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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/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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INDEX
HEMACARE CORPORATION
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated balance sheets--June 30, 1996 and December 31,
1995
Consolidated statements of operations--Three and six months
ended June 30, 1996 and 1995
Consolidated statements of cash flows--Six months ended June
30, 1996 and 1995
Notes to consolidated financial statements--June 30, 1996
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Matters
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31
1996 1995
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.................... $ 996,000 $ 997,000
Accounts receivable, net of allowance for
doubtful accounts - $93,000 (1996) and
$95,000 (1995)............................. 1,331,000 1,627,000
Product inventories.......................... 149,000 141,000
Supplies..................................... 292,000 328,000
Prepaid expenses............................. 248,000 117,000
Note receivable from officer - current....... 15,000 15,000
------------- -------------
Total current assets.............. 3,031,000 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
------------- -------------
$ 4,176,000 $ 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...................
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.......................... (11,832,000) (10,953,000)
------------- -------------
Total shareholders' equity........ 481,000 1,226,000
------------- -------------
$ 4,176,000 $ 4,457,000
============= =============
See Notes to Consolidated Financial Statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, Six months ended June 30,
1996 1995 1996 1995
----------- ------------ ----------- -----------
Revenues:
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 1,444,000 1,279,000
------------ ------------ ------------ ------------
Total operating
costs and
expenses........ 2,494,000 1,943,000 5,106,000 3,897,000
------------ ------------ ------------ ------------
Operating profit. 185,000 580,000 383,000 1,312,000
General and admini-
strative 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 (879,000) 348,000
Provision for income
taxes................ -- -- -- --
Loss from discontinued
operations........... -- (238,000) -- (535,000)
------------ ------------ ------------ ------------
Net loss.............. $ (430,000) $ (139,000) $ (879,000) $ (187,000)
============ ============ ============ ============
Per share amounts:
Income from continuing
operations.......... $ (0.07) $ 0.02 $ (0.14) $ 0.06
Loss from discontinued
operations.......... -- (0.04) -- (0.09)
------------ ------------ ------------ ------------
Net loss............. $ (0.07) $ (0.02) $ (0.14) $ (0.03)
============ ============ ============ ============
Weighted average
common and common
equivalent shares
outstanding........ 6,149,905 5,634,480 6,125,751 5,512,930
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
1996 1995
------------ ------------
Cash flows from operating activities:
Net loss..................................... $ (879,000) $ (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........................... (103,000) (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)
Reserve for 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 investment............ -- 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................................ (1,000) 562,000
Cash and cash equivalents at beginning of
period..................................... 997,000 786,000
------------ ------------
Cash and cash equivalents at end of period... $ 996,000 $ 1,348,000
============ ============
Supplemental disclosure:
Interest paid................................ $ 41,000 $ 28,000
============ ============
Items not impacting cash flows:
Increase in capital lease obligations........ $ 91,000 $ 167,000
============ ============
See Notes to Consolidated Financial Statements.
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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.
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
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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, 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.
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
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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 royality 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 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
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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" ("SFAS121"). 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 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 and six month periods 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 27% for the six month period ended June 30, 1996.
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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.
The profit margin on blood services decreased to 28% in the second
quarter of 1996 from 32% in the comparable period of 1995. This
decrease was primarily due to the decline in Atlanta business. The blood
services profit margin for the first six months of 1996 and 1995 was
31%.
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
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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 to its primary, high volume customers, 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:
- - 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
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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 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 competition 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.
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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 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
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for the termination, and the parties are discussing a negotiated
settlement. However, if an acceptable settlement cannot 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 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 1. Legal Proceedings
- ------- -----------------
See disclosure in Form 10-K for the year ended December 31,
1995.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
a. The Company's Annual Meeting of Shareholders (the
"Meeting") was held on July 19, 1996.
c. The following table shows the tabulation of votes for all
matters put to vote at the Company's Annual Meeting of
Shareholders held July 19, 1996.
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Against/ Broker
Matters Put to Vote For Withheld Abstentions Non-Votes
-------------------- --------- -------- ----------- -----------
Election of Four Directors
Thomas M. Asher 4,528,423 210,590 0 0
Hal I. Lieberman 4,709,753 29,260 0 0
Glenn W. Bartlett 4,691,753 47,260 0 0
Jon B. Victor 4,707,608 31,405 0 0
Approval of the Company's
1996 Stock Incentive Plan 2,750,584 245,935 42,702 1,699,792
Item 5. Other Information
- ------- -----------------
On July 29, 1996, Joshua Levy resigned as Senior Vice
President of the HemaCare Corporation. Dr. Levy will continue
in his position as Medical Director of the Company. On August
9, 1996, Thomas A. Asher, Ph.D. resigned as a Director of the
Company. Dr. Asher served as Chairman of the Board from 1986
to his resignation. Glenn W. Bartlett, was elected as the new
Chairman of the Board on that date. Dr. Bartlett has served
as a Director of the Company since 1991. Also, on August 9,
1996, Sharon C. Kaiser, Vice President and Chief Financial
Officer was elected as a Director of the Company.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a. Exhibits
2.1 Amended and Restated Asset Purchase Agreement
between the Registrant, HemaBiologics, Inc. (a
wholly owned subsidiary of the Registrant) and
Atopix Pharmaceuticals Corporation, dated June 26,
1996. See also Exhibit 99.1.
4.1 1996 Stock Incentive Plan of the Registrant--incorporated
by reference to the Supplemental Proxy Statement of the
Registrant dated June 14, 1996.
10.1 Settlement Agreement between the Registrant and
Medicorp Inc.--incorporated by reference to Exhibit
10.1 to Form 8-K of the Registrant dated July 19,
1996.
27 Financial Data Schedule for the Quarter Ending June
30, 1996.
99.1 Agreement to Furnish Exhibits and Schedules.
b. On July 31, 1996, HemaCare Corporation filed a Report on Form
8-K dated July 19, 1996. The Company reported Under Item 5
that the Company entered into Settlement Agreement and Mutual
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Release with Medicorp Inc. resolving all disputes between them
related to their February 1993 License Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 13, 1996 HEMACARE CORPORATION
--------------------- -----------------------------
(Registrant)
\s\ Sharon C. Kaiser
------------------------------
Sharon C. Kaiser, Vice President,
Finance and Chief Financial Officer
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INDEX TO EXHIBITS
Method of Filing
----------------
2.1 Asset Purchase Agreement among the Registrant,
HemaBiologics, Inc. (a wholly owned subsidiary of
the Registrant) and Atopix Pharmaceuticals
Corporation, dated May 2, 1996......................... Filed herewith electronically
27 Financial Data Schedule for the quarter ending
March 31, 1996......................................... Filed herewith electronically
99.1 Agreement to Furnish Exhibits and Schedules............ Filed herewith electronically
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