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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, 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
21101 Oxnard Street
Woodland Hills, California 91367
- ---------------------------------------- ----------
(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 10, 2002, 7,751,090 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.
Page Number
Consolidated balance sheets - September 30, 2002
(unaudited) and December 31, 2001 3
Consolidated statements of operations - Three and
nine months ended September 30, 2002 and 2001
(unaudited) 4
Consolidated statements of cash flows - Nine months
ended September 30, 2002 and 2001 (unaudited) 5
Notes to consolidated financial statements - September
30, 2002 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10
Item 3. Qualitative and Quantitative Disclosures About
Market Risk. 24
Item 4. Controls and Procedures. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 25
Item 2. Changes in Securities and Use of Proceeds. 25
Item 3. Defaults Upon Senior Securities. 25
Item 4. Submission of Matters to a Vote of Security Holders. 26
Item 5. Other Information. 26
Item 6. Exhibits and Reports on Form 8-K. 26
SIGNATURES 26
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,206,000 $ 1,025,000
Accounts receivable, net of allowance for
doubtful accounts - $208,000 in 2002 and $212,000
in 2001............................................ 4,643,000 5,454,000
Product inventories and supplies..................... 838,000 707,000
Prepaid expenses..................................... 271,000 192,000
Deferred income taxes................................ 498,000 498,000
------------ ------------
Total current assets..................... 7,456,000 7,876,000
Plant and equipment, net of accumulated
depreciation $2,324,000 in 2002 and $2,030,000 in
2001................................................. 2,954,000 2,348,000
Goodwill............................................... - 362,000
Deferred taxes......................................... 2,563,000 2,405,000
Other assets........................................... 61,000 91,000
------------ ------------
$13,034,000 $13,082,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 2,163,000 $ 2,495,000
Accrued payroll and payroll taxes.................... 1,470,000 948,000
Other accrued expenses............................... 99,000 113,000
Current obligations under capital leases............. 57,000 31,000
Current obligations under notes payable.............. 169,000 168,000
Reserve for discontinued operations.................. 73,000 75,000
------------ ------------
Total current liabilities................ 4,031,000 3,830,000
Obligations under capital leases, net
of current portion................................... 172,000 176,000
Notes payable, net of current portion.................. 774,000 626,000
Other long-term liabilities............................ 18,000 23,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, no par value - 20,000,000 shares
authorized, 7,751,090 issued and outstanding in
2002 and 7,590,205 in 2001......................... 13,296,000 13,065,000
Accumulated deficit.................................. (5,257,000) (4,638,000)
------------ ------------
Total shareholders' equity............... 8,039,000 8,427,000
------------ ------------
$13,034,000 $13,082,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30, Nine months ended September 30,
2002 2001 2002 2001
------------ ------------ ----------- -----------
Revenues:
Blood products.................... $4,979,000 $4,230,000 $14,110,000 $12,145,000
Blood services.................... 2,202,000 2,210,000 6,332,000 6,590,000
----------- ----------- ------------ -----------
Total revenue.................... 7,181,000 6,440,000 20,442,000 18,735,000
Operating costs and expenses:
Blood products.................... 4,699,000 3,784,000 13,471,000 10,856,000
Blood services.................... 1,460,000 1,511,000 4,202,000 4,331,000
----------- ----------- ------------ ------------
Total operating costs and
expenses....................... 6,159,000 5,295,000 17,673,000 15,187,000
----------- ----------- ------------ ------------
Gross profit...................... 1,022,000 1,145,000 2,769,000 3,548,000
General and administrative
expenses............................ 1,187,000 1,138,000 3,184,000 2,950,000
Write off of impaired goodwill......... 362,000 - 362,000 -
----------- ----------- ------------ ------------
Income (loss) before income taxes...... (527,000) 7,000 (777,000) 598,000
Provision (benefit) for income taxes... (65,000) 2,000 (158,000) 221,000
----------- ----------- ------------ ------------
Net income (loss)................... $ (462,000) $ 5,000 $ (619,000) $ 377,000
=========== =========== ============ ============
Income per share
Basic and diluted................... $ (0.06) $ 0.00 $ (0.08) $ 0.05
=========== =========== ============ ============
Weighted average shares
outstanding - basic................ 7,738,000 7,541,000 7,647,000 7,509,000
=========== =========== ============ ============
Weighted average shares
outstanding - diluted.............. 7,738,000 8,426,000 7,647,000 8,247,000
=========== =========== ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net (loss) income......................................... $ (619,000) $ 377,000
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 299,000 214,000
Compensation expense related to stock options.......... 56,000 -
Issuance of common stock to 401-K plan................. 122,000 93,000
Impaired goodwill...................................... 362,000 -
Deferred income taxes.................................. (158,000) 197,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable............ 811,000 (1,277,000)
Increase in inventories, supplies and
prepaid expenses..................................... (210,000) (35,000)
Increase in accounts payble, accrued expenses
and other liabilities............................... 171,000 327,000
Decrease in reserve for discontinued operations....... (2,000) (1,000)
----------- -----------
Net cash provided by (used in) operating activities... 832,000 (105,000)
Cash flows from investing activities:
Decrease (increase) in other assets....................... 30,000 (25,000)
Decrease in marketable securities......................... - 668,000
Proceeds from dispostion of plant and equipment........... 10,000 -
Purchases of equipment, net............................... (870,000) (1,067,000)
----------- -----------
Net cash used in investing activities..................... (830,000) (424,000)
Cash flows from financing activities:
Proceeds from the exercise of stock options............... 53,000 194,000
Principal payments on capital leases and notes payable.... (149,000) (49,000)
Borrowings from lines of credit........................... 275,000 584,000
Repurchase of common stock................................ - (386,000)
----------- -----------
Net cash provided by financing activities................. 179,000 343,000
----------- -----------
Increase (decrease) in cash and cash equivalents............ 181,000 (186,000)
Cash and cash equivalents at beginning of period............ 1,025,000 1,362,000
----------- -----------
Cash and cash equivalents at end of period.................. $1,206,000 $1,176,000
=========== ===========
Supplemental and non-cash disclosure:
Interest paid............................................. $ 44,000 $ 15,000
=========== ===========
Income taxes paid......................................... $ - $ 74,000
=========== ===========
Items not affecting cash flow:
Notes and capitalized leases issued in connection with
acquisition of plant and equipment....................... $ 131,000 $ 144,000
=========== ===========
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 accounting principles generally
accepted in the United States 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, 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
accounting principles generally accepted 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 September 30, 2002). As of September 30, 2002, the
Company had net borrowings of $450,000 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% (5.0% as of September 30, 2002).
At September 30, 2002, the total amount financed under the
equipment line of credit is $493,000 and the line of credit
requires 48 monthly principal payments of $14,000 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
September 30, 2002, the Company was not in compliance with a
covenant that requires the Company to be profitable each quarter.
During the quarter ended September 30, 2002, the Company incurred
a loss. The bank has waived this violation.
The Company is currently in negotiations with the bank to revise
the terms of the working capital line of credit. If negotiations
are successful, the new line of credit will have an availability
equal to the lesser of $2.5 million or 75% of eligible accounts
receivable. The maximum availability will be reduced by the
outstanding balance of the notes payable under the equipment line
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of credit. Interest will be payable monthly at a rate of prime
plus one half percent per annum. Until this line of credit
becomes effective, the bank has indicated that it will continue
to make advances under the existing working capital line of
credit; however, it will not make any additional advances under
the equipment line of credit.
Note 3 - Capitalized Lease
During the nine months ended September 30, 2002, the Company
entered into two capitalized leases in the amount of $131,000 to
finance the acquisition of certain equipment. The leases require
monthly payments of $4,264 including interest at the weighted
average rate of 9.2% per annum through January 2006 when they
expire.
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. Despite our lobbying efforts and
support from our hospital customers and the medical community,
the California Legislature did not extend our paid platelet
program. Consequently, we will be unable to offer cash
compensation to our donors after January 1, 2003. The Sherman
Oaks paid donor program provided revenue of $4,083,000, or 20% of
total revenue, during the nine months ended September 30, 2002
and gross profits of $1,094,000. The Company is in the process
of attempting to convert its paid donors to volunteer donors.
However, the ultimate success of this conversion can not be
determined. In the event the Company is unable to successfully
convert its paid donors to volunteer donors, it will close this
program and may terminate some other Blood Product activities in
Southern California whose profitability depends on the paid donor
program. The loss of this program will have a material adverse
financial affect on the Company. Additionally, the blood donor
center at the University of Irvine Medical Center is also
dependent on paid platelet donations. The Company gave the
hospital a 90-day notice of closure on October 15, 2002.
Accordingly, the Company will no longer operate this donor center
after January 15, 2003. This program provided $374,000 in
revenue and $35,000 in gross profits during the nine months ended
September 30, 2002.
State and Federal laws set forth anti-kickback 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.
HemaCare and its subsidiary, Coral Blood Services, Inc. filed an
antitrust action against the American Red Cross alleging that the
business practices of the Red Cross relating to its blood
products operations are illegal under antitrust laws and designed
to eliminate or prevent competition in the blood industry.
The courts elected to treat the litigation as two separate
actions, 1) HemaCare v. the American National Red Cross (relating
to matters in Southern California) under the jurisdiction of the
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Federal Court in Los Angeles, and 2) Coral Blood Services, Inc.
v. the American National Red Cross (relating to matters outside
of California) under the jurisdiction of the Federal Court in
Boston. The HemaCare litigation, relating to matters in
California, has been dismissed with prejudice, pursuant to a
mutual agreement between HemaCare and the American Red Cross.
The Coral litigation, pertaining to matters outside of
California, remains active and is in the discovery stage.
During the quarter ended September 30, 2002, the Company's
Chairmen and Chief Executive Officer resigned. Pursuant to the
terms of his employment contract, the Company is obligated to
make certain severance payments. Although negotiations are on-
going, the Company has estimated that the value of the severance
payments to be $247,000.
Note 5 - Business Segments
HemaCare operates in two business segments as follows:
- Blood Products - Collection, processing and distribution of blood
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 that was recorded as part
of the Coral Blood Services, Inc. transaction in 1998. The
Company completed the transitional goodwill impairment test during
the second quarter of 2002 and determined that there was no
impairment. During the third quarter of fiscal 2002, due to
continued economic declines and decrease is stock price,
management determined there was a possible impairment of goodwill.
As a result, the Company completed an interim test for impairment
during the third quarter and concluded that the existing goodwill
was impaired. The Company recorded an adjustment to write-off all
of remaining goodwill in the amount of $362,000. 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 nine
months ended September 30:
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2002 2001
------------ -----------
Reported net (loss) income $ (619,000) $ 377,000
Goodwill amortization - 39,000
Goodwill impairment 362,000 -
------------ ------------
Adjusted net (loss) income $ (257,000) $ 416,000
============ ============
Income per share
Basic
Reported net (loss) income $ (0.08) $ 0.05
Goodwill amortization - 0.01
Goodwill impairment 0.05 -
------------ ------------
Adjusted net (loss) income $ (0.03) $ 0.06
============ ============
Diluted
Reported net (loss) income $ (0.08) $ 0.05
Goodwill amortization - -
Goodwill impairment 0.05 -
------------ ------------
Adjusted net (loss) income $ (0.03) $ 0.05
============ ============
Note 7 - Equity
Options and warrants totaling 79,500 and 84,500 were exercised for
the three and nine months ended September 30, 2002. During the
three and nine months ended September 30, 2001, 133,000, and
140,000 options and warrants were exercised. Additionally, the
Company contributed 76,385 and 92,848 shares of stock to the 401-K
plan during the nine months ended September 30, 2002 and 2001,
respectively.
Note 8 - Earnings per Share
The following table provides the calculation methodology for the
numerator and denominator for earnings per share:
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------- ------------- ------------
Net income (loss)............. $ (462,000) $ 5,000 $ (619,000) $ 377,000
============ ============ ============= ============
Shares outstanding............ 7,738,000 7,541,000 7,647,000 7,509,000
Net effect of diluted options. - 885,000 - 738,000
------------ ------------ ------------- ------------
Dilutive shares outstanding... 7,738,000 8,426,000 7,647,000 8,247,000
============ ============ ============= ============
Options and warrants outstanding of 2,034,000 for the three and
nine months ended September 30, 2002 and 575,000 options and
warrants for the three and nine months ended September 30, 2001
have been excluded from the above calculation because their effect
would have been anti-dilutive.
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Note 9 - Provision for income taxes
The Company believes that it is more likely than not that it will
be able to utilize the deferred tax assets to offset taxable
income in future periods. However, if the Company does not
achieve profitability, then this asset may require a write off.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ------- ------------------------------------------------------------
The matters addressed in this Item 2 that are not historical
information constitute "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Although the
Company believes that the expectations reflected in these forward-
looking statements are reasonable, such statements are inherently
subject to risks and uncertainties and the Company can give no
assurances that its expectations will prove to be correct. Actual
results could differ from those described in this report because of
numerous factors, many of which are beyond the control of the Company.
These factors include, without limitation, those described below under
the heading "Factors Affecting Forward Looking Information." The
Company undertakes no obligation to revise or update its forward-
looking statements to reflect events or circumstances after the date
of this report.
The following discussion should be read in conjunction with the
Company's financial statements and the related notes provided under
Item 1 - Financial Statements above.
CRITICAL ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted 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.
Cash and Cash Equivalents: The Company considers all highly liquid
investments with an original maturity of three months or less to be
cash equivalents.
Revenues and Accounts Receivable: Revenues are recognized upon
acceptance of the blood products or the performance of blood services.
Blood services revenues consist primarily of mobile therapeutics
sales, while blood product revenues consist primarily of sales of
single donor platelets and whole blood components that are
manufactured or purchased and distributed by the Company and donor
testing. Accounts receivable are reviewed periodically for
collectability.
Plant and Equipment: Plant and equipment is stated at original cost.
Furniture, fixtures, equipment and vehicles are depreciated using the
straight-line method over three to ten years. Leasehold improvements
are amortized over the lesser of their useful life or the length of
the lease, ranging from three to five years. The cost of normal
repairs and maintenance are expensed as incurred.
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Income Taxes: Income taxes are computed under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." SFAS 109 is an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. In estimating future tax consequences, SFAS 109 generally
considers all expected future events other than enactments of changes
in the tax law or rates.
Per Share Data: Earnings per share-basic is computed by dividing net
income by the weighted average shares outstanding. Earnings per share-
diluted is computed by dividing net income by the weighted average
number of shares outstanding including the diluted effect of options,
warrants and preferred stock.
GENERAL
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.
Although we incurred a loss during the first nine 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, litigation expense associated with
our lawsuit against the American Red Cross, severance to the former
CEO and the write off of goodwill.
Loss of Paid Platelet Programs
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.
Despite our lobbying efforts and support from our hospital customers
and the medical community, the California Legislature did not extend
our paid platelet program. Consequently, we will be unable to offer
cash compensation to our donors after January 1, 2003. We obtain
platelets from paid donors in our Sherman Oaks and University of
Irvine Medical Center donor programs.
We are in the process of converting our Sherman Oaks paid donors to
volunteers by offering non-cash compensation. The Food and Drug
Administration has donor incentive guidelines that provide a vast
array of incentives that we can offer to our donors. We will offer
these incentives with the expectation that we can retain a sufficient
number of donors to remain profitable. If successful, this program
will continue to collect single donor platelets; however, we expect to
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have significantly fewer donations. If this volunteer platelet
program is unsuccessful, we may have to terminate this program and
some other blood product activities in Southern California. Revenue
from the Sherman Oaks paid platelet program was $4,083,000 for the nine
months ended September 30, 2002 and the gross profits were $1,094,000.
For the three months ended September 30, 2002, revenue from this
program was $1,310,000 and gross profits were $332,000. Since the
blood donor center at the University of Irvine significantly relies on
donors that are paid by the medical center and this donor center has
been only marginally profitable, we gave a 90 day notice of closure to
the hospital on October 15, 2002. We will terminate this program on
January 15, 2003. This blood center provided $374,000 in revenue and
$35,000 in gross profits during the nine months ended September 30,
2002. The termination of these programs will result in our reducing
our labor force accordingly and we expect to incur the cost of
severance payments to the affected employees. Some employees will be
offered positions in other parts of the Company; however, we will not
reassign employees unless additional staff is needed in other
departments. The amount of the severance payments will depend upon
the number of paid platelet donors that can be converted to volunteers
and the continued expansion of the California mobile program.
RESULTS OF OPERATIONS
Three months ended September 30, 2002 compared to the three months
ended September 30, 2001
Revenue, Gross Profit and Net Income
- ------------------------------------
Overview
Revenue for the three months ended September 30, 2002 was $7,181,000
compared to $6,440,000 in the same period last year. The increase of
$741,000 (12%) resulted from the expansion of our blood products
segment. During the most recent quarter we operated more BMPs,
expanded our California mobile program, experienced a greater number
of collections and increased prices for certain products. These
increases were partially offset by the termination of our St.
Vincent's BMP, which provided $320,000 in revenue during the quarter
ended September 30, 2001.
Gross profits were $1,022,000 (14.2% of revenue) during the quarter
ended September 30, 2002, compared to $1,145,000 (17.8% of revenue)
during the prior period. The decline is primarily due to start- up
losses at our new BMPs in Chicago, Vermont, Bangor, Albany, and Durham
and low margins attributable to our whole blood collection programs.
General and administrative expenses were $1,187,000 during the most
recent quarter compared to $1,138,000 during the same period last
year. The increase of $49,000 (4%) reflects the severance accrual
to former Chief Executive Officer Alan C. Darlington ($247,000),
partially offset by the salary and other related expenses of our former
president of West Coast Productions who resigned during the third
quarter of 2001 and was not replaced.
During the quarter ended September 30, 2002, we incurred a net loss of
$462,000, or $0.06 per share basic and diluted compared to net income
of $5,000 or $0.00 per share basic and diluted during the same quarter
of 2001. Without the severance to Alan C. Darlington and the goodwill
impairment charge, our net income would have been $49,000, or $0.01
per share basic and diluted. The financial results for the quarter
include $1,310,000 of revenue and $332,000 of gross profits from our
paid platelet program that will be transitioned to a volunteer program
in 2003 (See "Loss of Paid Platelet Programs" above).
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BLOOD PRODUCTS
Our revenues and expenses are summarized in the following table.
(In Thousands)
Mature Programs California Mobiles New Programs Total
2002 2001 2002 2001 2002 2001 2002 2001
----------------- ------------------ ------------------ -----------------
Revenue............ $ 3,220 $ 3,689 $1,447 $ 496 $ 312 $ 45 $ 4,979 $ 4,230
Gross Profit....... $ 493 $ 486 $ 49 $ 0 $ (262) $ (49) $ 280 $ 446
GP%................ 15.3% 13.2% 3.4% 1.9% -84.1% -107.9% 5.6% 10.5%
Collections*
SDP.............. 5,404 5,195 - - 292 23 5,696 5,218
WB............... 3,157 4,797 7,572 2,942 1,020 428 11,749 8,167
SDP - Single Donor Platelet
WB - Whole Blood
* Excludes products from our St. Vincent's BMP, because that BMP
was a combination of collections and product purchased from other blood.
The Company continues to make significant efforts to expand its mobile
and fixed-site whole blood collection programs. Prior to 2001, our
efforts in this area were primarily considered a necessary part of our
service agreements with our hospital customers rather than a
significant source of earnings potential. Nationwide increases in the
price of red cells, which became effective in mid-year 2001, have now
made this activity economically attractive.
Mature programs
- ---------------
Revenue from our mature programs (those that have been open for more
than 18 months) decreased to $3,220,000 during the three months ended
September 30, 2002, compared to $3,688,000 during the same period of
2001. The decrease of $468,000 (13%) was primarily due to the
termination of the St. Vincent's BMP on August 31, 2001. This program
provided $320,000 of revenue during the third quarter of 2001. We
collected more platelets from most donor centers with the exception of
our Sherman Oaks platelet program (See "Loss of Paid Platelet
Programs" above). Whole blood collections during the third quarter of
2001 reflected a significant increase in donations in the aftermath of
the events of September 11. Additionally, our donor center at Long
Beach Memorial Medical Center was terminated on August 1, 2002. These
factors were partially offset by an increase in red cell prices during
the quarter ended September 30, 2002.
The gross profit margin of our mature programs increased to 15.3%
during the three months ended September 30, 2002 compared to 13.2% in
the same period of 2001. The St. Vincent's program, which closed on
August 31, 2001, had a gross profit margin of only 5%. Our margins
were also helped by new technology in the Sherman Oaks platelet
operations that increased the number of saleable products obtained
from each platelet donor. This technology change reduced the cost per
platelet and improved the gross profit percentage partially offset by
a 21% decrease in donations. Most of our BMP customers had red cell
prices that were contractually established prior to the increase in
the market price that occurred during mid-2001. Over the past year,
we have raised red cell prices either through contract renegotiation
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or by raising prices when these contracts were renewed. Consequently,
we have raised red cell prices over the last year, thereby improving
our profit margins. Excluding the increase in donations in the
aftermath of September 11, 2001, we increased our whole blood
collections during the most recent quarter over the prior year.
However, we increased our labor staff in many locations to support an
even greater number of collections. The extra labor reduced our
efficiency in these locations. On August 1, 2002, our operation of
the Long Beach Memorial Medical Center donor center was terminated.
During the quarter, this program provided $64,000 in blood products
revenue and $31,000 in gross profits. We will continue to collect
whole blood products for this hospital as part of our Southern
California mobile collection program.
California Mobiles
- ------------------
Revenue from mobiles increased to $1,447,000 during the three months
ended September 30, 2002, compared to $496,000 during the three months
ended September 30, 2001. The increase of $951,000 (192%) reflects an
increase in the number of whole blood collections and improved red
cell pricing. Our average revenue per mobile red blood cell increased
to $183 in the most recent quarter compared to $139 in the same period
of 2001. The increase in price reflects the continued efforts to
bring our red cell prices in line with current market prices in
Southern California. Our gross profit from California mobiles were
$49,000 (3.4% of revenue) in the third quarter of 2002, compared to
$9,000 (1.9% of revenue) in the same period of 2001. Our collection
costs, particularly our labor and benefits costs, continue to be
higher than expected. Although we collected a record number of whole
blood donations, we have staffed to anticipate an even higher number
of collections in the fourth quarter of 2002 and beyond.
Consequently, this program's labor efficiency continues to be less
than optimal, which reduces our gross profit margin. We continue to
make progress in manufacturing fresh frozen plasma from whole blood
donations. During the third quarter of 2002, we manufactured fresh
frozen plasma from 83% of our California mobile whole blood donations
compared to 77% during the same period in 2001. The extra plasma
provides additional revenue per collection, thereby increasing our
gross profit margin.
New Programs
- ------------
We operate new programs in Chicago, Vermont, Bangor, Albany and
Durham. Together, these programs provided revenue of $312,000 and
losses of $262,000 during the three months ended September 30, 2002.
The Chicago program is the oldest, as it began collections in June
2001. The programs in Bangor and Durham began collections prior to
the start of the third quarter of 2002. Vermont collections began in
September and Albany has not started collections as of the end of the
most recent quarter. We are committed to making these programs
profitable by focusing on new recruiting initiatives that include a
national recruitment training program and expanding our recruitment
staff. Until these programs are profitable, we will not open
programs in new markets. If these programs are unable to achieve
profitability within certain time frames they will be shut down.
BLOOD SERVICES
Revenue from Blood Services during the quarter ended September 30,
2002 was $2,202,000 compared to $2,210,000 during the same period last
year. We experienced a decrease in demand for services in California,
offset by an increase in demand in the East Coast. During the most
recent quarter we performed 1,895 therapeutic apheresis procedures
compared to 1,903 during the three months ended September 30, 2001.
Our gross profits slightly increased to $742,000 (33.7% of revenue)
during the three months ended September 30, 2002, compared to $699,000
(31.6% of revenue) during the same period in 2001. The increase
reflects a modest change in the geographic mix of customers to regions
with lower operating costs. We continue to operate a physician
education program that began in California and are in the process of
expanding that program to other targeted geographic markets.
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GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expense increased to $1,187,000 during the
three months ended September 30, 2002, compared to $1,138,000 during
the same period of 2001. The increase of $49,000 (4%) was primarily
due to the contractual severance to former Chief Executive Officer
Alan C. Darlington ($247,000), partially offset by the salary and
other related expenses of our former President of West Coast Products
who resigned during the third quarter of 2001 and was not
replaced.
IMPAIRED GOODWILL
During the first quarter of 2002, we adopted Statement of Financial
Accounting Standards Number 142, "Goodwill and Other Intangible
Assets," (SFAS 142). In accordance with SFAS 142, we discontinued
amortizing goodwill that was recorded as part of the Coral Blood
Services, Inc. transaction in 1998. We completed the transitional
goodwill impairment test during the second quarter of 2002 and
determined that there was no impairment. During the third quarter of
fiscal 2002, due to continued economic declines and decrease is stock
price, we determined there was a possible impairment of goodwill. As a
result, we completed the additional testing for impairment during the
third quarter and concluded that the existing goodwill was impaired.
We recorded an adjustment to write-off all of remaining goodwill in the
amount of $362,000. We do not have any other intangible assets, other
than goodwill.
Nine months ended September 30, 2002 compared to 2001
- -----------------------------------------------------
Revenue, Gross Profit and Net Income
- ------------------------------------
Overview
Revenue for the nine months ended September 30, 2002 was $20,442,000
compared to $18,735,000 in the same period of 2001. The increase of
$1,707,000 (8%) was due to the expansion of our Blood Products
segment, including new BMPs and expansion of our California mobile
operations, partially offset by the loss of one BMP in August of 2001.
The revenue increase was also partially offset by a decline in overall
demand for Blood Services during the nine months ended September 30,
2002.
Gross profits during the nine months ended September 30, 2002 were
$2,769,000 or (13.5% of revenue) compared to $3,548,000 (18.9% of
revenue) during 2001. The decline was principally due to start up
losses at our new programs in Chicago, Vermont, Bangor, Albany and
Durham.
General and administrative expenses were $3,184,000 during the nine
months ended September 30, 2002, compared to $2,950,000 during the
same period last year. The increase of $234,000 (8%) was primarily
due to the accrual of a severance to the former Chief Executive
Officer.
For the nine months ended September 30, 2002, we incurred a loss of
$619,000 or $0.08 per share basic and diluted compared to net income
of $377,000 or $0.05 per share basic and diluted during the nine
months ended September 30, 2001.
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BLOOD PRODUCTS
Our revenues and expenses are summarized in the following table.
(In Thousands)
Mature Programs California Mobiles New Programs Total
2002 2001 2002 2001 2002 2001 2002 2001
----------------- ------------------ ------------------ -----------------
Revenue............ $ 9,478 $11,078 $ 3,976 $ 1,016 $ 656 $ 51 $14,110 $12,145
Gross Profit....... $ 1,356 $ 1,373 $ (94) $ 14 $ (623) $ (98) $ 639 $ 1,289
GP%................ 14.3% 12.4% -2.4% 1.4% -95.1% -191.2% 4.5% 10.6%
Collections*
SDP.............. 16,409 17,470 - - 750 28 17,159 17,498
WB............... 10,078 11,012 22,774 7,102 2,089 473 34,941 18,587
* Excludes products from our St. Vincent's BMP, because that BMP
was a combination of collections and product purchased from other
blood providers.
Mature Programs
- ---------------
Revenue from our mature programs (those that have been open for more
than 18 months) decreased to $9,478,000 during the nine months ended
September 30, 2002, compared to $11,078,000 in the same period of
2001. The decrease of $1,600,000 (14%) was primarily due to the
termination of the St. Vincent's BMP on August 31, 2001. This program
provided revenue of $1,273,000 during the nine months ended September
30, 2001. Additionally, we collected fewer platelets from our Sherman
Oaks paid platelet program (See "Loss of Paid Platelet Programs"
below). Our donor center at Long Beach Memorial Medical Center was
terminated on August 1, 2002. These decreases were partially offset
by increased prices on red cells during the nine months ended
September 30, 2002.
Gross profit margins of our mature programs increased to 14.3% during
the nine months ended September 30, 2002, compared to 12.4% during the
prior year. The termination of the St. Vincent's BMP helped our
margins as this program operated with a 2% loss during the first nine
months of 2001. Our margins were also helped by new technology in the
Sherman Oaks platelet operations that increased the number of saleable
products obtained from each platelet donor. This technology change
reduced the cost per platelet and improved the gross profit percentage
(albeit with fewer donors). Over the past year, we have raised red
cell prices either through contract renegotiation or by raising prices
when these contracts were renewed. Consequently, we have raised red
cell prices over the last year, thereby improving our profit margins.
Excluding the increase in donations in the aftermath of September 11
2001, we increased our whole blood collections during the nine months
ended September 30, 2002 compared to the same period in the prior
year. However, we increased our labor staff in many locations to
support an even greater number of collections. The extra labor
reduced our efficiency in these locations. Our operation of the Long
Beach Memorial Medical Center donor center was terminated on August 1,
2002. This program provided revenue of $282,000 and gross profit of
$47,000 during the nine months ended September 30, 2002. We will
continue to collect whole blood for this hospital as part of our
California mobile program.
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California Mobiles
- ------------------
Revenue from mobiles increased to $3,976,000 during the nine months
ended September 30, 2002, compared to $1,016,000 during the same
period in 2001. The increase of $2,960,000 (291%) was due to the
expansion of this program in late 2001 and resulted in an increase in
the number of whole blood collections. Our average revenue per red
blood cell increased to $166 during the first nine months of 2002
compared to $125 in the same period of 2001. The current market price
of a red cell in Southern California is approximately $215. The
increase in price reflects the continued efforts to bring our red cell
prices in line with current market prices in Southern California. We
incurred a loss of $94,000 (2% of revenue) for the nine months ended
2002, compared to gross profits of $14,000 (1% of revenue) in the same
period of 2001. Our collection costs, particularly our labor and
benefit costs, continue to be higher than expected. Although we
collected a record number of whole blood donations, we have staffed to
anticipate an even higher number of collections in the fourth quarter
of 2002 and beyond. Consequently, this program's labor efficiency
continues to be less than optimal, which reduces our gross profit
margin. We continue to make progress in manufacturing fresh frozen
plasma from whole blood donations. During the nine months ended
September 30, 2002, we manufactured fresh frozen plasma from 82% of
our California mobile whole blood donations compared to 75% during the
same period in 2001. The extra plasma provides additional revenue per
collection, thereby increasing our gross profit margin.
New Programs
- -------------
We operate new programs in Chicago, Vermont, Bangor, Albany and
Durham. Together, these programs provided revenue of $656,000 and
losses of $623,000 during the nine months ended September 30, 2002.
The Chicago program is the oldest, as it began collections in June
2001. The programs in Bangor, Durham and Vermont began during the
nine months ended September 30, 2002. The program in Albany has not
started collections as of the end of the most recent quarter. We are
committed to making these programs profitable by focusing on new
recruiting initiatives that include a national recruitment training
program and expanding our recruitment staff in selected markets.
Until these programs are profitable, we will not open programs in new
markets. If these programs are unable to achieve profitability within
certain time frames they will be shut down.
BLOOD SERVICES
Revenue from Blood Services for the nine months ended September 30,
2002 was $6,332,000 compared to $6,590,000 during the same period of
2001. We experienced a decrease in demand for services in California
offset by an increase in demand in the East Coast. For the nine
months ended September 30, 2002, we provided 5,413 therapeutic
apheresis procedures compared to 5,892 during the same period of 2001.
Our gross profits declined to $2,130,000 (33.6% of revenue) during the
nine months ended September 30, 2002 compared to $2,259,000 (34.3% of
revenue) in the same period of 2001. The decrease in gross profit
margin reflects a decline in procedures in high margin geographic
locations. We continue to operate a physician education program that
began in California and we are in the process of expanding that
program to other targeted geographic markets.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased to $3,184,000 during the
nine months ended September 30, 2002, compared to $2,950,000 during
the same period in 2001. The increase of $234,000 (8%) primarily
resulted from a contractual severance payment of $247,000 to the
former Chief Executive Officer.
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LIQUDITY AND CAPTIAL RESOURCES
As of September 30, 2002, we had cash and cash equivalents of
$1,206,000 and working capital of $3,425,000.
As of September 30, 2002, we have two lines of credit with a
commercial bank. The first line of credit is a working capital line.
We are able to 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% as of September 30, 2002). The second line of
credit provides $1.25 million for equipment purchases. Periodically,
we are able to 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% (5% as of September 30, 2002). As of September 30, 2002, we had
outstanding borrowings of $493,000 on the equipment line of credit and
net borrowings of $450,000 on the working capital line of credit.
These lines of credit are secured by substantially all of our
unencumbered assets and require the maintenance of certain financial
covenants. As of September 30, 2002, we were not in compliance with a
covenant requiring us to be profitable each quarter. The bank has
waived this covenant violation.
Currently, we are negotiating a new loan agreement with the bank. If
negotiations are successful, the new line of credit will have an
availability equal to the lesser of $2.5 million or 75% of eligible
accounts receivable. The maximum availability will be reduced by the
outstanding balance of the notes payable under the equipment line of
credit. Interest will be payable monthly at a rate of prime plus one
half percent per annum. Until this line of credit becomes effective,
the bank has indicated that it will continue to make advances under
the existing working capital line of credit; however, it will not make
any additional advances under the equipment line of credit.
The following table summarizes our contractual obligations by year.
Payments Due by Period
-------------------------------------------------------
Less Than After
Contractual Obligations Total One Year 1-3 Years 4-5 Years 5 Years
- ------------------------------ --------- --------- ---------- --------- ---------
Long-Term Debt................ $ 943,000 $ 169,000 $ 317,000 $ 7,000 $450,000
Capital Lease Obligations..... 229,000 57,000 127,000 12,000 33,000
Operating Leases.............. 1,885,000 486,000 863,000 536,000
---------- --------- ---------- -------- --------
Total Contractual Cash
Obligations................. $3,057,000 $ 712,000 $1,307,000 $555,000 $483,000
========== ========= ========== ======== ========
Additionally, we are committed to purchase approximately $10.5 million
of blood collection kits at established prices through 2006.
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Cash flow provided from operations was $832,000 for the nine months
ended September 30, 2002, compared to cash used in operations of
$105,000 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 62 days
as of September 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 provided by financing activities for the nine months ended
September 30, 2002 was $179,000 compared to $343,000 for the same
period of 2001. The cash provided by financing activities for the
nine months ended September 30, 2002 was primarily the results of
borrowings on our working capital line of credit. The cash provided by
financing activities during the nine months ended September 30, 2001,
was primarily due to $584,000 of notes payable issued to the bank that
were used to finance equipment purchases. This was partially offset
by the repurchase of $386,000 of company stock.
During the third quarter of 2002, we placed an order for five new
collection buses. These buses are scheduled to arrive during the
fourth quarter of 2002 at a total cost of approximately $450,000. We
are in the process of obtaining financing with a leasing company to
fund these buses. The terms of this lease have not been finalized.
We anticipate that our cash on hand, borrowing from the bank line of
credit and the equipment financing 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. We will not open any new programs in new geographic
regions until our current start-up operations are profitable. 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
line of credit and cash generated from operations. Our liquidity
depends, in part, on timely collections of accounts receivable. Any
significant delays in customer payments could adversely affect our
liquidity. Our liquidity also depends on our maintaining compliance
with our loan covenants. From time to time we have failed to comply
with these covenants and have obtained a waiver from our lender. 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.
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 nine months ended September 30, 2002.
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FACTORS AFFECTING FORWARDING-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;
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 of increases in reimbursement
rates from Medicare and Medicaid payers; competitive restraints on our
ability to pass increased costs on to customers; 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.
RISK FACTORS AFFECTING THE COMPANY
We Operate in a Heavily Regulated Industry
- ------------------------------------------
Our business consists of the collection, processing and distribution
of blood and blood products, all activities that are subject to
extensive and complex regulation by the state and federal governments.
With regard to the safety of our products, facilities and procedures
and the purity and quality of our blood products, we are required to
obtain and maintain numerous licenses in different locations and are
subject to frequent regulatory inspections. In addition, state and
federal laws include anti-kickback and self-referral prohibitions and
other regulations that affect the relationships between blood banks
and hospitals, physicians and other persons who refer business to
them. Health insurers and government payers such as Medicare and
Medicaid also cap reimbursement for our products and services and have
regulations that must be complied with before reimbursement will be
made.
The Company devotes substantial resources to complying with laws and
regulations and believes it is currently in compliance. However, the
possibility cannot be eliminated that interpretations of existing laws
and regulations will result in a finding that we have not complied
with significant existing regulations, which could materially harm our
business. Moreover, healthcare reform is continually under
consideration by regulators, and we do not know how laws and
regulations will change in the future. Some of these changes could
require costly compliance efforts or expensive outsourcing of
functions we currently handle internally could make some of the
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Company'soperations prohibitively expensive or impossible to
continue.
Product Safety and Product Liability
- ------------------------------------
Blood products carry the risk of transmitting infectious diseases,
including hepatitis, HIV and Creutzfeldt-Jakob Disease. HemaCare
carefully screens donors, uses the latest available technology to test
its blood products for known pathogens and complies with all
applicable safety regulations. Nevertheless, the risk that screening
and testing processes might fail or that new pathogens may be
undetected by them cannot be completely eliminated. There is
currently no test to detect the pathogen responsible for Creutzfeldt-
Jakob Disease. If patients are infected by known or unknown
pathogens, claims brought against us could exceed our insurance
coverage and materially and adversely affect our financial condition.
Access to Insurance
- -------------------
We currently maintain insurance coverage that we believe is
appropriate for our products and our industry. However, if we
experience losses or the risks associated with the blood products
industry increase in the future, insurance may become more expensive
or unavailable at reasonable prices or at all. We also cannot assure
you that as our business expands or we introduce new products and
services we will be able to obtain additional liability insurance on
acceptable terms, or that our insurance will provide adequate coverage
against any and all potential claims. Also, the limitations of
liability contained in agreements to which we are a party may not be
enforceable and may not otherwise protect us from liability for
damages. The successful assertion of one or more large claims against
us that exceeds available insurance coverage, or changes in our
insurance policies, such as premium increases or the imposition of
large deductibles or co-insurance requirements, could materially and
adversely affect our business.
Declining Blood Donations
- -------------------------
Our business depends on the availability of donated blood. Only a
small percentage of the population donates blood, and the rate
continues to decline. In addition, new regulations intended to reduce
the risk of introducing infectious diseases in the blood supply have
eliminated some groups of potential donors. While the Company has
developed strategies to recruit volunteer blood donors, there can be
no assurance that these strategies will result in sufficient blood
collections to meet hospital needs or to assure profitability.
Not-For-Profit Status Gives Advantages to Our Competitors
- ---------------------------------------------------------
We believe we are the only significant blood supplier in the U.S. that
is operated for profit and investor owned. Our competitors are
nonprofit organizations, which are exempt from federal and state
taxes, have substantial community support and have access to tax-
exempt financing. Although we believe that as a result of our
responsibility to operate for the benefit of investors we have
consistently achieved lower overhead than our nonprofit competitors,
there can be no assurance that we can maintain this advantage. If we
do not, we will not be able to compete successfully with nonprofit
organizations and our business and results of operations will suffer
material adverse harm.
Competition
- -----------
As a supplier of blood products we compete principally with the
American Red Cross and to a lesser degree with community-based blood
centers and hospital-based blood banks. As a provider of therapeutic
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blood services, we compete principally with regional and community
blood banks and hospital-based apheresis centers. We strive to
provide cost effective services, but our competitors sometimes have
advantages of price or established positions in their communities.
Also, the American Red Cross is a much larger organization than
HemaCare and has greater resources to sustain periods of unprofitable
sales or to adopt aggressive pricing strategies for the purpose of
defending or increasing its market share.
We Face Increasing Costs
- ------------------------
The costs of collecting, processing and testing blood have risen
significantly in recent years and will likely continue to rise. These
cost increases are related to new and improved testing procedures to
assure that blood is free of infectious disease, increased regulatory
requirements related to blood safety, and increased costs associated
with recruiting blood donors. New testing protocols have required us
to outsource some of our testing. Costs may increase further if the
FDA makes pre-storage leukoreduction mandatory. Because competition
limits our ability to pass these increased costs on to customers, the
increased costs could reduce our profitability and could have a
material adverse effect on our business and results of operations.
Increasing Reliance on Outside Laboratories
- -------------------------------------------
We maintain laboratories that are licensed and accredited to test
blood products for purity, potency and quality. Recently, we have
turned to outside laboratories for nucleic acid testing or NAT, a new
type of infectious disease test, which we expect to be mandated by the
FDA. As other new testing and processing technologies are introduced,
we may have to increase our reliance on outside laboratories. In
using outside laboratories we will have less control over testing
quality. In addition, because laboratory facilities competent in
these new technologies are scarce, the loss of an outside laboratory
because of competition for capacity would have a material adverse
effect on our business.
Our Target Donors Involve Higher Collection Costs
- -------------------------------------------------
Our competitors are most active in collecting blood outside of major
urban areas at sites where large numbers of potential donors are
concentrated, such as schools, large commercial employers and
government facilities. We believe that strategy has bypassed the
largest portion of the U.S. population and have instead targeted
smaller donor groups to raise blood for specific hospitals and their
patients. While we believe our donor recruitment and blood collection
activities are generally more cost-effective than our competition, our
targeted donor community does not offer the same economies of scale as
that of our competitors. As we grow we will need to increase our
number of donors, and our emphasis on smaller donor organizations
could make it more difficult for us to maintain a price advantage over
our competition.
Reimbursement Rates Have Not Kept Pace With Cost Increases
- ----------------------------------------------------------
The reimbursement rates for blood products provided to Medicaid and
Medicare patients were based on market prices prevailing several years
ago, when the American Red Cross reportedly sold red blood cells at
below-cost prices. Market prices have increased substantially since
that time, but the reimbursement rates have not. At present, the
Company's prices are less than the reimbursement rates in its
established markets and as a result the Company's products are
profitable. But costs may continue to increase in the future, and
there can be no assurance that reimbursement rates will increase at
that time. If they do not, our profits could be reduced or eliminated.
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Market Prices For Blood Do Not Necessarily Reflect Costs
- --------------------------------------------------------
We depend on competitive pricing to gain sales. Our cost management
strategy has generally enabled us to profitably sell blood products at
or below the prices of our competition. But as our costs increase we
will not be able to raise our prices commensurately if our competitors
do not. Some of our competitors have greater resources than we have
to sustain periods of unprofitable sales. Cost increases may
therefore have a direct negative effect on our profits and a material
adverse affect on our business.
We May Be Unable to Meet Future Capital Needs
- ---------------------------------------------
Currently, the Company believes it has sufficient cash available
through its cash on hand, bank credit facilities and funds from
operations to finance its operations for the next twelve months.
However, the Company had a loss in the fourth quarter which reduced
available cash. The Company may need 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.
We May Be Unable to Finance Expansion of Our Business
- -----------------------------------------------------
Our plans to expand blood collections and blood management programs to
new hospital customers will require significant capital investments in
equipment for new blood collection centers, bloodmobiles, blood
processing laboratories and other supporting facilities. In addition,
these new programs will require capital to finance start-up costs and
working capital requirements. The amount of these capital needs may
exceed our existing sources of capital 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.
We Could Lose our Lines of Credit
- ---------------------------------
From time to time the Company has failed to comply with the covenants
in its bank credit agreements, and has had to seek waivers from its
lenders. In particular, the Company has failed in the last four
quarters to comply with a covenant that it be profitable in each
quarter. While the lenders have previously granted these waivers when
needed, we cannot assure you that they will continue to grant them in
the future. Failure to obtain such waivers when, and if needed, could
result in acceleration of payment obligations under our credit
facilities and severely reduce our liquidity and available cash
resources.
We May Be Adversely Affected by Changes in the Healthcare Industry
- ------------------------------------------------------------------
In the U.S., a fundamental change is occurring in the healthcare
system. Competition to gain patients on the basis of price, quality
and service is intensifying among healthcare providers who are under
pressure to decrease the costs of healthcare delivery. This trend is
expected to continue. In addition, there has been significant
consolidation among healthcare providers as providers seek to enhance
efficiencies, and this consolidation is expected to continue. As a
result of these trends, we may be limited in our ability to increase
prices for our products in the future, even if our costs increase.
Further, we could be adversely affected by customer attrition as a
result of consolidation among healthcare providers.
Future Technological Developments Could Jeopardize Our Business.
- ----------------------------------------------------------------
Because of the risks posed by blood-borne diseases, many companies are
currently seeking to develop synthetic substitutes for human blood
products. At present, none of these products is a medically accepted
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substitute for human blood and its constituents. Nevertheless,
because our business consists of collecting, processing and
distributing human blood and blood products, the introduction and
acceptance in the market of synthetic blood substitutes would cause
material adverse harm to our business.
Our Articles of Incorporation and Rights Plan Could Delay or Prevent
an Acquisition or Sale of HemaCare
- ---------------------------------------------------------------------
Our Articles of Incorporation empower the Board of Directors to
establish and issue a class of preferred stock, and to determine the
rights, preferences and privileges of the preferred stock. This gives
the Board of Directors the ability to deter, discourage or make more
difficult a change in control of HemaCare, even if such a change in
control would be in the interest of a significant number of our
shareholders or if such a change in control would provide our
shareholders with a substantial premium for their shares over the then-
prevailing market price for our common stock.
In addition, the Board of Directors has adopted a Shareholder's Rights
Plan designed to require a person or group interested in acquiring a
significant or controlling interest in HemaCare to negotiate with the
Board. Under the terms of our Shareholders' Rights Plan, in general,
if a person or group acquires more than 15% of the outstanding shares
of common stock, all of our other shareholders would have the right to
purchase securities from us at a discount to the fair market value of
our common stock, causing substantial dilution to the acquiring person
or group. The Shareholders' Rights Plan may inhibit a change in
control and, therefore, could materially adversely affect our
shareholders' ability to realize a premium over the then-prevailing
market price for our common stock in connection with such a
transaction. For a description of the Rights Plan see the Company's
Current Report on Form 8-K filed with the SEC on March 5, 1998.
Stocks Traded on the OTC Bulletin Board are Subject to Greater Market
Risks than Those of Exchange-Traded and NASDAQ Stocks
- ---------------------------------------------------------------------
Our common stock was delisted from the NASDAQ Small Cap Market on
October 29, 1998 because we failed to maintain the market's
requirement of a minimum bid price of $1.00. Since November 2, 1998
our common stock has been traded on the OTC Bulletin Board, an
electronic, screen-based trading system operated by the National
Association of Securities Dealers, Inc. Securities traded on the OTC
Bulletin Board are, for the most part, thinly traded and generally are
not subject to the level of regulation imposed on securities listed or
traded on the NASDAQ Stock Market or on a national securities
exchange. As a result, an investor may find it difficult to dispose
of our common stock or to obtain accurate quotations as to its price.
We Do Not Expect to Pay Any Dividends
- --------------------------------------
The Company intends to retain any future earnings for use in its
business, and therefore does not anticipate declaring or paying any
cash dividends in the foreseeable future. The declaration and payment
of any cash dividends in the future will depend on the Company's
earnings, financial condition, capital needs and other factors deemed
relevant by the Board of Directors. In addition, the Company's credit
agreement prohibits the payment of dividends during the term of the
agreement.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Because some of the Company's obligations under its credit agreement
bear interest at floating rates (primarily prime interest rate), the
Company is sensitive to changes in prevailing interest rates. The
Company's interest expense is sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S.
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interest rates affect interest paid on the Company's debt. A majority
of the Company's credit facilities are at variable interest rates.
Item 4. Controls and Procedures
- ------- -----------------------
Within 90 days prior to the filing date of this report, the Chief
Operating Office and the Chief Financial Officer of the Company, with
the participation of the Company's management, carried out an
evaluation of the effectiveness of the Company's disclosure controls
and procedures pursuant to the Exchange Act Rule 13a-14. Based upon
that evaluation, the Chief Operating Officer and Chief Financial
Officer believe that, as of the date of the evaluation, the
Company's disclosure controls and procedures are effective in making
known to them material information relating to the Company (including
its consolidated subsidiaries) required to be included in this report.
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an
entity's disclosure objectives. The likelihood of achieving such
objections is affected by limitations inherent in disclosure controls
and procedures. These include the fact that human judgment in
decision-making can be faulty and that breakdowns in internal control
can occur because of human failures such as simple errors or mistakes
in intentional circumvention of the established process.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect internal controls,
known to the Chief Operating Officer or Chief Financial Officer,
subsequent to the date of the evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
For a description of pending litigation, see disclosure in Form 10-K
for the year ended December 31, 2001. For a description of recent
developments in the Company's litigation with the American Red Cross,
see Note 4 in Notes to Consolidated Financial Statements.
From time to time, the Company is involved in various routine legal
proceedings incidental to the conduct of its business. Management
does not believe that any of these legal proceedings will have a
material adverse impact on the business, financial condition or
results of operations of the Company, either due to the nature of the
claims, or because management believes that such claims should not
exceed the limits of the Company's insurance coverage.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ------ -------------------------------
None.
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Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
Item 5. Other Information
- ------- -----------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ------- ---------------------------------
a. Exhibits
11 Net Income per Common and Common Equivalent Share
99.1 Certification Pursuant to 18 U.S.C. 1350 Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
b. The Company filed a Form 8-K with the Securities and
Exchange Commission on (i) July 18, 2002 regarding the
change in accountants and (ii) August 26, 2002
regarding the potential termination of its paid donor
program.
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, 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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