-----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, DZjXsJJqeVtMGwR6TeCQPrTkAePiSguvLXrZd7umQJs3+pjaK+orRuFKeiqnuffM 576NyKF1Trb8hklbZFuepg== 0000801748-98-000016.txt : 19990105 0000801748-98-000016.hdr.sgml : 19990105 ACCESSION NUMBER: 0000801748-98-000016 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981023 ITEM INFORMATION: FILED AS OF DATE: 19990104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEMACARE CORP /CA/ CENTRAL INDEX KEY: 0000801748 STANDARD INDUSTRIAL CLASSIFICATION: 8090 IRS NUMBER: 953280412 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-15223 FILM NUMBER: 99500002 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 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A Amendment Number 1 to CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 Date of Report (Date of earliest event reported): October 22, 1998 HEMACARE CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its chapter) California ----------------------------------------------- (State or other jurisdiction of incorporations) 0-15223 95-3280412 ---------------------- -------------------------------- Commission File Number (IRS Employer Identification No.) 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 -------------- This Form 8-K/A amends and supplements the Form 8-K filed by the undersigned registrant on November 5, 1998 relating to the acquisition of certain assets of Coral Therapeutics, Inc. This Form 8-K/A contains the information referred to in Item 7 of the Form 8-K. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. - - ------- ---------------------------------------------------------- (a) Financial Statements of Business Acquired. Coral Therapeutics, Inc. Audited 1997 and 1996 Financial Statements together with Accountant's Report. Provided herein as Exhibit A. (b) Pro Forma Financial Information. HemaCare Corporation and Coral Therapeutics, Inc. Pro Forma Combined Condensed Balance Sheet as of September 30, 1998. Pro Forma Combined Condensed Statements of Income for the year ended December 31, 1997 and the nine months ended September 30, 1998. Notes to Pro Forma Combined Condensed Financial Statements. Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: December 30, 1998 ------------------ HemaCare Corporation By /s/ Sharon C. Kaiser -------------------------- Sharon C. Kaiser Chief Financial Officer Item 7. (b) Pro Forma Financial Information - - -------------------------------------------- Unaudited Pro Forma Combined Condensed Financial Statements On October 22, 1998, HemaCare Corporation ("HemaCare" or the "Company") through its wholly owned subsidiary Coral Blood Services, Inc. ("CBS"), acquired substantially all the assets of Coral Therapeutics, Inc. ("Coral") from Coral's secured lender. The acquisition price of the assets was $950,000 in cash and 450,000 shares of HemaCare's Series B senior convertible preferred stock. The Company financed the acquisition by (i) utilizing existing cash balances, (ii) borrowing $600,000 on its line of credit and (iii) issuing 450,000 shares of HemaCare Series B senior convertible preferred stock. The Series B preferred stock is convertible into 500,000 shares of HemaCare common stock, at the option of the holder, one year after issuance. Concurrently with the closing of the asset purchase, HemaCare extended offers of employment to most of Coral's employees. In addition, HemaCare has entered into or expects to enter into non-competition agreements with certain former managers of Coral pursuant to which HemaCare expects to make cash payments and issue shares of HemaCare common stock and warrants to purchase HemaCare common stock. HemaCare also is obligated to satisfy certain liabilities of Coral to its ex-employees and expects to make payments necessary to maintain essential business relationships. The acquisition will be accounted for as a purchase. The following unaudited pro forma combined condensed financial statements and related notes give effect to the acquisition of the assets of Coral as a purchase. The Pro Forma Combined Condensed Balance Sheet presents the financial position of the Company as if the acquisition had been completed on September 30, 1998. The Pro Forma Combined Condensed Statements of Operations have been prepared as if the acquisition occurred at the beginning of the period presented. The pro forma financial statements are presented for illustrative purposes only. They do not purport to be indicative of the financial position or results of operations of the Company which would have occurred if the acquisition had been effected on the date or dates indicated, nor do they purport to be indicative of future financial position of results of operations. The pro forma financial statements have been prepared based upon the historical financial statements of HemaCare and Coral, adjusted as described in the accompanying notes. No effect has been given in the pro forma results of operations for efficiencies or other benefits which may be realized through the acquisition. The pro forma financial statements should be read in conjunction with the historical financial statements and related notes thereto of HemaCare and Coral. HEMACARE CORPORATION PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1998
HemaCare Coral Thera- Eliminations Pro Forma Pro Forma Corporation peutics, Inc. (a) Adjustments (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------- ------------- ------------- ------------- ASSETS Current Assets Cash and equivalents............ $ 1,473,000 $ 30,000 $ - $ (350,000)(b) $ 1,153,000 Marketable securities........... 480,000 - - - 480,000 Accounts receivable, net........ 1,417,000 1,461,000 - (191,000)(c) 2,687,000 Inventories, primarily supplies. 391,000 236,000 - 627,000 Other current assets............ 153,000 110,000 (102,000) - 161,000 ------------- ------------- ------------ ------------ ------------- Total current assets........ 3,914,000 1,837,000 (102,000) (541,000) 5,108,000 Plant and equipment, net......... 474,000 387,000 - (72,000)(c) 789,000 Goodwill......................... - - - 709,000 (d) 709,000 Other assets..................... 105,000 25,000 (20,000) - 110,000 ------------- ------------- ------------ ------------ ------------- $ 4,493,000 $ 2,249,000 $ (122,000) $ 96,000 $ 6,716,000 ============= ============= ============ ============ ============= LIABILITIES Current Liabilities Accounts payable................ $ 415,000 $ 1,350,000 $(1,350,000) $ - $ 415,000 Accrued payroll and payroll taxes.......................... 575,000 - - 649,000 (e) 1,224,000 Accrued expenses................ 340,000 1,077,000 (1,077,000) 854,000 (f) 1,194,000 Current obligations under capital leases........... 126,000 - - - 126,000 Notes payable................... - 2,055,000 (2,055,000) - - Bank borrowing.................. - - - 600,000 (b) 600,000 Other current liabilities....... 122,000 (277,000) 277,000 - 122,000 ------------- ------------- ------------ ------------ ------------- Total current liabilities... 1,578,000 4,205,000 (4,205,000) 2,103,000 3,681,000 Obligations under capital leases, net of current portion.......... 133,000 - - - 133,000 Other long-term liabilities...... - 825,000 (825,000) 22,000 (f) 22,000 Commitments and contingencies.... - - - - - Shareholders equity Preferred stock................. - 16,691,000 (16,691,000) 75,000 (b) 75,000 Common stock.................... 13,570,000 2,000 (2,000) 23,000 (e,f) 13,593,600 Treasury Stock.................. - 1,000 (1,000) - - Additional paid in capital...... - 82,000 (82,000) - - Accumulated deficit............. (10,788,000) (19,557,000) 19,557,000 - (10,788,000) ------------- ------------- ------------ ------------ ------------- Total shareholders equity... 2,782,000 (2,781,000) 2,781,000 98,000 2,880,000 ------------- ------------- ------------ ------------ ------------- $ 4,493,000 $ 2,249,000 $(2,249,000) $ 2,222,600 $ 6,716,000 ============= ============= ============ ============ =============
The accompanying notes are an integral part of these financial statements. HEMACARE CORPORATION PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997
HemaCare Coral Thera- Eliminations Pro Forma Pro Forma Corporation peutics, Inc. (a) Adjustments Combined (Audited) (Audited) (Unaudited) ------------ ------------- ------------ ------------- ------------ Revenue......................... $ 11,101,000 $ 7,906,000 $(2,039,000) $ - $ 16,968,000 Operating costs and expenses.... 9,194,000 5,654,000 (1,340,000) - 13,508,000 ------------- ------------ ------------ ------------ ------------- Operating profit (loss)......... 1,907,000 2,252,000 (699,000) - 3,460,000 General and administrative expense........................ 1,998,000 10,377,000 (3,493,000) (3,443,000)(b) 5,439,000 ------------- ------------ ------------ ------------ ------------- Other Income (Expense): Gain on sale of Gateway Community Blood Program........ 128,000 - - - 128,000 ------------- ------------ ------------ ------------ ------------- Income (loss) from continuing operations before income taxes. 37,000 (8,125,000) 2,794,000 3,443,000 (1,851,000) Provision for income taxes...... - - - - - ------------ ------------ ------------ ------------ ------------- Net income (loss) from continuing operations.......... $ 37,000 $(8,125,000) $ 2,794,000 $ 3,443,000 $ (1,851,000) ============ ============ ============ ============ ============= Basic and diluted net income from continuing operations..... $ 0.01 $ (0.24) ============ ============= Weighted average common shares used to compute: Basic income (loss) per share. 7,190,710 560,000 (c) 7,750,710 ============ ============ ============= Diluted income (loss) per share.................... 7,190,710 560,000 (c) 7,750,710 ============ ============ =============
The accompanying notes are an integral part of these financial statements. HEMACARE CORPORATION PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998
HemaCare Coral Thera- Eliminations Pro Forma Pro Forma Corporation peutics, Inc. (a) Adjustments Combined (Unaudited) (Unaudited) (Unaudited) ------------ -------------- ------------ ------------ ------------ Revenue......................... $ 8,431,000 $ 6,445,000 $ (987,000) $ - $ 13,889,000 Operating costs and expenses.... 6,412,000 4,854,000 (763,000) - 10,503,000 ------------ ------------ ------------ ------------ ------------- Operating profit (loss)......... 2,019,000 1,591,000 (224,000) - 3,386,000 General and administrative expense........................ 1,694,000 4,365,000 (339,000) (2,066,000)(b) 3,654,000 ------------ ------------ ------------- ------------ ------------- Income (loss) from continuing operations before income taxes.......................... 325,000 (2,774,000) 115,000 2,066,000 (268,000) Provision for income taxes...... - - - - - ------------ ------------ ------------ ------------ ------------- Net income (loss) from continuing operations.......... $ 325,000 $(2,774,000) $ 115,005 $ 2,066,000 $ (268,000) ============ ============ ============ ============ ============= Basic and diluted net income from continuing operations..... $ 0.05 $ (0.03) ============ ============= Weighted average common shares used to compute: Basic income (loss) per share.. 7,194,113 560,000 (c) 7,754,113 ============ ============ ============= Diluted income (loss) per share......................... 7,194,382 560,000 (c) 7,754,382 ============ ============ =============
The accompanying notes are an integral part of these financial statements. HEMACARE CORPORATION NOTES TO PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS 1. Pro Forma Combined Condensed Balance Sheet - - --------------------------------------------- a. To eliminate the assets and liabilities of Coral which were not acquired by HemaCare. b. To record the payment of the acquisition purchase price, including a $950,000 cash payment, partially financed by $600,000 of credit line borrowing and issuance of 450,000 shares of Series B convertible preferred stock convertible at the option of the holder, after one year, into 500,000 shares of HemaCare common stock. c. To adjust the book value of Coral assets to estimated net realizable value. d. To record goodwill associated with the acquisition, equal to the difference between the net realizable value of the assets acquired and the aggregate consideration paid, including acquisition related liabilities incurred. e. To record the obligation for payments to be made and equity to be issued to former Coral employees for payroll, severance and non- competition agreements. f. To record other obligations incurred and equity to be issued in connection with the acquisition including: Payments necessary to maintain essential business relationships $352,000 Professional fees 330,000 Other transaction costs and expenses 194,000 -------- $876,000 ======== 2. Pro Forma Combined Condensed Statements of Operations - - --------------------------------------------------------- a. To eliminate the revenues, costs and expenses of operations not acquired by HemaCare, including a $2.8 million write off of goodwill included in 1997 general and administrative expense. b. To eliminate (i) historical depreciation and interest expense of Coral and (ii) general and administrative expense related to obligations not acquired; and to record depreciation, amortization and interest expense related to the transaction as follows:
Nine Months Ended Year Ended September 30, December 31, 1998 ------------------ ----------------- Historical amounts eliminated: Depreciation and amortization $ (240,000) $ (319,000) Interest (250,000) (275,000) Amounts related to transaction recorded: Depreciation and amortization 111,000 148,000 Interest 38,000 51,000 Elimination of obligations not acquired: Compensation of Coral employees who did not continue employment with HemaCare (1,250,000) (2,283,000) Lease obligation for facilities not acquired (204,000) (239,000) Other obligations, net (277,000) (534,000) ------------- ------------ $ (2,072,000) $(3,451,000) ============= ============
c. Shares issued as a part of the acquisition. EXHIBIT A FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND 1996 TOGETHER WITH AUDITORS' REPORT REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Coral Therapeutics, Inc.: We have audited the accompanying balance sheets of Coral Therapeutics, Inc. (a Delaware corporation) as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 9, subsequent to year-end, the Company defaulted under its lines of credit and the lender foreclosed on certain assets of the Company. Effective October 22, 1998, the lender sold substantially all of the Company's assets to HemaCare Corporation. This transaction resulted in the termination and dissolution of the Company. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coral Therapeutics, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Arthur Andersen, LLP ------------------------- Arthur Andersen, LLP Boston, Massachusetts March 6, 1998 (except with respect to the matter discussed in Note 9, as to which the date is October 22, 1998) CORAL THERAPEUTICS, INC. BALANCE SHEETS-DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 LIABILITIES AND STOCKHOLDERS' 1997 1996 EQUITY (DEFICIT) CURRENT ASSETS: CURRENT LIABILITIES: Cash and cash equivalents..... $ 2,878,944 $ 256,677 Line of credit (Note 6)............... $ 898,847 $ - Marketable securities - 2,215,193 Current portion of capital lease Accounts receivable, net obligations........................... 90,945 22,492 of allowances of approximately Current portion of notes payable...... 1,105,717 866,019 $259,000 and $48,000 for Accounts payable and accrued expenses. 1,992,811 1,356,723 1997 and 1996, respectively... 1,516,300 1,161,485 Current portion of noncompete agree- Inventories................... 235,317 187,369 ment obligations..................... 320,000 200,000 Other current assets.......... 88,600 138,616 ------------- ------------ ------------ ------------ Total current assets..... 4,719,161 3,959,340 Total current liabilities....... 4,408,320 2,445,234 ------------ ------------ ------------- ------------ LONG-TERM DEBT, NET OF CURRENT PORTION: Noncompete agreement obligations...... 261,666 500,000 Notes payable......................... 1,899,994 1,896,417 Capital lease obligations............. 236,367 22,326 ------------- ------------ 2,398,027 2,418,743 ------------- ------------ DUE FROM OFFICER - 25,000 COMMITMENTS (Note 5) ------------ ------------ STOCKHOLDERS' EQUITY (DEFICIT) (Note 8): Mandatorily redeemable convertible preferred stock, $.001 par value (at redemption value) - Series A - PROPERTY AND EQUIPMENT, Authorized - 3,500,000 shares AT COST: Issued and outstanding - Furniture, fixtures and 3,500,000 shares............... 4,624,861 4,274,861 office equipment.............. 665,671 574,434 Series B - Computer and clinical equip- Authorized - 4,077,042 and ment.......................... 405,774 309,784 3,711,998 shares as of Dec- Motor vehicles................. 141,671 141,671 ember 31, 1997 and 1996, Leasehold improvements......... 29,335 14,510 respectively ------------ ------------ Issued and outstanding - 3,809,559 and 3,711,998 1,242,451 1,040,399 shares as of December 31, 1997 and 1996, respectively.... 9,187,239 8,216,279 Less--Accumulated depreciation Series C - and amortization............. 525,043 243,420 Authorized - 3,636,362 shares ------------ ------------ Issued and outstanding - 3,636,362...................... 4,010,957 - 717,408 796,979 Common stock, $.001 par value ----------- ------------ Authorized - 15,536,581 and 11,000,000 shares as of December 31, 1997 and 1996, DEPOSITS 37,180 - respectively Issued and outstanding - 1,926,118 and 1,812,069 shares INTANGIBLE ASSETS, NET OF as of December 31, 1997 and 1996, ACCUMULATED AMORTIZATION OF respectively........................ 1,926 1,812 $35,000 AND $115,000 FOR Treasury stock, 251,471 shares as 1997 AND 1996 (NOTE 2) 1,014,522 3,732,087 of December 31, 1997, at cost........ (79) - ----------- ------------ Subscription receivable............... (178,868) - Additional paid-in capital............ 273,207 41,281 Accumulated deficit................... (18,237,319) (8,884,804) ------------- ------------- Total shareholders' equity (deficit). (318,076) 3,649,429 ------------- ------------- $ 6,488,271 $ 8,513,406 $ 6,488,271 $ 8,513,406 ============ ============ ============= =============
The accompanying notes are an integral part of these financial statements. CORAL THERAPEUTICS, INC. STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ------------- ------------ REVENUE............................. $ 7,906,041 $ 5,017,177 COST OF REVENUE..................... 5,653,552 3,838,999 ------------- ------------- Gross profit.............. 2,252,489 1,178,178 ------------- ------------- COSTS AND EXPENSES: General and administrative........ 6,760,715 4,429,526 Clinical support.................. 118,000 1,297,056 Marketing......................... 274,151 559,072 Severance and asset impairment charges (Note 2)................. 2,949,745 - ------------- ------------- Total costs and expenses.... (10,102,611) 6,285,654 ------------- ------------- Loss from operations........ (7,850,122) (5,107,476) INTEREST INCOME (EXPENSE), NET...... (274,719) 75,311 ------------- ------------- Net loss.................... (8,124,841) (5,032,165) ACCRETION OF DIVIDENDS ON PREFERRED STOCK.............................. (1,131,919) (956,683) ------------- ------------- Net loss available to common stockholders........ $ (9,256,760) $ (5,988,848) ============= ============= BASIC AND DILUTED EARNINGS PER SHARE.............................. $ (4.95) $ (3.30) ============= ============= WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING........... 1,869,094 1,812,069 ============= =============
The accompanying notes are an integral part of these financial statements. CORAL THERAPEUTICS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 NOTE: Information described in two tables.
--------Mandatorily Redeemable Convertible Preferred Stock----------- Series A Series B Series C Common Stock -------------------- -------------------- ---------------------- ----------------- Number Redem- Number Redem- Number Redem- Number $.001 of ption- of ption of ption of Par Shares Value Shares Value Shares Value Shares Value ---------- ---------- --------- ---------- --------- ---------- --------- ------ BALANCE, DECEMBER 31, 1995 3,500,000 $3,924,861 - $ - - $ - 1,812,069 $1,812 Issuance of mandatorialy redeemable convertible Series B Preferred Stock, at $2.05 per share, net of issuance costs at $42,693 - - 3,711,998 7,609,596 - - - - Accretion of cumulative dividends on mandatorialy redeemable preferred stock - 350,000 - 606,683 - - - - Net loss - - - - - - - - --------- ---------- --------- ---------- --------- ---------- --------- ------ BALANCE, DECEMBER 31, 1996 3,500,000 4,274,861 3,711,998 8,216,279 - - 1,812,069 1,812 Repurchase of common shares - - - - - - - - Issuance of mandatorialy redeemable convertible Series B Preferred Stock, at $2.05 per share - - 97,561 200,000 - - - - Issuance of mandatorialy redeemable convertible Series C Preferred Stock, at $1.10, net of issuance costs of $95,755 - - - - 3,636,362 3,999,998 - - Series B warrants issued in connection with notes payable - - - - - - - - Exercise of stock options - - - - - - 114,049 114 Accretion of cumulative dividends on mandatorialy redeemable preferred stock - 350,000 - 770,960 - 10,959 - - Net loss - - - - - - - - --------- ---------- --------- ---------- --------- ---------- --------- ------ BALANCE, DECEMBER 31, 1997 3,500,000 $4,624,861 3,809,559 $9,187,239 3,636,362 $4,010,957 1,926,118 $1,926 ========= ========== ========= ========== ========= ========== ========= ======
Total Treasury Stock Stock- ---------------------- Additional holders Number of Subscription Paid-in Accumulated Equity Shares At Cost Receivable Capital Deficit (Deficit) ---------- -------- ------------ ------------- ------------- ----------- BALANCE, DECEMBER 31, 1995 - $ - $ - $ 41,281 $ (2,853,263) $ 1,114,691 Issuance of mandatorialy redeemable convertible Series B Preferred Stock, at $2.05 per share, net of issuance costs at $42,693 - - - - (42,693) 7,566,903 Accretion of cummulative dividends on mandatorialy redeemable preferred stock - - - - (956,683) - Net loss - - - - (5,032,165) (5,032,165) ---------- -------- ------------ ------------ ------------- ------------ BALANCE, DECEMBER 31, 1996 - - - 41,281 (8,884,804) 3,649,429 Repurchase of common shares 251,471 (79) - - - (79) Issuance of mandatorialy redeemable convertible Series B Preferred Stock, at $2.05 per share - - - - 200,000 Issuance of mandatorialy redeemable convertible Series C Preferred Stock, at $1.10, net of issuance costs of $95,755 - - (178,868) - (95,755) 3,725,375 Series B warrants issued in connection with notes payable - - - 219,235 - 219,235 Exercise of stock options - - - 12,691 - 12,805 Accretion of cumulative dividends on mandatorialy redeemable preferred stock - - - - (1,131,919) - Net loss - - - - (8,124,841) (8,124,841) ---------- -------- ---------- ----------- ------------- ------------ BALANCE, DECEMBER 31, 1997 251,471 $ (79) $(178,868) $ 273,207 $(18,237,319) $ (318,076) ========== ======== ========== =========== ============= ============
The accompanying notes are an integral part of these financial statements. 5 CORAL THERAPEUTICS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996 ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................... $(8,124,841) $(5,032,165) Adjustments to reconcile net loss to net cash used in operating activities- Depreciation and amortization............ 338,067 295,431 Severance and asset impairment charges... 2,661,121 - Interest expense due to accretion of preferred stock warrants................ 35,072 - Changes in current assets and liabilities, net of acquisitions- Accounts receivable.................. (354,815) (838,547) Inventories.............................. (47,948) (43,539) Other current assets..................... 75,016 (90,703) Accounts payable and accrued expenses.... 636,088 917,220 Noncompete agreements.................... (118,334) 700,000 ------------ ------------ Net cash used in operating activities........................... (4,900,574) (4,092,303) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment......... (202,052) (256,856) Maturity (purchases) of marketable securities................................. 2,215,193 (2,215,193) Increase in other long-term assets.......... (37,180) - Cash paid for acquisitions of blood services companies......................... - (1,472,000) ------------ ------------ Net cash provided by (used in) investing activities................. 1,975,961 (3,944,049) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of mandatorily redeemable convertible preferred stock..... 3,925,375 7,579,403 Borrowings (repayments) under line of credit and notes payable, net.............. 1,326,285 (44,367) Borrowings under capital lease obligations, net........................................ 282,494 18,301 Repurchase of common stock.................. (79) - Proceeds from exercise of stock options..... 12,805 - ------------ ------------ Net cash provided by financing activities......................... 5,546,880 7,553,337 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................. 2,622,267 (483,015) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.. 256,677 739,692 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR........ $ 2,878,944 $ 256,677 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for- Interest.................................... $ 309,975 $ 34,372 ============ ============ SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES: Accretion of dividends on mandatorily redeemable convertible preferred stock..... $ 1,131,919 $ 956,683 ============ ============ Acquisition of equipment under capital lease obligations.......................... $ 405,435 $ 22,492 ============ ============ Preferred stock warrants issued in connection with notes payable.............. $ 219,235 $ - ============ ============
The accompanying notes are an integral part of these financial statements. CORAL THERAPEUTICS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Coral Therapeutics, Inc. (the Company) was incorporated in the state of Massachusetts in May 1992 and reincorporated in the state of Delaware in February 1995. The Company contracts with health care organizations to provide specialized blood services, including cellular and ex-vivo therapies, collection of specific blood components from donors and patients, and management services. The Company has incurred cumulative operating losses of approximately $17,024,000 through December 31, 1997, as the Company has been primarily engaged in raising funds, building its management team, expanding its market share in existing markets and developing new markets. The Company has funded these losses through issuances of equity securities. The Company is subject to risks such as the uncertainty of success in selling its services, competition from other companies, dependence on key individuals and the ability to obtain additional financing. As discussed in Note 8, subsequent to year end, the Company defaulted under its line of credit and the lender foreclosed on certain asets of the Company. Effective October 22, 1998, the lender sold substantially all of the Company's assets to HemaCare Corporation. This transaction resulted in the termination and dissolution of the Company. The accompanying financial statements reflect the application of certain significant accounting policies as described below: (a) Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) Revenue Recognition Revenues are recognized as services are performed. (c) Cash and Cash Equivalents Cash and cash equivalents include money market accounts that have original maturities of less than three months. (d) Marketable Securities The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Company reported its investments at amortized cost, which approximates fair market value. The Company's marketable securities consisted of U.S. Treasury bills and were classified as available-for-sale at the end of 1996. (e) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist primarily of disposable medical supplies. (f) Depreciation and Amortization The Company provides for depreciation by charges to operations in amounts estimated to allocate the cost of the assets ratably over their estimated useful lives on a straight-line basis as follows: Estimated Asset Classification Useful Life ---------------------------------------- ------------- Furniture, fixtures and office equipment 5 years Computer and clinical equipment 3 years Motor vehicles 4 years Leasehold improvements Life of lease Depreciation expense for 1997 and 1996 was approximately $282,000 and $189,000, respectively. (g) Concentration of Credit Risk SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. Financial instruments that subject the Company to credit risk consist primarily of trade accounts receivable. For the year ended December 31, 1997, the Company had two significant customers that represented 26% of total revenue. The Company had one significant customer that represented 14% of total revenue for the year ended December 31, 1996. The number of customers having balances greater than 10% of total accounts receivable was 0 and three as of December 31, 1997 and 1996, respectively. The following schedule summarizes the activity of the Company's accounts receivable reserve for the two years ended December 31, 1997:
Balance at Charged to Beginning of Costs and Balance at Description Period Expenses Write-offs End of Period - - --------------------- ------------ ----------- ---------- -------------- ACCOUNTS RECEIVABLE RESERVE December 31, 1996 $ 48,000 $ - $ - $ 48,000 December 31, 1997 48,000 234,000 23,000 259,000
(h) Accrued Expenses Accounts payable and accrued expenses at December 31, 1996 and 1997 consist of the following: December 31, 1997 1996 ------------ ----------- Trade accounts payable $ 744,000 $ 484,000 Accrued payroll and payroll related 1,064,000 638,000 Accrued other 185,000 235,000 ----------- ----------- $ 1,993,000 $ 1,357,000 =========== =========== (i) Net Loss Per Common Share In 1997, the Company adopted SFAS No. 128, Earnings Per Share, effective December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. The Company has applied the provisions of SFAS No. 128 retroactively to all periods presented. Diluted weighted average shares have not been presented because to do so would have been antidilutive. (j) Recently Issued Accounting Standards In June and July 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, respectively. Both SFAS No. 130 and No. 131 are effective for fiscal years beginning after December 15, 1997. The Company believes that the adoption of these new accounting standards will not have a material impact on the Company's financial statements. (2) SEVERANCE AND ASSET IMPAIRMENT CHARGES The Company had recognized goodwill from the business acquisitions discussed in Note 3, and had been amortizing these assets over their useful lives of 20 years on a straight-line basis. The Company has assessed the realizability of these assets in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed of. The Company evaluated the realizability of its goodwill based on estimated cash flows to be generated from the acquisitions giving rise to this asset. An impairment was identified, and therefore, the Company recognized a write-down of goodwill. Beginning in 1997, the Company implemented a plan to increase the operational efficiency of the Company. As part of this plan, the Company relocated corporate headquarters and terminated 12 employees. The severance and asset impairment charges included in the accompanying statement of operations for the year ended December 31, 1997 consists of the following: 1997 ------------ Charge for write-off of goodwill $ 2,661,121 Charge for employee severance 288,624 ------------ $ 2,949,745 ============ The total cash impact of the severance and asset impairment charges amounted to approximately $289,000. The total cash paid as of December 31, 1997 was approximately $165,000 and the remaining amount will be paid in 1998. (3) ACQUISITIONS OF BLOOD SERVICES COMPANIES During 1996, the Company acquired the assets of four blood services businesses for total consideration of approximately $3,970,000. Consideration for these businesses included payment in cash of $811,000, issuance of notes payable (see Note 7) of $2.5 million and repayment of acquired debt obligations of $452,000. Acquisition and legal expenses incurred amounted to approximately $207,000. The total cash paid in 1996 for acquisitions was approximately $1,472,000, which has been recorded as an investing activity in the accompanying statement of cash flows. In addition, the Company entered into employment or consulting agreements with the former owners of the acquired businesses (see Note 5). These acquisitions have been accounted for as purchase transactions in accordance with the Accounting Principles Board Opinion No. 16, Business Combinations, and results of operations includes the period subsequent to the acquisition in the accompanying statement of operations. The total consideration was allocated between the fair market value of assets acquired on the purchase date and goodwill, with substantially all of the purchase price allocated to goodwill. In 1997, the Company evaluated the realizability of goodwill pertaining to the above acquisitions and determined an impairment was identified. Therefore, the Company recognized a write-down of goodwill in the current period (see Note 2). (4) INCOME TAXES The Company provides for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, a deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Deferred tax expense (benefit) results from the net change in deferred tax assets and liabilities during the year. A deferred tax valuation allowance is required if it is more likely than not that all or a portion of recorded deferred tax assets will not be realized. The approximate tax effect of each type of temporary difference and carryforward that gives rise to the Company's deferred tax asset as of December 31, 1997 and 1996 is as follows: 1997 1996 ------------ ------------ Net operating loss carryforward $ 3,662,000 $ 2,298,000 Goodwill 1,526,000 (19,000) Nondeductible accruals 445,000 602,000 Valuation allowance (5,633,000) (2,881,000) ------------ ------------ Net deferred tax asset $ - $ - ============ ============ The Company has provided a valuation allowance equal to its net deferred tax asset due to the uncertainty regarding its ability to fully utilize this asset. The Company has a federal net operating loss carryforward of approximately $10,771,000, which expires through 2012. The Company's federal net operating loss carryforward differs from the accumulated loss since inception for financial reporting purposes primarily as a result of losses incurred while the Company was an S corporation, the effect of goodwill amortization and the effect of nondeductibel accruals. The Company terminated its S corporation status on October 13, 1994. Pursuant to the Tax Reform Act of 1986, the utilization of net operating loss carryforwards for tax purposes is subject to an annual limitation if a cumulative change of ownership of greater than 50% occurs over any three-year period. (5) COMMITMENTS AND RELATED PARTY TRANSACTIONS (a) Operating Leases The Company leases its facility and certain equipment under operating lease agreements expiring through November 2002. Future minimum rental payments due under these agreements are approximately as follows as of December 31, 1997: 1998 $ 447,000 1999 272,000 2000 170,000 2001 167,000 2002 172,000 ----------- $ 1,228,000 =========== Total rental expense included in the accompanying statements of operations amounted to approximately $362,000 and $212,000 for the years ended December 31, 1997 and 1996, respectively. (b) Capital Leases The Company entered into an equipment lease facility that provides for maximum borrowings of $1,700,000. The Company has $303,925 outstanding on this line as of December 31, 1997. The borrowings consist of three separate notes payable in equal monthly installments over a period of 30 to 42 months with an interest rate of 5.73%-9.17%. The Company issued warrants to purchase 53,902 shares of Series B Preferred Stock at $1.10 per share in connection with this debt, which resulted in a discount of $44,427, of which $38,773 is unamortized at year-end (see Note 7). The Company leases certain equipment under capital leases expiring through March 2002. Future minimum lease payments under these capital lease obligations as of December 31, 1997 are as follows: Year Amount ---- --------- 1998 $ 153,763 1999 136,868 2000 119,435 2001 31,205 2002 9,675 --------- Total minimum lease payments 450,946 Less-Amount representing interest 123,634 --------- 327,312 Less-Current portion of capital leases 90,945 ---------- $ 236,367 ========= (c) Consultant and Employment Agreements The Company has a five-year consulting agreement with the former owner of an acquired blood services company under which it is required to make annual payments to the former owner of amounts based on a certain percentage of the gross revenues of the blood services business, with such payments not to exceed $30,000 per year. The agreement also prohibits the sellers of the assets from conducting business that is in direct competition with services provided by the Company for the term of the consulting agreement and a period of three years thereafter. Concurrent with the acquisitions in 1996 (see Note 3), the Company entered into consulting and employment agreements with the former owners of the acquired businesses. These agreements have terms from one year to four years. In addition, options to purchase a total of 45,000 shares at fair market value were also granted as part of these agreements. As a condition of these former owners' employment by the Company, these individuals will be eligible to receive options to purchase an additional 33,333 shares of the Company's stock at the completion of each of the first two years of employment with the Company and 33,334 shares at the completion of the third year of employment, which will be issued at their fair market value at date of grant. These former owners have also entered into noncompete agreements with the Company in the event their employment is terminated. The Company has a total commitment of $583,333 in connection with these agreements as of December 31, 1997. The Company has employment agreements with certain key employees as of December 31, 1997. In addition to setting forth the terms of employment, these agreements prohibit the employees from conducting business that is in direct competition with services provided by the Company for up to two years following termination. In January 1997, the Company terminated the employment of two key employees. Under the terms of the Employee Noncompetition, Nondisclosure and Management Agreements dated October 13, 1994 with these individuals, the Company is required to pay these two individuals $100,000 each, per year, in 1997 and 1998. This amount is included in general and administrative expenses as of December 31, 1997. Furthermore, the agreement also prohibits the former employees from conducting business that is in direct competition with services provided by the Company for up to two years following termination. (d) Other Commitments As of December 31, 1997 and 1996, the Company has $2,041,200 and $1,646,000, respectively, of clinical equipment on loan from three vendors and one vendor, respectively. This equipment has not been recorded as a fixed asset by the Company since the vendors continue to hold title to the equipment. The Company is obligated to purchase all consumables associated with the operation of this equipment from the vendor; however, there is no minimum purchase commitment specified. The Company has insured the clinical equipment from risk of loss/damage. (6) LINES OF CREDIT On May 28, 1997, the Company entered into a line-of-credit agreement with a lender. The agreement provides for total maximum borrowings of up to $1,800,000, not to exceed 75% of the Company's total eligible accounts receivable, at an interest rate of prime plus 1% (9.5% at December 31, 1997) per annum. The line of credit is secured by all of the Company's accounts receivable and property (which is not already subject to a lien on security interest). The line of credit expires on May 27, 1998. The Company has borrowings under this line of $930,000 as of December 31, 1997. The Company issued warrants to purchase 65,854 shares of Series B preferred stock at $1.10 per share in connection with this debt, which resulted in a discount of $54,278, of which $31,153 was unamortized at year-end (see Note 7). (7) NOTES PAYABLE The following is a listing of the Company's outstanding notes payable as of December 31, 1997 and 1996:
1997 1996 ------------- ------------- Note payable to selling stockholder of Dialysis Apheresis Consultants, Inc. bearing interest at prime rate plus 1% (9.5% at December 31, 1997), with principal payments of $15,000 plus interest due quarterly $ 165,000 $ 225,000 Note payable to selling stockholder of Circulatory Support Services, Inc. bearing interest at prime rate (8.5% at December 31, 1997), with principal payments of $18,125 plus interest due quarterly, secured by the assets acquired and subordinated to any obligations to any bank or financial institutions 145,000 217,500 Note payable to selling stockholder of Norcal Surgical Blood, Inc. bearing interest at 9%, with principal payments commencing with four quarterly principal payments of $137,500 plus interest, followed by fifteen quarterly principal payments of $60,000 plus interest 900,000 1,450,000 Note payable to selling stockholder of Center for Apheresis & Immunology, Inc. bearing interest at prime rate (8.5% at December 31, 1997), with quarterly principal payments of $62,500 plus interest, secured by the assets acquired and subordinated to any bank or financial institutions 375,000 500,000 Present value of non-interest- bearing note payable to selling stockholder of Center for Apheresis & Immunology, Inc. payable in twelve quarterly principal payments of $25,000, secured by the assets acquired and subordinated to any bank or financial institutions, discounted at a rate of 8.25% 217,938 236,504 Note payable to selling stockholder of Apheresis Specialties, Inc. bearing interest at prime rate (8.5% at December 31, 1997) with quarterly principal payments of $5,555 plus interest 61,111 66,666 Note payable to a bank paid in 1997 - 10,433 Notes payable to a financing institution for the purchase of motor vehicles bearing interest ranging from 10.25-10.90% 33,972 56,333 Present value of subordinated note payable to a financing institution bearing interest at 12.5%, payable in thirty-six monthly principal and interest payments of $16,554, less unamortized discount due to warrants (see Note 8) 427,875 - Present value of subordinated note payable to a financing institution bearing interest at 12.5%, payable in thirty-six monthly principal and interest payments of $24,832, less unamortized discount due to warrants (see Note 8) 679,815 - ------------ ----------- 3,005,711 2,762,436 Less-Current portion of notes payable 1,105,717 866,019 ------------ ----------- $ 1,899,994 $ 1,896,417 ============ ===========
The following table summarizes scheduled payments required on all notes payable: Year Amount ---- ------------ 1998 $ 1,105,717 1999 991,743 2000 728,199 2001 180,052 ------------ Total $ 3,005,711 ============ (8) STOCKHOLDERS' EQUITY (DEFICIT) (a) Mandatorily Redeemable Convertible Preferred Stock On October 13, 1994, the Company authorized and issued 3,500,000 shares of $.001 par value Series A mandatorily redeemable convertible preferred stock (Series A Preferred Stock). Series A Preferred Stock is convertible, at any time at the option of the holder, into shares of the Company's $.001 par value common stock at a price of $1.00 per share, subject to certain adjustments. On March 15, 1996, the Company issued 3,711,998 shares of $.001 par value Series B mandatorily redeemable convertible preferred stock (Series B Preferred Stock) at a price of $2.05 per share. On May 28, 1997, the Company authorized and issued an additional 97,561 shares of Series B Preferred Stock at a price of $2.05 per share. Series B Preferred Stock is convertible at any time at the option of the holder into shares of the Company's $.001 par value common stock at a price of $2.05 per share, subject to certain adjustments. On December 21, 1997, the Company authorized and issued 3,636,362 shares of $.001 par value Series C mandatorily redeemable convertible preferred stock (Series C Preferred Stock). Series C Preferred Stock is convertible at any time at the option of the holder into shares of the Company's $.001 par value common stock at a price of $1.10 per share, subject to certain adjustments. Dividends on Series A, Series B and Series C Preferred Stock are cumulative and accrue on a daily basis at a per annum rate of $.10 per share of Series A Preferred Stock, $.205 per share of Series B Preferred Stock and $.11 per share of Series C Preferred Stock. In addition, commencing any time after October 13, 1999 and upon the election of two-thirds of the holders of the outstanding shares of preferred stock, the Company is obligated to redeem all outstanding shares of such stock for $1.00 per share for Series A Preferred Stock, $2.05 per share for Series B Preferred Stock and $1.10 per share of Series C Preferred Stock plus accrued dividends. The accretion of cumulative dividends for Series A, B and C Preferred Stock has been recorded in the accompanying statements of stockholders' equity (deficit). The Series A, Series B and Series C Preferred Stock automatically converts to common stock upon the closing of an underwritten public offering providing the Company with net proceeds of at least $15 million and an initial public offering price of at least $10.00 per share. The conversion rate into common stock for Series A, Series B and Series C Preferred Stock shall be 1- to-1, 1-to-1.25 and 1-to-1, respectively. Upon liquidation of the Company, the Series A, Series B and Series C preferred stockholders are entitled, before any distribution is made to the common stockholders, to be paid $1.00 per share, $2.05 and $1.10 per share, respectively, plus accrued dividends. The preferred stockholders vote, together with the common stockholders, as a single class based on the number of shares of common stock into which the shares convert. As of December 31, 1997, the liquidation preference and redemption value for Series A Preferred Stock was $4,624,861, including cumulative dividends of $1,124,861. As of December 31, 1997, the liquidation preference and redemption value of Series B Preferred Stock was $9,187,239, including cumulative dividends of $1,249,149. As of December 31, 1997, the liquidation preference and redemption value for Series C Preferred Stock was $4,010,957, including cumulative dividends of $20,423. The accompanying balance sheets and statements of stockholders' equity (deficit) state the value of the Series A, B and C Preferred Stock at their liquidation preference and redemption value. (b) Common Stock The Company has 15,536,581 shares of authorized common stock, $.001 par value, of which 1,926,118 shares are issued and 15,088,648 shares are reserved for issuance upon conversion of Series A, Series B and Series C Preferred Stock, warrants and common stock issuance under the Company's stock option plan As of December 31, 1997, the Company had a deficit of 447,933 authorized shares needed in order to sufficiently reserve for the issuance upon conversion of preferred stock, warrants and common stock issuance under the Company's stock option plan. The common stock issued to the Company's officers, employees and consultants vests over various periods up to approximately five years, and the unvested shares are subject to repurchase by the Company, at any time prior to vesting, upon certain defined events. In connection with the termination of two key employees in January 1997 (see Note 5(c)), the Company repurchased 251,471 shares of common stock from one of these individuals at the original issuance price paid by this individual. In January 1998, the Company purchased 251,471 shares of common stock from the other individual at the original issuance price. (c) Stock Option Plan On October 31, 1994, the Company's Board of Directors approved the establishment of the 1994 Stock Option Plan (the Plan). Under the terms of the Plan, the Board of Directors may grant key employees, stockholders and consultants options to purchase approximately 3,000,000 shares of common stock. The Company values option grants to nonemployees using methods defined under SFAS No. 123, Accounting for Stock-Based Compensation. The options generally vest in equal installments of 20% per year over five years and expire on the earlier of 10 years from the date of grant or 30 days following employee termination. A summary of stock option activity for the years ended December 31, 1997 and 1996 is as follows:
Weighted Exercise Average Number of Price per Exercise Shares Share Price ---------- ----------- ---------- Outstanding, December 31, 1995 865,000 $ .10-1.00 $ .12 Granted 436,625 .10-.20 .15 Canceled (35,000) .10 .10 ----------- Outstanding, December 31, 1996 1,266,625 .10-1.00 .13 Granted 1,743,448 .11-1.00 .12 Canceled (560,370) .10-1.00 .14 Exercised (114,049) .10-.20 .11 ----------- Outstanding, December 31, 1997 2,335,654 $ .10-1.00 $ .12 =========== ========== ======= Exercisable, December 31, 1997 327,428 $ .10-1.00 $ .12 =========== ========== ======= In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, which requires the measurement of the fair value of stock options or warrants to be included in the statement of income or disclosed in the notes to the financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the disclosure-only alternative under SFAS No. 123. The Company has computed the pro forma disclosures required for options granted in 1997 and 1996 using the Black- Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions are as follows: December 31, 1997 1996 ------------ ------------ Risk-free interest rate 5.83%-6.86% 6.24% Expected dividend yield - - Expected lives 7 years 7 years Expected volatility - - The effect of applying SFAS No. 123 would increase the Company's net loss by $7,000 and $2,000 in 1997 and 1996, respectively. (d) Warrants In 1997, the Company granted 267,483 warrants to purchase Series B Preferred Stock at a price of $1.10 per share to a noteholder (see Notes 6 and 7). Additionally, the noteholder is entitled to an additional number of warrants equal to 1% of outstanding principal at the same price for each month principal is overdue. These warrants are exercisable for ten years after the date of issuance or five years after the Company's initial public offering, whichever is longer. The value assigned to the warrants, $219,235, is being accounting for as a discount on the debt and is being amortized over the life of the loan. The Company recognized an amortization expense for these warrants of $35,000 during 1997. (9) SUBSEQUENT EVENTS On July 31, 1998, the Company sold substantially all of the assets it acquired in the purchase of Intraoperative Autologous Transfusion Services Business back to its original owner in exchange for the forgiveness of the remaining $780,000 of debt issued as part of the Company's original acquisition. On September 9, 1998, the Company sold substantially all of the assets it acquired in the purchase of Therapeutic Apheresis Services business back to its original owner in exchange for the forgiveness of the remaining $361,667 of debt issued as part of the Company's original acquisition. Subsequent to year-end, the Company defaulted under its lines of credit (Note 6). The lender noticed a foreclosure sale under Article 9 of the Illinois Uniform Commercial Code. Effective October 22, 1998, HemaCare Corporation made an offer to the lender, which the lender accepted, resulting in the sale of substantially all of the Company's assets by the lender to HemaCare Corporation for $950,000 in cash and 450,000 shares of HemaCare's Series B senior convertible preferred stock. This transaction resulted in the termination and dissolution of the Company by the lender.
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