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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, 1998
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 12, 1998, 7,281,120 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 sheet -- March 31, 1998 and December 31, 1997
Consolidated statements of operations -- Three months ended March 31,
1998 and 1997
Consolidated statements of cash flows -- Three months ended March 31,
1998 and 1997
Notes to consolidated financial statements -- March 31, 1998
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
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Part I. Financial Information
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(Unaudited)
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 889,000 $ 1,249,000
Marketable securities................................ 672,000 363,000
Accounts receivable, net of allowance for
doubtful accounts - $81,000 (1998 and 1997)........ 1,827,000 1,561,000
Product inventories.................................. 47,000 63,000
Supplies............................................. 249,000 341,000
Prepaid expenses..................................... 96,000 123,000
Note receivable from related party - current......... 24,000 24,000
------------ ------------
Total current assets..................... 3,804,000 3,724,000
Plant and equipment, net of accumulated
depreciation and amortization of
$1,724,000 (1998) and $1,690,000 (1997).............. 554,000 585,000
Note receivable from related party - non-current....... 61,000 65,000
Other assets........................................... 10,000 10,000
------------ ------------
$ 4,429,000 $ 4,384,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 825,000 $ 659,000
Accrued payroll and payroll taxes.................... 389,000 493,000
Other accrued expenses............................... 324,000 366,000
Current obligations under capital leases............. 131,000 140,000
Reserve for discontinued operations.................. 119,000 115,000
------------ ------------
Total current liabilities................ 1,788,000 1,773,000
Obligations under capital leases, net
of current portion................................... 181,000 209,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, without par value - 20,000,000
shares authorized, 7,281,120 issued and
outstanding in 1998 and 7,190,710 in 1997........... 13,557,000 13,515,000
Accumulated deficit.................................. (11,097,000) (11,113,000)
------------ ------------
Total shareholders' equity............... 2,460,000 2,402,000
------------ ------------
$ 4,429,000 $ 4,384,000
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTIION>
Three months ended March 31,
1998 1997
------------- -------------
Revenues:
Blood management programs......................... $ 851,000 $ 1,072,000
Regional operations
Blood products.................................. 582,000 718,000
Blood services.................................. 1,484,000 1,034,000
------------ ------------
Total revenue................................. 2,917,000 2,824,000
Operating costs and expenses:
Blood management programs......................... 814,000 1,124,000
Regional operations
Blood products.................................. 468,000 526,000
Blood services.................................. 1,118,000 685,000
------------ ------------
Total operating costs and expense............ 2,400,000 2,335,000
------------ ------------
Operating profit............................. 517,000 489,000
General and administrative expense.................. 501,000 518,000
Income (loss) from continuing operations
before income taxes............................... 16,000 (29,000)
Provision for income taxes.......................... - -
------------ ------------
Income (loss) from continuing operations............ 16,000 (29,000)
Discontinued operations:
Gain from disposal of discontinued operations - 120,000
------------ ------------
Net income..................................... $ 16,000 $ 91,000
============ ============
Basic and diluted per share amounts:
Income (loss) from continuing operations.......... $ 0.00 $ 0.00
Income from discontinued operations............... - 0.01
------------ ------------
Net income..................................... $ 0.00 $ 0.01
============ ============
Weighted average common shares used to compute
basic earnings (loss) per share................... 7,197,515 7,177,515
============ ============
Weighted average common shares and equivalents
used to compute diluted earnings (loss)
per share.......................................... 7,197,515 7,202,831
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
1998 1997
------------ ------------
Cash flows from operating activities:
Net Income................................................ $ 16,000 $ 91,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Gain on disposal of discontinued operations........... - (120,000)
Depreciation and amortization......................... 34,000 65,000
Issuance of common stock and options for compensation. 9,000 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............ (266,000) 184,000
Decrease (increase) in inventories, supplies
and prepaid expenses................................. 134,000 (107,000)
Decrease in other assets, net......................... - 2,000
Increase in accounts payable and accrued expenses..... 53,000 144,000
Proceeds from discontinued operations................. 5,000 120,000
------------ ------------
Net cash provided by (used in) operating
activities........................................... (15,000) 379,000
Cash flows from investing activities:
Decrease in note receivable from related party............ 4,000 13,000
(Increase) decrease in marketable securities.............. (309,000) 31,000
Purchase of plant and equipment, net...................... (3,000) (6,000)
------------ ------------
Net cash provided by (used in) investing activities....... (308,000) 38,000
Cash flows from financing activities:
Principal payments on line of credit and capital leases... (37,000) (45,000)
------------ ------------
Net cash used in financing activities..................... (37,000) (45,000)
------------ ------------
Increase (decrease) in cash and cash equivalents............ (360,000) 372,000
Cash and cash equivalents at beginning of period............ 1,249,000 1,136,000
------------ ------------
Cash and cash equivalents at end of period.................. $ 889,000 $ 1,508,000
============ ============
Supplemental disclosure:
Interest paid............................................. $ 4,000 $ 15,000
============ ============
Issuance of common stock to employee 401k plan............ $ 42,000 $ -
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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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, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. Certain 1997
amounts have been reclassified to conform to the 1998 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, 1997.
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 August 1997, Gateway's
operations were sold.
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. 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 June 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, 1998. Interest on
credit line borrowings is at the lender's prime rate (8.25% at March 31,
1998) plus one-half of a percentage point. As of March 31, 1998, there
was no balance outstanding under the line of credit.
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Note 4 - Commitments and Contingencies
- ---------------------------------------
On March 12, 1997, the Company was notified of a lawsuit filed by an
investment banking firm retained by the Company in connection with the
August 1996 private placement of its common stock, seeking recovery of
damages in the amount of approximately $60,000. The Company intends to
vigorously defend this claim, and its ultimate resolution is not expected
to have a material impact on the Company's financial condition or its
results of operations.
Note 5 - Related Party Information
- ----------------------------------
In 1995 and 1994, the Company made a series of personal loans to Dr.
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, collateralized by HemaCare stock owned by Dr. Levy, which
accrued interest at a rate equal to the rate paid by the Company under its
line of credit. The Company received installment payments in accordance
with the terms of this note of $15,000 in January 1996 and January 1997.
Effective July 31, 1997, the Company entered into an agreement with Dr.
Levy that superceded the 1996 note. Under the terms of this agreement, the
Company agreed to forgive the remaining balance of Dr. Levy's note,
including interest accrued at a 10% annual rate, over a five-year period
so long as Dr. Levy remains employed by the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
HemaCare's operations include blood management programs ("Blood Management
Programs" or "BMPs") and regional sales of blood products ("Blood
Products") and blood services ("Blood Services"). A HemaCare Blood
Management Program allows a hospital to outsource its blood procurement and
donor center management operations. The Blood Management Program model was
introduced in late 1995 with the Gateway Community Blood Program ("Gateway")
in St. Louis, Missouri. In 1996, two Southern California BMPs were
established. One with the University of Southern California, in February 1996,
and another with Citrus Valley Health Partners, in October 1996. Gateway's
operations were sold in August 1997. Blood Products include apheresis
platelets and whole blood components such as red blood cells and plasma
products. Blood Services include therapeutic apheresis procedures, stem cell
collection and cryopreservation and donor testing.
All comparisons within the following discussions are to the comparable periods
of the previous year.
Revenues and Operating Profit
- -----------------------------
Total revenues increased 3% ($93,000) in the first quarter of 1998. The
increase was due to higher Blood Services revenue, partially offset by lower
BMP (Gateway) and Blood Products revenues. The Company's operating profit as a
percentage of sales ("profit margin") increased to 18% in the first quarter of
1998 from 17% in the comparable quarter of 1997, due primarily to the
elimination of losses from its Gateway operations.
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Blood Management Programs
- --------------------------
Revenue decreased 21% ($222,000) in the first quarter of 1998, and operating
profit increased to $37,000 in 1998 quarter from a loss of $52,000 in 1997.
Both changes resulted from the sale of Gateway's operations in August 1997.
The 1998 increase in operating profit was partially offset by higher Citrus
Valley losses related to donor center operating costs and higher red blood
cell acquisition costs.
Regional Operations
- -------------------
Blood Products
Blood Products revenues decreased 19% ($136,000) in the first quarter of 1998
due to lower apheresis platelet prices and a decrease in the volume of whole
blood components sold by the Company. In mid-1997, the Company reduced its
apheresis platelet prices for higher volume customers due to competitive
pressures. The decreased volume of whole blood component sales was due to the
continuing shortage of red blood cells available for sale.
First quarter operating profit on Blood Product sales decreased to 20% in 1998
from 27% in 1997. The decrease was due primarily to lower average apheresis
platelet prices and higher red blood cell acquisition costs.
Blood Services
Blood Services revenues increased 44% ($450,000) in the first quarter of 1998
due primarily to the higher volume of therapeutic procedures and testing
services performed by the Company. In addition, the average price charged for a
therapeutic procedure increased in the 1998 quarter, in response to higher
albumin acquisition costs. However, the price increase did not entirely offset
the higher albumin cost.
The profit margin on Blood Services revenues decreased to 25% in the first
quarter of 1998 from 34% in the comparable quarter of 1997, due to higher
albumin acquisition costs.
General and Administrative Expense
- ----------------------------------
General and administrative expense decreased 3% ($17,000) in the first quarter
of 1998. The decrease was primarily due to lower legal fees.
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 its research and development
and related specialty plasma businesses.
During the wind down of the research and development operations, the Company
manufactured a supply of Immupath sufficient for the patients still receiving
treatment for a limited period of time. There are currently three patients
receiving Immupath treatments.
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In March 1997, the Company completed disposition of the assets of the
discontinued operations and recognized a further $120,000 gain on disposal. In
the fourth quarter of 1997, the Company reviewed and revised its estimated
costs of discontinued operations and recognized an additional gain of
$173,000. The Company does not expect the discontinued operations to have a
material impact on its future operating performance.
Liquidity and Capital Resources
- -------------------------------
At March 31, 1998, the Company had cash and cash equivalents of $1,561,000 and
working capital of $2,016,000. The Company has a $700,000 line of credit with
a commercial bank which is in effect through June 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, 1998,
and there were no borrowings outstanding on the line of credit at that date.
The Company's common stock is listed on the Nasdaq Small Cap Market
("Nasdaq"). In August 1997, Nasdaq adopted NASD Marketplace Rule 4310(c)(04)
(the "Rule") to strengthen both the quantitative and qualitative listing
requirements for issuers. The Rule, which became effective February 23, 1998,
requires among other things, that issuers listed on the Nasdaq SmallCap Market
maintain a minimum bid price of $1.00 and net tangible assets, as defined, of
at least $2 million. The minimum bid price of the Company's stock as of May 12,
1998 was less than $1.00, and its net tangible assets were $2.5 million at
March 31, 1998. On February 27, 1998, Nasdaq notified the Company that it is
not in compliance with the minimum bid price requirement. The Company has until
May 28, 1998 to regain compliance with the Rule. Compliance may be achieved if
the Company's common stock trades at or above the minimum requirement of one
dollar for at least 10 consecutive trade days. At the Company's annual
shareholder's meeting which is scheduled for June 29, 1998, shareholders will
vote on a proposal which, if approved, would authorize the Company's Board of
Directors to declare a reverse stock split. Although the ultimate effect of a
reverse stock split on the per share price of the Company's common stock can
not be accurately predicted, the Company is hopeful that the per share price of
stock, as quoted on Nasdaq, will be increased by a reverse stock split. If the
Company is unable to achieve compliance by May 28, 1998, Nasdaq has informed
the Company that it will issue a delisting letter which will identify the
review procedures available to the Company at that time. The Company intends to
file an appeal with Nasdaq requesting an extension of the May 28, 1998
deadline. In the event that the Company's common stock is no longer listed on
the Nasdaq SmallCap Market or a national securities exchange, the liquidity of
the Company's common stock would be adversely affected and the Company's
ability to raise capital may be impaired.
The Company's blood products and services businesses, other than BMP blood
donor center operations ("Center"), are profitable and cash flow positive.
Center operations are expected to continue to be unprofitable until a higher
level of Center blood collections can be achieved. The operating losses of the
Centers reduce the overall profitability of the USC and Citrus Valley BMP
arrangements to the Company. The Company has implemented plans to achieve a
breakeven level of collections and sales for these Centers. Although these
plans have decreased the USC and Citrus Valley Center losses, there can be no
assurance that the USC and Citrus Valley Centers will be able to achieve and
maintain a breakeven or
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profitable level of collections. In addition, a high
percentage of the products sold to the Citrus Valley BMP are red blood cells.
Despite an 8% increase in the Citrus Valley price for red blood cells which
was effective October 1, 1997, increases in the cost the Company must pay to
acquire or produce red blood cells has reduced the operating profit margin on
these sales.
Amendments to the Federal self-referral laws and related regulations could
restrict the Company's ability to provide therapeutic services to Dr. Levy's
patients who are covered by Medicare or MediCal. It is estimated that revenues
from these patients represented approximately 2.5% of the Company's 1997
revenues. These regulations are complex, and the Company requested a
clarification of their application to its business from Health Care Financing
Administration ("HCFA") in early 1996. To date, the Company has not received
a response to this request. In January 1998, new proposed regulations were
issued for comment. The proposed regulations do not specifically address
therapeutic apheresis services, and the Company has requested a revision of
these regulations to provide an exemption for therapeutic apheresis services
similar to the exemption provided for dialysis services. The comment period
for the proposed regulations ended in early May 1998, and the new regulations
will be issued sometime after that date. If the new regulations do not provide
an exemption for therapeutic apheresis services, the Company could lose the
revenue from its services to Dr. Levy's Medicare and MediCal patients,
approximately $84,000 in the first quarter of 1998.
Management is evaluating opportunities to develop and implement new
outsourcing models, including its Blood Management Program. Because of the
increase in the cost of acquiring red blood cells, it is likely that future
HemaCare outsourcing arrangements will be focused on providing specialized
donation services, apheresis based products and services, and other technology
based blood therapies. However, development and introduction of a revised
Blood Management Program model or other outsourcing programs may require that
the Company obtain additional financing or partner with other blood product
and service providers. There can be no assurance that the Company will be
successful in developing and marketing its outsourcing programs or that it
will be able to obtain the funds necessary to finance such programs.
The Company anticipates that cash flow from profitable operations 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, the effects of discontinued operations,
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
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to develop and market profitable outsourcing programs, obtain additional
financing, to achieve profitability in its Blood Management Programs, to retain
existing customers, 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 and retain existing customers and obtain new customers.
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, 1997.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See disclosure in Form 10-K for the year ended December 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Bylaws of the Registrant, as amended
27 Financial Data Schedule for the Quarter Ending March 31,
1998
27.2 Restated Financial Data Schedule for Year Ended December
31, 1995 and quarters ended June 30, 1996 and September
30, 1996
b. The Company did not file any reports on Form 8-K during the
three months ended March 31, 1998.
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 12, 1998 HEMACARE CORPORATION
------------------- (Registrant)
/s/ Sharon C. Kaiser
--------------------------
Sharon C. Kaiser, Sr. Vice
President, Finance and
Chief Financial Officer
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INDEX TO EXHIBITS
Method of Filing
-----------------------------
3.1 Bylaws of the Registrant, as amended Filed herewith electronically
27 Financial Data Schedule for the quarter
ended March 31, 1998 Filed herewith electronically
27.2 Restated Financial Data Schedule for
year ended December 31, 1995 and
quarters ended June 30, 1996 and
September 30, 1996 Filed herewith electronically
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