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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 June 30, 2004
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 10, 2004, 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 SIX MONTHS ENDED
JUNE 30, 2004
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 (unaudited) and
December 31, 2003..................................................... 1
Consolidated Statements of Income (Operations) for the three and six
months ended June 30, 2004 and 2003 (unaudited)........................ 2
Consolidated Statements of Cash Flows for the six months ended June
30, 2004 and 2003 (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. Quantitative and Qualitative Disclosures About Market Risk............. 20
Item 4. Controls and Procedures................................................ 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.............................................................. 21
Item 3. Defaults Upon Senior Securities......................................... 21
Item 4. Submission of Matters to a Vote of Security Holders..................... 21
Item 5. Other Information....................................................... 22
Item 6. Exhibits and Reports on Form 8-K........................................ 22
SIGNATURES...................................................................... 22
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------- --------------------
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
------------ -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,399,000 $ 935,000
Accounts receivable, net of allowance for
doubtful accounts - $353,000 in 2004 and $351,000
in 2003............................................ 3,047,000 3,128,000
Product inventories and supplies..................... 583,000 494,000
Prepaid expenses..................................... 567,000 388,000
Note receivable...................................... - 20,000
------------ ------------
Total current assets..................... 5,596,000 4,965,000
Plant and equipment, net of accumulated
depreciation and amortization of
$3,166,000 in 2004 and $2,919,000 in 2003............ 2,958,000 3,259,000
Deferred income taxes.................................. 47,000 -
Other assets........................................... 54,000 62,000
------------ ------------
$ 8,655,000 $ 8,286,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 1,947,000 $ 1,686,000
Accrued payroll and payroll taxes.................... 1,131,000 918,000
Other accrued expenses............................... 125,000 243,000
Current obligations under capital leases............. 248,000 229,000
Current obligations under notes payable.............. 203,000 710,000
------------ ------------
Total current liabilities................ 3,654,000 3,786,000
Obligations under capital leases, net
of current portion................................... 827,000 954,000
Notes payable, net of current portion.................. 21,000 124,000
Other long-term liabilities............................ 8,000 11,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, no par value - 20,000,000 shares
authorized, 7,756,060 issued and outstanding in
2004 and 2003...................................... 13,319,000 13,319,000
Accumulated deficit.................................. (9,174,000) (9,908,000)
------------ ------------
Total shareholders' equity............... 4,145,000 3,411,000
------------ ------------
$ 8,655,000 $ 8,286,000
============ ============
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------------ ------------ ----------- -----------
Revenues:
Blood products.................... $5,036,000 $5,093,000 $ 9,881,000 $10,039,000
Blood services.................... 1,885,000 1,844,000 3,776,000 3,829,000
----------- ----------- ------------ -----------
Total revenue.................... 6,921,000 6,937,000 13,657,000 13,868,000
Operating costs and expenses:
Blood products.................... 4,179,000 5,102,000 8,237,000 9,786,000
Blood services.................... 1,239,000 1,383,000 2,486,000 2,630,000
----------- ----------- ------------ ------------
Total operating costs and
expenses....................... 5,418,000 6,485,000 10,723,000 12,416,000
----------- ----------- ------------ ------------
Gross profit...................... 1,503,000 452,000 2,934,000 1,452,000
General and administrative
expenses............................ 1,015,000 906,000 2,200,000 1,892,000
----------- ----------- ------------ ------------
Income (loss) before income taxes...... 488,000 (454,000) 734,000 (440,000)
Benefit from income taxes.............. - (182,000) - (176,000)
----------- ----------- ------------ ------------
Net income (loss)................... $ 488,000 $ (272,000) $ 734,000 $ (264,000)
=========== =========== ============ ============
Basic and diluted earnings (loss)
per share.......................... $ 0.06 $ (0.04) $ 0.09 $ (0.03)
=========== =========== ============ ============
Weighted average shares
outstanding - basic................ 7,756,060 7,751,060 7,756,060 7,751,060
=========== =========== ============ ============
Weighted average shares
outstanding - diluted.............. 8,089,078 7,751,060 7,999,449 7,751,060
=========== =========== ============ ============
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)
Six months ended June 30,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income (loss)......................................... $ 734,000 $ (264,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for bad debts................................ 90,000 -
Recognition of deferred tax assets..................... (47,000) (176,000)
Depreciation and amortization.......................... 334,000 291,000
Loss on disposal of assets............................. 18,000 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable............ (9,000) 731,000
(Increase) decrease in inventories, supplies and
prepaid expenses..................................... (80,000) 24,000
Decrease in other assets.............................. 8,000 9,000
Increase (decrease) in accounts payable, accrued
expenses and other liabilitiess...................... 353,000 (271,000)
----------- -----------
Net cash provided by operating activities............. 1,401,000 344,000
Cash flows from investing activities:
Proceeds from sale of plant and equipment................. 16,000 -
Proceeds from note receivables............................ 20,000 -
Purchases of plant and equipment.......................... (67,000) (242,000)
----------- ----------
Net cash used in investing activities..................... (31,000) (242,000)
Cash flows from financing activities:
Principal payments on debt and capitalized leases......... (906,000) (586,000)
Proceeds from line of credit.............................. - 150,000
---------- ----------
Net cash used in financing activities..................... (906,000) (436,000)
----------- -----------
Increase (decrease) in cash and cash equivalents............ 464,000 (334,000)
Cash and cash equivalents at beginning of period............ 935,000 1,048,000
----------- -----------
Cash and cash equivalents at end of period.................. $1,399,000 $ 714,000
=========== ===========
Supplemental disclosure:
Interest paid............................................. $ 55,000 $ 42,000
=========== ===========
Income taxes paid......................................... $ 30,000 $ -
=========== ===========
Items not affecting cash flow:
Insurance premiums financed............................... $ 188,000 $ -
=========== ===========
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 six months ended June 30, 2004 and
2003 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, 2004, the results of its operations
for the three and six months ended June 30, 2004 and 2003, and its cash
flows for the six months ended June 30, 2004 and 2003 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, 2003, as amended, as filed with the Securities and
Exchange Commission on June 22, 2004 which 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, 2004 are not necessarily indicative of
the consolidated results of operations to be expected for the full fiscal
year ending December 31, 2004. 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, 2004 and December 31,
2003, the Company had uninsured cash and cash equivalents of $1,177,000 and
$719,000, 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 June 30, 2004 the rate associated with this note was
4.50%. As of June 30, 2004, the Company had no net borrowing on this line
of credit, and the Company had unused availability of $2,000,000. The
Company has entered into an amendment to the credit agreement with Comerica
Bank to extend the term of the line of credit to June 30, 2005, and to
revise the financial covenants to levels more favorable to the Company. As
of June 30, 2004, the Company was in compliance with all of the revised
covenants.
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In addition, the Company previously had various other equipment notes
payable with Comerica Bank - California. During the second quarter of 2004,
the Company paid off these notes in the amount of $203,000.
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. During the second quarter of 2004, the Company did incur
interest expense associated with the Comerica obligations totaling $2,500.
Additionally, the Company has another note payable to One Source Financial.
As of June 30, 2004, the balance on this note was $57,000, which is due in
full on January 25, 2006. The note requires quarterly payments of
approximately $10,000 including interest at a fixed rate of 8.5% and is
secured by certain fixed assets. Of the total amount of this note
outstanding, $35,000 is included in current obligations under notes payable
on the balance sheet.
The Company also has a note payable to Bay Tree Finance Company related to
financing certain insurance premiums. As of June 30, 2004, the balance due
on this note was $167,000, all of which is included in current obligations
under notes payable on the balance sheet. The note requires monthly
payments of approximately $21,000, including interest at a fixed rate of
4.6%, and is scheduled to mature in February 2005,
The Company also has a capital equipment lease with Gambro BCT to finance
the acquisition of equipment used in the Company's apheresis activities.
The total value of the equipment financed through this capital lease was
$932,000. As of June 30, 2004, the balance outstanding on this lease was
$871,000, of which approximately $168,000 is included in current obligations
under capital leases on the balance sheet. The lease is scheduled to expire
in December 2008 and has a fixed interest of 7.5%. The lease is secured by
all of the equipment purchased through the lease financing.
The Company also has a capital equipment lease with GE Capital used to
finance the acquisition of vehicles. As of June 30, 2004, the balance
outstanding on this lease was $193,000, of which approximately $70,000 is
included in current obligations. This lease is scheduled to mature in
January 2007, and has a fixed interest rate of 8.0%.
Finally, the Company has a capital equipment lease with Dell Financial
Services associated with the acquisition of computer equipment. As of June
30, 2004, the balance outstanding on this lease was $13,000, of which
approximately $11,000 is included in current obligations. This lease is
scheduled to mature in August 2005, and has a fixed interest rate of 12.6%.
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 2004 or 2003. Had compensation
expense for all options granted to employees and directors been recognized
in accordance with SFAS 123, the Company's net income (loss) per share would
have been as follows:
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Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income (loss) as reported............ $ 488,000 $ (272,000) $ 734,000 $ (264,000)
Deduct: Total stock-based employee
compensation expense determined under
fair market value based method for all
awards, net of related tax effects....... 23,000 (25,000) 63,000 (53,000)
----------- ----------- ---------- -----------
Pro forma net income (loss).............. $ 465,000 $ (297,000) $ 671,000 $ (317,000)
=========== =========== ========== ===========
Net income (loss) per share - basic and
diluted
As reported........................... $ 0.06 $ (0.04) $ 0.09 $ (0.03)
Pro forma............................. $ 0.06 $ (0.04) $ 0.09 $ (0.04)
The Board of Directors approved, and the Company formally adopted the 2004
Stock Purchase Plan and filed an S-8 with the Securities and Exchange
Commission to register the shares associated with this plan on June 10,
2004. The plan provides up to 1,000,000 shares of common stock of the
Company for directors, officers and employees of the Company to purchase
shares at market rates, but requires a minimum investment of $10,000.
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,
------------------------- -----------------------
2004 2003 2004 2003
---------- ----------- ---------- -----------
Net income (loss)........................ $ 488,000 $ (272,000) $ 734,000 $ (264,000)
=========== =========== ========== ===========
Shares outstanding....................... 7,756,060 7,751,000 7,756,060 7,751,060
Net effect of diluted options and
warrants............................... 333,018 - 243,389 -
----------- ----------- ---------- -----------
Dilutive shares outstanding.............. 8,089,078 7,751,060 7,999,449 7,751,060
=========== =========== ========== ===========
Options and warrants outstanding for 1,685,000 shares of common stock for
the three and six months ended June 30, 2003, have been excluded from the
above calculation because their effect would have been anti-dilutive.
Note 5 - Provision for Income Taxes
- -----------------------------------
The Company has substantial net operating losses from prior periods that
will be available in 2004 to eliminate most of any potential federal tax
liability. The Company has recognized income in each of the last three
quarters, and as a result, and to the degree that the Company incurs any tax
liability, the Company will reduce the valuation reserve against its
deferred tax assets to reflect some potential future benefit from the future
utilization of the Company's net operating losses. The Company will
continue to evaluate the deferred tax asset valuation reserve each quarter
based on the reportable income for each quarter. The Company estimates that
$13,000 and $34,000 respectively in taxes has been incurred as a result of
reportable income during the first and second quarters of 2004. Therefore,
the Company reduced the valuation reserve by $13,000 in the first quarter,
and $34,000 in the second quarter, thus eliminating any recognition of
income taxes in the first six months of 2004.
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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, 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. Costs associated with the closures are
reflected in the Company's third and fourth quarter 2003 results in
accordance with generally accepted accounting principles. Of the total
$598,000 recorded in 2003 as incurred and anticipated costs associated with
these closures, the Company has determined that $23,000 of these accrued
costs were not incurred. This amount was reversed in the second quarter of
2004.
During the second quarter of 2004, the Company was informed by Dartmouth-
Hitchcock Medical Center in Lebanon, New Hampshire and Presbyterian
Intercommunity Hospital in Whittier, California that the Company's blood
center management contracts with these hospitals would not be renewed upon
expiration in June 2004. As a result, the Company incurred $4,000 for
moving expenses associated with the closure of the donor center at
Dartmouth-Hitchcock Medical Center. There were no closure costs related to
the closure of the donor center at Presbyterian Intercommunity Hospital.
Note 8 - Subsequent Events
- --------------------------
The Company has received notice from Gambro BCT ("Gambro"), one of the
Company's largest suppliers, that the California Board of Equalization was
conducting an audit of Gambro's sales tax records. Gambro communicated to
the Company that preliminary results of this audit indicated that the
Company is likely to receive a refund of previously paid sales taxes. The
amount of the potential refund has not yet been determined; however,
preliminary indications are that the amount could be material. The Company
will record the benefit of this refund, if any, as soon as the amount can be
reasonably estimated and is certain.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------- -----------------------------------------------------------------
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 discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Quarterly Report
on Form 10-Q that are not historical are 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. These
statements may also be identified by the use of words such as
"anticipate," "believe," "continue," "estimate," "expect,"
"intend," "may," "project," "will" and similar expressions, as they
relate to the Company, its management and its industry. Investors and
prospective investors are cautioned that these forward-looking statements
are not guarantees of future performance and involve risks and
uncertainties. Actual results could differ from those described in this
report because of numerous factors, many of which are beyond the Company's
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control. These factors include, without limitation, those described below
under the heading "Risk Factors Affecting our Business." The Company does
not undertake to update its forward-looking statements to reflect later
events and circumstances or actual outcomes.
General
- -------
HemaCare Corporation ("HemaCare" or the "Company") collects, processes
and distributes blood products to hospitals in the United States.
Additionally, the Company provides blood related services, principally
therapeutic apheresis procedures, stem cell collection and other blood
treatments to patients with a variety of disorders. Blood related services
are provided on an in-patient and out-patient basis under contract with
hospitals, as an outside purchased service.
The Company has operated in Southern California since 1978. In 1998, the
Company expanded operations to include portions of the eastern U.S. In
2003, new management completed a comprehensive evaluation of the Company's
operations, and at the conclusion of this review developed a restructuring
plan to reduce the number of geographic areas served, reduce the overhead
costs associated with supporting the organization, and improve the
collection capability in the remaining geographic areas served by the
Company. The remaining collection capacity for the Company's blood
products business segment is in Maine, Massachusetts and Southern
California. Management's strategy was to return the Company to a
profitable foundation before exploring opportunities for growth in other
geographic areas or into new lines of business. The implementation of this
plan started in the third quarter of 2003, continued into early 2004, and
is now completed. Management is focused on improving the profitability of
the remaining operations including growth within existing geographic
markets, expanding therapeutic apheresis market share and exploring new
customer opportunities such as research companies.
Although most blood suppliers are organized as not-for-profit, tax-exempt
organizations, all suppliers charge fees for blood products to cover their
costs of operations. The Company believes that it is the only investor-
owned and taxable organization operating as a blood supplier with
significant operations in the U.S.
In the second quarter of 2004, the donor center management contracts between
the Company and Presbyterian Intercommunity Hospital, located in Whittier,
California, and between and Company and Dartmouth-Hitchcock Medical Center,
located in Lebanon, New Hampshire expired and were not renewed. The Company
recorded revenues from the contract with Presbyterian Intercommunity
Hospital in 2003 of $555,000. In addition, the Company recorded $294,000 of
revenue from this contract in the first six months of 2004, and $129,000 in
the second quarter of 2004. The Company recorded revenues from the contract
with Dartmouth-Hitchcock Medical Center in 2003 of $1,053,000. In addition,
the Company recorded $595,000 of revenue from this contract in the first six
months of 2004, and $243,000 in the second quarter of 2004.
Results of Operations
- ---------------------
Three months ended June 30, 2004 compared to the three months ended June 30,
2003
Overview
In the third and fourth quarters of 2003, management implemented a plan to
cease operations at several donor centers, as well as the mobile operations
associated with these centers. The operations management chose to close
were under-performing or required excessive overhead resources to support,
in comparison with other operations of the Company. All of the costs
associated with these closures were reflected in the Company's third and
fourth quarter 2003 results in accordance with generally accepted accounting
principles.
As a result of the successful implementation of management's restructuring
plan, the gross profit for the Company's blood products segment
significantly improved.
Revenues for the quarter ended June 30, 2004 were $6,921,000, which
represents a decline in revenue of $16,000, or 0.2%, from $6,937,000
generated during the same period in 2003. Blood products revenue decreased
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$57,000, or 1.1%, as a result of the elimination of revenue generated by
operations closed in the third and fourth quarters of 2003, although
portions of the lost revenue were recovered through increased revenues from
remaining operations. Blood services revenue increased $41,000, or 2.2%,
mostly as a result of changes in procedure mix to higher average price
procedures and an increased frequency in supplemental charges that increased
the average price per procedure performed during the second quarter of 2004
compared with the same period in 2003. Supplemental charges include
overtime fees, off hour procedure fees, holiday procedure fees and supply
charges.
Operating costs and expenses decreased $1,067,000, or 16.5%, to $5,418,000
in the second quarter of 2004, from $6,485,000 in the same period of 2003.
Most of this reduction is the result of the closure of donor centers as part
of the implementation of management's restructuring plan in late 2003.
General and administrative expenses increased $109,000, or 12%, to
$1,015,000 during the quarter, compared with $906,000 for the same quarter
in 2003. Much of this increase is the result of increases in accrued
management bonuses and 401(k) profit sharing contributions due to the
improved profitability of the Company, and the result of increases in
insurance costs.
For the three months ended June 30, 2004, the Company generated $488,000 of
net income compared with a net loss of $272,000 for the same period in 2003.
The increase in net income of $760,000, is mainly due to i) the elimination
of expenses associated with operating under-performing donor centers closed
in late 2003, ii) increased sales volume of single donor platelets at all of
the ongoing donor centers, and iii) increases in product pricing.
Blood Products
For this business segment, the following table summarizes the revenues,
gross profit and sales volumes associated with donor centers still operated
by the Company, and donor centers no longer operated as of June 30, 2004:
For the three month period ended June 30, 2004
(Revenues and Gross Profit in Thousands)
Ongoing Centers Closed Centers Total Company
------------------ ------------------ -------------------
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------- ---------
Revenues $ 4,713 $ 3,903 $ 323 $ 1,190 $ 5,036 $ 5,093
Gross Profit 806 131 51 (140) 857 (9)
Gross Profit % 17.1% 3.4% 15.8% (11.8%) 17.0% (0.2%)
Units Sold:
Single Donor
Platelet 4,019 3,118 353 1,559 4,372 4,677
Whole Blood 10,659 10,729 907 3,204 11,566 13,933
For the three months ended June 30, 2004, revenues from ongoing donor
centers increased by $810,000, or 20.8%, to $4,713,000 from $3,903,000 in
the same period of 2003. This increase in revenues was due to an increase in
platelet product sales during the quarter. Platelet volumes increased 28.9%
during the second quarter of 2004 compared with the same period last year.
In addition, ongoing efforts to increase product pricing has contributed to
improved blood product revenues. Revenues from the closed donor centers
declined by $867,000, or 72.9%, to $323,000 from $1,190,000, which offset
the growth in revenues from the ongoing centers. The decline in revenue
from closed centers was due to the fact that most of the facilities included
in this category were closed in the third and fourth quarters of 2003. The
closed center category also includes revenue from the recently expired
Dartmouth-Hitchcock Medical Center and Presbyterian Intercommunity Hospital
donor center contracts.
For the three months ended June 30, 2004, gross profit from ongoing donor
centers increased by $675,000, or 515.3%, to $806,000 compared with the
second quarter of 2003. The gross profit percentage increased to 17.1% in
2004 from 3.4% in 2003, for ongoing centers. This improvement in gross
profit is the result of i) increases in product prices, and ii) increased
operational efficiencies realized from higher volumes. The gross profit for
closed centers increased by $191,000 to $51,000 in the second quarter of
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2004, from a loss of $140,000 in the same period in 2003. Most of the loss
in 2003 was due to under-performing donor centers that were closed in the
third and fourth quarters of 2003. The only centers included in the closed
center category for the second quarter of 2004 are the centers at Dartmouth-
Hitchcock Medical Center and Presbyterian Intercommunity Hospital, which
expired in the second quarter.
Blood Services
Revenues from blood services increased by $41,000, or 2.2%, to $1,885,000 in
the second quarter of 2004 from $1,844,000 in the same period of 2003. The
number of procedures performed during the second quarter of 2004 decreased
11.4% to 1,489 from 1,680 in 2003. This decrease in the number of procedures
performed was due to decline in procedures in the New York market, and the
closure of the Company's operations in Illinois, North Carolina, New Jersey
and Pennsylvania. The impact on revenue from the decrease in volume was
offset by an increase in the average price charged per procedure in 2004
compared with 2003. The reasons for the increase in the average price per
procedure in the second quarter of 2004 compared with the second quarter of
2003 include an increase in the number of California procedures, which have
a higher average price per procedure than other regions served by the
Company, and an increase in the surcharges associated with each procedure
performed during this period.
Gross profit for the blood services segment increased $185,000, or 40.1%,
from $461,000 generated in the second quarter of 2003 to $646,000 generated
during the same period in 2004. This increase is primarily the result of an
increase in the number of higher margin procedures performed during the
period compared with 2003. The number of procedures and product mix in the
blood services business segment is highly variable, and the Company is
uncertain whether the improved performance in this segment during this
quarter is sustainable.
As previously mentioned, the Company closed the donor center located at
Dartmouth-Hitchcock Medical Center in June 2004. During the second quarter
of 2004, this donor center generated $49,000 in blood services revenue.
General and Administrative Expenses
General and administrative expenses increased by $109,000, or 12.0%, to
$1,015,000 in the second quarter of 2004 from $906,000 in the same period of
2003. This increase was primarily due to the recognition of $78,000 more in
management bonuses in the second quarter of 2004 compared with the same
period in 2003 based on achievement of profit targets. In addition, the
Company experienced a $52,000 increase in insurance expense in the second
quarter of 2004 compared with 2003 due to a large increase in the premium
for professional liability insurance. Finally, the Company accrued $28,000
in potential contributions to the Company's 401(k) profit sharing plan in
the second quarter of 2004. In the same quarter in 2003, the Company
reversed a similar accrual of $36,000 recorded in the first quarter of 2003
because of losses recorded in the second quarter of 2003 eliminated the
Company's expectation for a 401(k) contribution. Therefore, the net change
related to the Company's 401(k) profit sharing plan between the second
quarter of 2003 and 2004 was an increase in expenses of $64,000. These
increases in general and administrative expenses were offset in part by
decreases in wage expenses mostly attributable to the elimination of several
overhead positions as a result of the restructuring plan completed in late
2003.
Income Taxes
The Company has sufficient net operating loss carryforward to avoid most
federal income tax expense for the second quarter of 2004. However,
management anticipates that the Company will be subject to federal
alternative minimum tax in 2004. In addition, management anticipates the
Company will be subject to various state and local taxes which are
unaffected by the net operating loss carryforward. Management has calculated
an estimated tax liability that includes the potential for federal
alternative minimum tax, and has calculated estimated tax liability for each
state and local jurisdiction using the tax basis each jurisdiction uses to
assess taxes. During the second quarter of 2004, the Company recorded an
adjustment to the deferred tax asset valuation reserve of $34,000, which
eliminated any provision for income taxes from the statement of income.
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This adjustment represents less than 1% of the total potential deferred tax
asset. Management believes a small adjustment is appropriate considering
the Company has recorded net income in each of the last three fiscal
quarters, thereby constituting evidence that the Company may derive some
future benefit from the deferred tax asset.
Six months ended June 30, 2004 compared to the six months ended June 30,
2003
Overview
As a result of the successful implementation of management's restructuring
plan as previously discussed, the gross profit for the Company's blood
products segment significantly improved during the first six months of 2004
compared with the same period in 2003.
Revenues for the period ended June 30, 2004 were $13,657,000, which
represents a decline in revenue of $211,000, or 1.5%, from $13,868,000
generated during the same period in 2003. Blood products revenue decreased
$158,000, or 1.6%, as a result of the elimination of revenue generated by
operations closed in the third and fourth quarters of 2003. Blood services
revenue decreased $53,000, or 1.4%, to $3,776,000 as a result of a decrease
in the number of therapeutic apheresis procedures performed, offset by
increases in the average price charged per procedure, and a higher level of
surcharges per procedure.
Operating costs and expenses decreased $1,693,000, or 13.6%, to $10,723,000
in the first six months of 2004, from $12,416,000 in the same period of
2003. This decrease is mostly the result of the closure of donor centers as
part of the implementation of management's restructuring plan in late 2003.
General and administrative costs increased $308,000, or 16.3%, to $2,200,000
in the first six months of 2004, from $1,892,000 in the same period of 2003.
This was caused by increases in 2004 accrued management bonuses and 401(k)
profit sharing contributions as a result of improved Company profitability,
increases in insurance costs, increases in nurse recruitment expenses and
additional bad debt expense compared with 2003.
For the six months ended June 30, 2004, the Company generated $734,000 of
net income compared with net loss of $264,000 for the same period in 2003.
The increase in net income of $998,000, is mainly due to i) the elimination
of expenses associated with operating under-performing donor centers closed
in late 2003, ii) increased sales volume at all the ongoing donor centers,
and iii) increases in product pricing.
Blood Products
For this business segment, the following table summarizes the revenues,
gross profit and sales volumes associated with donor centers operated by the
Company, and those donor centers the Company no longer operates:
For the six month period ended June 30, 2004
(Revenues and Gross Profit in Thousands)
Ongoing Centers Closed Centers Total Company
------------------ ------------------ ------------------
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------- --------
Revenues $ 9,039 $ 7,621 $ 842 $ 2,418 $ 9,881 $10,039
Gross Profit 1,462 563 182 (310) 1,644 253
Gross Profit % 16.2% 7.4% 21.6% (12.8%) 16.6% 2.5%
Units Sold:
Single Donor
Platelet 7,818 6,268 876 3,169 8,694 9,437
Whole Blood 20,974 20,842 2,394 6,386 23,368 27,228
For the six months ended June 30, 2004, revenues from ongoing donor centers
increased by $1,418,000, or 18.6%, to $9,039,000 from $7,621,000 in the same
period of 2003. This increase in revenues was mostly due to an increase in
platelet volume of 24.7% to 7,818 in the first six months of 2004 from 6,268
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in the same period of 2003. In addition, ongoing efforts to increase product
pricing has contributed to improved blood product revenues. Revenues from
the closed donor centers declined by $1,576,000, or 65.2%, to $842,000
during the first six months of 2004 from $2,418,000 in 2003. This decrease
in revenues from the closed donor centers is partially offset by an increase
in revenues from the ongoing centers resulting in an overall decline in
revenues. The decline in revenues from the closed centers is due to the
fact that the Company closed several under-performing donor centers in the
third and fourth quarters of 2003. The closed center category also includes
revenue from the recently expired Dartmouth-Hitchcock Medical Center and
Presbyterian Intercommunity Hospital donor center contracts.
For the six months ended June 30, 2004, gross profit from ongoing donor
centers increased by $899,000, or 159.7%, to $1,462,000 compared with
$563,000 recorded in the first six months of 2003. The gross profit
percentage also increased to 16.2% in 2004 from 7.4% in 2003. This
improvement in gross profit is the result of i) increases in product prices,
and ii) increased operational efficiencies realized from higher volumes.
The gross profit for closed centers improved $492,000 in the first six
months of 2004 to $182,000, from a loss of $310,000 for the same period of
2003. The loss in 2003 was caused by under-performing donor centers that
were closed in the third and fourth quarters of 2003. The donor centers
previously operated by the Company at Dartmouth-Hitchcock Medical Center,
Presbyterian Intercommunity Hospital and the University of North Carolina
are reflected in the closed centers category for 2004.
Blood Services
Revenues from blood services decreased by $53,000, or 1.4%, to $3,776,000 in
the first six months of 2004 from $3,829,000 in the same period of 2003. The
decrease was mainly due to an 11.4% decrease in the number of therapeutic
apheresis procedures performed, from 3,415 in the first six months of 2003
to 3,026 procedures in 2004. This reduction in procedures is primarily due
to a reduction in the number of procedures performed in the New York market,
and the closure of the Company's operations in Illinois, North Carolina, New
Jersey, Pennsylvania and Tennessee in 2003. The revenue decrease caused by
this reduction in volume was partially offset by an increase in revenue due
to an increase in the average price charged per procedure and due to a
higher level of surcharges in 2004 compared with 2003. The increase in the
average price is mostly the result of a change in procedure mix to higher
average price procedures.
Gross profit for the blood services segment increased $91,000, or 7.6%, to
$1,290,000 in the first six months of 2004 from $1,199,000 during the same
period in 2003. This is primarily due to a change in procedure mix to
higher profit margin procedures.
As previously mentioned, the Company closed the donor center located at
Dartmouth-Hitchcock Medical Center in June 2004. During the first six
months of 2004, this donor center generated $112,000 in blood services
revenue.
General and Administrative Expenses
General and administrative expenses increased by $308,000, or 16.3%, to
$2,200,000 in the first six months of 2004 from $1,892,000 in the same
period of 2003. This increase was primarily due to the recognition of
$99,000 more in management bonuses in the first six months of 2004 compared
with the same period in 2003 based on achievement of profit targets. In
addition, the Company experienced a $120,000 increase in insurance expense
in the first six months of 2004 compared with 2003 due to a large increase
in the premium for professional liability insurance. The Company also
experienced a $91,000 increase in outside service costs in 2004 compared
with 2003, mostly for recruiting fees to attract and hire nurses. Finally,
the Company recorded an increase in bad debt expense of $85,000 compared
with 2003. This was the result of management's decision to increase the
allowance for bad debts to reflect the recent rise in receivable write-offs
associated with the closure of donor centers in late 2003. These increases
in general and administrative expenses were offset by lower wage expenses of
$114,000, which is the result of the elimination of several overhead
positions as part of the Company's restructuring plan, which was completed
in late 2003.
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Income Taxes
The Company has sufficient net operating loss carryforward to avoid most
federal income tax expense for the first six months of 2004. However, the
management anticipates that the Company will be subject to federal
alternative minimum tax in 2004. In addition, management anticipates the
Company will be subject to various state and local taxes which are
unaffected by the net operating loss carryforward. Management has calculated
an estimated tax liability that includes the potential for federal
alternative minimum tax, and has calculated estimated tax liability for each
state and local jurisdiction using the tax basis each jurisdiction uses to
assess taxes. During the first six months of 2004, the Company recorded an
adjustment to the deferred tax asset valuation reserve of $47,000, which
eliminated any provision for income taxes from the statement of income.
This adjustment represents less than 1% of the total potential deferred tax
asset. Management believes a small adjustment is appropriate considering
the Company has recorded net income in each of the last three fiscal
quarters, thereby constituting evidence that the Company may derive future
benefit from the deferred tax asset.
Critical Accounting Policies and Estimates
- ------------------------------------------
Use of Estimates
The Company's discussion and analysis of its financial condition and results
of operations are based on the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates its estimates, including those related to
valuation reserves, income taxes and intangibles. The Company bases its
estimates on historical experience and on various other assumptions that
management believes are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or conditions.
Allowance for Doubtful Accounts
The Company makes ongoing estimates relating to the collectibility of
accounts receivable and maintain a reserve for estimated losses resulting
from the inability of customers to meet their financial obligations to the
Company. In determining the amount of the reserve, management considers
the historical level of credit losses and makes judgments about the
creditworthiness of significant customers based on ongoing credit
evaluations. Since management cannot predict future changes in the
financial stability of customers, actual future losses from uncollectible
accounts may differ from the estimates. If the financial condition of
customers were to deteriorate, resulting in their inability to make
payments, a larger reserve may be required. In the event it is determined
that a smaller or larger reserve was appropriate, the Company would record
a credit or a charge to general and administrative expense in the period in
which such a determination is made.
Income Taxes
As part of the process of preparing the financial statements, the Company
is required to estimate income taxes in each of the jurisdictions that the
Company operates. This process involves estimating 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 the balance sheet. Management must then assess the likelihood
that the deferred tax assets will be recovered from future taxable income,
and to the extent management believes that recovery is not likely, must
establish a valuation allowance. To the extent a valuation allowance is
created or adjusted in a period, the Company must include an expense, or
benefit, within the tax provision in the statements of income.
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Significant management judgment is required in determining the provision
for income taxes, deferred tax asset and liabilities and any valuation
allowance recorded against net deferred tax assets. Management continually
evaluates if the deferred tax asset is likely to be realized. If
management determines that the deferred tax asset is 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, 2004, the Company's cash and cash equivalents equaled
$1,399,000 and it had working capital of $1,942,000.
The Company has a working capital line of credit with Comerica Bank -
California ("Comerica"). 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 June 30, 2004 the rate paid by the
Company was 4.5%. As of June 30, 2004, the Company had no net borrowing on
this line of credit, and the unused portion of the Company's line of credit
was $2,000,000. The Company has entered into an amendment to the credit
agreement with Comerica which extends the term of the line of credit to June
30, 2005, and to revise the financial covenants related to quick assets to
current liabilities, and debt to net worth, to levels more favorable to the
Company. As of June 30, 2004, the Company was in compliance with all of the
revised covenants.
In addition, the Company had other equipment notes payable with Comerica.
The Company paid off $203,000 of these notes during the second quarter of
2004 and no amounts remained outstanding as of the end of the quarter.
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. The Company incurred $2,500 in interest expense associated
with the Comerica obligations during the second quarter of 2004.
Additionally, the Company has a note payable with One Source Financial. As
of June 30, 2004, the balance on this note was $57,000. 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, $35,000 is included in current obligations under notes
payable on the balance sheet.
The Company also has a note payable with Bay Tree Finance Company related
to financing certain insurance premiums. As of June 30, 2004, the balance
due on this note was $167,000, all of which is included in current
obligations under notes payable on the balance sheet. The note requires
monthly payments of approximately $21,000, including interest at a rate of
4.6%.
The Company also has a capital lease with Gambro BCT to finance the
acquisition of equipment used in the Company's apheresis activities. The
total value of the equipment financed through this capital lease was
$932,000. The lease is scheduled to expire in December 2008 and has a fixed
interest rate of 7.5%. As of June 30, 2004, the balance of this lease was
$871,000, of which $168,000 is included in current obligations under capital
leases. The lease is secured by all of the equipment purchased through the
lease financing.
The Company also has a capital equipment lease with GE Capital used to
finance the acquisition of vehicles. As of June 30, 2004, the balance
outstanding on this lease was $193,000, of which approximately $70,000 is
included in current obligations. This lease is scheduled to mature in
January 2007, and has a fixed interest rate of 8.0%.
Finally, the Company has a capital equipment lease with Dell Financial
Services associated with the acquisition of computer equipment. As of June
30, 2004, the balance outstanding on this lease was $13,000, of which
approximately $11,000 is included in current obligations. This lease is
scheduled to mature in August 2005, and has a fixed interest rate of 12.6%.
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The following table summarizes our contractual obligations by year (in
thousands).
Less More
Than 1-3 3-5 Than
Total 1 Year Years Years 5 Years
------- ------- ------ ------ -------
Operating leases $ 643 $ 285 $ 358 $ - $ -
Capitalized leases 1,245 317 577 351 -
Notes payable 224 203 21 - -
------- ------- ------ ------ ------
Totals $ 2,112 $ 805 $ 956 $ 351 $ -
======= ======= ====== ====== ======
For the six months ended on June 30, 2004, net cash provided by operating
activities was $1,401,000, compared to $344,000 for the six months ended
June 30, 2003. The increase of $1,057,000 is primarily due to an increase in
net income to $734,000 compared to a net loss of $264,000 in 2003. The
adjustments to reconcile net income (loss) to net cash also reveals that
during the first six months of 2003, the Company recorded a net benefit from
income taxes of $176,000, whereas only $47,000 of income tax benefit was
recorded during the same period of 2004. During the first six months of
2003, the balance of net accounts receivable decreased $731,000, whereas
there was only a $9,000 increase in accounts receivable during the same
period of 2004. Although this represents a substantial swing from last year
to this year, the days sales outstanding statistic as of June 30, 2004 stood
at 40 days, which compares favorably to 42 days outstanding as of December
31, 2003. Therefore, the accounts receivable balance did not change
significantly during the first six months of 2004, but the relative age and
collectability of the accounts receivables on the books as of June 30, 2004
remains very good. Offsetting the change in account receivable balances
during the first quarter of 2004 compared with the same period in 2003 was
an increase in the change in accounts payable, accrued expenses and other
liabilities of $624,000. This increase is the result of i) an increase in
the accounts payable obligation during the first six months of 2004 due to
the timing of invoice payments, ii) an increase in the 401(k) matching
accrual that was not recorded during the same period in 2003, and iii) an
increase in the accrued bonuses compared with the same period in 2003.
For the six months ended on June 30, 2004, net cash used in investing
activities was $31,000, compared with $242,000 for the same period in 2003.
The decrease of $211,000 is primarily due to the Company's investments in
new vehicles and leasehold improvement expenditures during the first six
months of 2003. The Company did not make similar investments in plant or
equipment during the same period of 2004.
For the six months ended June 30, 2004, net cash used in financing
activities was $906,000 compared with net cash used of $436,000 for the six
months ended June 30, 2003. The difference in the cash used for financing
activities is primarily due to management's decision to use a portion of the
cash generated by operations to reduce debt by $906,000
The Company has decided to initiate a new information technology project to
enhance the automation of its blood product operations. This project is
expected to take approximately two years to complete, and will involve
considerable financial and managerial resources.
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 year, including working capital requirements, equipment
purchases, operating lease commitments and to fund the new information
technology project. The Company has entered into an amendment to the credit
agreement with Comerica that extends the term of the line of credit to June
30, 2005.
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
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 bank debt could immediately be due
and payable in full and the Company's liquidity could be materially
affected. As of June 30, 2004, the Company was in full compliance with all
of the required covenants.
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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 of 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 Could Affect Ability to Generate Consistent Profit
The Company recently completed a plan to eliminate underperforming
facilities to improve the profitability of the Company. The future of the
Company now depends on generating sufficient operating profit from the
remaining facilities to cover overhead expenses. The remaining facilities
have not always been consistently profitable. Therefore, the Company is at
risk if management is unable to execute an operating plan that will produce
consistent profits from the remaining facilities.
Potential Loss of Lines of Credit Could Adversely Impact Liquidity
In December 2002, the Company replaced the then existing lines of credit
with a new $2.0 million working capital line of credit with Comerica Bank
that requires the Company maintain certain financial covenants including
profitability each quarter. The Company has entered into an amendment to
the credit agreement with Comerica that extends the term of the line of
credit to June 30, 2005, and to revise the financial covenants to levels
more favorable to the Company. As of June 30, 2004, the Company was in
compliance with the revised covenants. Maintaining compliance is dependent,
among other things, on achieving the required profitability. The Company
generated losses of $591,000 and $4,679,000 for 2002 and 2003, respectively.
Although the Company has recorded profits in each of the last three
quarters, future losses would violate the terms of the 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 on
June 30, 2005. Management will make efforts to replace this facility or
negotiate an extension of the existing line of credit; however, the Company
cannot assure that alternative financing will be available or that the
existing line of credit can be extended on terms acceptable to the Company.
Failure to replace this facility will adversely impact liquidity and could
deprive the Company of the working capital needed to continue to operate.
Potential Inability to Meet Future Capital Needs Could Affect Plans to
Finance Future Expansion
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 year. However, the Company incurred a $4,679,000
loss during 2003. While the Company generated $734,000 in net income during
the first six months of 2004, there is no assurance this performance will be
sustainable, and 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.
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.
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Declining Blood Donations Could Affect Profitability
The business depends on the availability of donated blood. Only a small
percentage of the population donates blood, and new regulations intended to
reduce the risk of introducing infectious diseases in the blood supply have
decreased the pool of potential donors. If the level of donor participation
declines, the Company may not be able to achieve profitability or reduce
costs sufficiently to maintain profitability in blood products.
Increasing Costs Could Affect Profitability
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.
Impact of Reimbursement Rates
Reimbursement rates for blood products and services provided to Medicaid and
Medicare patients impact the fees that the Company is able to negotiate with
hospitals. Decreases in reimbursement rates or increases which do not keep
pace with higher costs, may impact the Company's profitability.
Increasing Reliance on Outside Laboratories Could Increase Testing Costs
The Company maintains laboratories that are licensed and accredited to test
blood products for purity, potency and quality. The Company also utilizes
outside laboratories for a variety of tests. As other new testing and
processing technologies are introduced, the Company has increased its
reliance on outside laboratories. In using outside laboratories the Company
will have less control over testing costs. 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 the business.
Targeted Donor Base Involves Higher Collection Costs
Part of the Company's current operations 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 Could Affect Ability to Defend Against Possible Claims
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 exceed 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.
Not-For-Profit Status Gives Advantages to Competitors
HemaCare Corporation is the only significant blood products supplier to
hospitals in the U.S. that is operated for profit and investor owned. The
not-for-profit competition is exempt from federal and state taxes, and has
17
18
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.
Potential Adverse Affect from Changes in the Healthcare Industry Could
Affect Access to Customers
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. A national hospital chain has announced
plans to sell 19 of its facilities in California, many of which are
customers of the Company. 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 or closure of hospital facilities.
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, operations depend on the services of
registered nurses and other medical technolgists. 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 Could Increase Operating Costs
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.
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 Could Provide Exposure to Claims and
Litigation
Blood products carry the risk of transmitting infectious diseases, including
hepatitis, HIV and Creutzfeldt-Jakob Disease. HemaCare carefully screens
donors, uses highly qualified testing service providers 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
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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.
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
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.
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,
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 $1,299,000 of debt, all of which is in the form of notes
payable and capitalized leases with fixed interest rates. As of June 30,
2004, the Company has no debt at variable interest rates, and therefore
there is no risk from changes in interest rates at this time. The Company
has the ability to draw against the working capital line of credit, which
has an interest rate linked to the prime interest rate. Accordingly, if the
Company did draw against this line of credit, interest rate expense could
fluctuate with rate changes in the U.S.
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, except as
described below, the Company's disclosure controls and procedures are
effective in timely 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.
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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.
The Company recently conducted an extensive evaluation of the existing
internal control structure. Management identified several internal control
weaknesses. Of these, the Company has alternative controls in place, which
management believes prevents any material misstatement of the Company's
financial statements. Nevertheless, management intends to modify the
existing internal control structure to eliminate any significant weaknesses
with the objective of eliminating or reducing reliance on alternative
controls.
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, as amended, for the year
ended December 31, 2003.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities
- ------- -----------------------------------------------------------
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 May 25, 2004.
b. The following table shows the tabulation of votes for all
matter put to vote at the Meeting:
Matters Put to Vote For Against/Withheld
----------------------------- ---------- ----------------
1. Election of Five Directors
Julian L. Steffenhagen 6,913,998 565,292
Steven B. Gerber, M.D. 7,428,659 50,631
Judi Irving 7,397,409 81,881
Robert L. Johnson 6,918,198 561,092
Terry Van Der Tuuk 7,417,809 61,481
Item 5. Other Information
- ------- -----------------
None.
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Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
a. Exhibits
11 Net Income per Common and Common Equivalent Share
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 April 9, 2004, the Company filed a Current Report on
Form 8-K disclosing under Item 4 (Changes in Registrant's
Certifying Accountant) the dismissal of Ernst & Young, LLP
as the Company's independent accountants, and the
appointment of Stonefield Josephson, Inc. as the Company's
new independent accountants.
On June 18, 2004, the Company filed a Current Report on
Form 8-K disclosing under Item 5 (Other Events) the text of
a press release dated June 17, 2004 announcing an
investigational site agreement with Otsuka America
Pharmaceutical and the termination of Dartmouth-Hitchcock
Medical Center blood center management contract.
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 13, 2004 HEMACARE CORPORATION
------------------------- ----------------------------------
(Registrant)
/s/ Judi Irving
-------------------------------------
Judi Irving, Chief Executive Officer
/s/ Robert S. Chilton
-------------------------------------
Robert S. Chilton,
Chief Financial Officer