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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 March 31, 1997
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 May 13, 1997, 7,190,710 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--March 31, 1997 and December 31,
1996
Consolidated statements of operations--Three months ended
March 31, 1997 and 1996
Consolidated statements of cash flows--Three months ended
March 31, 1997 and 1996
Notes to consolidated financial statements--March 31, 1997
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits
SIGNATURES
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
(Unaudited)
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents................ $ 1,508,000 $ 1,136,000
Marketable securities.................... 384,000 415,000
Accounts receivable, net of allowance
for doubtful accounts - $47,000 at
both dates.............................. 1,538,000 1,722,000
Product inventories...................... 96,000 74,000
Supplies................................. 305,000 306,000
Prepaid expenses......................... 232,000 146,000
Note receivable from officer - current... 15,000 15,000
------------- -------------
Total current assets.......... 4,078,000 3,814,000
Plant and equipment, net of accumulated
depreciation and amortization of
$1,940,000 (1997) and $1,875,000 (1996)... 764,000 823,000
Note receivable from officer - non-current. 75,000 88,000
Other assets............................... 49,000 51,000
------------- -------------
$ 4,966,000 $ 4,776,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 985,000 $ 909,000
Accrued blood purchases.................. 150,000 175,000
Accrued payroll and payroll taxes........ 359,000 335,000
Other accrued expenses................... 353,000 284,000
Current obligations under capital leases. 245,000 241,000
Reserve for discontinued operations -
current................................ 306,000 306,000
------------- -------------
Total current liabilities..... 2,398,000 2,250,000
Obligations under capital leases, net
of current portion........................ 454,000 503,000
Commitments and contingencies
Shareholders' equity:
Common stock, without par value -
20,000,000 shares authorized,
7,177,515 issued and outstanding
at both dates.......................... 13,466,000 13,466,000
Accumulated deficit...................... (11,352,000) (11,443,000)
------------- -------------
Total shareholders' equity.... 2,114,000 2,023,000
------------- -------------
$ 4,966,000 $ 4,776,000
============= =============
See Notes to Consolidated Financial Statements.
3
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
1997 1996
------------- -------------
Revenues:
Blood management programs........... $ 1,072,000 $ 351,000
Regional operations
Blood products................... 718,000 1,386,000
Blood services................... 1,034,000 1,073,000
------------ ------------
Total revenues................. 2,824,000 2,810,000
Operating costs and expenses:
Blood management programs........... $ 1,124,000 $ 831,000
Regional operations
Blood products................... 526,000 1,063,000
Blood services................... 685,000 774,000
------------ ------------
Total operating costs
and expenses................. 2,335,000 2,668,000
Operating profit............... 489,000 142,000
General and administrative expense.... 515,000 627,000
Interest expense, net................. 3,000 11,000
------------ ------------
Loss from continuing operations
before income taxes................. (29,000) (496,000)
Provision for income taxes............ - -
------------ ------------
Loss from continuing operations....... (29,000) (496,000)
Discontinued operations:
Gain on disposal of discontinued
operations........................ 120,000 -
------------ ------------
Net income (loss)..................... $ 91,000 $ (496,000)
============ ============
Per share amounts:
Loss from continuing operations....... $ 0.00 $ (0.08)
Discontinued operations:
Gain on disposal of discontinued
operations........................ 0.01 0.00
------------ ------------
Net income (loss)..................... $ 0.01 $ (0.08)
============ ============
Weighted average common and common
equivalent shares outstanding....... 7,202,831 6,069,642
============ ============
See Notes to Consolidated Financial Statements.
4
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
1997 1996
-------------- --------------
Cash flows from operating activities:
Net income (loss).............................. $ 91,000 $ (496,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Gain on disposal of discontinued operations. (120,000) -
Depreciation and amortization............... 65,000 81,000
Provision for losses on accounts receivable. - 15,000
Changes in operating assets and liabilities:
Decrease in accounts receivable............. 184,000 288,000
Decrease (increase) in inventories,
supplies and prepaid expenses.............. (107,000) 72,000
Decrease (increase) in other assets, net.... 2,000 (11,000)
Increase (decrease) in accounts payable and
accrued expenses........................... 144,000 (46,000)
Increase in other accrued employee benefits. - 38,000
Proceeds from (expenditures for)
discontinued operations.................... 120,000 (90,000)
------------ ------------
Net cash provided by (used in) operating
activities.................................... 379,000 (149,000)
------------ ------------
Cash flows from investing activities:
Repayment of note receivable from officer...... 13,000 13,000
Decrease in short-term investments............. 31,000 -
Purchase of plant and equipment, net........... (6,000) (36,000)
------------ ------------
Net cash provided by (used in) by
investing activities.......................... 38,000 (23,000)
------------ -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock..... - 31,000
Principal payments on line of credit and
capital leases................................ (45,000) (36,000)
------------ ------------
Net cash used in financing activities.......... (45,000) (5,000)
------------ ------------
Increase (decrease) in cash and cash
equivalents................................... 372,000 (177,000)
Cash and cash equivalents at beginning
of period..................................... 1,136,000 997,000
------------ ------------
Cash and cash equivalents at end of period..... $ 1,508,000 $ 820,000
============ ============
Supplemental disclosure:
Interest paid.................................. $ 15,000 $ 20,000
============ ============
Items not impacting cash flows:
Increase in capital lease obligations.......... $ - $ 167,000
============ ============
See Notes to Consolidated Financial Statements.
5
HemaCare Corporation
Notes to Consolidated Financial Statements
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. 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 months ended
March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. Certain
1996 amounts have been reclassified to conform to the 1997
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, 1996.
From 1990 to November 1995, the Company, through its wholly-owned
subsidiary HemaBiologics, Inc. ("HBI"), conducted research and
development of Immupath, an anti-HIV hyperimmune plasma-based
product intended to be used in the treatment of Acquired Immune
Deficiency Syndrome. In November of 1995, the Company discontinued
the operations of HBI. (See Note 2 below.)
In September 1995, the Company formed Gateway Community Blood
Program, Inc., a wholly-owned subsidiary incorporated in Missouri,
to provide blood products and services in Missouri and Illinois.
In the fourth quarter of 1995, the Company began providing blood
management programs to its customers. A blood management program
("Blood Management Program" or "BMP") allows a hospital or
affiliated group of hospitals to outsource many blood-related
operations to HemaCare. HemaCare establishes a local blood donor
center for the BMP hospital and becomes the hospital's primary
provider of blood products and services. HemaCare introduced its
Blood Management Program model at the Gateway Community Blood
Program in St. Louis, Missouri, in December 1995, and established
two Southern California Blood Management Programs with existing
customers in 1996. The University of Southern California Blood
Management Program commenced in February 1996 and the Citrus
Valley Health Partners Blood Management Program commenced in
October 1996.
Note 2 - Discontinued Operations
- --------------------------------
In November 1995, the Company discontinued the operations of HBI,
including the research and development of Immupath and the
associated specialty plasma business. The reserve established for
estimated HBI operating losses during the period of disposal
included a $600,000 contingent liability related to a dispute with
a licensor.
6
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. In June 1996, the Company agreed to sell
substantially all the tangible assets of the discontinued
operations and the FDA source plasma licenses. In the first
quarter of 1997, the Company received the final proceeds from the
sale and recognized a $120,000 gain on disposal of discontinued
operations.
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, 1998. Under the terms of the 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 financial
ratios. The Company was in compliance with all covenants of its
credit line agreement at March 31, 1997. Interest on credit line
borrowings is at the lender's prime rate (8.5% at March 31, 1997)
plus one-half of a percentage point. As of March 31, 1997, there
was no balance outstanding under the line of credit.
Note 4 - 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 is 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,
adverse impact on the Company's financial condition and results
of operations.
Note 5 - 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
$98,000. In January 1996, these individual notes were consolidated
into a promissory note and collateralized by HemaCare stock owned
by Dr. Levy. The note accrues interest at a rate equal to the rate
the Company pays under its line of credit, adjusted quarterly.
Interest accrued for the three months ended March 31, 1997 and
1996 totaled $2,282 and $2,126, respectively. The note requires
four annual installment payments of $15,000 due from 1996 to 1999
and the balance of the principal and accrued interest is due on
January 31, 2000. The Company received annual installment
payments of $15,000 in January 1996 and January 1997.
Note 6 - Recent Auditing Pronouncement
- --------------------------------------
In March 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share" (SFAS 128) and SFAS No. 129,
"Disclosure of Information about Capital Structure" (SFAS 129).
SFAS 128 revises and simplifies the computation of earnings per
share and requires certain additional disclosures. SFAS 129
requires additional disclosures regarding the Company's capital
structure. The Company will adopt both standards in the fourth
quarter of 1997. Management does not expect that the adoption of
theses standards will have a material effect on the Company's
financial position or results of operations.
7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
All comparisons within the following discussions are to the comparable
period of the previous year.
In 1995, HemaCare developed and introduced a program which allows a
hospital or affiliated hospital group to outsource many of its blood-
related operations. The Company's blood management program ("Blood
Management Program" or "BMP") model is customized to meet the needs of
each customer hospital, its patients and physicians. Operating under
its Federal Drug Administration license, HemaCare establishes a local
blood donor center to provide collection and other blood banking
services to patients and physicians of the BMP hospital and supplies
the hospital with products collected at its own BMP donor center as
well as products collected at other HemaCare donation sites and
purchased products.
In December 1995, the Gateway Community Blood Program regional BMP
("Gateway") opened in St. Louis, Missouri, and two Southern California
Blood Management Programs were established with existing customers in
1996. The University of Southern California ("USC") Blood Management
Program commenced in February 1996 and the Citrus Valley Health
Partners ("Citrus Valley") Blood Management Program commenced in
October 1996. Both the USC and Citrus Valley BMP agreements have
three-year terms. These BMPs are collectively referred to as the
"Programs" in the following discussions.
Revenues and Operating Profit
- -----------------------------
Total revenues for the first quarter of 1997 were comparable to the
first quarter of 1996. An increase in Program revenues was offset by a
decrease in Regional Blood Products and Blood Services revenues. The
Company's operating profit as a percentage of sales ("profit margin")
increased to 17% in the first quarter of 1997 from 5% in the comparable
quarter of 1996 due to higher Program revenues and lower costs at
Gateway. Regional Blood Products sales and operating profit in both
quarters were adversely affected by pricing practices employed by the
American Red Cross ("ARC") which the Company has alleged violate
antitrust laws. These pricing practices may compel Los Angeles area 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 ARC with
the United States District Court in the Central District of California
to recover damages and secure injunctive relief.
Blood Management Programs
- -------------------------
The 205% ($721,000) increase in first quarter 1997 Program revenues was
due to higher sales volumes at Gateway and USC and the conversion of
Citrus Valley to a Blood Management Program customer. First quarter
1997 Program operating loss decreased by 89% ($428,000), due largely to
higher revenue generated by USC and Gateway operations and lower
Gateway operating costs. The volume of products purchased by the USC
hospitals increased in the first quarter of 1997 compared to the 1996
quarter, when the program was initiated. In June of 1996, the Company
evaluated Gateway's operations and refocused its strategic direction.
As a result of this change, apheresis platelet production and sales
were increased and overhead costs for the operation were significantly
reduced.
8
Regional Operations
- -------------------
Blood Products
The 48% ($668,000) decrease in Blood Products revenues for the
first quarter of 1997 was due to decreases in the sales volume and
prices of apheresis platelet and whole blood component products.
Approximately 40% of the decrease in apheresis sales volume and 60% of
the decrease in whole blood component sales volume was due to the
conversion of Citrus Valley to a BMP customer. The remainder of the
decrease in platelet sales volumes resulted from the loss of customers,
primarily due to ARC pricing practices, while whole blood component
sales were lower due to a shortage of red blood cells available for
sale. The prices of both apheresis platelets and red blood cells
decreased in the first quarter of 1997 due to competitive pressures.
First quarter 1997 operating profit on Blood Product sales increased to
27% from 23% in the first quarter of 1996. The increase was due to
lower cost of sales for apheresis platelets and the more profitable mix
of whole blood components products sold in 1997.
Blood Services
Blood Services revenues decreased 4% ($39,000) in the first quarter of
1997 due primarily to the elimination of revenue from the Company's
Atlanta-based therapeutic services operation, which was closed in July
1996. This decrease was partially offset by increased testing services
revenue.
The profit margin on Blood Services revenues increased in the first
quarter of 1997 due to a small increase in the average operating profit
per therapeutic procedure, elimination of losses from the Atlanta
operation and increased testing services operating profits.
General and Administrative Expense
- ----------------------------------
General and administrative expense decreased 18% ($112,000) in the
first quarter of 1997 as compared to the first quarter of 1996. The
decrease was primarily due to spending controls initiated in June of
1996.
Discontinued Operations
- -----------------------
In November 1995, the Company discontinued its Immupath related
research and development activities and established a reserve for
operating losses and contingent liabilities related to the disposal of
the research and development and related specialty plasma businesses.
The reserve amount, which included $600,000 for a contingent liability
related to a dispute with a licensor, was net of the proceeds expected
to be realized from the sale of research and development assets.
In July 1996, the dispute with the licensor was settled without any
payment by the Company. As a result of this settlement, the Company
recognized a $600,000 gain on disposal of discontinued operations in
the third quarter of 1996.
In March 1997, the Company completed disposition of the assets of the
discontinued operations and recognized a further $120,000 gain on
disposal. The Company does not expect the discontinued operations to
have a material impact on its future operating performance.
9
Liquidity and Capital Resources
- -------------------------------
At March 31, 1997, the Company had cash and cash equivalents of
$1,508,000 and working capital of $1,680,000. The Company's Blood
Management Programs, other than Gateway, and its regional Blood
Products and Blood Services businesses are profitable and cash flow
positive. However, the loss of three significant apheresis platelet
customers during the first quarter of 1997 is expected to have a
continuing negative impact on regional Blood Products revenue until
these sales can be replaced. In light of current ARC pricing practices,
which the Company believes limit its ability to obtain and retain blood
products customers, there can be no assurance that these sales can be
replaced.
The Company has a $700,000 line of credit with a commercial bank which
is in effect through April 30, 1998. Under the terms of the 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
financial ratios including working capital, as defined, of $500,000 and
a tangible net worth of not less than $1.75 million. The Company was in
compliance with all covenants of its borrowing agreement at March 31,
1997, and there were no borrowings outstanding on the line of credit at
that date.
At March 31, 1997, the Citrus Valley Program Center was operating at a
temporary facility provided by the Citrus Valley hospitals. The
permanent center, which the Company is obligated to equip and operate,
is expected to open in the second quarter of 1997. The costs of
equipping the center are expected to be financed through a lease.
Gateway sustained a large net loss in 1996, and continued to incur
substantial losses in the first quarter of 1997. In June 1996,
Gateway's strategic direction was refocused to market a more profitable
mix of blood products and services to specific hospital customers.
These changes resulted in increased revenue and significant reductions
in personnel and other costs. However, the success of Gateway's current
strategy is dependent on a number of factors and circumstances, many of
which are outside the Company's control. There can be no assurance that
Gateway will be able to achieve and maintain a profitable level of
collections and sales. If profitable operations can not be achieved,
Gateway will be closed. The costs of such a closure are not expected to
be material to the Company's financial position.
Management is evaluating a number of opportunities to implement its
Blood Management Program concept in a variety of healthcare settings
and is considering ways to expand the Company's existing regional
operations. However, further expansion may require that the Company
obtain additional financing to fund start-up, equipment and marketing
costs. There can be no assurance that the Company will be able to
obtain the funds necessary to finance additional Blood Management
Programs or expand existing regional operations.
In March 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,
adverse impact on the Company's financial condition and results of
operations.
10
The Company anticipates that cash flow from profitable operations,
borrowing available from its bank line of credit and its cash and
investments on hand will be sufficient to provide funding for its
existing needs during the next twelve 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, 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 its Blood Management Programs, 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, and to
resolve favorably through negotiation or litigation claims asserted by
or against the 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, 1996.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See disclosure in Form 10-K for the year ended December 31,
1996.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Revolving Credit Agreement between the Registrant and
Bank Leumi Le-Israel, B.M., dated April 30, 1997.
27 Financial Data Schedule for the Quarter Ending
March 31, 1997
b. The Company did not file any reports on Form 8-K during
the three months ended March 31, 1997.
11
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 May 14, 1997 HEMACARE CORPORATION
---------------- --------------------------------
(Registrant)
/s/ Sharon C. Kaiser
--------------------------------
Sharon C. Kaiser, Vice President,
Finance and Chief Financial Officer
12
INDEX TO EXHIBITS
Method of Filing
10.1 Resolving Credit Agreement between
the Registrant and Bank Leumi Le-Israel,
B.M., dated April 30, 1997. . . . . . . . . Filed herewith electronically
27 Financial Data Schedule for the quarter
ending March 31, 1997 . . . . . . . . . . . Filed herewith electronically
13