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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 September 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 November 14, 2003, 7,756,060 shares of Common Stock of the registrant
were issued and outstanding.
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HEMACARE CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2003
Page
Number
------
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003 (unaudited)
and December 31, 2002.............................................. 1
Consolidated Statements of Operations for the three and nine months
ended September 30, 2003 and 2002 (unaudited)...................... 2
Consolidated Statements of Cash Flows for the nine 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.............................................. 7
Item 3. Qualitative and Quantitative Disclosures About Market Risk......... 18
Item 4. Controls and Procedure............................................. 18
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................................... 19
SIGNATURES................................................................. 20
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,057,000 $ 1,048,000
Accounts receivable, net of allowance for
doubtful accounts - $274,000 (2003) and $208,000
(2002)............................................. 3,421,000 4,932,000
Product inventories and supplies..................... 794,000 795,000
Prepaid expenses..................................... 348,000 295,000
Deferred income taxes................................ - 402,000
------------ ------------
Total current assets...................... 5,620,000 7,472,000
Plant and equipment, net of accumulated
depreciation and amortization of
$3,364,000 (2003) and $2,450,000 (2002).............. 2,587,000 3,308,000
Deferred taxes......................................... - 2,582,000
Other assets........................................... 68,000 93,000
------------ ------------
$ 8,275,000 $13,455,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 2,016,000 $ 2,277,000
Accrued payroll and payroll taxes.................... 1,420,000 1,231,000
Other accrued expenses............................... 549,000 201,000
Current obligations under capital leases............. 88,000 90,000
Current obligations under notes payable.............. 651,000 199,000
------------ ------------
Total current liabilities................ 4,724,000 3,998,000
Obligations under capital leases, net
of current portion................................... 186,000 246,000
Notes payable, net of current portion.................. 206,000 1,107,000
Other long-term liabilities............................ 12,000 17,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, no par value - 20,000,000 shares
authorized, 7,756,060 and 7,751,090 issued and
outstanding in 2003 and 2002, respectively......... 13,319,000 13,316,000
Accumulated deficit.................................. (10,172,000) (5,229,000)
------------ ------------
Total shareholders' equity............... 3,147,000 8,087,000
------------ ------------
$ 8,275,000 $13,455,000
============ ============
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Revenues:
Blood products.................... $ 5,166,000 $4,979,000 $15,205,000 $14,110,000
Blood services.................... 1,814,000 2,202,000 5,643,000 6,332,000
------------ ----------- ------------ -----------
Total revenue.................... 6,980,000 7,181,000 20,848,000 20,442,000
Operating costs and expenses:
Blood products.................... 5,888,000 4,699,000 15,832,000 13,471,000
Blood services.................... 1,268,000 1,460,000 3,872,000 4,202,000
------------ ---------- ------------ ------------
Total operating costs and
expenses....................... 7,156,000 6,159,000 19,704,000 17,673,000
------------ ----------- ------------ ------------
Gross profit...................... (176,000) 1,022,000 1,144,000 2,769,000
General and administrative
expenses............................ 1,343,000 1,187,000 3,103,000 3,184,000
Write off of impaired goodwill......... - 362,000 - 362,000
------------ ----------- ------------ ------------
Loss before income taxes............... (1,519,000) (527,000) (1,959,000) (777,000)
Provision (benefit) from income taxes.. 3,160,000 (65,000) 2,984,000) (158,000)
------------ ----------- ------------ ------------
Net loss............................ $(4,679,000) $ (462,000) $(4,943,000) $ (619,000)
============ =========== ============ ============
Loss per share - basic and diluted..... $ (0.60) $ (0.06) $ (0.64) $ (0.08)
============ =========== ============ ============
Weighted average shares outstanding
- basic and diluted................... 7,754,000 7,738,000 7,752,000 7,647,000
============ =========== ============ ============
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
2003 2002
------------- ---------------
Increase (decrease) in cash and cash equivalents:
- -------------------------------------------------
Cash flows from operating activities:
Net loss..................................................$(4,943,000) $ (619,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for bad debts................................ 216,000 -
Depreciation and amortization.......................... 1,003,000 299,000
Loss on disposal of assets............................. 5,000 -
Compensation expense related to stock options.......... - 56,000
Issuance of common stock to 401-K plan................. - 122,000
Impaired goodwill...................................... - 362,000
Deferred income taxes used to offset current period
loss.................................................. - (158,000)
Impaired deferred taxes................................ 2,984,000 -
Changes in operating assets and liabilities:
Decrease in accounts receivable....................... 1,295,000 811,000
Increase in inventories, supplies and
prepaid expenses..................................... (52,000) (210,000)
Decrease in other assets.............................. 25,000 30,000
Increase in accounts payable, accrued expenses
and other liabilitiess.............................. 271,000 169,000
----------- -----------
Net cash provided by operating activities............. 804,000 862,000
Cash flows from investing activities:
Proceeds from dispostion of plant and equipment........... 4,000 10,000
Purchases of equipment, net............................... (291,000) (870,000)
----------- -----------
Net cash used in investing activities..................... (287,000) (860,000)
Cash flows from financing activities:
Proceeds from exercise of stock options................... 3,000 53,000
Principal payments on line of credit, capital leases
and notes payable........................................ (661,000) (149,000)
Proceeds from line of credit.............................. 150,000 275,000
----------- -----------
Net cash (used in) provided by financing activities....... (508,000) 179,000
----------- -----------
Increase in cash and cash equivalents....................... 9,000 181,000
Cash and cash equivalents at beginning of period............ 1,048,000 1,025,000
----------- -----------
Cash and cash equivalents at end of period.................. $1,057,000 $1,206,000
=========== ===========
Supplemental disclosure:
Interest paid............................................. $ 62,000 $ 44,000
=========== ===========
Income taxes paid......................................... $ - $ -
=========== ===========
Items not affecting cash flow:
Notes and capitalized leases issued in connection with
acquisition of plant and equipment..................... $ - $ 131,000
=========== ===========
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
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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 nine months ended September 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 September 30, 2003, the results of its
operations for the three and nine months ended September 30, 2003 and 2002,
and its cash flows for the nine months ended September 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 nine months ended September 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 September 30, 2003 and December
31, 2002, the Company had uninsured cash and cash equivalents of $851,000
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 Comerica Bank -
California. 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%; as of September 30, 2003 the rate paid by the Company was
4.5%. As of September 30, 2003, the Company's net borrowing on this line of
credit was $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 other equipment notes payable with
Comerica Bank - California. As of September 30, 2003, the total amount
outstanding under these notes was $325,000 and requires monthly principal
payments of approximately $14,000 plus interest at a weighted average fixed
rate of 6.5%. Of the total amount borrowed under these notes, $168,000 is
included in "current obligations under notes payable" on the balance
sheet.
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All of the Comerica 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 September 30, 2003, the Company was not in compliance
with a covenant that requires the Company to be profitable each quarter.
During the quarter ended September 30, 2003, the Company incurred a loss.
The Company has requested, and received a waiver of this covenant violation.
Additionally, the Company has another note payable with One Source
Financial. As of September 30, 2003, the balance on this note was $81,000
and is due in full as of January 2006. The note requires quarterly payments
of approximately $10,000 including interest at the rate of 8.5% and is
secured by certain fixed assets. Of the total amount of this note
outstanding, $33,000 is included in "current obligations under notes
payable" on the balance sheet.
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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss as reported......... $(4,679,000) $ (462,000) $(4,943,000) $ (619,000)
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects................. (20,000) (27,000) (68,000) (80,000)
------------ ------------ ------------ -----------
Pro forma net loss........... $(4,699,000) $ (489,000) $(5,011,000) $ (699,000)
============ ============ ============ ===========
Net loss per share - basic
and diluted
As reported........ $ (0.60) $ (0.06) $ (0.64) $ (0.08)
Pro forma.......... $ (0.61) $ (0.06) $ (0.65) $ (0.09)
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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss.................... $(4,679,000) $ (462,000) $(4,943,000) $ (619,000)
============ =========== ============ ===========
Shares outstanding.......... 7,754,430 7,738,060 7,752,196 7,647,060
Net effect of diluted
options.................... - - - -
----------- ----------- ------------ -----------
Dilutive shares outstanding. 7,754,430 7,738,060 7,752,196 7,647,060
============ =========== ============ ===========
Options and warrants outstanding for 1,639,000 shares and 2,034,000 shares
for the three and nine months ended September 30, 2003 and 2002,
respectively, have been excluded from the above calculation because their
effect would have been anti-dilutive.
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Note 5 - Provision for Income Taxes
- -----------------------------------
Because of recent losses the Company believes that it is no longer possible
to sustain the position that it is "more likely than not" that it will be
able to utilize its net operating loss carryforward to offset taxable income
in future periods. As a result, the Company established a 100% valuation
reserve for its deferred tax asset in the third quarter of 2003.
Note 6 - Business Segments
- --------------------------
HemaCare operates two business segments as follows:
- Blood Products - Collection, processing and distribution of blood
products and donor testing.
- Blood Services - Therapeutic apheresis and stem cell collection
procedures and other therapeutic services to patients.
Management uses more than one measure to evaluate segment performance.
However, the dominant measurements are consistent with HemaCare's
consolidated financial statements, which present revenue from external
customers and operating income for each segment.
Note 7 - Exit and Disposal Activities
- -------------------------------------
As the result of an evaluation of the overall operations of the Company,
management implemented a plan to cease operations at several donor centers,
as well as the mobile operations associated with these centers in the third
and fourth quarters of 2003. The donor centers included in this plan are
Albany, New York; Chicago, Illinois; three centers in North Carolina; and
Williston Vermont. As of September 30, 2003, the donor centers in Albany,
New York; two centers in North Carolina; and Williston, Vermont were closed.
Costs associated with the closures are reflected in the Company's third
quarter results or will be recorded in the fourth quarter in accordance with
generally accepted accounting principals.
As a result of the implementation of management's plan to close certain
locations as described above, the Company incurred or anticipates will incur
certain expenses associated with closing these centers. These expenses
included the write-off of $285,000 of certain assets previously used in the
operations of the closed donor centers, severance payments of $77,000 to 29
terminated employees, recognition of unexpired facility lease obligations of
$435,000, and other associated costs.
The following represents a reconciliation of the provision created as a
result of the closure of these centers:
Remaining Accural as of
Provision Utilized September 30, 2003
--------- ---------- -----------------------
Termination Benefits: $ 77,000 $ 0 $ 77,000
Lease Abandonment Costs: 275,000 0 275,000
Fixed Asset Write-down: 285,000 $ 285,000 0
--------- --------- -----------
Total: $ 637,000 $ 285,000 $ 352,000
========= ========= ===========
Of the $637,000 provision recorded in the third quarter, $611,000 was
recorded as operating expenses and $26,000 was recorded as general
and administrative expenses.
Note 8 - Commitments
- --------------------
The Company is committed to purchase approximately $14 million of
blood collection kits at established prices through 2007. Because of the
closures mentioned above, management does not believe the Company's demand
for these kits will satisfy the purchase commitment. The Company is
presently in negotiations with the supplier to lower the commitment
requirement. Based on the preliminary results of these negotiations,
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management fully expects that a new achievable commitment requirement will
be successfully negotiated without any material negative impact on the
Company.
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
- -------
HemaCare operates two primary business segments. The first is the blood
products segment which supplies hospitals, and other customers, with whole
blood, apheresis platelets and other blood products. HemaCare collects
blood and other blood products from donors to satisfy customer demand. The
Company manages and operates donor centers and mobile donor vehicles to
collect blood products from donors.
The second business segment HemaCare operates is blood services, which
includes therapeutic apheresis procedures, stem cell collection and other
blood treatments provided to patients. These procedures are generally
performed in a hospital setting.
Results of Operations
- ---------------------
Three months ended September 30, 2003 compared to the three months ended
September 30, 2002
Overview
- --------
As the result of an evaluation of the overall operations of the Company,
management implemented a plan to cease operations at several donor centers,
as well as the mobile operations associated with these centers, in the third
and fourth quarters of 2003. The donor centers included in this plan were
Albany, New York; Chicago, Illinois; three centers in North Carolina; and
Williston, Vermont. As of September 30, 2003, the donor centers in Albany,
New York; two centers in North Carolina; and Williston, Vermont were closed.
Costs associated with the closures are reflected in the Company's third
quarter results or will be recorded in the fourth quarter in accordance with
generally accepted accounting principles.
As a result of the implementation of management's plan to close certain
locations as described above, the Company incurred certain expenses
associated with closing these centers in the third quarter. These expenses
included the write-off of certain assets previously used in the operations
of the closed donor centers, severance payments to 29 terminated employees,
recognition of unexpired facility lease obligations, and other associated
costs. In addition, because of its recent losses, the Company increased the
valuation reserve for the deferred tax asset to 100%.
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As a result of the recognition of the expenses associated with closing
centers, the increase in the deferred tax asset valuation reserve and
ongoing losses in certain blood product operations, the third quarter
results reflect a material loss.
Revenues for the quarter ended September 30, 2003 were $6,980,000, which
represents a decline in revenue of $201,000, or 2.8%, from $7,181,000
generated during the same period in 2002. During the quarter ended
September 30, 2003, revenues from blood products increased $187,000, or
3.8%, compared to the same period last year due primarily to increased
collection activities from California based mobile donor drives. This
increase was offset by a decline in revenues from blood services of
$388,000, or 17.6%, which was mainly due to a decrease in the number of
therapeutic apheresis procedures performed through the Company's California
operations. In addition, the Company's Sherman Oaks donor center has
experienced a decline in revenue as a result of converting this center's
previously paid donor program to a volunteer program.
For the three months ended September 30, 2003, gross profit was ($176,000)
compared to $1,022,000 during the same period in 2002. This decrease of
$1,198,000 was mainly due to i) expenses associated with closing those
certain blood donor centers described earlier as part of management's plan
to improve operations, ii) fewer high margin therapeutic apheresis
procedures which caused a decrease of $196,000 in gross profit, iii) ongoing
losses at donor centers outside of California, and iv) higher insurance
premiums.
General and administrative expenses increased by $156,000, or 13.1%, to
$1,343,000 in the three months ended September 30, 2003 from $1,187,000 in
the same period of 2002. This increase was due to i) expenses incurred
associated with implementing management's plan to improve operations, ii)
severance for terminated management personnel, and iii) valuation
adjustments for certain overhead assets associated with the ceased
operations.
Blood Products
- --------------
Revenues and expenses for this business segment are summarized in the
following table, but for 2002 excludes revenues and expenses associated with
donor centers closed prior to the third quarter of 2003:
For the three month period ended September 30, 2003
(Revenues and Gross Profit in Thousands)
Ongoing Centers Closed Centers California Mobiles Total
------------------ ------------------ ------------------ -----------------
2003 2002 2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- -------- -------- -------
Revenues $ 2,454 $ 2,701 $ 843 $ 553 $ 1,869 $ 1,447 $ 5,166 $ 4,701
Gross Profit $ (67) $ 361 $ (890) $ (172) $ 235 $ 49 $ (722) $ 238
Gross Profit % (2.7)% 13.4% (105.6)% (31.1)% 12.6% 3.4% (14.0)% 5.1%
Units Sold:
Single DP 3,522 4,305 1,053 967 - - 4,575 5,272
Whole Blood 1,582 2,720 1,366 714 8,111 7,572 11,059 11,006
DP - Donor Platelets
Ongoing Donor Centers
For the three months ended September 30, 2003, revenues from ongoing donor
centers decreased by $247,000, or 9.1%, to $2,454,000 from $2,701,000 in the
same period of 2002. This decrease in revenues was mainly due to a decrease
in platelet collections in the Sherman Oaks donor center of $281,000
reflecting the change from a paid to a volunteer program as of January 1,
2003. Third quarter unit sales from the Sherman Oaks donor center did reach
80% of the unit sales achieved in the fourth quarter of 2002, which was
prior to the elimination of the paid donor program.
For the three months ended September 30, 2003, gross profit from ongoing
donor centers decreased by $428,000 to ($67,000) from $361,000 in the same
period of 2002. The gross profit percentage from the ongoing donor centers
decreased to (2.7%) in 2003 from 13.4% in 2002. The decrease at these
centers reflects i) valuation adjustment for certain assets as a result of
ceasing certain operations, ii) the change in the Sherman Oaks program from
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a paid to a volunteer program as of January 1, 2003, iii) expenses related
to implementing management's plan to improve operations, and iv) increased
insurance premiums.
California Mobiles
For the three months ended September 30, 2003, revenues from our California
mobile operations increased by $422,000, or 29.2%, to $1,869,000 from
$1,447,000 in the same period of 2002. This increase in revenues from our
California mobiles is mainly due to improved and refocused marketing efforts
that resulted in increased collections, and improved whole blood pricing.
For the three months ended September 30, 2003, gross profit from our
California mobile operations increased by $186,000 to $235,000 from $49,000
in the same period of 2002. Our gross profit percentage from our California
mobile operations increased to 12.6% in the third quarter of 2003 from 3.4%
in the same period of 2002. This increase in gross profit is primarily due
to the efficiencies associated with higher collection volumes and increased
production and sales of plasma as compared to 2002.
Closed Donor Centers
The Company has closed, or targeted to close, the donor centers in Albany,
New York; Chicago, Illinois; three centers in North Carolina; and Williston,
Vermont. Together, these centers generated revenue of $843,000 during the
three months ended September 30, 2003 and an operating loss of $890,000.
During the quarter ended September 30, 2002, these centers, provided revenue
of $553,000 and produced an operating loss of $172,000. The increase in
revenues is due in part to higher volume of whole blood units collected as
these centers matured. The increase in loss is due to expenses associated
with closing these centers. These expenses include an increase in the
fixed asset reserve as a result of closing these centers, and lease
abandonment expenses accrued for the facilities vacated. In addition,
ongoing operating losses, unrelated to implementation of management's plan
to close these locations, contributed to the loss in the third quarter.
Blood Services
- --------------
Revenues from blood services decreased by $388,000, or 17.6%, to $1,814,000
in the third quarter of 2003 from $2,202,000 in the same period of 2002. The
decrease was mainly due a 20.5% decrease in the number of therapeutic
apheresis procedures performed from 1,895 procedures performed in the third
quarter of 2002 to 1,506 procedures in the third quarter of 2003. Gross
profit decreased to $546,000 (30.1% of revenue) during the three months
ended September 30, 2003, compared to $742,000 (33.7% of revenue) during the
same period in 2002. This is the result of lower procedure volume and fewer
higher margin procedures during the period. The Company continues to offer
a physician education program in California and New York as part of the
marketing effort for the Company's blood services.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses increased by $156,000, or 13.1%, to
$1,343,000 in the third quarter of 2003 from $1,187,000 in the same period
of 2002. This increase was primarily due to i) expenses incurred associated
with implementing management's plan to improve operations, ii) valuation
adjustments for certain overhead assets associated with closed locations
totaling $42,000, and iii) severance expenses for terminated managers.
Income Taxes
- ------------
During the third quarter, the Company recorded a valuation allowance of
$3.16 million against its deferred tax assets. This non-cash charge reduced
the net value of the deferred tax assets on the balance sheet to zero. The
assets were created as a result of income tax benefits that were recorded as
a result of operating losses in prior years. Current accounting standards
place significant weight on a history of recent cumulative losses in
determining whether or not a valuation allowance is necessary. Forecasts of
future taxable income are not considered sufficient positive evidence to
outweigh a history of losses. Accordingly, the assets were reserved in
full. The Company's federal net operating loss carryforwards are not
impacted and can continue to be utilized for up to 20 years.
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Nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002
- ------------------------------------------------------------------------
Overview
- --------
Revenues for the nine months ended September 30, 2003 increased by $406,000,
or 2.0%, to $20,848,000 from $20,442,000 in the same period of 2002. During
the nine months ended September 30, 2003, the Company's California mobile
operations revenue grew $1,643,000. This was offset by the absence of
revenue in 2003 from donor centers closed in 2002, principally in
California. In addition, the Company's consolidated revenue was reduced by
a decline in blood services revenue of $689,000, or 10.9%.
For the nine months ended September 30, 2003, gross profit was $1,144,000,
or 5.5% of revenues, compared to $2,769,000, or 13.5% of revenues, during
the same period in 2002. The decrease of $1,625,000 is mainly due to i)
expenses incurred in the third quarter related to implementing management's
plan to improve operations, ii) fewer high margin therapeutic apheresis
procedures which caused a decrease of $359,000 in gross profit, iii) ongoing
losses at donor centers outside of California and iv) higher insurance
premiums. These were partially offset by an increase in gross profit at the
California mobile operations due to increased efficiencies associated with
higher collection volumes.
General and administrative expenses decreased by $81,000, or 2.5%, to
$3,103,000 in the first nine months of 2003 from $3,184,000 in the same
period of 2002. The decrease was mainly due to non-recurring expenses
incurred in the first nine months of 2002 related to litigation against the
American Red Cross, and severance expenses incurred in 2002 related to the
departure of the Company's Chief Executive Officer. The 2003 expenses
included i) expenses incurred associated with implementing management's plan
to improve operations, ii) severance for terminated management personnel,
and iii) valuation adjustments for certain overhead assets associated with
the ceased operations.
Blood Products
- --------------
Revenues and expenses for this business segment are summarized in the
following table, but for 2002 excludes revenues and expenses associated with
donor centers closed prior to 2003:
For the nine month period ended September 30, 2003
(Revenues and Gross Profit in Thousands)
Ongoing Centers Closed Centers California Mobiles Total
------------------ ------------------ ------------------ -----------------
2003 2002 2003 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- -------- -------- -------
Revenues $ 7,040 $ 8,399 $ 2,546 $ 1,453 $ 5,619 $ 3,976 $15,205 $13,828
Gross Profit $ 174 $ 1,063 $(1,387) $ (377) $ 586 $ (94) $ (627) $ 592
Gross Profit % 2.5% 12.7% (54.5)% (25.9)% 10.4% (2.4)% (4.1)% 4.3%
Units Sold
Single DP 9,275 15,891 3,183 1,002 - - 12,458 16,893
Whole Blood 3,190 8,143 5,478 1,451 24,753 22,774 33,421 32,368
DP - Donor Platelets
Ongoing Donor Centers
For the nine months ended September 30, 2003, revenues from ongoing donor
centers decreased by $1,359,000, or 16.2%, to $7,040,000 from $8,399,000 in
the same period of 2002. This decrease in revenues is primarily due to a
decrease in revenues relating to platelet collections at the Sherman Oaks
donor center of $1,143,000 reflecting the change from a paid to a volunteer
program as of January 1, 2003.
For the nine months ended September 30, 2003, gross profit from ongoing
donor centers declined by $889,000, or 83.6%, to $174,000 from $1,063,000 in
the same period of 2002. The gross profit percentages also declined to 2.5%
in 2003 from 12.7% in 2002. This decrease in gross profit reflects i) the
change in the Sherman Oaks donor center from a paid to a volunteer program
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as of January 1, 2003, ii) higher recruitment and technology support costs,
and iii) expenses related to implementing management's plan to improve
operations.
California Mobiles
For the nine months ended September 30, 2003, revenues from the California
mobile operations increased by $1,643,000, or 41.3%, to $5,619,000 from
$3,976,000 in the same period of 2002. This increase reflects improved and
refocused marketing efforts that resulted in an increase in collection
rates, and better whole blood pricing.
For the nine months ended September 30, 2003, gross profit from California
mobile operations increased by $680,000 to $586,000 from a loss of $94,000
in the same period of 2002. The gross profit percentage increased to 10.4%
in the first nine months of 2003 from (2.4%) in the same period of 2002.
This increase is mainly due to the efficiencies associated with higher
collection volumes and increased sales of plasma.
Closed Donor Centers
The Company has closed, or targeted to close, the donor centers in Albany,
New York; Chicago, Illinois; three donor centers in North Carolina; and in
Williston, Vermont. Together, these centers generated revenue of $2,546,000
during the nine months ended September 30, 2003 and an operating loss of
$1,387,000. During the nine months ended September 30, 2002, these centers
provided revenue of $1,453,000 and produced an operating loss of $377,000.
The increase in revenues is due to the higher volume of whole blood units
collected as these centers matured during 2003. The increase in loss is due
to ongoing operating losses and expenses associated with closing these
centers. Additional costs associated with the closure of these facilities
will be reflected in the fourth quarter.
Blood Services
- --------------
Revenues from blood services decreased by $689,000, or 10.9%, to $5,643,000
in the first nine months of 2003 from $6,332,000 in the same period of 2002.
The decrease was mainly due to a decrease of 12.8% in the number of
therapeutic apheresis procedures performed from 5,413 procedures performed
during the period in 2002 to 4,722 procedures in 2003. Gross profit
decreased to $1,771,000, or 31.4% of revenue, during the nine months ended
September 30, 2003, compared to $2,130,000, or 33.6% of revenue, during the
same period in 2002. The slight decrease in the gross profit percentage is
primarily attributed to changes in customer mix since the price charged
different customers can vary based on the nature of the case serviced and
the contract in place with the customer.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses decreased by $81,000, or 2.5%, to
$3,103,000 in the first nine months of 2003 from $3,184,000 in the same
period of 2002. The decrease was mainly due to i) non-recurring legal fees
associated with the American Red Cross litigation which was settled in late
2002, and ii) severance expenses associated with the departure of the
Company's Chief Executive Officer in 2002. These decreases were partially
offset in 2003 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, ii) expenses estimated
and incurred related to implementing management's plan to improve
operations, iii) severance for terminated management personnel, iv)
valuation adjustments for certain overhead assets associated with the ceased
operations and v) 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
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evaluate the adequacy of the allowance for doubtful accounts, the accrual of
expenses associated with discontinued operations and the realization of
deferred tax assets.
Allowance for Doubtful Accounts: Ongoing estimates relating to the
collectibility of accounts receivable are used to 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 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
reserve. To the extent we establish a reserve or increase this reserve 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 reserve
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. As of September 30, 2003, management
has determined that the deferred tax asset was not likely to be realized,
and accordingly management wrote-down the value of this asset and has
reflected this write-down in the provision for taxes in the third quarter.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 2003, the Company cash and cash equivalents equaled
$1,057,000 and working capital of $896,000.
The Company has a working capital line of credit with Comerica Bank -
California. 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%; as of September 30, 2003 the rate paid by the Company was
4.5%. As of September 30, 2003, the Company's net borrowing on this line of
credit is $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 September 30, 2003, the unused portion of the Company's line
of credit was $1,550,000.
In addition, the Company has various other equipment notes payable with
Comerica Bank - California. As of September 30, 2003, the total amount
outstanding under these notes was $325,000 and requires monthly principal
payments of approximately $14,000 plus interest at a weighted average fixed
rate of 6.5%. Of the total amount borrowed under these notes, $168,000 is
included in "current obligations under notes payable" on the balance
sheet.
All of the Comerica 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 September 30, 2003, the Company was not in compliance
with a covenant that requires the Company to be profitable each quarter.
During the quarter ended September 30, 2003, the Company incurred a loss.
The Company has requested, and Comerica has agreed to waive this covenant
violation.
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Additionally, the Company has another note payable with One Source
Financial. As of September 30, 2003, the balance on this note was $81,000.
The note requires quarterly payments of approximately $10,000 including
interest at the rate of 8.5% and is secured by certain fixed assets. Of the
total amount of this note outstanding, $33,000 is included in "current
obligations under notes payable" on the balance sheet.
The following table summarizes our contractual obligations by year (in
thousands).
Total 2004 2005 2006 2007
------- ------- ------ ------ ------
Operating leases $ 1,657 $ 537 $ 467 $ 458 $ 195
Capitalized leases 312 107 94 83 28
Notes payable 857 651 187 19 -
------- ------- ------ ------ ------
Totals $ 2,826 $ 1,295 $ 748 $ 560 $ 223
======= ======= ====== ====== ======
The Company also committed to purchase approximately $14 million of blood
collection kits at established prices through 2007. Management does not
believe the Company's demand for these kits will satisfy the purchase
commitment. The Company is presently in negotiations with the supplier to
lower the commitment requirement. Based on the preliminary results of these
negotiations, management fully expects that a new, achievable commitment
requirement will be successfully negotiated without any material negative
impact on the Company.
For the nine months ended on September 30, 2003, net cash provided by
operating activities was $804,000, and $862,000 for the nine months ended
September 30, 2002. The decrease of $58,000 is primarily due to the net
losses of $4,943,000 recorded since the beginning of 2003. The decrease in
net cash from operating activities is partially offset by i) an increase in
depreciation and amortization of $704,000, ii) an increase in the deferred
tax asset valuation reserve of $2,984,000, and iii) a decrease in accounts
receivable of $484,000. The increase in depreciation and amortization is
mostly related to valuation adjustments associated with the implementation
of management's plans to improve operations. The increase in the deferred
tax asset valuation reserve is due to management's estimate of the
likelihood that the Company will utilize this asset against future taxable
income. Finally, the decrease in accounts receivable is due to the
Company's efforts to aggressively collect older receivables. During the
nine months ended September 30, 2003, these efforts reduced the number of
days sales outstanding to 45 at September 30, 2003, from 62 days at December
31, 2002.
For the nine months ended on September 30, 2003, net cash used in investing
activities was $287,000, compared with $860,000 for the same period in 2002.
The decrease of $573,000 is primarily due to the Company's investments in
new donor centers in 2002, the Company's investment in technology in 2002,
and expenditures on leasehold improvements relating to the move of the
Company's corporate headquarters to Woodland Hills in 2002.
For the nine months ended September 30, 2003, net cash used in financing
activities is $508,000 compared with net cash provided of $179,000 for the
nine months ended September 30, 2002. The net use of cash for financing
activities of $508,000 in 2003 is mainly due to a $661,000 in payments for
principal on the line of credit, the equipment loans and capital leases.
This amount is partially offset by $150,000 in proceeds taken from the line
of credit since the beginning of 2003.
Management anticipates that cash on hand and available borrowing on the bank
line of credit will be sufficient to provide funding for the Company's needs
during the next nine months, including working capital requirements,
equipment purchases and operating lease commitments. The Company intends to
negotiate a new line of credit as of June 30, 2004 to replace the existing
line of credit.
The Company's primary sources of liquidity include our cash on hand,
available borrowing on the line of credit and cash generated from
operations. Liquidity depends, in part, on timely collections of accounts
receivable. Any significant delays in customer payments could adversely
affect the Company's liquidity. Liquidity also depends on maintaining
compliance with the various loan covenants. From time to time the Company
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has failed to comply with some or all of these covenants. The Company has
obtained waivers from the bank for each of these covenant violations. If in
the future the Company is unable to comply with a loan covenant and the bank
does not issue a waiver, the Company's liquidity could be materially
affected.
Risk Factors Affecting the Company
- ----------------------------------
Short and long-term success is subject to many factors that are beyond
management's 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. 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.
Operating Risk
- --------------
Management has implemented a plan to close or abandon certain operations
that have been generating operating losses for the Company. Management
believes that closing these locations will help to improve the overall
profitability of the Company; however, the actual ability of the Company to
improve profitability depends on management successfully implementing the
plan to close the identified locations. If management is not successful,
the overall profitability of the Company may not improve which could have a
material adverse effect on the future of the business and on future results
of operations.
Market Prices for Blood Do Not Necessarily Reflect Costs
- --------------------------------------------------------
The Company depends on competitive pricing to obtain and maintain sales. As
costs increase, the Company may not be able to raise prices commensurately
if competitors do not. Some competitors have greater resources than the
Company to sustain periods of unprofitable sales. Cost increases may
therefore have a direct negative effect on profits and a material adverse
affect on the business.
Declining Blood Donations
- -------------------------
The 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 blood
products declines, the Company may not be able to achieve profitability or
reduce costs sufficiently to maintain profitability in blood products.
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.
Increasing Costs
- ----------------
The costs of collecting, processing and testing blood have risen
significantly in recent years and will likely continue to increase. 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 the Company to outsource
much of the required testing. Competition, and in some cases multi-year
contractual arrangements, may limit the Company's ability to pass these
increased costs to customers. In this circumstance, the increased costs
could reduce profitability and could have a material adverse effect on the
business and results of operations.
Increasing Reliance on Outside Laboratories
- -------------------------------------------
The Company maintains laboratories that are licensed and accredited to test
blood products for purity, potency and quality. The Company utilizes
outside laboratories for nucleic acid testing. As other new testing and
processing technologies are introduced, the Company may increase its
reliance on outside laboratories. In using outside laboratories the Company
will have less control over testing quality. In addition, because
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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 the business.
Targeted Donor Base Involves Higher Collection Costs
- ----------------------------------------------------
Part of the Company's 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, collection costs might be higher than the
competition and may affect profitability and growth plans.
Access to Insurance
- -------------------
The Company currently maintains insurance coverage consistent with the
industry; however, if the Company experiences losses or the risks associated
with the blood products industry increase in the future, insurance may
become more expensive or unavailable. The Company also cannot give
assurance that as the business expands, or the Company introduces new
products and services, that additional liability insurance on acceptable
terms will be available, or that the existing insurance will provide
adequate coverage against any and all potential claims. Also, the
limitations on liability contained in various agreements and contracts may
not be enforceable and may not otherwise protect the Company from liability
for damages. The successful assertion of one or more large claims against
the Company that exceeds available insurance coverage, or changes in
insurance policies, such as premium increases or the imposition of large
deductibles or co-insurance requirements, could materially and adversely
affect the business.
Potential Inability 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 nine months. However, the Company incurred a
$4,943,000 loss during the nine months ended September 30, 2003. The Company
may need to raise additional capital in the debt or equity markets. There
can be no assurance that the Company will be able to obtain such financing
on reasonable terms or at all. Additionally, there is no assurance that the
Company will be able to obtain sufficient capital to finance future
expansion.
Not-For-Profit Status Gives Advantages to Our Competitors
- ---------------------------------------------------------
HemaCare Corporation is the only significant blood supplier in the U.S. that
is operated for profit and investor owned. The competition is not-for-
profit, exempt from federal and state taxes, has substantial community
support and access to tax-exempt financing. The Company may not be able to
continue to compete successfully with not-for-profit organizations and the
business and results of operations may 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.
Business 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 the Company's results of operations and financial
condition. Furthermore, the Company 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
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terrorist activities and potential activities. The U.S. economy in general
is adversely affected by 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.
Potential Loss of Lines of Credit
- ---------------------------------
In December 2002, the Company replaced the then existing lines of credit
with a new $2.0 million working capital line of credit that requires the
Company maintain certain financial covenants including profitability each
quarter. As of September 30, 2003, the Company was not in compliance with a
covenant that requires profits each quarter since the Company incurred a
loss. The bank has waived this violation. Maintaining compliance is
dependent, among other things, on achieving the required profitability. In
2002, the Company lost $591,000 and for the first nine months of 2003 the
Company lost $4,943,000. Continued losses would violate the terms of the
new credit line. While in the past the bank granted covenant violation
waivers when needed, the Company cannot assure that the bank will continue
to grant waivers in the future. Failure to obtain such waivers when, and if
needed, could result in acceleration of payment obligations under the credit
agreement and severely reduce liquidity. In addition, the existing credit
agreement expires June 30, 2004. Management will make efforts to replace
this facility; however, the Company cannot assure that alternative financing
will be available. Failure to replace this facility will adversely impact
liquidity and therefore adversely impact the business as well.
Potential Adverse Affect from 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, the Company may be
limited in its ability to increase prices for products in the future, even
if costs increase. Further, the Company could be adversely affected by
customer attrition as a result of consolidation among healthcare providers.
Future Technological Developments Could Jeopardize 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.
HemaCare's 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
the business.
Operations Depend on Obtaining the Services of Qualified Medical
Professionals
- ----------------------------------------------------------------
The Company is highly dependent upon obtaining the services of qualified
medical professionals. In particular, product collection operations depend
on the services of registered nurses, and other professionals. Nationwide,
the demand for these professionals 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 the Company is unable to attract
and retain a staff of qualified medical professionals, operations would be
adversely affected.
Heavily Regulated Industry
- ---------------------------
The business of collecting, processing and distributing blood and blood
products are all subject to extensive and complex regulation by the state
and federal governments. The Company is required to obtain and maintain
numerous licenses in different legal jurisdictions regarding the safety of
products, facilities and procedures, and regarding the purity and quality of
blood products. In addition, state and federal laws include anti-kickback
and self-referral prohibitions and other regulations that affect the
relationships between blood banks, hospitals, physicians and other persons
who refer business to each other. Health insurers and government payers,
such as Medicare and Medicaid, also limit reimbursement for products and
services, and require compliance with certain regulations before
reimbursement will be made.
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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 the Company has not complied with
significant existing regulations. Such a finding could materially harm the
business. Moreover, healthcare reform is continually under consideration by
regulators, and the Company does 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 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 could exceed insurance
coverage and materially and adversely affect the Company's 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.
Articles of Incorporation and Rights Plan Could Delay or Prevent an
Acquisition or Sale of HemaCare
- --------------------------------------------------------------------
HemaCare's 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 for a
change in control of HemaCare, even if such a change in control would be in
the interest of a significant number of shareholders or if such a change in
control would provide 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 the
other shareholders would have the right to purchase securities from the
Company at a discount to the fair market value of the 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 the shareholders' ability to realize a premium over the
then-prevailing market price for the 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
- ----------------------------------------------------------------------------
HemaCare's common stock was delisted from the NASDAQ Small Cap Market on
October 29, 1998 because of the failure to maintain NASDAQ's requirement of
a minimum bid price of $1.00. Since November 2, 1998 the common stock has
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
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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.
Stock Price Could Be Volatile
- -----------------------------
The price of HemaCare's 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 the Company or by the
competition, healthcare legislation, trends in the health insurance and HMO
industry, litigation, fluctuations in operating results and market
conditions for healthcare stocks in general could have a significant impact
on the future price of HemaCare's 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 HemaCare's
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
shareholders to sell their shares, which could further reduce the market
price of the common stock.
Lack of Dividend Payments
- -------------------------
The Company intends to retain any future earnings for use in its business,
and therefore does not anticipate declaring or paying any cash dividends in
the foreseeable future. The declaration and payment of any cash dividends in
the future will depend on the Company's earnings, financial condition,
capital needs and other factors deemed relevant by the Board of Directors.
In addition, the Company's credit agreement prohibits the payment of
dividends during the term of the agreement.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------------
The Company has $1,131,000 of debt that includes $681,000 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 and the 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 and the principal financial officer
believe 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 them material information relating to the Company (including its
consolidated subsidiaries required to be included in this report).
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objections is
affected by limitations inherent in disclosure controls and procedures.
These include the fact that human judgment in decision-making can be faulty
and that breakdowns in internal control can occur because of human failures
such as simple errors, 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 or the 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.
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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
- -------------------------------------------------------------
a. The Company's Annual Meeting of Shareholders (the
"Meeting") was held on August 13, 2003.
b. The following table shows the tabulation of votes for
all matters put to vote at the Meeting.
Matters Put to Vote For Against/Withheld
- ------------------------------ --------------- -------------------
1. Election of Five Directors
Julian L. Steffenhagen 6,654,082 11,625
Judi Irving 6,653,882 11,825
Robert L. Johnson 6,654,082 11,625
Terry Van Der Tuuk 6,653,982 11,725
Stephen P. Wallace 6,654,082 11,625
Item 5. Other Information
- ----------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- ---------------------------------------------
a. Exhibits
10.1 Employment letter between the Registrant and
Robert Chilton, dated October 2, 2003
11 Net Loss per Common and Common Equivalent Share
31.1 Certification Pursuant to Rule 15d-14(a) Under the
Securities Exchange Act
31.2 Certification Pursuant to Rule 15d-14(a) Under the
Securities Exchange Act
32 Certification Pursuant to 18 U.S.C. 1350 and Rule 15d-
14(a) Under the Securities Exchange Act
b. Reports on Form 8-K
On November 4, 2003, the Company filed a current report on
Form 8-K disclosing under Item 5 (Other Information), a
press release dated November 3, 2003 announcing the
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appointment of Robert Chilton as Chief Financial Officer
and Steven B. Gerber to the Board of Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date November 14, 2003 HEMACARE CORPORATION
--------------------- -------------------------------------
(Registrant)
/s/ Judi Irving
-------------------------------------
Judi Irving, Chief Executive Officer
/s/ Robert S. Chilton
--------------------------------------
Robert S. Chilton, Chief Financial
Officer
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