-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J0yc2MM/0Z3K5wJCHuQkdBE3uuc8DkIf+0Tf5ai2a0jYr/1m01N+yvXQvCJBHuZu bEx4XytZkz9XA9ONmELI7g== 0000801748-97-000003.txt : 19970221 0000801748-97-000003.hdr.sgml : 19970221 ACCESSION NUMBER: 0000801748-97-000003 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19970211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEMACARE CORP /CA/ CENTRAL INDEX KEY: 0000801748 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 953280412 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15223 FILM NUMBER: 97523349 BUSINESS ADDRESS: STREET 1: 4954 VAN NUYS BLVD 2ND FLR CITY: SHERMAN OAKS STATE: CA ZIP: 91403 BUSINESS PHONE: 8189863883 MAIL ADDRESS: STREET 1: 4954 VAN NUYS BLVD, 2ND FL. CITY: SHERMAN STATE: CA ZIP: 91403 10-Q/A 1 =========================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A-1 /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 0-15223 HEMACARE CORPORATION (Exact name of registrant as specified in its charter) State or other jurisdiction of I.R.S. Employer I.D. incorporation or organization: California Number: 95-3280412 ---------- ---------- 4954 Van Nuys Boulevard Sherman Oaks, California 91403 (Address of principal executive offices) (Zip Code) ___________________ Registrant's telephone number, including area code: (818)986-3883 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 ____ As of August 12, 1996, 5,962,515 shares of Common Stock of the Registrant were issued and outstanding. ========================================================================== 2 INDEX HEMACARE CORPORATION The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Quarterly Report for the fiscal quarter ended June 30, 1996 on Form 10-Q as set forth in the pages attached hereto: PART I. FINANCIAL INFORMATION Item 1. Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits These adjustments are being made to reflect the cumulative effects of an adjustment in materials inventory, related to a prior period, that was made in the first quarter of 1996. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. Date February 10, 1997 HEMACARE CORPORATION --------------------- By: /s/ Sharon C. Kaiser -------------------------- Sharon C. Kaiser, Vice President, Finance and Chief Financial Office 2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HEMACARE CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1996 1995 ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 996,000 $ 997,000 Accounts receivable, net of allowance for doubtful accounts - $93,000 (1996) and $95,000 (1995) 1,331,000 1,627,000 Product inventories 149,000 141,000 Supplies 245,000 328,000 Prepaid expenses 248,000 117,000 Note receivable from officer - current 15,000 15,000 ------------- ------------- Total current assets 2,984,000 3,225,000 Plant and equipment, net of accumulated depreciation and amortization of $1,693,000 (1996) and $1,513,000 (1995) 962,000 1,051,000 Note receivable from officer - non-current 83,000 94,000 Other assets 100,000 87,000 ------------- ------------- $ 4,129,000 $ 4,457,000 ============= ============= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 532,000 $ 473,000 Accrued blood purchases 248,000 252,000 Accrued payroll and payroll taxes 355,000 310,000 Other accrued expenses 237,000 239,000 Current obligations under capital leases 219,000 209,000 Line of credit payable 300,000 - Reserve for discontinued operations - current 392,000 336,000 ------------- ------------- Total current liabilities 2,283,000 1,819,000 Obligations under capital leases, net of current portion 639,000 649,000 Other accrued expenses - long term 173,000 163,000 Reserve for discontinued operations - non-current 600,000 600,000 Commitments and contingencies - - ------------- ------------- Total Liabilities 3,695,000 3,231,000 Shareholders' equity: Common stock, without par value - 20,000,000 shares authorized, 5,961,683 and 5,911,285 issued and outstanding in 1996 and 1995, respectively 12,313,000 12,179,000 Accumulated deficit (11,879,000) (10,953,000) ------------- ------------- Total shareholders' equity 434,000 1,226,000 ------------- ------------- $ 4,129,000 $ 4,457,000 ============= =============
See Notes to Consolidated Financial Statements. 3 4 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended June 30, Six months ended June 30, 1996 1995 1996 1995 ------------ ------------ ----------- ----------- Blood products $ 1,712,000 $ 1,642,000 $ 3,397,000 $ 3,351,000 Blood services 967,000 881,000 2,092,000 1,858,000 ------------ ------------ ------------ ------------ Total revenues 2,679,000 2,523,000 5,489,000 5,209,000 Operating costs and expenses: Blood products 1,797,000 1,343,000 3,662,000 2,618,000 Blood services 697,000 600,000 1,491,000 1,279,000 ------------ ------------ ------------ ------------ Total operating costs and expenses 2,494,000 1,943,000 5,153,000 3,897,000 ------------ ------------ ------------ ------------ Gross profit 185,000 580,000 336,000 1,312,000 General and administrative expense 599,000 472,000 1,235,000 962,000 Interest (income) expense: Interest income (5,000) (11,000) (14,000) (26,000) Interest expense 21,000 20,000 41,000 28,000 ----------- ------------ ------------ ------------ Income from continuing operations before income taxes (430,000) 99,000 (926,000) 348,000 Provision for income taxes - - - - Discontinued operations: Loss from discontinued operations - (238,000) - (535,000) ----------- ------------ ----------- ------------ Net loss $ (430,000) $ (139,000) $ (926,000) $ (187,000) =========== ============ =========== ============ Per share amounts: Income from continuing operations $ (0.07) $ 0.02 $ (0.15) $ 0.06 Discontinued operations: Loss from discontinued operations - (0.04) - (0.09) ----------- ------------ ----------- ------------ Net loss $ (0.07) $ (0.02) $ (0.15) $ (0.03) =========== ============ =========== ============ Weighted average common and common equivalent shares outstanding 6,149,905 5,634,480 6,125,751 5,512,930 =========== ============ =========== ============
See Notes to Consolidated Financial Statements. 4 5 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, 1996 1995 ----------- ----------- Cash flows from operating activities: Net loss $ (926,000) $ (187,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 169,000 258,000 Provision for losses on accounts receivable - 30,000 Changes in operating assets and liabilities: Decrease in accounts receivable 296,000 437,000 Increase in inventories, supplies and prepaid expenses (56,000) (201,000) Increase in other assets, net (13,000) (2,000) Increase (decrease) in accounts payable and accrued expenses 98,000 (459,000) Increase (decrease) in other accrued expenses - long term 10,000 (43,000) Net profit on discontinued operations 56,000 - ----------- ----------- Net cash used in operating activities (366,000) (167,000) ------------ ----------- Cash flows from investing activities: Decrease (increase) in note receivable from officer 11,000 (13,000) Decrease in short-term investments - 295,000 Purchase of plant and equipment, net (89,000) (41,000) ----------- ----------- Net cash (used in) provided by investing activities (78,000) 241,000 ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock 134,000 560,000 Proceeds from line of credit 300,000 - Principal payments on line of credit and capital leases (91,000) (71,000) ----------- ----------- Net cash provided by financing activities 343,000 489,000 ----------- ----------- Increase (decrease) in cash and cash equivalents (101,000) 562,000 Cash and cash equivalents at beginning of period 997,000 786,000 ----------- ----------- Cash and cash equivalents at end of period $ 896,000 $1,348,000 =========== =========== Supplemental disclosure: Interest paid $ 41,000 $ 28,000 =========== =========== Items not impacting cash flows: Increase in capital lease obligations $ 91,000 $ 167,000 =========== ============
See Notes to Consolidated Financial Statements. 5 HEMACARE CORPORATION Notes to Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation and General Information The accompanying unaudited consolidated financial statements of HemaCare Corporation (the "Company" or "HemaCare") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. Certain 1995 amounts have been reclassified to conform to the 1996 presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. From 1990 to November 1995, the Company, through its wholly owned subsidiary, HemaBiologics, Inc. ("HBI"), conducted research and development of ImmupathTM, an anti-HIV hyperimmune plasma-based product intended to be used in the treatment of Acquired Immune Deficiency Syndrome ("AIDS"). The Company had a license agreement with Medicorp, Inc. ("Medicorp") for the rights to the United States patent to commercialize Immupath. In November 1995, the Company's Board of Directors decided to discontinue the operations of HBI. (Notes 2 and 5). In September 1995, the Company formed Gateway Community Blood Program, Inc. ("Gateway"), a wholly owned subsidiary incorporated in Missouri, to provide blood products and services in portions of Missouri and Illinois. In June 1996, Gateway's operational focus was redirected to providing autologous and directed blood donation services and single donor platelet products to specific hospital customers. The Company opened its University of Southern California Blood Center ("USC Blood Center"), a full-service blood donation and services facility, in February 1996. The USC Blood Center facility is leased from USC and is staffed and operated by HemaCare under its Food and Drug Administration ("FDA") license. Located on the USC Health Sciences Campus in Los Angeles, California, the center provides services to the USC/Norris Comprehensive Cancer Center and Hospital and the USC University Hospital (the "USC Hospitals"). The USC Hospitals have agreed that HemaCare will be their primary provider of blood products and therapeutic services for the three-year period ending February 1999. Pathologists on the USC medical faculty provide medical direction services for the USC Blood Center as consultants to the Company. 6 7 Note 2 - Discontinued Operations In November 1995, the Company's Board of Directors decided to discontinue the operations of HBI, including the research and development of Immupath and the associated specialty plasma business. In connection with this decision, the Company wrote off the remaining book value of HBI's assets and provided a reserve for estimated operating losses from the November 30, 1995 measurement date through December 1996, the expected date of substantial completion of disposal. The loss on the disposition of HBI's operations has been accounted for as discontinued operations, and prior year financial statements have been restated to reflect the discontinuation of these operations. The net loss from such operations for the three months ended June 30, 1995 was $238,000. For the three-month and six-month periods ended June 30, 1996, the Company's reserve for discontinued operations increased by $137,000 and $56,000, respectively, as the result of favorable variance in estimated operating losses. A reserve in the amount of $1,035,000 was established for estimated HBI operating losses during the period of disposal. Included in this reserve was $600,000 for the resolution of contingent liabilities in connection with the Medicorp license agreement and Medicorp warrants, none of which will be required to be applied for this purpose. (See Note 5). The Company has been actively pursuing a sale of HBI's research and development and associated specialty plasma assets, and in June 1996, the Company signed an amended agreement to sell substantially all the tangible assets of the discontinued operations and two of the three remaining FDA source plasma licenses. Final closing of the sale is contingent upon obtaining FDA approval to transfer the licenses to the purchaser and certain other conditions. Although subject to a number of factors beyond the Company's control, management believes that the disposal of the remainder of the discontinued HBI operations will be substantially completed during the third or fourth quarter of 1996. Note 3 - Line of Credit Since August 1991, the Company has maintained a line of credit with a commercial bank secured by its accounts receivable, inventory and equipment. Effective May 1, 1996, the credit line was renewed through April 30, 1997. Under the terms of the new credit line agreement, the Company may borrow up to 70% of eligible accounts receivable, up to a maximum of $700,000 and must maintain certain ratios, including Working Capital, defined, of $500,000 and a tangible net worth of not less than $370,000 prior to September 30, 1996 and not less than $2 million thereafter. At June 30, 1996, the Company's defined working Capital was $500,000. The credit line agreement also requires that the Company achieve defined operating objectives in order to make loan draws. Although the Company was in compliance with all covenants of its borrowing agreement at June 30, 1996, but further borrowing is restricted due to the failure to achieve the defined operating objectives, until tangible net worth of $2 million is achieved. In order to comply with the tangible net worth covenant after September 1996, the Company will be required to increase its shareholders' equity through the sale of additional equity securities. Interest on credit line borrowings is at the lender's prime rate (8.25% at June 30, 1996) plus one-half of a percentage point. As of June 30, 1996, $300,000 was outstanding under the line of credit. 7 8 Note 4 - Shareholders' Equity In April 1994, HemaCare sold 250,000 units consisting of one share of common stock and three warrants to purchase additional shares (at $4.00 per unit) in an offshore transaction, from which it received net proceeds of approximately $900,000. The second group of 250,000 warrants was fully exercised in the first quarter of 1995 and yielded net proceeds of approximately $350,000. In consideration of this exercise, which was made 45 days prior to the expiration date, a fourth group of 250,000 warrants exercisable at a price of $3.50 per share and expiring in December 1998 was granted to the purchaser. The third group of 250,000 warrants was exercised in June and July 1995, yielding net proceeds of approximately $390,000. The fourth group of options remains outstanding at June 30, 1996. In connection with the sale of the units and the subsequent exercise of related warrants, the Company granted to the finder warrants to purchase 50,000 shares of the Company's common stock (the "Finder Warrants"). The Finder Warrants expire five years from their issue date and are exercisable at prices ranging from $1.45 to $4.00. Up to 12,500 additional Finder Warrants may be issued at $3.50 per share, depending on the number of the fourth group of 250,000 warrants which are exercised. In November 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123 recommends changes in accounting for employee stock based compensation plans and requires certain disclosures with respect to these plans. The Company will adopt SFAS 123 prior to December 31, 1996. Note 5 - Commitments and Contingencies On March 11, 1994, the Company was served with a lawsuit filed by a former employee against the Company and its wholly owned subsidiary, HBI, in the Superior Court of the State of California, related to the termination of this employee and seeking relief in the amount of $550,000. At this stage in the proceedings, neither management nor counsel are in a position to evaluate the probable merits of the claim asserted by this former employee. Accordingly, the resolution of this lawsuit could have a material impact on the Company's financial conditions and results of operations. In September 1995, the Company entered into a letter of intent to make royalty payments to certain parties in consideration of certain commitments to the establishment of Gateway. The definitive agreement providing for the payment of these royalties has not been completed due to a dispute with one of the parties, which is now the only remaining party who may be entitled to royalty payments. The letter of intent provides for cash royalties of up to 20% of Gateway's cash flow, as defined, and shares of HemaCare common stock with a value equal to the cash royalty, up to a maximum of 500,000 shares of HemaCare common stock. If a definitive royalty agreement is entered into, royalty payments would commence after the Company recovers its initial investment in Gateway, including capital expenditures and operating deficits, and terminate in 2003. In November 1995, the Company terminated its license agreement with Medicorp (Note 1) due to a default by the license holder. The Company also notified Medicorp that the stock purchase warrants (exercisable for 400,000 shares of HemaCare common stock at $5.50 per share) issued by the Company to Medicorp had terminated under 8 9 their terms, due to the default. Medicorp denied that it had breached the license agreement and alleged that the Company was liable for royalties under the license agreement of approximately $425,000 and that its warrants remain outstanding. On July 19, 1996, the Company and Medicorp Inc. entered into a settlement agreement and mutual release resolving all disputes between them related to their February 1993 license agreement. In the Medicorp settlement agreement, the parties agreed (i) to terminate the license agreement, (ii) to mutually release each other from all prior monetary and other breaches of the license agreement, (iii) that the Medicorp warrants would remain outstanding and exercisable and (iv) that the Company would grant a nonexclusive royalty-free license to Medicorp to certain research data and other documentation associated with the Immupath project. The Medicorp settlement agreement does not require any monetary settlement payments by either party. In February 1996, the Company terminated an agreement with a vendor, based on an unsatisfactory level of performance of the vendor's product. The vendor is disputing the basis for the termination. The Company intends to vigorously defend any legal action which may result from this dispute, and the resolution of this matter is not expected to have a material impact on the Company's financial position or results of operations. Note 6 - Related Party Information In 1995 and 1994, the Company made a series of personal loans to Joshua Levy, then an officer and director of the Company, totaling $98,307. The proceeds of these loans were used to refinance existing debt which was collateralized by HemaCare stock owned by Dr. Levy. In January 1996, these individual notes were consolidated into a promissory note, collateralized by HemaCare stock owned by Dr. Levy, which accrues interest at a rate equal to the rate the Company pays under its line of credit (Note 3), adjusted quarterly. Interest accrued related to the loans made to Dr. Levy for the quarters ended June 30, 1996 and 1995 was $2,112 and $2,426, respectively. The note requires four annual installment payments of $15,000 due on January 31, with the balance of the principal and accrued interest due on January 31, 2000. The Company received its first annual installment payment of $15,000 in January 1996. Note 7 - Recent Auditing Pronouncement In the first quarter of 1996, the Company adopted Statement of Financial Auditing Standards no. 121 "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS 121"). The adoption of SFAS 121 did not impact the Company's financial, position or its results of operations. 9 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Comparison of the Quarter and Six Months ended June 30, 1996 and 1995. All comparisons within the following discussions are to the same period of the previous year. In late December 1995, the Gateway Community Blood Program ("Gateway") opened in St. Louis, Missouri. The University of Southern California (USC) Blood Center, located in Los Angeles, California, opened in late February 1996. These new operations are collectively referred to as the "Expansion Operations" in the following discussions. Revenues and Operating Profit Revenues for the three and six month periods ended June 30, 1996, increased 6% ($156,000) and 5% ($280,000), respectively. The Company's operating profit as a percentage of sales ("profit margin") decreased to 7% in the three month period and 6% in the six month period of 1996 from 23% in the three month period and 25% in the six month period of 1995, due to start-up losses incurred by the Expansion Operations. Operating losses from Expansion Operations were $420,000 for the three months and $979,000 for the six months ended June 30, 1996. The Company's profit margin before the effect of the Expansion Operations was 26% for the three month period and 24% for the six month period ended June 30, 1996. Blood Products Blood product revenue increased by 4% for the three months and 1% for the six months ended June 30, 1996. The increases were due to revenue from Expansion Operations, partially offset by a decrease in revenue from other product sales, primarily due to a lower volume of platelet sales. Platelet sales volumes declined by 12% in the three month and 13% in the six month period of 1996, primarily due to competitive pressures. The blood product operating costs and expenses exceed blood product revenue for the 1996 three and six month periods due to the Expansion Operations. Before the effect of the Expansion Operations, the blood product profit margin increased to 24% for the second quarter 1996 as compared to 18% in 1995 and to 23% for the 1996 six months as compared to 22% in 1995. The higher 1996 profit margins were due to (1) a decrease in the percentage of lower margin, imported products sold and (2) a higher ratio of products produced per donation, in the 1996 quarter. Blood Services For the three-month and six-month periods ended June 30, 1996, blood services revenues increased 10% ($86,000) and 13% ($234,000), respectively, primarily as a result of an 8% increase in the number of therapeutic procedures performed in both periods. The second quarter 1996 increase in procedures was comprised of a 9% increase in Los Angeles partially offset by a 16% decrease in Atlanta. The Atlanta operation was closed in July 1996. 10 11 The profit margin on blood services decreased to 28% in the second quarter of 1996 from 32% in the comparable period of 1995. Blood services profit margin for the first six months of 1996 was 29% compared to 31% for the first six months of 1995. The 1996 decreases were primarily due to the decline in Atlanta business. General and Administrative Expense General and administrative expense increased 27% ($127,000) for the three months and 28% ($273,000) for the six months ended June 30, 1996. The increase was primarily due to changes in the Company's corporate structure initiated in late 1995, in conjunction with its national expansion strategy, including the addition of a business development department. However, since the timing of additional expansion is currently uncertain and dependent upon improved operating performance and increased capitalization, the Company recently implemented a plan to reduce general and administrative expense. (See "Liquidity and Capital Resources") Discontinued Operations In November 1995, the Company discontinued its Immupath related research and development activities and established a $1 million reserve for losses during the disposal period, including $600,000 for a contingent liability related to a dispute with Medicorp, a license holder. The reserve amount is net of the expected proceeds to be realized from the sale of research and development assets. To date, results of the disposal have been more favorable than expected. In June 1996, the Company signed an amended agreement to sell most of its research and development assets. In July 1996, the Medicorp dispute was settled without any payment by the Company. The asset sale is expected to close in the third or fourth quarter of 1996, at which time the disposal of the discontinued operations will be substantially complete. If at that time the remaining reserve exceeds any estimated residual costs of disposition, the Company will reduce its liabilities by the amount of the remaining reserve for disposal, including the amount provided for settlement of the dispute with the license holder, and increase its net income and retained earnings in a corresponding amount. Although management expects that the reserve will exceed the disposal costs, there can be no assurance of this or that the reserve provided will exceed or be sufficient to cover all disposal costs. (See "Liquidity and Capital Resources") Liquidity and Capital Resources At June 30, 1996, the Company had cash and cash equivalents of $996,000 and working capital of $748,000. The Company's blood products and services businesses, other than the Expansion Operations, are profitable and cash flow positive. Effective August 1, 1996, the Company reduced many of its product prices, as a part of its overall marketing strategy. The price reductions are expected to increase the number of products sold. However, profit margins on these products will be reduced. To offset the effect of the price reductions and increase the overall profitability of its operations, the Company implemented the following cost reduction and control measures beginning in June 1996: 11 12 - - Closing of the Atlanta-based therapeutic services business which did not achieve sustained profitability. - - Reorganization of Los Angeles-based operations to increase efficiency and reduce costs. Operation of the collection, testing, manufacturing and distribution departments were reevaluated and rescheduled to reduce personnel costs. - - Reduction of general and administrative expenses. Personnel-related and other costs were critically reviewed, resulting in a significant overall reduction in these expenses. The Company has a $700,000 line of credit with a commercial bank which is in effect through April 30, 1997. Under the terms of the new credit line agreement, the Company may borrow up to 70% of eligible accounts receivable, up to a maximum of $700,000 and must maintain certain ratios, including Working Capital, defined, of $500,000 and a tangible net worth of not less than $370,000 prior to September 30, 1996 and not less than $2 million thereafter. At June 30, 1996, the Company's defined working Capital was $500,000. The credit line agreement also requires that the Company achieve defined operating objectives in order to make loan draws. Although the Company was in compliance with all covenants of its borrowing agreement at June 30, 1996, further borrowing is restricted due to the failure to achieve the defined operating objectives, until tangible net worth of $2 million is achieved. In order to comply with the tangible net worth covenant after September 1996, the Company will be required to increase its shareholders' equity through the sale of additional equity securities. The Company is implementing a compliance plan, but no assurance can be given that this plan will be completed on a timely basis or at all and, if completed, will result in one or more financing transactions adequate to satisfy the credit line covenants. At June 30, 1996, $300,000 was outstanding on the credit line. The Company's common stock is listed on the NASDAQ SmallCap Market. To maintain that listing, the Company's "capital and surplus," as defined, must be at least $1 million. At June 30, 1996, the Company had capital and surplus of approximately $481,000. NASDAQ has granted the Company an exception to the capital and surplus requirement, subject to completing certain steps to increase its capital and surplus to $2 million by August 16, 1996. On July 19, 1996, the Company resolved a dispute which is expected to result in a $600,000 increase in its capital and surplus on a pro forma basis (See "Discontinued Operations"). The Company is pursuing a plan to meet the $2 million capital and surplus requirement. However, there can be no assurance that the Company can complete the required steps by August 16, 1996 or at all. If the Company's stock is no longer listed on NASDAQ's SmallCap Market or a national securities exchange, the Company's ability to raise capital may be impaired. The USC Blood Center serves the USC/Norris Comprehensive Cancer Center and Hospital and the USC University Hospital (the "Hospitals"). The USC Blood Center operates under the terms of the Company's three-year agreements with the USC Hospitals. These agreements designate the Company as the primary provider of blood products and services to the Hospitals, and the Company is entitled to recoup the cost of tenant improvements for the USC Blood Center 12 13 through surcharges to the Hospitals. On an overall basis, this is a profitable arrangement for the Company, which is currently supplying most of the Hospitals' blood product needs from sources other than donations at the USC Blood Center. On a stand-alone basis, the USC Blood Center is experiencing start up losses, in accordance with original expectations. When the USC Blood Center reaches stabilized operations, it is expected to be a profitable, stand-alone operation. To date, blood donations made at the USC Blood Center have been primarily autologous or directed. To achieve a profitable level of operations, allogeneic donations (donated for general use) of platelets and whole blood must be increased. The Company is attempting to increase allogeneic donations through a platelet donor recruitment program and the initiation of blood drives. However, there can be no assurance that the Center will be able to achieve and maintain a profitable level of stand-alone operations. Gateway opened for business and began conducting blood drives in December 1995. In June 1996, Gateway's operations were redirected from predominantly mobile blood drives, in which efforts the Company competed directly with the American Red Cross (the "ARC") on a regional basis, to a more profitable mix of blood products and services provided for specific hospital customers. As a result, the cost of Gateway's operations were reduced, including a substantial reduction in personnel. The Company believes that Gateway's new strategy will result in a profitable level of donations and revenue. However, the success of Gateway's operations will be dependent on a number of factors and circumstances, many of which will be outside the Company's control. Accordingly, there can be no assurance that profitable operations will be achieved. If profitable operations are not achieved, Gateway will be closed. The costs of such a closure are not expected to be material to the Company's overall results of operations. In many instances, the Company competes against the ARC in providing its products and services to health care institutions. To date, the ARC has aggressively responded to competition from the Company and management believes that such completion will continue. In southern California, the Los Angeles Region Blood Service of the American Red Cross (the "Los Angeles ARC") employs pricing practices which the Company has alleged violate antitrust laws. These pricing practices may compel ARC customers to purchase certain blood products from the ARC at higher prices than those offered by the Company. In December 1995, the Company filed an antitrust and unfair competition complaint against the Los Angeles ARC with the United States District Court in the Central District of California to recover damages and secure injunctive relief. In response to the complaint, the ARC filed a motion to dismiss which was partially rejected by the Court. A February 1997 trial date has been set. The Company cannot predict the outcome of this lawsuit at this time. In St. Louis, prior to the opening of Gateway, the ARC provided virtually all blood products to hospitals in the greater St. Louis area. Immediately following the opening of Gateway, the ARC decreased its price for red blood cells in excess of 10%. This price decrease materially impacted Gateway's ability to market its products and was largely responsible for the redirection of Gateway's operations. Management is evaluating a number of opportunities to expand its operations by packaging the Company's capabilities in a blood management program (the "Blood Management Program") that responds to and solves customers' problems. The USC Blood Center program is a prototype of this approach, which enables a hospital to gain 13 14 control over its blood utilization and costs by providing the benefits of an in house blood program without the associated regulatory and management burdens and financial risks. The Company's blood management programs are being marketed to: - - Existing customers in Southern California and St. Louis metropolitan area who are buying various blood products and services from the Company in a traditional buyer-vendor relationship and - - Potential customers who either have their own blood programs which they prefer to out source or have traditional blood vendors who are not meeting their needs. Further expansion will require that the Company obtain additional financing and overcome its competitors, which in many instances, will be the ARC. Accordingly, there can be no assurance that the Company will be successful in marketing its blood management programs or that, if successful, it will be able to obtain the funds necessary to finance such programs. In November 1995, the Company's Board of Directors decided to discontinue HBI's operations. This decision resulted in a write off of assets in the amount of approximately $2.1 million and the provision of a $1 million reserve for losses during the disposal period. To date, results of the disposal have been more favorable than expected. Approximately $56,000 of the reserve was funded in the six months ended June 30, 1996, net of amounts received from asset sales. In June 1996, the Company signed an amended agreement to sell most of its research and development assets. The asset sale is expected to close in the third or fourth quarter of 1996. However closure of the sale is contingent upon obtaining FDA approval to transfer certain of the assets to the purchaser and certain other conditions. Should the FDA fail to approve the transfer, the Company would be obligated to return a portion of sales proceeds paid by the purchaser in June 1996. (See "Discontinued Operations") On March 11, 1994, the Company was served with a lawsuit filed by a former employee against the Company and its wholly owned subsidiary, HBI, in the Superior Court of the State of California, related to the termination of this employee and seeking relief in the amount of $550,000. The case is still in the discovery stage in the proceedings and neither management nor counsel are in a position to evaluate the probable merits of the claim asserted by this former employee. Accordingly, the resolution of this lawsuit could have a material impact on the Company's financial condition and results of operations. In February 1996, the Company terminated an agreement with a vendor, based on the inability of the vendor's product to perform to the standards outlined in the agreement. The vendor is disputing the basis for the termination, and the parties are discussing a negotiated settlement. However, if an acceptable settlement can not be achieved, the Company intends to vigorously defend any legal action which may result from the dispute. In either event, the resolution of this matter is not expected to have a material impact on the Company's financial position or future results of operations. The Company anticipates that positive cash flow from its profitable operations and its cash and investments on hand will be sufficient 14 15 to provide funding for the anticipated operating deficits of the Expansion Operations and, if necessary, the closure of Gateway, fund the remaining costs of disposing of its discontinued operations and meet its other working capital needs for the next 12 months. Factors Affecting Forward-Looking Information The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" from liability for forward-looking statements. Certain information included in this Form 10-Q and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by or on behalf of the Company) are forward-looking, such as statements relating to operational and financing plans, competition, the completion of the disposal of research and developments assets, demand for the Company's products and services, and the anticipated outcome of contingent claims against the Company. Such forward looking statements involve important risks and uncertainties, many of which will be beyond the control of the Company. These risks and uncertainties could significantly affect anticipated results in the future, both short-term and long-term, and accordingly, such results may differ from those expressed in forward-looking statements made by on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to the ability of the Company to increase its shareholders' equity through the sale of equity securities, to achieve profitability in either or both of its Expansion Operations, to improve the profitability of the Company's other operations, to expand its operations, to comply with the covenants under its bank line of credit, to effectively compete against the ARC and other competitors, to complete the sale of the Company's research and development assets on contracted terms and to resolve favorably through negotiation or litigation claims asserted against Company. Each of these risks and uncertainties as well as others are discussed in greater detail in the preceding paragraphs of this Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a. Exhibits 27 Financial Data Schedule for the Quarter Ending June 30, 1996. 15 16 INDEX TO EXHIBITS
Method of Filing ---------------- 27 Financial Data Schedule for the quarter ending June 30, 1996 .. . . . . . . . . . . . . . Filed herewith electronically
16 EX-27 2
5 This schedule contains summary information extracted from unaudited financial statements contained in Form 10-Q for the quarter ending June 30, 1996 and is qualified in its entirety by reference to such financial statements. 6-MOS DEC-31-1996 JUN-30-1996 995,626 0 1,424,820 93,438 149,495 2,984,501 2,654,979 1,693,377 4,128,950 2,282,672 0 0 0 12,312,933 (11,878,539) 4,128,950 2,678,816 2,678,816 2,494,142 2,494,142 599,052 93,438 21,234 (430,249) 0 (430,249) 0 0 0 (430,249) (.07) (.07)
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