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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
/ / 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 jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
21101 Oxnard Street
Woodland Hills, California 91367
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (818) 226-1968
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(without par value)
Rights to purchase
Preferred Stock
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: /x/ YES ___ NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K / /
As of March 24, 2003, 7,751,060 shares of Common Stock of the registrant were
issued and outstanding. The aggregate market value of the Common Stock held
by non-affiliates of the registrant on that date (based upon the closing bid
price of the Common Stock as reported by the OTC Bulletin Board) was
approximately $4,398,154.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule12b-2 of the Act). / / YES /x/ NO
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TABLE OF CONTENTS
PART I.
Page
Number
Item 1. Business
General............................................. 1
Our Business Strategy............................... 1
Recent Developments................................. 2
Blood Products Operations........................... 4
Blood Services Operations........................... 6
Competition......................................... 8
Sales to Major Customers............................ 9
Marketing........................................... 9
Human Resources..................................... 9
Suppliers........................................... 9
Government Regulation and Blood Safety.............. 10
Professional and Product Liablity Insurance......... 11
Risk Factors Affecting the Company.................. 11
Additional Information.............................. 16
Item 2. Properties.......................................... 16
Item 3. Legal Proceedings................................... 17
Item 4. Submission of Matters to a Vote of Security Holders. 17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters......................... 17
Item 6. Selected Financial Data............................. 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 19
Item 7a. Quantitative and Qualitative Disclosures about
Market Risk......................................... 28
Item 8. Financial Statements and Supplementary Data......... 28
Item 9. Changes and Disagreements with Accountants on
Accounting and Financial Disclosures................ 28
PART III
Item 10. Directors and Executive Officers of the Registrant. 29
Item 11. Executive Compensation............................. 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 36
Item 13. Certain Relationships and Related Transactions..... 37
Item 14. Controls and Procedures............................ 38
PART IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 10-K............................... 38
Signatures................................................... 41
Certifications............................................... 42
Index to Consolidated Financial Statements and Schedules..... F-1
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PART I
ITEM 1. BUSINESS
This 2002 Annual Report on Form 10-K contains statements which 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. Those statements include statements
regarding the intent, belief or current expectations of the Company and its
management. Prospective investors are cautioned that any such forward-
looking statements are not guarantees of future performance and involve risks
and uncertainties, and that actual results may differ materially from those
projected in the forward-looking statements (See Risk Factors).
General
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HemaCare Corporation collects, processes and distributes blood products to
hospitals in the United States. Additionally, we provide blood related
services including therapeutic apheresis procedures, stem cell collection and
other blood treatments to patients with a variety of disorders. Our blood
related services are usually provided in the hospital setting under
contractual arrangements with the hospital as an outside purchased service.
As part of our marketing strategy, we have entered into blood management
programs ("BMP") with many of our hospital customers. Under a BMP
arrangement, a hospital, or a group of hospitals, contracts with us to
provide management services which may include operation of a donor center,
mobile blood drives and blood services. A BMP provides our hospital
customers with a safe and reliable source of blood products and services at a
reasonable cost, as well as assistance in achieving their financial,
regulatory compliance and patient service goals related to blood products and
services.
We have provided blood products and services in Southern California since
1979. In 1998, we began to expand our operations in the eastern U.S. Our
operations now cover 14 states throughout the nation. We market our products
and services as HemaCare Corporation ("HemaCare") in California and Coral
Blood Services, Inc. ("Coral") in other states. Coral is a wholly owned
subsidiary of HemaCare.
In the U.S., the American Red Cross ("ARC") is the largest provider of blood
products, accounting for approximately 50% of the total blood supply.
Approximately 90 privately organized blood centers, generally operating in
limited geographic regions, provide another 40% of U.S. blood requirements.
The remaining blood supply is collected by hospitals. HemaCare provides
less than 1% of the total blood supply. Although most blood suppliers
are organized as not-for-profit, tax-exempt organizations, all charge
fees for blood products. These fees are set at levels designed to
recover the costs of blood center operations and provide sufficient profit
margins to finance continued operations.
We believe we are the only investor-owned and taxable organization
operating as a blood supplier with significant operations in the U.S.
Our programs provide red cells, plasma and aphersis platelets to
hospitals at charges that are competitive with or lower than those
charged by other blood providers.
In recent years, most areas of the U.S. have experienced recurring blood
product shortages. We believe our programs offer hospitals an effective
tool to address these shortages and present a significant opportunity
for growth of the Company and expansion of our activities throughout
the United States.
Our Business Strategy
- ---------------------
The key objectives of our strategy are profitability and growth. In the
short term, we plan to focus on improving the profitability of our blood
products segment, by focusing on donor recruitment and streamlining
operations, while maintaining our commitment to quality. After achieving
acceptable profitability, we plan to expand in areas consistent with our core
competencies and that offer the opportunity to profitably leverage our
existing infrastructure.
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Recent Developments
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Termination of California Exemption
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 were
exempted from this law by a series of state statutes, the latest of which
expired on January 1, 2003. Consequently, we are no longer able to offer
cash compensation to our apheresis platelet donors. In 2002, the Sherman
Oaks paid donor program provided revenue of $5.4 million, or 19% of total
revenue, and gross profits of $1.4 million. The Company converted its paid
program to a 100% volunteer program as of January 1, 2003. The ultimate
success of this conversion cannot be determined. In the event the Company is
unable to maintain a substantial donor base, it will close this program and
may terminate some other blood product activities in Southern California
whose profitability depends on sharing overhead with the paid donor program.
The loss of this program will have a material adverse financial affect on the
Company. Early indications, based on the results in January and February
2003, are that the program is operating at approximately 75% of 2002
collection volume.
Settlement of ARC litigation
In the fourth quarter of 2002, we settled our anti-trust litigation with the
ARC. We believed that the ARC was capitalizing on its position as the
dominant blood supplier in the U.S. and bundling products and services to
prevent or eliminate competition in the blood industry. Pursuant to the terms
of the settlement, the ARC has agreed not to bundle blood-related products
and services in the New England or the Carolinas regions in a manner that
would constrain lawful competition. In the third quarter of 2002, litigation
with the ARC relating to what we believed to be anticompetitive business
practices in California was settled without the payment of cash to either
party.
New BMPs
Nationally, in 2001, the prices for red blood cells increased 35% to 45%.
As a result of the price increases, combined with chronic product
shortages in many parts of the U.S., we significantly expanded our programs
for collection of whole blood. We added one new BMP in 2001 and four new
BMPs in 2002. Our expansion efforts have resulted in new clients and
additional blood product revenues. However, to date, our costs relating to
blood products operations have increased in amounts greater than our
revenues resulting in a decline in profitability in 2002. During 2002,
these new programs generated revenue of $1.1 million and losses of $862,000.
Other
We have also closed two BMPs; the University of Irvine in January 2003, and
the Long Beach Memorial Medical Center in August 2002. These operations
provided $780,000 in revenue and $95,000 in gross profits in 2002.
In December 2002, Judi Irving was appointed the Company's President and Chief
Executive Officer, succeeding Alan Darlington who left the Company in
September 2002.
Blood Product Facts
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The practice of modern medicine depends on the availability of a safe and
adequate blood supply and upon the capability of treating a medical
deficiency in one or more blood components by transfusion. A variety of blood
products are used for this purpose. Most of these products must be matched to
the blood type of the patient and all must be stored under appropriate
conditions. All blood products have a limited therapeutic life.
Whole Blood
A summary of major whole blood components and their therapeutic applications
follows:
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Product Shelf Life Function and Medical Applications
- --------------- ---------- ----------------------------------------------------
Red Blood Cells 42 days Carries oxygen to the body's tissues. Transfused to
replace losses due to surgery or trauma.
Platelets 5 days Facilitate blood clotting and vascular integrity.
Transfused to replace platelets lost in massive bleeding
or inactivated in aggressive cancer treatments.
Plasma Frozen: Transports red blood cells and other cellular components,
1 year contains several factors useful in treating diseases.
Thawed: Transfused to replace fluid losses and treat specific
24 hours disease applications. The supply of plasma most often
exceeds demand, and excess is sold to biological product
manufacturers.
Cryoprecipitate Frozen: Treatment of Hemophilia, Factor VIII deficiency, and
1 year other conditions.
Most blood product collections consist of single units of whole blood. The
actual collection process is simple and completely safe for the donor. Whole
blood may only be donated once every eight weeks.
After collection, whole blood units are generally tested, processed in a
laboratory, typed, separated into the various components and then distributed
to hospitals for transfusion.
Significant progress has been made in the development of artificial or
synthetic substitutes for human blood components. Such substitutes,
however, offer no near term solution to the transfusion needs of
most patients.
Apheresis or Single Donor Platelets
The apheresis collection process permits the separation of blood components
during the donation process through the use of a cell separator. This
process allows for the collection of only the desired component of a
donor's blood and returns the other blood components to the donor blood
stream.
Apheresis blood product collection is considerably more complex and more
expensive than whole blood collection and processing. Automated apheresis
equipment is costly and requires specialized collection single use
disposables for each donation and longer donation times involve increased
labor costs. The complexity of the donation process and longer donation time
makes recruiting donors for apheresis procedures more difficult than
recruiting whole blood donors. Apheresis platelets may be donated twice a
week up to a maximum of 24 times a year.
Apheresis platelets serve the same medical purpose as platelets manufactured
from a whole blood donation and have the same five-day life. However, a
single apheresis platelet donation can yield between one and three
therapeutic transfusion dosages, depending on the donor's platelet count. The
use of platelets derived from whole blood to achieve the same therapeutic
effect would require combining or pooling the platelets obtained from between
6 and 30 individual whole blood donations of different donors.
Every transfusion involves certain risks to the patient. These risks include
a slight chance of infectious disease transmission and the chance that the
patient will have an adverse reaction to the transfused material. The lower
number of donors involved with a transfusion of apheresis or single donor
platelets materially reduces these risks. Additionally, patients receiving
multiple platelet transfusions from different donors often become resistant
to the therapeutic effect of the transfusions. Utilization of single donor
platelets reduces the instances of patient refractory reactions. We believe
that medical trends, including the growth of aggressive cancer therapies,
will result in a rate of growth in platelet transfusions that will exceed the
growth of other blood products.
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Blood Products Operations
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Our Blood Products segment collects, processes and distributes blood products
to hospitals. Our programs specialize in red cells, plasma and platelets.
Additionally, we offer testing services and specialized blood products to
hospitals in the Greater Los Angeles area. We recruit donors to either a
fixed collection site or on mobile blood drives primarily at churches,
schools and businesses. The blood products collected are processed into
their primary components, tested and distributed to customers.
Blood Management Programs
The Company's platelet collection programs in our mature blood management
programs (those that have been open for more than 18 months) have
operated profitably. Whole blood collection activities at both our mature
and new blood management programs have not been profitable as we have not
collected sufficient volumes to cover labor and other costs associated
with these fixed sites.
As part of our BMP strategy with our California hospital customers, we began
our mobile program in 2001. This program collects whole blood units at
sponsoring organizations such as schools, businesses and churches and became
profitable during 2002.
Our new BMPs (those in operation less than 18 months) have experienced
significant start up losses. In 2002, our new BMPs did not generate
sufficient donations and revenue to cover their costs of operations. There
is no assurance that these operations will achieve anticipated economies of
scale or that pricing of these programs can be successfully adjusted to
generate profitability.
We believe our programs are attractive to hospitals because they directly
address three major areas of concern:
- - Adequacy of blood supplies. Our programs provide a dedicated, local
blood supplier to supplement products available from regional blood
providers
- - Cost of such blood supplies. Contract pricing and inventory management
expertise reduce customer blood procurement costs
- - Regulatory compliance. Regulatory responsibilities for blood operations
are transferred to the Company, an organization that is knowledgeable
in FDA compliance.
Other benefits may include:
- - On campus donor rooms. Autologous (blood self-donation by a patient
usually before surgery) and directed blood collections from patients'
friends and families can be collected in a convenient location.
- - Community relations. Community blood drives complement the hospital's
public relations and programs and increase the visibility of the
hospital and the importance of its mission in the local community.
- - Therapeutic procedures. Access to therapeutic blood nurses and
physicians with significant expertise in addition to cost savings in
providing these services.
- - Research Assistance. Technical assistance in research projects relating
to blood.
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We operate our blood products operations in the following locations:
Year
Location Hospital Customer Opened
- ----------------------- ----------------------------------------- --------
Albany, New York St. Peter's Hospital 2002
Bangor, Maine Eastern Maine Medical Center 2002
Chapel Hill, North Carolina University of North Carolina 1997
Cambridge, Massachusetts Mount Auburn Hospital 2000
Chicago, Illinois Children's Memorial Hospital of Chicago 2001
Durham, North Carolina Univeristy of North Carolina 2002
Lebanon, New Hampshire Dartmouth-Hitchcock Medical Center 1995
Los Angeles, California University of Southern California 1995
Portland, Maine (A) 1994
Sherman Oaks, California (B) 1979
Whittier, California Presbyterian Intercommunity Hospital 2000
Williston, Vermont (C) 2002
(A) - This program serves various hospitals in Maine.
(B) - This program serves various hospitals in the Greater Los Angeles area.
This facility also serves as the principal processing location for most whole
blood products collected as part of our California mobile whole blood
collection program.
(C) - This program serves various hospitals in Vermont.
Recruiting Blood Donors
On average, only about 5% of the United States population donates blood and a
much smaller subset of this group is apheresis platelet donors. Recruiting
and retaining donors is critical to the success of our blood products
operations.
Apheresis platelet donors are recruited from the most dedicated and committed
subset of our whole blood donor population. On average such donors donate
platelets between four and six times a year, compared to twice a year for
whole blood donors. Apheresis platelet donation is a more demanding process
than the process for donating whole blood. Donation times are much longer,
ranging from 60 to 150 minutes and pre-donation requirements are more
rigorous than for whole blood donation. In addition, since apheresis
procedures are most efficiently performed in a blood center with large
automated collection units that are not easily transportable, most donors
must commute to a blood center to donate.
We believe that donor recruitment is the factor that will determine the
success of our programs by increasing revenue while decreasing the cost per
donation.
We recently expanded our recruitment staff and developed and implemented new
donor recruiting initiatives. To ensure the consistency and success of our
donor recruitment programs, we developed a national recruitment training
program. Our collection staff also plays a key role in recruiting and
retaining donors by making the actual donation a friendly and pleasant
process. A donor-friendly collection staff is essential to the long-term
effectiveness of initial recruiting efforts by securing repeat donations.
Our apheresis platelet donor recruitment programs involve significant one-on-
one donor education and telerecruiting programs. Our donor retention programs
involve creating a friendly, inviting environment. We provide movies and
other entertainment while donating, and donor appreciation events to
encourage repeat donations. Prior to 2003, our Sherman Oaks program also paid
its platelet donors. In response to a change in California law that
prohibited the transfusion of apheresis platelet products obtained from paid
donors after January 1, 2003, the Sherman Oaks program began converting its
donors to a volunteer program in late 2002. The volunteer donors program
offers a incentives consistent with FDA guidelines.
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While the Company has developed what we believe are cost effective strategies
to recruit blood donors, there can be no assurance that such strategies will
in fact result in sufficient donations to meet client hospital needs or to
assure profitability. In particular, we compete with major blood centers
(such as the ARC) that have significantly greater financial resources and
donor name recognition than the Company.
Quality Control
Product safety is of paramount concern when dealing with blood products. The
U.S. Food and Drug Administration ("FDA") is the agency principally
responsible for regulation of the blood product industry in the U.S. Our
entire blood product operations are either licensed or registered with the
FDA and are regularly inspected by FDA personnel. Additionally, our
operations are licensed, regulated and inspected by various state agencies.
We consider our regulatory record and our relationships with the FDA and the
various state regulatory agencies to be good.
The American Association of Blood Banks ("AABB") is the blood industry
sponsored organization responsible for maintaining and improving science,
safety, quality and education relating to blood. We are an AABB
institutional member, and our operations are accredited by the AABB.
The Joint Commission for Accreditation of Healthcare Organizations ("JCAHO")
is the private sector accreditation organization for hospitals and medical
centers. Our hospital based blood product programs and our therapeutic
operations meet or exceed JCAHO standards.
Blood Services Operations
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General
Since its inception, we have performed approximately 64,000 therapeutic
apheresis procedures in the treatment of more than 27 diseases thereby
providing us with a substantial level of experience.
We provide therapeutic apheresis services to many of our blood products
customers, and we offer such services on a regional basis in a total of 11
states on the east and west coasts of the U.S. Our major operations are
located in Los Angeles, New York and Connecticut.
Therapeutic apheresis is a technique for removing harmful components from a
patient's blood and is used in the treatment of autoimmune diseases and other
disorders. Therapeutic services are provided upon the request of a hospital,
which has received an order from a patient's physician. Therapeutic
treatments are administered using mobile units operated at the patient's
bedside or in a hospital outpatient setting. The mobile therapeutics
equipment includes a blood cell separator and the disposables and supplies
needed to perform the procedure. Treatments are administered by trained,
nurse-specialists acting in accordance with documented operating procedures
and quality assurance protocols based on guidelines developed by the AABB and
the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"),
under the supervision of a specially trained physician.
Since requests for therapeutic apheresis treatment are often sporadic and
unpredictable, most community hospitals cannot afford to equip, staff and
maintain an apheresis unit. Our mobile service enables such hospitals to
offer therapeutic apheresis services to their patients on an "as needed"
basis without incurring the fixed costs associated with providing these
services from in-house resources. For larger hospitals with in-house
programs, our mobile programs serve as a supplemental provider of therapeutic
apheresis services.
Patients referred to us for therapeutic services remain under the care of
the referring physician or another trained physician at the client hospital.
Our medical directors serve as a backup resource to the treating physician if
assistance is desired. Additionally, our medical directors conduct physician
training and educational seminars on medical applications of therapeutic
apheresis.
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Our blood services have consistently generated a satisfactory level of gross
profit. However, this level of profitability is dependent on a number of
factors, including the occurrence of disease states that are appropriately
treated by these services, the perceived benefits of blood therapies compared
to alternative courses of treatment and the cost of labor and materials.
Our experience suggests that educational efforts result in increases of
therapeutic apheresis applications in medically appropriate circumstances.
Our medical directors conduct educational seminars for physicians to inform
them of the benefits of therapeutic apheresis relative to other modes of
patient treatment. We plan to continue and expand the scope of these
educational efforts in the areas in which we have a base of blood services
operations.
However, there can be no assurance that we will be able to expand our blood
services business or maintain the level or profitability of these operations.
The Company provides therapeutic services using all currently recognized
treatment methods: 1) plasma exchange and cell depletion, 2) in-line
immunoadsorbant columns, 3) stem cell collection, and 4) photopheresis.
Plasma Exchange and Cell Depletion
The primary blood services provided by the Company are plasma exchange and
cell depletion therapy. These procedures involve removing harmful substances
from a patient's blood using automated blood separation equipment. As the
patient's blood flows through the cell separator, abnormal or excess proteins
or components associated with the disease being treated are selectively
removed. The remaining blood components are returned to the patient.
Most treatments involve the removal of two to four liters of abnormal plasma
or certain cellular components. Replacement fluids, most commonly albumin,
are used to maintain the patient's blood volume. When requested, we also
provide albumin for our therapeutic apheresis services.
Patients suffering from diseases such as multiple myeloma, polyneuropathy,
leukemia, systemic lupus erythematosus, scleroderma, hyperviscosity syndrome,
thrombocytosis, thrombotic thrombocytopenic purpura (TTP), myasthenia gravis
and Guillain-Barre syndrome may benefit from therapeutic apheresis
treatments. A patient may require from four to twenty treatments over a
period of time ranging from a few days to several months.
Other Therapeutic Technologies
Other FDA approved therapeutic apheresis treatments provided by the Company
include immunoadsorption column and photopheresis. We also provide peripheral
blood stem cell collection services.
Immunoadsorption column therapy is used to modify a patient's immune
response. This treatment is approved by the FDA for the treatment of several
conditions, including moderate to severe rheumatoid arthritis ("RA"). RA is
a potentially crippling autoimmune disease that is estimated to affect
approximately 2.5 million people in the U.S.
Approximately 50% of the treated RA patients experience a significant
decrease in symptoms and are able to function without further drug treatments
for a period of approximately one year. However, the procedure is not widely
used to treat RA. Factors that may influence the choice of therapeutic
apheresis as a treatment for RA include new drugs that also address severe
cases of RA and unclear policies of insurance carriers, including the
Medicare program, as to the amount of reimbursement that will be paid to the
hospital and physicians for performing the treatment.
Photopheresis is a therapeutic technique in which the patient's lymphocytes
(white blood cells) are collected by a blood separation device. The
lymphocytes are then exposed to ultraviolet light, in combination with
certain medications. After this exposure, the lymphocytes are returned to
the patient. The treated cells stimulate the immune system to attack the
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cells that are causing the disease. Photopheresis is FDA approved for the
treatment of Cutaneous T-Cell Lymphoma.
Since 1990, we have been providing peripheral blood stem cell collection
services. In this application, stem cells (those cells which mature into all
the different cellular components of blood) are collected from a cancer
patient using apheresis technology, processed and cryopreserved. The patient
then receives a series of intensive chemotherapy treatments followed by
reinfusion of the patient's stem cells.
Competition
- -----------
General
Most U.S. blood centers are organized as not-for-profit, tax-exempt entities.
However, all blood centers finance their activities by charging fees to
hospitals for the products they utilize. These fees are generally set at
levels designed to enable the blood center to recover its overall costs of
operation based on its business plans, capital needs, market position,
expected blood product collections, and blood component demand.
We compete on the basis of responsiveness to customer needs, value-based
pricing and the high quality of our services and products. Our competitors
are generally not-for-profit entities, including the ARC and regional and
community blood banks. Many of these organizations have greater financial,
technical and personnel resources than we do. Since such competitors are tax
exempt, they do not incur costs for many taxes that are levied on our
operations and they have access to low cost tax-exempt debt to finance their
operations.
Blood Products
In the United States, 50% of blood products are provided by the ARC's
national collection network, 40% are provided by approximately 90 other local
and regional blood centers and the remainder is collected by the hospitals
directly.
The primary competitor for our single donor platelet and whole blood
component business is the ARC. To a lesser extent, we also compete with local
and regional blood centers and hospital-based blood banks. Nationally, in
2001 the prices for red blood cells increased 35% to 45%.
We have developed several blood product and service programs to respond to
our customers' needs. These include a depot system where we assume the risk
of platelet products outdating and our BMP outsourcing programs. We believe
our strategy of offering blood product and service programs tailored to the
requirements of individual customers favorably differentiates us from other
suppliers of blood products and services and that outsourcing programs
provide opportunities for expansion of the Company's businesses.
We consistently reevaluate and revise our product and BMP outsourcing
programs to meet customer needs and respond to marketplace factors. At
present we are unaware of any competitors in this field. However, there is
no assurance that others blood centers or new market participants will not
successfully introduce similar programs that will compete with those of the
Company.
We strive to provide cost effective services, but our competitors sometimes
have advantages of price or established positions in their communities.
Also, the ARC 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.
Blood Services
Competitors of our therapeutic blood services business are primarily
regional and community blood banks. Secondarily, larger hospitals may
maintain their own in-house apheresis service units. In addition, dialysis
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companies and local kidney specialists occasionally supplement acute dialysis
services with therapeutic apheresis services. Some of the diseases that are
treated by therapeutic apheresis can also be treated by other medical
therapies.
Sales to Major Customers
- ------------------------
During 2002, 2001 and 2000, no customer accounted for more than 10% of our
total sales.
Marketing
- ----------
Our marketing programs include a combination of medical education, technical
and tradeshow presentations, advertising and promotional programs, in-person
sales and other marketing programs directed to selected physicians, hospitals
and donor groups.
We market our products and services as components of custom-tailored programs
developed to meet the needs of specific customers. The BMP is one application
of this marketing strategy. The Company uses a depot system for distributing
its blood products to BMPs and other large volume customers, which enhances
convenience and product availability. The depot system provides the customer
with an on-site inventory of blood products stocked by the Company under a
standing order.
Human Resources
- ----------------
As of March 12, 2003, the Company had 318 employees, including 116 part-time
employees. Most of the Company's professional and management personnel
possess prior experience in hospitals, medical service companies or blood
banks.
None of the Company's employees are represented by a labor union. The
Company considers its relations with its employees to be good.
Suppliers
- ---------
The Company maintains relationships with numerous suppliers who provide cell
separator equipment, disposables, supplies, replacement fluids, testing
services and blood products. Generally, the Company has not experienced
difficulty in obtaining most of its equipment and supplies from its sources.
However, if there were material changes in the sources of its supplies, the
Company's operations could be adversely affected. In particular, in the event
of a war or other international conflict, the availability of critical
supplies could be negatively affected and the cost of procuring these
supplies could increase.
The Company relies on blood donors to provide the platelets and whole blood
required to produce the blood products manufactured and sold by the Company.
The Company competes with the ARC and other blood banks in recruiting its
volunteer donors. Prior to the January 1, 2003 expiration of the California
exemption permitting transfusion of apheresis platelets from paid donors, the
Company paid its Sherman Oaks apheresis platelet program donors. As of
January 1, 2003, this program was converted to a 100% volunteer program. The
ability to pay apheresis platelet donors was an important factor in assuring
our ability to attract and retain donors for the Sherman Oaks program. There
is no assurance the Company will secure and retain sufficient apheresis
platelet donors on a voluntary basis. The growth of the Company's
manufactured blood products business is dependent on the Company's ability
to attract, screen and retain qualified donors.
Albumin is the most commonly used replacement fluid in therapeutic apheresis
procedures. In late 1996, a shortage of albumin arose when a major U.S.
manufacturer was required by regulatory agencies to temporarily cease
operations. As a result of the shortage, the price of albumin to HemaCare
more than doubled. Subsequent to 1998, the supply of albumin increased and
prices declined. However, in the event of a war the supply of albumin could
be limited and the price would be expected to increase.
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Government Regulation and Blood Safety
- --------------------------------------
Blood Products Operations
Safety is of paramount concern when dealing with blood products. We have
developed extensive procedures and internal quality control programs to
assure that blood products collected and distributed are safe and of the
highest quality.
All hospitals and blood centers that collect blood and distribute blood for
transfusion are subject to extensive regulation by the FDA and various state
licensing authorities. The FDA regulations are comprehensive and complex and
extend to virtually all aspects of the industry operations, including:
recruiting and screening blood donors; processing, testing, labeling, storing
and shipping blood products; recordkeeping; and communications with hospitals
customers and donors. In addition, FDA regulations also extend to the
manufacturers of all critical supplies and equipment used in blood center
operations.
An FDA license allows the license holder to sell licensed products across
state lines. Such licensure is extended to a qualifying organization; each
blood product produced by that organization and every variation of such
product requires separate licensure.
We hold FDA licenses for our operations in Sherman Oaks, California and
Portland, Maine. In addition, our USC BMP program is operated under our
establishment licensure. Our other blood management programs are operated
under the various hospitals' FDA registrations.
Irrespective of licensed or registered status, the FDA conducts regular
inspections of all facilities collecting blood. The FDA has inspected most of
our operations within the last 12 months. In addition to FDA regulations,
various states have regulatory agencies that govern blood product operations.
In California, state representatives inspect our operations for compliance at
least annually.
The American Association of Blood Banks ("AABB") is the private-sector,
industry-sponsored organization charged with maintaining and improving
science, safety, quality and education relating to blood. The AABB also
maintains a voluntary accreditation program requiring organizations to
maintain internal quality plans and procedures to assure blood safety to
undergo periodic inspections for compliance. We are an AABB institutional
member and our operations are accredited by the AABB.
We consider our regulatory compliance record with the FDA, the various states
and the AABB to be good.
Other Matters
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
the Company 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.
Joshua Levy, M.D., the national medical director of the Company and a
shareholder, through his private practice in Sherman Oaks, California, treats
patients who require therapeutic services. Sales by the Company to hospital
customers for therapeutic services provided to Dr. Levy's patients amounted
to approximately 2% of the Company's total revenues in each of the three
years ended December 31, 2002. There are no agreements between Dr. Levy and
the Company's hospital customers that require the hospitals to select
HemaCare to provide therapeutic services to Dr. Levy's patients.
Health care reform is continuously under consideration by lawmakers, and it
is not certain as to what changes may be made in the future regarding health
care policies. However, policies regarding hospital reimbursement, health
insurance coverage and managed care may materially impact the Company's
operations.
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Professional and Product Liability Insurance
- --------------------------------------------
The nature of the Company's business is such that it may be subject to
substantial liabilities for personal injury. We maintain medical
professional liability insurance in the amount of $2,000,000 for a single
occurrence and $5,000,000 in the aggregate per year in California, and
$1,000,000 for a single occurrence and $3,000,000 in the aggregate per year
in other states. There can be no assurance that potential insurance claims
will not exceed present coverage or that additional insurance coverage would
be available at affordable premium costs. If such insurance were ineffective
or inadequate for any reason, the Company could be exposed to significant
liabilities.
Risk Factors Affecting the Company
- ----------------------------------
Operating Risk
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 paltelet products obtained from paid donors were
exempted from this law by a series of state statutes, the latest of which
expired on January 1, 2003. Consequently, we are no longer able to offer
cash compensation to our apheresis platelet donors. In 2002, the Sherman Oaks
paid donor program provided revenue of $5.4 million, or 19% of total revenue,
and gross profits of $1.4 million. The Company converted its paid program to
a 100% volunteer program as of January 1, 2003. The ultimate success of this
conversion cannot be determined. In the event the Company is unable to
maintain a substantial donor base, it will close this program and may terminate
some other blood product activities in Southern California whose profitability
depends on sharing overhead with the paid donor program. The loss of this
program will have a material adverse financial affect on the Company. Early
indications, based on the results in January and February 2003, are that the
program is operating at approximately 75% of 2002 collection volume.
Nationally, in 2001 the prices for red blood cells increased 35% to 45%.
As a result of the price increases, combined with chronic product
shortages in many parts of the U.S., we significantly expanded our programs
for collection of whole blood. We added one new BMP in 2001 and four
new BMPs in 2002. Our expansion efforts have resulted in new clients
and additional blood product revenues. However, to date, our costs
relating to blood products operations have increased in amounts greater
than our revenues resulting in a decline in profitability in 2002. During
2002, these new programs generated revenue of $1.1 million and losses of
$862,000.
Management may not be successful in executing its operating plan. Although
platelet product activities hae been historically profitable, whole blood
collections have not. Successful results of both programs are dependent
upon management's ability to effectively recruit donors and control
operating costs.
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.
Declining Blood Donations
Our buisness 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. If the level of donor participation
in our blood product programs declines, we will not be able to achieve
profitability or reduce costs sufficiently to maintain profitability
in our mature blood products programs. While the Company has developed
strategies to recruit volunteer donors, there can be no assurance that
these strategies will result in sufficient blood collections to meet
hospital needs or to assure profitability.
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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. Competition, and in some cases multi-year contractual arrangements,
may limit our ability to pass these increased costs on to customers. In this
circumstance, 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. 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 Targeted Donor Base Involves Higher Collection Costs
Part of our recruitment strategy involves conducting blood drives for
organizations that provide a relatively small number of donors. Blood drives
directed at a smaller donor sites lack the efficiencies associated with
larger blood drives. As a result, our collection costs might be higher than
our competition and may affect our profitability and growth plans.
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.
Universal Leukoreduction
In January 2001, the Department of Health and Human Services Advisory
Committee on Blood Safety and Availability ("BSAC") recommended that
universal pre-storage leukoreduction be implemented as soon as feasible. The
leukoreduction process removes the white blood cells or leukocytes from blood
and platelets before they are transfused. BSAC's recommendation was
conditioned on an implementation process that does not diminish blood
supplies and also that HHS establishes adequate funding for the effort. It is
possible that the FDA will mandate that all blood products distributed be
leukoreduced.
Historically, only portions of blood component transfusions were leukoreduced
and the process was often performed in the hospital setting immediately prior
to transfusion rather than pre-storage (at the time of collection or
processing). While we have provided only leukoreduced apheresis platelet
products for several years, our whole blood component products are not
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routinely leukoreduced. The adoption of a universal leukoreduced policy for
all blood products would raise our costs to manufacturing whole blood
products. Competition may limit our ability to pass these increased costs on
to customers. In this circumstance, the increased costs could reduce our
profitability and could have a material adverse effect on our business and
results of operations.
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 incurred a
$591,000 loss in 2002, 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. Additionally, there is no assurance that we will be able to
obtain sufficient capital to finance future expansion.
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. We may
not be able to continue to compete successfully with nonprofit organizations
and our business and results of operations will suffer material adverse harm.
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. 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.
HemaCare's Business May Face Interruption Due to Terrorism and Increased
Security Measures In Response to Terrorism
HemaCare's business depends on the free flow of products and services through
the channels of commerce and freedom of movement for patients and donors.
The 2001 response to terrorist activities slowed or stopped transportation,
mail, financial and other services for a period of time. Further delays or
stoppages in transportation of perishable blood products and interruptions of
mail, financial or other services could have a material adverse effect on
HemaCare's business, results of operations and financial condition.
Furthermore, HemaCare may experience an increase in operating costs, such as
costs for transportation, insurance and security, as a result of the
terrorist activities and potential activities, which may target health care
facilities or medical products. The Company may also experience delays in
receiving payments from payers that have been affected by terrorist
activities and potential activities. The U.S. economy in general is being
adversely affected by the terrorist activities and potential activities and
any economic downturn could adversely impact the Company's results of
operations, impair its ability to raise capital or otherwise adversely affect
its ability to grow its business.
We Could Lose our Lines of Credit
In December 2002, we replaced our then existing lines of credit with a new
$2.0 million working capital line of credit that requires HemaCare to
maintain certain financial covenants including profitability coverage. The
Company was in compliance with these covenants at December 31, 2002, but
maintaining compliance is dependent on achieving the required profitability
coverage. In 2002, the Company lost $591,000. Continued losses would violate
the terms of the new credit line. 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. While in the past lenders have granted these
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waivers when needed, we are not assured 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
As a result of the risks posed by blood-borne diseases, many companies are
currently seeking to develop synthetic substitutes for human blood products.
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 Operations Depend on Obtaining the Services of Qualified Medical
Professionals
We are highly dependent upon obtaining the services of qualified medical
professionals. In particular, our collection operations depend on the
services of registered nurses. Nationwide, the demand for registered nurses
exceeds the supply and competition for their services is strong. This
shortage could be aggravated in the event of a war or other international
conflict. If we were unable to attract and retain a staff of qualified
medical professionals, our operations would be adversely affected.
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 Company's operations prohibitively expensive or impossible to continue.
See "Government Regulation and Blood Safety."
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
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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.
Environmental Risks
HemaCare's operations involve the controlled use of bio-hazardous materials
and chemicals. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any damages that
result, and any such liability could exceed the resources of the Company and
its insurance coverage. The Company may incur substantial costs to maintain
compliance with environmental regulations as it develops and expands its
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.
Our Stock Price Could Be Volatile
The price of our common stock has fluctuated in the past and may be more
volatile in the future. Factors such as the announcements of government
regulation, new products or services introduced by us or our competitors,
healthcare legislation, trends in the health insurance and HMO industry,
litigation, fluctuations in our operating results and market conditions for
healthcare stocks in general could have a significant impact on the future
price of our common stock. In addition, the stock market has from time to
time experienced extreme price and volume fluctuations that may be unrelated
to the operating performance of particular companies. The generally low
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volume of trading in our common stock makes it more vulnerable to rapid
changes in price in response to market conditions.
Future Sales of Equity Securities Could Dilute the Company's Common Stock
The Company may seek new financing in the future through the sale of its
securities. Future sales of common stock or securities convertible into
common stock could result in dilution of the common stock currently
outstanding. In addition, the perceived risk of dilution may cause some of
our shareholders to sell their shares, which could further reduce the market
price of the Common Stock.
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.
Additional information
- -----------------------
The Company makes available free of charge through its website
www.hemacare.com its Annual Report on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934,
as soon as practical after those reports are filed with the Securities and
Exchange Commission.
ITEM 2 PROPERTIES
In January 2003, the Company reduced the square footage of its Sherman Oaks,
California facility from 12,000 square feet to approximately 6,300 square
feet. The Company operates a platelet apheresis center, a blood bank
laboratory, a manufacturing facility for whole blood components and a
distribution center. The Company is currently leasing the space on a month-
to-month basis at a monthly rental of approximately $11,000 while the lease
terms are being negotiated.
In December 2001, the Company relocated its corporate offices and part of its
distribution center to an 11,250 square foot facility in Woodland Hills,
California. The rent is fixed at $15,500 per month and the lease on this
space expires October 31, 2006, and has one five-year option to extend at the
then current market price.
The Maine Blood Center occupies a 3,600 square foot donor center in
Scarborough, Maine. The lease expires October 31, 2004.
In addition, the Company occupies a 1,278 square foot office space in
Yonkers, New York which expires August 31, 2006, a 2,500 square foot office
space in Bangor, Maine which expires December 31, 2006, a 2,600 square foot
office space in Williston, Vermont, which expires August 11, 2007, and a
3,990 square foot office space in Durham, North Carolina, which expires in
June 30, 2007.
In connection with each of its blood management programs, the Company
occupies space on the campus of its client hospitals. While the arrangements
vary, certain of these facilities are formally subject to a lease agreement
with the sponsoring hospital for periods concurrent with the blood management
program agreement. Other agreements grant the Company the right to utilize
space and facilities on the hospital premises during the term the Company
continues to provide services to the hospitals without specific lease terms.
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ITEM 3 LEGAL PROCEEDINGS
In December 2000, HemaCare filed with the United States District Court in the
Central District of California an antitrust and unfair competition complaint
to recover damages and secure injunctive relief against the ARC in connection
with ARC pricing practices in Southern California and other areas of the
nation where we operate.
Our lawsuit alleged that the ARC, as part of a publicly announced strategy to
increase its market share in the U.S. blood industry, has employed below cost
and bundled product pricing to eliminate competition.
During 2001, our lawsuit was separated into two separate lawsuits. One
lawsuit alleged that the ARC was engaged in selling apheresis platelets in
Southern California at prices that were less than cost in an effort to
prevent us from expanding our market share and reducing our profit margins
("The HemaCare lawsuit"). The other lawsuit contended that the ARC engaged
in anti-competitive practices in New England and in the Carolinas ("The Coral
lawsuit"). This action was transferred to the United States District Court
for the District of Massachusetts, Western Division. During the second
quarter of 2002, the HemaCare lawsuit was settled and on November 14, 2002,
the Coral lawsuit was also settled.
The Company is also party to various claims, actions and proceedings
incidental to its normal business operations. The Company believes the
outcome of such claims, actions and proceedings, individually and in the
aggregate, will not have a material adverse effect on the business and
financial condition of the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market for Common Stock
- -----------------------
Effective November 2, 1998, the Company's Common Stock became quoted on the
OTC Bulletin Board under the symbol HEMA. Prior to that date, the Company's
Common Stock was listed on the Nasdaq Small Cap Market ("Nasdaq") under the
same symbol.
The following table sets forth the range of high and low closing bid prices
of the Common Stock, as reported by the OTC Bulletin Board, for the periods
indicated. These prices reflect inter-dealer quotations, without retail
markups, markdowns or commissions, and do not necessarily represent actual
transactions. The prices appearing below were obtained from the National
Quotation Bureau.
2002 2001
----------- ------------
Quarter ended High Low High Low
- ---------------------- ----- ----- ----- -----
March 31 $1.65 $0.95 $1.44 $0.88
June 30 $1.38 $0.97 $2.69 $1.21
September 30 $0.96 $0.45 $2.65 $1.50
December 31 $0.60 $0.27 $1.90 $1.25
On March 21, 2003, the last reported sales price for the Company's Common
Stock was $0.60. Shareholders are urged to obtain current market quotations
for the Company's Common Stock.
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. Additionally, the Company's line of credit prohibits
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the payment of dividends. The declaration and payment of any cash dividends
in the future will depend upon the Company's earnings, financial condition,
capital needs, line of credit requirements and other factors deemed relevant
by the Board of Directors.
Former Chief Executive Officer Alan Darlington separated from the
Company on September 28, 2002. Pursuant to the terms of his employment
contract, he previously received an option to purchase up to 250,000
shares of the Company's Common Stock at a price of $0.41 per share. On
March 23, 2001, Mr. Darlington was granted stock options to purchase
100,000 shares of the Company's Common Stock at the market price on the
date of grant ($1.20), subject to certain vesting requirements. All of
the 250,000 stock options issued pursuant to Mr. Darlington's employment
agreement and 20,000 stock options from the March 23, 2001 option grant
were vested as of his separation date. In partial consideration for
canceling these options, Mr. Darlington received 250,000 warrants to
purchase shares of the Company's Common Stock at $0.60 per share.
Additionally, Mr. Darlington received 20,000 warrants to purchase
shares of the Company's Common Stock at $1.20 per share. All such
warrants have four-year lives. As additional consideration for
the warrants, and based upon a Black-Scholes option valuation,
Mr. Darlington's severance was reduced by $20,000.
On March 24, 2003, the approximate number of shareholders of record was 300
(excluding individual participants in nominee security position listings).
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
other information and financial statements, including the notes thereto,
appearing elsewhere herein.
Years Ended December 31,
(In Thousands, except Per Share Data)
2002 2001 2000 1999 1998
------- ------- -------- ------- -------
Revenues $27,817 $25,199 $21,512 $19,021 $13,124
Gross profit 3,745 4,409 4,850 4,026 3,122
Income (loss) from operations (329) 491 1,358 1,085 768
Write off of impaired goodwill (362) - - - -
Provision (benefit) for income
taxes (151) 190 (2,901) 28 23
Net income (loss) $ (591) $ 323 $ 4,350 $ 1,057 $ 745
Basic per Share Amounts:
- ------------------------
Income (loss) from operations $ (0.04) $ 0.07 $ 0.18 $ 0.15 $ 0.11
Net income (loss) $ (0.08) $ 0.04 $ 0.57 $ 0.14 $ 0.10
Diluted Per Share Amounts:
- --------------------------
Income (loss) from operations $ (0.04) $ 0.06 $ 0.16 $ 0.13 $ 0.11
Net income (loss) $ (0.08) $ 0.04 $ 0.50 $ 0.13 $ 0.10
Total assets $13,455 $13,082 $11,477 $ 7,574 $ 7,662
Long-term debt and capital
lease obligations, net of
current portion $ 1,353 $ 802 $ 46 $ 541 $ 1,118
Shareholders' equity $ 8,087 $ 8,427 $ 8,203 $ 4,440 $ 3,291
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 perform blood collection on behalf of our hospital
clients. We also provide our hospital clients with apheresis platelets and
specialty blood components purchased from other blood centers, and donor
testing services.
Blood Services include 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 ("BMPs") with many of our hospital customers. Under a BMP
arrangement, a hospital, or a group of hospitals, contracts with us to
provide management services which may include operation of a donor center,
mobile blood drives and blood services. A BMP provides our hospital
customers with a safe and reliable source of blood products and services at a
reasonable cost, as well as assistance in achieving their financial,
regulatory compliance and patient service goals related to blood products and
services.
All comparisons within the following discussions are to the previous year.
Results of Operations
- ---------------------
Year ended December 31, 2002 compared to the Year ended December 31, 2001
Overview
- --------
Revenues for 2002 were $27,817,000, compared to $25,199,000 in 2001. The
increase of $2,618,000 (10%) was due to the expansion of our Blood Products
segment, including four new BMPs and expansion of our California mobile
operations. This increase was partially offset by the closure of one BMP in
August 2001 and by a decline in the overall demand for Blood Services in
2002.
Gross profit was $3,745,000 (13% of revenues) during 2002, compared to
$4,409,000 (17% of revenues) in 2001. The decline was primarily due to start-
up losses incurred by our new BMPs and lower overall margins in our whole
blood collection programs.
In 2002, we incurred a net loss of $591,000 or $0.08 per share basic and
diluted compared to net income of $323,000 or $0.04 per share basic and
diluted in 2001. The loss in 2002 included severance to the former CEO
($247,000), write-off of goodwill ($362,000), litigation expense with the
American Red Cross ("ARC") ($285,000) and start-up losses at our new BMPs
($862,000).
Revenues and Gross Profits
- --------------------------
Blood Products
In mid-2001, the ARC announced a significant increase in its whole blood
prices. Many hospitals concerned about rising costs and product availability
began looking for alternative blood vendors. We responded to this
opportunity by significantly increasing our BMPs and Southern California
mobile whole blood collection capacity. We also opened one new BMP in 2001
and four BMPs in 2002.
As a result of the increase in the prices of whole blood derived products, we
substantially increased our revenue per whole blood collection during 2002.
This was especially apparent in our California mobile whole blood program.
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Our revenues, gross profit and collection volumes are summarized in the
following table.
($ in Thousands)
Mature BMPs (1) California Mobiles New BMPs Total
----------------- ------------------ -------------- ------------------
2002 2001 2002 2001 2002 2001 2002 2001
-------- -------- -------- ------- ------- ------ -------- --------
Revenue.................... $ 12,502 $ 14,295 $ 5,842 $ 2,045 $1,100 $ 126 $ 19,444 $ 16,466
Gross Profit............... $ 1,710 $ 1,721 $ 149 $ 16 $ (862) $ (250) $ 997 $ 1,487
Gross Profit Margin........ 14% 12% 3% 1% (78%) (198%) 5% 9%
Collections (2)
Single Donor Platelets.. 22,000 23,200 - - 900 100 22,900 23,300
Whole Blood............. 12,400 14,500 31,900 11,900 4,200 800 48,500 27,200
- ------------------
1. Mature BMPs are those that have been open for at least 18 months
at year end.
2. Excludes combined, collected and purchased products at our St.
Vincent's BMP, which was terminated August 2001.
Mature BMPs
Revenue from our mature BMPs (those open for more than 18 months) decreased
$1,793,000 (13%) in 2002. The decrease was primarily due to the termination
of the St. Vincent's BMP in August 2001. This program provided revenue of
$1,312,000 in 2001. Additionally, we collected fewer platelets from our
Sherman Oaks paid platelet program, and our donor center agreement at Long
Beach Memorial Medical Center was terminated in August 2002. These decreases
were partially offset by increased red cell prices in 2002.
Gross profit margins of our mature programs increased to 14% in 2002,
compared to 12% in 2001. The termination of the St. Vincent's BMP improved
our margins as this program operated at a loss during 2001. Our Sherman Oaks
platelet operations benefited from improved platelet collection technology
that increased the number of saleable products we obtained from each
donation, reducing the cost of each product. However, this improvement in
yield was not sufficient to offset the decreased number of donors resulting
in a decrease in the overall number of products. In 2002, we increased our
red cell prices for existing and new contracts. Excluding the short term
spike in donations in the aftermath of September 11, 2001, our whole blood
collections increased in 2002. Donations in some locations, however, were
not sufficient to fully utilize minimum staffing requirements. The
underutilized labor capacity increased the cost and decreased the gross
profit margin on our whole blood products. We ceased operating the Long
Beach Memorial Medical Center donor center on August 1, 2002. This program
provided revenue of $282,000 and gross profit of $47,000 in 2002. We will
continue to collect whole blood for this hospital as part of our California
mobile program. Effective January 15, 2003, we ceased operating the
University of California, Irvine Medical Center donor center. This program
provided $500,000 in revenue and $49,000 in gross profits during 2002.
Effective January 1, 2003, we are no longer able to offer cash compensation
to our Sherman Oaks platelet donors. In 2002, the Sherman Oaks paid donor
program provided revenue of $5.4 million and $1,427,000 of gross profits.
The Company is in the process of converting its paid donors into volunteer
donors. However, the ultimate success of this conversion cannot be
determined. In the event the Company is unable to successfully convert a
sufficient number of its paid donors to volunteer donors, it may be required
to close this program. Since other Blood Product programs in Southern
California utilize the same staff and resources, the Company may need to
terminate these programs as well. The loss of this program would have a
material adverse financial effect on the Company. Early indications, based on
the results in January and February of 2003, are that the program is operating
at approximately 75% of the 2002 collection volume.
California Mobiles
Revenues from the California mobile operations increased $3,797,000 (186%) in
2002. This growth was due to a higher volume of collections resulting from
the expansion of the program in 2002, as well as from higher red blood cell
20
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prices in 2002. Our average revenue per red blood cell increased from $143
at the end of 2001 to $185 at the end of 2002. We believe the market price
of a red cell in Southern California exceeds our current pricing. Due
to existing contractual obligations, we have not raised red cell prices to
market levels. We continue to work toward bringing our average red cell
prices in line with current market prices in Southern California. Our
gross profit on California Mobile operations was $149,000 (3% of revenue)
in 2002, compared to a gross profit of $16,000 (1% of revenue) in 2001.
As a result of the mid-year price increases this program became
profitable during the second half of 2002. This program's labor efficiency
continues to be less than optimal, reducing our gross profit margin.
New BMPs (open less than 18 months)
We operate new BMPs in: Chicago, Illinois; Bangor, Maine; Williston, Vermont;
Albany, New York; and Durham, North Carolina. Together, these programs
generated revenue of $1,100,000 and losses of $862,000 during 2002. The
Chicago program began collections in June 2001. The program in Bangor began
operations in the second quarter of 2002, the programs in Durham and
Williston began operations in the third quarter of 2002, and the Albany
program began operations in the fourth quarter of 2002. Losses in these
programs reflect the lack of a timely development of a sizable donor base.
We are committed to making these programs profitable through a higher level
of donations resulting from our new recruiting initiatives that include a
national recruitment training program and expanding our recruitment staff in
selected markets. Until these programs are profitable, we do not intend to
open programs in new markets. If these programs fail to achieve
profitability within budgeted time frames, they will not be continued.
Blood Services
- --------------
Revenues from Blood Services were $8,373,000 in 2002, compared to $8,733,000
in 2001, a decrease of $360,000 (4%). We experienced a decrease in demand
for services in California, partially offset by an increase in demand in our
east coast service areas. We provided 7,140 therapeutic apheresis procedures
in 2002 compared to 7,520 in 2001 and our revenue per procedure was basically
unchanged. Our gross profit was $2,748,000 (33% of revenue) in 2002 compared
to $2,922,000 (33% of revenue) in 2001. 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 $4,074,000 in 2002, compared
to $3,918,000 in 2001, an increase of $156,000 (4%). The increase reflects
contractual severance to the former Chief Executive Officer ($247,000) and
increased expenses related to the ARC litigation ($285,000 in 2002 compared
to $110,000 in 2001). These increases were partially offset by the reduction
of 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.
In 2002, general and administrative expenses decreased to 15% of revenue from
16% in 2001.
Goodwill Impairment Charge
- --------------------------
During the third quarter of 2002, continued declines in the Company's stock
price indicated that the goodwill associated with the acquisition of Coral
Blood Services in 1998 may be impaired. Management 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 the remaining goodwill in the amount of $362,000 during the third quarter.
Year ended December 31, 2001 compared to the Year ended December 31, 2000
Overview
- ---------
Revenues for 2001 were $25,199,000 compared to $21,512,000 in 2000. The
increase of $3,687,000 (17%) reflects the expansion of our Blood Products
operations and an increase in the number of Blood Service procedures,
partially offset by the termination of one BMP in August 2001.
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Gross profit as a percentage of revenue was 17% ($4,409,000) during 2001,
compared to 23% ($4,850,000) in 2000. The decrease reflects lower levels of
profitability in our Blood Products segment resulting from our investments to
expand the areas served and the range of the products we offer.
Additionally, we incurred certain costs associated with expanding the scope
of our programs to collect larger volumes of whole blood products for both
existing and new customers (including an expanded regulatory affairs and
quality control function, expanded blood donor recruiting capabilities and
expanded laboratory and distribution capabilities). Our platelet operations
experienced a decline in profitability resulting from new regulatory
requirements that reduced the number of saleable products obtained per donor.
The gross profit of our Blood Services segment increased as a result of
higher procedure volumes. Gross profit margins in this segment were
comparable between years.
In 2001, our net income was $323,000, or $0.04 per share basic and diluted,
compared to net income of $4,350,000 or $0.57 per share basic and $0.50 per
share diluted. Net income in 2001 included the recognition of $2.9 million
in deferred tax assets relating to the recognition of our net operating
losses. Pre-tax income in 2001 was $513,000 compared to $1,449,000 in 2000.
The decrease in pre-tax income was primarily due to regulatory changes that
reduced our profitability in our platelet collection programs, losses from
the opening of one new BMP, litigation with the ARC and expanded general
and administrative expenses.
Revenue and Gross Profits
- -------------------------
Blood Products
In mid-2001, the ARC announced a significant increase in its red blood cell
prices. Many hospitals concerned about rising costs and product availability
began looking for alternative blood vendors. We responded to this opportunity
by significantly increasing our BMPs and mobile Southern California capacity.
Our revenues, gross profits and collection volumes are summarized in the
following table.
($ in Thousands)
Mature BMPs (1) California Mobiles New BMPs Total
----------------- ------------------ -------------- ------------------
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- -------- ------- ------- ------ -------- --------
Revenue.................... $ 14,295 $ 14,019 $ 2,045 $ - $ 126 $ - $ 16,466 $ 14,019
Gross Profit............... $ 1,721 $ 2,323 $ 16 $ - $ (250) $ - $ 1,487 $ 2,323
Gross Profit Margin........ 12% 17% 1% (198%) 9% 17%
Collections (2)
Single Donor Platelets.. 23,200 21,500 - - 100 - 23,300 21,500
Whole Blood............. 14,500 14,100 11,900 - 800 - 27,200 14,100
- -------------
1. Mature BMPs are those that have been open for at least 18 months
at year end.
2. Excludes combined, collected and purchased products at our St.
Vincent's BMP, which was terminated in August 2001.
Mature BMPs
Revenue from our mature programs increased $276,000 (2%) in 2001. The
increase was due to the higher level of single donor platelet collections at
our Sherman Oaks facility and higher donor testing revenue, partially offset
by lower sales of purchased components.
A major BMP arrangement was terminated on August 31, 2001. This agreement
was a multi-year fixed price agreement that required the Company to either
purchase or collect all of the hospital's requirements for blood products.
This BMP generated a loss of $57,000 on revenue of $1,312,000 during
2001. The loss of this customer did not materially impact our operations.
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Gross profit margins of our mature programs decreased to 12% in 2001,
compared to 17% in 2000. The decrease was primarily due to lower profit
margins on our apheresis platelet products, which were negatively affected by
a regulatory change that reduced the number of saleable products obtained per
donor. We also incurred higher recruitment and inventory costs. During the
fourth quarter of 2001, we acquired new laboratory technology designed to
improve the average product yield per platelet collection.
California Mobiles
Our California mobile program was initiated in 2001 and expanded rapidly
during the third and fourth quarter in response to the demand for red cells
resulting from national price increases. We hired and trained additional
donor recruiters and collection personnel and expanded our laboratory
capabilities. We also invested in new capital assets including mobile
collection vehicles and laboratory equipment. Our mobile operations in
Southern California were only marginally profitable in 2001. This is
partially due to pricing that did not reflect current prices and the
costs associated with expanding our collection capabilities.
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New BMPs
In June 2001, we opened a new BMP at Children's Memorial Hospital in Chicago,
Illinois. The program incurred pre-opening costs and losses during its
initial months of operation as donations were less than expected.
We had no new BMP programs in 2000.
Blood Services
- --------------
Revenues for 2001 were $8,733,000, compared to $7,493,000 in 2000. The
increase of $1,240,000 (17%) reflects a higher demand for therapeutic
services. During 2000, we began an expanded physician education program
designed to familiarize physicians with the benefits of therapeutic
apheresis. We believe these efforts resulted in increased procedure volumes.
Additionally, during 2001 there was an increase in the disease states where
therapeutic apheresis is applicable. During 2001, we provided approximately
7,300 therapeutic apheresis procedures compared to approximately 5,900
therapeutic apheresis procedures in 2000.
Gross profit as a percentage of revenue was 33% ($2,922,000) in 2001,
compared to 34% in 2000 ($2,527,000). Gross profit margin was negatively
impacted by higher recruitment and training costs associated with hiring
additional registered nurses to perform the additional procedures. These
expenses were partially offset by increased operating efficiencies associated
with higher procedure volumes.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $3,918,000 in 2001, compared to
$3,492,000 in 2000 an increase of $426,000 (12%). The increase is primarily
the result of expenditures associated with increased legal fees related to
the ARC litigation, increased marketing expenses and expanded staff to
support our growing operations. General and administrative expenses as a
percentage of revenue were 16% in both years.
Provision for Income Taxes
- --------------------------
Prior to 1997, we incurred operating losses that we used to offset current
income for financial reporting and tax purposes. Accordingly, we recognized
minimal tax expense in recent years. Prior to December 31, 2000, we
accounted for these accumulated losses by determining their future benefit,
but did not recognize this benefit as an asset since our ability to use these
losses in future periods was uncertain. During the fourth quarter of 2000,
we determined that it was more likely than not that we will be able to
utilize almost all of the tax benefits associated with these net-operating
losses. Accordingly, we recorded a deferred tax asset for the expected
future tax benefit. The amount of the tax benefit as of December 31, 2000
was $3,093,000. Results for 2001 reflect normal tax expense for financial
reporting purposes. The normalized tax expenses will reduce the deferred tax
assets. We will continue to use our net operating losses to offset future
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taxable income and minimize the amount of taxes we pay to the federal and
state agencies. This adjustment does not impact our current or future cash
flows.
Fourth Quarter Adjustment
- -------------------------
During 2001, we acquired and began installation of a blood bank computer
system. We have capitalized the cost of the hardware and software associated
with the system. During the third quarter of 2001, we expensed the costs of
our internal labor and related benefits associated with the validation and
implementation of this system. After review, we determined that the
appropriate accounting treatment for these costs should be capitalization as
part of the cost of the computer system. Therefore, during the fourth
quarter of 2001, we capitalized $132,000 of labor costs associated with the
validation and installation of this system of which $58,000 relates to the
third quarter of 2001.
Quarterly Financial Data
The following table presents unaudited statement of operations data for each
of the eight quarters ended December 31, 2002. We believe that all necessary
adjustments have been included to fairly present the quarterly information
when read in conjunction with the consolidated financial statements. The
operating results for any quarter are not necessarily indicative of the
results for any subsequent quarter.
UNAUDITED
(In Thousands, Except Per Share Data)
2002 2001
Quarter Ended Quarter Ended
------------------------------------- -------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
-------- -------- -------- -------- -------- -------- ------- --------
Revenues............. $ 6,321 $ 6,940 $ 7,181 $ 7,375 $ 6,057 $ 6,238 $ 6,440 $ 6,464
Gross Profit......... 910 987 1,022 826 1,192 1,211 1,145 861
Income (loss) before
income taxes........ (219) (31) (527)* 35 347 244 7 (85)
Income tax provision
(benefit)........... (81) (12) (65) 7 128 91 2 (31)
-------- -------- --------- -------- -------- -------- -------- --------
Net income(loss)..... $ (138) $ (19) $ (462) $ 28 $ 219 $ 153 $ 5 $ (54)
Earnings (loss) per
share
Basic.............. $ (0.02) $ - $ (0.06) $ - $ 0.03 $ 0.02 $ - $ (0.01)
Diluted............ $ (0.02) $ - $ (0.06) $ - $ 0.03 $ 0.02 $ - $ (0.01)
* Pre tax income in the third quarter of 2002 includes $247,000 in severance
to the former Chief Executive Officer and $362,000 write-off of goodwill.
Critical Accounting Policies and Estimates
- -------------------------------------------
General: The Company's discussion and analysis of its financial condition
and results of operations are based on the Company's consolidated financial
statements that have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates its estimates, including those related to
valuation reserves, income taxes and intangibles. The Company bases its
estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
24
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liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
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 revenues and expenses during the reporting period. Actual results
could differ from those estimates. Estimates were used to evaluate the
adequacy of the allowance for doubtful accounts, the reserve for discontinued
operations and the realization of deferred tax assets.
Allowance for Doubtful Accounts: We make ongoing estimates relating to the
collectibility of our accounts receivable and maintain a reserve for
estimated losses resulting from the inability of our customers to meet their
financial obligations to us. In determining the amount of the reserve, we
consider our historical level of credit losses and make judgments about the
creditworthiness of significant customers based on ongoing credit
evaluations. Since we cannot predict future changes in the financial
stability of our customers, actual future losses from uncollectible accounts
may differ from our estimates. If the financial condition of our customers
were to deteriorate, resulting in their inability to make payments, a larger
reserve may be required. In the event we determined that a smaller or larger
reserve was appropriate, we would record a credit or a charge to selling and
administrative expense in the period in which we made such a determination.
Income Taxes: As part of the process of preparing our financial statements,
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves our estimating our actual current tax
exposure together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These dif-
ferences result in deferred tax assets and liabilities, which are included
in our Balance Sheet. We must then assess the likelihood that our
deferred tax assets will be recovered from future taxable income and to
the extent we believe that recovery is not likely, we must establish a
valuation allowance. To the extent we establish a valuation allowance
or increase this allowance in a period, we must include an expense
within the tax provision in the Statements of Operations.
Significant management judgment is required in determining our provision for
income taxes, deferred tax asset and liabilities and any valuation allowance
recorded against our net deferred tax assets. Management continually
evaluates its deferred tax asset as to whether it is likely that the deferred
tax asset will be realized. If management ever determined that its deferred
tax asset was not likely to be realized, a write-down of that asset would be
required and would be reflected in the provision for taxes in the
accompanying period.
Goodwill: During the first quarter of 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS 142, the Company discontinued
amortizing goodwill that was recorded as part of the Coral Blood Services,
Inc. transaction in 1998. During 2002, the Company determined that the
goodwill was impaired and recorded an adjustment to write off all of the
remaining goodwill in the amount of $362,000. The Company does not have any
other intangible assets. During 2001 and prior, goodwill was amortized on a
straight-line basis over ten years. Goodwill amortization was $53,000 for
each of the two years ended December 31, 2001 and 2000.
Liquidity and Capital Resources
- --------------------------------
At December 31, 2002, we had cash and cash equivalents and marketable
securities of $1,048,000 and working capital of $3,474,000.
The Company has a working capital line of credit with a bank. The amount the
Company may borrow is the lesser of: 75% of eligible accounts receivable less
amounts outstanding on the notes payable discussed below, or $2 million.
Interest is payable monthly at a rate of prime plus 0.5% (4.75% as of
December 31, 2002). As of December 31, 2002, the Company's net borrowings on
this line of credit were $750,000. This line of credit matures in June 2004,
and is included in notes payable, net of current portion on the balance
sheet. As of December 31, 2002, the unused portion of the Company's line of
credit was $1.25 million.
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In addition, the Company has various notes payable with the same bank. At
December 31, 2002, the total amount outstanding under these notes is $451,000
and requires monthly principal payments of approximately $14,000 plus
interest at a weighted average fixed rate of 6.6%.
These loans are collateralized by substantially all of the Company's assets
and are cross-defaulted. They also require the maintenance of certain
financial covenants that require minimum levels of profitability and prohibit
the payment of dividends or stock repurchases. As of December 31, 2002, we
were in compliance with these covenants.
Additionally, the Company has another note payable with a finance company.
The note requires quarterly payments of approximately $10,000 including
interest at the rate of 8.5% and is secured by certain fixed assets.
The following table summarizes our contractual obligations by year (in
thousands).
Payments due by year
---------------------------------------------------
Total 2003 2004 2005 2006 2007
------- ------- ------ ------ ------ ------
Operating leases.... $ 1,979 $ 515 $ 504 $ 445 $ 402 $ 113
Capitalized leases.. 389 115 101 90 83 -
Long term debt...... 569 207 207 152 3 -
------- ------- ------ ------ ------ ------
Totals.............. $ 2,937 $ 837 $ 812 $ 687 $ 488 $ 113
======= ======= ====== ====== ====== ======
We are also committed to purchase approximately $10 million of blood
collection kits at established prices through 2006.
During 2002, net cash provided by operations was $714,000. This compares to
cash used in operations of $93,000 in 2001 and cash provided by operations of
$1,431,000 in 2000.
During 2002, we reduced the level of our accounts receivable balances,
despite a 10% growth in our revenue, thereby increasing our cash flow from
operations. 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 to 62 days as of December 31,
2002 from 77 days at December 31, 2001. Net cash from operations also
reflects the adjustment of our 2002 loss to reflect a $362,000 non-cash
goodwill impairment charge.
Cash used in investing activities was $1,193,000 in 2002, $778,000 in 2001
and $346,000 in 2000. The cash used in investing activities was primarily
for the acquisition of plant and equipment. During 2002, we made a
significant investment in capital assets. These additions included mobile
blood collection vehicles, a new blood banking computer system that became
operational in 2002, and laboratory equipment and leasehold improvements for
our new BMPs. Many of these additions were financed through our equipment
line of credit and equipment leases.
Cash provided by financing activities in 2002 was $502,000 and $534,000 in
2001. Cash used in financing activities was $1,213,000 in 2000. The cash
provided in 2002 was primarily net borrowings of $575,000 on our lines of
credit discussed above and $132,000 of new notes payable partially offset by
payments on our notes payable and capitalized leases.
Our new BMPs will require capital to finance operating losses until they
achieve profitability or are discontinued. If programs are discontinued, the
Company will incur severance and other expenses. 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, availability on
our line 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.
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27
In 2002, the Company lost $591,000. Continued losses would violate the
terms of then new credit line. From time-to-time, the Company has failed
to comply with the convenants in its bank credit agreements, and has had
to seek waivers from its lenders. While in the past, lenders have granted
these waivers when needed, we are not assured 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.
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. Effective January 1, 2003, this exemption expired.
We are in the process of converting our paid donors to a volunteer program,
but it is too early to determine the success of this program. Revenue from
paid platelet donors was $5.4 million and gross profit from these operations
was $1,427,000 in 2002. If we are not successful in converting a sufficient
numbed of paid platelet donors to a volunteer program, it would have a
materially adverse affect on our profitability and could have an impact on
loan compliance, which in turn could severely reduce our liquidity.
We anticipate that our cash on hand and borrowing on our bank line of credit
will be sufficient to provide funding for our needs during the next 12
months, including financing our California mobile program and new BMP
operations and other working capital requirements, including capital and
operating lease commitments.
Although we incurred a loss in 2002, our mature BMPs remain profitable. Our
losses were primarily due to start-up losses associated with our new BMPs. In
addition, we incurred non-recurring expenses associated with our lawsuit
against the ARC, which has been settled, severance payments to our former
Chief Executive Officer and write-off of goodwill.
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-K 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 and demand for our Company's products and
services. 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; lack of 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, war in the middle
east or other international conflict; uncertainty about our ability to obtain
additional capital when needed in the future; defaults on our credit
agreement that could lead to a loss of our 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. For a discussion of certain of these
factors see "Item 1 Business Risk Factors Affecting the Company."
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ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our operations are exposed to risks
associated with fluctuations in interest rates. The Company manages its
risks based on management's judgment of the appropriate trade-off between
risk, opportunity and costs. Management does not believe that interest rate
risks are material to the results of operations or cash flows of the
Company, and, accordingly, does not generally enter into interest rate
hedge instruments.
The Company has $1,642,000 of debt that includes $892,000 of notes payable
and capitalized leases with fixed interest rates. The remaining $750,000 of
debt represents advances on our working capital line of credit and the
interest rate is linked to the prime interest rate. Accordingly, interest
rate expense will fluctuate with rate changes in the U.S. If interest rates
were to increase or decrease by 1% for the year, our interest expense would
increase or decrease by approximately $7,500.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements and Schedules appears on page F-1, The
Report of Independent Public Accountants appears on F-2, F-3, and the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements appear on pages F-4 to F-15.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On July 18, 2002, the Company in accordance with actions authorized by the
Board of Directors, and upon recommendation of its audit committee, appointed
Ernst & Young LLP as the Company's independent public accountants, replacing
Arthur Andersen LLP. The Company dismissed Arthur Andersen LLP on the same
date.
The audit reports of Arthur Andersen LLP on the consolidated financial
statements of the Company as of and for the fiscal years ended December 31,
2001 and 2000 did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or
accounting principles.
During the two fiscal years of the Company, ended December 31, 2001 and 2000,
there were no disagreements between the Company and Arthur Andersen LLP on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not
resolved to Arthur Andersen's satisfaction, would have caused Arthur Andersen
LLP to make reference to the subject matter of the disagreement in connection
with its reports.
During the two most recent fiscal years of the Company and the subsequent
interim period to July 18, 2002, the Company did not consult with Ernst &
Young LLP regarding any of the matters or events set forth in the Item 304
(a) (2) (i) and (ii) of Regulation S-K.
Pursuant to Item 304T under Regulation S-K, the Issuer has not obtained
and is not able to obtain a letter from Arthur Andersen, LLP relating to
the above change in auditors.
The Company has not received the consent of Arthur Andersen LLP to the
inclusion of its report of independent public accountants dated March 14,
2002 in the Company's Annual Report Form 10-K for the fiscal year ended
December 31, 2002.
Because Arthur Andersen LLP has not consented to the inclusion of their
report into the Company's Annual Report Form 10-K for the fiscal year ended
December 31, 2002, you may not be able to recover against Arthur Andersen LLP
for any untrue statements of a material fact contained in the financial
statements or financial statement schedule audited by Arthur Andersen LLP or
any omissions to state a material fact required to be stated therein.
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PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
None of the directors or executive officers was selected pursuant to any
arrangements or understanding, other than with the directors and
executive officers of the Company acting within their capacity as such.
There are no family relationships among directors or executive
officers of the Company, and except as set forth below, as of the date
hereof, no directorships are held by any director in a company which has a
class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the
requirements of Section 15(d) of the Exchange Act or any company registered
as an investment company under the Investment Company Act of 1940. Officers
serve at the discretion of the Board of Directors.
The Company's bylaws provide that the number of directors shall be fixed from
time to time by the Board of Directors, but not be less than five nor more
than nine. The Board of Directors on February 27, 2003 reduced the number of
directors from six to five. As of this date, there is one vacancy on the
Board of Directors.
The following table sets forth certain information concerning the directors,
executive officers and key employees of the Company.
Name Age Position
- ----------------------------- --- -----------------------------------------------
Julian L. Steffenhagen (1)(2) 59 Chairman of the Board
Judi Irving 45 President, Chief Executive Officer and Director
David E. Fractor 43 Chief Financial Officer
Dana E. Belisle 39 Chief Operating Officer
Robert L. Johnson (1)(2) 64 Director
Stephen P. Wallace (1)(2) 48 Director
Johsua Levy, M.D. 62 National Medical Director
- ----------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Directors
- ---------
Julian L. Steffenhagen has been a director of the Company since December 1997
and Chairman of the Board since October 2002. Since 1979, Mr. Steffenhagen
has held several management positions at Beckman Coulter, Inc., an
international manufacturer of laboratory equipment and diagnostic reagents.
He is currently the Vice President, Corporate Development and Strategic
Planning and Vice President, Point of Care Operations. He earned his
Bachelor of Science and Master of Science degrees in mechanical engineering,
and his Master of Business Administration degree from the University of
Michigan. Mr. Steffenhagen is a member of the Audit Committee and is
Chairman of the Compensation Committee.
Robert L. Johnson has been a director of the Company since April 1999. From
1986 until his retirement in January 2002, Mr. Johnson was the Senior Vice
President, Legal and General Counsel of the Catholic Healthcare West hospital
system, headquartered in San Francisco, California. Prior to joining
Catholic Healthcare West, Mr. Johnson was in the private practice of law and
is admitted to practice in the federal and state courts of Arizona and
California, as well as the United States Supreme Court. He has been active in
various health care related organizations and, in 1995, served as the
President of the American Academy of Healthcare Attorneys. Mr. Johnson
obtained his LL.B. degree, cum laude, from the University of Arizona. Mr.
Johnson is a member of the Audit and Compensation Committees.
Stephen P. Wallace has been a director of the Company since June 2001. From
1998 until August 31, 2001, Mr. Wallace was Executive Vice President and
Chief Operating Officer of Catellus Development Corporation, a real estate
operating company with one of the largest portfolios of developable land in
the Western United States. Mr. Wallace was Catellus' Chief Financial Officer
29
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from 1995 to 1998. Prior to his employment with Catellus, Mr. Wallace was
Chief Financial Officer of Castle and Cooke Homes. Mr. Wallace received his
Bachelor of Science degree at the University of Colorado. Mr. Wallace is
Chairman of the Audit Committee and a member of the Compensation Committee.
Judi Irving was appointed President and Chief Executive Officer in December
2002. Prior to joining the Company, Ms. Irving was President and Chief
Executive Officer of Health Net of Arizona and Health Net of Oregon, national
health and life insurance organizations. From 1996 to 1999, Ms. Irving was
Vice President of Operations and Chief Financial Officer for the Western
Region of Prudential Healthcare, a national health insurance provider. Ms.
Irving received her Bachelor of Science degree in Management and Accounting
from the State University of New York at Binghamton and is a Certified
Public Accountant.
Officers
- --------
David E. Fractor has been Chief Financial Officer of the Company since June
1999. Prior to joining the Company, Mr. Fractor was Chief Financial Officer
of the Andwin Corporation, a manufacturer and distributor of medical devices,
since 1996. From 1994 through 1996, Mr. Fractor performed consulting
services primarily functioning as interim Chief Financial Officer for
emerging public companies. From 1986 through 1994, he was an audit manager
at both Deloitte and Touche and Weber, Lipshie & Co., a regional accounting
firm. He received his Bachelor of Science degree in Accounting from the
University of Southern California and is a Certified Public Accountant.
Dana E. Belisle has been Chief Operating Officer of the Company's nation-wide
operations since October 2001. Prior to that, Mr. Belisle was the Chief
Operating Officer of the Eastern United States operations. Mr. Belisle
joined the Company in connection with the Company's acquisition of the assets
of Coral Therapeutics in October 1998. From 1995 to 1998, Mr. Belisle served
in various management positions with Coral Therapeutics. From 1990 through
1995, Mr. Belisle was a Clinical Specialist for Haemonetics Corporation, an
international manufacturer of automated blood processing systems. Mr.
Belisle received his Bachelor of Arts degree in Medical Technology at the
University of Maine and is a registered Hemapheresis Specialist.
Key Employees
- --------------
Joshua Levy, M.D. was appointed National Medical Director of the Company in
March 2000. Since co-founding the Company in 1978, Dr. Levy has been the
Company's Medical Director and had served as a member of the Board of
Directors from 1978 until 1996. Dr. Levy received his M.D. degree from
Albert Einstein College of Medicine. He is certified by the American Board
of Internal Medicine and was Adjunct Associate Professor of Medicine at UCLA
from 1967 to 1982. He has published numerous scientific articles in the
fields of rheumatology and immunology and is a national authority and
frequent lecturer on therapeutic hemapheresis.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC"). Such officers, directors and ten-percent stock
holders are also required by SEC rules to furnish the Company with copies of
all forms that they file pursuant to Section 16(a). Based solely upon review
of copies of reports filed with the SEC, each person subject to the reporting
requirements of Section 16(a) has filed timely all reports required to be
filed in fiscal 2002, with the exception of Ronald Gilcher, a former
director, who was delinquent in filing a Form 3 in 2002.
ITEM 11 EXECUTIVE COMPENSATION.
The following table sets forth information concerning all cash and non-cash
compensation earned by, awarded to, or paid by the Company to its executive
officers (collectively, the "Named Executive Officers") and other key
employees for the fiscal years ended December 31, 2002, 2001 and 2000.
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SUMMARY COMPENSATION TABLE
Long-term
Annual Compensation Compensation
------------------------------------- -----------
Name and Securities All Other
Principal Salary Bonus Other Annual Underlying Compensation
Position Year ($) ($) Compensation(1) Options ($) (2)
- ----------------- ----- -------- ------- --------------- ---------- ------------
Alan C. Darlington, 2002 $150,000 - -- - $237,500
Executive Chairman 2001 $200,000 - -- 100,000 -
and CEO (3) 2000 $200,000 $80,000 -- - -
Judi Irving, 2002 $ 7,700 - -- 200,000 -
President and 2001 $ - - -- - -
Chief Executive 2000 $ - - -- - -
Officer (4)
Dana E. Belisle, 2002 $141,155 - -- 50,000 $ 3,500
Chief Operating 2001 $122,000 - -- 50,000 $ 3,500
Officer 2000 $110,000 $20,000 -- - $ 3,000
David E. Fractor, 2002 $120,000 - -- 20,000 $ 3,000
Chief Financial 2001 $120,000 - -- 20,000 $ 3,300
Officer 2000 $110,000 $10,000 -- - $ 2,900
Joshua Levy, 2002 $200,000 - -- - $ 2,800
National Medical 2001 $201,000 $29,000 -- - $ 4,300
Director 2000 $187,000 $10,000 -- 50,000 $ 4,300
1) During fiscal 1999, 2000 and 2001, the Named Executive Officers
received personal benefits, including but not limited to an
automobile allowance, the aggregate amounts of which for each
Named Executive Officer did not exceed the lesser of $50,000 or
10% of the total of the annual salary and bonus reported for such
Named Executive Officer in such years.
2) "All Other Compensation" consists of Company contributions to its
Employee Salary Deferral Plan 401(k) except for Mr. Darlington
who received $237,500 in severance, which is payable through
September 2003. See Footnote 3.
3) Mr. Darlington's employment with HemaCare ended as of
September 28, 2002. Under the terms of his Services Agreement,
Mr. Darlington will receive a severance amount of $237,500
payable over a period of one year following the separation
date. In 2002, he received $50,000 as part of his severance
compensation.
4) Ms. Irving was appointed President and Chief Executive Officer
in December 2002.
Employment Agreements and Services Agreements
- ---------------------------------------------
Pursuant to a Services Agreement effective as of March 10, 1999 (the
"Darlington Agreement"), Alan C. Darlington was engaged as the Company's
Executive Chairman. The Darlington Agreement required Mr. Darlington to
devote substantially all his time to the business of the Company. The
Darlington Agreement provided for an annual salary of $200,000 with an annual
bonus based upon the Company's annual net income growth (the "Bonus
Payment"), as well as an option to purchase up to 250,000 shares of the
Company's Common Stock at a price of $0.41 per share. Mr. Darlington
separated from the Company on September 28, 2002 and in accordance with
the terms of the Darlington Agreement he is entitled to severance equal
to $237,500. Mr. Darlington's severance is being paid over a period of
one year following the separation date, of which $50,000 was paid in 2002.
On March 23, 2001, Mr. Darlington was granted stock options to purchase
100,000 shares of the Company's Common Stock at the market price on the
date of grant ($1.20), subject to certain vesting requirements. All
of the 250,000 stock options issued pursuant to the Darlington Agreement
and 20,000 stock options from the March 23, 2001 option grant were
vested as of the separation date. In partial consideration for canceling
these options, Mr. Darlington received 250,000 warrants to purchase shares
of the Company's Common Stock at $0.60 per share and 20,000 warrants to
purchase shares of the Company's Common Stock at $1.20 per share. All
such of warrants have four-year lives from the date of grant. As additional
consideration for the warrants, Mr. Darlington's severance wasreduced
by $20,000.
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Pursuant to an Employment Agreement dated March 22, 2000 (the "Levy
Agreement"), Joshua Levy has been employed as the Company's National Medical
Director. Dr. Levy is a co-founder of HemaCare Corporation and has been the
medical director of the Company since its inception. The Levy Agreement
provides that Dr. Levy receive an annual salary of $200,000 and a bonus equal
to ten percent (10%) of the increase, if any, in the Company's net operating
profits from therapeutic apheresis services over the prior year, excluding
any consideration of therapeutic apheresis treatments rendered by the Company
to patients of Dr. Levy's medical practice. Such bonus shall be in addition
to any other bonus awarded at the discretion of the Board of Directors. In
the event Dr. Levy is terminated by the Company without "cause" (as defined
in the Levy Agreement), the Levy Agreement provides that the Company shall
pay Dr. Levy his then current salary and provide the benefits as described in
the Levy Agreement for twelve months after termination. In the event (i) Dr.
Levy is terminated without cause or (ii) the principal place of business of
the Company is changed from Southern California within twelve months after a
"change in control" (as defined in the Levy Agreement), Dr. Levy is entitled
to receive two times the severance provided in the previous sentence. The
term of the Levy Agreement shall be one year and shall be renewed
automatically for subsequent one year terms unless written notice of
termination is given by either party to the other not less than ninety (90)
days before the end of the initial term or any subsequent one year renewal
term. In 2002, Mr. Levy was granted a $600 per month car allowance.
Pursuant to a Letter Agreement dated December 6, 2002 (the "Irving
Agreement"), Judi Irving is employed as the Company's President and Chief
Executive Officer. The Irving Agreement provides that Ms. Irving receive an
annual salary of $200,000 and a $1,000 per month car allowance. In 2003, Ms.
Irving will receive a minimum bonus of $45,000 in 2003 with a potential of
up to 40% of her base salary based on achieving profit targets and other
objectives. Additionally, Ms. Irving was granted a 10-year stock option to
purchase up to 200,000 shares of the Company's Common Stock, vesting over
4 years, at an exercise price of $0.32, the closing bid price of the
Company's stock on her day of hire. In the event Ms. Irving's employment
is terminated by the Company for any reason, she will receive a separation
payment equal to her then current annual base salary, unless it is
determined her termination is due to fraud or illegal activities. In the
event Ms. Irving elects to leave the Company within 90 days of a change
of control, she will receive 200% of her separation payment.
In March 2000, the Compensation Committee approved severance packages for
David Fractor, the Company's Chief Financial Officer, JoAnn Stover, the
Company's Corporate Secretary, and Linda McDermott, the Company's Human
Resources Director. The Company has agreed that upon a change in control of
the Company and the subsequent termination of their employment, such
individuals would receive termination payments equal to 12 months of their
annual compensation.
Employee Salary Deferral Plan
- -----------------------------
In 1990, the Company adopted an Employee Salary Deferral Plan (the "Employee
Deferral Plan"), which is intended to be qualified under Section 401(k) of
the Internal Revenue Code of 1986, as amended. To be eligible, an employee
must have been employed by the Company for at least one year. The Employee
Deferral Plan permits employees who have completed one year of service to
defer from 1% to 15% of their annual compensation into the Employee Deferral
Plan. Additional annual contributions may be made at the discretion of the
Company and a 50% matching contribution may be made by the Company up to a
maximum of 5% of a participating employee's annual compensation.
Contributions made by the Company vest according to a schedule set forth in
the Employee Deferral Plan.
Stock Option Plan
- -----------------
In 1996, the Board of Directors, with shareholder approval, adopted the
Company's 1996 Stock Incentive Plan (the "1996 Plan"). The purposes of the
1996 Plan are to (i) enable the Company to attract, motivate and retain top-
quality directors, officers, employees, consultants and advisors, (ii)
provide substantial incentives for such persons to act in the best interests
of the shareholders of the Company, and (iii) reward extraordinary effort by
such persons on behalf of the Company. The 1996 Plan provides for awards in
the form of stock options, which may be either "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or non-qualified stock options, or restricted stock.
The total number of shares of Common Stock available for distribution under
32
33
the 1996 Plan is 2,000,000, however, no award may be made at any time if,
after giving effect to such award, the total number of shares of Common Stock
issuable upon exercise of all outstanding options and warrants of the Company
(whether or not under the 1996 Plan) plus the total number of shares of
Common Stock called for under any stock bonus or similar plan of the Company
(including shares of Common Stock underlying awards under the 1996 Plan)
would exceed 30% of the total number of shares of Common Stock outstanding at
the time of such award. As of March 25, 2003, there were options outstanding
under the 1996 Plan for 1,318,000 of Common Stock with exercise prices
ranging from $0.32 to $2.44 and with expiration dates ranging from March 20,
2007 to March 20, 2013. As of March 25, 2003, 251,000 shares of Common Stock
had been issued upon exercise of stock options granted under the 1996 Plan.
Stock Option Grants, Exercises and Holdings and Repricings
- -----------------------------------------------------------
The following two tables set forth information concerning stock options
granted to or exercised by the Named Executive Officers and key employees
during fiscal 2002 and the unexercised stock options held by them as of
December 31, 2002 and the repricing of stock options during the ten
years ended December 31, 2002.
OPTION/SAR GRANTS IN FISCAL 2002
Individual Grants
-------------------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation
Underlying Granted to Exercise for Option Term (4)
Options Employees in Price Expiration ----------------------
Name Granted (1) Fiscal Year (2) ($/Sh)(3) Date 5% 10%
- ---------- ----------- --------------- --------- ---------- ---------- ----------
Judi
Irving 200,000 29.85% $0.32 12/8/12 $ 40,249 $102,000
Dana E.
Belisle 50,000 7.46% $1.09 3/24/12 $ 34,275 $ 86,859
David E.
Fractor 20,000 2.98% $1.09 3/24/12 $ 13,710 $ 34,744
Alan C.
Darlington (5) 270,000 40.30% $0.64 9/28/06 $ 37,498 $ 80,753
_____________
(1) The stock options issued to Judi Irving vest at a rate of 25%
per year starting on March 1, 2003. The stock options granted to
Dana E. Belisle and David E. Fractor vest at a rate of 20% per
year starting one year from the date of grant.
(2) Options to purchase 400,000 shares and warrants to purchase
270,000 shares were granted during 2002
(3) All option grants were at the fair market value on the date of
grant.
(4) The "Potential Realizable Value" is the product of (a) the
difference between (i) the product of the closing sale price
per share at the date of grant and the sum of (A) 1 plus
(B) the assumed rate of appreciation of the Common Stock
compounded annually over the term of the option and (ii)
the per share exercise price of the option and (b) the
number of shares of Common Stock underlying the option at
December 31, 2002. These amounts represent certain
assumed rates of appreciation only. Actual gains, if
any, on stock option exercises are dependent on a variety
of factors, including market conditions and the price
performance of the Common Stock. There can be no
assurance that the rate of appreciation presented in
this table can be achieved.
(5) In connection with Mr. Darlington's separation from the
Company on September 28, 2002, the Company canceled
250,000 fully vested stock options with an exercise
price of $0.41 and 100,000 stock options, of which
20,000 options were vested, with an exercise price
of $1.20. The Company issued warrants to purchase
250,000 shares of Common Stock with an exercise price
of $0.60 and warrants to purchase 20,000 shares of Common
Stock with an exercise price of $1.20. As consideration for
these warrants, Mr. Darlington's severance was reduced by
$20,000.
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34
TEN-YEAR OPTION/SAR REPRICINGS
Number of
Securities
Number of Length of
Securities Original
Underlying Market Price Exercise Option Term
Options/ of Stock at Price at Remaining at
SARs Time of Time of New Date of
Repriced Repricing Repricing Exercise Repricing
Name Date or Amended or Amending or Amendment Price or Amendment
- -------------------- ------ ---------- ----------- ------------ --------- ------------
Sharon Kaiser (1) 5/1/98 7,500 $ 0.68 $1.50 $0.68 9 years
Hal Lieberman (2) 12/2/97 125,000 $ 0.72 $1.50 $1.50 9 years
Alan Darlington (3) 3/10/99 55,000 $ 0.41 $1.69 $0.41 8 years
Alan Darlington (4) 9/28/02 250,000 $ 0.55 $0.41 $0.60 7 years
Alan Darlington (5) 9/28/02 100,000 $ 0.55 $1.20 $1.20 9 years
- ---------
(1) Sharon Kaiser was the Chief Financial Officer and Hal
Lieberman was the Chief Executive Officer. Alan Darlington
was an outside director when he was awarded 55,000 options
and Chairman of the Board when the 55,000 options were
repriced.
(2) Mr. Lieberman's options would have expired three months
after his May 31, 1998 separation from the Company.
These options were extended through June 30, 2001, in
exchange for Mr. Lieberman remaining as the Company's
Chief Executive Officer through May 31, 1998.
(3) These options were granted while Mr. Darlington was
an outside director and were canceled when he became
Chairman of the Board. These options were replaced with
250,000 options that were priced at $0.41 per share and
had a 10-year life.
(4) These options were canceled at the time of Mr.
Darlington's separation and were replaced with warrants
to purchase 250,000 shares for a four-year period.
(5) These options were cancelled at the time of Mr.
Darlington's separation and were replaced with warrants
to purchase 20,000 shares for a four-year period.
AGGREGATED OPTION EXERCISES IN FISCAL 2002
AND FISCAL 2002 YEAR-END OPTION/SAR VALUES
Number of Securities
Underlying
Unexercised Options Value of Unexercised
at Fiscal In-the-Money Options
Year-End at Fiscal Year-End (1)
------------------- ----------------------
Shares Value
Acquired on Realized Exer- Unexer- Exer- Unexer-
Name Exercise (#) ($) ciseable cisable cisable cisable
- ----------- ------------- --------- -------- ------- ------- -------
Judi Irving -- -- - 200,000 $ - $ 26,000
Joshua Levy -- -- 100,000 50,000 $ - $ -
Dana E.
Belisle -- -- 31,000 104,000 $ - $ -
David E.
Fractor -- -- 22,000 48,000 $ - $ -
____________
(1) The value of unexercised "in-the-money" options is
the difference between the closing bid price of the Common
Stock on the OTC Bulletin Board at the close of business
on December 31, 2002 ($0.45 per share) and the exercise
price of the option, multiplied by the number of shares
subject to the option.
Compensation Committee Interlocks and Insider Participation
- ------------------------------------------------------------
The Compensation Committee is composed entirely of non-employee directors
none of whom are affiliates of the Company. Messrs. Stephen Wallace, Robert
L. Johnson and Julian L. Steffenhagen are currently members of the
Compensation Committee. Mr. Steffenhagen was appointed Chairman of the
Committee in June 2002.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Report of the Compensation Committee of the Board of
Directors shall not be deemed filed under the Securities Act
of 1933 (the "Securities Act") or under the Exchange Act.
The Compensation Committee (the "Committee") reviews and
recommends to the Board of Directors the compensation and
other terms and conditions of employment of the executive
officers of the Company, as well as incentive plan
guidelines for Company employees generally. he Committee
is composed entirely of non-employee directors.
The policies underlying the Committee's compensation
decisions are designed to attract and retain the best-
qualified management personnel available. The Company
compensates its executive officers primarily through
salaries. The Company, at its discretion, may, as it has
in other years, reward executive officers through bonus
programs based on profitability and other objectively
measurable performance factors. Additionally, the Company
uses stock options to compensate its executives and other
key employees.
In establishing executive compensation, the Committee
evaluates individual performance as it impacts overall
Company performance with particular focus on an individual's
contribution to the realization of operating profits and
the achievement of strategic business goals, including the
timely development and introduction of products and the
creation of markets in new geographic territories.
The Committee further attempts to rationalize a particular
executive's compensation with that of other executive
officers of the Company in an effort to distribute
compensation fairly among the executive officers.
Although the components of executive compensation (salary,
bonus and option grants) are reviewed separately, compensation
decisions are made based on a review of total compensation.
The number of shares covered by option grants is determined
in the context of this review.
Pursuant to his services agreement, Mr. Darlington, received
an annual salary of $200,000 and was eligible for an annual
bonus based upon the Company's annual net income growth
(the "Bonus Payment"). In connection with his service agreement,
Mr. Darlington was granted stock options to purchase up to
250,000 shares of the Company's Common Stock, subject to
certain vesting requirements as set forth in the Services
Agreement. In March 2001, Mr. Darlington received a bonus
of $80,000 for fiscal 2000, and a stock option to purchase up
to 100,000 shares of Common Stock at market price on date of
grant, subject to certain vesting requirements. Mr.
Darlington did not receive a bonus payment for fiscal 2001 or
2002 because certain milestones described in the Darlington
agreement were not met.
Dr. Levy,pursuant to his employment agreement, receives an
annual salary of $200,000 and a bonus equal to ten percent
(10%) of the increase, if any, in the Company's net operating
profits from therapeutic apheresis services over the prior
year, excluding any consideration of therapeutic apheresis
treatments rendered by the Company to patients of Dr. Levy's
medical practice. Dr. Levy received a bonus of $29,000 for
fiscal for 2001 and did not receive a bonus for fiscal 2002.
In March 2002, Mr. Belisle received a salary increase to
$145,000 and a stock option to purchase 50,000 shares of
Common Stock at market price on date of grant, subject to
certain vesting requirements. Mr. Belisle did not receive a
bonus for fiscal 2002.
In March 2002, Mr. Fractor received a stock option to
purchase 20,000 shares of Common Stock at market price on
date of grant, subject to certain vesting requirements. Mr.
Fractor did not receive a bonus in fiscal 2002.
Ms. Irving, pursuant to a letter of employment, receives an
annual salary of $200,000 and a minimum bonus of $45,000 in
2003 with a potential of up to 40% of her base salary based
on achieving profit targets and other objectives.
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36
At the time of his separation, Mr. Darlington had 250,000
fully vested options to purchase the Company's Common Stock
with an exercise price of $0.41. The exercise price was
approximately equal to the market price of the Company's
stock at the time of separation. Additionally, Mr.
Darlington had options to purchase an additional 100,000
shares of the Company's Common Stock with an exercise price
of $1.20 per share, of which 20,000 options were vested. All
unvested options would have terminated on the date of separation,
and all vested options would have expired 90 days from the
separation date. Since the Company's Common Stock is thinly
traded, the exercise of these options and subsequent sale of
Common Stock would most likely have a negative effect on the
price of the Company's Common Stock. Accordingly, the
Compensation Committee recommended to the Company's Board
of Directors to cancel all of Mr. Darlington's stock options
and reduce the cash portion of his compensation by $20,000
in exchange for the issuance of warrants to purchase 250,000
shares with an exercise price $0.60 per share and an additional
20,000 shares of $1.20 per share. All such warrants will be
exercisable for four years, and the shares purchased purusant
to the warrants, if any, will not registered under the Securities
Act.
Since the Company's historical levels of executive
compensation have been substantially less than $1,000,000
per employee annually, the Committee has not yet established
a policy with respect to qualifying compensation to the
Company's executive officers for deductibility under Section
162(m) of the Internal Revenue Code of 1986, as amended.
Compensation Committee
- ----------------------
Julian L. Steffenhagen, Chairman
Robert L. Johnson
Stephen P. Wallace
March 27, 2003
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of the March 25, 2003 by (i) all persons known to the Company
to own beneficially more than 5% of the outstanding Common Stock (other than
depositories), (ii) each director of the Company, (iii) each executive
officer of the Company and (iv) all executive officers and directors of the
Company as a group.
Amount and
Nature of
Name and Address of Beneficial Percentage
Beneficial Owner (1) Ownership (2) Owned (3)
---------------------- -------------- -----------
Kudo Partners 455,000 (4) 5.9%
Alan C. Darlington 290,000 (5) 3.6%
Julian L. Steffenhagen 160,000 (6) 2.0%
Robert L. Johnson 105,000 (7) 1.3%
Stephen P. Wallace 75,000 (7) *
Dana E. Belisle 70,000 (8) *
Judi Irving 70,000 (9) *
David E. Fractor 36,000 (8) *
All executive officers
and directors as a 806,000 (10) 9.5%
group (7 persons)
_________
* Less than 1%
(1) The address for Kudu Partners, LP is 1900 C.R. 124, Hesperus, CO
81326. The address for Ms. Irving and Messrs. Steffenhagen,
Wallace, Johnson, Darlington, Belisle and Fractor is 21101 Oxnard
Street, Woodland Hills, CA 91367.
(2) Except as set forth below, the named shareholder has sole voting power and
investment power with respect to the shares listed, subject to community
property laws were applicable.
36
37
(3) Shares of Common Stock, which the person (or group) has the right to
acquire within 60 days after March 25, 2003, are deemed to be
outstanding in calculating the beneficial ownership and the
percentage ownership of the person (or group) but are not deemed
to be outstanding as to any other
person or group.
(4) Per Form 13D filed with the Securities and Exchange Commission on February
18, 2003, Kudu Partners, LP has sole voting power.
(5) Represents shares of Common Stock issuable upon exercise of currently
exercisable warrants.
(6) Includes 145,000 shares of Common Stock issuable upon exercise of
currently exercisable stock options.
(7) Represents shares of Common Stock issuable upon exercise of currently
exercisable stock options.
(8) Represents shares of Common Stock issuable upon exercise of stock options
exercisable within 60 days of March 25, 2003.
(9) Represents 50,000 shares of Common Stock issuable upon exercise of stock
options exercisable within 60 days of March 25, 2003.
(10) Excludes an aggregate of 264,000 shares, which certain directors and
executive officers will have the right to purchase upon the exercise of
stock options exercisable in various installments commencing 60 days from
March 25, 2003.
EQUITY COMPENSATION PLAN INFORMATION
Number of
securities to Number of Securities
be issued upon remaining available
exercise of Weighted-average for future issuance under
outstanding exercise price of equity compensation
options, outstanding options, plans (excluding
warrants and warrants and securities reflected in
rights (1) rights (2) column 1 (3)
------------- -------------------- -------------------------
Plan category
Equity compensation plans
approved by security
holders....................... 1,264,000 $0.96 485,000
Equity compensation plans
not approved by security
holders....................... 270,000 $0.64
--------- ------
1,534,000
=========
Additionally, the Company facilitates employee ownership through matching
contributions to the Company's Employee Deferral Plan. The Company may elect
to match a portion of the employees' contribution. In 2001, 2000 and 1999,
the Company elected to match 50 percent of each participant's contribution,
up to 5% of the participants' annual salary, with the Company's Common Stock.
The Company match has a vesting period of 5 years.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Joshua Levy, M.D., the National Medical Director of the Company, through his
private practice in Sherman Oaks, California, treats patients who require
therapeutic services. Sales by the Company to hospital customers for
therapeutic services provided to Dr. Levy's patients amounted to
approximately 2% of the Company's revenues in each of the three years ended
December 31, 2002. There are no agreements between Dr. Levy and the
Company's hospital customers that require the hospitals to select
the Company to provide therapeutic services to the hospital's patients.
37
38
ITEM 14 CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Chief
Executive Officer 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
Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and the 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 objectives 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 or 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 Executive Officer or the Chief Financial Officer, subsequent to the
date of the evaluation.
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following are filed as part of this Report:
(a) 1. Financial Statements
An index to Financial Statements and Schedules appears on
page F-1.
2. Financial Statement Schedules
All schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under related
instructions or are inapplicable, and therefore have
been omitted.
3. Exhibits
The following exhibits listed are filed or incorporated by
reference as part of this Report.
3.1 Restated Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant, as amended--incorporated by reference
to Exhibit 3.1.0 to Form 8-K of the Registrant dated February 19,
2003, File No. 000-15233.
4.1 Warrant Agreement between the Registrant and Medicorp Inc. dated
February 17, 1993--incorporated by reference to Exhibit 4 to the
Current Report on Form 8-K of the Registrant dated February 17,
1993, File No. 000-15233.
4.2 Warrant Agreement between the Registrant and Stuart Dinney, dated
March 4, 1999 -- incorporated by reference to Exhibit 4.2 to Form
10-Q of the Registrant for the quarter ended March 31, 1999, File
No. 000-152333.
38
39
4.3 Warrant Agreement between the Registrant and Lori Terra-Vassalo,
dated March 4, 1999 -- incorporated by reference to Exhibit 4.8 to
Form 10-K of the Registrant for the year ended December 31, 1999,
File No. 000-152333.
4.4 Warrant Agreement between the Registrant and Alan C. Darlington,
dated January 15, 2003.
4.5 Warrant Agreement between the Registrant and Alan C. Darlington,
dated January 15, 2003.
4.6 Rights Agreement between the Registrant and U.S. Stock
Transfer Corporation dated March 3, 1998 -- incorporated by
reference to Exhibit 4 to Form 8-K of the Registrant dated March
5, 1998, File No. 000-15233.
4.7 Amended Certificate of Determination dated March 18. 1998 --
incorporated by reference to Exhibit 4.8 on Form 10-K of the
Registrant for the year ended December 31, 1997, File No.
000-15233.
4.8 Certificate of Determination of the Registrant's Series B
Senior Convertible Preferred Stock between the Registrant and
Comdisco Health Care Group dated October 23, 1998--incorporated by
reference to Exhibit 4.1 of Form 8-K of the Registrant dated
November 5, 1998, File No. 000-15233.
4.9 Registration Rights of Shareholders'-- Incorporated by
reference to Exhibit 4.9 to the Current Report on Form 8-K of the
Registrant dated August 19, 1996, File No. 000-15233.
10.1 1996 Stock Incentive Plan, as amended, of the Registrant--
incorporated by reference to Exhibit 4.1 to Form 10-Q of the
Registrant for the quarter ended September 30, 1996, File No.
000-15233.
10.2 Loan and Security Agreement between the Registrant and Comerica
Bank dated November 19, 2002.
10.3 Settlement Agreement between the Registrant and Medicorp, Inc. --
incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K of the Registrant dated July 19, 1996, File No. 000-15233.
10.4 Foreclosure Sale Agreement between the Registrant and Comdisco
Health Care Group, Inc dated October 23, 1998-- incorporated by
reference to Exhibit 2.1 of Form 8-K of the Registrant dated
November 5, 1998, File No. 000-15233.
10.5* Employment Agreement between the Registrant and William D. Nicely
dated June 1, 2000 --incorporated by reference to Form 10-Q for
the quarter ended June 30, 2000, File No. 000-15233.
10.6* Services Agreement between the Registrant and Alan C. Darlington,
dated March 10, 1999 -- incorporated by reference to Exhibit 10.1
of Form 10-Q of the Registrant for the quarter ended March 31,
1999, File No. 000-15233.
10.7* Employment Agreement between the Registrant and Joshua Levy dated
March 22, 2000 - incorporated by reference to Exhibit 10.12 of
Form 10-K of the Registrant for the year ended December 31, 2000,
File No. 000-15233.
10.8* Employment Letter between the Registrant and Judi Irving, dated
December 6, 2002.
10.9* Separation Agreement between the Registrant and Alan C.
Darlington, dated September 28, 2002.
39
40
10.10 Master Security Lease Agreement between the Registrant and GE
Capital Healthcare Financial Services dated December 26, 2002.
11 Computation of earnings (loss) per common equivalent share.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Notice Regarding Consent of Arthur Andersen LLP.
99.1 Certification Pursuant to 18 U.S.C. 1350 Adopted Pursuant to
Section 906 of the Sarbanes Oxley Act of 2002.
* Management contracts and compensatory plans and arrangements.
(b) Reports on Form 8-K.
The Company filed a Form 8-K on January 19, 2003 disclosing under
Item 5 (Other Information) the amendment to the Company's bylaws.
40
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 2003 HEMACARE CORPORATION
/s/ David E. Fractor
--------------------------
David E. Fractor, Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 27th day of March, 2003.
Signature Title
- --------------------------- ---------------------------
/s/ Julian L. Steffenhagen Chairman of the Board
- ----------------------------
Julian L. Steffenhagen
/s/ Judi Irving President and chief Executive
- ----------------------------- Officer (Principal Executive
Judi Irving Officer)
/s/ David E. Fractor Vice President, Finance and
- ----------------------------- Chief Financial Officer
David Fractor (Principal Financial and
Accounting Officer)
/s/ Stephen Wallace Director
- -----------------------------
Stephen Wallace
/s/ Robert L. Johnson Director
- -----------------------------
Robert L. Johnson
41
42
CERTIFICATION
I, David Fractor certify that:
1. I have reviewed this annual report on Form 10-K of HemaCare
Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in the annual report:
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15b-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedure as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ David E. Fractor
- -----------------------
David E. Fractor
Chief Financial Officer
42
43
CERTIFICATION
I, Judi Irving certify that:
1. I have reviewed this annual report on Form 10-K of HemaCare
Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in the annual report:
4. The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15b-14) for the
registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedure as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 24, 2003
/s/ Judi Irving
- ------------------
Judi Irving
Chief Executive Officer
43
F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
ITEM 14(A) (1) AND (2)
Sequential
Page
Number
Report of Independent Auditors Ernst & Young, LLP........ F-2
Report of Independent Auditors Andersen, LLP............. F-3
Consolidated balance sheets at December 31, 2002 and
December 31, 2001...................................... F-4
For the years ended December 31, 2002, 2001 and 2000:
Consolidated income statements..................... F-5
Consolidated statements of shareholders' equity.... F-6
Consolidated statements of cash flows.............. F-7
Notes to consolidated financial statements.............. F-8
Other schedules are not submitted because either they are not applicable,
not required or because the information required is included in
the Consolidated Financial Statements, including the notes thereto.
F-1
F-2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders of HemaCare Corporation
We have audited the accompanying consolidated balance sheet of HemaCare
Corporation. (a California corporation) and subsidiaries as of December 31,
2002 and the related consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit. The consolidated financial statements of HemaCare Corporation,
for the fiscal years ended December 31, 2001 and 2000, were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those statements in their report dated March 14, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of HemaCare
Corporation and subsidiaries as of December 31, 2002 and the consolidated
results of their operations and their cash flows for the year ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 10 to the consolidated financial statements, HemaCare
Corporation changed its method of accounting for purchased goodwill and other
intangible assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142 during the first quarter of fiscal 2002. As
discussed above, the financial statements of HemaCare Corporation as of
December 31, 2001 and 2000, and for the years then ended were audited by
other auditors who have ceased operations. As described in Note 10, these
financial statements have been updated to include the transitional
disclosures required by SFAS No. 142, "Goodwill and Other Intangible Assets,"
which was adopted by the Company as of January 1, 2002. Our audit procedures
with respect to the disclosures in Note 10 for fiscal 2001 and 2000 included
(i) agreeing the previously reported net income to the previously issued
financial statements and the adjustments to reported net loss representing
amortization expense (including any related tax effects) recognized in those
periods related to goodwill that are no longer being amortized to the
Company's underlying records obtained from management, and (ii) testing the
mathematical accuracy of the reconciliation of adjusted net loss to reported
net income, and the related net earnings-per-share amounts. Our audit
procedures with respect to the disclosures in Note 10 for fiscal 2001 and
2000 included (i) agreeing the goodwill and amortization amounts and the
gross intangible assets and accumulated amortization amounts to the Company's
underlying records obtained from management, and (ii) testing the
mathematical accuracy of the tables. In our opinion, the disclosures for
fiscal 2001 and 2000 in Note 10 related to the transitional disclosures of
SFAS No. 142 are appropriate. However, we were not engaged to audit, review,
or apply any procedures to the Company's financial statements for fiscal 2001
and 2000 other than with respect to such disclosures and, accordingly, we do
not express an opinion or any other form of assurance on the Company's fiscal
2001 and 2000 financial statements taken as a whole.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 18, 2003
F-2
F-3
This is a copy of the audit report previously issued by Arthur Andersen LLP
in connection with HemaCare Corporation filing on Form 10-K for the year
ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this filing on Form 10-K. See Exhibit 23.2
for further discussion. The consolidated balance sheet as of December 31,
2000, referred to in this report has not been included in the accompanying
financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of HemaCare Corporation:
We have audited the accompanying consolidated balance sheets of HemaCare
Corporation (a California corporation) and subsidiaries as of December 31,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and comprehensive income and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of HemaCare Corporation, and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
March 14, 2002
F-3
F-4
HEMACARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents.................... $ 1,048,000 $ 1,025,000
Accounts receivable, net of allowance for
doubtful accounts of $208,000 in 2002 and
$212,000 in 2001............................ 4,932,000 5,454,000
Product inventories and supplies............. 795,000 707,000
Prepaid expenses............................. 295,000 192,000
Deferred income taxes........................ 402,000 298,000
------------- -------------
Total current assets................ 7,472,000 7,676,000
Plant and equipment, net of accumulated
depreciation and amortization of
$2,450,000 in 2002 and $2,030,000 in 2001.... 3,308,000 2,348,000
Goodwill....................................... - 362,000
Deferred taxes................................. 2,582,000 2,605,000
Other assets................................... 93,000 91,000
------------- -------------
$ 13,455,000 $ 13,082,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 2,277,000 $ 2,495,000
Accrued payroll and payroll taxes............ 1,231,000 948,000
Other accrued expenses....................... 133,000 113,000
Current obligations under capital leases..... 90,000 31,000
Current obligations under notes payable...... 199,000 168,000
Reserve for discontinued operations.......... 68,000 75,000
------------- -------------
Total current liabilities........... 3,998,000 3,830,000
Obligations under capital leases, net
of current portion........................... 246,000 176,000
Notes payable, net of current portion.......... 1,107,000 626,000
Other long-term liabilities.................... 17,000 23,000
Commitments and contingencies (Note 12)........
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.. 13,316,000 13,065,000
Accumulated deficit.......................... (5,229,000) (4,638,000)
------------- -------------
Total shareholders' equity.......... 8,087,000 8,427,000
------------- -------------
$ 13,455,000 $ 13,082,000
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
F-5
HEMACARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Years Ended December 31
2002 2001 2000
------------ ------------ ------------
Revenues:
Blood products.................. $ 19,444,000 $ 16,466,000 $14,019,000
Blood services.................. 8,373,000 8,733,000 7,493,000
------------- ------------- ------------
Total revenue................... 27,817,000 25,199,000 21,512,000
Operating costs and expenses:
Blood products.................. 18,447,000 14,979,000 11,696,000
Blood services.................. 5,625,000 5,811,000 4,966,000
------------- ------------- ------------
Total operating costs and
expenses...................... 24,072,000 20,790,000 16,662,000
Gross profit.................... 3,745,000 4,409,000 4,850,000
General and administrative expenses. 4,074,000 3,918,000 3,492,000
------------- ------------- ------------
Income (loss) from operations....... (329,000) 491,000 1,358,000
Other income (expense).............. (51,000) 22,000 91,000
Write off of impaired goodwill...... (362,000) - -
------------- ------------- ------------
Income (loss) before income taxes... (742,000) 513,000 1,449,000
Provision (benefit) for income
taxes............................ (151,000) 190,000 (2,901,000)
------------- ------------- ------------
Net Income (loss).............. $ (591,000) $ 323,000 $ 4,350,000
============= ============= ============
Income (loss) per share
Basic.............................. $ (0.08) $ 0.04 $ 0.57
============= ============= ============
Diluted............................ $ (0.08) $ 0.04 $ 0.50
============= ============= ============
Weighted average shares outstanding
- basic............................ 7,673,000 7,534,000 7,567,000
============= ============= ============
Weighted average shares outstanding
- diluted.......................... 7,673,000 8,298,000 8,776,000
============= ============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
F-6
HEMACARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2002, 2001 and 2000
Preferred Stock Common Stock Accumulated
Shares Amount Shares Amount Deficit Total
-------- ---------- ---------- ------------ ------------- -----------
Balances at December
31, 1999........... 450,000 $75,000 7,475,082 $13,676,000 $ (9,311,000) $ 4,440,000
Issuance of common
stock for employee
401(k) and
incentive bonus
plans.............. - - 115,133 75,000 - 75,000
Preferred stock
conversion.........(450,000) (75,000) 500,000 75,000 - -
Stock repurchased and
warrants redeemed.. - - (439,558) (697,000) - (697,000)
Stock options and
warrants exercised. - - 39,000 35,000 - 35,000
Net income.......... - - - - 4,350,000 4,350,000
-------- -------- ----------- ------------ ------------- ------------
Balances at December
31, 2000........... - - 7,689,657 13,164,000 (4,961,000) 8,203,000
Issuance of common
stock for employee
401(k) and
incentive bonus
plans.............. - - 92,848 93,000 - 93,000
Stock repurchased... - - (332,300) (391,000) - (391,000)
Stock options
exercised.......... - - 140,000 199,000 - 199,000
Net income.......... - - - - 323,000 323,000
------- -------- ----------- ------------ ------------- ------------
Balances at December
31, 2001........... - - 7,590,205 13,065,000 (4,638,000) 8,427,000
Issuance of common
stock for employee
401(k) and
incentive bonus
plans.............. - - 76,385 122,000 - 122,000
Extension of stock
options............ - - - 56,000 - 56,000
Warrants issued..... - - - 20,000 - 20,000
Stock options
exercised.......... - - 84,500 53,000 - 53,000
Net loss............ - - - - (591,000) (591,000)
-------- -------- ----------- ------------ ------------- ------------
Balances at December
31, 2002.......... - $ - 7,751,090 $13,316,000 $ (5,229,000) $ 8,087,000
======== ======== =========== ============ ============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
F-7
HEMACARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended DEcember 31
2002 2001 2000
------------ ------------ -------------
Cash flows from operating activities:
Net Income (loss)............................... $ (591,000) $ 323,000 $ 4,350,000
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Provision for bad debts...................... - 10,000 21,000
(Recognition) use of deferred tax assets..... (81,000) 190,000 (3,093,000)
Depreciation and amortization................ 426,000 299,000 198,000
Loss (gain) on disposal of assets............ (1,000) 2,000 (51,000)
Impaired goodwill............................ 362,000 - -
Issuance of common stock and options for
compensation................................ 178,000 93,000 75,000
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable... 522,000 (1,468,000) (927,000)
(Increase) decrease in inventories, supplies
and prepaid expenses........................ (191,000) 11,000 73,000
Decrease (increase) in other assets.......... (2,000) (57,000) -
Increase in accounts payable,accrued
expenses, and other liabilities............. 99,000 505,000 790,000
Expenditures for discontinued operations..... (7,000) (1,000) (5,000)
------------ ------------ ------------
Net cash provided by (used in) operating
activities.................................. 714,000 (93,000) 1,431,000
Cash flows from investing activities:
Decrease in other assets........................ - - 12,000
Proceeds from sale of plant and equipment....... 10,000 - 17,000
Decrease (increase) in marketable securities.... - 868,000 (90,000)
Purchase of plant and equipment, net............ (1,203,000) (1,646,000) (285,000)
------------ ------------ ------------
Net cash used in investing activities.......... (1,193,000) (778,000) (346,000)
Cash flows from financing activities:
Proceeds from exercise of stock options......... 53,000 199,000 35,000
Repurchase and retirmenet of common stock....... - (391,000) (697,000)
Principal payments on notes payable and
capitalized leases............................. (258,000) (116,000) -
Debt borrowings (payments)...................... 132,000 - -
Net borrowings on lines of credit............... 575,000 842,000 (551,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities.................................... 502,000 534,000 (1,213,000)
Increase (decrease) in cash and cash
equivalents.................................... 23,000 (337,000) (128,000)
Cash and cash equivalents at beginning of
period........................................ 1,025,000 1,362,000 1,490,000
------------ ------------ ------------
Cash and cash equivalents at end of period...... $ 1,048,000 $ 1,025,000 $ 1,362,000
============ ============ ============
Supplemental disclosure:
Interest paid................................... $ 59,000 $ 30,000 $ 22,000
============ ============ ============
Income taxes paid............................... $ - $ 44,000 $ 133,000
============ ============ ============
Items not impacting cash flows:
Purchase of equipment - Capital lease........... $ 162,000 $ 151,000 $ -
============ ============ ============
Purchase of equipment - Notes................... $ 30,000 $ - $ -
============ ============ ============
Issuance of warrants............................ $ 20,000 $ - $ -
============ ============ ============
Termination of capital leases................... $ - $ - $ 94,000
============ ============ ============
Conversion of preferred stock into common stock. $ - $ - $ 75,000
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
F-8
HEMACARE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
Note 1 - Organization
- ----------------------
HemaCare Corporation is in the business of providing blood products and blood
services to hospitals and medical centers primarily in California.
Note 2 - Summary of Accounting Policies
- ----------------------------------------
Principles of Consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its 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.
Financial Instruments: Cash and cash equivalents, marketable securities,
accounts receivable and accounts payable are carried at cost which
approximates fair value. The interest rate applied to capital leases is
based upon the Company's borrowing rate, and therefore their carrying value
approximates fair value.
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.
Inventories and Supplies: Inventories consist of Company-manufactured
platelets and whole blood components as well as component blood products
purchased for resale. Supplies consist primarily of medical supplies used to
collect and manufacture products and to provide therapeutic services.
Inventories are stated at the lower of cost of market and are accounted for
on a first-in, first-out basis.
Inventories are comprised of the following as of December 31,
2002 2001
--------- --------
Blood Supplies $126,000 $ 88,000
Supplies 669,000 619,000
-------- --------
$795,000 $707,000
======== ========
Plant and Equipment: Plant and equipment are stated at original cost.
Furniture, fixtures, equipment and vehicles are depreciated using the
straight-line method over two to nine 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.
F-8
F-9
Goodwill: During the first quarter of 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." In accordance with SFAS 142, the Company discontinued
amortizing goodwill. During 2002, the Company determined that the goodwill
was impaired and recorded an adjustment to write off all of the remaining
goodwill in the amount of $362,000. The Company does not have any other
intangible assets. During 2001 and prior, goodwill was amortized on a
straight-line basis over ten years. Goodwill amortization was $52,000 for
each of the two years ended December 31, 2001 and 2000.
Long lived Assets: All long-lived assets are reviewed for impairment in value
when changes in circumstances dictate, based upon undiscounted future
operating cash flows, and appropriate losses are recognized and reflected in
current earnings, to the extent the carrying amount of an asset exceeds its
estimated fair value determined by the use of appraisals, discounted cash
flow analyses or comparable fair values of similar assets.
Income Taxes: Income taxes are computed under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS 109 provides for 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.
Concentration of risk: During 2002, 2001 and 2000, no single customer
accounted for more than 10% of the Company's revenues. At December 31, 2002
and 2001, no customer accounted for over 10% of the Company's accounts
receivable.
Advertising costs: Advertising costs are expensed as incurred. For the years
ended December 31, 2002, 2001, and 2000, advertising costs were $61,000,
$76,000, and $78,000, respectively.
Interest expense: During the three years ended December 31, 2002, 2001 and
2000 the Company incurred interest expense of $61,000, $30,000 and $22,000,
respectively.
Employee stock option plan: The Company accounts for its employee stock
option plan under the recognition and measurement principles of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Under APB No. 25, no stock-based
compensation is reflected in net income, as all options granted under the
plans had an exercise price equal to the market value of the underlying
common stock on the date of grant and the related number of shares granted is
fixed at that point in time.
Reclassification: Certain prior year amounts have been reclassified to
conform to the current year presentation.
Recent accounting pronouncements: In June 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 143, "Asset Retirement Obligations"
effective for fiscal years beginning after June 15, 2002. Under the new
rules, the cost to retire assets or remediate property or certain leased
assets is capitalized and recognized as an operating expense over the life of
the asset. The Company will apply the new rules on accounting for asset
retirement obligations in the first quarter of 2003. The impact of adoption
of the new standard is not expected to have a material impact on the results
of operations or the financial position of the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" effective for fiscal years beginning after
December 15, 2001. The impact of adopting this standard has not had a
material impact on the results of operations or the financial position of the
Company.
F-9
F-10
In April 2002, Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
13, and Technical Corrections (SFAS No. 145) was issued and will be effective
for fiscal years beginning after May 15, 2002. SFAS 145 eliminates the
classification of debt extinguishment activity as extraordinary items, and
provides corrections or clarifications of other existing authoritative
pronouncements. The Company has elected early adoption and implemented the
provisions of SFAS 145 during 2002, which did not have a material effect on
the Company's consolidated financial statements.
The FASB has issued FASB Statement No. 146 ("SFAS 146"), Accounting for Exit
or Disposal Activities. SFAS 146 addresses the recognition, measurement, and
reporting of costs that are associated with exit and disposal activities,
including costs related to terminating a contract that is not a capital lease
and termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an
ongoing benefit arrangement or an individual deferred-compensation contract.
SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring) and
requires liabilities associated with exit and disposal activities to be
expensed as incurred. The impact of adopting this standard will not have a
material impact on the results of operations or the financial position of the
company.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others, (FIN
45). FIN 45 elaborates on the existing disclosure requirements for most
guarantees. FIN 45 requires that at the time a company issues certain
guarantees, the company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee
and must disclose that information in its interim and annual financial
statements. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. FIN 45's disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002 and are applicable to all guarantees issued by the guarantor subject to
FIN 45's scope, including guarantees issued prior to the issuance of FIN 45.
The Company adopted the provisions of FIN 45 in December 2002. The adoption
did not have any material impact on the Company's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure -- An Amendment of SFAS No. 123"
("SFAS 148"). SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. The Company has accounted for its stock-
based compensation to employees using the intrinsic methodology and provided
the "disclosures only" information related to the fair value method as allowed
under SFAS No. 123. SFAS 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company has concluded it is in compliance with these required
prominent disclosures.
Note 3 - Plant and Equipment
- ----------------------------
Plant and equipment consists of the following:
December 31,
------------------------
2002 2001
----------- ------------
Furniture, fixtures and equipment $ 5,274,000 $ 4,000,000
Leasehold improvements 484,000 378,000
------------ ------------
5,758,000 4,378,000
Less accumulated depreciation
and amortization (2,450,000) (2,030,000)
------------ ------------
$ 3,308,000 $ 2,348,000
============ ============
Depreciation expense for 2002, 2001 and 2000 was $426,000, $247,000 and
$146,000 respectively.
F-10
F-11
Note 4 - Line of Credit and Notes Payable
- -----------------------------------------
The Company has a working capital line of credit with a bank. The amount the
Company may borrow the lesser of: 75% of eligible accounts receivable less
amounts outstanding on the notes payable discussed below, or $2 million.
Interest is payable monthly at a rate of prime plus 0.5% (4.75% as of
December 31, 2002). As of December 31, 2002, the Company's net borrowings on
this line of credit were $750,000. This line of credit matures in June 2004,
and is included in notes payable, net of current portion on the balance
sheet.
In addition, the Company has various notes payable with the same bank. At
December 31, 2002, the total amount outstanding under these notes is $451,000
and require monthly principal payments of approximately $14,000 plus interest
at a weighted average fixed rate of 6.6%.
These loans are collateralized by substantially all of the Company's assets
and are cross defaulted. They also require the maintenance of certain
financial covenants that require minimum levels of profitability and prohibit
the payment of dividends or stock repurchases. The Company incurred interest
expense to the bank in 2002, 2001 and 2000 of $46,000, $30,000 and $22,000
respectively. As of December 31, 2002, the Company was in compliance with
these loan covenants.
The working capital line of credit described above replaced the Company's old
line of credit with the same bank. Under the terms of the old line of credit
the Company was able to borrow 75% of the eligible accounts receivable up to
a maximum of $2.0 million at an interest rate of prime plus .25%.
Previously, the Company also had a credit facility with the same bank that
provided $1.25 million to be used to acquire vehicles and equipment.
NPurchases were combined into multi-year notes payable and the interest rate
was equal to the bank's internal cost of funds plus 2.5%. As part of the new
credit agreement, the bank cancelled future advances.
Additionally, the Company has another note payable with a finance company.
As of December 31, 2002, the balance on this note is $105,000. The note
requires quarterly payments of approximately $10,000 including interest at
the rate of 8.5% and matures at January 2006. It is collateralized by
certain fixed assets.
Future maturities under these notes are as follows:
Future maturities under notes:
2003 $ 199,000
2004 952,000
2005 152,000
2006 3,000
-----------
$ 1,306,000
===========
Note 5 - Leases
- ---------------
The Company has entered into various capital leases for equipment, expiring
on various dates through 2006. Included in property and equipment are the
following assets held under capital leases.
Year Ended December 31 2002 2001
---------- ----------
Equipment $ 439,000 $ 315,000
Accumulated Depreciation (92,000) (86,000)
---------- ----------
$ 347,000 $ 229,000
========== ==========
F-11
F-12
The Company leases its facilities and certain equipment under operating
leases that expire through the year 2007. Future minimum rentals under
capitalized and operating leases are as follows:
Year ending December 31 Capital Operating
----------- -----------
2003..................... $ 115,000 $ 514,000
2004..................... 101,000 504,000
2005..................... 90,000 445,000
2006..................... 83,000 402,000
2007..................... - 113,000
----------- -----------
389,000 $1,979,000
Less: Interest.......... (53,000) ===========
-----------
Present value............ 336,000
Less: Current portion... (90,000)
-----------
$ 246,000
===========
Total rent expense under all operating leases was $796,000, $517,000 and
$497,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Most of the operating leases for facilities include options to renew the
lease at the then current fair market value for periods of one to three
years. Additionally, the Company's facility in Sherman Oaks is currently
operating under a month-to-month basis while contract negotiations are
ongoing. In most cases, management expects that in the normal course of
business, leases will be renewed or replace by other leases.
Note 6 - Severance
- -------------------
During 2002, the Company's President ahd Chief Executive Officer left
the Company. In accordance with the terms of his employment contract,
he was entitled to severance in the amount of $237,500. This amount is
being paid over a period of one year from the date of separation. As
of December 31, 2002, the the unpaid severance was $180,000. Pursuant
to the terms of his employment contract, he previously received an option
to purchase up to 250,000 shares of the Company's Common Stock at a
price of $0.41 per share. In 2001, the former Chief Executive Officer
was granted stock options to purchase 100,000 shares of the Company's
Common Stock at the market price on the date of grant $1.20, subject
to certain vesting requirements. All of the 250,000 stock options
issued pursuant to the employment agreement and 20,000 stock options
from the 2001 option grant were vested as of his separation date.
In partial consideration for canceling these options, the former Chief
Executive Officer received 250,000 warrants to purchase shares of the
Company's Common Stock at $0.60 per share. Additionally, he received
20,000 warrants to purchase shares of the Company's Comon Stock at
$1.20 per share. All warrants have four-year lives. As additional
consideration for the warrants, the former Chief Executive Officer's
severance was reduced by $20,000, which was approximately equal to
the fair market value on the date of grant. During 2002, the Company
also extended the stock options to a former officer and accounted
for the difference between the fair market value on the date of the
extension and the exercise price as additional compensation in the
amount of $56,000. This was accounted for in general and
administrative expenses as employee compensation in 2002.
F-12
F-13
Note 7 - Income Taxes
- ---------------------
The Provision (benefit) for income taxes for the years ended December 31,
2002, 2001 and 2000 is as follows:
2002 2001 2000
---------- ---------- ------------
Current taxes:
Federal................. $ - $ 5,000 $ 29,000
State................... (50,000) 12,000 56,000
---------- ---------- ------------
(50,000) 17,000 85,000
Deferred taxes:
Federal................. (87,000) 146,000 (2,633,000)
State................... (14,000) 27,000 (353,000)
---------- ---------- ------------
(101,000) 173,000 (2,986,000)
Provision (benefit)
for income taxes......... $(151,000) $ 190,000 $(2,901,000)
========== ========== ============
Differences between the provision (benefit) for income taxes and income taxes
at statutory federal income tax rate for the years ended December 31, 2002,
2001 and 2000 are as follows:
2002 2001 2000
---------- ---------- ------------
Income tax expense at fed-
eral statutory rate...... $(250,000) $ 174,000 $ 493,000
State income taxes, net
of federal benefit...... (5,300) 30,000 87,000
Change in valuation
allowance............... 142,000 - (3,650,000)
Permanent differences..... 14,000 34,000 146,000
Other..................... (51,700) (48,000) 23,000
---------- ---------- ------------
Income tax expense
(benefit)................ $(151,000) $ 190,000 $(2,901,000)
========== ========== ============
The Company has recorded a net deferred tax asset of $2,984,000 and $2,903,000
at December 31, 2002 and 2001, respectively. The components of the net
deferred tax asset at December 31, 2002 and 2001 are as follows:
2002 2001
----------- -----------
Current:
Reserve................... $ 108,000 $ 75,000
Accrued expense and
other.................... 294,000 223,000
----------- -----------
Total deferred tax
assets................... 402,000 298,000
Noncurrent:
Net operating loss....... 2,016,000 1,873,000
Depreciation and
amortization............ 245,000 233,000
Tax credit carryforward.. 866,000 866,000
Other.................... (3,000) 33,000
Valuation allowance...... (542,000) (400,000)
----------- -----------
2,582,000 2,605,000
---------- -----------
$2,984,000 $2,903,000
=========== ===========
A valuation allowance is recorded if the weight of available evidence
suggests it is more likely than not that some portion or all of the deferred
tax asset will not be recognized. The Company provided a valuation allowance
against all of its deferred tax assets through September 30, 2000. A
determination was made in the fourth quarter of 2002 that, based on recent
historical and expected future operating results, it is more likely than not
that the Company will be able to realize a significant portion of its
deferred tax assets.
F-13
F-14
At December 31, 2002, the Company had net operating loss carryforwards
available for Federal income and state tax purposes totaling $6,230,000,
which expires through 2011. At December 31, 2002, the Company had federal
income tax credit carryforwards of approximately $550,000 expiring through
2010, and state tax credit carryforwards of approximately $316,000, which are
not subject to expiration.
Acquisitions of common stock which result in changes in equity ownership in
the Company could result in an "ownership change" within the meaning of
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"),
thereby imposing an annual limitation (the "Section 382 Limitation") on the
Company's ability to utilize its net operating loss carryforwards to reduce
future taxable income. In the event of a Section 382 Limitation, the
Company's utilization of its net operating loss carryforwards would be
restricted.
Note 8 - Shareholders' Equity
- -----------------------------
Stock Options
- -------------
In July 1996, the Company's Board of Directors approved and adopted a stock
incentive plan, which provides for grants of both stock options and shares of
restricted stock. A total of 2,000,000 shares may be granted under the terms
of the 1996 Plan. The term of the options granted is determined by the
Company's Board of Directors, but in no event may be longer than ten years.
The exercise price of options granted generally is required to be not less
than the fair market value of the common stock on the date of grant. Options
granted to employees generally vest at a rate of at least 20% per year.
The table below summarizes stock option transactions.
2002 2001 2000
------------------ ----------------- ------------------
Shares Price Shares Price Shares Price
---------- -------- ---------- ------ --------- -------
Outstanding at beginning
of year................. 1,521,000 $0.92 1,365,000 $0.86 1,321,300 $0.89
Granted.................. 400,000 $ .70 345,000 $1.32 145,000 $1.85
Exercised................ (84,500) ($0.63) (140,000) ($1.42) (26,500) ($0.63)
Canceled................. (572,500) ($0.66) (49,000) ($1.04) (74,800) ($0.63)
---------- ------- ---------- ------- ---------- -------
Outstanding at end
of year................. 1,264,000 $0.96 1,521,000 $0.92 1,365,000 $0.86
========== ========== ==========
Exercisable at end
of year................. 703,000 $1.04 939,000 $0.80 862,000 $0.85
========== ========== ==========
The following table summarizes the range of exercise price, weighted average
remaining contractual life ("Life") and weighted average exercise price
("Price") for all stock options outstanding as of December 31, 2002:
Options Outstanding Options Exercisable
------------------------------- --------------------
Range of Exercise Price Shares Life Price Shares Price
- ------------------------- ----------- --------- -------- ---------- --------
$0.32 to $0.75 654,000 6.7 years $ 0.52 364,000 $ 0.61
$0.76 to $1.50 440,000 8.0 years $ 1.16 235,000 $ 1.16
$1.51 to $2.44 170,000 7.1 years $ 2.15 104,000 $ 2.27
--------- ---------
1,264,000 $ 0.96 703,000 $ 1.04
========= ====== ========= ======
The Company has elected to adopt SFAS 123 "Accounting for Stock-Based
Compensation" for disclosure purposes only and applies the provisions of APB
Opinion No. 25. The Company did not recognize any compensation expense
related to the issuance of stock options in 2002, 2001 or 2000. Had
compensation expense for all options granted to employees been recognized in
accordance with SFAS 123, the Company's net income and net income per share
would have been as follows:
F-14
F-15
Years ended December 31,
2002 2001 2000
---------- --------- ----------
Net income (loss)
as reported........ $(591,000) $323,000 $4,350,000
Pro forma net
income (loss)...... $(728,000) $171,000 $4,184,000
Basic income (loss)
per share as
reported........... $ (0.08) $ 0.04 $ 0.57
Diluted income
(loss) per share
as reported....... $ (0.08) $ 0.04 $ 0.50
Pro forma basic net
income (loss) per
share.............. $ (0.09) $ 0.02 $ 0.55
Pro forma diluted
net income (loss)
per share.......... $ (0.09) $ 0.02 $ 0.48
The above pro forma amounts were calculated by estimating the fair value
of each option or warrant granted on the date of grant using the
Black-Scholes option-pricing model as follows:
Years ended December 31,
2002 2001 2000
---------- --------- ----------
Expected life....... 4 Years 4 Years 3 Years
Expected volatility. 113% 40% 60%
Interest rate....... 3.6% 6.2% 6.2%
Dividend yield...... 0% 0% 0%
Warrants
- --------
At December 31, 2002, 2001 and 2000, the Company had a total of 760,000,
520,000 and 540,000 warrants to purchase common stock outstanding, at
weighted average exercise prices of $3.23, $4.60 and $4.54, respectively. All
of the warrants outstanding for all periods were exercisable. The weighted
average lives for warrants outstanding at December 31, 2002 is 1.5 years.
In 1993, the Company issued warrants to purchase 400,000 shares of stock at
$5.50 per share. These warrants expire in February 2003.
As part of the severance with the former Chief Executive Officer (see
Note 7 - Severance), the Company cancelled 350,000 stock options with
a weighted average exercise price of $0.64 per share. The Company
issued 270,000 warrants to the former Chief Executive Officer with an
average exercise price of $0.64 per share. These warrants are fully
vested and expire in 2006.
Stock Repurchase
- ----------------
In 2000, the Company announced its intention to repurchase up to 15% of its
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. In 2000, the Company purchased 439,558 shares at an average
price of $1.58 per share. In 2001, the Company purchased 332,300 shares at
an average price of $1.18 per share. No purchases were made in 2002 and the
Company has terminated this program.
Preferred Stock
- ---------------
In October 1998 as part of the purchase price of an acquisition, 450,000
shares of no par value Senior Convertible Series B preferred stock ("Series B
Preferred") were issued to the seller. The Series B Preferred was convertible
into 500,000 shares of HemaCare common stock, at the option of the holder at
any time after one year from the date of issuance. In December 2000, the
holder of the Series B Preferred converted all of the preferred stock into
500,000 shares of HemaCare common stock.
F-15
F-16
Note 9 - Earnings per Share
- ----------------------------
The following table provides the calculation methodology for the numerator
and denominator for earnings per share:
Years ended December 31,
2002 2001 2000
----------- ------------ ------------
Net income (loss)... $ (591,000) $ 323,000 $ 4,350,000
Shares outstanding.. 7,673,000 7,534,000 7,567,000
Net effect of
diluted options
and warrants....... - 764,000 1,209,000
----------- ----------- ------------
Dilutive shares
oustanding......... 7,673,000 8,298,000 8,776,000
=========== =========== ===========
Earnings (loss)
per share diluted.. $ (0.08) $ 0.04 $ 0.50
=========== =========== ===========
Warrants and options to purchase 2,024,000 shares of common stock at December
31, 2002, were excluded from the 2002 computation of diluted earnings per
share because they were anti-dilutive. Warrants and options to purchase
590,000 and 575,000 shares of common stock at December 31, 2001 and 2000
respectively, were excluded in the computation of diluted earnings per share
because the exercise price of the warrants and options was greater than the
average market price of the common stock.
Note 10 - Goodwill
- ------------------
During 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 acquisition. As of December 31, 2001, the
Company had $530,000 of goodwill and accumulated amortization of $168,000.
During 2002, management determined that the goodwill was impaired and
recorded an adjustment to write-off all of the 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:
2002 2001 2000
----------- ------------ ------------
Reported net income (loss)... $ (591,000) $ 323,000 $ 4,350,000
Goodwill amortization,
net of taxes................ - 31,000 31,000
Goodwill impairment,
net of taxes................ 271,000 - -
----------- ----------- ------------
$ (374,000) $ 354,000 $ 4,381,000
=========== =========== ============
Income (loss) per share
Basic
Reported net income (loss).. $ (0.08) $ 0.04 $ 0.57
Goodwill amortization....... - 0.00 0.00
Goodwill impairment......... 0.03 - -
----------- ----------- ------------
Adjusted net income (loss).. $ (0.05) $ 0.04 $ 0.57
=========== =========== ============
Diluted
Reported net income (loss).. $ (0.08) $ 0.04 $ 0.50
Goodwill amortization....... - 0.00 0.00
Goodwill impairment......... 0.03 - -
----------- ----------- ------------
Adjusted net income (loss).. $ (0.05) $ 0.04 $ 0.50
=========== =========== ============
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F-17
Note 11 - Employee Salary Deferral Plan
- ----------------------------------------
HemaCare's Employee Salary Deferral Plan qualifies under Section 401(k) of
the Internal Revenue Service Code (the "401(k) Plan"). In 2001, 2000 and
1999, the Company elected to match 50 percent of each participant's
contribution, up to 5% of the participants' annual salary, with HemaCare
common stock. During 2002, 2001 and 2000, HemaCare issued 76,365 shares
($122,000), 92,848 shares ($93,000) and 115,133 shares ($75,000) of common
stock as matching contributions for the 2001, 2000 and 1999 plan years,
respectively. The Company intends to issue contribute cash in the amount
of $131,000 in 2003 as matching contributions for the 2002 plan year.
Note 12 - Commitments and Contingencies
- ---------------------------------------
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
the Company's Sherman Oaks Center's paid donors, were exempted from this law
by a series of state statutes, which, expired on January 1, 2003. Effective
January 2, 2003, the Company will only accept platelet donations from
volunteer donors. During 2002, 2001 and 2000 revenues from paid apheresis
platelet donors were $5,374,000, $5,956,000 and $5,593,000 respectively.
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 the
Company 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.
Healthcare reform is continuously under consideration by lawmakers, and it is
not certain as to what changes may be made in the future regarding health
care policies. However, policies regarding reimbursement, universal health
insurance and managed competition may materially impact the Company's
operations.
The Company is also party to various claims, actions and proceedings
incidental to its normal business operations. The Company believes the
outcome of such claims, actions and proceedings, individually and in the
aggregate, will not have a material adverse effect on the business and
financial condition of the Company.
The Company entered into a long-term commitment with a vendor to purchase
kits used to produce blood products from blood donors and to provide blood
services to patients. Under the terms of the agreement, the Company is
obligated to purchase $10 million of kits at established prices through July
2006. During 2002, the Company purchased approximately $2.9 million of kits.
Note 13 - Segment Information
- ------------------------------
The Company 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 provided to patients.
Management uses more than one criterion to measure segment performance.
However, the dominant measurements are consistent with the Company's
consolidated financial statements which present revenue from external
customers and operating profit income for each segment. Supplemental data are
as follows:
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F-18
Blood Products Blood Services
2002
Depreciation and amortization $ 226,000 $ 19,000
Expenditures for fixed assets 1,300,000 -
2001
Depreciation and amortization $ 109,000 $ 27,000
Expenditures for fixed assets 1,097,000 145,000
2000
Depreciation and amortization $ 65,000 $ 26,000
Expenditures for fixed assets 154,000 31,000
Management evaluates segment performance based primarily on operating income.
Other revenue and expenses are not allocated to the segments. The accounting
policies of the segments are the same as those described in the significant
accounting policies.
Note 14 - Discontinued Operations
- ---------------------------------
In November 1995, the Company discontinued the operations of HBI, a wholly
owned subsidiary, including the research and development of Immupath and the
associated specialty plasma business.
During the wind down of the research and development operations, the Company
manufactured a supply of Immupath to supply the patients still receiving
treatment for a limited period of time. There are currently two patients
receiving Immupath treatments. The Company has a reserve of $68,000 at
December 31, 2002, for costs relating to the two patients receiving Immupath
treatments. The Company does not expect discontinued operations to have a
material impact on future operating results.
Note 15 - Allowance for Doubtful Accounts
- -------------------------------------------
Increases to the allowance for doubtful accounts totaled $0, $10,000
and $21,000 for the years ended December 31, 2002, 2001 and 2000,
respecttively. Write-offs against the allowance for doubtful accounts
totaled $4,000, $2,000 and $73,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
F-18
EXHIBIT INDEX
3.1 Restated Articles of Incorporation of the Registrant.
4.4 Warrant Agreement between the Registrant and Alan C. Darlington,
dated January 15, 2003.
4.5 Warrant Agreement between the Registrant and Alan C. Darlington,
dated January 15, 2003.
10.2 Loan and Security Agreement between the Registrant and Comerica
Bank dated November 19, 2002.
10.8 Employment Letter between the Registrant and Judi Irving, dated
December 6, 2002.
10.9 Separation Agreement between the Registrant and Alan C.
Darlington, dated September 28, 2002.
10.10 Master Security Lease Agreement between the Registrant and GE
Capital Healthcare Financial Services dated December 26, 2002.
11 Computation of earnings (loss) per common equivalent share.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Notice Regarding Consent of Arthur Andersen LLP.
99.1 Certification Pursuant to 18 U.S.C. 1350 Adopted Pursuant to
Section 906 fo the Sarbanes Oxley Act of 2002.