SERACARE LIFE SCIENCES INC - 10-K Annual Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM

Commission file number 0-33045

SERACARE LIFE SCIENCES, INC.

(Exact name of registrant as specified in its charter)

California

(State or other jurisdiction of

incorporation or organization)

33-0056054

(I.R.S. Employer

Identification No.)

1935 Avenida del Oro, Suite F

Oceanside, California 92056

(Address of principal executive offices including zip code)

(760) 806-8922

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value share

(Title of class)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

As of December 2, 2002, there were 7,374,078 shares of the registrant’s Common Stock outstanding. As of December 2, 2002, the aggregate market value of Common Stock held by non-affiliates of the registrant was approximately $22,629,002 based on the closing sale price of $5.80 per share as reported by the National Association of Securities Dealers. Shares of Common Stock held by officers, directors, and 5% holders have been excluded from this calculation because such persons may be deemed to be affiliates. The determination of affiliate status is not a conclusive determination for other purposes.

Part III incorporates information by reference from the registrant’s definitive Proxy Statement to be filed with the Commission within 120 days after the close of the registrant’s fiscal year.

TABLE OF CONTENTS

PART I

Item 1.	Business (including Risk Factors beginning on page 9)	1

Item 2.	Properties	13

Item 3.	Legal Proceedings	13

Item 4.	Submission of Matters to a Vote of Security Holders	13

PART II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	14

Item 6.	Selected Financial Data	15

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 8.	Financial Statements and Supplementary Data	22

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	22

PART III

Item 10.	Directors and Executive Officers of the Registrant	23

Item 11.	Executive Compensation	23

Item 12.	Security Ownership of Certain Beneficial Owners and Management	23

Item 13.	Certain Relationships and Related Transactions	23

Item 14.	Controls and Procedures	23

Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	23

PART I

ITEM 1. BUSINESS.

CAUTIONARY NOTE AS TO FORWARD-LOOKING STATEMENTS

We caution you that this document contains disclosures that are forward-looking statements. All statements regarding our expected future financial position, results of operations, cash flows, dividends, financing plans, business strategy, budgets, projected costs or cost savings, capital expenditures, competitive positions, growth opportunities for existing products or products under development, plans and objectives of management for future operations and markets for stock are forward-looking statements. In addition, forward-looking statements include statements in which we use words such as “expect,” “believe,” “anticipate,” “intend,” or similar expressions. Although we believe the expectations reflected in such forward-looking statements are based on reasonable assumptions, we cannot assure you that these expectations will prove to have been correct, and actual results may differ materially from those reflected in the forward-looking statements. Factors that could cause our actual results to differ from the expectations reflected in the forward-looking statements in this document include those set forth in “Risk Factors”.

Our Company

We are a manufacturer of plasma-based diagnostic products and distributor of therapeutic products based in Oceanside, California with distributors strategically located in Milan and Seoul. We are a vendor-approved supplier to over 500 pharmaceutical and other healthcare companies, including being listed as an exclusive supplier in many customers’ regulatory applications with the Food and Drug Administration. Our primary focus is on the sale of plasma-based therapeutic, cell culture and diagnostic products to domestic and international customers. Through its strategic alliance with Biomat USA, Inc., the Company has access to a nationwide network of donor centers which has provided the basis for our development of products and services which are fundamentally plasma based. The Company also provides value-added antibody-based products that are used as the active ingredients in therapeutic products for the treatment and management of diseases and in diagnostic products including test kits.

During the past three years, we have also made progress in establishing ourselves as a manufacturer of bulk plasma-based products and serums. The current year has been a period in which the Company has focused on: product development; continuing to solidify relationships with major customers; and, fine tuning the expanded manufacturing capability in Oceanside. In this respect, Management has been successful in increasing the variety and improving the quality of products which can be manufactured in Oceanside. Management believes this strategic repositioning of the Company will ensure long-term success in this highly regulated and competitive industry. During the course of this evolution, we have helped many customers develop internal protocols and standards used to establish quality control benchmarks and have performed various other value-added services for our customers in order to establish solid relationships. We have made significant progress as a major supplier of plasma-based diagnostic products to several pharmaceutical and biotech companies. We have continued to build on our product expertise by cultivating alternative diagnostic applications for traditionally therapeutic products as an alternative to animal-based mediums.

Industry Overview

Our business operates in the industry known as the “bioscience” or “life sciences” industry. The products in our industry can be divided into three categories, therapeutic, diagnostic and cell culture. Diagnostic products are used to diagnose specific patient conditions, including infectious disease and blood type, and include products consisting of antibodies that are used to determine blood type or screen for a specific disease. The diagnostic segment also includes non-human derived blood products for cell culture, research, manufacturing or in vitro diagnostic use. Therapeutic products are used for the treatment or prevention of disease conditions, and include

products consisting of specialty antibodies, non-specialty antibodies and source plasma. Cell culture products are media used to grow cells including but not limited to monoclonal antibodies and recombinant proteins.

Product sectors in which we compete include source plasma, specialty and non-specialty antibodies found in source plasma and other specialty biologic components.

Antibodies are proteins produced by B cells, which are designed to control the immune response in extra-cellular fluids. B cells develop in the bone marrow and are responsible for immunity in the intercellular fluids.

Plasma is the liquid part of blood and is collected through a procedure similar to giving blood. The clear plasma is mechanically separated from the cellular elements of the blood (such as red and white blood cells and platelets) through centrifugation or membrane filtration at the time the donation is made. These cellular elements are then returned to the donor as part of the same procedure.

The process of collecting plasma is known as plasmapheresis. Because blood cells are returned, it is possible for individuals to donate plasma more frequently than whole blood. Donations of plasma can be made up to twice per week or 104 times per year pursuant to Food and Drug Administration rules. Source plasma is the cornerstone for most therapeutic and diagnostic products. The availability of source plasma affects the ability to produce therapeutic and diagnostic products. In our opinion, the market factors currently affecting the supply and demand of source plasma and plasma-derived products include the following:

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The expanded use of immune globulins to prevent and treat disease;

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A worldwide plasma shortage was made worse by the impact of the bovine spongiform encephalopathy (BSE) and transmissible spongiform encephalopathy (TSE) disease in Europe;

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Extensive public concern over the safety of blood products, which has led to increased domestic and foreign regulatory control over the collection and testing of plasma and the disqualification of certain segments of the population from the donor pool;

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The continuing increase in the uses of plasma as the source material for new treatments and applications, such as fibrin glue, a growth agent for microbiotics and vaccines;

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The increased demand for plasma-based healthcare products worldwide, which has led to expansion of fractionation capacity; and

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The barriers to entry into the fractionation and plasma collection business, including the extensive Food and Drug Administration and Plasma Protein Therapeutics Association approval process, which can take years to complete.

Company History

SeraCare Life Sciences, Inc. was incorporated under the laws of the State of California in 1984 and changed its name from The Western States Group, Inc. to SeraCare Life Sciences, Inc. in June 2001. In February 1998, Biomat USA, Inc. (formerly known as SeraCare, Inc.) acquired all of our outstanding stock in a strategic acquisition designed to expand sales and distribution opportunities internationally. At that time, we were a worldwide marketing organization for therapeutic blood plasma products, diagnostic test kits, specialty plasma and bulk plasma. During the initial twelve months after the acquisition, our primary product was human blood plasma that was sold to various established customers internationally. Since that time, the ever-increasing shortage of bulk plasma has resulted in a transition of our business away from sales of bulk plasma to manufacturing of plasma-based diagnostic products and distribution of therapeutic products. Key to this transition have been: (1) the agreement with Instituto Grifols, S.A. under which Grifols supplies us with Human Serum Albumin, which we then distribute to multinational biotech companies; (2) the joint venture agreement with Proliant for the distribution of Bovine Serum Albumin to multinational diagnostic products manufacturers; and (3) the establishment of a manufacturing operation in Oceanside for the custom manufacturing of bulk serums and other plasma based products.

On September 24, 2001, in connection with the merger of Biomat USA with a subsidiary of Instituto Grifols, S.A, Biomat USA spun-off our company to Biomat USA’s then existing stockholders in a distribution. In the spin-off, stockholders of Biomat USA received two shares of our common stock for every five shares of Biomat USA common stock that they owned as of the close of business on September 24, 2001. A total of 5,633,467 shares of our common stock was issued as part of the spin-off. Warrant and option holders of Biomat USA also participated in the distribution. Holders of options or warrants to purchase Biomat USA common stock who held their options or warrants on the day prior to the spin-off received options or warrants to purchase two shares of common stock of our company for every five shares of common stock underlying the Biomat USA options or warrants held. Options and warrants to purchase an aggregate of 2,233,045 shares of our common stock were issued as part of the spin-off.

On November 6, 2001, we announced a change in our fiscal year from February 28/29 to September 30, 2001. Accordingly, on January 2, 2002 we filed a transition report on Form 10-K for the transition period from March 1, 2001 to September 30, 2001.

Principal Business Divisions

Our business operates through two divisions, the Therapeutics division and the Diagnostics division. The primary focus of our Therapeutics division is the sale of our therapeutic products internationally. The primary focus of our Diagnostics division is the sale of our diagnostic products domestically. For financial information relating to our business segments, refer to Note 7 to our financial statements. See “Index to Financial Statements at page F-1.”

Regulatory Issues

The blood resources industry is one of the most heavily regulated in the United States. Federal, state, local and international regulations are designed to protect the health of the donors as well as the integrity of the products. The Food and Drug Administration (the “FDA”) administers the federal regulations across the country. Failure to comply with FDA regulations, or state and local regulations, may result in the forced closure of a facility licensed by the FDA or monetary fines or both, depending upon the issues involved. We are also subject to regulation by the Occupational Safety and Health Administration (“OSHA”).

These regulations apply to our manufacturing facility in Oceanside, California. In addition, these regulations apply to the collection facilities under contract with us that supply us with plasma and the facilities where we refer donors for plasmapheresis services in connection with our specialty plasma program (our “contract collection centers”). We do not own or operate plasma collection centers or perform plasmapheresis services. The following summarizes the nature of certain of these regulations:

Federal Government

Food and Drug Administration:

The testing, manufacturing, storage, transport, labeling, export, and marketing of blood products and in vitro diagnostic products are extensively regulated. In the U.S., the FDA regulates blood products and medical devices under the Food, Drug, and Cosmetic Act, the Public Health Service Act, and implementing regulations. Violations of FDA requirements may result in various adverse consequences, including shutdown of a facility, withdrawal of product approvals, and the imposition of civil or criminal penalties.

Generally, blood products and in vitro diagnostics may not be marketed in the United States unless they are the subject of FDA approval or clearance. Obtaining FDA approvals and clearances is time consuming, expensive and uncertain. Approvals or clearances for the products we manufacture and distribute are generally obtained and held by our customers, who often include information on our products, as well as their own products, in their FDA applications for approval or clearance. Once a product is approved or cleared, certain

product changes must receive FDA approval or clearance before they are implemented. If our customers do not obtain and maintain FDA approvals or clearances in compliance with the law, it could adversely affect our ability to continue to manufacture and distribute our products.

In addition, we must comply with extensive FDA requirements governing our manufacturing procedures and practices. These requirements cover, among other issues, personnel qualifications; suitability of facilities; product processing, packaging, labeling, and shipping; and record keeping. We are also required to register and list our products with the FDA. The FDA periodically inspects facilities to assess compliance with these requirements, and manufacturers must continue to spend time, money and effort to maintain compliance. Future inspections may identify compliance issues at our facilities, or those of our suppliers or customers, that could disrupt production, or require substantial resources to correct. In addition, discovery of problems with a product may result in restrictions on the product, manufacturer, or license holder, including withdrawal of the product from the market.

Occupational Safety and Health Administration:

As with most operating companies, our manufacturing facility and the contract collection centers must comply with both Federal and State OSHA regulations. We train our employees in current OSHA standards, provide hepatitis vaccination to employees when desired, and maintain all required records. OSHA does inspect operating locations as it deems appropriate, and generally does so without advance notice.

State Governments:

Most states in which we operate have regulations that parallel the federal regulations. Most states conduct periodic unannounced inspections and require licensing under each state’s procedures.

Discussion Of Our Primary Products

Currently, most of our products are made from source plasma. Plasma-derived products can be divided into two groups, diagnostic or “non-injectable” into humans and therapeutic or “injectable” into humans. Diagnostic products are used to diagnose specific patient conditions, including infectious disease and blood type and are not injected into humans. Therapeutic products are used as excipients for the manufacture of vaccines.

Plasma collected by our contract collection centers is placed in storage at these centers while a plasma sample is sent to a lab for testing. No plasma can be shipped to us unless test results are received which indicate the plasma is free of any bacterial or viral occurrences. If results of the testing indicate any bacterial or viral presence, we may retain the plasma as specialty plasma for our diagnostic products or research purposes.

Or, if the donor was a referred donor from our specialty plasma program, then we know that the plasma will be specialty plasma for our diagnostic products. If the plasma cannot be sold as source plasma or specialty plasma, it is generally destroyed. Plasma is collected by the contract collection centers in accordance with Biomat USA’s Standard Operating Procedures that have been approved by the FDA. These procedures, which all employees of the contract collection centers are required to follow, detail all safety related instructions. In accordance with such procedures, all initial donors are given a physical examination before being accepted as a plasma donor. Additionally, every time the donor donates, he or she is tested for the presence of blood borne pathogens by antibody assays and PCR test for diseases such as hepatitis B, hepatitis C, HIV (antigen and antibody) and liver enzymes (indication of liver disease, such as other types of hepatitis). The donor is also checked for serum protein content and hematocrit (percent of red blood cells in serum). These tests serve as a safety mechanism for both the donor and the plasma. New donors are also checked for syphilis and drug use. Repeat donors are re-tested for syphilis three times each year and for drug use once each year.

Donor safety is very important to us. Accordingly, operating procedures for our referred donors in connection with our specialty plasma program require that donors have the process thoroughly explained, including the hazards and side effects, and that donors sign an informed consent form.

Therapeutic Plasma Products (Injectable):

Source plasma is the base raw material used to manufacture many injectable therapeutic products. The most important of which are: Normal Serum Albumin and Plasma Protein Fraction, which are primarily used to keep vessel walls from collapsing following major injury as blood volume expanders and as a protein replacement. They are used:

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to treat shock due to trauma or hemorrhage;

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to treat fluid loss due to severe burns;

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in cardiovascular surgery;

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to treat liver and kidney diseases; and

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as a carrier for many other injectable solutions.

Immune Globulins, which are used to strengthen the immune system in order to fight off common diseases such as:

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Suppressed immune systems in cases of organ transplants, HIV and other immune deficiencies;

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Hepatitis B;

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Tetanus;

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Rabies;

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Whooping cough;

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Measles;

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Polio; and

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Other immune related diseases.

Diagnostic Plasma Products (Non-injectable):

We provide our customers with a variety of diagnostic products, which are not injectible into humans and are used to diagnose specific patient conditions, including infectious disease and blood type. Some of our primary products include:

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Laboratory Control Reagents used by laboratories to assure the quality control of their tests; and

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Special Test Kit Reagents derived from the plasma of donors known to have a specific disease and used in the laboratory as a positive control test. The following are our primary disease state test kits:

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Hepatitis A, B and C;

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HIV;

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Syphilis (RPR); and

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Rheumatoid Factor (RF)

Our diagnostic products also include animal blood products that are used for cell culture, research, manufacturing or in vitro diagnostic use only. Such products include:

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Animal Sera, including Goat, Guinea Pig, Mouse, Rabbit, and Sheep Serums; and

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Bovine Protein Fractions, including Bovine Serum Albumin, Bovine Cholesterol Concentrate and Bovine Gamma Globulin.

Cell Culture:

Cell culture products are media used to grow cells for recombinant protein, monoclonal antibodies, and research and laboratory use. Some examples of our cell culture products include:

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Male AB Serum;

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Mouse Serum;

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Fetal Calf Serum;

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Transferrin; and

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Specialty Plasma.

Specialty plasma can be for diagnostic or therapeutic purposes. Generally, specialty plasma contains high concentrations of specific antibodies and is used primarily to manufacture immune globulin therapeutic products that bolster the immunity of patients to fight a particular infection or to treat certain immune system disorders. Following advances in intravenous therapy in the mid-1980s, use of specialty plasma for therapeutic purposes significantly increased. Among the current uses for specialty plasma is the production of products to prevent hepatitis, Rh incompatibility in newborns, tetanus and rabies. Specialty plasma is also widely used for diagnostic and tissue culture purposes.

While cell culture products can be sold as both a therapeutic and a diagnostic product, a majority of our sales of cell culture products are diagnostic products and as such are classified in our diagnostic segment.

BioBank Depository and Donor Profile System

In July 2002 the Company announced the launch of its innovative BioBank Depository and Donor Profile System (BioBank). BioBank is a proprietary database of medical information and associated blood, plasma, DNA and RNA samples from an initial population of healthy and non-healthy individuals who have given consent for research and commercial use of their specimens. The Company expects to market its BioBank data and samples to biotechnology and pharmaceutical companies for use in drug target validation and as control specimens for pre-clinical studies. The Company believes that BioBank may represent a high margin revenue opportunity that could complement products and customer relationships in the Company’s existing diagnostic and therapeutic businesses.

Our Customers

We market our products to both domestic and international manufacturers of therapeutic and diagnostic products. Often a customer provides us with exact specifications and we develop a product specifically for that customer. Our customer then uses our product in manufacturing its product to be sold to the ultimate consumer.

Our ability to supply quality plasma products to our customers helps them do their job effectively. Benefits we provide our customers include:

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elimination of duplicate screening of brokered-relabeled samples and units;

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reduction in testing and screening fees because we pre-screen and pre-test products to meet our customers’ specifications;

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we have a record of shipping material to our customers on time; and

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we have a proven track record of maintaining traceability, reliability and control regarding all products manufactured in our Oceanside facility.

Confidentiality is another important feature of the service offered by us to our customers. Information provided to us by our customers regarding commercially sensitive work or original research is kept in the strictest of confidence.

For the fiscal year ended September 30, 2002 about 27% of our net sales were to Wyeth Pharmaceuticals, Inc. through its Wyeth BioPharma unit (formerly known as Genetics Institute, Inc.) and 22% of our net sales were to Dong Shin Pharm. Co., Ltd., a Korean fractionator. These customers did not have significant receivable balances at year end. For the seven months ended September 30, 2001, approximately 26% of net sales were to Dong Shin Pharm. Co., Ltd. During the year ended February 28, 2001, approximately 24% of our net sales were to Wyeth Pharmaceuticals, Inc., 15% of our net sales were to Haemopharm, Inc. and 10% of our net sales were to Biotest Pharma GmbH. For the year ended February 29, 2000, approximately 23% of our net sales were to Dong Shin Pharm. Co., Ltd. and 16% of our net sales were to Wyeth Pharmaceuticals, Inc. Biogen, Inc. represented approximately 28% of accounts receivable as of September 30, 2002, however they represented less than 10% of our net sales for the fiscal year ended September 30, 2002. If we were to lose any one of these customers, or if any major customer were to materially reduce its purchases of our plasma products, our business and results of operations would be materially adversely affected.

The Company’s domestic sales represented approximately 66% of net sales for the year ended September 30, 2002, 50% of net sales for the seven months ended September 30, 2001, 58% of net sales for the fiscal year ended February 28, 2001 and 55% of net sales for the fiscal year ended February 29, 2000. For financial information relating to our customers divided by geographic area, refer to Note 6 of our financial statements. See “Index to our Financial Statements at page F-1.”

Strategic Alliances

Key to our competitive strength is our strategic alliance with Instituto Grifols, S.A.

Biomat USA, Inc., our former parent, entered into an agreement in June 1999 with Instituto Grifols, S.A., which was subsequently assumed by us in connection with our spin-off from Biomat USA, Inc. in September 2001, under which Instituto Grifols S.A. supplies us with Human Serum Albumin, which we then distribute for therapeutic use to multinational biotech companies. Under this agreement, Instituto Grifols, S.A. also supplies us with Human Serum Albumin for use in diagnostic products as well as for distribution by us to our biotech customers. This agreement also provides us with a constant source of Human Serum Albumin for manufacturing of our diagnostic products. We obtain a substantial portion of our revenue and operating margin from sales of Human Serum Albumin or products incorporating the Human Serum Albumin, supplied to us by Instituto Grifols S.A. under this agreement. We have entered into an amendment to the original agreement with Instituto Grifols S.A. extending the term until March 31, 2006, however there can be no assurances that Instituto Grifols S.A. will be able to supply us with our needs or that the demand for Human Serum Albumin will continue throughout the contract period. The loss of our contract with Instituto Grifols S.A. would have a material adverse effect on our revenues and profitability.

Competition

We compete with fractionators, specialty plasma collection companies and distributors of plasma products in the sale of our therapeutic and diagnostic plasma products. Long term established relationships both internationally and domestically serve as the cornerstone of our competitive edge. The Company is working with its therapeutic customers to establish long-term contractual relationships to provide them a more consistent flow

of shipments which management believes will result in improved predictability in profit margins. In addition, we believe our ability to work with customers in developing Standard Operating Procedures and formulations for FDA approval is unique within the industry. However, if we are not able to sustain these relationships, or if more pharmaceutical companies decide to buy directly from fractionators, our business and future growth could be adversely affected.

Employees

As of September 30, 2002, we employed 33 full time employees, including our corporate office staff.

We believe that the relations between our employees and us are good, although there can be no assurances that such relations will continue. If we are unable to attract or retain qualified personnel there could be a material adverse effect on our business.

RISK FACTORS

You should carefully consider the risks described below and other information in this annual report. Our business, financial condition and operating results could be seriously harmed if any of these risks materialize. The trading price of our common stock may also decline due to any of these risks.

We May Need Additional Capital

In order to implement our growth strategy and remain competitive, we must make investments in research and development to develop new and enhanced products and continuously upgrade our process technology and manufacturing capabilities. In order to do this, we may need to obtain additional capital. Although we believe that internal cash flows from operations will be sufficient to satisfy our working capital and normal operating requirements, we may not be able to fund our planned research and development, capital investment programs and possible acquisitions without additional capital.

Our ability to raise additional capital will depend on a variety of factors, some of which may not be within our control, including investor perceptions of us, our business and the industries in which we operate, and general economic and market conditions. We cannot assure you that we will be able to enter into a credit facility or obtain additional capital on acceptable terms, or at all. If we borrow money we may become subject to restrictive covenants. We may be unable to successfully raise needed capital and the amount of net proceeds that will be available to us may not be sufficient to meet our needs. If we raise money through the issuance of equity securities, your stock ownership will be diluted. An inability to successfully raise needed capital on a timely or cost-effective basis could have a material adverse effect on our business, results of operations and financial condition.

We Make a Large Percentage of our Sales to a Few Customers

During the year ended September 30, 2002 approximately 49% of net sales were to two customers. These customers did not have significant receivable balances at year end, however another customer represented approximately 28% of year end accounts receivable. During the year ended February 28, 2001, approximately 49% of net sales were to three customers and for the year ended February 29, 2000, approximately 39% of net sales were to two customers. For the seven months ended September 30, 2001, approximately 26% of net sales were to one customer. If we were to lose any one of these customers, or if any major customer were to materially reduce its purchases of our plasma products, our business and results of operations would be materially adversely affected.

An Interruption in the Supply of Diagnostic and Therapeutic Products That We Purchase From Third Parties Could Cause a Decline in Our Sales

We purchase diagnostics products that are used in the manufacture and testing of our plasma products from third parties, such as Instituto Grifols, S.A. and other companies. Any significant interruption in the supply of these diagnostics products could cause a decline in our plasma product sales, unless and until we are able to replace them.

We obtain a substantial portion of our therapeutic revenue and operating margin from sales of products incorporating the Human Serum Albumin supplied to us by Instituto Grifols S.A. under this agreement. Although we have entered into an amendment to the original agreement with Instituto Grifols S.A. extending the term until March 31, 2006, there can be no guarantees that Instituto Grifols S.A. will be able to supply us with our needs or that the demand for Human Serum Albumin will continue thoughout the contract period or that the agreement will not be terminated prior to March 31, 2006. In connection with a recent agreement for the supply of Human Serum Albumin that we entered into with one of our significant customers we amended the terms of our agreement with Instituto Grifols S.A. to conform certain aspects of the agreement with this customer contract.

The loss of this contract with Instituto Grifols or a significant increase in our purchase price would have a material adverse effect on our revenues and profitability.

We also depend on third parties such as Instituto Grifols, S.A. to provide their products on a timely and cost-effective basis and to deliver high quality products and respond to emerging industry standards and other technological changes. The failure of these third parties to meet these criteria could harm our business.

Having Limited Operating History as an Independent Company Makes it Difficult to Predict Our Profitability as a Stand-Alone Company

We have limited operating history as an independent company. Our business had relied on Biomat USA, Inc. for various financial, managerial and administrative services and has been able to benefit from the earnings, financial resources, assets and cash flows of Biomat USA’s other businesses. As a result of the spin-off, Biomat USA is now only obligated to provide us with the assistance and services set forth in the Master Separation and Distribution Agreement and related documents that we entered into with Biomat USA in connection with the spin-off.

As a result of the spin-off, we incur costs and expenses associated with the management of a public company that are greater than the amount reflected in our historical financial statements. While we were profitable as part of Biomat USA, and in our first year as a stand alone company, there can be no assurance that our future profits will be comparable to historical operating results before the spin-off.

We also will continue to need to dedicate significant managerial and other resources at the corporate level to establish the infrastructure and systems necessary for us to operate as an independent public company. While we believe that we have sufficient management resources, we cannot guarantee you that this will be the case or that we will successfully implement our operating and growth initiatives. Failure to implement these initiatives successfully could have a material adverse effect on our business, results of operations and financial condition.

Our Stock Price is Expected to be Volatile

The market price of our common stock has been, and is expected to continue to be volatile. We believe that future announcements concerning us, our competitors, governmental regulations, litigation or unexpected losses, or the failure to meet or exceed analysts’ projections of financial performance, may cause the market price of our common stock to fluctuate substantially in the future. Sales of substantial amounts of our outstanding common stock in the public market could also materially adversely affect the market price of our common stock. These fluctuations, as well as general economic, political and market conditions, may materially adversely affect the market price of our common stock.

Investment in Our Common Stock may be Relatively Illiquid

The trading volume of our former parent, Biomat USA, Inc., was historically relatively low and to date, the trading volume of our common stock has been low. Investments in our common stock may be relatively illiquid, and investors in our common stock must be prepared to bear the economic risks of such investment for an indefinite period of time.

If the Shares of Our Common Stock Eligible for Future Sale are Sold, the Market Price of Our Common Stock may be Adversely Affected

If our existing security holders sell significant amounts of our common stock in the public market, the market price of our common stock could be adversely affected, and you may find it more difficult to sell our common stock in the future at times and for prices you consider appropriate. As of September 30, 2002, there

were 7,374,078 shares of our common stock outstanding. As of September 30, 2002, we also had warrants and options outstanding that were exercisable for up to 1,785,781 shares of our common stock.

We may not be able to Successfully Implement Our Growth Strategy

Our growth strategy may include acquisitions and expansion into new markets. However, our ability to successfully implement this strategy depends on a number of factors, including our access to capital, our ability to obtain applicable governmental approvals and our ability to integrate acquired businesses into our existing operations. Any problems with manufacturing or licensing of our Oceanside facility could severely curtail our sales to biologics companies. We cannot assure you that we will be successful in expanding our operations or entering new markets.

Acquisitions Involve Inherent Risks That May Adversely Affect Our Operating Results and Financial Condition

Our growth strategy includes possible acquisitions, which involve various inherent risks, such as:

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our ability to assess accurately the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition candidates;

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the potential loss of key personnel of an acquired business;

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our ability to integrate acquired businesses and to achieve identified financial and operating synergies anticipated to result from an acquisition; and

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unanticipated changes in business and economic conditions affecting an acquired business.

Our Business is Highly Competitive

Our products compete with those of other companies. Most of these companies have greater financial resources, research and product development capabilities and marketing organizations than we do. Competition for customers depends primarily on the ability to provide products of the quality and in the quantity required by customers. If we succeed in bringing one or more products to market, we will compete with many other companies that may have extensive and well-funded marketing and sales operations. Our failure to provide products of the quality and quantity demanded by our customers and successfully market new products could have a material adverse effect on our future business, financial condition and results of operation.

Certain of our special antibody products are derived from donors with rare antibody characteristics, resulting in increased competition for such donors. If we are unable to maintain and expand our donor base, this could have a material adverse effect on our future business, financial conditions and results of operation.

We are Dependent on Key Personnel

Our success depends on our ability to attract, retain and motivate the qualified personnel that will be essential to our current plans and future development. The competition for such personnel is substantial, and we cannot assure you that we will successfully retain our key employees or attract and retain any required additional personnel. In particular, our success depends to a significant extent upon the continued services of Michael Crowley II, our President and Chief Executive Officer, and Barry Plost, our Chairman of the Board.

Our Principal Shareholders May Exert Significant Influence on Us

As of November 30, 2002, our Chairman of the Board, Barry D. Plost, beneficially owned approximately 12.1% of our common stock. In addition, Pecks Management Partners, Ltd., as investment advisor for four separate investors, beneficially owns 19.8% of our outstanding shares. Therefore, Mr. Plost and Pecks Management Partners, Ltd. each will have power to exert significant influence on our management and policies.

We are Subject to Significant Government Regulation

Our business is heavily regulated in the United States. In addition to the Food and Drug Administration, or FDA, which regulates, among other matters, the testing, manufacturing, storage, labeling, export, and marketing of blood products and in vitro diagnostic products, various other federal, state and local regulations also apply and can be, in some cases, more restrictive. If we fail to comply with FDA requirements, we could be subjected to civil and criminal penalties, or even required to suspend or cease operations. Failure of our plasma suppliers or customers to comply with FDA requirements could also adversely affect us. In addition, more restrictive laws, regulations or interpretations could be adopted, which could make compliance more difficult or expensive or otherwise adversely affect our business.

We are Subject to Governmental Reforms and the Adequacy of Reimbursement

Healthcare reform is a priority of many elected and appointed officials. Some reform measures, if adopted, could adversely affect the pricing of diagnostic products, which are made from plasma, or the amount of reimbursement available for diagnostic products from government agencies, third party payers and other organizations.

Product Liability Claims Could Have a Material Adverse Effect on Our Reputation, Business, Results of Operations and Financial Condition

As a manufacturer and distributor of various therapeutic and diagnostic plasma products, our results of operations are susceptible to adverse publicity regarding the quality or safety of our products. Product liability claims challenging the safety of our products may result in a decline in sales for a particular product, which could adversely affect our results of operations. This could be true even if the claims themselves are proven to not be true or settled for immaterial amounts. The Company believes that its current product liability insurance is sufficient at this time.

Risk of Hazardous Waste Liability

Our operations involve the controlled use of bio-hazardous materials and chemicals. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal agencies, we cannot assure you that we will be able to continue to comply with all applicable standards or that violations will not occur. In addition, we cannot assure you that more restrictive laws, rules and regulations or enforcement policies will not be adopted in the future which could make compliance more difficult or expensive or otherwise adversely affect our business or prospects. The Company believes that its current product liability insurance is sufficient at this time.

We are Subject to the Risks Associated with International Sales

International sales accounted for approximately 34% of our total revenues during the year ended September 30, 2002, and approximately 50% of our total revenues during the transition period from March 1, 2001 to September 30, 2001. We anticipate that international sales will continue to account for a significant percentage of our revenues. Risks associated with these sales include:

•

political and economic instability;

•

export controls;

•

changes in legal and regulatory requirements;

•

U.S. and foreign government policy changes affecting the markets for our products; and

•

changes in tax laws and tariffs.

Any of these factors could have a material adverse effect on our business, results of operations and financial condition.

Foreign Restrictions on Importation of Blood Derivatives

Concern over blood safety has led to movements in a number of European and other countries to restrict the importation of blood and blood derivatives, including antibodies, collected outside the countries’ borders or, in the case of certain European countries, outside Europe. To date, these efforts have not led to any meaningful restriction on the importation of blood or blood derivates, and have not adversely affected our business. Such restrictions, however, continue to be debated and there can be no assurance that such restrictions will not be imposed in the future. If imposed, such restrictions could have a material adverse effect on the demand for our products.

We May Issue Preferred Stock in the Future

We have authorized in our Articles of Incorporation the issuance of up to 25 million shares of preferred stock. We may issue additional shares of preferred stock in one or more new series. Our Board of Directors may determine the terms of the preferred stock without further action by our shareholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions. Although we have no present plans to issue additional shares of preferred stock or to create new series of preferred stock, if we do issue additional preferred stock, it could affect the rights, or even reduce the value, of our common stock.

Anti-Takeover Effects of Certain Charter and Bylaw Provisions

Certain provisions of our articles of incorporation and bylaws may be deemed to have anti-takeover effects and may discourage, delay or prevent a takeover attempt that might be considered in the best interests of the shareholders of the Company. These provisions, among other things:

(i) eliminate cumulative voting rights when the Company becomes a “listed” company on a national securities exchange;

(ii) authorize the issuance of “blank check” preferred stock having such designations, rights and preferences as may be determined from time to time by the Board of Directors, without any vote or further action by the shareholders of the Company; and

(iii) eliminate the right of shareholders to act by written consent.

ITEM 2. PROPERTIES.

Our principal executive offices are located in Oceanside, California. This facility, which is leased under terms of a five year lease (expiring in August 2006) with a five year option, consists of approximately 18,000 square feet and includes our corporate offices and our manufacturing facility.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of the date of this report, we are not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(a) Market Information:

Our common stock is traded on the NASDAQ SmallCap Market under the symbol “SRLS.”

The following table sets forth the high and low prices for the Company’s common stock for the periods indicated as reported by Nasdaq.

Quarter Ended	Low		High
December 31, 2001	$	2.60	$	5.15
March 31, 2002		4.40		6.40
June 30, 2002		5.62		6.54
September 30, 2002		5.00		6.20

The reported closing sales price of our common stock on the OTCBB on September 25, 2001, the first day after our spin-off from Biomat USA, Inc., was $1.50. For the period from September 25, 2001 to September 30, 2001, the highest closing sale price was $2.82 and the lowest closing sale price was $1.50.

(b) Holders:

As of December 2, 2002 there were 7,374,078 shares of our common stock outstanding and approximately 184 holders of record of our common stock, the closing price of the stock was $5.80 per share.

(c) Dividends:

Our company has not paid any dividends since our spin-off from Biomat USA, Inc. in September 2001. Our Board of Directors has no current plans to pay cash dividends. Future dividend policy will depend on our earnings, capital requirements, financial condition and other factors considered relevant by our Board of Directors.

ITEM 6. SELECTED FINANCIAL DATA.

The table below presents selected financial data of the Company as of and for the four years ended February 28 (29), 2001, 2000, 1999, 1998, for the seven months ended September 30, 2001 and for the twelve months ended September 30, 2002. The data for the fiscal years ended February 28, 1998 is unaudited and was derived from internal financial statements. The historical results are not necessarily indicative of results to be expected for any future period.

	Fiscal Year Ended Sept. 30, 2002		Seven Months Ended Sept. 30, 2001			Years ended February 28(29),
	Fiscal Year Ended Sept. 30, 2002		Seven Months Ended Sept. 30, 2001			2001		2000		1999		1998
												(Unaudited)
STATEMENT OF OPERATIONS DATA:
Sales	$	25,307,501	$	7,753,870		$	19,663,336	$	16,219,056	$	13,110,819	$	11,545,746
Cost of sales		17,932,775		12,526,182			13,197,646		12,057,761		9,448,220		8,906,553

Gross margin (deficit)		7,374,726		(4,772,312	)		6,465,690		4,161,295		3,662,599		2,639,193
General and administrative expenses		3,894,578		2,511,492			2,759,445		2,694,271		1,551,681		1,323,169

Operating income (loss)

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