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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 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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INDEX
HEMACARE CORPORATION
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated balance sheets--September 30, 1996 and December 31,
1995
Consolidated statements of operations--Three and nine months ended
September 30, 1996 and 1995
Consolidated statements of cash flows--Nine months ended September
30, 1996 and 1995
Notes to consolidated financial statements--September 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
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......................................... 344,000 328,000
Prepaid expenses................................. 199,000 117,000
Note receivable from officer - current........... 15,000 15,000
------------ -------------
Total current assets.......................... 3,759,000 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
------------- -------------
$ 4,813,000 $ 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.... 600,000 600,000
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.................................. (12,003,000) (10,953,000)
------------- -------------
Total shareholders' equity.................... 1,465,000 1,226,000
------------- -------------
$ 4,813,000 $ 4,457,000
============= =============
See Notes to Consolidated Financial Statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30, Nine months ended September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
Revenues:
Blood products................... $ 1,645,000 $ 1,752,000 $ 5,041,000 $ 5,103,000
Blood services................... 981,000 963,000 3,073,000 2,821,000
------------ ------------ ------------ ------------
Total revenues................. 2,626,000 2,715,000 8,114,000 7,924,000
Operating costs and expenses:
Blood products................... 1,621,000 1,318,000 5,282,000 3,887,000
Blood services................... 641,000 638,000 2,085,000 1,966,000
------------ ------------ ------------ ------------
Total operating costs and
expenses...................... 2,262,000 1,956,000 7,367,000 5,853,000
------------ ------------ ------------ ------------
Operating profit........... 364,000 759,000 747,000 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 (1,051,000) 605,000
Provision for income taxes........ -- -- -- --
Loss from discontinued
operations....................... -- (232,000) -- (767,000)
------------ ------------ ------------ ------------
Net income (loss)................. $ (172,000) $ 25,000 $(1,051,000) $ (162,000)
============ ============ ============ ============
Per share amounts:
Income (loss) from continuing
operations....................... $ (0.03) $ 0.04 $ (0.16) $ 0.11
Loss from discontinued
operations....................... -- (0.04) -- (0.14)
------------ ------------ ------------ ------------
Net income (loss)................. $ (0.03) $ 0.00 $ (0.16) $ (0.03)
============ ============ ============ ============
Weighted average common and
common equivalent shares
outstanding..................... 6,384,838 6,020,684 6,477,203 5,622,215
============ ============ ============ ============
See Notes to Consolidated Financial Statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
1996 1995
------------- --------------
Cash flows from operating activities:
Net loss........................................... $ (1,051,000) $ (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
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable....... (63,000) 355,000
Increase in inventories, supplies and
prepaid expenses................................ (99,000) (62,000)
Increase in other assets, net.................... (11,000) (81,000)
Increase (decrease) in accounts payable
and accrued expenses............................ 151,000 (520,000)
Increase (decrease) in other accrued
expenses - long-term............................ 24,000 (13,000)
Reserve for discontinued operations.............. 9,000 --
------------- ------------
Net cash used in operating activities.............. (775,000) (98,000)
------------- ------------
Cash flows from investing activities:
Decrease (increase) in note receivable from officer 8,000 (16,000)
Decrease in short-term investments................. -- 300,000
Sale (purchase) of plant and equipment, net........ 8,000 (113,000)
------------- ------------
Net cash provided by investing activities.......... 16,000 171,000
------------- ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock......... 1,289,000 834,000
Principal payments on line of credit and
capital leases.................................... (158,000) (299,000)
------------- ------------
Net cash provided by financing activities.......... 1,131,000 535,000
------------- ------------
Increase (decrease) in cash and cash
equivalents....................................... 372,000 608,000
Cash and cash equivalents at beginning
of period......................................... 997,000 786,000
------------- ------------
Cash and cash equivalents at end of period......... $ 1,369,000 $ 1,394,000
============= ============
Supplemental disclosure:
Interest paid..................................... $ 60,000 $ 41,000
============= ============
Items not impacting cash flows:
Increase in capital lease obligations............. $ 92,000 $ 167,000
============= ============
See Notes to Consolidated Financial Statements.
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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 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.
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
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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 $47,000 and increased by $9,000, 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. (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, 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.
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.
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,
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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
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
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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 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 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.
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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 32% 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
June 1996, the Company signed an amended agreement to sell most of its
research and development assets, and in July 1996, the Medicorp dispute was
settled without any payment by the Company. 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 reserve for disposal, including the amount provided
for settlement of the dispute with the license holder, and increase its net
income and retained earnings by 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 September 30, 1996, the Company had cash and cash equivalents of $1.4
million and working capital of $1.8 million.
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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.
* 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.
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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 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.
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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."
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
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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 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
- ------ ---------------------------------------------------
None.
Item 5. Other Information
- ------- -----------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a. Exhibits
4.1 1996 Stock Incentive Plan of the Registrant as amended and
restated through September 17, 1996
10.1 Amendment to Loan Agreement between the Registrant and
Bank Leumi dated November 8, 1996.
27 Financial Data Schedule for the Quarter Ending September
30, 1996.
b. On August 19, 1996, HemaCare Corporation filed a Report on Form
8-K dated August 19, 1996. The Company reported Under Item 5
that the Company had completed a $1.2 million private placement
of its equity securities.
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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 November 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
4.1 1996 Stock Incentive Plan of the Registrant as amended and
restated through September 17, 1996...................... Filed herewith electronically
10.1 Amendment to Loan Agreement between the Registrant and
Bank Leumi dated November 8, 1996......................... Filed herewith electronically
27 Financial Data Schedule for the quarter ending
September 30, 1996........................................ Filed herewith electronically
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