-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QqhsIMgKJpA2Xu9muG4AkJFYW8eulG7fdSCUg6ZrO5BwPPexZ1wyy551OTNxgCbN pe3NjwqV7wDBoFZc+rApZg== 0000801748-03-000019.txt : 20030811 0000801748-03-000019.hdr.sgml : 20030811 20030811125847 ACCESSION NUMBER: 0000801748-03-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEMACARE CORP /CA/ CENTRAL INDEX KEY: 0000801748 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 953280412 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15223 FILM NUMBER: 03833883 BUSINESS ADDRESS: STREET 1: 21101 OXNARD STREET CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 818-226-1968 MAIL ADDRESS: STREET 1: 21101 OXNARD STREEET CITY: WOODLAND HILLS STATE: CA ZIP: 91367 10-Q 1 qtr22003.txt FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2003 ========================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 0-15223 HEMACARE CORPORATION (Exact name of registrant as specified in its charter) California 95-3280412 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 21101 Oxnard Street Woodland Hills, California 91367 (Address of principal executive offices) (Zip Code) (818) 226-1968 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ As of August 11, 2003, 7,751,060 shares of Common Stock of the registrant were issued and outstanding. ============================================================================= HEMACARE CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
Page Number ------ PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002.................................................. 1 Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002 (unaudited)........................... 2 Consolidated Statements of Cash Flows for the six months ended June 30, 2003 and 2002 (unaudited)...................................... 3 Notes to Unaudited Consolidated Financial Statements............... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 6 Item 3. Qualitative and Quantitative Disclosures About Market Risk......... 19 Item 4. Controls and Procedure............................................. 19 PART II. OTHER INFORMATION - -------- ----------------- Item 1 Legal Proceedings.................................................. 19 Item 2. Changes in Securities and Use of Proceeds.......................... 19 Item 3. Defaults Upon Senior Securities.................................... 19 Item 4. Submission of Matters to a Vote of Security Holders................ 19 Item 5. Other Information.................................................. 19 Item 6. Exhibits and Reports on Form 8-K................................... 20 SIGNATURES................................................................. 21
i 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HEMACARE CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2003 2002 ------------ ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents............................ $ 714,000 $ 1,048,000 Accounts receivable, net of allowance for doubtful accounts - $206,000 (2003) and $208,000 (2002)............................................. 4,201,000 4,932,000 Product inventories and supplies..................... 795,000 795,000 Prepaid expenses..................................... 271,000 295,000 Deferred income taxes................................ 402,000 402,000 ------------ ------------ Total current assets..................... 6,383,000 7,472,000 Plant and equipment, net of accumulated depreciation and amortization of $2,741,000 (2003) and $2,450,000 (2002).............. 3,259,000 3,308,000 Deferred taxes......................................... 2,758,000 2,582,000 Other assets........................................... 84,000 93,000 ------------ ------------ $12,484,000 $13,455,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 2,035,000 $ 2,277,000 Accrued payroll and payroll taxes.................... 1,208,000 1,231,000 Other accrued expenses............................... 132,000 133,000 Current obligations under capital leases............. 91,000 90,000 Current obligations under notes payable.............. 654,000 199,000 Reserve for discontinued operations.................. 66,000 68,000 ------------ ------------ Total current liabilities................ 4,186,000 3,998,000 Obligations under capital leases, net of current portion................................... 205,000 246,000 Notes payable, net of current portion.................. 256,000 1,107,000 Other long-term liabilities............................ 14,000 17,000 Commitments and contingencies.......................... Shareholders' equity: Common stock, no par value - 20,000,000 shares authorized, 7,751,060 issued and outstanding....... 13,316,000 13,316,000 Accumulated deficit.................................. (5,493,000) (5,229,000) ------------ ------------ Total shareholders' equity............... 7,823,000 8,087,000 ------------ ------------ $12,484,000 $13,455,000 ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 2 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2003 2002 2003 2002 ------------ ------------ ----------- ----------- Revenues: Blood products.................... $5,093,000 $4,742,000 $10,039,000 $ 9,131,000 Blood services.................... 1,844,000 2,198,000 3,829,000 4,130,000 ----------- ----------- ------------ ----------- Total revenue.................... 6,937,000 6,940,000 13,868,000 13,261,000 Operating costs and expenses: Blood products.................... 5,223,000 4,471,000 9,944,000 8,772,000 Blood services.................... 1,336,000 1,482,000 2,604,000 2,742,000 ----------- ----------- ------------ ------------ Total operating costs and expenses....................... 6,559,000 5,953,000 12,548,000 11,514,000 ----------- ----------- ------------ ------------ Gross profit...................... 378,000 987,000 1,320,000 1,747,000 General and administrative expenses............................ 832,000 1,018,000 1,760,000 1,997,000 ----------- ----------- ------------ ------------ Loss before income taxes............... (454,000) (31,000) (440,000) (250,000) Benefit from income taxes.............. (182,000) (12,000) (176,000) (93,000) ----------- ----------- ------------ ------------ Net loss............................ $ (272,000) $ (19,000) $ (264,000) $ (157,000) =========== =========== ============ ============ Loss per share Basic and Diluted................... $ (0.04) $ (0.00) $ (0.03) $ (0.02) =========== =========== ============ ============ Weighted average shares outstanding - basic and diluted.... 7,751,060 7,611,000 7,751,060 7,601,000 =========== =========== ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 3 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, ---------------------------- 2003 2002 ------------ ------------ Increase (decrease) in cash and cash equivalents: - ------------------------------------------------ Cash flows from operating activities: Net loss.................................................. $ (264,000) $ (157,000) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 291,000 192,000 Compensation expense related to stock options.......... - 56,000 Issuance of common stock to 401-K plan................. - 122,000 Deferred income taxes used to offset current period loss.................................................. (176,000) (93,000) Changes in operating assets and liabilities: Decrease in accounts receivable....................... 731,000 1,000,000 Decrease (increase) in inventories, supplies and prepaid expenses..................................... 24,000 (174,000) Decrease in other assets.............................. 9,000 44,000 Decrease in accounts payable, accrued expenses and other liabilitiess.............................. (269,000) (156,000) Expenditures for discontinued operations.............. (2,000) (2,000) ----------- ----------- Net cash provided by operating activities............. 344,000 832,000 Cash flows from investing activities: Proceeds from dispostion of plant and equipment........... - 10,000 Purchases of equipment, net............................... (242,000) (609,000) ----------- ----------- Net cash used in investing activities..................... (242,000) (599,000) Cash flows from financing activities: Proceeds from exercise of stock options................... - 3,000 Principal payments on line of credit, capital leases and notes payable........................................ (586,000) (282,000) Proceeds from line of credit.............................. 150,000 - Proceeds from capitalized leases.......................... - 100,000 ----------- ----------- Net cash used in financing activities..................... (436,000) (179,000) ----------- ----------- (Decrease) increase in cash and cash equivalents............ (334,000) 54,000 Cash and cash equivalents at beginning of period............ 1,048,000 1,025,000 ----------- ----------- Cash and cash equivalents at end of period.................. $ 714,000 $1,079,000 =========== =========== Supplemental disclosure: Interest paid............................................. $ 42,000 $ 31,000 =========== =========== Income taxes paid......................................... $ - $ - =========== =========== Items not affecting cash flow: Notes and capitalized leases issued in connection with acquisition of plant and equipment....................... $ - $ 31,000 =========== ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 4 HemaCare Corporation Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation and General Information - ------------------------------------------------------ BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2003 and 2002 include all adjustments (consisting of normal recurring accruals) which management considers necessary to present fairly the financial position of the Company as of June 30, 2003, the results of its operations for the three and six months ended June 30, 2003 and 2002, and its cash flows for the six months ended June 30, 2003 and 2002 in conformity with accounting principles generally accepted in the United States. These financial statements have been prepared consistently with the accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on March 31, 2003 and should be read in conjunction with this Quarterly Report on Form 10-Q. The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the consolidated results of operations to be expected for the full fiscal year ending December 31, 2003. Certain information and footnote disclosures normally included in the financial statements presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company maintains cash balances at various financial institutions. Deposits not exceeding $100,000 for each institution are insured by the Federal Deposit Insurance Corporation. At June 30, 2003 and December 31, 2002, the Company had uninsured cash and cash equivalents of $488,000 and $818,000, respectively. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current period presentation. Note 2 - Line of Credit and Notes Payable - ----------------------------------------- The Company has a working capital line of credit with a bank. The amount the Company may borrow is the lesser of: 75% of eligible accounts receivable less amounts outstanding on the notes payable discussed below, or $2 million. Interest is payable monthly at a rate of prime plus 0.5% (4.5% as of June 30, 2003). As of June 30, 2003, the Company's net borrowings on this line of credit were $450,000 and the Company had unused availability of $1,550,000. This line of credit matures in June 2004, and is included in current obligations under notes payable. In addition, the Company has various notes payable with the same bank. At June 30, 2003, the total amount outstanding under these notes is $371,000 and requires monthly principal payments of approximately $14,000 plus interest at a weighted average fixed rate of 6.6%. These loans (including the line of credit) are collateralized by substantially all of the Company's assets and are cross-defaulted. They also require the maintenance of certain financial covenants that require 4 5 among other things, minimum levels of profitability and prohibit the payment of dividends or stock repurchases. As of June 30, 2003, the Company was not in compliance with a covenant that requires the Company to be profitable each quarter. During the quarter ended June 30, 2003, the Company incurred a loss. The bank has waived this violation. Additionally, the Company has another note payable with a finance company. As of June 30, 2003, the balance on this note was $89,000. The note requires quarterly payments of approximately $10,000 including interest at the rate of 8.5% and matures at January 2006. It is collateralized by certain fixed assets. Note 3 - Shareholders' Equity - ----------------------------- The Company has elected to adopt SFAS 123, "Accounting for Stock-Based Compensation," for disclosure purposes only and applies the provision of APB Opinion No. 25. The Company did not recognize any compensation expense related to the issuance of stock options in 2003 or 2002. Had compensation expense for all options granted to employees and directors been recognized in accordance with SFAS 123, the Company's net loss per share would have been as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net loss as reported......... $ (272,000) $ (19,000) $ (264,000) $ (157,000) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects................. (25,000) (27,000) (53,000) (53,000) ----------- ----------- ----------- ----------- Pro forma net loss........... $ (297,000) $ (46,000) $ (317,000) $ (210,000) =========== =========== =========== =========== Net loss per share - basic and diluted As reported........ $ (0.04) $ (0.01) $ (0.03) $ (0.02) Pro forma.......... $ (0.04) $ (0.01) $ (0.04) $ (0.03)
Note 4 - Earnings per Share - --------------------------- The following table provides the calculation methodology for the numerator and denominator for diluted earnings per share:
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net loss.................... $ (272,000) $ (19,000) $ (264,000) $ (157,000) =========== =========== =========== =========== Shares outstanding.......... 7,751,060 7,611,000 7,751,060 7,601,000 Net effect of diluted options.................... - - - - ----------- ----------- ----------- ----------- Dilutive shares outstanding. 7,751,060 7,611,000 7,751,060 7,601,000 =========== =========== =========== ===========
Options and warrants outstanding for 1,685,000 shares and 2,226,000 shares for the three and six months ended June 30, 2003 and 2002, respectively, have been excluded from the above calculation because their effect would have been anti-dilutive. 5 6 Note 5 - Provision for Income Taxes - ----------------------------------- The Company believes that it is more likely than not that it will be able to utilize the deferred tax assets to offset taxable income in future periods. In the event the Company does not achieve profitability, this asset may be written off. Note 6 - Business Segments - -------------------------- HemaCare operates in two business segments as follows: - Blood Products - Collection, processing and distribution of blood products and donor testing. - Blood Services - Therapeutic apheresis and stem cell collection procedures and other therapeutic services to patients. Management uses more than one measure to evaluate segment performance. However, the dominant measurements are consistent with HemaCare's consolidated financial statements, which present revenue from external customers and operating income for each segment. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------- --------------------------------------------------------------- Factors Affecting Forward-Looking Information - --------------------------------------------- The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's financial statements and the related notes provided under "Item 1-Financial Statements" above. The matters addressed in this Item 2 that are not historical information constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and the Company can give no assurances that its expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond the control of the Company. These factors include, without limitation, those described below under the heading "Risk Factors Affecting the Company." The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unexpected events. General - ------- Our business segments include blood products and blood services. Our blood products segment supplies hospitals with a portion of their blood product needs. We perform blood collection on behalf of our hospital clients. We also provide our hospital clients with apheresis platelets, specialty blood components purchased from other blood centers, and donor testing services. Blood services include therapeutic apheresis procedures, stem cell collection and other blood treatments provided to patients. These procedures are generally performed in a hospital setting. We have entered into blood management programs ("BMPs") with many of our hospital customers. Under a BMP arrangement, a hospital (or a group of hospitals) contracts with us to provide management services which may include operation of a donor center, mobile blood drives and blood services. A BMP provides our hospital customers with a safe and reliable source of blood products and services at a reasonable cost, as well as assisting them in achieving their financial, regulatory compliance and patient service goals related to blood products and services. 6 7 Results of Operations - --------------------- THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2002 Overview Second quarter results reflect continuing losses in our east coast and mid- west blood management programs, decreases in production volume in our California operations and higher operating costs. We are actively addressing what we believe are the production issues in California. We are evaluating the potential of our programs outside of California and determining the actions necessary to return the Company to profitability. As a result, we may terminate some activities in 2003. Revenues for the three months ended June 30, 2003 were $6,937,000, virtually unchanged from $6,940,000 during the same period in 2002. During the quarter ended June 30, 2003, revenues from our blood products increased $351,000 compared to the same period last year due to the growth of our California mobile operations (which increased $605,000 during the quarter), and to our new BMPs (which increased $359,000 during the quarter). The Company also benefited from an increase in the average revenue per blood cell unit during the quarter from $165 to $191. These increases were offset by decreases in revenues at our mature BMPs of $613,000 which was mainly due to i) a decrease in revenues relating to platelet collections in our Sherman Oaks program of $414,000 reflecting the change from a paid to a volunteer program as of January 1, 2003, and ii) the termination of our blood management programs at Long Beach Memorial Medical Center in August 2002 and the University of Irvine Medical Center in January 2003 which resulted in a decrease of $232,000 in revenues. Additionally, we performed fewer therapeutic apheresis procedures which resulted in a decrease of $354,000 in blood services revenues. For the three months ended June 30, 2003, gross profit was $378,000 (or 5.4% of revenues), compared to $987,000 (or 14.2% of revenues) during the same period in 2002. The decrease of $609,000 was mainly due to i) the change in our Sherman Oaks program from a paid to a volunteer program as of January 1, 2003, which remains profitable but reflects a decrease of $175,000 in gross profit, ii) an increase in losses from our new BMPs of $128,000, iii) fewer higher margin therapeutic apheresis procedures performed as compared to the prior year which contributed a decrease of $208,000 in gross profit, iv) additional expenses relating to hiring and training of new employees, and v) higher insurance premiums. General and administrative expenses decreased by $186,000, or 18%, to $832,000 in the three months ended June 30, 2003 from $1,018,000 in the same period of 2002. The decrease was mainly due to non-recurring 2002 expenses related to our litigation against the American Red Cross ("ARC") which was settled in 2002. This decrease was partially offset by an increase in salaries and benefits relating to the expansion of our information technology department to support our blood bank computer system and other technological initiatives. 7 8 Blood Products - -------------- Our revenues and expenses are summarized in the following table.
(Revenues and Gross Profit in Thousands) Mature BMPs (1) California Mobiles New BMPs Total ------------------ ------------------ ------------------ --------------- 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- -------- -------- -------- ------- Revenues $ 2,576 $ 3,189 $ 1,944 $ 1,339 $ 573 $ 214 $ 5,093 $ 4,742 Gross Profit $ 27 $ 453 $ 115 $ (38) $ (272) $ (144) $ (130) $ 271 GP% 1.1% 14.2% 5.9% -2.8% -47.6% -67.2% -2.6% 5.7% Units Sold SDP 4,332 5,456 35 - 310 221 4,677 5,677 WB 2,998 3,451 8,646 7,758 2,289 770 13,933 11,979
SDP - Single donor platelets WB - Whole blood (1) Mature BMPS are those that have been open for at least 18 months as of April 1, 2003. Our BMP in Chicago opened in June 2001 and is included in new BMPS as of June 30, 2002. Beginning in January 2003, it is included in mature BMPs. Mature BMPs For the three months ended June 30, 2003, revenues from our mature blood products programs decreased by $613,000, or 19%, to $2,576,000 from $3,189,000 in the same period of 2002. This decrease in revenues at our mature BMPs was mainly due to i) a decrease in platelet collections in our Sherman Oaks program of $414,000 reflecting the change from a paid to a volunteer program as of January 1, 2003, ii) the termination of our blood management programs at Long Beach Memorial Medical Center in August 2002 and the University of Irvine Medical Center in January 2003 contributing a decrease of $232,000, and iii) a loss of a testing customer accounting for a $100,000 decrease in revenues. These decreases were partially offset by the inclusion of our Chicago blood management program as a mature BMP in 2003 accounting for $186,000 in revenues. For the three months ended June 30, 2003, gross profit from our mature blood products programs decreased by $426,000, or 94%, to $27,000 from $453,000 in the same period of 2002. Our gross profit percentages from our mature blood products programs decreased to 1.1% in 2003 from 14.2% in 2002. This decrease at our mature BMPs reflects i) the change in our Sherman Oaks program from a paid to a volunteer program as of January 1, 2003, which remains profitable but reflects a decrease of $175,000 in gross profit, ii) decreases in gross profit at our testing services of $33,000, iii) the termination of our blood management programs at Long Beach Memorial Medical Center and at the University of Irvine Medical Center which contributed a decrease of $34,000 to gross profit, iv) the inclusion of our Chicago program in mature blood programs in 2003 which contributed a decrease of $64,000, and v) increased insurance premiums and costs relating to the hiring and training of new recruitment and clinical staff. California Mobiles For the three months ended June 30, 2003, revenues from our California mobile operations increased by $605,000, or 45%, to $1,944,000 from $1,339,000 in the same period of 2002. This increase in revenues from our California mobiles is mainly due to increased collections (of whole blood and fresh frozen plasma "FFP") and better red cell pricing. Our average revenue per red cell unit in the second quarter of 2003 was $191 compared to $165 during the second quarter of 2002. For the three months ended June 30, 2003, gross profit from our California mobile operations increased by $153,000 to $115,000 from a loss of $38,000 in the same period of 2002. Our gross profit percentages from our California mobile operations increased to 5.9% in the second quarter of 2003 from -2.8% in the same period of 2002. This increase in gross profit 8 9 was mainly due to the efficiencies associated with higher collection volumes and increased production and sales of FFP as compared to 2002. During the three months ended June 30, 2003, our gross profit was negatively impacted by an equipment failure during the month of June which reduced sales of FFP and other blood components. New BMPs (open less than 18 months as of April 1, 2003) We operate new programs in Bangor, Maine; Williston, Vermont; Albany, New York; and Durham, North Carolina. Together, these programs generated revenue of $573,000 during the three months ended June 30, 2003 and an operating loss of $272,000. During the quarter ended June 30, 2002, these programs, including our Chicago BMP, provided revenue of $214,000 and a loss of $144,000 (the results of our Chicago program are included in the mature programs in 2003). Our focus for these programs is to significantly increase the number of whole blood and platelet donations. Although whole blood and platelet production for these new centers has increased significantly from prior year, these volumes are not sufficient to generate operating profits. During the six months ended June 30, 2003, several additional donor recruiters were hired with the expectation of higher collections in future periods, although it often requires several months for new recruiters to develop a significant donor base. Blood Services - -------------- Revenues from blood services decreased by $354,000, or 16%, to $1,844,000 in the second quarter of 2003 from $2,198,000 in the same period of 2002. The decrease was mainly due a decrease of 7.8% in the number of therapeutic apheresis procedures performed from 1,824 procedures performed in the second quarter of 2002 to 1,680 procedures in the second quarter of 2003 (mainly in our California and Connecticut operations), and to a change in the product mix of the services offered by the Company. As such, our gross profits decreased to $508,000 (28% of revenue) during the three months ended June 30, 2003, compared to $716,000 (33% of revenue) during the same period in 2002. We continue to offer a physician education program in California and New York as part of our blood services marketing efforts. General and Administrative Expenses - ----------------------------------- General and administrative expenses decreased by $186,000, or 18%, to $832,000 in the second quarter of 2003 from $1,018,000 in the same period of 2002. The decrease was mainly due to non-recurring 2002 legal fees associated with the settlement of the ARC litigation which was settled in the later part of 2002. This decrease was partially offset by increases in salaries and benefits relating to the expansion of our information technology department to support our blood bank computer system and other technological initiatives, and by increases in insurance premiums. SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002 Overview - -------- Revenues for the six months ended June 30, 2003 increased by $607,000, or 5%, to $13,868,000 from $13,261,000 in the same period of 2002. During the six months ended June 30, 2003, we experienced increases in blood products revenues from the expansion of our California mobile operations (which contributed an increase of $1,220,000 in revenues during the six months), and increases in our new BMPs (which were not all operational in 2002 and contributed an increase of $672,000 during the six months). The Company also benefited from an increase in the average revenue per blood cell unit during 2003. These increases were partially offset by decreases in revenues at our mature BMPs of $984,000 mainly due to a decrease in revenues relating to platelet collections in our Sherman Oaks program of $830,000 reflecting the change from a paid to a volunteer program as of January 1, 2003, and a decrease in our blood service revenues of $301,000. For the six months ended June 30, 2003, gross profit was $1,320,000 (or 9.5% of revenues), compared to $1,747,000 (or 13.2% of revenues) during the same period in 2002. The decrease of $427,000 was mainly due to i) the change in our Sherman Oaks program from a paid to a volunteer program as of January 1, 2003 which remains profitable but reflects a decrease of 9 10 $309,000 in gross profit, ii) an increase in losses from our new BMPs of $223,000, iii) lower average fees for therapeutic apheresis procedures performed as compared to prior year which contributed a decrease of $163,000 in gross profit, iv) additional expenses incurred in 2003 relating to hiring and training of new employees, v) higher product expiration and donor deferral rates. These decreases were partially offset by an increase in gross profit at our California mobile operations of $495,000 due to increased efficiencies at higher volumes. General and administrative expenses decreased by $237,000, or 12%, to $1,760,000 in the first six months of 2003 from $1,997,000 in the same period of 2002. The decrease was mainly due to the non-recurring expenses related to our litigation against the ARC in 2002, and certain non cash compensation expense related to the extension of certain employee stock options in 2002. These decreases were partially offset by an increase in salaries and benefits relating to the expansion of our information technology department to support our blood bank computer system and other technological initiatives. Blood Products - -------------- Our revenues and expenses are summarized in the following table.
(Revenues and Gross Profit in Thousands) Mature BMPs (1) California Mobiles New BMPs Total ------------------ ------------------ ------------------ --------------- 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- -------- -------- -------- ------- Revenues $ 5,313 $ 6,297 $ 3,749 $ 2,529 $ 977 $ 305 $10,039 $ 9,131 Gross Profit $ 304 $ 840 $ 352 $ (143) $ (561) $ (338) $ 95 $ 359 GP% 5.7% 13.3% 9.4% -5.7% -57.4% -110.8% 0.9% 3.9% Units Sold SDP 8,921 11,101 49 - 467 362 9,437 11,463 WB 5,965 6,921 17,811 15,202 4,287 1,069 28,063 23,192
SDP - Single donor platelets WB - Whole blood (1) Mature BMPS are those that have been open for at least 18 months as of April 1, 2003. Our BMP in Chicago opened in June 2001 and is included in new BMPS as of June 30, 2002. Beginning in January 2003, it is included in mature BMPs. Mature BMPs For the six months ended June 30, 2003, revenues from our mature blood products programs decreased by $984,000, or 16%, to $5,313,000 from $6,297,000 in the same period of 2002. This decrease in revenues at our mature BMPs was mainly due to i) a decrease in revenues relating to platelets collections in our Sherman Oaks program of $830,000 reflecting the change from a paid to a volunteer program as of January 1, 2003, and ii) the termination of our management programs at Long Beach Memorial Medical Center in August 2002 and the University of Irvine Medical Center in January 2003 contributing a decrease of $403,000. These decreases were partially offset by the inclusion of our Chicago blood management program as a mature BMP in 2003 accounting for $400,000 in revenues. For the six months ended June 30, 2003, gross profit from our mature blood products programs decreased by $536,000, or 64%, to $304,000 from $840,000 in the same period of 2002. Our gross profit percentages from our mature blood products programs decreased to 5.7% in 2003 from 13.3% in 2002. This decrease reflects i) the change in our Sherman Oaks program from a paid to a volunteer program as of January 1, 2003, which remains profitable but reflects a decrease of $309,000 in gross profit, ii) decreases due to lower product utilization of two east coast customers due to need and product availability, and iii) increases in recruitment and technology support costs. 10 11 California Mobile For the six months ended June 30, 2003, revenues from our California mobile operations increased by $1,220,000, or 48%, to $3,749,000 from $2,529,000 in the same period of 2002. This increase reflects increased collections and better red cell pricing. Our average revenue per red cell unit in the first six months of 2003 was $187 compared to $157 during the same period of 2002. For the six months ended June 30, 2003, gross profit from our California mobile operations increased by $495,000 to $352,000 from a loss of $143,000 in the same period of 2002. Our gross profit percentages from our California mobile operations increased to 9.4% in the first six months of 2003 from -5.7% in the same period of 2002. This increase in gross profit was mainly due to the efficiencies associated with higher collection volumes and increased production and sales of fresh frozen plasma. During the three months ended June 30, 2003, our gross profit was negatively impacted by an equipment failure during the month of June which reduced sales of FFP and other blood components. New BMPs (open less than 18 months as of April 1, 2003) We operate new programs in Bangor, Maine; Williston, Vermont; Albany, New York; and Durham, North Carolina. Together, these programs generated revenue of $977,000 during the six months ended June 30, 2003 and an operating loss of $561,000. During the six months ended June 30, 2002, these programs, including our Chicago BMP, provided revenue of $305,000 and a loss of $338,000 (the results of our Chicago program are now included in the mature programs in 2003). During the six months ended June 30, 2003, several additional donor recruiters were hired with the expectation of higher collections in future periods, although it often requires several months for new recruiters to develop a significant donor base. Blood Services - -------------- Revenues from blood services decreased by $301,000, or 7%, to $3,829,000 in the first six months of 2003 from $4,130,000 in the same period of 2002. The decrease was mainly due a decrease of 3% in the number of therapeutic apheresis procedures performed (mainly in our California and Connecticut operations) from 3,518 procedures performed in 2002 to 3,415 procedures in 2003, and to change in the product mix of the services offered by the Company. These decreases were partially offset by an increase in the number of procedures performed at our New York operation. As such, gross profits decreased to $1,225,000 (32% of revenue) during the six months ended June 30, 2003, compared to $1,388,000 (34% of revenue) during the same period in 2002. We continue to offer a physician education program in California and New York as part of our blood services marketing efforts. General and Administrative Expenses - ----------------------------------- General and administrative expenses decreased by $237,000, or 12%, to $1,760,000 in the first six months of 2003 from $1,997,000 in the same period of 2002. The decrease was mainly due to i) non-recurring legal fees associated with the settlement of the ARC litigation which was settled in late 2002, and ii) certain non cash compensation expense related to the extension of certain employee stock options in 2002. These decreases were partially offset by i) increases in salaries and benefits relating to the expansion of our information technology department to support our blood bank computer system and other technological initiatives, and ii) by increases in insurance premiums. Critical Accounting Policies and Estimates - ------------------------------------------ Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates were used to evaluate the adequacy of the allowance for doubtful accounts, the reserve for discontinued operations and the realization of deferred tax assets. 11 12 Allowance for Doubtful Accounts: We make ongoing estimates relating to the collectibility of our accounts receivable and maintain a reserve for estimated losses resulting from the inability of our customers to meet their financial obligations to us. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve may be required. In the event we determined that a smaller or larger reserve was appropriate, we would record a credit or a charge to general and administrative expense in the period in which we made such a determination. Income Taxes: As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves our estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statements of operations. Significant management judgment is required in determining our provision for income taxes, deferred tax asset and liabilities and any valuation allowance recorded against our net deferred tax assets. Management continually evaluates its deferred tax asset as to whether it is likely that the deferred tax asset will be realized. If management ever determined that its deferred tax asset was not likely to be realized, a write-down of that asset would be required and would be reflected in the provision for taxes in the accompanying period. Liquidity and Capital Resources - ------------------------------- As of June 30, 2003, we had cash and cash equivalents of $714,000 and working capital of $2,197,000. The Company has a working capital line of credit with a bank. The amount the Company may borrow is the lesser of: 75% of eligible accounts receivable less amounts outstanding on the notes payable discussed below, or $2 million. Interest is payable monthly at a rate of prime plus 0.5% (4.5% as of June 30, 2003). As of June 30, 2003, the Company's net borrowings on this line of credit were $450,000. This line of credit matures in June 2004, and is included in current obligations under notes payable on the balance sheet. As of June 30, 2003, the unused portion of the Company's line of credit was $1,550,000. In addition, the Company has various notes payable with the same bank. At June 30, 2003, the total amount outstanding under these notes is $371,000 and requires monthly principal payments of approximately $14,000 plus interest at a weighted average fixed rate of 6.6%. These loans are collateralized by substantially all of the Company's assets and are cross-defaulted. They also require the maintenance of certain financial covenants that among other things require minimum levels of profitability and prohibit the payment of dividends or stock repurchases. As of June 30, 2003, the Company was not in compliance with a covenant that requires the Company to be profitable each quarter. During the quarter ended June 30, 2003, the Company incurred a loss. The bank has waived this violation. Additionally, the Company has another note payable with a finance company. As of June 30, 2003, the balance on this note was $89,000. The note requires quarterly payments of approximately $10,000 including interest at the rate of 8.5% and is secured by certain fixed assets. The following table summarizes our contractual obligations by year (in thousands). 12 13
Total 2004 2005 2006 2007 2008 ------- ------- ------ ------ ------ ------ Operating leases $ 1,768 $ 529 $ 479 $ 455 $ 282 $ 23 Capitalized leases 340 112 95 85 48 - Notes payable 910 654 193 63 - - ------- ------- ------ ------ ------ ------ Totals $ 3,018 $ 1,295 $ 767 $ 603 $ 330 $ 23 ======= ======= ====== ====== ====== ======
We are also committed to purchase approximately $15 million of blood collection kits at established prices through 2007. Net cash provided by operating activities was $344,000 and $832,000 for the six months ended June 30, 2003 and 2002, respectively. The decrease in 2003 from 2002 of $488,000 was mainly due to i) a decrease in accounts receivable of $269,000, ii) an increase in losses before tax of $190,000, iii) a decrease in stock and stock option compensation of $178,000, and iv) a decrease in account payable and accruals of $113,000. These decreases were partially offset by i) a decrease in inventories and supplies of $198,000, and ii) an increase in depreciation and amortization of $99,000. During the six months ended June 30, 2003, we continued to work with our customers to reduce the number of days sales outstanding to 57 at June 30, 2003, from 62 days at December 31, 2002. Net cash used in investing activities was $242,000 and $599,000 for the six months ended June 30, 2003 and 2002, respectively. The decrease in 2003 from 2002 of $357,000 was mainly due to the Company's investments in its new BMPs in 2002, the Company's higher initial investment in technology in 2002, and expenditures on leasehold improvements relating to the Company's move of its corporate headquarters to Woodland Hills in 2002. Net cash used in financing activities was $436,000 and $179,000 for the six months ended June 30, 2003 and 2002, respectively. The increase of $257,000 was mainly due to a $304,000 increase in principal payments made on the line of credit, capital leases and notes payable, which was partially offset by a net increase of $50,000 in proceeds from the line of credit and capital leases. We anticipate that our cash on hand and borrowing on our bank line of credit will be sufficient to provide funding for our needs during the next 12 months, including financing our new BMP operations and other working capital requirements, including capital and operating lease commitments. Our primary sources of liquidity include our cash on hand, available line of credit and cash generated from operations. Our liquidity depends, in part, on timely collections of accounts receivable. Any significant delays in customer payments could adversely affect our liquidity. Our liquidity also depends on our maintaining compliance with our loan covenants. From time to time we have failed to comply with these covenants and have obtained a waiver from our lender. If in the future we are unable to comply with our loan covenants and the bank does not issue a waiver, then our liquidity could be materially affected. Risk Factors Affecting the Company - ---------------------------------- Our short and long-term success is subject to many factors that are beyond our control. Shareholders and prospective shareholders in the Company should consider carefully the following risk factors, in addition to other information contained in this report. This Quarterly Report on Form 10-Q contains forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those described below. 13 14 Operating Risk - -------------- Our operations outside of California have been generating operating losses for the Company. We are evaluating the potential of each of these programs and may terminate some activities in 2003 which may have a material adverse effect on our business and results of operations. Since 1976, California law has prohibited the transfusion of blood products to patients if the donors of those products were paid unless, in the opinion of the recipient's physician, blood from a non-paid donor was not immediately available. Apheresis platelet products obtained from paid donors were exempted from this law by a series of state statutes, the latest of which expired on January 1, 2003. Consequently, we are no longer able to offer cash compensation to our apheresis platelet donors. In 2002, the Sherman Oaks paid donor program provided revenue of $5.4 million, or 19% of total revenue, and gross profits of $1.4 million. The Company converted its paid program to a 100% volunteer program as of January 1, 2003. In the event the Company is unable to maintain a substantial donor base, it will close this program and may terminate some other blood product activities in Southern California whose profitability depends on sharing overhead with the volunteer donor program. The loss of this program will have a material adverse financial affect on the Company. The program is currently operating at approximately 70% of 2002 collection volume. Nationally, in 2001 the prices for red blood cells increased 35% to 45%. As a result of the price increases, combined with chronic product shortages in many parts of the U.S., we significantly expanded our programs for the collection of whole blood. We added one new BMP in 2001 and four new BMPs in 2002. Our expansion efforts have resulted in new clients and additional blood product revenues. However, to date, our costs relating to blood products operations have increased in amounts greater than our revenues resulting in a decline in profitability and losses. Additionally, multi- year contractual agreements limit our ability to significantly increase our sales prices. Management may not be successful in executing its operating plan. Although platelet production activities have been historically profitable, whole blood collections have not. Successful results of both programs are dependent upon management's ability to effectively recruit donors and control operating costs. Market Prices for Blood Do Not Necessarily Reflect Costs - -------------------------------------------------------- We depend on competitive pricing to obtain and maintain sales. As our costs increase, we will not be able to raise our prices commensurately if our competitors do not. Some of our competitors have greater resources than we have to sustain periods of unprofitable sales. Cost increases may therefore have a direct negative effect on our profits and a material adverse affect on our business. Declining Blood Donations - ------------------------- Our business depends on the availability of donated blood. Only a small percentage of the population donates blood, and the rate continues to decline. In addition, new regulations intended to reduce the risk of introducing infectious diseases in the blood supply have eliminated some groups of potential donors. If the level of donor participation in our blood product programs declines, we will not be able to achieve profitability or reduce costs sufficiently to maintain profitability in our mature blood products programs. While the Company has developed strategies to recruit volunteer blood donors, there can be no assurance that these strategies will result in sufficient blood collections to meet hospital needs or to assure profitability. We Face Increasing Costs - ------------------------ The costs of collecting, processing and testing blood have risen significantly in recent years and will likely continue to rise. These cost increases are related to new and improved testing procedures to assure that blood is free of infectious disease, increased regulatory requirements related to blood safety, and increased costs associated with recruiting blood donors. New testing protocols have required us to outsource much of our testing. Competition, and in some cases multi-year contractual arrangements, may limit our ability to pass these increased costs on to customers. In this circumstance, the increased costs could reduce our profitability and could have a material adverse effect on our business and results of operations. 14 15 Increasing Reliance on Outside Laboratories - ------------------------------------------- We maintain laboratories that are licensed and accredited to test blood products for purity, potency and quality. We utilize outside laboratories for nucleic acid testing. As other new testing and processing technologies are introduced, we may increase our reliance on outside laboratories. In using outside laboratories we will have less control over testing quality. In addition, because laboratory facilities competent in these new technologies are scarce, the loss of an outside laboratory because of competition for capacity would have a material adverse effect on our business. Our Targeted Donor Base Involves Higher Collection Costs - -------------------------------------------------------- Part of our recruitment strategy involves conducting blood drives for organizations that provide a relatively small number of donors. Blood drives directed at smaller donor sites lack the efficiencies associated with larger blood drives. As a result, our collection costs might be higher than our competition and may affect our profitability and growth plans. Access to Insurance - ------------------- We currently maintain insurance coverage that we believe is appropriate for our products and our industry. However, if we experience losses or the risks associated with the blood products industry increase in the future, insurance may become more expensive or unavailable at reasonable prices or at all. We also cannot assure you that as our business expands or we introduce new products and services we will be able to obtain additional liability insurance on acceptable terms, or that our insurance will provide adequate coverage against any and all potential claims. Also, the limitations of liability contained in agreements to which we are a party may not be enforceable and may not otherwise protect us from liability for damages. The successful assertion of one or more large claims against us that exceeds available insurance coverage, or changes in our insurance policies, such as premium increases or the imposition of large deductibles or co-insurance requirements, could materially and adversely affect our business. Universal Leukoreduction - ------------------------ In January 2001, the Department of Health and Human Services Advisory Committee on Blood Safety and Availability ("BSAC") recommended that universal pre-storage leukoreduction be implemented as soon as feasible. The leukoreduction process removes the white blood cells or leukocytes from blood and platelets before they are transfused. BSAC's recommendation was conditioned on an implementation process that does not diminish blood supplies and also that HHS establishes adequate funding for the effort. It is possible that the FDA will mandate that all blood products distributed be leukoreduced. Historically, only portions of blood component transfusions were leukoreduced and the process was often performed in the hospital setting immediately prior to transfusion rather than pre-storage (at the time of collection or processing). While we have provided only leukoreduced apheresis platelet products for several years, our whole blood component products are not routinely leukoreduced. The adoption of a universal leukoreduced policy for all blood products would raise our costs to manufacturing whole blood products. Competition and multi-year contractual arrangements may limit our ability to pass these increased costs on to customers. In this circumstance, the increased costs could reduce our profitability and could have a material adverse effect on our business and results of operations. We May Be Unable to Meet Future Capital Needs - --------------------------------------------- Currently, the Company believes it has sufficient cash available through its cash on hand, bank credit facilities and funds from operations to finance its operations for the next twelve months. However, the Company incurred a $440,000 loss before tax benefit during the six months ended June 30, 2003, which reduced available cash. The Company may need to raise additional capital in the debt or equity markets. There can be no assurance that we will be able to obtain such financing on reasonable terms or at all. Additionally, there is no assurance that we will be able to obtain sufficient capital to finance future expansion. 15 16 Not-For-Profit Status Gives Advantages to Our Competitors - --------------------------------------------------------- We believe we are the only significant blood supplier in the U.S. that is operated for profit and investor owned. Our competitors are nonprofit organizations, which are exempt from federal and state taxes, have substantial community support and have access to tax-exempt financing. We may not be able to continue to compete successfully with nonprofit organizations and our business and results of operations will suffer material adverse harm. Reimbursement Rates Have Not Kept Pace with Cost Increases - ---------------------------------------------------------- The reimbursement rates for blood products and services provided to Medicaid and Medicare patients were based on medical costs prevailing several years ago. Medical costs have increased substantially since that time, but the reimbursement rates have not. Further increases in medical costs in the future without increases in reimbursement rates may impact the Company's profitability HemaCare's Business May Face Interruption Due to Terrorism and Increased Security Measures In Response to Terrorism - ------------------------------------------------------------------------ HemaCare's business depends on the free flow of products and services through the channels of commerce and freedom of movement for patients and donors. The 2001 response to terrorist activities slowed or stopped transportation, mail, financial and other services for a period of time. Further delays or stoppages in transportation of perishable blood products and interruptions of mail, financial or other services could have a material adverse effect on HemaCare's business, results of operations and financial condition. Furthermore, HemaCare may experience an increase in operating costs, such as costs for transportation, insurance and security, as a result of the terrorist activities and potential activities, which may target health care facilities or medical products. The Company may also experience delays in receiving payments from payers that have been affected by terrorist activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact the Company's results of operations, impair its ability to raise capital or otherwise adversely affect its ability to grow its business. We Could Lose our Lines of Credit - --------------------------------- In December 2002, we replaced our then existing lines of credit with a new $2.0 million working capital line of credit that requires HemaCare to maintain certain financial covenants including profitability each quarter. As of June 30, 2003, the Company was not in compliance with a covenant that requires the Company to be profitable each quarter. During the quarter ended June 30, 2003, the Company incurred a loss. The bank has waived this violation, and maintaining compliance is dependent, among other things, on achieving the required profitability. In 2002, the Company lost $591,000. Continued losses would violate the terms of the new credit line. From time to time, the Company has failed to comply with the covenants in its bank credit agreements, and has sought waivers from its lenders. While in the past lenders have granted these waivers when needed, we are not assured that they will continue to grant them in the future. Failure to obtain such waivers when, and if needed, could result in acceleration of payment obligations under our credit facilities and severely reduce our liquidity and available cash resources. We May Be Adversely Affected by Changes in the Healthcare Industry - ------------------------------------------------------------------ In the U.S., a fundamental change is occurring in the healthcare system. Competition to gain patients on the basis of price, quality and service is intensifying among healthcare providers who are under pressure to decrease the costs of healthcare delivery. This trend is expected to continue. In addition, there has been significant consolidation among healthcare providers as providers seek to enhance efficiencies, and this consolidation is expected to continue. As a result of these trends, we may be limited in our ability to increase prices for our products in the future, even if our costs increase. Further, we could be adversely affected by customer attrition as a result of consolidation among healthcare providers. 16 Future Technological Developments Could Jeopardize Our Business - --------------------------------------------------------------- As a result of the risks posed by blood-borne diseases, many companies are currently seeking to develop synthetic substitutes for human blood products. Because our business consists of collecting, processing and distributing human blood and blood products, the introduction and acceptance in the market of synthetic blood substitutes would cause material adverse harm to our business. Our Operations Depend on Obtaining the Services of Qualified Medical Professionals - --------------------------------------------------------------------- We are highly dependent upon obtaining the services of qualified medical professionals. In particular, our collection operations depend on the services of registered nurses. Nationwide, the demand for registered nurses exceeds the supply and competition for their services is strong. This shortage could be aggravated in the event of a war or other international conflict. If we were unable to attract and retain a staff of qualified medical professionals, our operations would be adversely affected. We Operate in a Heavily Regulated Industry - ------------------------------------------ Our business consists of the collection, processing and distribution of blood and blood products, all activities that are subject to extensive and complex regulation by the state and federal governments. With regard to the safety of our products, facilities and procedures and the purity and quality of our blood products, we are required to obtain and maintain numerous licenses in different locations and are subject to frequent regulatory inspections. In addition, state and federal laws include anti- kickback and self-referral prohibitions and other regulations that affect the relationships between blood banks and hospitals, physicians and other persons who refer business to them. Health insurers and government payers such as Medicare and Medicaid also cap reimbursement for our products and services and have regulations that must be complied with before reimbursement will be made. The Company devotes substantial resources to complying with laws and regulations and believes it is currently in compliance. However, the possibility cannot be eliminated that interpretations of existing laws and regulations will result in a finding that we have not complied with significant existing regulations, which could materially harm our business. Moreover, healthcare reform is continually under consideration by regulators, and we do not know how laws and regulations will change in the future. Some of these changes could require costly compliance efforts or expensive outsourcing of functions we currently handle internally which could make some of the Company's operations prohibitively expensive or impossible to continue. Product Safety and Product Liability - ------------------------------------ Blood products carry the risk of transmitting infectious diseases, including hepatitis, HIV and Creutzfeldt-Jakob Disease. HemaCare carefully screens donors, uses the latest available technology to test its blood products for known pathogens in accordance with industry standards, and complies with all applicable safety regulations. Nevertheless, the risk that screening and testing processes might fail or that new pathogens may be undetected by them cannot be completely eliminated. There is currently no test to detect the pathogen responsible for Creutzfeldt-Jakob Disease. If patients are infected by known or unknown pathogens, claims brought against us could exceed our insurance coverage and materially and adversely affect our financial condition. Furthermore, healthcare regulations are constantly changing and certain changes could require costly compliance or make some of our operations impossible to continue. Environmental Risks - ------------------- HemaCare's operations involve the controlled use of bio-hazardous materials and chemicals. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company and its insurance coverage. The Company may incur substantial costs to maintain compliance with environmental regulations as it develops and expands its business. 17 18 Our Articles of Incorporation and Rights Plan Could Delay or Prevent an Acquisition or Sale of HemaCare - ----------------------------------------------------------------------- Our Articles of Incorporation empower the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. This gives the Board of Directors the ability to deter, discourage or make more difficult a change in control of HemaCare, even if such a change in control would be in the interest of a significant number of our shareholders or if such a change in control would provide our shareholders with a substantial premium for their shares over the then-prevailing market price for our common stock. In addition, the Board of Directors has adopted a Shareholder's Rights Plan designed to require a person or group interested in acquiring a significant or controlling interest in HemaCare to negotiate with the Board. Under the terms of our Shareholders' Rights Plan, in general, if a person or group acquires more than 15% of the outstanding shares of common stock, all of our other shareholders would have the right to purchase securities from us at a discount to the fair market value of our common stock, causing substantial dilution to the acquiring person or group. The Shareholders' Rights Plan may inhibit a change in control and, therefore, could materially adversely affect our shareholders' ability to realize a premium over the then-prevailing market price for our common stock in connection with such a transaction. For a description of the Rights Plan see the Company's Current Report on Form 8-K filed with the SEC on March 5, 1998. Stocks Traded on the OTC Bulletin Board are Subject to Greater Market Risks than Those of Exchange-Traded and NASDAQ Stocks - --------------------------------------------------------------------------- Our common stock was delisted from the NASDAQ Small Cap Market on October 29, 1998 because we failed to maintain the market's requirement of a minimum bid price of $1.00. Since November 2, 1998 our common stock has been traded on the OTC Bulletin Board, an electronic, screen-based trading system operated by the National Association of Securities Dealers, Inc. Securities traded on the OTC Bulletin Board are, for the most part, thinly traded and generally are not subject to the level of regulation imposed on securities listed or traded on the NASDAQ Stock Market or on a national securities exchange. As a result, an investor may find it difficult to dispose of our common stock or to obtain accurate quotations as to its price. Our Stock Price Could Be Volatile - ---------------------------------- The price of our common stock has fluctuated in the past and may be more volatile in the future. Factors such as the announcements of government regulation, new products or services introduced by us or our competitors, healthcare legislation, trends in the health insurance and HMO industry, litigation, fluctuations in our operating results and market conditions for healthcare stocks in general could have a significant impact on the future price of our common stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that may be unrelated to the operating performance of particular companies. The generally low volume of trading in our common stock makes it more vulnerable to rapid changes in price in response to market conditions. Future Sales of Equity Securities Could Dilute the Company's Common Stock - ------------------------------------------------------------------------- The Company may seek new financing in the future through the sale of its securities. Future sales of common stock or securities convertible into common stock could result in dilution of the common stock currently outstanding. In addition, the perceived risk of dilution may cause some of our shareholders to sell their shares, which could further reduce the market price of the common stock. We Do Not Expect to Pay Any Dividends - ------------------------------------- The Company intends to retain any future earnings for use in its business, and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. The declaration and payment of any cash dividends in the future will depend on the Company's earnings, financial condition, capital needs and other factors deemed relevant by the Board of Directors. In addition, the Company's credit agreement prohibits the payment of dividends during the term of the agreement. 18 19 Item 3. Qualitative and Quantitative Disclosures About Market Risk - ------- ----------------------------------------------------------- The Company has $1,206,000 of debt that includes $756,000 of notes payable and capitalized leases with fixed interest rates. The remaining $450,000 of debt represents advances on our working capital line of credit and the interest rate is linked to the prime interest rate. Accordingly, interest rate expense will fluctuate with rate changes in the U.S. If interest rates were to increase or decrease by 1% for the year, our interest expense would increase or decrease by approximately $4,500. Item 4. Controls and Procedures - ------- ----------------------- The Company's chief executive officer / principal financial officer, with the participation of the Company's management, carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the chief executive officer / the principal financial officer believes that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective in making known to her material information relating to the Company (including its consolidated subsidiaries required to be included in this report). Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objections is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established process. There was no change in the Company's internal controls over financial reporting, known to the chief executive officer / principal financial officer, that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------- ----------------- From time to time, the Company is involved in various routine legal proceedings incidental to the conduct of its business. Management does not believe that any of these legal proceedings will have a material adverse impact on the business, financial condition or results of operations of the Company, either due to the nature of the claims, or because management believes that such claims should not exceed the limits of the Company's insurance coverage. See disclosure in Form 10-K for the year ended December 31, 2002. Item 2. Changes in Securities and Use of Proceeds - ------- ----------------------------------------- None. Item 3. Defaults Upon Senior Securities - ------- ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- None. Item 5. Other Information - ------- ------------------ None. 19 20 Item 6. Exhibits and Reports on Form 8-K - ------- --------------------------------- a. Exhibits 11 Net Loss per Common and Common Equivalent Share 31 Certification Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 32 Certification Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 b. Reports on Form 8-K On May 15, 2003, the Company filed a Form 8-K disclosing under Item 5 (Other Information), a press release dated May 15, 2003, announcing the Company's 2003 First Quarter Financial Results. On May 19, 2003, the Company filed a Form 8-K disclosing under Item 5 (Other Information), a press release dated May 19, 2003, announcing the appointment of Wm. Andrew Heaton, MD and Terry Van Der Tuuk to the Company's Board of Directors. On June 3, 2003, the Company filed a Form 8-K disclosing under Item 5 (Other Information), a press release dated June 2, 2003, announcing the appointment of Jody DeVere as the Company's National Director of Sales and Marketing. On June 27, 2003, the Company filed a Form 8-K disclosing under Item 5 (Other Information), a press release dated June 27, 2003, announcing the appointment of Rose Marcario as Chief Financial Officer. On July 8, 2003, the Company filed a Form 8-K disclosing under Item 5 (Other Information), a press release dated July 8, 2003, announcing that the Company has reopened its search for a Chief Financial Officer, and that Rose Marcario, who had accepted the position the prior month, was unable to assume the role due to personnel reasons. On July 24, 2003, the Company filed a Form 8-K disclosing under Item 5 (Other Information), a press release dated July 24, 2003, announcing the resignation of Wm. Andrew Heaton from the Company's Board of Directors, and that the Company has reduced its number of directors from six to five. 20 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date August 11, 2003 HEMACARE CORPORATION --------------------- --------------------------------- (Registrant) /s/ Judi Irving -------------------------------- Judi Irving , Chief Executive Officer (Duly authorized officer on behalf of the registrant and principal financial officer) 21 INDEX TO EXHIBITS EXHIBIT DESCRIPTION - ------- ----------- 11 Net Loss per Common and Common Equivalent Share 31 Certification Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002 32 Certification Pursuant to 18 U.S.C. 1350 Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002 EX-11 3 ex1122003.txt EXHIBIT 11 HemaCare Corporation EXHIBIT 11 Basic and Diluted Net Loss per Share
Three Months Ended Six Months Ended June 30, June 30, --------------------------- ---------------------- 2003 2002 2003 2002 ----------- ------------ ---------- ---------- BASIC AND DILUTED ----------------- Weighted average common shares used to compute basic and diluted earnings per share........................... 7,751,060 7,611,000 7,751,060 7,601,000 =========== =========== =========== =========== Net loss........... $ (272,000) $ (19,000) $ (264,000) $ (157,000) =========== =========== =========== =========== Basic and diluted net loss per share.. $ (0.04) $ (0.00) $ (0.03) $ (0.02) =========== =========== =========== ===========
EX-31 4 ex312q.txt EXHIBIT 31 EXHIBIT 31 CERTIFICATION I, Judi Irving, certify that: 1. I have reviewed this quarterly report on Form 10-Q of HemaCare Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in, all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant, and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedure and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financing reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 11, 2003 /s/ Judi Irving -------------------------------------- Judi Irving (Chief executive officer and principal financial officer) EX-32 5 exh322q.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 of HemaCare Corporation (the "Company") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such periodic report fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in such report. Very truly yours, /s/ Judi Irving __________________________ Judi Irving Chief executive officer and principal financial officer Dated: August 11, 2003 A signed original of this written statement required by Section 906 has been provided to HemaCare Corporation and will be retained by HemaCare Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----