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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, 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 November 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 sheets-September 30, 1998 and December
31, 1997
Consolidated statements of operations-Three and nine months
ended September 30, 1998 and 1997
Consolidated statements of cash flows-Nine months ended
September 30, 1998 and 1997
Notes to consolidated financial statements-September 30,
1998
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 Information
Item 6. Exhibits
SIGNATURES
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------- ---------------------
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,473,000 $ 1,249,000
Marketable securities............................... 480,000 363,000
Accounts receivable, net of allowance for
doubtful accounts - $81,000 (1998 and 1997)....... 1,417,000 1,561,000
Product inventories................................. 43,000 63,000
Supplies............................................ 348,000 341,000
Prepaid expenses.................................... 129,000 123,000
Note receivable from officer - current.............. 24,000 24,000
------------- -------------
Total current assets........................... $ 3,914,000 $ 3,724,000
Plant and equipment, net of accumulated
depreciation and amortization of
$1,806,000 (1998) and $1,690,000 (1997)............. 474,000 585,000
Note receivable from officer - non-current............ 53,000 65,000
Other assets.......................................... 52,000 10,000
------------- -------------
$ 4,493,000 $ 4,384,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 415,000 $ 659,000
Accrued payroll and payroll taxes................... 575,000 493,000
Other accrued expenses.............................. 340,000 366,000
Current obligations under capital leases............ 126,000 140,000
Reserve for discontinued operations - current....... 122,000 115,000
------------- -------------
Total current liabilities..................... 1,578,000 1,773,000
Obligations under capital leases, net
of current portion.................................. 133,000 209,000
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............................. 13,570,000 13,515,000
Accumulated deficit................................. (10,788,000) (11,113,000)
------------- -------------
Total shareholders' equity............................ 2,782,000 2,402,000
------------- -------------
$ 4,493,000 $ 4,384,000
============= =============
The accompanying notes are an integral
part of these consolidated financial statements.
3
4
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues:
Blood management programs.... $ 587,000 $ 1,002,000 $ 2,291,000 $ 3,185,000
Blood products............... 1,075,000 567,000 2,335,000 1,911,000
Blood services............... 1,005,000 1,098,000 3,805,000 3,166,000
------------- ------------ ------------- -------------
Total revenue............. 2,667,000 2,667,000 8,431,000 8,262,000
Operating costs and expenses:
Blood management programs.... $ 465,000 $ 1,059,000 $ 2,067,000 $ 3,339,000
Blood products............... 676,000 426,000 1,622,000 1,451,000
Blood services............... 661,000 774,000 2,723,000 2,209,000
------------- ------------ ------------- -------------
Total operating costs and
expenses................ 1,802,000 2,259,000 6,412,000 6,999,000
------------- ------------ ------------- -------------
Operating profit........... 865,000 408,000 2,019,000 1,263,000
General and administrative
expense...................... 608,000 494,000 1,694,000 1,466,000
Other income (expense).......... -- 10,000 -- 7,000
Gain on sale of Gateway
Community Blood Program...... -- 128,000 -- 128,000
------------- ------------ ------------- -------------
Income (loss) from continuing
operations before income
taxes........................ 257,000 52,000 325,000 (68,000)
Provision for income taxes...... - - - -
Discontinued operations:
Gain on disposal of dis-
continued operations....... - - - 120,000
------------- ------------ ------------- -------------
Net income (loss)............ $ 257,000 $ 52,000 $ 325,000 $ 52,000
============= ============ ============= =============
Basic and diluted per share
amounts:
Income (loss) from continuing
operations................. $ 0.04 $ 0.01 $ 0.05 $ (0.01)
Income from discontinued
operations................. - - - 0.02
------------- ----------- ------------- --------------
$ 0.04 $ 0.01 $ 0.05 $ 0.01
============= ============ ============= ==============
Weighted average common shares
used to compute:
Basic income (loss) per
share...................... 7,281,120 7,190,710 7,194,113 7,185,212
============ =========== ============ =============
Diluted income (loss) per
share...................... 7,281,120 7,190,710 7,194,382 7,344,998
============= ============ ============= ==============
The accompanying notes are an integral part of
these consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
1998 1997
------------ ------------
Cash flows from operating activities:
Net income................................................... $ 325,000 $ 52,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Gain on disposal of discontinued operations.............. - (248,000)
Depreciation and amortization............................ 116,000 178,000
Issuance of common stock and options for compensation.... 13,000 -
Changes in operating assets and liabilities:
Decrease in accounts receivable.......................... 144,000 482,000
Decrease in inventories, supplies and prepaid expenses... 7,000 5,000
Decrease in accounts payable and other accrued
expenses............................................... (146,000) (587,000)
Proceeds from (expenditures for) discontinued operations. 7,000 (55,000)
------------ ------------
Net cash provided by (used in) operating activities.......... 466,000 (173,000)
Cash flows from investing activities:
Decrease in note receivable from related party........... 12,000 10,000
Increase in marketable securities........................ (117,000) (44,000)
(Purchase) disposition of plant and equipment, net....... (47,000) 282,000
------------ ------------
Net cash provided by (used in) investing activities.......... (152,000) 248,000
Cash flows from financing activities:
Principal payment on line of credit and capital leases... (90,000) (103,000)
------------ ------------
Net cash used in financing activities.................... (90,000) (103,000)
------------ ------------
Increase (decrease) in cash and cash equivalents......... 224,000 (28,000)
Cash and cash equivalents at beginning of period......... 1,249,000 1,136,000
------------ ------------
Cash and cash equivalents at end of period............... $ 1,473,000 $ 1,108,000
============ ============
Supplemental disclosure:
Interest paid............................................ $ 19,000 $ 42,000
============ ============
Items not impacting cash flows:
Decrease in capital lease obligations.................... $ - $ (356,000)
============ ============
The accompanying notes are an integral part of these
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 and nine
months ended September 30, 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.
HemaCare is a blood products and services company. For the first
nine months of 1998 the Company has provided its products and
services to hospitals and medical centers located in southern
California.
Effective October 22, 1998 the Company acquired the assets of
Coral Therapeutics, Inc. a company which provided blood products
and services to hospitals in Maine, New Hampshire, Massachusetts,
Connecticut, New York, New Jersey, North Carolina and several
other states (see Note 7). Coral's services are similar to those
of the Company, and the acquisition significantly expands the
geographic scope of the Company's operations. The Coral
acquisition will be accounted for using the purchase method of
accounting and the results of the new Coral operations will be
included in the Company's financial statements subsequent to the
date of acquisition.
Blood Products
- --------------
Blood products revenue consists principally of sales of apheresis
or single donor platelets. Platelets are a blood component
useful in treating patients with a variety of medical conditions,
particularly cancer patients undergoing chemotherapy. Through
the apheresis process, the Company is able to collect a
sufficient amount of this blood component from a single donation
to constitute a therapeutic unit of platelets for transfusion to
a patient in need.
Blood product sales also include sales of other whole blood
components including plasma and red blood cells.
Blood products are collected and processed at the Company's
principal facility in Sherman Oaks. California. Products are
also collected at the Company's USC Blood Donor Center. The
Company conducts its blood product operations under licensure of
the US Food and Drug Administration (FDA).
6
7
Blood Services
- --------------
Blood services revenue consists of sales of therapeutic apheresis
procedures, peripheral blood stem cell collection and
cryopreservation and other medical procedures performed by a
specially trained nursing staff, generally in a hospital setting.
These procedures involve the use of specialized blood separation
technology to remove selected components of a patient's blood as
a part of a therapeutic treatment program prescribed by a
physician. The Company provides these services to hospitals on a
mobile basis. Specially trained nurses employed by the Company
using HemaCare-owned equipment provide care to patients on client
hospital premises.
Blood services revenue also includes fees charged by the Company
for testing services provided to hospitals that operate their own
blood donation programs.
Blood Management Programs
- -------------------------
The Company operates a Blood Management Program (BMP) for two
hospitals affiliated with the University of Southern California.
A BMP allows a hospital to outsource many blood-related
operations to HemaCare. The Company previously operated two
other BMPs, one of these was located in St. Louis, Missouri
(Gateway) and another was conducted for three southern California
hospitals (Citrus Valley). The Gateway program was sold August
1997 and the Citrus Valley program was terminated in July of
1988. These programs did not meet the Company's profitability
criteria.
NOTE 2 - 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
May 31, 1999. 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 September 30, 1998. Interest on credit
line borrowings is at the lender's prime rate (8.5% at September
30, 1998) plus one-half of a percentage point. As of September
30, 1998, there was no balance outstanding under the line of
credit. On October 22, 1998, the Company borrowed $600,000 on its
line of credit in connection with the acquisition of the assets
of Coral Therapeutics, Inc. (See Note 7 below.)
NOTE 3 - 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. In July 1998, this suit was settled on terms favorable
to the Company. The effect of the settlement did not have a
material effect on the Company's financial condition or results
of operations.
NOTE 4 - 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
7
8
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. In
accordance with the terms of this note, the Company received
installment payments of $15,000 in January 1996 and January 1997.
Effective July 31, 1997, the Company entered into an agreement
with Dr. Levy that superseded 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.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of An Enterprise and
Related Information" (SFAS 131). SFAS 131, which is effective
for years beginning after December 15, 1997, revises the
requirements for segment disclosures. The Company will adopt this
standard in the fourth quarter of 1998.
NOTE 6 - DISPOSITION OF OPERATIONS
On August 1, 1997, Gateway's operations were sold. The purchaser
assumed liability for certain leases related to Gateway's
operations; purchased Gateway's inventories and made a $200,000
non-refundable payment against HemaCare's interest in future
Gateway earnings. Cash proceeds from the sale, net of transaction
costs, were approximately $255,000. The Company is entitled to
receive a percentage of Gateway's revenues, as defined, over the
five years subsequent to the date of sale, up to maximum of
$422,000. An additional payment of $100,000 is due when Gateway
receives a Food and Drug Administration establishment license.
On July 17, 1998, the Company terminated the Citrus Valley Blood
Services Agreement (the "Agreement") and disposed of Citrus
Valley BMP operations. These actions were necessitated by the
continuing shortage and escalating price of red blood cells,
which comprise the largest portion of the blood products
purchased by the Citrus Valley hospitals. The disposition is not
expected to have a material, adverse effect on the Company's
results of operations or financial position.
NOTE 7 - SUBSEQUENT EVENT - ACQUISITION
As previously reported on Form 8-K filed November 5, 1998, on
October 22, 1998, HemaCare, through its wholly owned subsidiary
Coral Blood Services, Inc. ("CBS"), acquired substantially all
the assets of Coral Therapeutics, Inc. ("Coral") from Coral's
secured lender. Prior to the acquisition, Coral provided blood
services to major university, teaching and community hospitals in
Maine, New Hampshire, Massachusetts, Connecticut, New York, North
Carolina and other states. The acquired assets include (i)
approximately $1.4 million in accounts receivable, $600,000 of
which are over 90 days old, (ii) fixed assets and (iii) Coral's
rights under its hospital contracts. HemaCare is currently in the
process of negotiating separate agreements with the hospitals
previously served by Coral and is providing services to most of
these hospitals under interim arrangements. Concurrently with the
closing of the asset purchase, HemaCare extended offers of
employment to most of Coral's employees.
8
9
The acquisition price of the assets was $950,000 in cash and
450,000 shares of HemaCare's Series B senior convertible
preferred stock. The Company financed the acquisition by (i)
utilizing existing cash balances, (ii) borrowing $600,000 on its
line of credit and (iii) issuing 450,000 shares of HemaCare
Series B senior convertible preferred stock. The Series B
preferred stock is convertible into 500,000 shares of HemaCare
common stock, at the option of the holder, one year after
issuance. In addition, HemaCare has entered into or expects to
enter into non-competition agreements with certain former
managers of Coral pursuant to which HemaCare expects to make cash
payments and issue shares of HemaCare common stock and warrants
to purchase HemaCare common stock. HemaCare also expects to
satisfy certain liabilities of Coral to its ex-employees and to
make payments necessary to maintain essential business
relationships.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ------- ------------------------------------------------------------
HemaCare is a blood products and services company. For the first nine
months of 1998 the Company has provided its products and services to
hospitals and medical centers located in southern California.
Effective October 22, 1998 the Company acquired the assets of Coral
Therapeutics, Inc. a company which provided blood products and
services to hospitals in Maine, New Hampshire, Massachusetts,
Connecticut, New York, New Jersey, North Carolina and several other
states. Coral's services are similar to those of the
Company, and the acquisition significantly expands the geographic
scope of the Company's operations. The Coral acquisition will be
accounted for using the purchase method of accounting and the results
of the new Coral operations will be included in the Company's financial
statements subsequent to the date of acquisition.
Blood Products
- --------------
Blood products revenue consists principally of sales of apheresis or
single donor platelets. Platelets are a blood component useful in
treating patients with a variety of medical conditions, particularly
cancer patients undergoing chemotherapy. Through the apheresis
process, the Company is able to collect a sufficient amount of this
blood component from a single donation to constitute a therapeutic
unit of platelets for transfusion to a patient in need.
Blood product sales also include sales of other whole blood components
including plasma and red blood cells.
Blood products are collected and processed at the Company's principal
facility in Sherman Oaks. California. Products are also collected at
the Company's USC Blood Donor Center. The Company conducts its blood
product operations under licensure of the US Food and Drug
Administration (FDA).
Blood Services
Blood services revenue consists of sales of therapeutic apheresis
procedures, peripheral blood stem cell collection and cryopreservation
and other medical procedures performed by a specially trained nursing
staff, generally in a hospital setting. These procedures involve the
use of specialized blood separation technology to remove selected
9
10
components of a patient's blood as a part of a therapeutic treatment
program prescribed by a physician. The Company provides these
services to hospitals on a mobile basis. Specially trained nurses
employed by the Company using HemaCare-owned equipment provide care to
patients on client hospital premises.
Blood services revenue also includes fees charged by the Company for
testing services provided to hospitals that operate their own blood
donation programs.
Blood Management Programs
- -------------------------
The Company operates a Blood Management Program (BMP) for two
hospitals affiliated with the University of Southern California. A
BMP allows a hospital to outsource many blood-related operations to
HemaCare. The Company previously operated two other BMPs, one of
these was located in St. Louis, Missouri (Gateway) and another was
conducted for three southern California hospitals (Citrus Valley).
The Gateway program was sold August 1997 and the Citrus Valley program
was terminated in July of 1988. These programs did not meet the
Company's profitability criteria.
All comparisons within the following discussions are to the comparable
periods of the previous year.
- -----------------------------
Revenues and Operating Profit
- -----------------------------
Total revenues were consistent in the three-month period and increased
2% in the nine-month period of 1998. The nine-month increase resulted
from higher Blood Products and Blood Services revenues, offset by
lower BMP revenue. The Company's operating profit as a percentage of
revenues ("profit margin") increased to 32% in the third quarter of
1998 from 15% in the comparable quarter of 1997 and to 24% for the
first nine months of 1998 from 15% in the comparable period of 1997.
The increases in both periods were due primarily to the elimination of
losses associated with Gateway and, with respect to the third quarter,
the elimination of losses associated with Citrus Valley, combined with
a higher gross profit margin on sales of apheresis platelets.
Blood Management Programs
- -------------------------
The 1998 three-month ($415,000) and nine-month ($894,000) decreases in
BMP revenues were due to the sale of Gateway in August 1997 and the
disposition of Citrus Valley in July 1998. Program profit margins
increased by 26% in the three-month period and by 15% in the nine-
month period, as a result of the elimination of these under-performing
programs.
On July 17, 1998, the Company terminated the Citrus Valley Blood
Services Agreement (the "Agreement") and discontinued Citrus Valley
BMP operations. These actions were necessitated by the continuing
shortage and escalating price of red blood cells, which comprise the
largest portion of the blood products purchased by the Citrus Valley
hospitals. Disposition of the Citrus Valley Blood Management Program
did not to have a material, adverse effect on the Company's results of
operations or financial condition.
Blood Products
- --------------
Blood Products revenues increased $508,000 (90%) in the third quarter
and increased $424,000 (22%) in the first nine-months of 1998. The
three-month and nine-month increases were due to higher volumes of
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apheresis platelet sales, partially offset by a lower volume of whole
blood component sales. In both periods, the increase in apheresis
platelet sales volume was due to higher demand from existing customers
as well as the acquisition of new customers, while whole blood
component sales volumes decreased primarily due to a shortage of red
blood cells available for sale.
The profit margin on Blood Products sales increased to 37% from 25% in
the third quarter and to 31% from 24% in the first nine months of
1998. The increases resulted from a higher percentage of apheresis
platelet sales in the mix of products sold and from a lower average
cost per apheresis platelet unit sold, partially offset by a lower,
average sales price per apheresis platelet sold.
Blood Services
- --------------
Blood Services revenues decreased 8% ($93,000) in the three-month
period and increased 20% ($639,000) in the nine-month period of 1998.
The third quarter decrease in revenue was due to a lower average price
per procedure resulting from the mix of procedures provided.
Approximately 39% of the nine-month increase resulted from sales of
albumin, a protein replacement fluid, to non-hospital customers. The
remaining nine-month increase resulted from a higher demand for
therapeutic procedures from existing customers. In addition, the
average price charged for a therapeutic procedure increased in both
1998 periods, 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 sales increased to 34% from 30% in
the third quarter and decreased to 28% from 30% in the first nine
months of 1998. The third quarter increase was due primarily to an
easing of albumin costs, while the nine month decrease was due to
higher albumin costs.
- ----------------------------------
General and Administrative Expense
- ----------------------------------
General and administrative expense increased 26% ($124,000) for the
three-month period and 16% ($235,000) for the nine-month period of
1998. Both increases reflects severance payments, compensation cost
associated with forgiveness of a related-party loan, higher CEO
compensation and higher legal, director and consulting fees. In
addition, the 1997 nine-month general and administrative expense was
reduced by a $71,000 recovery of previously expensed legal fees
related to the Company's lawsuit against the American Red Cross, which
was settled in June 1997.
- -------------------------------
Liquidity and Capital Resources
- -------------------------------
At September 30, 1998, the Company had cash and cash equivalents of
$1,953,000 and working capital of $2,336,000. The Company has a
$700,000 line of credit with a commercial bank which is in effect
through May 31, 1999. 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 September 30, 1998,
and there were no borrowings outstanding on the line of credit at that
date.
The Company's blood products and services businesses, other than the
USC Blood Donor Center (the "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 Center reduce the overall
11
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profitability of the USC Blood Management Program to the Company. The
Company continues to implement changes intended to increase the level
of Center collections, but there can be no assurance that the Center
will be able to achieve and maintain a breakeven or profitable level
of collections.
Effective November 2, 1998, the Company's common stock is quoted on
the OTC Bulletin Board. Prior to that date, the Company's common stock
was listed on the Nasdaq Small Cap Market ("Nasdaq"). Issuers listed
on the Nasdaq SmallCap Market are required to maintain a minimum bid
price of $1.00, and the Company's common stock has been trading below
the minimum price for some time. Despite requests to Nasdaq for an
exception to the minimum bid price listing requirement, on October 29,
1998, the Company was informed that its stock would be delisted from
the Nasdaq SmallCap market effective the end of that day. Although
the Company's common stock is traded on the OTC Bulletin Board,
the liquidity of the Company's common stock and the Company's ability
to raise capital may be impaired by the Nasdaq delisting.
On October 22, 1998, HemaCare, through its wholly owned subsidiary
Coral Blood Services, Inc. ("CBS"), acquired substantially all the
assets of Coral Therapeutics, Inc. ("Coral"). The acquired assets
include (i) approximately $1.4 million in accounts receivable,
$600,000 of which are over 90 days old, (ii) fixed assets and (iii)
Coral's rights under its hospital contracts. HemaCare is currently in
the process of negotiating separate agreements with the hospitals
previously served by Coral and is providing services to most of these
hospitals under interim arrangements. HemaCare extended offers of
employment to most of Coral's employees.
The acquisition price of the assets was $950,000 in cash and 450,000
shares of HemaCare's Series B senior convertible preferred stock. The
Company financed the acquisition by (i) utilizing existing cash
balances, (ii) borrowing $600,000 on its line of credit and (iii)
issuing 450,000 shares of HemaCare Series B senior convertible
preferred stock. In addition, HemaCare has entered into or expects to
enter into non-competition agreements with certain former managers of
Coral pursuant to which HemaCare expects to make cash payments and
issue shares of HemaCare common stock and warrants to purchase
HemaCare common stock. HemaCare also expects to satisfy certain
liabilities of Coral to its ex-employees and to make payments
necessary to maintain essential business relationships.
Management is evaluating other opportunities to expand the Company's
operations, including implementing outsourcing models in a variety of
healthcare settings, joint ventures and acquisitions of apheresis-
based business. Future HemaCare outsourcing arrangements will most
likely be focused on providing specialized donation services,
apheresis based products and services, and other technology-based
blood therapies. However, implementing expansion plans 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 implementing its expansion plans or
that it will be able to obtain the funds necessary to finance such
programs.
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.
However, 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. The Company has not
received a response to this request. In January 1998, new proposed
12
13
regulations were issued for comment. The proposed regulations did not
address therapeutic apheresis services, and the Company has requested
that HCFA revise 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. In a discussion with the Company's legal
counsel, HCFA personnel expressed a willingness to consider the
arguments put forth in the Company's request for an exemption. If the
new regulations do not provide an exemption for therapeutic apheresis
services, the Company could lose future revenue from services to be
provided to Dr. Levy's Medicare and MediCal patients (approximately
$244,000 in the first nine months of 1998).
The Company anticipates that cash flow from profitable operations,
collection of the accounts receivable purchased from Coral, 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 months 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, the liquidity of the
Company's common stock 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
months of the Company. These risks and uncertainties include, but are
not limited to, those relating to the ability of the Company to expand
its operations, obtain additional financing, to repay existing debt,
to achieve profitability in its USC Center, to retain existing
customers and obtain new customers, to integrate the assets recently
acquired from Coral Therapeutic, Inc.'s secured lender, to retain the
Coral Therapeutic, Inc. customers, to improve the profitability of the
Company's other operations and to comply with the covenants under its
bank line of credit. 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See disclosure in Form 10-K for the year ended December
31, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
The proxy materials for the 1998 annual meeting of
stockholders held on June 29, 1998 were mailed to
shareholders of the Company on May 18, 1998. Shareholder
proposals to be presented at the 1999 annual meeting of
shareholders must be received at the Company's executive
offices at 4954 Van Nuys Blvd., Sherman Oaks, California
91403, addressed to the attention of the Corporate Secretary
by January 19, 1999, in order to be considered for inclusion
in the proxy materials relating to such meeting. Recently,
the Securities and Exchange Commission amended its rule
governing a company's ability to use discretionary proxy
authority with respect to shareholder proposals which were
not submitted by the shareholders in time to be included in
the proxy statement. As a result of that rule change, in
the event a shareholder proposal is not submitted to the
Company prior to April 3, 1999, the proxies solicited by the
Board of directors for the 1999 annual meeting of
shareholders will confer authority on the holders of the
proxy to vote the shares in accordance with their best
judgement and discretion if the proposal is presented at the
1999 annual meeting of shareholders without any discussion
of the proposal in the proxy statement for such meeting.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Office Building Lease dated August 1, 1998
between the Registrant and Tar Asset Addison
Place, L.P. (Exhibits have been omitted
pursuant to Item 601(b)(2) of Regulation S-K.
Such exhibits are listed in the Office Building
Lease. The Registrant hereby agrees to furnish
supplementary to the Securities and Exchange
Commission, upon its request, any or all such
omitted exhibits.)
27 Financial Data Schedule for the Quarter
Ending September 30, 1998.
b. The Company did not file any reports on Form 8-K during
the three months ended September 30, 1998.
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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, 1998 HEMACARE CORPORATION
-----------------------------
(Registrant)
/s/ Sharon C. Kaiser
------------------------------
Senior Vice President,
Finance and Chief Financial
Officer
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INDEX TO EXHIBITS
Description Method of Filing
- ------ ----------------------------------------------------- -----------------
10.1 Office Building Lease dated August 1, 1998 between the Filed herewith electronically
Registrant and Tar Asset Addison Place, L.P. (Exhibits
have been omitted pursuant to Item 601(b)(2) of
Regulation S-K. Such exhibits are listed in the Office
Building Lease. The Registrant hereby agrees to
furnish supplementary to the Securities and Exchange
Commission, upon its request, any or all such omitted
exhibits.)
27 Financial Data Schedule for the quarter ending Filed herewith electronically
September 30, 1998
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