-----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, IbLVR4UCREVR6l34V+HV0fIhbu0VW6unaFCt4W0jIEo+8Yp+vYklqaETnQOkZdym jum54i4umGvrs2Zj2dGbuw== 0000801748-03-000024.txt : 20031114 0000801748-03-000024.hdr.sgml : 20031114 20031114115919 ACCESSION NUMBER: 0000801748-03-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031114 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: 031001704 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 qtr32003.txt FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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 September 30, 2003 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 0-15223 HEMACARE CORPORATION (Exact name of registrant as specified in its charter) California 95-3280412 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 21101 Oxnard Street Woodland Hills, California 91367 (Address of principal executive offices) (Zip Code) (818) 226-1968 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ As of November 14, 2003, 7,756,060 shares of Common Stock of the registrant were issued and outstanding. ============================================================================= HEMACARE CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003
Page Number ------ PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002.............................................. 1 Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 (unaudited)...................... 2 Consolidated Statements of Cash Flows for the nine months ended June 30, 2003 and 2002 (unaudited)...................................... 3 Notes to Unaudited Consolidated Financial Statements............... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 7 Item 3. Qualitative and Quantitative Disclosures About Market Risk......... 18 Item 4. Controls and Procedure............................................. 18 PART II. OTHER INFORMATION - -------- ----------------- Item 1 Legal Proceedings.................................................. 19 Item 2. Changes in Securities and Use of Proceeds.......................... 19 Item 3. Defaults Upon Senior Securities.................................... 19 Item 4. Submission of Matters to a Vote of Security Holders................ 19 Item 5. Other Information.................................................. 19 Item 6. Exhibits and Reports on Form 8-K................................... 19 SIGNATURES................................................................. 20
i 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HEMACARE CORPORATION CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2003 2002 ------------ ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents............................ $ 1,057,000 $ 1,048,000 Accounts receivable, net of allowance for doubtful accounts - $274,000 (2003) and $208,000 (2002)............................................. 3,421,000 4,932,000 Product inventories and supplies..................... 794,000 795,000 Prepaid expenses..................................... 348,000 295,000 Deferred income taxes................................ - 402,000 ------------ ------------ Total current assets...................... 5,620,000 7,472,000 Plant and equipment, net of accumulated depreciation and amortization of $3,364,000 (2003) and $2,450,000 (2002).............. 2,587,000 3,308,000 Deferred taxes......................................... - 2,582,000 Other assets........................................... 68,000 93,000 ------------ ------------ $ 8,275,000 $13,455,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 2,016,000 $ 2,277,000 Accrued payroll and payroll taxes.................... 1,420,000 1,231,000 Other accrued expenses............................... 549,000 201,000 Current obligations under capital leases............. 88,000 90,000 Current obligations under notes payable.............. 651,000 199,000 ------------ ------------ Total current liabilities................ 4,724,000 3,998,000 Obligations under capital leases, net of current portion................................... 186,000 246,000 Notes payable, net of current portion.................. 206,000 1,107,000 Other long-term liabilities............................ 12,000 17,000 Commitments and contingencies.......................... Shareholders' equity: Common stock, no par value - 20,000,000 shares authorized, 7,756,060 and 7,751,090 issued and outstanding in 2003 and 2002, respectively......... 13,319,000 13,316,000 Accumulated deficit.................................. (10,172,000) (5,229,000) ------------ ------------ Total shareholders' equity............... 3,147,000 8,087,000 ------------ ------------ $ 8,275,000 $13,455,000 ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 2 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ------------------------- 2003 2002 2003 2002 ------------ ------------ ----------- ----------- Revenues: Blood products.................... $ 5,166,000 $4,979,000 $15,205,000 $14,110,000 Blood services.................... 1,814,000 2,202,000 5,643,000 6,332,000 ------------ ----------- ------------ ----------- Total revenue.................... 6,980,000 7,181,000 20,848,000 20,442,000 Operating costs and expenses: Blood products.................... 5,888,000 4,699,000 15,832,000 13,471,000 Blood services.................... 1,268,000 1,460,000 3,872,000 4,202,000 ------------ ---------- ------------ ------------ Total operating costs and expenses....................... 7,156,000 6,159,000 19,704,000 17,673,000 ------------ ----------- ------------ ------------ Gross profit...................... (176,000) 1,022,000 1,144,000 2,769,000 General and administrative expenses............................ 1,343,000 1,187,000 3,103,000 3,184,000 Write off of impaired goodwill......... - 362,000 - 362,000 ------------ ----------- ------------ ------------ Loss before income taxes............... (1,519,000) (527,000) (1,959,000) (777,000) Provision (benefit) from income taxes.. 3,160,000 (65,000) 2,984,000) (158,000) ------------ ----------- ------------ ------------ Net loss............................ $(4,679,000) $ (462,000) $(4,943,000) $ (619,000) ============ =========== ============ ============ Loss per share - basic and diluted..... $ (0.60) $ (0.06) $ (0.64) $ (0.08) ============ =========== ============ ============ Weighted average shares outstanding - basic and diluted................... 7,754,000 7,738,000 7,752,000 7,647,000 ============ =========== ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 3 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, 2003 2002 ------------- --------------- Increase (decrease) in cash and cash equivalents: - ------------------------------------------------- Cash flows from operating activities: Net loss..................................................$(4,943,000) $ (619,000) Adjustments to reconcile net loss to net cash provided by operating activities: Provision for bad debts................................ 216,000 - Depreciation and amortization.......................... 1,003,000 299,000 Loss on disposal of assets............................. 5,000 - Compensation expense related to stock options.......... - 56,000 Issuance of common stock to 401-K plan................. - 122,000 Impaired goodwill...................................... - 362,000 Deferred income taxes used to offset current period loss.................................................. - (158,000) Impaired deferred taxes................................ 2,984,000 - Changes in operating assets and liabilities: Decrease in accounts receivable....................... 1,295,000 811,000 Increase in inventories, supplies and prepaid expenses..................................... (52,000) (210,000) Decrease in other assets.............................. 25,000 30,000 Increase in accounts payable, accrued expenses and other liabilitiess.............................. 271,000 169,000 ----------- ----------- Net cash provided by operating activities............. 804,000 862,000 Cash flows from investing activities: Proceeds from dispostion of plant and equipment........... 4,000 10,000 Purchases of equipment, net............................... (291,000) (870,000) ----------- ----------- Net cash used in investing activities..................... (287,000) (860,000) Cash flows from financing activities: Proceeds from exercise of stock options................... 3,000 53,000 Principal payments on line of credit, capital leases and notes payable........................................ (661,000) (149,000) Proceeds from line of credit.............................. 150,000 275,000 ----------- ----------- Net cash (used in) provided by financing activities....... (508,000) 179,000 ----------- ----------- Increase in cash and cash equivalents....................... 9,000 181,000 Cash and cash equivalents at beginning of period............ 1,048,000 1,025,000 ----------- ----------- Cash and cash equivalents at end of period.................. $1,057,000 $1,206,000 =========== =========== Supplemental disclosure: Interest paid............................................. $ 62,000 $ 44,000 =========== =========== Income taxes paid......................................... $ - $ - =========== =========== Items not affecting cash flow: Notes and capitalized leases issued in connection with acquisition of plant and equipment..................... $ - $ 131,000 =========== ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 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 nine months ended September 30, 2003 and 2002 include all adjustments (consisting of normal recurring accruals) which management considers necessary to present fairly the financial position of the Company as of September 30, 2003, the results of its operations for the three and nine months ended September 30, 2003 and 2002, and its cash flows for the nine months ended September 30, 2003 and 2002 in conformity with accounting principles generally accepted in the United States. These financial statements have been prepared consistently with the accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on March 31, 2003 and should be read in conjunction with this Quarterly Report on Form 10-Q. The results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the consolidated results of operations to be expected for the full fiscal year ending December 31, 2003. Certain information and footnote disclosures normally included in the financial statements presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company maintains cash balances at various financial institutions. Deposits not exceeding $100,000 for each institution are insured by the Federal Deposit Insurance Corporation. At September 30, 2003 and December 31, 2002, the Company had uninsured cash and cash equivalents of $851,000 and $818,000, respectively. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current period presentation. Note 2 - Line of Credit and Notes Payable - ----------------------------------------- The Company has a working capital line of credit with Comerica Bank - California. The amount the Company may borrow is the lesser of: 75% of eligible accounts receivable less amounts outstanding on the notes payable discussed below, or $2 million. Interest is payable monthly at a rate of prime plus 0.5%; as of September 30, 2003 the rate paid by the Company was 4.5%. As of September 30, 2003, the Company's net borrowing on this line of credit was $450,000, and the Company had unused availability of $1,550,000. This line of credit matures in June 2004, and is included in current obligations under notes payable. In addition, the Company has various other equipment notes payable with Comerica Bank - California. As of September 30, 2003, the total amount outstanding under these notes was $325,000 and requires monthly principal payments of approximately $14,000 plus interest at a weighted average fixed rate of 6.5%. Of the total amount borrowed under these notes, $168,000 is included in "current obligations under notes payable" on the balance sheet. 4 5 All of the Comerica loans are collateralized by substantially all of the Company's assets and are cross-defaulted. They also require the maintenance of certain financial covenants that among other things require minimum levels of profitability and prohibit the payment of dividends or stock repurchases. As of September 30, 2003, the Company was not in compliance with a covenant that requires the Company to be profitable each quarter. During the quarter ended September 30, 2003, the Company incurred a loss. The Company has requested, and received a waiver of this covenant violation. Additionally, the Company has another note payable with One Source Financial. As of September 30, 2003, the balance on this note was $81,000 and is due in full as of January 2006. The note requires quarterly payments of approximately $10,000 including interest at the rate of 8.5% and is secured by certain fixed assets. Of the total amount of this note outstanding, $33,000 is included in "current obligations under notes payable" on the balance sheet. Note 3 - Shareholders' Equity - ----------------------------- The Company has elected to adopt SFAS 123, "Accounting for Stock-Based Compensation," for disclosure purposes only and applies the provision of APB Opinion No. 25. The Company did not recognize any compensation expense related to the issuance of stock options in 2003 or 2002. Had compensation expense for all options granted to employees and directors been recognized in accordance with SFAS 123, the Company's net loss per share would have been as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net loss as reported......... $(4,679,000) $ (462,000) $(4,943,000) $ (619,000) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects................. (20,000) (27,000) (68,000) (80,000) ------------ ------------ ------------ ----------- Pro forma net loss........... $(4,699,000) $ (489,000) $(5,011,000) $ (699,000) ============ ============ ============ =========== Net loss per share - basic and diluted As reported........ $ (0.60) $ (0.06) $ (0.64) $ (0.08) Pro forma.......... $ (0.61) $ (0.06) $ (0.65) $ (0.09)
Note 4 - Earnings per Share - --------------------------- The following table provides the calculation methodology for the numerator and denominator for diluted earnings per share:
Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Net loss.................... $(4,679,000) $ (462,000) $(4,943,000) $ (619,000) ============ =========== ============ =========== Shares outstanding.......... 7,754,430 7,738,060 7,752,196 7,647,060 Net effect of diluted options.................... - - - - ----------- ----------- ------------ ----------- Dilutive shares outstanding. 7,754,430 7,738,060 7,752,196 7,647,060 ============ =========== ============ ===========
Options and warrants outstanding for 1,639,000 shares and 2,034,000 shares for the three and nine months ended September 30, 2003 and 2002, respectively, have been excluded from the above calculation because their effect would have been anti-dilutive. 5 6 Note 5 - Provision for Income Taxes - ----------------------------------- Because of recent losses the Company believes that it is no longer possible to sustain the position that it is "more likely than not" that it will be able to utilize its net operating loss carryforward to offset taxable income in future periods. As a result, the Company established a 100% valuation reserve for its deferred tax asset in the third quarter of 2003. Note 6 - Business Segments - -------------------------- HemaCare operates two business segments as follows: - Blood Products - Collection, processing and distribution of blood products and donor testing. - Blood Services - Therapeutic apheresis and stem cell collection procedures and other therapeutic services to patients. Management uses more than one measure to evaluate segment performance. However, the dominant measurements are consistent with HemaCare's consolidated financial statements, which present revenue from external customers and operating income for each segment. Note 7 - Exit and Disposal Activities - ------------------------------------- As the result of an evaluation of the overall operations of the Company, management implemented a plan to cease operations at several donor centers, as well as the mobile operations associated with these centers in the third and fourth quarters of 2003. The donor centers included in this plan are Albany, New York; Chicago, Illinois; three centers in North Carolina; and Williston Vermont. As of September 30, 2003, the donor centers in Albany, New York; two centers in North Carolina; and Williston, Vermont were closed. Costs associated with the closures are reflected in the Company's third quarter results or will be recorded in the fourth quarter in accordance with generally accepted accounting principals. As a result of the implementation of management's plan to close certain locations as described above, the Company incurred or anticipates will incur certain expenses associated with closing these centers. These expenses included the write-off of $285,000 of certain assets previously used in the operations of the closed donor centers, severance payments of $77,000 to 29 terminated employees, recognition of unexpired facility lease obligations of $435,000, and other associated costs. The following represents a reconciliation of the provision created as a result of the closure of these centers:
Remaining Accural as of Provision Utilized September 30, 2003 --------- ---------- ----------------------- Termination Benefits: $ 77,000 $ 0 $ 77,000 Lease Abandonment Costs: 275,000 0 275,000 Fixed Asset Write-down: 285,000 $ 285,000 0 --------- --------- ----------- Total: $ 637,000 $ 285,000 $ 352,000 ========= ========= ===========
Of the $637,000 provision recorded in the third quarter, $611,000 was recorded as operating expenses and $26,000 was recorded as general and administrative expenses. Note 8 - Commitments - -------------------- The Company is committed to purchase approximately $14 million of blood collection kits at established prices through 2007. Because of the closures mentioned above, management does not believe the Company's demand for these kits will satisfy the purchase commitment. The Company is presently in negotiations with the supplier to lower the commitment requirement. Based on the preliminary results of these negotiations, 6 7 management fully expects that a new achievable commitment requirement will be successfully negotiated without any material negative impact on the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------- Factors Affecting Forward-Looking Information The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's financial statements and the related notes provided under "Item 1 - Financial Statements" above. The matters addressed in this Item 2 that are not historical information constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and the Company can give no assurances that its expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond the control of the Company. These factors include, without limitation, those described below under the heading "Risk Factors Affecting the Company." The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unexpected events. General - ------- HemaCare operates two primary business segments. The first is the blood products segment which supplies hospitals, and other customers, with whole blood, apheresis platelets and other blood products. HemaCare collects blood and other blood products from donors to satisfy customer demand. The Company manages and operates donor centers and mobile donor vehicles to collect blood products from donors. The second business segment HemaCare operates is blood services, which includes therapeutic apheresis procedures, stem cell collection and other blood treatments provided to patients. These procedures are generally performed in a hospital setting. Results of Operations - --------------------- Three months ended September 30, 2003 compared to the three months ended September 30, 2002 Overview - -------- As the result of an evaluation of the overall operations of the Company, management implemented a plan to cease operations at several donor centers, as well as the mobile operations associated with these centers, in the third and fourth quarters of 2003. The donor centers included in this plan were Albany, New York; Chicago, Illinois; three centers in North Carolina; and Williston, Vermont. As of September 30, 2003, the donor centers in Albany, New York; two centers in North Carolina; and Williston, Vermont were closed. Costs associated with the closures are reflected in the Company's third quarter results or will be recorded in the fourth quarter in accordance with generally accepted accounting principles. As a result of the implementation of management's plan to close certain locations as described above, the Company incurred certain expenses associated with closing these centers in the third quarter. These expenses included the write-off of certain assets previously used in the operations of the closed donor centers, severance payments to 29 terminated employees, recognition of unexpired facility lease obligations, and other associated costs. In addition, because of its recent losses, the Company increased the valuation reserve for the deferred tax asset to 100%. 7 8 As a result of the recognition of the expenses associated with closing centers, the increase in the deferred tax asset valuation reserve and ongoing losses in certain blood product operations, the third quarter results reflect a material loss. Revenues for the quarter ended September 30, 2003 were $6,980,000, which represents a decline in revenue of $201,000, or 2.8%, from $7,181,000 generated during the same period in 2002. During the quarter ended September 30, 2003, revenues from blood products increased $187,000, or 3.8%, compared to the same period last year due primarily to increased collection activities from California based mobile donor drives. This increase was offset by a decline in revenues from blood services of $388,000, or 17.6%, which was mainly due to a decrease in the number of therapeutic apheresis procedures performed through the Company's California operations. In addition, the Company's Sherman Oaks donor center has experienced a decline in revenue as a result of converting this center's previously paid donor program to a volunteer program. For the three months ended September 30, 2003, gross profit was ($176,000) compared to $1,022,000 during the same period in 2002. This decrease of $1,198,000 was mainly due to i) expenses associated with closing those certain blood donor centers described earlier as part of management's plan to improve operations, ii) fewer high margin therapeutic apheresis procedures which caused a decrease of $196,000 in gross profit, iii) ongoing losses at donor centers outside of California, and iv) higher insurance premiums. General and administrative expenses increased by $156,000, or 13.1%, to $1,343,000 in the three months ended September 30, 2003 from $1,187,000 in the same period of 2002. This increase was due to i) expenses incurred associated with implementing management's plan to improve operations, ii) severance for terminated management personnel, and iii) valuation adjustments for certain overhead assets associated with the ceased operations. Blood Products - -------------- Revenues and expenses for this business segment are summarized in the following table, but for 2002 excludes revenues and expenses associated with donor centers closed prior to the third quarter of 2003: For the three month period ended September 30, 2003 (Revenues and Gross Profit in Thousands)
Ongoing Centers Closed Centers California Mobiles Total ------------------ ------------------ ------------------ ----------------- 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- -------- -------- -------- ------- Revenues $ 2,454 $ 2,701 $ 843 $ 553 $ 1,869 $ 1,447 $ 5,166 $ 4,701 Gross Profit $ (67) $ 361 $ (890) $ (172) $ 235 $ 49 $ (722) $ 238 Gross Profit % (2.7)% 13.4% (105.6)% (31.1)% 12.6% 3.4% (14.0)% 5.1% Units Sold: Single DP 3,522 4,305 1,053 967 - - 4,575 5,272 Whole Blood 1,582 2,720 1,366 714 8,111 7,572 11,059 11,006
DP - Donor Platelets Ongoing Donor Centers For the three months ended September 30, 2003, revenues from ongoing donor centers decreased by $247,000, or 9.1%, to $2,454,000 from $2,701,000 in the same period of 2002. This decrease in revenues was mainly due to a decrease in platelet collections in the Sherman Oaks donor center of $281,000 reflecting the change from a paid to a volunteer program as of January 1, 2003. Third quarter unit sales from the Sherman Oaks donor center did reach 80% of the unit sales achieved in the fourth quarter of 2002, which was prior to the elimination of the paid donor program. For the three months ended September 30, 2003, gross profit from ongoing donor centers decreased by $428,000 to ($67,000) from $361,000 in the same period of 2002. The gross profit percentage from the ongoing donor centers decreased to (2.7%) in 2003 from 13.4% in 2002. The decrease at these centers reflects i) valuation adjustment for certain assets as a result of ceasing certain operations, ii) the change in the Sherman Oaks program from 8 9 a paid to a volunteer program as of January 1, 2003, iii) expenses related to implementing management's plan to improve operations, and iv) increased insurance premiums. California Mobiles For the three months ended September 30, 2003, revenues from our California mobile operations increased by $422,000, or 29.2%, to $1,869,000 from $1,447,000 in the same period of 2002. This increase in revenues from our California mobiles is mainly due to improved and refocused marketing efforts that resulted in increased collections, and improved whole blood pricing. For the three months ended September 30, 2003, gross profit from our California mobile operations increased by $186,000 to $235,000 from $49,000 in the same period of 2002. Our gross profit percentage from our California mobile operations increased to 12.6% in the third quarter of 2003 from 3.4% in the same period of 2002. This increase in gross profit is primarily due to the efficiencies associated with higher collection volumes and increased production and sales of plasma as compared to 2002. Closed Donor Centers The Company has closed, or targeted to close, the donor centers in Albany, New York; Chicago, Illinois; three centers in North Carolina; and Williston, Vermont. Together, these centers generated revenue of $843,000 during the three months ended September 30, 2003 and an operating loss of $890,000. During the quarter ended September 30, 2002, these centers, provided revenue of $553,000 and produced an operating loss of $172,000. The increase in revenues is due in part to higher volume of whole blood units collected as these centers matured. The increase in loss is due to expenses associated with closing these centers. These expenses include an increase in the fixed asset reserve as a result of closing these centers, and lease abandonment expenses accrued for the facilities vacated. In addition, ongoing operating losses, unrelated to implementation of management's plan to close these locations, contributed to the loss in the third quarter. Blood Services - -------------- Revenues from blood services decreased by $388,000, or 17.6%, to $1,814,000 in the third quarter of 2003 from $2,202,000 in the same period of 2002. The decrease was mainly due a 20.5% decrease in the number of therapeutic apheresis procedures performed from 1,895 procedures performed in the third quarter of 2002 to 1,506 procedures in the third quarter of 2003. Gross profit decreased to $546,000 (30.1% of revenue) during the three months ended September 30, 2003, compared to $742,000 (33.7% of revenue) during the same period in 2002. This is the result of lower procedure volume and fewer higher margin procedures during the period. The Company continues to offer a physician education program in California and New York as part of the marketing effort for the Company's blood services. General and Administrative Expenses - ----------------------------------- General and administrative expenses increased by $156,000, or 13.1%, to $1,343,000 in the third quarter of 2003 from $1,187,000 in the same period of 2002. This increase was primarily due to i) expenses incurred associated with implementing management's plan to improve operations, ii) valuation adjustments for certain overhead assets associated with closed locations totaling $42,000, and iii) severance expenses for terminated managers. Income Taxes - ------------ During the third quarter, the Company recorded a valuation allowance of $3.16 million against its deferred tax assets. This non-cash charge reduced the net value of the deferred tax assets on the balance sheet to zero. The assets were created as a result of income tax benefits that were recorded as a result of operating losses in prior years. Current accounting standards place significant weight on a history of recent cumulative losses in determining whether or not a valuation allowance is necessary. Forecasts of future taxable income are not considered sufficient positive evidence to outweigh a history of losses. Accordingly, the assets were reserved in full. The Company's federal net operating loss carryforwards are not impacted and can continue to be utilized for up to 20 years. 9 10 Nine months ended September 30, 2003 compared to the nine months ended September 30, 2002 - ------------------------------------------------------------------------ Overview - -------- Revenues for the nine months ended September 30, 2003 increased by $406,000, or 2.0%, to $20,848,000 from $20,442,000 in the same period of 2002. During the nine months ended September 30, 2003, the Company's California mobile operations revenue grew $1,643,000. This was offset by the absence of revenue in 2003 from donor centers closed in 2002, principally in California. In addition, the Company's consolidated revenue was reduced by a decline in blood services revenue of $689,000, or 10.9%. For the nine months ended September 30, 2003, gross profit was $1,144,000, or 5.5% of revenues, compared to $2,769,000, or 13.5% of revenues, during the same period in 2002. The decrease of $1,625,000 is mainly due to i) expenses incurred in the third quarter related to implementing management's plan to improve operations, ii) fewer high margin therapeutic apheresis procedures which caused a decrease of $359,000 in gross profit, iii) ongoing losses at donor centers outside of California and iv) higher insurance premiums. These were partially offset by an increase in gross profit at the California mobile operations due to increased efficiencies associated with higher collection volumes. General and administrative expenses decreased by $81,000, or 2.5%, to $3,103,000 in the first nine months of 2003 from $3,184,000 in the same period of 2002. The decrease was mainly due to non-recurring expenses incurred in the first nine months of 2002 related to litigation against the American Red Cross, and severance expenses incurred in 2002 related to the departure of the Company's Chief Executive Officer. The 2003 expenses included i) expenses incurred associated with implementing management's plan to improve operations, ii) severance for terminated management personnel, and iii) valuation adjustments for certain overhead assets associated with the ceased operations. Blood Products - -------------- Revenues and expenses for this business segment are summarized in the following table, but for 2002 excludes revenues and expenses associated with donor centers closed prior to 2003: For the nine month period ended September 30, 2003 (Revenues and Gross Profit in Thousands)
Ongoing Centers Closed Centers California Mobiles Total ------------------ ------------------ ------------------ ----------------- 2003 2002 2003 2002 2003 2002 2003 2002 -------- -------- -------- -------- -------- -------- -------- ------- Revenues $ 7,040 $ 8,399 $ 2,546 $ 1,453 $ 5,619 $ 3,976 $15,205 $13,828 Gross Profit $ 174 $ 1,063 $(1,387) $ (377) $ 586 $ (94) $ (627) $ 592 Gross Profit % 2.5% 12.7% (54.5)% (25.9)% 10.4% (2.4)% (4.1)% 4.3% Units Sold Single DP 9,275 15,891 3,183 1,002 - - 12,458 16,893 Whole Blood 3,190 8,143 5,478 1,451 24,753 22,774 33,421 32,368
DP - Donor Platelets Ongoing Donor Centers For the nine months ended September 30, 2003, revenues from ongoing donor centers decreased by $1,359,000, or 16.2%, to $7,040,000 from $8,399,000 in the same period of 2002. This decrease in revenues is primarily due to a decrease in revenues relating to platelet collections at the Sherman Oaks donor center of $1,143,000 reflecting the change from a paid to a volunteer program as of January 1, 2003. For the nine months ended September 30, 2003, gross profit from ongoing donor centers declined by $889,000, or 83.6%, to $174,000 from $1,063,000 in the same period of 2002. The gross profit percentages also declined to 2.5% in 2003 from 12.7% in 2002. This decrease in gross profit reflects i) the change in the Sherman Oaks donor center from a paid to a volunteer program 10 11 as of January 1, 2003, ii) higher recruitment and technology support costs, and iii) expenses related to implementing management's plan to improve operations. California Mobiles For the nine months ended September 30, 2003, revenues from the California mobile operations increased by $1,643,000, or 41.3%, to $5,619,000 from $3,976,000 in the same period of 2002. This increase reflects improved and refocused marketing efforts that resulted in an increase in collection rates, and better whole blood pricing. For the nine months ended September 30, 2003, gross profit from California mobile operations increased by $680,000 to $586,000 from a loss of $94,000 in the same period of 2002. The gross profit percentage increased to 10.4% in the first nine months of 2003 from (2.4%) in the same period of 2002. This increase is mainly due to the efficiencies associated with higher collection volumes and increased sales of plasma. Closed Donor Centers The Company has closed, or targeted to close, the donor centers in Albany, New York; Chicago, Illinois; three donor centers in North Carolina; and in Williston, Vermont. Together, these centers generated revenue of $2,546,000 during the nine months ended September 30, 2003 and an operating loss of $1,387,000. During the nine months ended September 30, 2002, these centers provided revenue of $1,453,000 and produced an operating loss of $377,000. The increase in revenues is due to the higher volume of whole blood units collected as these centers matured during 2003. The increase in loss is due to ongoing operating losses and expenses associated with closing these centers. Additional costs associated with the closure of these facilities will be reflected in the fourth quarter. Blood Services - -------------- Revenues from blood services decreased by $689,000, or 10.9%, to $5,643,000 in the first nine months of 2003 from $6,332,000 in the same period of 2002. The decrease was mainly due to a decrease of 12.8% in the number of therapeutic apheresis procedures performed from 5,413 procedures performed during the period in 2002 to 4,722 procedures in 2003. Gross profit decreased to $1,771,000, or 31.4% of revenue, during the nine months ended September 30, 2003, compared to $2,130,000, or 33.6% of revenue, during the same period in 2002. The slight decrease in the gross profit percentage is primarily attributed to changes in customer mix since the price charged different customers can vary based on the nature of the case serviced and the contract in place with the customer. General and Administrative Expenses - ----------------------------------- General and administrative expenses decreased by $81,000, or 2.5%, to $3,103,000 in the first nine months of 2003 from $3,184,000 in the same period of 2002. The decrease was mainly due to i) non-recurring legal fees associated with the American Red Cross litigation which was settled in late 2002, and ii) severance expenses associated with the departure of the Company's Chief Executive Officer in 2002. These decreases were partially offset in 2003 by i) increases in salaries and benefits relating to the expansion of our information technology department to support our blood bank computer system and other technological initiatives, ii) expenses estimated and incurred related to implementing management's plan to improve operations, iii) severance for terminated management personnel, iv) valuation adjustments for certain overhead assets associated with the ceased operations and v) by increases in insurance premiums. Critical Accounting Policies and Estimates - ------------------------------------------ Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates were used to 11 12 evaluate the adequacy of the allowance for doubtful accounts, the accrual of expenses associated with discontinued operations and the realization of deferred tax assets. Allowance for Doubtful Accounts: Ongoing estimates relating to the collectibility of accounts receivable are used to maintain a reserve for estimated losses resulting from the inability of our customers to meet their financial obligations to us. In determining the amount of the reserve, we consider our historical level of credit losses and make judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since we cannot predict future changes in the financial stability of our customers, actual future losses from uncollectible accounts may differ from our estimates. If the financial condition of our customers were to deteriorate, resulting in their inability to make payments, a larger reserve may be required. In the event we determined that a smaller or larger reserve was appropriate, we would record a credit or a charge to general and administrative expense in the period in which we made such a determination. Income Taxes: As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation reserve. To the extent we establish a reserve or increase this reserve in a period, we must include an expense within the tax provision in the statements of operations. Significant management judgment is required in determining our provision for income taxes, deferred tax asset and liabilities and any valuation reserve recorded against our net deferred tax assets. Management continually evaluates its deferred tax asset as to whether it is likely that the deferred tax asset will be realized. As of September 30, 2003, management has determined that the deferred tax asset was not likely to be realized, and accordingly management wrote-down the value of this asset and has reflected this write-down in the provision for taxes in the third quarter. Liquidity and Capital Resources - ------------------------------- As of September 30, 2003, the Company cash and cash equivalents equaled $1,057,000 and working capital of $896,000. The Company has a working capital line of credit with Comerica Bank - California. The amount the Company may borrow is the lesser of: 75% of eligible accounts receivable, less amounts outstanding on the notes payable discussed below, or $2 million. Interest is payable monthly at a rate of prime plus 0.5%; as of September 30, 2003 the rate paid by the Company was 4.5%. As of September 30, 2003, the Company's net borrowing on this line of credit is $450,000. This line of credit matures in June 2004, and is included in "current obligations under notes payable" on the balance sheet. As of September 30, 2003, the unused portion of the Company's line of credit was $1,550,000. In addition, the Company has various other equipment notes payable with Comerica Bank - California. As of September 30, 2003, the total amount outstanding under these notes was $325,000 and requires monthly principal payments of approximately $14,000 plus interest at a weighted average fixed rate of 6.5%. Of the total amount borrowed under these notes, $168,000 is included in "current obligations under notes payable" on the balance sheet. All of the Comerica loans are collateralized by substantially all of the Company's assets and are cross-defaulted. They also require the maintenance of certain financial covenants that among other things require minimum levels of profitability and prohibit the payment of dividends or stock repurchases. As of September 30, 2003, the Company was not in compliance with a covenant that requires the Company to be profitable each quarter. During the quarter ended September 30, 2003, the Company incurred a loss. The Company has requested, and Comerica has agreed to waive this covenant violation. 12 13 Additionally, the Company has another note payable with One Source Financial. As of September 30, 2003, the balance on this note was $81,000. The note requires quarterly payments of approximately $10,000 including interest at the rate of 8.5% and is secured by certain fixed assets. Of the total amount of this note outstanding, $33,000 is included in "current obligations under notes payable" on the balance sheet. The following table summarizes our contractual obligations by year (in thousands).
Total 2004 2005 2006 2007 ------- ------- ------ ------ ------ Operating leases $ 1,657 $ 537 $ 467 $ 458 $ 195 Capitalized leases 312 107 94 83 28 Notes payable 857 651 187 19 - ------- ------- ------ ------ ------ Totals $ 2,826 $ 1,295 $ 748 $ 560 $ 223 ======= ======= ====== ====== ======
The Company also committed to purchase approximately $14 million of blood collection kits at established prices through 2007. Management does not believe the Company's demand for these kits will satisfy the purchase commitment. The Company is presently in negotiations with the supplier to lower the commitment requirement. Based on the preliminary results of these negotiations, management fully expects that a new, achievable commitment requirement will be successfully negotiated without any material negative impact on the Company. For the nine months ended on September 30, 2003, net cash provided by operating activities was $804,000, and $862,000 for the nine months ended September 30, 2002. The decrease of $58,000 is primarily due to the net losses of $4,943,000 recorded since the beginning of 2003. The decrease in net cash from operating activities is partially offset by i) an increase in depreciation and amortization of $704,000, ii) an increase in the deferred tax asset valuation reserve of $2,984,000, and iii) a decrease in accounts receivable of $484,000. The increase in depreciation and amortization is mostly related to valuation adjustments associated with the implementation of management's plans to improve operations. The increase in the deferred tax asset valuation reserve is due to management's estimate of the likelihood that the Company will utilize this asset against future taxable income. Finally, the decrease in accounts receivable is due to the Company's efforts to aggressively collect older receivables. During the nine months ended September 30, 2003, these efforts reduced the number of days sales outstanding to 45 at September 30, 2003, from 62 days at December 31, 2002. For the nine months ended on September 30, 2003, net cash used in investing activities was $287,000, compared with $860,000 for the same period in 2002. The decrease of $573,000 is primarily due to the Company's investments in new donor centers in 2002, the Company's investment in technology in 2002, and expenditures on leasehold improvements relating to the move of the Company's corporate headquarters to Woodland Hills in 2002. For the nine months ended September 30, 2003, net cash used in financing activities is $508,000 compared with net cash provided of $179,000 for the nine months ended September 30, 2002. The net use of cash for financing activities of $508,000 in 2003 is mainly due to a $661,000 in payments for principal on the line of credit, the equipment loans and capital leases. This amount is partially offset by $150,000 in proceeds taken from the line of credit since the beginning of 2003. Management anticipates that cash on hand and available borrowing on the bank line of credit will be sufficient to provide funding for the Company's needs during the next nine months, including working capital requirements, equipment purchases and operating lease commitments. The Company intends to negotiate a new line of credit as of June 30, 2004 to replace the existing line of credit. The Company's primary sources of liquidity include our cash on hand, available borrowing on the line of credit and cash generated from operations. Liquidity depends, in part, on timely collections of accounts receivable. Any significant delays in customer payments could adversely affect the Company's liquidity. Liquidity also depends on maintaining compliance with the various loan covenants. From time to time the Company 13 14 has failed to comply with some or all of these covenants. The Company has obtained waivers from the bank for each of these covenant violations. If in the future the Company is unable to comply with a loan covenant and the bank does not issue a waiver, the Company's liquidity could be materially affected. Risk Factors Affecting the Company - ---------------------------------- Short and long-term success is subject to many factors that are beyond management's control. Shareholders and prospective shareholders in the Company should consider carefully the following risk factors, in addition to other information contained in this report. This Quarterly Report on Form 10-Q contains forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those described below. Operating Risk - -------------- Management has implemented a plan to close or abandon certain operations that have been generating operating losses for the Company. Management believes that closing these locations will help to improve the overall profitability of the Company; however, the actual ability of the Company to improve profitability depends on management successfully implementing the plan to close the identified locations. If management is not successful, the overall profitability of the Company may not improve which could have a material adverse effect on the future of the business and on future results of operations. Market Prices for Blood Do Not Necessarily Reflect Costs - -------------------------------------------------------- The Company depends on competitive pricing to obtain and maintain sales. As costs increase, the Company may not be able to raise prices commensurately if competitors do not. Some competitors have greater resources than the Company to sustain periods of unprofitable sales. Cost increases may therefore have a direct negative effect on profits and a material adverse affect on the business. Declining Blood Donations - ------------------------- The business depends on the availability of donated blood. Only a small percentage of the population donates blood, and the rate continues to decline. In addition, new regulations intended to reduce the risk of introducing infectious diseases in the blood supply have eliminated some groups of potential donors. If the level of donor participation in blood products declines, the Company may not be able to achieve profitability or reduce costs sufficiently to maintain profitability in blood products. While the Company has developed strategies to recruit volunteer blood donors, there can be no assurance that these strategies will result in sufficient blood collections to meet hospital needs or to assure profitability. Increasing Costs - ---------------- The costs of collecting, processing and testing blood have risen significantly in recent years and will likely continue to increase. These cost increases are related to new and improved testing procedures to assure that blood is free of infectious disease, increased regulatory requirements related to blood safety, and increased costs associated with recruiting blood donors. New testing protocols have required the Company to outsource much of the required testing. Competition, and in some cases multi-year contractual arrangements, may limit the Company's ability to pass these increased costs to customers. In this circumstance, the increased costs could reduce profitability and could have a material adverse effect on the business and results of operations. Increasing Reliance on Outside Laboratories - ------------------------------------------- The Company maintains laboratories that are licensed and accredited to test blood products for purity, potency and quality. The Company utilizes outside laboratories for nucleic acid testing. As other new testing and processing technologies are introduced, the Company may increase its reliance on outside laboratories. In using outside laboratories the Company will have less control over testing quality. In addition, because 14 15 laboratory facilities competent in these new technologies are scarce, the loss of an outside laboratory because of competition for capacity would have a material adverse effect on the business. Targeted Donor Base Involves Higher Collection Costs - ---------------------------------------------------- Part of the Company's recruitment strategy involves conducting blood drives for organizations that provide a relatively small number of donors. Blood drives directed at smaller donor sites lack the efficiencies associated with larger blood drives. As a result, collection costs might be higher than the competition and may affect profitability and growth plans. Access to Insurance - ------------------- The Company currently maintains insurance coverage consistent with the industry; however, if the Company experiences losses or the risks associated with the blood products industry increase in the future, insurance may become more expensive or unavailable. The Company also cannot give assurance that as the business expands, or the Company introduces new products and services, that additional liability insurance on acceptable terms will be available, or that the existing insurance will provide adequate coverage against any and all potential claims. Also, the limitations on liability contained in various agreements and contracts may not be enforceable and may not otherwise protect the Company from liability for damages. The successful assertion of one or more large claims against the Company that exceeds available insurance coverage, or changes in insurance policies, such as premium increases or the imposition of large deductibles or co-insurance requirements, could materially and adversely affect the business. Potential Inability to Meet Future Capital Needs - ------------------------------------------------ Currently, the Company believes it has sufficient cash available through its cash on hand, bank credit facilities and funds from operations to finance its operations for the next nine months. However, the Company incurred a $4,943,000 loss during the nine months ended September 30, 2003. The Company may need to raise additional capital in the debt or equity markets. There can be no assurance that the Company will be able to obtain such financing on reasonable terms or at all. Additionally, there is no assurance that the Company will be able to obtain sufficient capital to finance future expansion. Not-For-Profit Status Gives Advantages to Our Competitors - --------------------------------------------------------- HemaCare Corporation is the only significant blood supplier in the U.S. that is operated for profit and investor owned. The competition is not-for- profit, exempt from federal and state taxes, has substantial community support and access to tax-exempt financing. The Company may not be able to continue to compete successfully with not-for-profit organizations and the business and results of operations may suffer material adverse harm. Reimbursement Rates Have Not Kept Pace with Cost Increases - ---------------------------------------------------------- The reimbursement rates for blood products and services provided to Medicaid and Medicare patients were based on medical costs prevailing several years ago. Medical costs have increased substantially since that time, but the reimbursement rates have not. Further increases in medical costs in the future without increases in reimbursement rates may impact the Company's profitability. Business Interruption Due to Terrorism and Increased Security Measures In Response to Terrorism - -------------------------------------------------------------------------- HemaCare's business depends on the free flow of products and services through the channels of commerce and freedom of movement for patients and donors. The 2001 response to terrorist activities slowed or stopped transportation, mail, financial and other services for a period of time. Further delays or stoppages in transportation of perishable blood products and interruptions of mail, financial or other services could have a material adverse effect on the Company's results of operations and financial condition. Furthermore, the Company may experience an increase in operating costs, such as costs for transportation, insurance and security, as a result of the terrorist activities and potential activities, which may target health care facilities or medical products. The Company may also experience delays in receiving payments from payers that have been affected by 15 16 terrorist activities and potential activities. The U.S. economy in general is adversely affected by terrorist activities, and potential activities, and any economic downturn could adversely impact the Company's results of operations, impair its ability to raise capital or otherwise adversely affect its ability to grow its business. Potential Loss of Lines of Credit - --------------------------------- In December 2002, the Company replaced the then existing lines of credit with a new $2.0 million working capital line of credit that requires the Company maintain certain financial covenants including profitability each quarter. As of September 30, 2003, the Company was not in compliance with a covenant that requires profits each quarter since the Company incurred a loss. The bank has waived this violation. Maintaining compliance is dependent, among other things, on achieving the required profitability. In 2002, the Company lost $591,000 and for the first nine months of 2003 the Company lost $4,943,000. Continued losses would violate the terms of the new credit line. While in the past the bank granted covenant violation waivers when needed, the Company cannot assure that the bank will continue to grant waivers in the future. Failure to obtain such waivers when, and if needed, could result in acceleration of payment obligations under the credit agreement and severely reduce liquidity. In addition, the existing credit agreement expires June 30, 2004. Management will make efforts to replace this facility; however, the Company cannot assure that alternative financing will be available. Failure to replace this facility will adversely impact liquidity and therefore adversely impact the business as well. Potential Adverse Affect from Changes in the Healthcare Industry - ---------------------------------------------------------------- In the U.S., a fundamental change is occurring in the healthcare system. Competition to gain patients on the basis of price, quality and service is intensifying among healthcare providers who are under pressure to decrease the costs of healthcare delivery. This trend is expected to continue. In addition, there has been significant consolidation among healthcare providers as providers seek to enhance efficiencies, and this consolidation is expected to continue. As a result of these trends, the Company may be limited in its ability to increase prices for products in the future, even if costs increase. Further, the Company could be adversely affected by customer attrition as a result of consolidation among healthcare providers. Future Technological Developments Could Jeopardize Business - ------------------------------------------------------------ As a result of the risks posed by blood-borne diseases, many companies are currently seeking to develop synthetic substitutes for human blood products. HemaCare's business consists of collecting, processing and distributing human blood and blood products. The introduction and acceptance in the market of synthetic blood substitutes would cause material adverse harm to the business. Operations Depend on Obtaining the Services of Qualified Medical Professionals - ---------------------------------------------------------------- The Company is highly dependent upon obtaining the services of qualified medical professionals. In particular, product collection operations depend on the services of registered nurses, and other professionals. Nationwide, the demand for these professionals exceeds the supply and competition for their services is strong. This shortage could be aggravated in the event of a war or other international conflict. If the Company is unable to attract and retain a staff of qualified medical professionals, operations would be adversely affected. Heavily Regulated Industry - --------------------------- The business of collecting, processing and distributing blood and blood products are all subject to extensive and complex regulation by the state and federal governments. The Company is required to obtain and maintain numerous licenses in different legal jurisdictions regarding the safety of products, facilities and procedures, and regarding the purity and quality of blood products. In addition, state and federal laws include anti-kickback and self-referral prohibitions and other regulations that affect the relationships between blood banks, hospitals, physicians and other persons who refer business to each other. Health insurers and government payers, such as Medicare and Medicaid, also limit reimbursement for products and services, and require compliance with certain regulations before reimbursement will be made. 16 17 The Company devotes substantial resources to complying with laws and regulations, and believes it is currently in compliance; however, the possibility cannot be eliminated that interpretations of existing laws and regulations will result in a finding that the Company has not complied with significant existing regulations. Such a finding could materially harm the business. Moreover, healthcare reform is continually under consideration by regulators, and the Company does not know how laws and regulations will change in the future. Some of these changes could require costly compliance efforts or expensive outsourcing of functions which could make some of the Company's operations prohibitively expensive or impossible to continue. Product Safety and Product Liability - ------------------------------------ Blood products carry the risk of transmitting infectious diseases, including hepatitis, HIV and Creutzfeldt-Jakob Disease. HemaCare carefully screens donors, uses the latest available technology to test its blood products for known pathogens in accordance with industry standards, and complies with all applicable safety regulations. Nevertheless, the risk that screening and testing processes might fail or that new pathogens may be undetected by them cannot be completely eliminated. There is currently no test to detect the pathogen responsible for Creutzfeldt-Jakob Disease. If patients are infected by known or unknown pathogens, claims could exceed insurance coverage and materially and adversely affect the Company's financial condition. Furthermore, healthcare regulations are constantly changing and certain changes could require costly compliance or make some of our operations impossible to continue. Environmental Risks - ------------------- HemaCare's operations involve the controlled use of bio-hazardous materials and chemicals. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company and its insurance coverage. The Company may incur substantial costs to maintain compliance with environmental regulations as it develops and expands its business. Articles of Incorporation and Rights Plan Could Delay or Prevent an Acquisition or Sale of HemaCare - -------------------------------------------------------------------- HemaCare's Articles of Incorporation empower the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. This gives the Board of Directors the ability to deter, discourage or make more difficult for a change in control of HemaCare, even if such a change in control would be in the interest of a significant number of shareholders or if such a change in control would provide shareholders with a substantial premium for their shares over the then-prevailing market price for our common stock. In addition, the Board of Directors has adopted a Shareholder's Rights Plan designed to require a person or group interested in acquiring a significant or controlling interest in HemaCare to negotiate with the Board. Under the terms of our Shareholders' Rights Plan, in general, if a person or group acquires more than 15% of the outstanding shares of common stock, all of the other shareholders would have the right to purchase securities from the Company at a discount to the fair market value of the common stock, causing substantial dilution to the acquiring person or group. The Shareholders' Rights Plan may inhibit a change in control and, therefore, could materially adversely affect the shareholders' ability to realize a premium over the then-prevailing market price for the common stock in connection with such a transaction. For a description of the Rights Plan see the Company's Current Report on Form 8-K filed with the SEC on March 5, 1998. Stocks Traded on the OTC Bulletin Board are Subject to Greater Market Risks than Those of Exchange-Traded and NASDAQ Stocks - ---------------------------------------------------------------------------- HemaCare's common stock was delisted from the NASDAQ Small Cap Market on October 29, 1998 because of the failure to maintain NASDAQ's requirement of a minimum bid price of $1.00. Since November 2, 1998 the common stock has traded on the OTC Bulletin Board, an electronic, screen-based trading system operated by the National Association of Securities Dealers, Inc. Securities traded on the OTC Bulletin Board are, for the most part, thinly traded and 17 18 generally are not subject to the level of regulation imposed on securities listed or traded on the NASDAQ Stock Market or on a national securities exchange. As a result, an investor may find it difficult to dispose of our common stock or to obtain accurate quotations as to its price. Stock Price Could Be Volatile - ----------------------------- The price of HemaCare's common stock has fluctuated in the past and may be more volatile in the future. Factors such as the announcements of government regulation, new products or services introduced by the Company or by the competition, healthcare legislation, trends in the health insurance and HMO industry, litigation, fluctuations in operating results and market conditions for healthcare stocks in general could have a significant impact on the future price of HemaCare's common stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that may be unrelated to the operating performance of particular companies. The generally low volume of trading in HemaCare's common stock makes it more vulnerable to rapid changes in price in response to market conditions. Future Sales of Equity Securities Could Dilute the Company's Common Stock - -------------------------------------------------------------------------- The Company may seek new financing in the future through the sale of its securities. Future sales of common stock or securities convertible into common stock could result in dilution of the common stock currently outstanding. In addition, the perceived risk of dilution may cause some shareholders to sell their shares, which could further reduce the market price of the common stock. Lack of Dividend Payments - ------------------------- The Company intends to retain any future earnings for use in its business, and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. The declaration and payment of any cash dividends in the future will depend on the Company's earnings, financial condition, capital needs and other factors deemed relevant by the Board of Directors. In addition, the Company's credit agreement prohibits the payment of dividends during the term of the agreement. Item 3. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------------- The Company has $1,131,000 of debt that includes $681,000 of notes payable and capitalized leases with fixed interest rates. The remaining $450,000 of debt represents advances on our working capital line of credit and the interest rate is linked to the prime interest rate. Accordingly, interest rate expense will fluctuate with rate changes in the U.S. If interest rates were to increase or decrease by 1% for the year, our interest expense would increase or decrease by approximately $4,500. Item 4. Controls and Procedures - --------------------------------- The Company's chief executive officer and the principal financial officer, with the participation of the Company's management, carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the chief executive officer and the principal financial officer believe that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries required to be included in this report). Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objections is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established process. There was no change in the Company's internal controls over financial reporting, known to the chief executive officer or the principal financial officer, that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 18 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings - --------------------------- From time to time, the Company is involved in various routine legal proceedings incidental to the conduct of its business. Management does not believe that any of these legal proceedings will have a material adverse impact on the business, financial condition or results of operations of the Company, either due to the nature of the claims, or because management believes that such claims should not exceed the limits of the Company's insurance coverage. See disclosure in Form 10-K for the year ended December 31, 2002. Item 2. Changes in Securities and Use of Proceeds - --------------------------------------------------- None. Item 3. Defaults Upon Senior Securities - ----------------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------- a. The Company's Annual Meeting of Shareholders (the "Meeting") was held on August 13, 2003. b. The following table shows the tabulation of votes for all matters put to vote at the Meeting. Matters Put to Vote For Against/Withheld - ------------------------------ --------------- ------------------- 1. Election of Five Directors Julian L. Steffenhagen 6,654,082 11,625 Judi Irving 6,653,882 11,825 Robert L. Johnson 6,654,082 11,625 Terry Van Der Tuuk 6,653,982 11,725 Stephen P. Wallace 6,654,082 11,625 Item 5. Other Information - ---------------------------- None. Item 6. Exhibits and Reports on Form 8-K - --------------------------------------------- a. Exhibits 10.1 Employment letter between the Registrant and Robert Chilton, dated October 2, 2003 11 Net Loss per Common and Common Equivalent Share 31.1 Certification Pursuant to Rule 15d-14(a) Under the Securities Exchange Act 31.2 Certification Pursuant to Rule 15d-14(a) Under the Securities Exchange Act 32 Certification Pursuant to 18 U.S.C. 1350 and Rule 15d- 14(a) Under the Securities Exchange Act b. Reports on Form 8-K On November 4, 2003, the Company filed a current report on Form 8-K disclosing under Item 5 (Other Information), a press release dated November 3, 2003 announcing the 19 20 appointment of Robert Chilton as Chief Financial Officer and Steven B. Gerber to the Board of Directors. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date November 14, 2003 HEMACARE CORPORATION --------------------- ------------------------------------- (Registrant) /s/ Judi Irving ------------------------------------- Judi Irving, Chief Executive Officer /s/ Robert S. Chilton -------------------------------------- Robert S. Chilton, Chief Financial Officer 20 EX-10 3 ex10rc.txt EXHIBIT 10.1 EXHIBIT 10.1 [HEMACARE LOGO] October 2, 2003 Robert Chilton XXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXX Dear Bob: I am pleased to offer you the position of Chief Financial Officer at HemaCare Corporation, a position reporting directly to me. I look forward to working with you as we build upon our long legacy of providing quality blood products and services. I believe that HemaCare's business plan and growth strategy will offer you many rewards and opportunities as the Company positions itself to be a major player in the blood sector of the healthcare industry. The following summarizes the particulars of the offer of employment: Annual Salary: A base salary of $160,000 per year, with annual reviews. Car allowance of $600.00 per month. Stock Options: Subject to formal Board approval, 100,000 shares, vesting in 20% increments in March, 2004, 2005, 2006, 2007, and 2008. These shares will be priced at the average price in the month you join, or if on investigation, we discover that creates a charge to the company, they will be priced at the close on the day in which they are awarded. If you leave the company for any reason, you will have up to three months from the last day of your employment to exercise any options that may have vested during your employment. All of your options would vest at the time of a sale of the company. From time to time you may be awarded additional options based on their availability in our stockholder approved plan and your performance. Bonus: Up to 30% of the base annual salary (starting in 2004) for achieving specified goals determined by the Chief Executive Officer. The bonus structure will typically put 100% of your bonus at risk; bonuses are usually paid in March. A $10,000 bonus will be paid to you in March 2004, subject to satisfactory performance. Severance: Immediately upon employment you will be eligible for a severance package of three months of salary with a signed agreement releasing the company from any liability in relation to your employment. After six months of employment performance, the severance package will be increased to six months with a signed release. This severance would be paid monthly. In the event of gross negligence or illegal acts, severance shall not be payable. Benefits: You will receive the standard health plans and other employee benefits, including 29 days of paid time off (on an annual basis accruing bi-weekly). Health benefits will commence on November 1, 2003. This offer is contingent upon the favorable results of reference checks including background, driving, criminal and credit check. As part of our employment offer, we also require all new employees to sign an arbitration agreement. Your start date will be October 3, 2003. We are looking forward to you joining the HemaCare team and the contributions you will make toward our success. To accept this offer of employment, please sign below and return to Linda McDermott, Director of Human Resources, within five business days of receipt. Sincerely, Accepted: /s/ Judi Irving /s/Robert Chilton - -------------------------- --------------------------- Judi Irving Robert Chilton Chief Executive Officer EX-11 4 ex1132003.txt EXHIBIT 11 HemaCare Corporation EXHIBIT 11 Basic and Diluted Net Loss per Share
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ----------------------- 2003 2002 2003 2002 ----------- ------------ ---------- ---------- BASIC AND DILUTED ----------------- Weighted average common shares used to compute basic and diluted earnings per share........................... 7,754,430 7,738,060 7,752,196 7,647,060 ============ =========== ============ =========== Net loss........... $(4,679,000) $ (462,000) $(4,943,000) $ (619,000) ============ =========== ============ =========== Basic and diluted net loss per share.. $ (0.60) $ (0.06) $ (0.64) $ (0.08) ============ =========== ============ ===========
EX-31 5 ex311303.txt EXHIBIT 31.1 EXHIBIT 31.1 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: November 14, 2003 /s/ Judi Irving ________________________________________ Judi Irving (Chief executive officer) EX-31 6 ex312303.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Robert Chilton, 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: November 14, 2003 /s/ Robert Chilton ________________________________________ Robert Chilton (Chief Financial Officer and Principal Accounting Officer) EX-32 7 ex323q.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 September 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 Robert Chilton ___________________________ Robert Chilton Chief Financial Officer (Principal Accounting Officer) Dated: November 14, 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-----