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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 September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-15223
HEMACARE CORPORATION
(Exact name of registrant as specified in its charter)
State or other jurisdiction of I.R.S. Employer I.D.
incorporation or organization: California Number: 95-3280412
---------- ----------
4954 Van Nuys Boulevard
Sherman Oaks, California 91403
(Address of principal executive offices) (Zip Code)
___________________
Registrant's telephone number, including area code: (818)986-3883
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days: YES X NO ___
As of November 13, 1996, 7,177,515 shares of Common Stock of the
Registrant were issued and outstanding.
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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 September 30, 1996 on Form 10-Q as
set forth in the pages attached hereto:
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits
These adjustments are being made to reflect the cumulative effects of
an adjustment in materials inventory, related to a prior period, that
was made in the first quarter of 1996 and to reflect a gain on
disposal of discontinued operations resulting from the resolution of a
contingent liability in July 1996.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date February 10, 1997 HEMACARE CORPORATION
-----------------
By: /s/ Sharon C. Kaiser
-------------------------
Sharon C. Kaiser, Vice
President, Finance and
Chief Financial Officer
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<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1996 1995
------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,369,000 $ 997,000
Accounts receivable, net of
allowance for doubtful
accounts - $88,000 (1996) and
$95,000 (1995) 1,690,000 1,627,000
Product inventories 142,000 141,000
Supplies 297,000 328,000
Prepaid expenses 199,000 117,000
Note receivable from officer
- current 15,000 15,000
------------- -------------
Total current assets 3,712,000 3,225,000
Plant and equipment, net of
accumulated depreciation and
amortization of $1,788,000 (1996)
and $1,513,000 (1995) 870,000 1,051,000
Note receivable from officer
- non-current 86,000 94,000
Other assets 98,000 87,000
------------- -------------
$ 4,766,000 $ 4,457,000
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 721,000 $ 473,000
Accrued blood purchases 230,000 252,000
Accrued payroll and payroll taxes 247,000 310,000
Other accrued expenses 227,000 239,000
Current obligations under capital
leases 234,000 209,000
Reserve for discontinued
operations - current 345,000 336,000
------------- -------------
Total current liabilities 2,004,000 1,819,000
Obligations under capital leases,
net of current portion 557,000 649,000
Other accrued expenses - long-term 187,000 163,000
Reserve for discontinued operations
- non-current - 600,000
Commitments and contingencies
Shareholders' equity:
Common stock, without par value -
20,000,000 shares authorized,
7,176,683 and 5,911,285 issued
and outstanding in 1996 and 1995,
respectively 13,468,000 12,179,000
Accumulated deficit (11,450,000) (10,953,000)
------------- -------------
Total shareholders' equity 2,018,000 1,226,000
============= =============
$ 4,766,000 $ 4,457,000
============ =============
</TABLE>
3
See Notes to Consolidated Financial Statements.
<PAGE> 4
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
Revenues: -------------- -------------- ------------- ---------------
Blood products $ 1,645,000 $ 1,752,000 $ 5,041,000 $ 5,103,000
Blood services 981,000 963,000 3,073,000 2,821,000
------------- ------------- ------------- -------------
Total revenues 2,626,000 2,715,000 8,114,000 7,924,000
Operating costs and expenses:
Blood products 1,621,000 1,318,000 5,282,000 3,887,000
Blood services 641,000 638,000 2,132,000 1,966,000
------------- ------------- ------------- -------------
Total operating costs
and expenses 2,262,000 1,956,000 7,414,000 5,853,000
------------- ------------- ------------- -------------
Operating profit 364,000 759,000 700,000 2,071,000
General and administrative
expense 529,000 499,000 1,759,000 1,461,000
Interest expense 7,000 3,000 39,000 5,000
------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income
taxes (172,000) 257,000 (1,098,000) 605,000
Provision for income taxes - - - -
Discontinued Operations:
Loss from discontinued
operations - (232,000) - (767,000)
Gain on disposal of discontinued
operations 600,000 - 600,000 -
------------- ------------- ------------- -------------
Net income (loss) $ 428,000 $ 25,000 $ (498,000) $ (162,000)
============= ============= ============= ==============
Per share amounts:
Income (loss) from
continuing operations $ (0.02) $ 0.04 $ (0.17) $ 0.11
Discontinued Operations:
Loss from discontinued
operations - (0.04) - (0.14)
Gain on disposal of
discontinued operations 0.09 - 0.09 -
------------- ------------- ------------- -------------
Net income (loss) $ 0.07 $ 0.00 $ (0.08) $ (0.03)
============= ============= ============= =============
Weighted average common and
common equivalent shares
outstanding 6,384,838 6,020,684 6,477,203 5,622,215
============= ============= ============= =============
</TABLE>
4
See Notes to Consolidated Financial Statements.
<PAGE> 5
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Nine months ended September 30,
1996 1995
-------------- --------------
Cash flows from operating
activities:
Net loss $ (498,000) $ (162,000)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 265,000 384,000
Provision for losses on
accounts receivable - 1,000
Decrease in reserve for
discontinued operations (600,000) -
Changes in operating assets and
liabilities:
Decrease (increase) in accounts
receivable (63,000) 355,000
Increase in inventories,
supplies and prepaid expenses (52,000) (62,000)
Increase in other assets, net (11,000) (81,000)
Increase (decrease) in accounts
payable and accrued expenses 151,000 (520,000)
Increase (decrease) in other
accrued expenses - long-term 24,000 (13,000)
Reserve for discontinued
operations 9,000 -
------------ ------------
Net cash used in operating
activities (775,000) (98,000)
------------ ------------
Cash flows from investing activities:
Decrease (increase) in note
receivable from officer 8,000 (16,000)
Decrease in short-term investments - 300,000
Sale (purchase) of plant and
equipment, net 8,000 (113,000)
----------- ------------
Net cash provided by investing
activities 16,000 171,000
----------- ------------
Cash flows from financing activities:
Net proceeds from issuance of
common stock 1,289,000 834,000
Principal payments on line of
credit and capital leases (158,000) (299,000)
----------- ------------
Net cash provided by financing
activities 1,131,000 535,000
----------- ------------
Increase (decrease) in cash and
cash equivalents 372,000 608,000
Cash and cash equivalents at
beginning of period 997,000 786,000
----------- ------------
Cash and cash equivalents at end
of period $1,369,000 $ 1,394,000
=========== ============
Supplemental disclosure:
Interest paid $ 60,000 $ 41,000
=========== ============
Items not impacting cash flows:
Increase in capital lease
obligations $ 92,000 $ 167,000
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements
<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 nine months ended
September 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. Certain 1995
amounts have been reclassified to conform to the 1996 presentation.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
From 1990 to November 1995, the Company, through its wholly owned
subsidiary HemaBiologics, Inc. ("HBI"), conducted research and
development of ImmupathTM, an anti-HIV hyperimmune plasma-based
product intended to be used in the treatment of Acquired Immune
Deficiency Syndrome ("AIDS"). In connection with this project, the
Company licensed the rights to the United States patent to
commercialize Immupath from Medicorp, Inc. ("Medicorp"). In November
1995, the Company's Board of Directors decided to discontinue the
operations of HBI. At the time the operations were discontinued, each
party to the license alleged that the other party was in breach of the
agreement. (Notes 2 and 5).
In September 1995, the Company formed Gateway Community Blood Program,
Inc. ("Gateway"), a wholly owned subsidiary incorporated in Missouri,
to provide blood products and services in portions of Missouri and
Illinois.
The Company opened its University of Southern California Blood Center
("USC Blood Center"), a full-service blood donation and services
facility, in February 1996. The USC Blood Center facility is leased
from USC and is staffed and operated by HemaCare under its Food and
Drug Administration ("FDA") license. Located on the USC Health
Sciences Campus in Los Angeles, California, the center provides
services to the USC/Norris Comprehensive Cancer Center and Hospital
and the USC University Hospital (the "USC Hospitals"). The USC
Hospitals have agreed that HemaCare will be their primary provider of
blood products and therapeutic services for the three-year period
ending February 1999. Pathologists on the USC medical faculty provide
medical direction services for the USC Blood Center as consultants to
the Company.
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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
and nine months ended September 30, 1995 was $232,000 and $767,000,
respectively. For the three-month and nine-month periods ended
September 30, 1996, the Company's reserve for discontinued operations
decreased by $647,000 and increased by $591,000, respectively.
The reserve established for estimated HBI operating losses during the
period of disposal included a $600,000 contingent liability for the
resolution of the dispute with Medicorp. In July 1996, the dispute was
settled without any payment by the Company, and the Company recognized
a $600,000 gain on disposal of discontinued operations. (See Note 5).
In June 1996, the Company signed an amended agreement to sell
substantially all the tangible assets of the discontinued operations
and two of the three remaining FDA source plasma licenses. The sale
and transfer of the licenses was contingent upon obtaining FDA
approval which was received on October 21, 1996. The buyer has
delivered a promissory note in payment of the purchase price for the
tangible assets sold which is collateralized by these assets. However,
the buyer's ability to make payment on the note, which was due
November 2, 1996, is dependent upon the completion of a financing
transaction by the buyer. If, upon completion of the sale transaction,
the remaining reserve exceeds any estimated residual costs of
disposition, the Company will reduce its liabilities by the amount of
the remaining reserve for disposal and increase its net income and
retained earnings in a corresponding amount.
Note 3 - Line of Credit
Since August 1991, the Company has maintained a line of credit with a
commercial bank secured by its accounts receivable, inventory and
equipment. The credit line is in effect through April 30, 1997. Under
the terms of the credit line agreement, as amended, the Company may
borrow up to 70% of eligible accounts receivable, up to a maximum of
$700,000 and must maintain certain ratios, including working capital,
as defined, of $500,000 and a tangible net worth of not less than $1.2
million prior to March 31, 1997 and not less than $1.8 million
thereafter. The Company was in compliance with all covenants of its
borrowing agreement, as amended, at September 30, 1996. Interest on
credit line borrowings is at the lender's prime rate (8.25% at
September 30, 1996) plus one-half of a percentage point. As of
September 30, 1996, there was no balance outstanding under the line of
credit.
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<PAGE> 8
Note 4 - Shareholders' Equity
In August 1996, the Company completed a $1.2 million private placement
of 1.2 million shares of its common stock.
In November 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock Based Compensation" ("SFAS 123"). SFAS 123 recommends changes
in accounting for employee stock based compensation plans and requires
certain disclosures with respect to these plans. The Company will
adopt SFAS 123 prior to December 31, 1996. The Company does not expect
the adoption of SFAS 123 to materially impact the Company's financial
position or its results of operations.
Note 5 - Commitments and Contingencies
On March 11, 1994, the Company was served with a lawsuit filed by a
former employee against the Company and its wholly owned subsidiary,
HBI, in the Superior Court of the State of California, related to the
termination of this employee and seeking relief in the amount of
$550,000. A trial date has been set for October 29, 1997; however, at
this stage in the proceedings, neither management nor counsel are in a
position to evaluate the probable merits of the claim asserted by this
former employee. Accordingly, the resolution of this lawsuit could
have a material impact on the Company's financial conditions and
results of operations.
In November 1995, the Company terminated its license agreement with
Medicorp (Note 1) due to an alleged default by the license holder.
The Company also notified Medicorp that the stock purchase warrants
(exercisable for 400,000 shares of HemaCare common stock at $5.50 per
share) issued by the Company to Medicorp had terminated under their
terms, due to the default. Medicorp denied that it had breached the
license agreement and alleged that the Company was liable for
royalties of approximately $425,000 under the license agreement and
that its warrants remained outstanding. On July 19, 1996, the Company
and Medicorp Inc. entered into a settlement agreement and mutual
release resolving all disputes between them related to their February
1993 license agreement. In the Medicorp settlement agreement, the
parties agreed (i) to terminate the license agreement, (ii) to
mutually release each other from all prior monetary and other breaches
of the license agreement, (iii) that the Medicorp warrants would
remain outstanding and exercisable and (iv) that the Company would
grant a nonexclusive royalty-free license to Medicorp to certain
research data and other documentation associated with the Immupath
project.
Note 6 - Related Party Information
In 1995 and 1994, the Company made a series of personal loans to
Joshua Levy, then an officer and director of the Company, totaling
$98,307. The proceeds of these loans were used to refinance existing
debt which was collateralized by HemaCare stock owned by Dr. Levy. In
January 1996, these individual notes were consolidated into a
promissory note, collateralized by HemaCare stock owned by Dr. Levy,
which accrues interest at a rate equal to the rate the Company pays
under its line of credit (Note 3), adjusted quarterly. Interest
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<PAGE> 9
accrued related to the loans made to Dr. Levy was $2,154 for the three
months and $6,392 for the nine months ended September 30, 1996 and
$2,445 for the three months and $7,092 for the nine months ended
September 30, 1995, respectively. The note requires four annual
installment payments of $15,000 due on January 31, with the balance of
the principal and accrued interest due on January 31, 2000. The
Company received its first annual installment payment of $15,000 in
January 1996.
Note 7 - Recent Auditing Pronouncement
In the first quarter of 1996, the Company adopted Statement of
Financial Auditing Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of"
("SFAS 121"). The adoption of SFAS 121 did not impact the Company's
financial position or its results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of the Quarter and Nine Months ended September 30, 1996 and
1995.
All comparisons within the following discussions are to the same
period of the previous year.
In late December 1995, the Gateway Community Blood Program ("Gateway")
opened in St. Louis, Missouri. The University of Southern California
("USC") Blood Center, located in Los Angeles, California, opened in
late February 1996. These new operations are collectively referred to
as the "Expansion Operations" in the following discussions.
Revenues and Operating Profit
Revenues for the three month period ended September 30, 1996,
decreased 3% ($89,000), and revenue for the nine month period ended
September 30, 1996 increased 2% ($190,000). The Company's operating
profit as a percentage of sales ("profit margin") decreased to 14% in
the three month period and 9% in the nine month period of 1996 from
28% in the three month period and 26% in the nine month period of
1995, due primarily to start-up losses incurred by the Expansion
Operations. Losses from Expansion Operations were $284,000 for the
three months and $1,264,000 for the nine months ended September 30,
1996. The Company's profit margin before the effect of the Expansion
Operations was 27% for the three month period and 26% for the nine
month period ended September 30, 1996.
Blood Products
Blood products revenue decreased 6% for the three months and 1% for
the nine months ended September 30, 1996. The decreases were due to a
lower platelet sales volumes and prices in Southern California,
partially offset by revenue from Gateway sales. Platelet sales volumes
9
<PAGE> 10
declined by 24% in the three month period and 16% in the nine month
period of 1996, primarily due to competitive pressures. Average
platelet sales prices declined by 4% for the three months and 2% for
the nine month periods of 1996. Effective August 1, 1996, the Company
reduced many of its blood product prices, as a part of its overall
marketing strategy.
As a result of the Expansion Operations, operating costs and expenses
exceed revenues in the nine month period of 1996 and revenues only
slightly exceed operating costs and expenses in the three month period
of 1996. Before the effect of the Expansion Operations, the blood
products profit margin decreased to 22% for the 1996 three months, as
compared to 25% in 1995, and to 23% for the 1996 nine months, as
compared to 24% in 1995. The lower 1996 profit margins were due to (1)
lower platelet sales prices and (2) lower platelet and component sales
volumes.
Blood Services
For the three-month and nine-month periods ended September 30, 1996,
blood services revenues increased 2% ($18,000) and 9% ($252,000),
respectively, primarily as a result of 5% and 7% increases in the
number of therapeutic procedures performed in Southern California
during the 1996 three and nine month periods, respectively. The
Atlanta therapeutic services operation was closed in July 1996.
The profit margin on blood services increased to 35% for the three
month period and to 31% for the nine month period of 1996 from 34% and
30% in the corresponding periods of 1995, respectively.
General and Administrative Expense
General and administrative expense increased 6% ($30,000) for the
three months and 20% ($298,000) for the nine months ended September
30, 1996. The increase was primarily due to changes in the Company's
corporate structure initiated in late 1995 in conjunction with its
expansion strategy. However, since the timing of additional expansion
is currently uncertain and dependent upon improved operating
performance and increased capitalization, in June 1996, the Company
implemented a plan to reduce general and administrative expense. (See
"Liquidity and Capital Resources.") As a result of this plan, general
and administrative expenses decreased by 12% ($70,000) in the third
quarter of 1996, as compared to the second quarter of the year.
Discontinued Operations
In November 1995, the Company discontinued its research and
development activities and established a $1 million reserve for losses
during the disposal period, including $600,000 for a contingent
liability related to a dispute with Medicorp, a license holder. The
reserve amount is net of the proceeds expected to be realized from the
sale of research and development assets.
To date, results of the disposal have been more favorable than
expected. In July 1996, the Medicorp dispute was settled without any
payment by the Company. As a result of this settlement, the Company
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<PAGE> 11
recognized a $600,000 gain on disposal of discontinued operations in
the third quarter of 1996. In June 1996, the Company signed an amended
agreement to sell most of its research and development assets, and The
asset sale is expected to be completed in the fourth quarter of 1996,
at which time the disposal of the discontinued operations will be
substantially complete. However, completion of the sale is dependent
on the purchaser's ability to obtain financing. At the time the sale
is completed, if the remaining reserve exceeds any estimated residual
costs of disposition, the Company will reduce its liabilities by the
amount of the remaining reserveand increase its net income and
retained earnings by a corresponding amount.
Liquidity and Capital Resources
At September 30, 1996, the Company had cash and cash equivalents of
$1.4 million and working capital of $1.8 million.
The Company has a $700,000 line of credit with a commercial bank which
is in effect through April 30, 1997. Under the terms of the credit
line agreement, as amended, the Company may borrow up to 70% of
eligible accounts receivable, up to a maximum of $700,000 and must
maintain certain ratios, including working capital, as defined, of
$500,000 and a tangible net worth of not less than $1.2 million prior
to March 31, 1997 and not less than $1.8 million thereafter. The
Company was in compliance with all covenants of its borrowing
agreement, as amended, at September 30, 1996. At September 30, 1996,
there were no borrowings outstanding on the credit line.
In order to maintain the listing of its common stock on the Nasdaq
SmallCap Market, the Company increased its capitalization through a
$1.2 million private placement of its common stock which was completed
in August 1996.
The Company's blood products and services businesses, other than the
Expansion Operations, are profitable and cash flow positive. Effective
August 1, 1996, the Company reduced many of its blood product prices,
as a part of its overall marketing strategy. The price reductions are
intended to retain existing customers and attract new customers.
However, profit margins on the affected products have been reduced. To
offset the effect of the price reductions and increase the overall
profitability of its operations, the Company implemented the following
cost reduction and control measures beginning in June 1996:
- - Closing of the Atlanta-based therapeutic services business which
did not achieve sustained profitability.
- - Reorganization of Los Angeles-based operations to increase
efficiency and reduce costs. Operation of the collection,
testing, manufacturing and distribution departments were
reevaluated and revised to reduce personnel costs.
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<PAGE> 12
- - Reduction of general and administrative expenses. Personnel-
related and other costs were critically reviewed, resulting in a
significant overall reduction in these expenses.
In many instances, the Company competes against the American Red Cross
("ARC") in providing its products and services to health care
institutions. To date, the ARC has aggressively responded to
competition from the Company, and management believes that such
competition will continue. In St. Louis, prior to the opening of
Gateway, the ARC provided virtually all blood products to hospitals in
the greater St. Louis area. Immediately following the opening of
Gateway, the ARC decreased its price for red blood cells in excess of
10%. This price decrease materially impacted Gateway's ability to
market its products and services profitably.
In Southern California, the Los Angeles Region Blood Service of the
American Red Cross (the "Los Angeles ARC") employs pricing practices
which the Company has alleged violate antitrust laws. These pricing
practices may compel Los Angeles ARC customers to purchase certain
blood products from the ARC at higher prices than those offered by the
Company. In December 1995, the Company filed an antitrust and unfair
competition complaint against the ARC with the United States District
Court in the Central District of California to recover damages and
secure injunctive relief. In response to the complaint, the ARC filed
a motion to dismiss which was partially rejected by the Court. The
Company amended its complaint, and in November 1996, an ARC motion to
dismiss the amended complaint was denied. A May 1997 trial date has
been set. The Company cannot predict the outcome of this lawsuit at
this time.
The Company has developed a blood management program ("Blood
Management Program") model which provides its hospital customers with
the convenience and efficiencies of an in-house blood program without
the associated regulatory and management burdens and related financial
risks. The USC Blood Program is a prototype of this approach. The
Company's Blood Management Programs are being marketed to:
- - Existing customers in Southern California and the St. Louis
metropolitan area who are buying various blood products and
services from the Company in a traditional buyer-vendor
relationship.
- - Potential customers who either have their own blood programs which
they prefer to out source or have traditional blood vendors who are
not meeting their needs.
The USC Blood Program serves the USC/Norris Comprehensive Cancer
Center and Hospital and the USC University Hospital (the "Hospitals")
under the terms of the Company's three-year agreements with the USC
Hospitals. Under the terms of these agreements, the Company is the
primary provider of blood products and services to the Hospitals and
agrees to equip and operate a blood donor center (the "USC Blood
Donor Center"). The Company is entitled to recoup the cost of tenant
improvements for the USC Blood Donor Center through surcharges to the
Hospitals. On an overall basis, this is a profitable arrangement for
the Company, which is currently supplying most of the Hospitals'
blood product needs from sources other than donations at the USC
Blood Donor Center. However, start-up costs for the USC Blood Donor
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<PAGE> 13
Center have temporarily reduced the overall profitability of the USC
Blood Program. When the USC Blood Donor Center reaches stabilized
operations, it is expected to be a profitable, stand-alone operation.
To date, blood donations made at the Center have been primarily
autologous or directed. To achieve a profitable level of operations,
allogeneic donations (donated for general use) of platelets and whole
blood must be increased. The Company is attempting to increase
allogeneic donations through a platelet donor recruitment program,
fixed-site blood drives and mobile blood drives which were initiated
in the fourth quarter of 1996. However, there can be no assurance
that the Center will be able to achieve and maintain a profitable
level of stand-alone operations.
Gateway opened for business and began conducting blood drives in
December 1995. In June 1996, Gateway's operations were redirected
from predominantly mobile blood drives, where the Company competed
directly with the ARC on a regional basis, to a more profitable mix
of blood products and services targeted to the needs of specific
hospital customers. As a result of a substantial reduction in
personnel, the cost of Gateway's operations were reduced. The Company
believes that Gateway's new strategy will result in a profitable
level of donations and revenue. However, the success of Gateway's
operations are dependent on a number of factors and circumstances,
many of which are outside the Company's control. Accordingly, there
can be no assurance that profitable operations will be achieved. If
profitable operations are not achieved, Gateway will be closed. The
costs of such a closure are not expected to be material to the
Company's overall results of operations.
In October 1996, the Company signed an agreement to provide a
comprehensive blood management program to Citrus Valley Health
Partners, a three-hospital healthcare system serving a population of
approximately 720,000 in suburban Los Angeles. The terms of the
agreement require the Company to equip and operate a blood donor
center in the vicinity of the three hospitals.
Management is evaluating a number of opportunities to implement the
Blood Management Program in a variety of other healthcare settings.
However, further expansion will require that the Company obtain
additional financing and the ability to compete effectively against
other blood product and service providers, including the ARC.
Accordingly, there can be no assurance that the Company will be
successful in marketing its Blood Management Programs or that, if
successful, it will be able to obtain the funds necessary to finance
such programs.
In November 1995, the Company's Board of Directors decided to
discontinue its research and development operations. This decision
resulted in a write off of assets in the amount of approximately $2.1
million and the provision of a $1 million reserve for losses during
the disposal period. To date, results of the disposal have been more
favorable than expected. Approximately $9,000 of the reserve was
expended in the nine months ended September 30, 1996, net of amounts
received from asset sales. In June 1996, the Company signed an amended
agreement to sell most of its remaining research and development
assets. The asset sale is expected to be completed in the fourth
quarter of 1996. However, completion of the sale is dependent on the
purchaser's ability to obtain financing. See "Discontinued
Operations."
13
<PAGE> 14
On March 11, 1994, the Company was served with a lawsuit filed by a
former employee against the Company and its wholly owned subsidiary,
HBI, in the Superior Court of the State of California, related to the
termination of this employee and seeking relief in the amount of
$550,000. The case is still in the discovery stage in the proceedings
and neither management nor counsel are in a position to evaluate the
probable merits of the claim asserted by this former employee.
Accordingly, the resolution of this lawsuit could have a material
impact on the Company's financial condition and results of operations.
The Company anticipates that positive cash flow from its profitable
operations and its cash and investments on hand will be sufficient to
provide funding for the anticipated operating deficits of the
Expansion Operations, to equip and operate the Citrus Valley Health
Partners blood donor center and, if necessary, for the closure of
Gateway, and to fund the remaining costs of disposing of its
discontinued operations and meet its other working capital needs for
the next 12 months.
Factors Affecting Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" from liability for forward-looking statements. Certain
information included in this Form 10-Q and other materials filed or to
be filed by the Company with the Securities and Exchange Commission
(as well as information included in oral statements or other written
statements made or to be made by or on behalf of the Company) are
forward-looking, such as statements relating to operational and
financing plans, competition, the completion of the disposal of
research and developments assets, demand for the Company's products
and services, and the anticipated outcome of contingent claims against
the Company. Such forward looking statements involve important risks
and uncertainties, many of which will be beyond the control of the
Company. These risks and uncertainties could significantly affect
anticipated results in the future, both short-term and long-term, and
accordingly, such results may differ from those expressed in forward-
looking statements made by or on behalf of the Company. These risks
and uncertainties include, but are not limited to, those relating to
the ability of the Company to obtain additional financing, to achieve
profitability in either or both of its Expansion Operations, to
improve the profitability of the Company's other operations, to expand
its operations, to comply with the covenants under its bank line of
credit, to effectively compete against the ARC and other competitors,
to complete the sale of the Company's research and development assets
on contracted terms and to resolve favorably through negotiation or
litigation claims asserted against Company. Each of these risks and
uncertainties as well as others are discussed in greater detail in the
preceding paragraphs of this Management's Discussion and Analysis of
Financial Condition and Results of Operations and in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule for the Quarter Ending
September 30, 1996.
14
<PAGE> 15
Index to Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
Method of Filing
----------------
27 Financial Data Schedule for the quarter
ending September 30, 1996.............. Filed herewith electronically
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from unaudited
financial statements contained in Form 10-Q for the quarter ending September
30,1996 and is qualified in its entirety to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,368,670
<SECURITIES> 0
<RECEIVABLES> 1,777,764
<ALLOWANCES> 87,858
<INVENTORY> 141,654
<CURRENT-ASSETS> 3,712,002
<PP&E> 2,657,710
<DEPRECIATION> 1,787,570
<TOTAL-ASSETS> 4,765,515
<CURRENT-LIABILITIES> 2,003,532
<BONDS> 0
0
0
<COMMON> 13,468,200
<OTHER-SE> (11,450,177)
<TOTAL-LIABILITY-AND-EQUITY> 4,765,515
<SALES> 2,625,725
<TOTAL-REVENUES> 2,625,725
<CGS> 2,261,726
<TOTAL-COSTS> 2,261,726
<OTHER-EXPENSES> 529,077
<LOSS-PROVISION> 87,858
<INTEREST-EXPENSE> 13,604
<INCOME-PRETAX> (171,636)
<INCOME-TAX> 0
<INCOME-CONTINUING> (171,636)
<DISCONTINUED> 600,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 428,364
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
