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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-15223
HEMACARE CORPORATION
(Exact name of registrant as specified in its charter)
State or other jurisdiction of I.R.S. Employer I.D.
incorporation or organization: California Number: 95-3280412
---------- ----------
4954 Van Nuys Boulevard
Sherman Oaks, California 91403
(Address of principal executive offices) (Zip Code)
___________________
Registrant's telephone number, including area code: (818)986-3883
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: YES X NO ____
As of August 12, 1996, 5,962,515 shares of Common Stock of the Registrant
were issued and outstanding.
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<PAGE> 2
INDEX
HEMACARE CORPORATION
The undersigned registrant hereby amends the following items,
financial statements, exhibits or other portions of its Quarterly
Report for the fiscal quarter ended June 30, 1996 on Form 10-Q as set
forth in the pages attached hereto:
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits
These adjustments are being made to reflect the cumulative effects of
an adjustment in materials inventory, related to a prior period, that
was made in the first quarter of 1996.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date February 10, 1997 HEMACARE CORPORATION
---------------------
By: /s/ Sharon C. Kaiser
--------------------------
Sharon C. Kaiser, Vice
President, Finance and Chief
Financial Office
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
1996 1995
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 996,000 $ 997,000
Accounts receivable, net of
allowance for doubtful
accounts - $93,000 (1996) and
$95,000 (1995) 1,331,000 1,627,000
Product inventories 149,000 141,000
Supplies 245,000 328,000
Prepaid expenses 248,000 117,000
Note receivable from officer
- current 15,000 15,000
------------- -------------
Total current assets 2,984,000 3,225,000
Plant and equipment, net of
accumulated depreciation and
amortization of $1,693,000 (1996)
and $1,513,000 (1995) 962,000 1,051,000
Note receivable from officer -
non-current 83,000 94,000
Other assets 100,000 87,000
------------- -------------
$ 4,129,000 $ 4,457,000
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 532,000 $ 473,000
Accrued blood purchases 248,000 252,000
Accrued payroll and payroll taxes 355,000 310,000
Other accrued expenses 237,000 239,000
Current obligations under
capital leases 219,000 209,000
Line of credit payable 300,000 -
Reserve for discontinued
operations - current 392,000 336,000
------------- -------------
Total current liabilities 2,283,000 1,819,000
Obligations under capital leases,
net of current portion 639,000 649,000
Other accrued expenses - long term 173,000 163,000
Reserve for discontinued operations
- non-current 600,000 600,000
Commitments and contingencies - -
------------- -------------
Total Liabilities 3,695,000 3,231,000
Shareholders' equity:
Common stock, without par value
- 20,000,000 shares authorized,
5,961,683 and 5,911,285 issued
and outstanding in 1996 and
1995, respectively 12,313,000 12,179,000
Accumulated deficit (11,879,000) (10,953,000)
------------- -------------
Total shareholders' equity 434,000 1,226,000
------------- -------------
$ 4,129,000 $ 4,457,000
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 4
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
------------ ------------ ----------- -----------
Blood products $ 1,712,000 $ 1,642,000 $ 3,397,000 $ 3,351,000
Blood services 967,000 881,000 2,092,000 1,858,000
------------ ------------ ------------ ------------
Total revenues 2,679,000 2,523,000 5,489,000 5,209,000
Operating costs and expenses:
Blood products 1,797,000 1,343,000 3,662,000 2,618,000
Blood services 697,000 600,000 1,491,000 1,279,000
------------ ------------ ------------ ------------
Total operating costs
and expenses 2,494,000 1,943,000 5,153,000 3,897,000
------------ ------------ ------------ ------------
Gross profit 185,000 580,000 336,000 1,312,000
General and administrative
expense 599,000 472,000 1,235,000 962,000
Interest (income) expense:
Interest income (5,000) (11,000) (14,000) (26,000)
Interest expense 21,000 20,000 41,000 28,000
----------- ------------ ------------ ------------
Income from continuing
operations before income
taxes (430,000) 99,000 (926,000) 348,000
Provision for income taxes - - - -
Discontinued operations:
Loss from discontinued
operations - (238,000) - (535,000)
----------- ------------ ----------- ------------
Net loss $ (430,000) $ (139,000) $ (926,000) $ (187,000)
=========== ============ =========== ============
Per share amounts:
Income from continuing
operations $ (0.07) $ 0.02 $ (0.15) $ 0.06
Discontinued operations:
Loss from discontinued
operations - (0.04) - (0.09)
----------- ------------ ----------- ------------
Net loss $ (0.07) $ (0.02) $ (0.15) $ (0.03)
=========== ============ =========== ============
Weighted average common
and common equivalent
shares outstanding 6,149,905 5,634,480 6,125,751 5,512,930
=========== ============ =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE> 5
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Six months ended June 30,
1996 1995
----------- -----------
Cash flows from operating
activities:
Net loss $ (926,000) $ (187,000)
Adjustments to reconcile
net loss to net cash
used in operating activities:
Depreciation and amortization 169,000 258,000
Provision for losses on accounts
receivable - 30,000
Changes in operating assets and
liabilities:
Decrease in accounts receivable 296,000 437,000
Increase in inventories, supplies
and prepaid expenses (56,000) (201,000)
Increase in other assets, net (13,000) (2,000)
Increase (decrease) in accounts
payable and accrued expenses 98,000 (459,000)
Increase (decrease) in other
accrued expenses - long term 10,000 (43,000)
Net profit on discontinued
operations 56,000 -
----------- -----------
Net cash used in operating
activities (366,000) (167,000)
------------ -----------
Cash flows from investing activities:
Decrease (increase) in note
receivable from officer 11,000 (13,000)
Decrease in short-term investments - 295,000
Purchase of plant and equipment, net (89,000) (41,000)
----------- -----------
Net cash (used in) provided by
investing activities (78,000) 241,000
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock 134,000 560,000
Proceeds from line of credit 300,000 -
Principal payments on line of credit
and capital leases (91,000) (71,000)
----------- -----------
Net cash provided by financing
activities 343,000 489,000
----------- -----------
Increase (decrease) in cash and
cash equivalents (101,000) 562,000
Cash and cash equivalents at beginning
of period 997,000 786,000
----------- -----------
Cash and cash equivalents at end of
period $ 896,000 $1,348,000
=========== ===========
Supplemental disclosure:
Interest paid $ 41,000 $ 28,000
=========== ===========
Items not impacting cash flows:
Increase in capital lease
obligations $ 91,000 $ 167,000
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
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<Page 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 six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1996. Certain 1995 amounts have been
reclassified to conform to the 1996 presentation. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
From 1990 to November 1995, the Company, through its wholly owned
subsidiary, HemaBiologics, Inc. ("HBI"), conducted research and
development of ImmupathTM, an anti-HIV hyperimmune plasma-based
product intended to be used in the treatment of Acquired Immune
Deficiency Syndrome ("AIDS"). The Company had a license agreement
with Medicorp, Inc. ("Medicorp") for the rights to the United
States patent to commercialize Immupath. In November 1995, the
Company's Board of Directors decided to discontinue the operations
of HBI. (Notes 2 and 5).
In September 1995, the Company formed Gateway Community Blood
Program, Inc. ("Gateway"), a wholly owned subsidiary incorporated
in Missouri, to provide blood products and services in portions of
Missouri and Illinois. In June 1996, Gateway's operational focus
was redirected to providing autologous and directed blood donation
services and single donor platelet products to specific hospital
customers.
The Company opened its University of Southern California Blood
Center ("USC Blood Center"), a full-service blood donation and
services facility, in February 1996. The USC Blood Center facility
is leased from USC and is staffed and operated by HemaCare under
its Food and Drug Administration ("FDA") license. Located on the
USC Health Sciences Campus in Los Angeles, California, the center
provides services to the USC/Norris Comprehensive Cancer Center and
Hospital and the USC University Hospital (the "USC Hospitals").
The USC Hospitals have agreed that HemaCare will be their primary
provider of blood products and therapeutic services for the
three-year period ending February 1999. Pathologists on the USC
medical faculty provide medical direction services for the USC
Blood Center as consultants to the Company.
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<PAGE> 7
Note 2 - Discontinued Operations
In November 1995, the Company's Board of Directors decided to
discontinue the operations of HBI, including the research and
development of Immupath and the associated specialty plasma
business. In connection with this decision, the Company wrote off
the remaining book value of HBI's assets and provided a reserve for
estimated operating losses from the November 30, 1995 measurement
date through December 1996, the expected date of substantial
completion of disposal. The loss on the disposition of HBI's
operations has been accounted for as discontinued operations, and
prior year financial statements have been restated to reflect the
discontinuation of these operations. The net loss from such
operations for the three months ended June 30, 1995 was $238,000.
For the three-month and six-month periods ended June 30, 1996, the
Company's reserve for discontinued operations increased by $137,000
and $56,000, respectively, as the result of favorable variance in
estimated operating losses. A reserve in the amount of $1,035,000
was established for estimated HBI operating losses during the
period of disposal. Included in this reserve was $600,000 for the
resolution of contingent liabilities in connection with the
Medicorp license agreement and Medicorp warrants, none of which
will be required to be applied for this purpose. (See Note 5). The
Company has been actively pursuing a sale of HBI's research and
development and associated specialty plasma assets, and in June
1996, the Company signed an amended agreement to sell substantially
all the tangible assets of the discontinued operations and two of
the three remaining FDA source plasma licenses. Final closing of
the sale is contingent upon obtaining FDA approval to transfer the
licenses to the purchaser and certain other conditions. Although
subject to a number of factors beyond the Company's control,
management believes that the disposal of the remainder of the
discontinued HBI operations will be substantially completed during
the third or fourth quarter of 1996.
Note 3 - Line of Credit
Since August 1991, the Company has maintained a line of credit with
a commercial bank secured by its accounts receivable, inventory and
equipment. Effective May 1, 1996, the credit line was renewed
through April 30, 1997. Under the terms of the new credit line
agreement, the Company may borrow up to 70% of eligible accounts
receivable, up to a maximum of $700,000 and must maintain certain
ratios, including Working Capital, defined, of $500,000 and a
tangible net worth of not less than $370,000 prior to September 30,
1996 and not less than $2 million thereafter. At June 30, 1996,
the Company's defined working Capital was $500,000. The credit
line agreement also requires that the Company achieve defined
operating objectives in order to make loan draws. Although the
Company was in compliance with all covenants of its borrowing
agreement at June 30, 1996, but further borrowing is restricted due
to the failure to achieve the defined operating objectives, until
tangible net worth of $2 million is achieved. In order to comply
with the tangible net worth covenant after September 1996, the
Company will be required to increase its shareholders' equity
through the sale of additional equity securities. Interest on
credit line borrowings is at the lender's prime rate (8.25% at June
30, 1996) plus one-half of a percentage point. As of June 30,
1996, $300,000 was outstanding under the line of credit.
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<PAGE> 8
Note 4 - Shareholders' Equity
In April 1994, HemaCare sold 250,000 units consisting of one share
of common stock and three warrants to purchase additional shares
(at $4.00 per unit) in an offshore transaction, from which it
received net proceeds of approximately $900,000. The second group
of 250,000 warrants was fully exercised in the first quarter of
1995 and yielded net proceeds of approximately $350,000. In
consideration of this exercise, which was made 45 days prior to the
expiration date, a fourth group of 250,000 warrants exercisable at
a price of $3.50 per share and expiring in December 1998 was
granted to the purchaser. The third group of 250,000 warrants was
exercised in June and July 1995, yielding net proceeds of
approximately $390,000. The fourth group of options remains
outstanding at June 30, 1996. In connection with the sale of the
units and the subsequent exercise of related warrants, the Company
granted to the finder warrants to purchase 50,000 shares of the
Company's common stock (the "Finder Warrants"). The Finder
Warrants expire five years from their issue date and are
exercisable at prices ranging from $1.45 to $4.00. Up to 12,500
additional Finder Warrants may be issued at $3.50 per share,
depending on the number of the fourth group of 250,000 warrants
which are exercised.
In November 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock Based Compensation" ("SFAS 123"). SFAS 123 recommends
changes in accounting for employee stock based compensation plans
and requires certain disclosures with respect to these plans. The
Company will adopt SFAS 123 prior to December 31, 1996.
Note 5 - Commitments and Contingencies
On March 11, 1994, the Company was served with a lawsuit filed by a
former employee against the Company and its wholly owned
subsidiary, HBI, in the Superior Court of the State of California,
related to the termination of this employee and seeking relief in
the amount of $550,000. At this stage in the proceedings, neither
management nor counsel are in a position to evaluate the probable
merits of the claim asserted by this former employee. Accordingly,
the resolution of this lawsuit could have a material impact on the
Company's financial conditions and results of operations.
In September 1995, the Company entered into a letter of intent to
make royalty payments to certain parties in consideration of
certain commitments to the establishment of Gateway. The definitive
agreement providing for the payment of these royalties has not been
completed due to a dispute with one of the parties, which is now
the only remaining party who may be entitled to royalty payments.
The letter of intent provides for cash royalties of up to 20% of
Gateway's cash flow, as defined, and shares of HemaCare common
stock with a value equal to the cash royalty, up to a maximum of
500,000 shares of HemaCare common stock. If a definitive royalty
agreement is entered into, royalty payments would commence after
the Company recovers its initial investment in Gateway, including
capital expenditures and operating deficits, and terminate in 2003.
In November 1995, the Company terminated its license agreement with
Medicorp (Note 1) due to a default by the license holder. The
Company also notified Medicorp that the stock purchase warrants
(exercisable for 400,000 shares of HemaCare common stock at $5.50
per share) issued by the Company to Medicorp had terminated under
8
<PAGE> 9
their terms, due to the default. Medicorp denied that it had
breached the license agreement and alleged that the Company was
liable for royalties under the license agreement of approximately
$425,000 and that its warrants remain outstanding. On July 19,
1996, the Company and Medicorp Inc. entered into a settlement
agreement and mutual release resolving all disputes between them
related to their February 1993 license agreement. In the Medicorp
settlement agreement, the parties agreed (i) to terminate the
license agreement, (ii) to mutually release each other from all
prior monetary and other breaches of the license agreement, (iii)
that the Medicorp warrants would remain outstanding and exercisable
and (iv) that the Company would grant a nonexclusive royalty-free
license to Medicorp to certain research data and other
documentation associated with the Immupath project. The Medicorp
settlement agreement does not require any monetary settlement
payments by either party.
In February 1996, the Company terminated an agreement with a
vendor, based on an unsatisfactory level of performance of the
vendor's product. The vendor is disputing the basis for the
termination. The Company intends to vigorously defend any legal
action which may result from this dispute, and the resolution of
this matter is not expected to have a material impact on the
Company's financial position or results of operations.
Note 6 - Related Party Information
In 1995 and 1994, the Company made a series of personal loans to
Joshua Levy, then an officer and director of the Company, totaling
$98,307. The proceeds of these loans were used to refinance
existing debt which was collateralized by HemaCare stock owned by
Dr. Levy. In January 1996, these individual notes were
consolidated into a promissory note, collateralized by HemaCare
stock owned by Dr. Levy, which accrues interest at a rate equal to
the rate the Company pays under its line of credit (Note 3),
adjusted quarterly. Interest accrued related to the loans made to
Dr. Levy for the quarters ended June 30, 1996 and 1995 was $2,112
and $2,426, respectively. The note requires four annual
installment payments of $15,000 due on January 31, with the balance
of the principal and accrued interest due on January 31, 2000. The
Company received its first annual installment payment of $15,000 in
January 1996.
Note 7 - Recent Auditing Pronouncement
In the first quarter of 1996, the Company adopted Statement of
Financial Auditing Standards no. 121 "Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed Of"
("SFAS 121"). The adoption of SFAS 121 did not impact the Company's
financial, position or its results of operations.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Comparison of the Quarter and Six Months ended June 30, 1996 and
1995.
All comparisons within the following discussions are to the same
period of the previous year. In late December 1995, the Gateway
Community Blood Program ("Gateway") opened in St. Louis, Missouri.
The University of Southern California (USC) Blood Center, located
in Los Angeles, California, opened in late February 1996. These
new operations are collectively referred to as the "Expansion
Operations" in the following discussions.
Revenues and Operating Profit
Revenues for the three and six month periods ended June 30, 1996,
increased 6% ($156,000) and 5% ($280,000), respectively. The
Company's operating profit as a percentage of sales ("profit
margin") decreased to 7% in the three month period and 6% in the
six month period of 1996 from 23% in the three month period and
25% in the six month period of 1995, due to start-up losses
incurred by the Expansion Operations. Operating losses from
Expansion Operations were $420,000 for the three months and
$979,000 for the six months ended June 30, 1996. The Company's
profit margin before the effect of the Expansion Operations was 26%
for the three month period and 24% for the six month period ended
June 30, 1996.
Blood Products
Blood product revenue increased by 4% for the three months and 1%
for the six months ended June 30, 1996. The increases were due to
revenue from Expansion Operations, partially offset by a decrease
in revenue from other product sales, primarily due to a lower
volume of platelet sales. Platelet sales volumes declined by 12%
in the three month and 13% in the six month period of 1996,
primarily due to competitive pressures.
The blood product operating costs and expenses exceed blood product
revenue for the 1996 three and six month periods due to the
Expansion Operations. Before the effect of the Expansion
Operations, the blood product profit margin increased to 24% for
the second quarter 1996 as compared to 18% in 1995 and to 23% for
the 1996 six months as compared to 22% in 1995. The higher 1996
profit margins were due to (1) a decrease in the percentage of
lower margin, imported products sold and (2) a higher ratio of
products produced per donation, in the 1996 quarter.
Blood Services
For the three-month and six-month periods ended June 30, 1996,
blood services revenues increased 10% ($86,000) and 13% ($234,000),
respectively, primarily as a result of an 8% increase in the number
of therapeutic procedures performed in both periods. The second
quarter 1996 increase in procedures was comprised of a 9% increase
in Los Angeles partially offset by a 16% decrease in Atlanta. The
Atlanta operation was closed in July 1996.
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<PAGE> 11
The profit margin on blood services decreased to 28% in the second
quarter of 1996 from 32% in the comparable period of 1995. Blood
services profit margin for the first six months of 1996 was 29%
compared to 31% for the first six months of 1995. The 1996
decreases were primarily due to the decline in Atlanta business.
General and Administrative Expense
General and administrative expense increased 27% ($127,000) for the
three months and 28% ($273,000) for the six months ended June 30,
1996. The increase was primarily due to changes in the Company's
corporate structure initiated in late 1995, in conjunction with its
national expansion strategy, including the addition of a business
development department. However, since the timing of additional
expansion is currently uncertain and dependent upon improved
operating performance and increased capitalization, the Company
recently implemented a plan to reduce general and administrative
expense. (See "Liquidity and Capital Resources")
Discontinued Operations
In November 1995, the Company discontinued its Immupath related
research and development activities and established a $1 million
reserve for losses during the disposal period, including $600,000
for a contingent liability related to a dispute with Medicorp, a
license holder. The reserve amount is net of the expected proceeds
to be realized from the sale of research and development assets.
To date, results of the disposal have been more favorable than
expected. In June 1996, the Company signed an amended agreement to
sell most of its research and development assets. In July 1996, the
Medicorp dispute was settled without any payment by the Company.
The asset sale is expected to close in the third or fourth quarter
of 1996, at which time the disposal of the discontinued operations
will be substantially complete. If at that time the remaining
reserve exceeds any estimated residual costs of disposition, the
Company will reduce its liabilities by the amount of the remaining
reserve for disposal, including the amount provided for settlement
of the dispute with the license holder, and increase its net income
and retained earnings in a corresponding amount. Although
management expects that the reserve will exceed the disposal costs,
there can be no assurance of this or that the reserve provided will
exceed or be sufficient to cover all disposal costs. (See
"Liquidity and Capital Resources")
Liquidity and Capital Resources
At June 30, 1996, the Company had cash and cash equivalents of
$996,000 and working capital of $748,000. The Company's blood
products and services businesses, other than the Expansion
Operations, are profitable and cash flow positive. Effective
August 1, 1996, the Company reduced many of its product prices, as
a part of its overall marketing strategy. The price reductions are
expected to increase the number of products sold. However, profit
margins on these products will be reduced. To offset the effect of
the price reductions and increase the overall profitability of its
operations, the Company implemented the following cost reduction
and control measures beginning in June 1996:
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<PAGE> 12
- - Closing of the Atlanta-based therapeutic services business
which did not achieve sustained profitability.
- - Reorganization of Los Angeles-based operations to increase
efficiency and reduce costs. Operation of the collection,
testing, manufacturing and distribution departments were
reevaluated and rescheduled to reduce personnel costs.
- - Reduction of general and administrative expenses.
Personnel-related and other costs were critically reviewed,
resulting in a significant overall reduction in these
expenses.
The Company has a $700,000 line of credit with a commercial bank
which is in effect through April 30, 1997. Under the terms of the
new credit line agreement, the Company may borrow up to 70% of
eligible accounts receivable, up to a maximum of $700,000 and must
maintain certain ratios, including Working Capital, defined, of
$500,000 and a tangible net worth of not less than $370,000 prior
to September 30, 1996 and not less than $2 million thereafter. At
June 30, 1996, the Company's defined working Capital was $500,000.
The credit line agreement also requires that the Company achieve
defined operating objectives in order to make loan draws. Although
the Company was in compliance with all covenants of its borrowing
agreement at June 30, 1996, further borrowing is restricted due to
the failure to achieve the defined operating objectives, until
tangible net worth of $2 million is achieved. In order to comply
with the tangible net worth covenant after September 1996, the
Company will be required to increase its shareholders' equity
through the sale of additional equity securities. The Company is
implementing a compliance plan, but no assurance can be given that
this plan will be completed on a timely basis or at all and, if
completed, will result in one or more financing transactions
adequate to satisfy the credit line covenants. At June 30, 1996,
$300,000 was outstanding on the credit line.
The Company's common stock is listed on the NASDAQ SmallCap Market.
To maintain that listing, the Company's "capital and surplus," as
defined, must be at least $1 million. At June 30, 1996, the
Company had capital and surplus of approximately $481,000. NASDAQ
has granted the Company an exception to the capital and surplus
requirement, subject to completing certain steps to increase its
capital and surplus to $2 million by August 16, 1996. On July 19,
1996, the Company resolved a dispute which is expected to result in
a $600,000 increase in its capital and surplus on a pro forma basis
(See "Discontinued Operations"). The Company is pursuing a plan to
meet the $2 million capital and surplus requirement. However,
there can be no assurance that the Company can complete the
required steps by August 16, 1996 or at all. If the Company's stock
is no longer listed on NASDAQ's SmallCap Market or a national
securities exchange, the Company's ability to raise capital may be
impaired.
The USC Blood Center serves the USC/Norris Comprehensive Cancer
Center and Hospital and the USC University Hospital (the
"Hospitals"). The USC Blood Center operates under the terms of the
Company's three-year agreements with the USC Hospitals. These
agreements designate the Company as the primary provider of blood
products and services to the Hospitals, and the Company is entitled
to recoup the cost of tenant improvements for the USC Blood Center
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<PAGE> 13
through surcharges to the Hospitals. On an overall basis, this is a
profitable arrangement for the Company, which is currently
supplying most of the Hospitals' blood product needs from sources
other than donations at the USC Blood Center. On a stand-alone
basis, the USC Blood Center is experiencing start up losses, in
accordance with original expectations. When the USC Blood Center
reaches stabilized operations, it is expected to be a profitable,
stand-alone operation. To date, blood donations made at the USC
Blood Center have been primarily autologous or directed. To achieve
a profitable level of operations, allogeneic donations (donated for
general use) of platelets and whole blood must be increased. The
Company is attempting to increase allogeneic donations through a
platelet donor recruitment program and the initiation of blood
drives. However, there can be no assurance that the Center will be
able to achieve and maintain a profitable level of stand-alone
operations.
Gateway opened for business and began conducting blood drives in
December 1995. In June 1996, Gateway's operations were redirected
from predominantly mobile blood drives, in which efforts the
Company competed directly with the American Red Cross (the "ARC")
on a regional basis, to a more profitable mix of blood products and
services provided for specific hospital customers. As a result, the
cost of Gateway's operations were reduced, including a substantial
reduction in personnel. The Company believes that Gateway's new
strategy will result in a profitable level of donations and
revenue. However, the success of Gateway's operations will be
dependent on a number of factors and circumstances, many of which
will be outside the Company's control. Accordingly, there can be
no assurance that profitable operations will be achieved. If
profitable operations are not achieved, Gateway will be closed.
The costs of such a closure are not expected to be material to the
Company's overall results of operations.
In many instances, the Company competes against the ARC in
providing its products and services to health care institutions.
To date, the ARC has aggressively responded to competition from the
Company and management believes that such completion will continue.
In southern California, the Los Angeles Region Blood Service of the
American Red Cross (the "Los Angeles ARC") employs pricing
practices which the Company has alleged violate antitrust laws.
These pricing practices may compel ARC customers to purchase
certain blood products from the ARC at higher prices than those
offered by the Company. In December 1995, the Company filed an
antitrust and unfair competition complaint against the Los Angeles
ARC with the United States District Court in the Central District
of California to recover damages and secure injunctive relief. In
response to the complaint, the ARC filed a motion to dismiss which
was partially rejected by the Court. A February 1997 trial date
has been set. The Company cannot predict the outcome of this
lawsuit at this time.
In St. Louis, prior to the opening of Gateway, the ARC provided
virtually all blood products to hospitals in the greater St. Louis
area. Immediately following the opening of Gateway, the ARC
decreased its price for red blood cells in excess of 10%. This
price decrease materially impacted Gateway's ability to market its
products and was largely responsible for the redirection of
Gateway's operations.
Management is evaluating a number of opportunities to expand its
operations by packaging the Company's capabilities in a blood
management program (the "Blood Management Program") that responds
to and solves customers' problems. The USC Blood Center program is
a prototype of this approach, which enables a hospital to gain
13
<PAGE> 14
control over its blood utilization and costs by providing the
benefits of an in house blood program without the associated
regulatory and management burdens and financial risks. The
Company's blood management programs are being marketed to:
- - Existing customers in Southern California and St. Louis
metropolitan area who are buying various blood products and
services from the Company in a traditional buyer-vendor
relationship and
- - Potential customers who either have their own blood programs
which they prefer to out source or have traditional blood
vendors who are not meeting their needs.
Further expansion will require that the Company obtain additional
financing and overcome its competitors, which in many instances,
will be the ARC. Accordingly, there can be no assurance that the
Company will be successful in marketing its blood management
programs or that, if successful, it will be able to obtain the
funds necessary to finance such programs.
In November 1995, the Company's Board of Directors decided to
discontinue HBI's operations. This decision resulted in a write off
of assets in the amount of approximately $2.1 million and the
provision of a $1 million reserve for losses during the disposal
period.
To date, results of the disposal have been more favorable than
expected. Approximately $56,000 of the reserve was funded in the
six months ended June 30, 1996, net of amounts received from asset
sales. In June 1996, the Company signed an amended agreement to
sell most of its research and development assets. The asset sale
is expected to close in the third or fourth quarter of 1996.
However closure of the sale is contingent upon obtaining FDA
approval to transfer certain of the assets to the purchaser and
certain other conditions. Should the FDA fail to approve the
transfer, the Company would be obligated to return a portion of
sales proceeds paid by the purchaser in June 1996. (See
"Discontinued Operations")
On March 11, 1994, the Company was served with a lawsuit filed by a
former employee against the Company and its wholly owned
subsidiary, HBI, in the Superior Court of the State of California,
related to the termination of this employee and seeking relief in
the amount of $550,000. The case is still in the discovery stage
in the proceedings and neither management nor counsel are in a
position to evaluate the probable merits of the claim asserted by
this former employee. Accordingly, the resolution of this lawsuit
could have a material impact on the Company's financial condition
and results of operations.
In February 1996, the Company terminated an agreement with a
vendor, based on the inability of the vendor's product to perform
to the standards outlined in the agreement. The vendor is
disputing the basis for the termination, and the parties are
discussing a negotiated settlement. However, if an acceptable
settlement can not be achieved, the Company intends to vigorously
defend any legal action which may result from the dispute. In
either event, the resolution of this matter is not expected to have
a material impact on the Company's financial position or future
results of operations.
The Company anticipates that positive cash flow from its profitable
operations and its cash and investments on hand will be sufficient
14
<PAGE> 15
to provide funding for the anticipated operating deficits of the
Expansion Operations and, if necessary, the closure of Gateway,
fund the remaining costs of disposing of its discontinued
operations and meet its other working capital needs for the next 12
months.
Factors Affecting Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" from liability for forward-looking statements.
Certain information included in this Form 10-Q and other materials
filed or to be filed by the Company with the Securities and
Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by or on
behalf of the Company) are forward-looking, such as statements
relating to operational and financing plans, competition, the
completion of the disposal of research and developments assets,
demand for the Company's products and services, and the anticipated
outcome of contingent claims against the Company. Such forward
looking statements involve important risks and uncertainties, many
of which will be beyond the control of the Company. These risks
and uncertainties could significantly affect anticipated results in
the future, both short-term and long-term, and accordingly, such
results may differ from those expressed in forward-looking
statements made by on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to
the ability of the Company to increase its shareholders' equity
through the sale of equity securities, to achieve profitability in
either or both of its Expansion Operations, to improve the
profitability of the Company's other operations, to expand its
operations, to comply with the covenants under its bank line of
credit, to effectively compete against the ARC and other
competitors, to complete the sale of the Company's research and
development assets on contracted terms and to resolve favorably
through negotiation or litigation claims asserted against Company.
Each of these risks and uncertainties as well as others are
discussed in greater detail in the preceding paragraphs of this
Management's Discussion and Analysis of Financial Condition and
Results of Operations and in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule for the Quarter Ending
June 30, 1996.
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
Method of Filing
----------------
27 Financial Data Schedule for the quarter ending
June 30, 1996 .. . . . . . . . . . . . . . Filed herewith electronically
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from unaudited financial
statements contained in Form 10-Q for the quarter ending June 30, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 995,626
<SECURITIES> 0
<RECEIVABLES> 1,424,820
<ALLOWANCES> 93,438
<INVENTORY> 149,495
<CURRENT-ASSETS> 2,984,501
<PP&E> 2,654,979
<DEPRECIATION> 1,693,377
<TOTAL-ASSETS> 4,128,950
<CURRENT-LIABILITIES> 2,282,672
<BONDS> 0
0
0
<COMMON> 12,312,933
<OTHER-SE> (11,878,539)
<TOTAL-LIABILITY-AND-EQUITY> 4,128,950
<SALES> 2,678,816
<TOTAL-REVENUES> 2,678,816
<CGS> 2,494,142
<TOTAL-COSTS> 2,494,142
<OTHER-EXPENSES> 599,052
<LOSS-PROVISION> 93,438
<INTEREST-EXPENSE> 21,234
<INCOME-PRETAX> (430,249)
<INCOME-TAX> 0
<INCOME-CONTINUING> (430,249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (430,249)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
