-----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, IeMwB+TCq58lhkJ6VQGUHVMIV0zDEhKs9FlXsgQj2L1NfB0n8uWyxu2iCZU+Lcz+ 1dMahTvcW+1qu9G3QA7oyA== 0000801748-97-000004.txt : 19970221 0000801748-97-000004.hdr.sgml : 19970221 ACCESSION NUMBER: 0000801748-97-000004 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 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: 97523350 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 September 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 November 13, 1996, 7,177,515 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 September 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 and to reflect a gain on disposal of discontinued operations resulting from the resolution of a contingent liability in July 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 Officer 2 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HEMACARE CORPORATION CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1996 1995 ------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,369,000 $ 997,000 Accounts receivable, net of allowance for doubtful accounts - $88,000 (1996) and $95,000 (1995) 1,690,000 1,627,000 Product inventories 142,000 141,000 Supplies 297,000 328,000 Prepaid expenses 199,000 117,000 Note receivable from officer - current 15,000 15,000 ------------- ------------- Total current assets 3,712,000 3,225,000 Plant and equipment, net of accumulated depreciation and amortization of $1,788,000 (1996) and $1,513,000 (1995) 870,000 1,051,000 Note receivable from officer - non-current 86,000 94,000 Other assets 98,000 87,000 ------------- ------------- $ 4,766,000 $ 4,457,000 ============= ============= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 721,000 $ 473,000 Accrued blood purchases 230,000 252,000 Accrued payroll and payroll taxes 247,000 310,000 Other accrued expenses 227,000 239,000 Current obligations under capital leases 234,000 209,000 Reserve for discontinued operations - current 345,000 336,000 ------------- ------------- Total current liabilities 2,004,000 1,819,000 Obligations under capital leases, net of current portion 557,000 649,000 Other accrued expenses - long-term 187,000 163,000 Reserve for discontinued operations - non-current - 600,000 Commitments and contingencies Shareholders' equity: Common stock, without par value - 20,000,000 shares authorized, 7,176,683 and 5,911,285 issued and outstanding in 1996 and 1995, respectively 13,468,000 12,179,000 Accumulated deficit (11,450,000) (10,953,000) ------------- ------------- Total shareholders' equity 2,018,000 1,226,000 ============= ============= $ 4,766,000 $ 4,457,000 ============ =============
3 See Notes to Consolidated Financial Statements. 4 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended September 30, Nine months ended September 30, 1996 1995 1996 1995 Revenues: -------------- -------------- ------------- --------------- Blood products $ 1,645,000 $ 1,752,000 $ 5,041,000 $ 5,103,000 Blood services 981,000 963,000 3,073,000 2,821,000 ------------- ------------- ------------- ------------- Total revenues 2,626,000 2,715,000 8,114,000 7,924,000 Operating costs and expenses: Blood products 1,621,000 1,318,000 5,282,000 3,887,000 Blood services 641,000 638,000 2,132,000 1,966,000 ------------- ------------- ------------- ------------- Total operating costs and expenses 2,262,000 1,956,000 7,414,000 5,853,000 ------------- ------------- ------------- ------------- Operating profit 364,000 759,000 700,000 2,071,000 General and administrative expense 529,000 499,000 1,759,000 1,461,000 Interest expense 7,000 3,000 39,000 5,000 ------------- ------------- ------------- ------------- Income (loss) from continuing operations before income taxes (172,000) 257,000 (1,098,000) 605,000 Provision for income taxes - - - - Discontinued Operations: Loss from discontinued operations - (232,000) - (767,000) Gain on disposal of discontinued operations 600,000 - 600,000 - ------------- ------------- ------------- ------------- Net income (loss) $ 428,000 $ 25,000 $ (498,000) $ (162,000) ============= ============= ============= ============== Per share amounts: Income (loss) from continuing operations $ (0.02) $ 0.04 $ (0.17) $ 0.11 Discontinued Operations: Loss from discontinued operations - (0.04) - (0.14) Gain on disposal of discontinued operations 0.09 - 0.09 - ------------- ------------- ------------- ------------- Net income (loss) $ 0.07 $ 0.00 $ (0.08) $ (0.03) ============= ============= ============= ============= Weighted average common and common equivalent shares outstanding 6,384,838 6,020,684 6,477,203 5,622,215 ============= ============= ============= =============
4 See Notes to Consolidated Financial Statements. 5 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, 1996 1995 -------------- -------------- Cash flows from operating activities: Net loss $ (498,000) $ (162,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 265,000 384,000 Provision for losses on accounts receivable - 1,000 Decrease in reserve for discontinued operations (600,000) - Changes in operating assets and liabilities: Decrease (increase) in accounts receivable (63,000) 355,000 Increase in inventories, supplies and prepaid expenses (52,000) (62,000) Increase in other assets, net (11,000) (81,000) Increase (decrease) in accounts payable and accrued expenses 151,000 (520,000) Increase (decrease) in other accrued expenses - long-term 24,000 (13,000) Reserve for discontinued operations 9,000 - ------------ ------------ Net cash used in operating activities (775,000) (98,000) ------------ ------------ Cash flows from investing activities: Decrease (increase) in note receivable from officer 8,000 (16,000) Decrease in short-term investments - 300,000 Sale (purchase) of plant and equipment, net 8,000 (113,000) ----------- ------------ Net cash provided by investing activities 16,000 171,000 ----------- ------------ Cash flows from financing activities: Net proceeds from issuance of common stock 1,289,000 834,000 Principal payments on line of credit and capital leases (158,000) (299,000) ----------- ------------ Net cash provided by financing activities 1,131,000 535,000 ----------- ------------ Increase (decrease) in cash and cash equivalents 372,000 608,000 Cash and cash equivalents at beginning of period 997,000 786,000 ----------- ------------ Cash and cash equivalents at end of period $1,369,000 $ 1,394,000 =========== ============ Supplemental disclosure: Interest paid $ 60,000 $ 41,000 =========== ============ Items not impacting cash flows: Increase in capital lease obligations $ 92,000 $ 167,000 =========== ============
See Notes to Consolidated Financial Statements 6 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 nine months ended September 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"). In connection with this project, the Company licensed the rights to the United States patent to commercialize Immupath from Medicorp, Inc. ("Medicorp"). In November 1995, the Company's Board of Directors decided to discontinue the operations of HBI. At the time the operations were discontinued, each party to the license alleged that the other party was in breach of the agreement. (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. 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 and nine months ended September 30, 1995 was $232,000 and $767,000, respectively. For the three-month and nine-month periods ended September 30, 1996, the Company's reserve for discontinued operations decreased by $647,000 and increased by $591,000, respectively. The reserve established for estimated HBI operating losses during the period of disposal included a $600,000 contingent liability for the resolution of the dispute with Medicorp. In July 1996, the dispute was settled without any payment by the Company, and the Company recognized a $600,000 gain on disposal of discontinued operations. (See Note 5). 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. The sale and transfer of the licenses was contingent upon obtaining FDA approval which was received on October 21, 1996. The buyer has delivered a promissory note in payment of the purchase price for the tangible assets sold which is collateralized by these assets. However, the buyer's ability to make payment on the note, which was due November 2, 1996, is dependent upon the completion of a financing transaction by the buyer. If, upon completion of the sale transaction, 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 and increase its net income and retained earnings in a corresponding amount. 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. The credit line is in effect through April 30, 1997. Under the terms of the credit line agreement, as amended, 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, as defined, of $500,000 and a tangible net worth of not less than $1.2 million prior to March 31, 1997 and not less than $1.8 million thereafter. The Company was in compliance with all covenants of its borrowing agreement, as amended, at September 30, 1996. Interest on credit line borrowings is at the lender's prime rate (8.25% at September 30, 1996) plus one-half of a percentage point. As of September 30, 1996, there was no balance outstanding under the line of credit. 7 8 Note 4 - Shareholders' Equity In August 1996, the Company completed a $1.2 million private placement of 1.2 million shares of its common stock. 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. The Company does not expect the adoption of SFAS 123 to materially impact the Company's financial position or its results of operations. 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. A trial date has been set for October 29, 1997; however, 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 November 1995, the Company terminated its license agreement with Medicorp (Note 1) due to an alleged 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 their terms, due to the default. Medicorp denied that it had breached the license agreement and alleged that the Company was liable for royalties of approximately $425,000 under the license agreement and that its warrants remained 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. 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 8 9 accrued related to the loans made to Dr. Levy was $2,154 for the three months and $6,392 for the nine months ended September 30, 1996 and $2,445 for the three months and $7,092 for the nine months ended September 30, 1995, 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Comparison of the Quarter and Nine Months ended September 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 month period ended September 30, 1996, decreased 3% ($89,000), and revenue for the nine month period ended September 30, 1996 increased 2% ($190,000). The Company's operating profit as a percentage of sales ("profit margin") decreased to 14% in the three month period and 9% in the nine month period of 1996 from 28% in the three month period and 26% in the nine month period of 1995, due primarily to start-up losses incurred by the Expansion Operations. Losses from Expansion Operations were $284,000 for the three months and $1,264,000 for the nine months ended September 30, 1996. The Company's profit margin before the effect of the Expansion Operations was 27% for the three month period and 26% for the nine month period ended September 30, 1996. Blood Products Blood products revenue decreased 6% for the three months and 1% for the nine months ended September 30, 1996. The decreases were due to a lower platelet sales volumes and prices in Southern California, partially offset by revenue from Gateway sales. Platelet sales volumes 9 10 declined by 24% in the three month period and 16% in the nine month period of 1996, primarily due to competitive pressures. Average platelet sales prices declined by 4% for the three months and 2% for the nine month periods of 1996. Effective August 1, 1996, the Company reduced many of its blood product prices, as a part of its overall marketing strategy. As a result of the Expansion Operations, operating costs and expenses exceed revenues in the nine month period of 1996 and revenues only slightly exceed operating costs and expenses in the three month period of 1996. Before the effect of the Expansion Operations, the blood products profit margin decreased to 22% for the 1996 three months, as compared to 25% in 1995, and to 23% for the 1996 nine months, as compared to 24% in 1995. The lower 1996 profit margins were due to (1) lower platelet sales prices and (2) lower platelet and component sales volumes. Blood Services For the three-month and nine-month periods ended September 30, 1996, blood services revenues increased 2% ($18,000) and 9% ($252,000), respectively, primarily as a result of 5% and 7% increases in the number of therapeutic procedures performed in Southern California during the 1996 three and nine month periods, respectively. The Atlanta therapeutic services operation was closed in July 1996. The profit margin on blood services increased to 35% for the three month period and to 31% for the nine month period of 1996 from 34% and 30% in the corresponding periods of 1995, respectively. General and Administrative Expense General and administrative expense increased 6% ($30,000) for the three months and 20% ($298,000) for the nine months ended September 30, 1996. The increase was primarily due to changes in the Company's corporate structure initiated in late 1995 in conjunction with its expansion strategy. However, since the timing of additional expansion is currently uncertain and dependent upon improved operating performance and increased capitalization, in June 1996, the Company implemented a plan to reduce general and administrative expense. (See "Liquidity and Capital Resources.") As a result of this plan, general and administrative expenses decreased by 12% ($70,000) in the third quarter of 1996, as compared to the second quarter of the year. Discontinued Operations In November 1995, the Company discontinued its 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 proceeds expected to be realized from the sale of research and development assets. To date, results of the disposal have been more favorable than expected. In July 1996, the Medicorp dispute was settled without any payment by the Company. As a result of this settlement, the Company 10 11 recognized a $600,000 gain on disposal of discontinued operations in the third quarter of 1996. In June 1996, the Company signed an amended agreement to sell most of its research and development assets, and The asset sale is expected to be completed in the fourth quarter of 1996, at which time the disposal of the discontinued operations will be substantially complete. However, completion of the sale is dependent on the purchaser's ability to obtain financing. At the time the sale is completed, if the remaining reserve exceeds any estimated residual costs of disposition, the Company will reduce its liabilities by the amount of the remaining reserveand increase its net income and retained earnings by a corresponding amount. Liquidity and Capital Resources At September 30, 1996, the Company had cash and cash equivalents of $1.4 million and working capital of $1.8 million. 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 credit line agreement, as amended, 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, as defined, of $500,000 and a tangible net worth of not less than $1.2 million prior to March 31, 1997 and not less than $1.8 million thereafter. The Company was in compliance with all covenants of its borrowing agreement, as amended, at September 30, 1996. At September 30, 1996, there were no borrowings outstanding on the credit line. In order to maintain the listing of its common stock on the Nasdaq SmallCap Market, the Company increased its capitalization through a $1.2 million private placement of its common stock which was completed in August 1996. 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 blood product prices, as a part of its overall marketing strategy. The price reductions are intended to retain existing customers and attract new customers. However, profit margins on the affected products have been 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: - - 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 revised to reduce personnel costs. 11 12 - - Reduction of general and administrative expenses. Personnel- related and other costs were critically reviewed, resulting in a significant overall reduction in these expenses. In many instances, the Company competes against the American Red Cross ("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 competition will continue. 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 services profitably. 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 Los Angeles 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 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. The Company amended its complaint, and in November 1996, an ARC motion to dismiss the amended complaint was denied. A May 1997 trial date has been set. The Company cannot predict the outcome of this lawsuit at this time. The Company has developed a blood management program ("Blood Management Program") model which provides its hospital customers with the convenience and efficiencies of an in-house blood program without the associated regulatory and management burdens and related financial risks. The USC Blood Program is a prototype of this approach. The Company's Blood Management Programs are being marketed to: - - Existing customers in Southern California and the St. Louis metropolitan area who are buying various blood products and services from the Company in a traditional buyer-vendor relationship. - - 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. The USC Blood Program serves the USC/Norris Comprehensive Cancer Center and Hospital and the USC University Hospital (the "Hospitals") under the terms of the Company's three-year agreements with the USC Hospitals. Under the terms of these agreements, the Company is the primary provider of blood products and services to the Hospitals and agrees to equip and operate a blood donor center (the "USC Blood Donor Center"). The Company is entitled to recoup the cost of tenant improvements for the USC Blood Donor Center 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 Donor Center. However, start-up costs for the USC Blood Donor 12 13 Center have temporarily reduced the overall profitability of the USC Blood Program. When the USC Blood Donor Center reaches stabilized operations, it is expected to be a profitable, stand-alone operation. To date, blood donations made at the 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, fixed-site blood drives and mobile blood drives which were initiated in the fourth quarter of 1996. 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, where the Company competed directly with the ARC on a regional basis, to a more profitable mix of blood products and services targeted to the needs of specific hospital customers. As a result of a substantial reduction in personnel, the cost of Gateway's operations were reduced. 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 are dependent on a number of factors and circumstances, many of which are 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 October 1996, the Company signed an agreement to provide a comprehensive blood management program to Citrus Valley Health Partners, a three-hospital healthcare system serving a population of approximately 720,000 in suburban Los Angeles. The terms of the agreement require the Company to equip and operate a blood donor center in the vicinity of the three hospitals. Management is evaluating a number of opportunities to implement the Blood Management Program in a variety of other healthcare settings. However, further expansion will require that the Company obtain additional financing and the ability to compete effectively against other blood product and service providers, including 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 its research and development 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 $9,000 of the reserve was expended in the nine months ended September 30, 1996, net of amounts received from asset sales. In June 1996, the Company signed an amended agreement to sell most of its remaining research and development assets. The asset sale is expected to be completed in the fourth quarter of 1996. However, completion of the sale is dependent on the purchaser's ability to obtain financing. See "Discontinued Operations." 13 14 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. The Company anticipates that positive cash flow from its profitable operations and its cash and investments on hand will be sufficient to provide funding for the anticipated operating deficits of the Expansion Operations, to equip and operate the Citrus Valley Health Partners blood donor center and, if necessary, for the closure of Gateway, and to 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 or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to the ability of the Company to obtain additional financing, 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 September 30, 1996. 14 15 Index to Exhibits
Method of Filing ---------------- 27 Financial Data Schedule for the quarter ending September 30, 1996.............. Filed herewith electronically
EX-27 2
5 This schedule contains summary financial information extracted from unaudited financial statements contained in Form 10-Q for the quarter ending September 30,1996 and is qualified in its entirety to such financial statements. 9-MOS DEC-31-1996 SEP-30-1996 1,368,670 0 1,777,764 87,858 141,654 3,712,002 2,657,710 1,787,570 4,765,515 2,003,532 0 0 0 13,468,200 (11,450,177) 4,765,515 2,625,725 2,625,725 2,261,726 2,261,726 529,077 87,858 13,604 (171,636) 0 (171,636) 600,000 0 0 428,364 .07 .07
-----END PRIVACY-ENHANCED MESSAGE-----