these quarters. The increase in recombinant human insulin was primarily due to timing of shipments between quarters. Insulin sales have been increasing primarily because of additional availability of this product from our supplier and the exiting of one of the Company's competitors from this market space. Gross margins during the third quarter of 2004 and 2003 were 51% and 50%, respectively. Gross margins during the first nine months of 2004 and 2003 were 51% and 49%, respectively. Gross margins for our Cell Culture segment during the first nine months of 2004 included a charge of approximately $0.5 million or 1% of Cell Culture revenue related to a production halt at our Toronto facility early in the first quarter of 2004 due to a "mad-cow" disease scare in Washington state. The production halt resulted from our inability to transport raw materials from our U.S. supplier to our facility in Toronto. As a result, much of our Toronto plant was idle for approximately one month until all of the importation clearances from the Canadian government were obtained. The plant is now fully operational and running near capacity and we expect to meet customer demand for the remainder of 2004. Gross margins for our Cell Culture segment during the first nine months of 2003 included a charge of approximately $0.9 million, or 2%, of Cell Culture revenues, related to a production halt arising from "mad cow" disease scare in Canada as discussed under the caption "Consolidated" above.

Diagnostics

        Diagnostics segment revenues were $7.5 million in the third quarter of 2004, compared with $7.2 million in the third quarter of 2003. Sales of diagnostic monoclonal antibodies and related products were $6.8 million in the third quarter of 2004, compared with $5.1 million in the third quarter of the prior year. Sales of disease state antibodies, detection products and other diagnostic products decreased in the third quarter of 2004 as compared to the third quarter of the prior year, primarily because the prior year quarter included sales of diagnostic products that were sourced from our donor center network, which was sold as part of the therapeutic plasma divestiture. Gross margins on diagnostic products were 42% and 44% for the third quarter and first nine months of 2004 compared

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with 54% and 55% during the comparable periods in 2003. The decline in gross margin is due to product mix and the impact of continuing to operate the Scotland facility at a lower percentage of capacity in order to more accurately match inventory levels to anticipated customer demand and to a lesser extent the effects of foreign currency exchange rates. Changes in foreign currency exchange rates increased dollar-denominated Diagnostics revenue by $0.3 million and $1.1 million during the three and nine months ended September 26, 2004, respectively, as compared to the same periods in 2003. The negative impact of changes in foreign currency exchange rates on Diagnostics segment gross margins was four percentage points during the third quarter and two percentage points during the first nine months of 2004 compared to the same periods in 2003.