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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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)
California 95-3280412
- ------------------------ -----------------------
State or Other I.R. S. Employer I.D.
Jurisdiction of Number
Incorporation or
Organization
4954 Van Nuys Boulevard
Sherman Oaks, California 91403
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (818) 986-3883
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: YES X NO ___
As of August 12, 2002, 7,738,060 shares of Common Stock of the registrant
were issued and outstanding.
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INDEX
HEMACARE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets - June 30, 2002 (unaudited) and
December 31, 2001
Consolidated statements of operations - Three and six months
ended June 30, 2002 and 2001 (unaudited)
Consolidated statements of cash flows - Six months ended June 30,
2002 and 2001 (unaudited)
Notes to consolidated financial statements - June 30, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,079,000 $ 1,025,000
Accounts receivable, net of allowance for
doubtful accounts - $208,000 in 2002 and $212,000
in 2001............................................ 4,454,000 5,454,000
Product inventories and supplies..................... 805,000 707,000
Prepaid expenses..................................... 268,000 192,000
Deferred income taxes................................ 498,000 498,000
------------ ------------
Total current assets..................... 7,104,000 7,876,000
Plant and equipment, net of accumulated
depreciation and amortization of
$2,217,000 in 2002 and $2,030,000 in 2001............ 2,786,000 2,348,000
Goodwill............................................... 362,000 362,000
Deferred taxes......................................... 2,498,000 2,405,000
Other assets........................................... 47,000 91,000
------------ ------------
$12,797,000 $13,082,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 2,409,000 $ 2,495,000
Accrued payroll and payroll taxes.................... 880,000 948,000
Other accrued expenses............................... 114,000 113,000
Current obligations under capital leases............. 50,000 31,000
Current obligations under notes payable.............. 168,000 168,000
Reserve for discontinued operations.................. 73,000 75,000
------------ ------------
Total current liabilities................ 3,694,000 3,830,000
Obligations under capital leases, net
of current portion................................... 257,000 176,000
Notes payable, net of current portion.................. 375,000 626,000
Other long-term liabilities............................ 20,000 23,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, not par value - 20,000,000 shares
authorized, 7,671,590 issued and outstanding in
2002 and 7,590,205 in 2001......................... 13,246,000 13,065,000
Accumulated deficit.................................. (4,795,000) (4,638,000)
------------ ------------
Total shareholders' equity............... 8,451,000 8,427,000
------------ ------------
$12,797,000 $13,082,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
------------ ------------ ----------- -----------
Revenues:
Blood products.................... $4,742,000 $3,979,000 $ 9,131,000 $ 7,915,000
Blood services.................... 2,198,000 2,259,000 4,130,000 4,380,000
----------- ----------- ------------ -----------
Total revenue.................... 6,940,000 6,238,000 13,261,000 12,295,000
Operating costs and expenses:
Blood products.................... 4,471,000 3,586,000 8,772,000 7,072,000
Blood services.................... 1,482,000 1,441,000 2,742,000 2,820,000
----------- ----------- ------------ ------------
Total operating costs and
expenses....................... 5,953,000 5,027,000 11,514,000 9,892,000
----------- ----------- ------------ ------------
Gross profit...................... 987,000 1,211,000 1,747,000 2,403,000
General and administrative
expenses............................ 1,018,000 967,000 1,997,000 1,812,000
----------- ----------- ------------ ------------
Income (loss) before income taxes...... (31,000) 244,000 (250,000) 591,000
Provision (benefit) for income taxes... (12,000) 91,000 (93,000) 219,000
----------- ----------- ------------ ------------
Net income (loss)................... $ (19,000) $ 153,000 $ (157,000) $ 372,000
=========== =========== ============ ============
Income per share
Basic............................... $ - $ 0.02 $ (0.02) $ 0.05
=========== =========== ============ ============
Diluted............................ $ - $ 0.02 $ (0.02) $ 0.04
=========== =========== ============ ============
Weighted average shares
outstanding - basic................ 7,611,000 7,431,000 7,601,000 7,508,000
=========== =========== ============ ============
Weighted average shares
outstanding - diluted.............. 7,611,000 8,119,000 7,601,000 8,297,000
=========== =========== ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net (Loss) Income......................................... $ (157,000) $ 372,000
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 192,000 141,000
Compensation expense related to stock options.......... 56,000 -
Issuance of common stock to 401-K plan................. 122,000 93,000
Deferred income taxes.................................. (93,000) 181,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............ 1,000,000 (539,000)
Increase in inventories, supplies and
prepaid expenses..................................... (174,000) (36,000)
Decrease in accounts payble, accrued expenses
and other liabilitiess.............................. (156,000) (269,000)
(Expenditures) for discontinued operations............ (2,000) (1,000)
----------- -----------
Net cash provided by (used in) operating activities... 788,000 (58,000)
Cash flows from investing activities:
Decrease in other assets.................................. 44,000 15,000
Decrease in marketable securities......................... - 572,000
Proceeds from dispostion of plant and equipment........... 10,000 -
Purchases of equipment, net............................... (609,000) (396,000)
----------- -----------
Net cash (used in) provided by investing activities....... (555,000) 191,000
Cash flows from financing activities:
Proceeds from exercise of stock options................... 3,000 -
Principal payments on line of credit, capital leases
and notes payable........................................ (282,000) (31,000)
Borrowings from equipment line of credit.................. - 116,000
Proceeds from capitalized leases.......................... 100,000 -
Repurchase of common stock................................ - (386,000)
----------- -----------
Net cash used in financing activities..................... (179,000) (301,000)
----------- -----------
Increase (decrease) in cash and cash equivalents............ 54,000 (168,000)
Cash and cash equivalents at beginning of period............ 1,025,000 1,362,000
----------- -----------
Cash and cash equivalents at end of period.................. $1,079,000 $1,194,000
=========== ===========
Supplemental and non-cash disclosure:
Interest paid............................................. $ 31,000 $ 8,000
=========== ===========
Income taxes paid......................................... $ - $ 46,000
=========== ===========
Items not affecting cash flow:
Notes and capitalized leases issued in connection with
acquisition of plant and equipment....................... $ 31,000 $ -
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
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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 six months ended June 30, 2002, are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2002. For further information, refer to
the consolidated financial statements and footnotes thereto included
in HemaCare's Annual Report on Form 10-K for the year ended December
31, 2001.
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenue
and expenses during the reporting period. Actual results could
differ from those estimates.
Certain amounts from the first quarter of 2002 have been
reclassified to conform to current period presentation.
Note 2 - Line of Credit and Notes Payable
- -----------------------------------------
The Company has a working capital line of credit whereby the
Company may borrow the lesser of 75% of eligible accounts
receivable or $2.0 million at an interest rate of prime plus .25%
(5.0% as of June 30, 2002). As of June 30, 2002, the Company did
not have any borrowings outstanding on this working capital line of
credit. This line matures on June 30, 2003.
In addition, the Company has a credit facility with the same bank
which provides for $1.25 million to be used to acquire vehicles and
equipment. Payments are made on a straight-line basis over a
period of four years including interest equal to the bank's internal
cost of funds plus 2.5% (6.05% as of June 30, 2002). At
June 30, 2002, the total amount financed under the equipment line
of credit is $543,000 and requires 48 monthly principal payments of
$13,000 plus interest at a weighted average fixed rate of 6.6% per
annum.
The two lines of credit are collateralized by substantially all of
the Company's assets and are cross defaulted. They also require
the maintenance of certain financial covenants. As of June 30,
2002, the Company was not in compliance with a covenant that
requires the Company to be profitable each quarter. During the
quarter ended June 30, 2002, the Company incurred a loss. The bank
has waived this violation.
Note 3 - Capitalized Lease
- --------------------------
During the six months ended June 30, 2002, the Company entered into
a capitalized lease in the amount of $131,000 to finance the
acquisition of certain equipment. The lease requires monthly
payments of $3,265 including interest at the rate of 8.5% per
annum and expires in January 2006.
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Note 4 - Commitments and Contingencies
- --------------------------------------
Since 1976, California law has prohibited the transfusion of blood
products to patients if the donors of those products were paid
unless, in the opinion of the recipient's physician, blood from a
non-paid donor was not immediately available. Apheresis platelet
products obtained from paid donors have been exempted from this law
by a series of state statutes the latest of which expires on January
1, 2003. Unless existing California law is modified by legislation
currently being considered by the California legislature, the
exemption will expire, which could have a material adverse effect on
the Company's revenue and net income. Revenue from paid platelet
donors during the six months ended June 30, 2002 was $2,773,000.
State and Federal laws set forth antikickback and self-referral
prohibitions and otherwise regulate financial relationships between
blood banks and hospitals, physicians and other persons who refer
business to them. While HemaCare believes its present operations
comply with applicable regulations, there can be no assurance that
future legislation or rule making, or the interpretation of existing
laws and regulations will not prohibit or adversely impact the
delivery by HemaCare of its services and products.
Note 5 - Business Segments
- --------------------------
HemaCare operates in two business segments as follows:
- Blood Products - Collection, processing and distribution of
apheresis and whole blood derived products and donor testing.
- Blood Services - Therapeutic apheresis and stem cell collection
procedures and other therapeutic services to patients.
Management uses more than one measure to evaluate segment
performance. However, the dominant measurements are consistent with
HemaCare's consolidated financial statements, which present revenue
from external customers and operating income for each segment.
Note 6 - Goodwill
- -----------------
During the first quarter of 2002, the Company adopted Statement of
Financial Accounting Standards Number 142, "Goodwill and Other
Intangible Assets," (SFAS 142). In accordance with SFAS 142, the
Company discontinued amortizing goodwill and other intangible assets
with indefinite lives. The Company completed the transitional
goodwill impairment test during the second quarter of 2002 and will
continue to test goodwill and other intangible assets not subject to
amortization for impairment at least annually.
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Goodwill was $362,000 as of June 30, 2002 and was unchanged since
December 31, 2001. There was no impairment loss recorded during the
quarter. The Company does not have any other intangible assets,
other than goodwill.
The following table presents net income (loss) on a comparable basis
after adjustment for amortization of goodwill, for the six months
ended June 30:
2002 2001
------------ -----------
Reported net (loss) income $ (157,000) $ 372,000
Goodwill amortization - 26,000
------------ -----------
Adjusted net (loss) income $ (157,000) $ 398,000
============ ===========
Income per share
Basic
Reported net (loss) income $ (0.02) $ 0.05
Goodwill amortization - -
------------ -----------
Adjusted net (loss) income $ (0.02) $ 0.05
============ ===========
Diluted
Reported net (loss) income $ (0.02) $ 0.04
Goodwill amortization - -
------------ -----------
Adjusted net (loss) income $ (0.02) $ 0.04
============ ===========
Note 7 - Equity
- ---------------
Options and warrants totaling 5,000 and 7,000 were exercised for the
three and six months ended June 30, 2002 and 2001 respectively.
Additionally, the company contributed 76,385 and 92,848 shares of
stock to the 401-K plan during the quarters ended June 30, 2002 and
2001, respectively.
Note 8 - Earnings per Share
- ---------------------------
The following table provides a reconciliation of the numerator and
denominator for earnings per share:
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
------------ ----------- ------------ -----------
Net income (loss) $ ( 19,000) $ 153,000 $ (157,000) $ 372,000
============ =========== ============ ===========
Shares outstanding 7,611,000 7,431,000 7,601,000 7,508,000
Net effect of diluted options - 688,000 - 789,000
------------ ----------- ------------ -----------
Dilutive shares outstanding 7,611,000 8,119,000 7,601,000 8,297,000
------------ ----------- ------------ -----------
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Options and warrants outstanding of 2,226,000 and 725,000 for the
three months and 2,226,000 and 575,000 for the six months ended June
30, 2002 and 2001, respectively, have been excluded from the above
calculation because they were not considered common share
equivalents or because their effect would have been anti-dilutive.
Note 9 - Provision for income taxes
- -----------------------------------
The tax rate used to compute the provision for income taxes is based
upon the Company's estimate for the full year and is subject to
change.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------ ----------------------------------------------------------------
Our business segments include Blood Products and Blood Services.
Our Blood Products segment supplies hospitals with a portion of their
blood product needs. We operate blood collection programs for the
benefit of our hospital clients. We also provide apheresis platelets
collected in our Sherman Oaks facility, specialty blood components and
donor testing services to hospitals in Southern California.
Our Blood Services segment includes therapeutic apheresis procedures,
stem cell collection and other blood treatments provided to patients,
generally in a hospital setting.
As part of our marketing strategy we have entered into Blood Management
Programs ("BMP") with many of our hospital customers. Under a BMP
arrangement, we provide blood products and services under a multiyear
contractual agreement.
RESULTS OF OPERATIONS
Three-months ended June, 2002 compared to the three-months ended June 30,
2001
- -------------------------------------------------------------------------
Revenue, Gross Profit and Net Income
- ------------------------------------
Overview
Revenue for the three-months ended June 30, 2002, was $6,940,000 compared
to $6,238,000 in the same period of 2001. The increase of $702,000 (11%)
reflects the continued expansion of our Blood Products segment, including
a greater number of collections and price increases to certain customers,
partially offset by a decrease in demand for Blood Services and the loss
of revenue of $470,000 from a terminated BMP agreement.
Gross profits were $987,000 (14.2% of revenues) in 2002 compared to
$1,211,000 (19.4% of revenues) in 2001. The decrease in gross profit
margins primarily resulted from start-up losses for our new BMPs and pre-
opening expenses associated with our new BMPs in Vermont, Albany, New
York and Bangor, Maine. Additionally, the decline in demand for
therapeutic apheresis negatively affected our gross profits.
Our BMP in Chicago, which began operations in June of 2001, provided
revenue from its Blood Products and Blood Services of $187,000 and an
operating loss of $35,000. During the quarter we continued to emphasize
our collection efforts and our losses have narrowed from previous
quarters.
General and administrative expenses increased in 2002 as compared to 2001
as a result of increased costs relating to litigation with the American
Red Cross, and increased levels of infrastructure to support our expanded
operations.
During the quarter ended June 30, 2002, we incurred a net loss of
$19,000, or $0.00 per share basic and diluted compared to net income of
$153,000, or $0.02 per share basic and diluted in the same period of
2001.
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Blood Products
The Company has made significant efforts to expand its mobile and fixed
site whole blood collection program conducted for our hospital clients
since mid 2001. While we have conducted whole blood collection services
for hospitals for several years, our activities in this area prior to
2001 were primarily viewed as necessary part of our service agreements
with hospital clients rather than a significant source of earnings.
Nationwide increases in the prices charged for red blood cells and other
products produced from whole blood, which became effective mid year 2001,
have now made this activity attractive economically.
For the three months ended June 30, 2002, revenue from Blood Products was
$4,742,000 compared to $3,979,000 in the same period of 2002. The
increase of $763,000 (19%) was the result of several factors including;
1) continued expansion of the Southern California mobile whole blood
collection program, 2) collection of an increased number of red cells
from our East Coast BMPs, 3) opening of new BMPs and 4) price increases
for whole blood derived products at some of our West Coast BMP customers.
The increased revenue from these activities was partially offset by a
slowdown in the collection and sale of platelets derived from the Sherman
Oaks paid platelet program and the loss of the St. Vincent's BMP that
terminated in August 2001. The St. Vincent's BMP contributed $470,000 of
revenue during the second quarter of 2001.
Gross profits from Blood Products were $271,000 (6% of revenue) for the
three months ended June 30, 2002, compared to $393,000 (10% of revenue)
during the second quarter of 2001, a decrease of $122,000. The decrease
was primarily attributed to start up costs and pre-opening expenses at
our new BMPs and limited recruiting success of whole blood donors at our
Southern California mobile collection program and at our East Coast BMPs.
These decreases were partially offset by price increases for whole blood
derived products at our West Coast BMPs, which increased profits at these
programs.
During the second quarter of 2002, we continued the expansion of our
whole blood collection program in our donor centers and our Southern
California mobile program. During the three months ended June 30, 2002,
we collected 12,000 whole blood donations compared to 5,600 during the
same period last year. We implemented certain price increases for whole
blood derived products at certain donor centers and for some of our
mobile customers. Some of these price increases took affect during the
second quarter and some will take effect during the third quarter.
Although we collected 114% more whole blood units over the prior period,
we increased our infrastructure to support an even greater number of
collections. Since those have not yet materialized (but are expected to
do so), our profitability was negatively impacted. We collected 5,600
platelets during the three months ended June 30, 2002 compared to 5,800
during the same period in 2001. Effective August 1, 2002, we terminated
our operation of the Long Beach Memorial Medical Center donor center.
This donor center provided $111,000 in revenue and $22,000 in profits
during the three months ended June 30, 2002. We will continue to collect
whole blood products for this hospital as part of our Southern California
mobile collectiono program.
We currently have four new programs that are in various start up stages
in North Caorlina, Vermont and Maine. Together, these programs contri-
buted revenue of $97,000 during the three months ended June 30, 2002, and
incurred start up and pre-opening losses of $93,000.
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Blood Services
Revenue for the three months ended June 30, 2002, was $2,198,000 compared
to $2,259,000 during the three months ended June 30, 2001. The decrease
of $61,000 (3%) was due to a slowdown in demand for therapeutic apheresis
services in Southern California partially offset by an increase in demand
in other regions. We performed 1,824 procedures during the second
quarter of 2002, compared to 1,894 during the same period of 2002. We
continue to sponsor a physician education program that was started in
2000. The success of that program along with an increase in the disease
states that require therapeutic apheresis, caused a greater demand for
our Blood Services in the three months ended June 30, 2001 as compared to
the same period of 2002. The gross profit margin was 33% during the
three months ended June 30, 2002, compared to 36% during the same period
last year. The decrease was primarily due to increases in labor costs in
the Southern California region.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $1,018,000 for the three months
ended June 30, 2002, compared to $967,000 for the three months ended June
30, 2001. The increase of $51,000 (5%) is primarily due to increased
legal fees associated with the American Red Cross litigation and expanded
staff and corporate facilities.
Six months ended June 30, 2002 compared to June 30, 2001
- --------------------------------------------------------
Revenue, Gross Profit and Net Income
- ------------------------------------
Overview
Revenue for the six months ended June 30, 2002 was $13,261,000 compared
to $12,295,000 in the same period of 2001. The increase of $966,000 (8%)
reflects the continued expansion of our Blood Products segment partially
offset by a decrease in demand for Blood Services and the loss of
$954,000 from a terminated BMP agreement.
Gross profits were $1,747,000 (13.2% of revenue) in the six months ended
June 30, 2002 compared to $2,403,000 (19.5% of revenue) in the same
period of 2001. The decrease in gross profit margins primarily resulted
from start-up losses for our new BMPs in Chicago, Illinois, Bangor, Maine
and Durham, North Carolina and pre-opening expenses associated with our
new BMPs in Vermont and Albany, New York along with the expansion of our
California based mobile collection program. Additionally, the decline in
demand for therapeutic apheresis negatively affected our gross profits.
Our BMP in Chicago, which began operations in June of 2001, provided
revenue from its Blood Products and Blood Services of $303,000 and in-
curred an operating loss of $127,000. Other new programs in the start up
stage contributed $106,000 in revenue and incurred losses of $221,000.
General and administrative expenses were $1,997,000 for the six months
ended June 30, 2002, compared to $1,812,000 for the six months ended June
30, 2001. The increase of $185,000 (5%) is primarily due to increased
legal fees associated with the American Red Cross litigation and expanded
staff and corporate facilities.
For the six months ended June 30, 2002, we incurred a net loss of
$157,000, or $0.02 per share basic and diluted, compared to net income of
$372,000, or $0.05 per share basic and $0.04 per share diluted, during
the same period of 2001.
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Blood Products
Revenue from Blood Products was $9,131,000 for the six months ended June
30, 2002, compared to $7,915,000 for the same period of 2001. The
increase of $1,216,000 (15%) was the result of several factors including
1) expansion of our Southern California mobile whole blood collection
program, 2) the collection of red cells in our East Coast BMPs, 3)
revenue from new programs and 4) price increases in our west coast donor
centers. The increased revenue from these activities was partially
offset by the loss of the St. Vincent's BMP which was terminated in
August 2001 and contributed revenue of $954,000 during the six months
ended June 30, 2002.
Gross profits from Blood Products declined to $359,000 (4% of revenue)
during the six months ended June 30, 2002, compared to $843,000 (11% of
revenue) during the six months ended June 30, 2001. The decrease was
primarily attributed to start up losses at our new BMPs and limited
recruiting success of whole blood donors at our Southern California
mobile collection program and at our east coast BMPs. These decreases
were partially offset by price increases for whole blood products at our
west coast BMPs.
During the first six months of 2002, we continued the expansion of our
whole blood collection program in our donor centers and our Southern
California mobile program. During the six months ended June 30, 2002, we
collected 23,200 whole blood donations compared to 10,400 during the same
period last year. We implemented certain price increases for whole blood
derived products at certain donor centers and for some of our mobile
customers. Some of these price increases took affect during the second
quarter and some will take effect during the third quarter. Although we
collected 123% more whole blood units over the prior period, we increased
our infrastructure to support an even greater number of collections.
Since those collections have not yet materialized (but are expected to do
so), our profitability was negatively impacted.
We collected 11,500 platelets during the six months ended June 30, 2002
compared to 11,900 during the same period in 2001. Some of our hospital
customers' demand for platelets decreased during the six months ended
June 30, 2002. Accordingly, we reduced our collection efforts for those
programs.
Effective August 1, 2002, we terminated our operatin of the Long Beach
Memorial Medical Center donor center. This donor center provided $198,000
in revenue and $21,000 in profits during the six months ended June 30,
2002. We will continue to collect whole blood products for this hospital
as part of our Southern California mobile program.
Blood Services
Revenue for the six months ended June 30, 2002 was $4,130,000 compared to
$4,380,000 during the six months ended June 30, 2001. The decrease of
$250,000 (6%) was due to a slowdown in demand for therapeutic apheresis
services in Southern California partially offset by an increase in demand
in other regions. We performed 3,500 procedures during the first six
months of 2002, compared to 3,700 during the same period of 2002. We
continue to sponsor a physician education program that was started in
2000. The success of that program along with an increase in the disease
states that require therapeutic apheresis, increased demand for our Blood
Services in 2001. The gross profit margin was 34% during the six months
ended June 30, 2002, compared to 36% during the same period last year.
The decrease was primarily due to increases in labor costs in the
Southern California region.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $1,997,000 for the six months
ended June 30, 2002, compared to $1,812,000 during the same period in the
prior year. The increase of $185,000 (10%) is primarily due to increased
legal fees associated with the ARC litigation and costs associated with
lobbying efforts to change the legislation affecting our paid platelet
program. Additionally, we incurred $56,000 of non cash compensation
expense related to the extension of certain employee stock options as
part of an employee severance arrangement.
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Liquidity and Capital Resources
- --------------------------------
As of June 30, 2002, we had cash and cash equivalents of $1,079,000 and
working capital of $3,410,000.
We have two lines of credit with a commercial bank. The first line of
credit is a working capital line. We can borrow the lesser of 75% of
eligible accounts receivable or $2.0 million. Interest is payable
monthly at a rate of prime plus 0.25% (5.0% as of June 30, 2002). The
second line of credit provides $1.25 million for equipment purchases.
Periodically, we can convert equipment purchase loans into a long-term,
fully amortized note payable. The note requires monthly payments
including interest equal to the bank's internal cost of funds plus 2.5%
(6.05% as of June 30, 2002). As of June 30, 2002, we had outstanding
borrowings of $543,000 on the equipment line of credit and no borrowings
on the working capital line of credit. These lines of credit are
secured by substantially all of our unencumbered assets and require us to
maintain certain financial covenants. As of June 30, 2002, we were not
in compliance with one of these covenants due to our incurring a loss in
the second quarter of 2002. The bank has waived this covenant violation.
Cash flow provided from operations was $788,000 for the six months ended
June 30, 2002, compared to cash used in operations of $58,000 during the
same period of 2001. During 2001, we experienced a slowdown in our
accounts receivable collections. Beginning in late 2001, we increased
the frequency of our customer contacts and tightened our credit policies.
Consequently, the number of days sales outstanding was reduced from 77
days at December 31, 2001 to 59 days as of June 30, 2002.
Cash used in investing activities primarily represents the acquisition of
plant and equipment. We acquired various assets to support our continued
expansion of our Blood Products segment.
Cash used in financing activities for the six months ended June 30, 2002
was $179,000 compared to $301,000 for the same period of 2001. The cash
used in financing activities for the six months ended June 30, 2002 was
primarily the principal payments on our working capital and equipment
lines of credit. We also received $100,000 in proceeds from a
capitalized lease. The cash used in financing activities during the six
months ended June 30, 2001, was primarily to repurchase $386,000 of
company stock.
We anticipate that our cash on hand and borrowing from the bank lines of
credit will be sufficient to provide funding for our needs during the
next 12 months for (i) existing operations, (ii) the remaining costs of
discontinued operations, (iii) bringing existing start-up programs to
maturity and (iv) other working capital requirements including capital
and operating lease commitments. Our future programs to extend our blood
collection and blood management programs to new hospital customers may
require significant capital investments in new equipment for new blood
collection centers, mobile collection units ("bloodmobiles"), blood
processing laboratories and other supporting facilities. The amounts of
such capital needs may exceed our existing sources of capital (operating
cash flow and unused borrowing facilities) and require us to raise
additional capital in the debt or equity markets. There can be no
assurance that we will be able to obtain such financing on reasonable
terms or at all.
Our primary sources of liquidity include our cash on hand, available
lines of credit and cash generated from operations. Our liquidity is
dependent, in part, on timely collections of accounts receivable. Any
significant delays in customer payments could adversely affect our
liquidity. Our liquidity is also dependent on our maintaining compliance
with our bank covenants. As previously stated the bank waived the June
30, 2002 covenant violation. If in the future we are unable to comply
with our loan covenants and the bank does not issue a waiver, then our
liquidity could be materially affected.
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Since 1976, California law has prohibited the infusion of blood products
into patients if the donors of those products were paid unless, in the
opinion of the recipient's physician, blood from a non-paid donor was not
immediately available. Apheresis platelet products obtained from paid
donors, including our Sherman Oaks center's paid donors, have been
exempted from this law by a series of state statutes. Unless a new
exemption is obtained, the existing exemption will expire under its
sunset provision of December 31, 2002. This could have a material adverse
effect on the Company's revenue and net income. Revenue from paid
platelet donors during the six months ended June 30, 2002 was $2,773,000.
If we are unable to continue our practice of paying platelet donors in
our Sherman Oaks operation, it would have a materially adverse effect on
our profitability and could have an impact on loan compliance. Absent
significant economic improvement in our volunteer donor blood programs in
Southern California, we may exit the blood products business and focus on
our therapeutic apheresis operations in the state and our non-California
blood products operations and BMPs.
In July 2000, we announced our intention to repurchase up to 15% of our
outstanding common stock, or up to 1.1 million shares. Purchases were
made in the open market or in private transactions depending on price and
availability. We funded the purchases from cash and cash equivalents and
marketable securities along with profits generated in the normal course
of business. In 2001, we repurchased 772,000 shares at an average price
of $1.41 per share. No purchases were made during the first six months
of 2002.
Although we incurred a loss during the first six months of 2002, most of
our established operations remain profitable. Our losses were primarily
due to start-up losses associated with the expansion of our blood
management programs, expenses associated with the expansion of our whole
blood collection program and litigation expense associated with our
lawsuit against the American Red Cross.
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 our 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 our Company) are forward-looking,
such as statements relating to operational and financing plans,
competition, the impact of future price increases for blood products, the
effects of discontinued operations, demand for our Company's products and
services, and the anticipated outcome of litigated matters. Such forward-
looking statements involve important risks and uncertainties, many of
which will be beyond the control of our 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 our Company. These risks and uncertainties include, but are not
limited to, the following: the high degree of government regulation of
our business; product safety concerns and potential liability for blood-
borne diseases; environmental risks; access to insurance; declining blood
donations; new laws that might threaten our paid donor programs; our
competitor's advantages as tax-exempt organizations; difficulties in
expanding our business; increasing costs; increasing reliance on outside
laboratories; our emphasis on single-donor platelet products, which may
have limited future growth; difficulty in recruiting new volunteer donors
for apheresis collection; our emphasis on smaller donor groups than our
competitors; lack on increases in reimbursement rates from Medicare and
Medicaid payers; competitive restraints on our ability to pass increased
costs on to customers; increased use of fixed price contracts for our
services; possible interruptions from terrorist activity; uncertainty
about our ability to obtain additional capital when needed in the future
or to obtain capital for expansion of our business; defaults on our
credit agreements that could lead to a loss of our working capital credit
line; our dependence on key personnel; our Rights Plan and provisions of
our Articles of Incorporation, which could discourage a takeover of the
Company; the limited market for our stock resulting from our delisting
from the Nasdaq Small Cap Market and thin trading volume; possible
volatility in our stock price; possible dilution from future issuances of
equity securities; and the likelihood that we will not pay dividends in
the future.
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Item 3. Qualitative and Quantitative Disclosures About Market Risk
None.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See disclosure in Form 10-K for the year ended December 31,
2001.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
a. The Company's annual meeting of shareholders (the "Meeting")
held on June 13, 2002 was adjourned and reconvened
on July 1, 2002.
b. The following table shows the tabulation of votes for
all matters put to vote at the Meeting.
Against\
Matters Put to Vote For Withheld Abstain
----------------------------- ----------- ---------- ----------
1. Election of Six Directors
Alan C. Darlington....... 6,244,338 242,904 -
Stephen P. Wallace....... 6,244,338 242,904 -
Julian L. Steffenhagen... 6,244,338 242,904 -
Robert L. Johnson........ 6,244,338 242,904 -
Ronald O. Gilcher........ 6,244,338 242,904 -
Dana E. Belisle.......... 6,244,338 242,904 -
Thomas M. Asher.......... 3,373,632 - -
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
11 Net Income per Common and Common Equivalent Share
99 Certification Pursuant to 18 U.S.C. 1350 Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
b. Reports on Form 8-K
The Company filed a Form 8-k with the Securities and
Exchange Commission on July 18, 2002 regarding the
change in accountants.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 14, 2002 HEMACARE CORPORATION
----------------------------
(Registrant)
/s/ David E. Fractor
----------------------------
David E. Fractor, Chief
Financial Officer
(Duly authorized officer
and principal financial and
accounting officer)
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