==========================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-15223
HEMACARE CORPORATION
(Exact name of registrant as specified in its charter)
California 95-3280412
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
21101 Oxnard Street
Woodland Hills, California 91367
(Address of principal executive offices) (Zip Code)
(818) 226-1968
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes / / No /X/
As of August 11, 2003, 7,751,060 shares of Common Stock of the registrant were
issued and outstanding.
=============================================================================
HEMACARE CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2003
Page
Number
------
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003 (unaudited) and
December 31, 2002.................................................. 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2003 and 2002 (unaudited)........................... 2
Consolidated Statements of Cash Flows for the six months ended June
30, 2003 and 2002 (unaudited)...................................... 3
Notes to Unaudited Consolidated Financial Statements............... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 6
Item 3. Qualitative and Quantitative Disclosures About Market Risk......... 19
Item 4. Controls and Procedure............................................. 19
PART II. OTHER INFORMATION
- -------- -----------------
Item 1 Legal Proceedings.................................................. 19
Item 2. Changes in Securities and Use of Proceeds.......................... 19
Item 3. Defaults Upon Senior Securities.................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................ 19
Item 5. Other Information.................................................. 19
Item 6. Exhibits and Reports on Form 8-K................................... 20
SIGNATURES................................................................. 21
i
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 714,000 $ 1,048,000
Accounts receivable, net of allowance for
doubtful accounts - $206,000 (2003) and $208,000
(2002)............................................. 4,201,000 4,932,000
Product inventories and supplies..................... 795,000 795,000
Prepaid expenses..................................... 271,000 295,000
Deferred income taxes................................ 402,000 402,000
------------ ------------
Total current assets..................... 6,383,000 7,472,000
Plant and equipment, net of accumulated
depreciation and amortization of
$2,741,000 (2003) and $2,450,000 (2002).............. 3,259,000 3,308,000
Deferred taxes......................................... 2,758,000 2,582,000
Other assets........................................... 84,000 93,000
------------ ------------
$12,484,000 $13,455,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 2,035,000 $ 2,277,000
Accrued payroll and payroll taxes.................... 1,208,000 1,231,000
Other accrued expenses............................... 132,000 133,000
Current obligations under capital leases............. 91,000 90,000
Current obligations under notes payable.............. 654,000 199,000
Reserve for discontinued operations.................. 66,000 68,000
------------ ------------
Total current liabilities................ 4,186,000 3,998,000
Obligations under capital leases, net
of current portion................................... 205,000 246,000
Notes payable, net of current portion.................. 256,000 1,107,000
Other long-term liabilities............................ 14,000 17,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, no par value - 20,000,000 shares
authorized, 7,751,060 issued and outstanding....... 13,316,000 13,316,000
Accumulated deficit.................................. (5,493,000) (5,229,000)
------------ ------------
Total shareholders' equity............... 7,823,000 8,087,000
------------ ------------
$12,484,000 $13,455,000
============ ============
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
1
2
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Revenues:
Blood products.................... $5,093,000 $4,742,000 $10,039,000 $ 9,131,000
Blood services.................... 1,844,000 2,198,000 3,829,000 4,130,000
----------- ----------- ------------ -----------
Total revenue.................... 6,937,000 6,940,000 13,868,000 13,261,000
Operating costs and expenses:
Blood products.................... 5,223,000 4,471,000 9,944,000 8,772,000
Blood services.................... 1,336,000 1,482,000 2,604,000 2,742,000
----------- ----------- ------------ ------------
Total operating costs and
expenses....................... 6,559,000 5,953,000 12,548,000 11,514,000
----------- ----------- ------------ ------------
Gross profit...................... 378,000 987,000 1,320,000 1,747,000
General and administrative
expenses............................ 832,000 1,018,000 1,760,000 1,997,000
----------- ----------- ------------ ------------
Loss before income taxes............... (454,000) (31,000) (440,000) (250,000)
Benefit from income taxes.............. (182,000) (12,000) (176,000) (93,000)
----------- ----------- ------------ ------------
Net loss............................ $ (272,000) $ (19,000) $ (264,000) $ (157,000)
=========== =========== ============ ============
Loss per share
Basic and Diluted................... $ (0.04) $ (0.00) $ (0.03) $ (0.02)
=========== =========== ============ ============
Weighted average shares
outstanding - basic and diluted.... 7,751,060 7,611,000 7,751,060 7,601,000
=========== =========== ============ ============
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
2
3
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
----------------------------
2003 2002
------------ ------------
Increase (decrease) in cash and cash equivalents:
- ------------------------------------------------
Cash flows from operating activities:
Net loss.................................................. $ (264,000) $ (157,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.......................... 291,000 192,000
Compensation expense related to stock options.......... - 56,000
Issuance of common stock to 401-K plan................. - 122,000
Deferred income taxes used to offset current period
loss.................................................. (176,000) (93,000)
Changes in operating assets and liabilities:
Decrease in accounts receivable....................... 731,000 1,000,000
Decrease (increase) in inventories, supplies and
prepaid expenses..................................... 24,000 (174,000)
Decrease in other assets.............................. 9,000 44,000
Decrease in accounts payable, accrued expenses
and other liabilitiess.............................. (269,000) (156,000)
Expenditures for discontinued operations.............. (2,000) (2,000)
----------- -----------
Net cash provided by operating activities............. 344,000 832,000
Cash flows from investing activities:
Proceeds from dispostion of plant and equipment........... - 10,000
Purchases of equipment, net............................... (242,000) (609,000)
----------- -----------
Net cash used in investing activities..................... (242,000) (599,000)
Cash flows from financing activities:
Proceeds from exercise of stock options................... - 3,000
Principal payments on line of credit, capital leases
and notes payable........................................ (586,000) (282,000)
Proceeds from line of credit.............................. 150,000 -
Proceeds from capitalized leases.......................... - 100,000
----------- -----------
Net cash used in financing activities..................... (436,000) (179,000)
----------- -----------
(Decrease) increase in cash and cash equivalents............ (334,000) 54,000
Cash and cash equivalents at beginning of period............ 1,048,000 1,025,000
----------- -----------
Cash and cash equivalents at end of period.................. $ 714,000 $1,079,000
=========== ===========
Supplemental disclosure:
Interest paid............................................. $ 42,000 $ 31,000
=========== ===========
Income taxes paid......................................... $ - $ -
=========== ===========
Items not affecting cash flow:
Notes and capitalized leases issued in connection with
acquisition of plant and equipment....................... $ - $ 31,000
=========== ===========
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
3
4
HemaCare Corporation
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and General Information
- ------------------------------------------------------
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements for the three and six months ended June 30, 2003 and
2002 include all adjustments (consisting of normal recurring accruals)
which management considers necessary to present fairly the financial
position of the Company as of June 30, 2003, the results of its operations
for the three and six months ended June 30, 2003 and 2002, and its cash
flows for the six months ended June 30, 2003 and 2002 in conformity with
accounting principles generally accepted in the United States. These
financial statements have been prepared consistently with the accounting
policies described in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002, as filed with the Securities and Exchange
Commission on March 31, 2003 and should be read in conjunction with this
Quarterly Report on Form 10-Q. The results of operations for the three and
six months ended June 30, 2003 are not necessarily indicative of the
consolidated results of operations to be expected for the full fiscal year
ending December 31, 2003. Certain information and footnote disclosures
normally included in the financial statements presented in accordance with
accounting principles generally accepted in the United States have been
condensed or omitted.
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.
CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at various financial institutions.
Deposits not exceeding $100,000 for each institution are insured by the
Federal Deposit Insurance Corporation. At June 30, 2003 and December 31,
2002, the Company had uninsured cash and cash equivalents of $488,000 and
$818,000, respectively.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Note 2 - Line of Credit and Notes Payable
- -----------------------------------------
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%
(4.5% as of June 30, 2003). As of June 30, 2003, the Company's net
borrowings on this line of credit were $450,000 and the Company had unused
availability of $1,550,000. This line of credit matures in June 2004, and
is included in current obligations under notes payable.
In addition, the Company has various notes payable with the same bank. At
June 30, 2003, the total amount outstanding under these notes is $371,000
and requires monthly principal payments of approximately $14,000 plus
interest at a weighted average fixed rate of 6.6%.
These loans (including the line of credit) are collateralized by
substantially all of the Company's assets and are cross-defaulted. They
also require the maintenance of certain financial covenants that require
4
5
among other things, minimum levels of profitability and prohibit the
payment of dividends or stock repurchases. As of June 30, 2003, the
Company was not in compliance with a covenant that requires the Company to
be profitable each quarter. During the quarter ended June 30, 2003, the
Company incurred a loss. The bank has waived this violation.
Additionally, the Company has another note payable with a finance company.
As of June 30, 2003, the balance on this note was $89,000. 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.
Note 3 - Shareholders' Equity
- -----------------------------
The Company has elected to adopt SFAS 123, "Accounting for Stock-Based
Compensation," for disclosure purposes only and applies the provision of
APB Opinion No. 25. The Company did not recognize any compensation expense
related to the issuance of stock options in 2003 or 2002. Had compensation
expense for all options granted to employees and directors been recognized
in accordance with SFAS 123, the Company's net loss per share would have
been as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss as reported......... $ (272,000) $ (19,000) $ (264,000) $ (157,000)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects................. (25,000) (27,000) (53,000) (53,000)
----------- ----------- ----------- -----------
Pro forma net loss........... $ (297,000) $ (46,000) $ (317,000) $ (210,000)
=========== =========== =========== ===========
Net loss per share - basic
and diluted
As reported........ $ (0.04) $ (0.01) $ (0.03) $ (0.02)
Pro forma.......... $ (0.04) $ (0.01) $ (0.04) $ (0.03)
Note 4 - Earnings per Share
- ---------------------------
The following table provides the calculation methodology for the numerator
and denominator for diluted earnings per share:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss.................... $ (272,000) $ (19,000) $ (264,000) $ (157,000)
=========== =========== =========== ===========
Shares outstanding.......... 7,751,060 7,611,000 7,751,060 7,601,000
Net effect of diluted
options.................... - - - -
----------- ----------- ----------- -----------
Dilutive shares outstanding. 7,751,060 7,611,000 7,751,060 7,601,000
=========== =========== =========== ===========
Options and warrants outstanding for 1,685,000 shares and 2,226,000 shares
for the three and six months ended June 30, 2003 and 2002, respectively,
have been excluded from the above calculation because their effect would
have been anti-dilutive.
5
6
Note 5 - Provision for Income Taxes
- -----------------------------------
The Company believes that it is more likely than not that it will be able to
utilize the deferred tax assets to offset taxable income in future periods.
In the event the Company does not achieve profitability, this asset may be
written off.
Note 6 - Business Segments
- --------------------------
HemaCare operates in two business segments as follows:
- Blood Products - Collection, processing and distribution of blood
products and donor testing.
- Blood Services - Therapeutic apheresis and stem cell collection
procedures and other therapeutic services to patients.
Management uses more than one measure to evaluate segment performance.
However, the dominant measurements are consistent with HemaCare's
consolidated financial statements, which present revenue from external
customers and operating income for each segment.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------- ---------------------------------------------------------------
Factors Affecting Forward-Looking Information
- ---------------------------------------------
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements and the related notes provided under "Item 1-Financial
Statements" above.
The matters addressed in this Item 2 that are not historical information
constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company believes
that the expectations reflected in these forward-looking statements are
reasonable, such statements are inherently subject to risks and the Company
can give no assurances that its expectations will prove to be correct.
Actual results could differ from those described in this report because of
numerous factors, many of which are beyond the control of the Company.
These factors include, without limitation, those described below under the
heading "Risk Factors Affecting the Company." The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unexpected events.
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,
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. These
procedures are generally performed in a hospital setting.
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
assisting them in achieving their financial, regulatory compliance and
patient service goals related to blood products and services.
6
7
Results of Operations
- ---------------------
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE MONTHS ENDED JUNE
30, 2002
Overview
Second quarter results reflect continuing losses in our east coast and mid-
west blood management programs, decreases in production volume in our
California operations and higher operating costs.
We are actively addressing what we believe are the production issues in
California. We are evaluating the potential of our programs outside of
California and determining the actions necessary to return the Company to
profitability. As a result, we may terminate some activities in 2003.
Revenues for the three months ended June 30, 2003 were $6,937,000,
virtually unchanged from $6,940,000 during the same period in 2002. During
the quarter ended June 30, 2003, revenues from our blood products increased
$351,000 compared to the same period last year due to the growth of our
California mobile operations (which increased $605,000 during the quarter),
and to our new BMPs (which increased $359,000 during the quarter). The
Company also benefited from an increase in the average revenue per blood
cell unit during the quarter from $165 to $191. These increases were
offset by decreases in revenues at our mature BMPs of $613,000 which was
mainly due to i) a decrease in revenues relating to platelet collections in
our Sherman Oaks program of $414,000 reflecting the change from a paid to a
volunteer program as of January 1, 2003, and ii) the termination of our
blood management programs at Long Beach Memorial Medical Center in August
2002 and the University of Irvine Medical Center in January 2003 which
resulted in a decrease of $232,000 in revenues. Additionally, we
performed fewer therapeutic apheresis procedures which resulted in a
decrease of $354,000 in blood services revenues.
For the three months ended June 30, 2003, gross profit was $378,000 (or
5.4% of revenues), compared to $987,000 (or 14.2% of revenues) during the
same period in 2002. The decrease of $609,000 was mainly due to i) the
change in our Sherman Oaks program from a paid to a volunteer program as of
January 1, 2003, which remains profitable but reflects a decrease of
$175,000 in gross profit, ii) an increase in losses from our new BMPs of
$128,000, iii) fewer higher margin therapeutic apheresis procedures
performed as compared to the prior year which contributed a decrease of
$208,000 in gross profit, iv) additional expenses relating to hiring and
training of new employees, and v) higher insurance premiums.
General and administrative expenses decreased by $186,000, or 18%, to
$832,000 in the three months ended June 30, 2003 from $1,018,000 in the
same period of 2002. The decrease was mainly due to non-recurring 2002
expenses related to our litigation against the American Red Cross ("ARC")
which was settled in 2002. This decrease was partially offset by an
increase in salaries and benefits relating to the expansion of our
information technology department to support our blood bank computer system
and other technological initiatives.
7
8
Blood Products
- --------------
Our revenues and expenses are summarized in the following table.
(Revenues and Gross Profit in Thousands)
Mature BMPs (1) California Mobiles New BMPs Total
------------------ ------------------ ------------------ ---------------
2003 2002 2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- -------- -------- -------
Revenues $ 2,576 $ 3,189 $ 1,944 $ 1,339 $ 573 $ 214 $ 5,093 $ 4,742
Gross Profit $ 27 $ 453 $ 115 $ (38) $ (272) $ (144) $ (130) $ 271
GP% 1.1% 14.2% 5.9% -2.8% -47.6% -67.2% -2.6% 5.7%
Units Sold
SDP 4,332 5,456 35 - 310 221 4,677 5,677
WB 2,998 3,451 8,646 7,758 2,289 770 13,933 11,979
SDP - Single donor platelets
WB - Whole blood
(1) Mature BMPS are those that have been open for at least 18 months as of
April 1, 2003. Our BMP in Chicago opened in June 2001 and is included in
new BMPS as of June 30, 2002. Beginning in January 2003, it is included in
mature BMPs.
Mature BMPs
For the three months ended June 30, 2003, revenues from our mature blood
products programs decreased by $613,000, or 19%, to $2,576,000 from
$3,189,000 in the same period of 2002. This decrease in revenues at our
mature BMPs was mainly due to i) a decrease in platelet collections in our
Sherman Oaks program of $414,000 reflecting the change from a paid to a
volunteer program as of January 1, 2003, ii) the termination of our blood
management programs at Long Beach Memorial Medical Center in August 2002
and the University of Irvine Medical Center in January 2003 contributing a
decrease of $232,000, and iii) a loss of a testing customer accounting for
a $100,000 decrease in revenues. These decreases were partially offset by
the inclusion of our Chicago blood management program as a mature BMP in
2003 accounting for $186,000 in revenues.
For the three months ended June 30, 2003, gross profit from our mature
blood products programs decreased by $426,000, or 94%, to $27,000 from
$453,000 in the same period of 2002. Our gross profit percentages from our
mature blood products programs decreased to 1.1% in 2003 from 14.2% in
2002. This decrease at our mature BMPs reflects i) the change in our
Sherman Oaks program from a paid to a volunteer program as of January 1,
2003, which remains profitable but reflects a decrease of $175,000 in gross
profit, ii) decreases in gross profit at our testing services of $33,000,
iii) the termination of our blood management programs at Long Beach
Memorial Medical Center and at the University of Irvine Medical Center
which contributed a decrease of $34,000 to gross profit, iv) the inclusion
of our Chicago program in mature blood programs in 2003 which contributed a
decrease of $64,000, and v) increased insurance premiums and costs relating
to the hiring and training of new recruitment and clinical staff.
California Mobiles
For the three months ended June 30, 2003, revenues from our California
mobile operations increased by $605,000, or 45%, to $1,944,000 from
$1,339,000 in the same period of 2002. This increase in revenues from our
California mobiles is mainly due to increased collections (of whole blood
and fresh frozen plasma "FFP") and better red cell pricing. Our average
revenue per red cell unit in the second quarter of 2003 was $191 compared
to $165 during the second quarter of 2002.
For the three months ended June 30, 2003, gross profit from our California
mobile operations increased by $153,000 to $115,000 from a loss of $38,000
in the same period of 2002. Our gross profit percentages from our
California mobile operations increased to 5.9% in the second quarter of
2003 from -2.8% in the same period of 2002. This increase in gross profit
8
9
was mainly due to the efficiencies associated with higher collection
volumes and increased production and sales of FFP as compared to 2002.
During the three months ended June 30, 2003, our gross profit was
negatively impacted by an equipment failure during the month of June which
reduced sales of FFP and other blood components.
New BMPs (open less than 18 months as of April 1, 2003)
We operate new programs in Bangor, Maine; Williston, Vermont; Albany, New
York; and Durham, North Carolina. Together, these programs generated
revenue of $573,000 during the three months ended June 30, 2003 and an
operating loss of $272,000. During the quarter ended June 30, 2002, these
programs, including our Chicago BMP, provided revenue of $214,000 and a
loss of $144,000 (the results of our Chicago program are included in the
mature programs in 2003). Our focus for these programs is to significantly
increase the number of whole blood and platelet donations. Although whole
blood and platelet production for these new centers has increased
significantly from prior year, these volumes are not sufficient to generate
operating profits. During the six months ended June 30, 2003, several
additional donor recruiters were hired with the expectation of higher
collections in future periods, although it often requires several months
for new recruiters to develop a significant donor base.
Blood Services
- --------------
Revenues from blood services decreased by $354,000, or 16%, to $1,844,000
in the second quarter of 2003 from $2,198,000 in the same period of 2002.
The decrease was mainly due a decrease of 7.8% in the number of therapeutic
apheresis procedures performed from 1,824 procedures performed in the
second quarter of 2002 to 1,680 procedures in the second quarter of 2003
(mainly in our California and Connecticut operations), and to a change in
the product mix of the services offered by the Company. As such, our gross
profits decreased to $508,000 (28% of revenue) during the three months
ended June 30, 2003, compared to $716,000 (33% of revenue) during the same
period in 2002. We continue to offer a physician education program in
California and New York as part of our blood services marketing efforts.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses decreased by $186,000, or 18%, to
$832,000 in the second quarter of 2003 from $1,018,000 in the same period
of 2002. The decrease was mainly due to non-recurring 2002 legal fees
associated with the settlement of the ARC litigation which was settled in
the later part of 2002. This decrease was partially offset by increases in
salaries and benefits relating to the expansion of our information
technology department to support our blood bank computer system and other
technological initiatives, and by increases in insurance premiums.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
Overview
- --------
Revenues for the six months ended June 30, 2003 increased by $607,000, or
5%, to $13,868,000 from $13,261,000 in the same period of 2002. During the
six months ended June 30, 2003, we experienced increases in blood products
revenues from the expansion of our California mobile operations (which
contributed an increase of $1,220,000 in revenues during the six months),
and increases in our new BMPs (which were not all operational in 2002 and
contributed an increase of $672,000 during the six months). The Company
also benefited from an increase in the average revenue per blood cell unit
during 2003. These increases were partially offset by decreases in
revenues at our mature BMPs of $984,000 mainly due to a decrease in
revenues relating to platelet collections in our Sherman Oaks program of
$830,000 reflecting the change from a paid to a volunteer program as of
January 1, 2003, and a decrease in our blood service revenues of $301,000.
For the six months ended June 30, 2003, gross profit was $1,320,000 (or
9.5% of revenues), compared to $1,747,000 (or 13.2% of revenues) during the
same period in 2002. The decrease of $427,000 was mainly due to i) the
change in our Sherman Oaks program from a paid to a volunteer program as of
January 1, 2003 which remains profitable but reflects a decrease of
9
10
$309,000 in gross profit, ii) an increase in losses from our new BMPs of
$223,000, iii) lower average fees for therapeutic apheresis procedures
performed as compared to prior year which contributed a decrease of
$163,000 in gross profit, iv) additional expenses incurred in 2003 relating
to hiring and training of new employees, v) higher product expiration and
donor deferral rates. These decreases were partially offset by an increase
in gross profit at our California mobile operations of $495,000 due to
increased efficiencies at higher volumes.
General and administrative expenses decreased by $237,000, or 12%, to
$1,760,000 in the first six months of 2003 from $1,997,000 in the same
period of 2002. The decrease was mainly due to the non-recurring expenses
related to our litigation against the ARC in 2002, and certain non cash
compensation expense related to the extension of certain employee stock
options in 2002. These decreases were partially offset by an increase in
salaries and benefits relating to the expansion of our information
technology department to support our blood bank computer system and other
technological initiatives.
Blood Products
- --------------
Our revenues and expenses are summarized in the following table.
(Revenues and Gross Profit in Thousands)
Mature BMPs (1) California Mobiles New BMPs Total
------------------ ------------------ ------------------ ---------------
2003 2002 2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- -------- -------- -------
Revenues $ 5,313 $ 6,297 $ 3,749 $ 2,529 $ 977 $ 305 $10,039 $ 9,131
Gross Profit $ 304 $ 840 $ 352 $ (143) $ (561) $ (338) $ 95 $ 359
GP% 5.7% 13.3% 9.4% -5.7% -57.4% -110.8% 0.9% 3.9%
Units Sold
SDP 8,921 11,101 49 - 467 362 9,437 11,463
WB 5,965 6,921 17,811 15,202 4,287 1,069 28,063 23,192
SDP - Single donor platelets
WB - Whole blood
(1) Mature BMPS are those that have been open for at least 18 months as of
April 1, 2003. Our BMP in Chicago opened in June 2001 and is included in
new BMPS as of June 30, 2002. Beginning in January 2003, it is included in
mature BMPs.
Mature BMPs
For the six months ended June 30, 2003, revenues from our mature blood
products programs decreased by $984,000, or 16%, to $5,313,000 from
$6,297,000 in the same period of 2002. This decrease in revenues at our
mature BMPs was mainly due to i) a decrease in revenues relating to
platelets collections in our Sherman Oaks program of $830,000 reflecting
the change from a paid to a volunteer program as of January 1, 2003, and
ii) the termination of our management programs at Long Beach Memorial
Medical Center in August 2002 and the University of Irvine Medical Center
in January 2003 contributing a decrease of $403,000. These decreases were
partially offset by the inclusion of our Chicago blood management program
as a mature BMP in 2003 accounting for $400,000 in revenues.
For the six months ended June 30, 2003, gross profit from our mature blood
products programs decreased by $536,000, or 64%, to $304,000 from $840,000
in the same period of 2002. Our gross profit percentages from our mature
blood products programs decreased to 5.7% in 2003 from 13.3% in 2002.
This decrease reflects i) the change in our Sherman Oaks program from a
paid to a volunteer program as of January 1, 2003, which remains profitable
but reflects a decrease of $309,000 in gross profit, ii) decreases due to
lower product utilization of two east coast customers due to need and
product availability, and iii) increases in recruitment and technology
support costs.
10
11
California Mobile
For the six months ended June 30, 2003, revenues from our California mobile
operations increased by $1,220,000, or 48%, to $3,749,000 from $2,529,000
in the same period of 2002. This increase reflects increased collections
and better red cell pricing. Our average revenue per red cell unit in the
first six months of 2003 was $187 compared to $157 during the same period
of 2002.
For the six months ended June 30, 2003, gross profit from our California
mobile operations increased by $495,000 to $352,000 from a loss of $143,000
in the same period of 2002. Our gross profit percentages from our
California mobile operations increased to 9.4% in the first six months of
2003 from -5.7% in the same period of 2002. This increase in gross profit
was mainly due to the efficiencies associated with higher collection
volumes and increased production and sales of fresh frozen plasma.
During the three months ended June 30, 2003, our gross profit was
negatively impacted by an equipment failure during the month of June which
reduced sales of FFP and other blood components.
New BMPs (open less than 18 months as of April 1, 2003)
We operate new programs in Bangor, Maine; Williston, Vermont; Albany, New
York; and Durham, North Carolina. Together, these programs generated
revenue of $977,000 during the six months ended June 30, 2003 and an
operating loss of $561,000. During the six months ended June 30, 2002,
these programs, including our Chicago BMP, provided revenue of $305,000 and
a loss of $338,000 (the results of our Chicago program are now included in
the mature programs in 2003). During the six months ended June 30, 2003,
several additional donor recruiters were hired with the expectation of
higher collections in future periods, although it often requires several
months for new recruiters to develop a significant donor base.
Blood Services
- --------------
Revenues from blood services decreased by $301,000, or 7%, to $3,829,000 in
the first six months of 2003 from $4,130,000 in the same period of 2002.
The decrease was mainly due a decrease of 3% in the number of therapeutic
apheresis procedures performed (mainly in our California and Connecticut
operations) from 3,518 procedures performed in 2002 to 3,415 procedures in
2003, and to change in the product mix of the services offered by the
Company. These decreases were partially offset by an increase in the
number of procedures performed at our New York operation. As such, gross
profits decreased to $1,225,000 (32% of revenue) during the six months
ended June 30, 2003, compared to $1,388,000 (34% of revenue) during the
same period in 2002. We continue to offer a physician education program in
California and New York as part of our blood services marketing efforts.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses decreased by $237,000, or 12%, to
$1,760,000 in the first six months of 2003 from $1,997,000 in the same
period of 2002. The decrease was mainly due to i) non-recurring legal fees
associated with the settlement of the ARC litigation which was settled in
late 2002, and ii) certain non cash compensation expense related to the
extension of certain employee stock options in 2002. These decreases were
partially offset by i) increases in salaries and benefits relating to the
expansion of our information technology department to support our blood
bank computer system and other technological initiatives, and ii) by
increases in insurance premiums.
Critical Accounting Policies and Estimates
- ------------------------------------------
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.
11
12
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 general 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 differences 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.
Liquidity and Capital Resources
- -------------------------------
As of June 30, 2003, we had cash and cash equivalents of $714,000 and
working capital of $2,197,000.
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%
(4.5% as of June 30, 2003). As of June 30, 2003, the Company's net
borrowings on this line of credit were $450,000. This line of credit
matures in June 2004, and is included in current obligations under notes
payable on the balance sheet. As of June 30, 2003, the unused portion of
the Company's line of credit was $1,550,000.
In addition, the Company has various notes payable with the same bank. At
June 30, 2003, the total amount outstanding under these notes is $371,000
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 among other things require minimum levels of
profitability and prohibit the payment of dividends or stock repurchases.
As of June 30, 2003, the Company was not in compliance with a covenant that
requires the Company to be profitable each quarter. During the quarter
ended June 30, 2003, the Company incurred a loss. The bank has waived this
violation.
Additionally, the Company has another note payable with a finance company.
As of June 30, 2003, the balance on this note was $89,000. 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).
12
13
Total 2004 2005 2006 2007 2008
------- ------- ------ ------ ------ ------
Operating leases $ 1,768 $ 529 $ 479 $ 455 $ 282 $ 23
Capitalized leases 340 112 95 85 48 -
Notes payable 910 654 193 63 - -
------- ------- ------ ------ ------ ------
Totals $ 3,018 $ 1,295 $ 767 $ 603 $ 330 $ 23
======= ======= ====== ====== ====== ======
We are also committed to purchase approximately $15 million of blood
collection kits at established prices through 2007.
Net cash provided by operating activities was $344,000 and $832,000 for the
six months ended June 30, 2003 and 2002, respectively. The decrease in
2003 from 2002 of $488,000 was mainly due to i) a decrease in accounts
receivable of $269,000, ii) an increase in losses before tax of $190,000,
iii) a decrease in stock and stock option compensation of $178,000, and iv)
a decrease in account payable and accruals of $113,000. These decreases
were partially offset by i) a decrease in inventories and supplies of
$198,000, and ii) an increase in depreciation and amortization of $99,000.
During the six months ended June 30, 2003, we continued to work with our
customers to reduce the number of days sales outstanding to 57 at June 30,
2003, from 62 days at December 31, 2002.
Net cash used in investing activities was $242,000 and $599,000 for the six
months ended June 30, 2003 and 2002, respectively. The decrease in 2003
from 2002 of $357,000 was mainly due to the Company's investments in its
new BMPs in 2002, the Company's higher initial investment in technology in
2002, and expenditures on leasehold improvements relating to the Company's
move of its corporate headquarters to Woodland Hills in 2002.
Net cash used in financing activities was $436,000 and $179,000 for the six
months ended June 30, 2003 and 2002, respectively. The increase of
$257,000 was mainly due to a $304,000 increase in principal payments made
on the line of credit, capital leases and notes payable, which was
partially offset by a net increase of $50,000 in proceeds from the line of
credit and capital leases.
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 new BMP operations and other working
capital requirements, including capital and operating lease commitments.
Our primary sources of liquidity include our cash on hand, available line
of credit and cash generated from operations. Our liquidity depends, in
part, on timely collections of accounts receivable. Any significant delays
in customer payments could adversely affect our liquidity. Our liquidity
also depends on our maintaining compliance with our loan covenants. From
time to time we have failed to comply with these covenants and have
obtained a waiver from our lender. If in the future we are unable to
comply with our loan covenants and the bank does not issue a waiver, then
our liquidity could be materially affected.
Risk Factors Affecting the Company
- ----------------------------------
Our short and long-term success is subject to many factors that are beyond
our control. Shareholders and prospective shareholders in the Company
should consider carefully the following risk factors, in addition to other
information contained in this report. This Quarterly Report on Form 10-Q
contains forward-looking statements. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various risks and uncertainties, including those described below.
13
14
Operating Risk
- --------------
Our operations outside of California have been generating operating losses
for the Company. We are evaluating the potential of each of these programs
and may terminate some activities in 2003 which may have a material adverse
effect on our business and results of operations.
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. 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 volunteer donor program. The loss of this program will
have a material adverse financial affect on the Company. The program is
currently operating at approximately 70% 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 the
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 and losses. Additionally, multi-
year contractual agreements limit our ability to significantly increase our
sales prices.
Management may not be successful in executing its operating plan. Although
platelet production activities have 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 obtain and maintain sales. 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 business depends on the availability of donated blood. Only a small
percentage of the population donates blood, and the rate continues to
decline. In addition, new regulations intended to reduce the risk of
introducing infectious diseases in the blood supply have eliminated some
groups of potential donors. 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 blood donors, there can be no assurance that these
strategies will result in sufficient blood collections to meet hospital
needs or to assure profitability.
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 much 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.
14
15
Increasing Reliance on Outside Laboratories
- -------------------------------------------
We maintain laboratories that are licensed and accredited to test blood
products for purity, potency and quality. We utilize outside laboratories
for nucleic acid testing. As other new testing and processing technologies
are introduced, we may 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 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 routinely leukoreduced. The adoption of a universal
leukoreduced policy for all blood products would raise our costs to
manufacturing whole blood products. Competition and 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.
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 $440,000 loss before tax benefit during the six months ended
June 30, 2003, 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.
15
16
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 and services provided to
Medicaid and Medicare patients were based on medical costs prevailing
several years ago. Medical costs have increased substantially since that
time, but the reimbursement rates have not. Further increases in medical
costs in the future without increases in reimbursement rates may impact the
Company's profitability
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 each quarter.
As of June 30, 2003, the Company was not in compliance with a covenant that
requires the Company to be profitable each quarter. During the quarter
ended June 30, 2003, the Company incurred a loss. The bank has waived this
violation, and maintaining compliance is dependent, among other things, on
achieving the required profitability. 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 sought 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.
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.
16
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 which
could make some of the Company's operations prohibitively expensive or
impossible to continue.
Product Safety and Product Liability
- ------------------------------------
Blood products carry the risk of transmitting infectious diseases,
including hepatitis, HIV and Creutzfeldt-Jakob Disease. HemaCare carefully
screens donors, uses the latest available technology to test its blood
products for known pathogens in accordance with industry standards, 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. Furthermore, healthcare regulations are
constantly changing and certain changes could require costly compliance or
make some of our operations impossible to continue.
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.
17
18
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 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.
18
19
Item 3. Qualitative and Quantitative Disclosures About Market Risk
- ------- -----------------------------------------------------------
The Company has $1,206,000 of debt that includes $756,000 of notes payable
and capitalized leases with fixed interest rates. The remaining $450,000
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 $4,500.
Item 4. Controls and Procedures
- ------- -----------------------
The Company's chief executive officer / principal financial officer, 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-15(e). Based upon that evaluation, the
chief executive officer / the principal financial officer believes that, as
of the end of the period covered by this report, the Company's disclosure
controls and procedures are effective in making known to her material
information relating to the Company (including its consolidated
subsidiaries required to be included in this report).
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objections is
affected by limitations inherent in disclosure controls and procedures.
These include the fact that human judgment in decision-making can be faulty
and that breakdowns in internal control can occur because of human failures
such as simple errors, mistakes or intentional circumvention of the
established process.
There was no change in the Company's internal controls over financial
reporting, known to the chief executive officer / principal financial
officer, that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
From time to time, the Company is involved in various routine legal
proceedings incidental to the conduct of its business. Management does not
believe that any of these legal proceedings will have a material adverse
impact on the business, financial condition or results of operations of the
Company, either due to the nature of the claims, or because management
believes that such claims should not exceed the limits of the Company's
insurance coverage. See disclosure in Form 10-K for the year ended
December 31, 2002.
Item 2. Changes in Securities and Use of Proceeds
- ------- -----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ------- -------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None.
Item 5. Other Information
- ------- ------------------
None.
19
20
Item 6. Exhibits and Reports on Form 8-K
- ------- ---------------------------------
a. Exhibits
11 Net Loss per Common and Common Equivalent Share
31 Certification Pursuant to 18 U.S.C. 1350 Adopted
Pursuant to Section 302 of the Sarbanes Oxley Act of
2002
32 Certification Pursuant to 18 U.S.C. 1350 Adopted
Pursuant to Section 906 of the Sarbanes Oxley Act of
2002
b. Reports on Form 8-K
On May 15, 2003, the Company filed a Form 8-K disclosing
under Item 5 (Other Information), a press release dated May
15, 2003, announcing the Company's 2003 First Quarter
Financial Results.
On May 19, 2003, the Company filed a Form 8-K disclosing
under Item 5 (Other Information), a press release dated May
19, 2003, announcing the appointment of Wm. Andrew Heaton,
MD and Terry Van Der Tuuk to the Company's Board of
Directors.
On June 3, 2003, the Company filed a Form 8-K disclosing
under Item 5 (Other Information), a press release dated
June 2, 2003, announcing the appointment of Jody DeVere as
the Company's National Director of Sales and Marketing.
On June 27, 2003, the Company filed a Form 8-K disclosing
under Item 5 (Other Information), a press release dated
June 27, 2003, announcing the appointment of Rose Marcario
as Chief Financial Officer.
On July 8, 2003, the Company filed a Form 8-K disclosing
under Item 5 (Other Information), a press release dated
July 8, 2003, announcing that the Company has reopened its
search for a Chief Financial Officer, and that Rose
Marcario, who had accepted the position the prior month,
was unable to assume the role due to personnel reasons.
On July 24, 2003, the Company filed a Form 8-K disclosing
under Item 5 (Other Information), a press release dated
July 24, 2003, announcing the resignation of Wm. Andrew
Heaton from the Company's Board of Directors, and that the
Company has reduced its number of directors from six to
five.
20
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date August 11, 2003 HEMACARE CORPORATION
--------------------- ---------------------------------
(Registrant)
/s/ Judi Irving
--------------------------------
Judi Irving , Chief Executive
Officer
(Duly authorized officer on
behalf of the registrant and
principal financial officer)
21
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
11 Net Loss per Common and Common Equivalent Share
31 Certification Pursuant to 18 U.S.C. 1350 Adopted
Pursuant to Section 302 of the Sarbanes Oxley Act of
2002
32 Certification Pursuant to 18 U.S.C. 1350 Adopted
Pursuant to Section 906 of the Sarbanes Oxley Act of
2002