-----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, Vk2NnhrKCLsUOSVRdV/92GdA0pHSmyFw2KVHJ1k5d9xFCNqndqJh7uChmnEdYgSD +sBOz92oB2ZDx1qRFuJY+A== 0000801748-04-000007.txt : 20040514 0000801748-04-000007.hdr.sgml : 20040514 20040514142922 ACCESSION NUMBER: 0000801748-04-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040514 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: 04806561 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 q12004.txt ========================================================================== 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 March 31, 2004 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 0-15223 HEMACARE CORPORATION (Exact name of registrant as specified in its charter) California 95-3280412 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 21101 Oxnard Street Woodland Hills, California 91367 (Address of principal executive offices) (Zip Code) (818) 226-1968 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ As of May 10, 2004, 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 MONTHS ENDED MARCH 31, 2004
Page Number ------ PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003.............................................. 1 Consolidated Statements of Income for the three ended March 31, 2004 and 2003 (unaudited)................................ 2 Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited)................................ 3 Notes to Unaudited Consolidated Financial Statements............... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 7 Item 3. Qualitative and Quantitative Disclosures About Market Risk......... 17 Item 4. Controls and Procedure............................................. 17 PART II. OTHER INFORMATION - -------- ----------------- Item 1 Legal Proceedings.................................................. 17 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.................................................. 17 Item 3. Defaults Upon Senior Securities.................................... 17 Item 4. Submission of Matters to a Vote of Security Holders................ 18 Item 5. Other Information.................................................. 18 Item 6. Exhibits and Reports on Form 8-K................................... 18 SIGNATURES................................................................. 18
i 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements HEMACARE CORPORATION CONSOLIDATED BALANCE SHEETS
March 31, December 31, 2004 2003 ------------ ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents............................ $ 911,000 $ 935,000 Accounts receivable, net of allowance for doubtful accounts - $395,000 in 2004 and $351,000 in 2003............................................ 3,442,000 3,128,000 Product inventories and supplies..................... 565,000 494,000 Prepaid expenses..................................... 316,000 388,000 Note receivable...................................... - 20,000 ------------ ------------ 5,234,000 4,965,000 Plant and equipment, net of accumulated depreciation and amortization of $3,057,000 in 2004 and $2,919,000 in 2003............ 3,113,000 3,259,000 Deferred income taxes.................................. 13,000 - Other assets........................................... 54,000 62,000 ------------ ------------ Total current assets............... $ 8,414,000 $ 8,286,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 1,515,000 $ 1,686,000 Accrued payroll and payroll taxes.................... 1,341,000 918,000 Other accrued expenses............................... 159,000 243,000 Current obligations under capital leases............. 247,000 229,000 Current obligations under notes payable.............. 209,000 710,000 ------------ ------------ Total current liabilities................ 3,471,000 3,786,000 Obligations under capital leases, net of current portion................................... 891,000 954,000 Notes payable, net of current portion.................. 386,000 124,000 Other long-term liabilities............................ 9,000 11,000 Commitments and contingencies.......................... Shareholders' equity: Common stock, no par value - 20,000,000 shares authorized, 7,756,060 isued and outstanding in 2004 and 2003...................................... 13,319,000 13,319,000 Accumulated deficit.................................. ( 9,662,000) (9,908,000) ------------ ------------ Total shareholders' equity............... 3,657,000 3,411,000 ------------ ------------ $ 8,414,000 $ 8,286,000 ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 2 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, -------------------------- 2004 2003 ------------ ------------ Revenues: Blood products.................... $ 4,845,000 $4,946,000 Blood services.................... 1,891,000 1,985,000 ------------ ----------- Total revenue.................... 6,736,000 6,931,000 Operating costs and expenses: Blood products.................... 4,058,000 4,684,000 Blood services.................... 1,247,000 1,247,000 ------------ ---------- Total operating costs and expenses....................... 5,305,000 5,931,000 ------------ ----------- Gross profit...................... 1,431,000 1,000,000 General and administrative expenses............................ 1,185,000 986,000 ------------ ----------- Income before income taxes............. 246,000 14,000 Provision for income taxes............. - 6,000 ------------ ----------- Net income.......................... $ 246,000 $ 8,000 ============ =========== Basic and diluted earnings per share... $ 0.03 $ 0.00 ============ =========== Weighted average shares outstanding - basic............................... 7,756,000 7,751,000 ============ =========== Weighted average shares outstanding - diluted............................ 7,947,000 7,834,000 ============ ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 3 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, 2004 2003 ------------- --------------- Cash flows from operating activities: Net income................................................$ 246,000 $ 8,000 Adjustments to reconcile net income to net cash provided by operating activities: Provision for bad debts................................ 126,000 - Use (recognition) of deferred tax assets............... (13,000) 6,000 Depreciation and amortization.......................... 153,000 148,000 Loss of disposal of assets............................. 3,000 - Changes in operating assets and liabilities: (Increase) decrease in accounts receivable............ (440,000) 610,000 Decrease (increase) in inventories, supplies and prepaid expenses..................................... 1,000 (173,000) Decrease in other assets.............................. 8,000 9,000 Decrease in note receivable........................... 20,000 - Increase (decrease) in accounts payable, accrued expenses and other liabilitiess...................... 166,000 (25,000) ----------- ----------- Net cash provided by operating activities............. 270,000 583,000 Cash flows from investing activities: Proceeds from sale of plant and equipment................. 14,000 - Purchases of plant and equipment, net..................... (24,000) (207,000) ----------- ----------- Net cash used in investing activities..................... (10,000) (207,000) Cash flows from financing activities: Principal payments on debt and capitalized leases......... (284,000) (218,000) ----------- ----------- Net cash used in financing activities..................... (284,000) (218,000) ----------- ----------- (Decrease) increase in cash and cash equivalents............ (24,000) 158,000 Cash and cash equivalents at beginning of period............ 935,000 1,048,000 ----------- ----------- Cash and cash equivalents at end of period.................. $ 911,000 $1,206,000 =========== =========== Supplemental disclosure: Interest paid............................................. $ 31,000 $ 20,000 =========== =========== Income taxes paid......................................... $ 1,000 $ - =========== ===========
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 months ended March 31, 2004 and 2003 include all adjustments (consisting of normal recurring accruals) which management considers necessary to present fairly the financial position of the Company as of March 31, 2004, the results of its operations for the three months ended March 31, 2004 and 2003, and its cash flows for the three months ended March 31, 2004 and 2003 in conformity with accounting principles generally accepted in the United States. These financial statements have been prepared consistently with the accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on March 25, 2004 and should be read in conjunction with this Quarterly Report on Form 10-Q. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the consolidated results of operations to be expected for the full fiscal year ending December 31, 2004. Certain information and footnote disclosures normally included in the financial statements presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company maintains cash balances at various financial institutions. Deposits not exceeding $100,000 for each institution are insured by the Federal Deposit Insurance Corporation. At March 31, 2004 and December 31, 2003, the Company had uninsured cash and cash equivalents of $701,000 and $719,000, respectively. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current period presentation. Note 2 - Line of Credit and Notes Payable - ----------------------------------------- The Company has a working capital line of credit with Comerica Bank - California. The amount the Company may borrow is the lesser of: 75% of eligible accounts receivable less amounts outstanding on the notes payable discussed below, or $2 million. Interest is payable monthly at a rate of prime plus 0.5%; as of March 31, 2004 the rate paid by the Company was 4.5%. As of March 31, 2004, the Company's net borrowing on this line of credit was $300,000, and the Company had unused availability of $1,700,000. The Company has entered into an amendment to the credit agreement with Comerica Bank to extend the term of the line of credit to June 30, 2005, 4 5 and to revise the financial covenants to levels more favorable to the Company. As of March 31, 2004, the Company was in compliance with all of the revised covenants. In addition, the Company has various other equipment notes payable with Comerica Bank - California. As of March 31, 2004, the total amount outstanding under these notes was $203,000 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, $148,000 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. Additionally, the Company has another note payable with One Source Financial. As of March 31, 2004, the balance on this note was $65,000, which is due in full on January 25, 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, $35,000 is included in current obligations under notes payable on the balance sheet. The Company also has a note payable with AICCO, Inc. related to financing certain insurance premiums. As of March 31, 2004, the balance due on this note was $26,000, all of which is included in current obligations under notes payable on the balance sheet. The note requires monthly payments of approximately $13,000, including interest at a rate of 3.4%. In December 2003 the Company entered into a capital lease transaction with Gambro BCT to finance the acquisition of equipment used in the Company's apheresis activities. The total value of the equipment financed through this capital lease was $932,000. The lease has a five year term and a fixed interest of 7.5%. The lease is secured by all of the equipment purchased through the lease financing. Note 3 - Shareholders' Equity - ----------------------------- The Company has elected to adopt SFAS 123, "Accounting for Stock-Based Compensation," for disclosure purposes only and applies the provision of APB Opinion No. 25. The Company did not recognize any compensation expense related to the issuance of stock options in 2004 or 2003. Had compensation expense for all options granted to employees and directors been recognized in accordance with SFAS 123, the Company's net income (loss) per share would have been as follows:
Three months ended March 31, ------------------------- 2004 2003 ----------- ---------- Net income as reported.................... $ 246,000 $ 8,000 Deduct: Total stock-based employee compensation expense determined under fair market value based method for all awards net of related tax effects........ (40,000) (28,000) ----------- ---------- Pro forma net income (loss):............. $ 206,000 $ (20,000) =========== ========== Net income per share - basic and diluted As reported........................... $ 0.03 $ 0.00 Pro forma............................. $ 0.03 $ (0.00)
5 6 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 March 31, ------------------------- 2004 2003 ---------- ----------- Net income............................... $ 246,000 $ 8,000 =========== =========== Shares outstanding....................... 7,756,060 7,751,000 Net effect of diluted options and warrants............................... 191,000 83,000 ----------- ----------- Dilutive shares outstanding.............. 7,947,060 7,834,000 =========== ===========
Options and warrants outstanding for 1,639,000 shares and 1,794,000 for the three months ended March 31, 2003 and 2004, respectively, have been excluded from the above calculation because their effect would have been anti-dilutive. Note 5 - Provision for Income Taxes - ----------------------------------- The Company has substantial net operating losses from prior periods that will be available in 2004 to eliminate any federal tax liability. The Company has recognized income in each of the last two quarters, and as a result, and to the degree that the Company incurs any state tax liability, the Company will reduce the valuation reserve against its deferred tax assets to reflect some potential future benefit from the future utilization of the Company's net operating losses. The Company will continue to evaluate the deferred tax asset valuation reserve each quarter based on the reportable income for each quarter. The Company estimates that $13,000 in state taxes has been incurred as a result of reportable income during the first quarter of 2004. Therefore, the Company reduced the valuation reserve by $13,000, thus eliminating any recognition of income taxes in the quarter. 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. Costs associated with the closures are reflected in the Company's third and fourth quarter results in accordance with generally accepted accounting principles. 6 7 During the first quarter of 2004, management completed the implementation of this plan by closing the donor center in Chapel Hill, North Carolina. All of the costs associated with the closure of this center are reflected in the Company's first quarter results in accordance with generally accepted accounting principles. As a result of the implementation of management's plan to close the donor center as described above, the Company incurred or anticipates will incur certain expenses associated with closing this center. These expenses total $11,000 and include vehicle transportation expenses, equipment lease cancellation costs and other associated costs. All of the these costs were recorded as operating expense. Of the $11,000 provision recorded in the first quarter of 2004, $2,000 was utilized during the quarter and $9,000 remains outstanding as of March 31, 2004. Note 8 - Subsequent Events - -------------------------- In February 2004, the Company received notice from Gambro BCT ("Gambro"), one of the Company's largest suppliers, that the California Board of Equalization was conducting an audit of Gambro's sales tax records. Gambro communicated to the Company that preliminary results of this audit indicated that the Company is likely to receive a refund of previously paid sales taxes. The amount of the potential refund has not yet been determined; however, preliminary indications are that the amount could be material. The Company will record the benefit of this refund, if any, as soon as the amount can be reasonably estimated and is certain. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------- The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's financial statements and the related notes provided under "Item 1-Financial Statements" above. The matters discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may also be identified by the use of words such as "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "project," "will" and similar expressions, as they relate to the Company, its management and its industry. Investors and prospective investors are cautioned that these forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results could differ from those described in this report because of numerous factors, many of which are beyond the Company's control. These factors include, without limitation, those described below under the heading "Risk Factors Affecting our Business." The Company does not undertake to update its forward-looking statements to reflect later events and circumstances or actual outcomes. General - ------- HemaCare Corporation ("HemaCare" or the "Company") collects, processes and distributes blood products to hospitals in the United States. Additionally, the Company provides blood related services, principally therapeutic apheresis procedures, stem cell collection and other blood treatments to patients with a variety of disorders. Blood related services are usually provided on an "in-patient" basis under contract with the hospital as an outside purchased service. The Company has operated in Southern California since 1979. In 1998, the Company expanded operations to include portions of the eastern U.S. In 2003, new management completed a comprehensive evaluation of the Company's operations, and at the conclusion of this review developed a restructuring plan to reduce the number of geographic areas served, reduce the overhead costs associated with supporting the organization, and improve the collection capability in the geographic areas still served by the Company. Management's strategy is to return the Company to a profitable foundation before exploring opportunities for growth in other geographic areas or into new lines of business. The implementation of this plan started in the third quarter of 2003, and continued into early 2004. As of the end of the first quarter of 2004, the implementation of the restructuring plan is complete, and management is now focused on improving the profitability of 7 8 the remaining operations including growth within existing geographic markets, expanding therapeutic apheresis market share and exploring new customer opportunities such as research companies. Although most blood suppliers are organized as not-for-profit, tax-exempt organizations, all suppliers charge fees for blood products to cover their costs of operations. The Company believes that it is the only investor- owned and taxable organization operating as a blood supplier with significant operations in the U.S. Results of Operations - --------------------- Three months ended March 31, 2004 compared to the three months ended March 31, 2003 Overview In the third and fourth quarters of 2003, management implemented a plan to cease operations at several donor centers, as well as the mobile operations associated with these centers. The operations management chose to close were under performing or required excessive overhead resources to support, in comparison with other operations of the Company. All of the costs associated with these closures were reflected in the Company's third and fourth quarter 2003 results in accordance with generally accepted accounting principles. During the first quarter of 2004, management closed the donor center in Chapel Hill, North Carolina. All of the costs associated with the closure of this center are reflected in the Company's first quarter results in accordance with generally accepted accounting principles. As a result of the successful implementation of management's restructuring plan, the gross profit for the Company's blood products segment significantly improved. Revenues for the quarter ended March 31, 2004 were $6,736,000, which represents a decline in revenue of $195,000, or 2.8%, from $6,931,000 generated during the same period in 2003. Blood products revenue decreased $101,000, or 2.0%, as a result of the elimination of revenue generated by operations closed in the third and fourth quarters of 2003. Blood services revenue decreased $94,000, or 4.7%, as a result in a decrease in the number of therapeutic apheresis procedures performed. For the three months ended March 31, 2004, the Company generated $246,000 of net income compared with net income of $8,000 for the same period in 2003. The increase in net income of $238,000, is mainly due to i) the elimination of expenses associated with operating non-performing donor centers closed in late 2003, ii) increased sales volume at all the ongoing donor centers, and iii) increases in product pricing. Blood Products For this business segment, the following table summaries the revenues, gross profit and sales volumes associated with donor centers operated by the Company, and donor centers closed in 2003:
For the three month period ended March 31, 2004 (Revenues and Gross Profit in Thousands) Ongoing Centers Closed Centers California Mobiles ------------------ ------------------ ------------------ 2004 2003 2004 2003 2004 2003 -------- -------- -------- -------- -------- -------- Revenues $ 4,780 $ 4,102 $ 65 $ 844 $ 4,845 $ 4,946 Gross Profit $ 787 $ 456 $ - $ (194) $ 787 $ 262 Gross Profit % 16.5% 11.1% - (23.0%) 16.2% 5.3% Units Sold: Single Donor Platelets 4,242 3,538 80 1,222 4,322 4,760 Whole Blood 11,802 11,358 0 1,937 11,802 13,295
8 9 For the three months ended March 31, 2004, revenues from ongoing donor centers increased by $678,000, or 16.5%, to $4,780,000 from $4,102,000 in the same period of 2003. This increase in revenues was due to an increase in both platelet and whole blood product sales during the quarter. Platelet volumes increased nearly 20% during the first quarter of 2004 compared with the same period last year. Whole blood volumes increased 3.9% during this same period. All of the Company's ongoing donor centers generated increased revenue compared with the same period in 2003. Revenues from the closed donor centers declined by $779,000 from $844,000, which offset the growth in revenues from the ongoing centers. For the three months ended March 31, 2004, gross profit for ongoing donor centers increased by $331,000 to $787,000 compared with the first quarter of 2003. The gross profit percentage also increased to 16.5% in 2004 from 11.1% in 2003. This improvement in gross profit is the result of i) increases in product prices and, ii) increased operational efficiencies realized from higher volumes. In the second quarter of 2004, the donor center management contract between the Company and Presbyterian Intercommunity Hospital, located in Whittier, California, will terminate. The Company recorded revenues of $555,000 as a result of this contract in 2003, and $165,000 in the first quarter of 2004. Blood Services Revenues from blood services decreased by $94,000, or 4.7%, to $1,891,000 in the first quarter of 2004 from $1,985,000 in the same period of 2003. The decrease was mainly due to a 15.7% decrease in the number of therapeutic apheresis procedures performed from 1,649 procedures performed to 1,390 procedures primarily due to a reduction in the New York market, and the closure of the Company's operations in Illinois, North Carolina, Pennsylvania and Tennessee in 2003. Gross profit for the blood services segment decreased $94,000, or 12.7%, from $738,000 generated in the first quarter of 2003 to $644,000 generated during the same period in 2004. This decline is primarily the direct result of lower blood services revenue in 2004 compared with 2003, and fewer high margin procedures. General and Administrative Expenses General and administrative expenses increased by $199,000, or 20.2%, to $1,185,000 in the first quarter of 2004 from $986,000 in the same period of 2003. This increase was primarily due to a $69,000 increase in insurance expenses, and a $124,000 increase in bad debt expense compared with the first quarter of 2003. The Company has experienced a significant increase in professional liability insurance costs and other forms of insurance over the past year. In addition, during the fourth quarter of 2003 and the first quarter of 2004, the Company wrote off receivable balances at a greater rate than experienced in previous quarters. Most of these write offs pertain to receivables associated with the closed donor centers. Until the Company experiences a decrease in the level of receivable write offs, management has decided to maintain the allowance for doubtful accounts at the same percentage of gross receivables recognized as of the end of 2003. Accordingly, the Company recognized additional bad debt expense in the first quarter of 2004 of $126,000. This amount is $124,000 more than the bad debt expense recognized by the Company in the first quarter of 2003. Income Taxes The Company has sufficient net operating loss carryforward to avoid any federal income tax expense for the first quarter of 2004. Therefore, no provision for federal income taxes was recorded for the quarter. However, in recent years the State of California has had a moratorium on the full utilization of prior period operating losses against current period income. Although this moratorium is scheduled to expire in 2004, management believes it is likely the moratorium will be extended in order to provide additional revenue to the state at a time of severe budget deficits. Since the Company recorded net income of $246,000, management estimates that a provision for state income tax is appropriate at the rate of 5.3%, which takes into consideration state apportionment factors and the California operating loss moratorium issue. During the first quarter of 2004, the 9 10 Company recorded an adjustment to the deferred tax asset valuation reserve of $13,000, which eliminated any provision for income taxes from the statement of income. This adjustment represents less than 1% of the total deferred tax asset. Management believes a small adjustment is appropriate considering the Company has recorded net income in each of the last two fiscal quarters, thereby constituting evidence that the Company may derive some future benefit from the deferred tax asset. Critical Accounting Policies and Estimates - ------------------------------------------- Use of Estimates The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to valuation reserves, income taxes and intangibles. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Allowance for Doubtful Accounts The Company makes ongoing estimates relating to the collectibility of accounts receivable and maintain a reserve for estimated losses resulting from the inability of customers to meet their financial obligations to the Company. In determining the amount of the reserve, management considers the historical level of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since management cannot predict future changes in the financial stability of customers, actual future losses from uncollectible accounts may differ from the estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve may be required. In the event it is determined that a smaller or larger reserve was appropriate, the Company would record a credit or a charge to general and administrative expense in the period in which such a determination is made. Income Taxes As part of the process of preparing the financial statements, the Company is required to estimate income taxes in each of the jurisdictions that the Company operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the balance sheet. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent management believes that recovery is not likely, must establish a valuation allowance. To the extent a valuation allowance is created or adjusted in a period, the Company must include an expense, or benefit, within the tax provision in the statements of income. Significant management judgment is required in determining the provision for income taxes, deferred tax asset and liabilities and any valuation allowance recorded against net deferred tax assets. Management continually evaluates if the deferred tax asset is likely to be realized. If management determines that the deferred tax asset is not likely to be realized, a write-down of that asset would be required and would be reflected in the provision for taxes in the accompanying period. Liquidity and Capital Resources As of March 31, 2004, the Company cash and cash equivalents equaled $911,000 and working capital of $1,763,000. 10 11 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 March 31, 2004 the rate paid by the Company was 4.5%. As of March 31, 2004, the Company's net borrowing on this line of credit was $300,000, and the unused portion of the Company's line of credit was $1,700,000. The Company has entered into an amendment to the credit agreement with Comerica Bank which extends the term of the line of credit to June 30, 2005, and to revise the financial covenants to levels more favorable to the Company. As of March 31, 2004, the Company was in compliance with all of the revised covenants. In addition, the Company has various other equipment notes payable with Comerica Bank - California. As of March 31, 2004, the total amount outstanding under these notes was $203,000 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, $148,000 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. Additionally, the Company has another note payable with One Source Financial. As of March 31, 2004, the balance on this note was $65,000. The note requires quarterly payments of approximately $10,000 including interest at the rate of 8.5% and is secured by certain fixed assets. Of the total amount of this note outstanding, $35,000 is included in current obligations under notes payable on the balance sheet. The Company also has a note payable with AICCO, Inc. related to financing certain insurance premiums. As of March 31, 2004, the balance due on this note was $26,000, all of which is included in current obligations under notes payable on the balance sheet. The note requires monthly payments of approximately $13,000, including interest at a rate of 3.4%. Finally, in December 2003 the Company entered into a capital lease transaction with Gambro BCT to finance the acquisition of equipment used in the Company's apheresis activities. The total value of the equipment financed through this capital lease was $932,000. The lease has a five year term and a fixed interest rate of 7.5%. The lease is secured by all of the equipment purchased through the lease financing. The following table summarizes our contractual obligations by year (in thousands).
Total 2005 2006 2007 2008 2009 ------- ------- ------ ------ ------ ------ Operating leases $ 704 $ 290 $ 259 $ 155 $ - $ - Capitalized leases 1,327 320 309 291 222 185 Notes payable 595 209 386 - - - ------- ------- ------ ------ ------ ------ Totals $ 2,626 $ 819 $ 954 $ 446 $ 222 $ 185 ======= ======= ====== ====== ====== ======
For the three months ended on March 31, 2004, net cash provided by operating activities was $270,000, compared to $583,000 for the three months ended March 31, 2003. The decrease of $313,000 is primarily due to an increase in accounts receivable balances of $440,000 since the end of 2003, whereas in the first three months of 2003, accounts receivable balances actually decreased $610,000. Although this represents a substantial swing from last year to this year, the days sales outstanding statistic as of the end of the first quarter of 2004 stood at 47 days, which compares favorably to 57 days outstanding as of the end of the first quarter of 2003. Therefore, management remains confident that recent efforts to accelerate collections has produced positive results for the Company's cash flow. Offsetting the change in account receivable balances during the first quarter of 2004 compared with the same period in 2003 were i) an increase in net income of $238,000, ii) an increase in the provision for bad debts of $126,000, iii) a decrease in the change in inventories, supplies and prepaid expenses of $174,000, and iv) an increase in the change in accounts payable, accrued expenses and other liabilities of 11 12 $189,000. The increase in the provision for bad debts was the result of recent increases in receivable write offs that reduced the allowance for doubtful accounts below levels maintained in recent years as a percent of gross receivables. Unless and until the rate of receivable write offs decreases, management has decided to continue to maintain a consistent percentage of gross receivables in the allowance for doubtful accounts. The decrease in the change in inventories, supplies and prepaid expenses is mostly the result of smaller build up of inventory during the first quarter of 2004 than experienced in the first quarter of 2003. Finally, the increase in the change in accounts payable, accrued expenses and other liabilities in the first quarter of 2004 compared with the first quarter of 2003 is primarily due to an increase in accrued payroll in 2004. For the three months ended on March 31, 2004, net cash used in investing activities was $10,000, compared with $207,000 for the same period in 2003. The decrease of $197,000 is primarily due to the Company's investments in new vehicles and leasehold improvement expenditures during the first quarter of 2003. The Company did not make similar investments in plant or equipment during the first quarter of 2004. For the three months ended March 31, 2004, net cash used in financing activities is $284,000 compared with net cash used of $218,000 for the three months ended March 31, 2003. The difference in the cash used for financing activities is primarily due to management's decision to use a portion of the cash generated by operations to reduce debt rather than on the acquisition of plant and equipment as was done during the first quarter 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 year, including working capital requirements, equipment purchases and operating lease commitments. The Company has entered into an amendment to the credit agreement with Comerica Bank that extends the term of the line of credit to June 30, 2005. The Company's primary sources of liquidity include our cash on hand, available borrowing on the line of credit and cash generated from operations. Liquidity depends, in part, on timely collections of accounts receivable. Any significant delays in customer payments could adversely affect the Company's liquidity. Liquidity also depends on maintaining compliance with the various loan covenants. From time to time the Company has failed to comply with some or all of these covenants. The Company has obtained waivers from the bank for each of these covenant violations. If in the future the Company is unable to comply with a loan covenant and the bank does not issue a waiver, the Company's 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 The Company recently completed a plan to eliminate underperforming facilities to improve the profitability of the Company. The future of the Company now depends on generating sufficient operating profit from the remaining facilities to cover overhead expenses. The remaining facilities have not always been consistently profitable. Therefore, the Company is at risk if management is unable to execute an operating plan that will produce consistent profits from the remaining facilities. Potential Loss of Lines of Credit 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. The Company has entered into an amendment to the credit agreement with Comerica Bank that extends the term of the line of credit to June 30, 2005, and to revise the financial covenants to levels more favorable to the Company. As of March 31, 2004, the Company was in compliance with the revised covenants. Maintaining compliance is dependent, among other 12 13 things, on achieving the required profitability. The Company generated losses of $591,000 and $4,679,000 for 2002 and 2003, respectively. Continued losses would violate the terms of the credit line. While in the past the bank granted covenant violation waivers when needed, the Company cannot assure that the bank will continue to grant waivers in the future. Failure to obtain such waivers when, and if, needed could result in acceleration of payment obligations under the credit agreement and severely reduce liquidity. In addition, the existing credit agreement expires June 30, 2005. Management will make efforts to replace this facility or negotiate an extension of the existing line of credit; however, the Company cannot assure that alternative financing will be available or that the existing line of credit can be extended on terms acceptable to the Company. Failure to replace this facility will adversely impact liquidity and could deprive the Company of the working capital needed to continue to operate. Potential Inability to Meet Future Capital Needs 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 six months. However, the Company incurred a $4,679,000 loss during 2003. While the Company generated $246,000 in net income during the first quarter of 2004, there is no assurance this performance will be sustainable and the Company may need to raise additional capital in the debt or equity markets. There can be no assurance that the Company will be able to obtain such financing on reasonable terms or at all. Additionally, there is no assurance that the Company will be able to obtain sufficient capital to finance future expansion. Market Prices for Blood Do Not Necessarily Reflect Costs The Company depends on competitive pricing to obtain and maintain sales. As costs increase, the Company may not be able to raise prices commensurately if competitors do not. Some competitors have greater resources than the Company to sustain periods of unprofitable sales. Cost increases may therefore have a direct negative effect on profits and a material adverse affect on the business. Declining Blood Donations The business depends on the availability of donated blood. Only a small percentage of the population donates blood, and new regulations intended to reduce the risk of introducing infectious diseases in the blood supply have decreased the pool of potential donors. If the level of donor participation declines, the Company may not be able to achieve profitability or reduce costs sufficiently to maintain profitability in blood products. Increasing Costs The costs of collecting, processing and testing blood have risen significantly in recent years and will likely continue to increase. These cost increases are related to new and improved testing procedures to assure that blood is free of infectious disease, increased regulatory requirements related to blood safety, and increased costs associated with recruiting blood donors. New testing protocols have required the Company to outsource much of the required testing. Competition, and in some cases multi-year contractual arrangements, may limit the Company's ability to pass these increased costs to customers. In this circumstance, the increased costs could reduce profitability and could have a material adverse effect on the business and results of operations. Impact of Reimbursement Rates Reimbursement rates for blood products and services provided to Medicaid and Medicare patients impact the fees that the Company is able to negotiate with hospitals. Decreases in reimbursement rates or increases which do not keep pace with higher costs, may impact the Company's profitability. Increasing Reliance on Outside Laboratories The Company maintains laboratories that are licensed and accredited to test blood products for purity, potency and quality. The Company also utilizes outside laboratories for a variety of tests. As other new testing and processing technologies are introduced, the Company has increased its reliance on outside laboratories. In using outside laboratories the 13 14 Company will have less control over testing costs. In addition, because laboratory facilities competent in these new technologies are scarce, the loss of an outside laboratory because of competition for capacity would have a material adverse effect on the business. Targeted Donor Base Involves Higher Collection Costs Part of the Company's current operations involves conducting blood drives for organizations that provide a relatively small number of donors. Blood drives directed at smaller donor sites lack the efficiencies associated with larger blood drives. As a result, collection costs might be higher than the competition and may affect profitability and growth plans. Access to Insurance The Company currently maintains insurance coverage consistent with the industry; however, if the Company experiences losses or the risks associated with the blood products industry increase in the future, insurance may become more expensive or unavailable. The Company also cannot give assurance that as the business expands, or the Company introduces new products and services, that additional liability insurance on acceptable terms will be available, or that the existing insurance will provide adequate coverage against any and all potential claims. Also, the limitations on liability contained in various agreements and contracts may not be enforceable and may not otherwise protect the Company from liability for damages. The successful assertion of one or more large claims against the Company that exceed available insurance coverage, or changes in insurance policies, such as premium increases or the imposition of large deductibles or co-insurance requirements, could materially and adversely affect the business. Not-For-Profit Status Gives Advantages to Our Competitors HemaCare Corporation is the only significant blood products supplier to hospitals in the U.S. that is operated for profit and investor owned. The not-for-profit competition is exempt from federal and state taxes, and has substantial community support and access to tax-exempt financing. The Company may not be able to continue to compete successfully with not-for- profit organizations and the business and results of operations may suffer material adverse harm. Potential Adverse Affect from Changes in the Healthcare Industry In the U.S., a fundamental change is occurring in the healthcare system. Competition to gain patients on the basis of price, quality and service is intensifying among healthcare providers who are under pressure to decrease the costs of healthcare delivery. A national hospital chain has announced plans to sell 19 of its facilities in California, many of which are customers of the Company. In addition, there has been significant consolidation among healthcare providers as providers seek to enhance efficiencies, and this consolidation is expected to continue. As a result of these trends, the Company may be limited in its ability to increase prices for products in the future, even if costs increase. Further, the Company could be adversely affected by customer attrition as a result of consolidation or closure of hospital facilities. Future Technological Developments Could Jeopardize Business As a result of the risks posed by blood-borne diseases, many companies are currently seeking to develop synthetic substitutes for human blood products. HemaCare's business consists of collecting, processing and distributing human blood and blood products. The introduction and acceptance in the market of synthetic blood substitutes would cause material adverse harm to the business. Operations Depend on Obtaining the Services of Qualified Medical Professionals The Company is highly dependent upon obtaining the services of qualified medical professionals. In particular, operations depend on the services of registered nurses and other medical technolgists. Nationwide, the demand for these professionals exceeds the supply and competition for their services is strong. This shortage could be 14 15 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. 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 highly qualified testing service providers to test its blood products for known pathogens in accordance with industry standards, and complies with all applicable safety regulations. Nevertheless, the risk that screening and testing processes might fail or that new pathogens may be undetected by them cannot be completely eliminated. There is currently no test to detect the pathogen responsible for Creutzfeldt-Jakob Disease. If patients are infected by known or unknown pathogens, claims could exceed insurance coverage and materially and adversely affect the Company's financial condition. Furthermore, healthcare regulations are constantly changing and certain changes could require costly compliance or make some of our operations impossible to continue. Environmental Risks HemaCare's operations involve the controlled use of bio-hazardous materials and chemicals. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company and its insurance coverage. The Company may incur substantial costs to maintain compliance with environmental regulations as it develops and expands its business. Business Interruption Due to Terrorism and Increased Security Measures In Response to Terrorism HemaCare's business depends on the free flow of products and services through the channels of commerce and freedom of movement for patients and donors. The 2001 response to terrorist activities slowed or stopped transportation, mail, financial and other services for a period of time. Further delays or stoppages in transportation of perishable blood products and interruptions of mail, financial or other services could have a material adverse effect on the Company's results of operations and financial condition. Furthermore, the Company may experience an increase in operating costs, such as costs for transportation, insurance and security, as a result of the terrorist activities and potential activities, which may target health care facilities or medical products. The Company may also experience delays in receiving payments from payers that have been affected by terrorist activities and potential activities. The U.S. economy in general is adversely affected by terrorist 15 16 activities, and potential activities, and any economic downturn could adversely impact the Company's results of operations, impair its ability to raise capital or otherwise adversely affect its ability to grow its business. Articles of Incorporation and Rights Plan Could Delay or Prevent an Acquisition or Sale of HemaCare HemaCare's Articles of Incorporation empower the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. This gives the Board of Directors the ability to deter, discourage or make more difficult for a change in control of HemaCare, even if such a change in control would be in the interest of a significant number of shareholders or if such a change in control would provide shareholders with a substantial premium for their shares over the then-prevailing market price for our common stock. In addition, the Board of Directors has adopted a Shareholder's Rights Plan designed to require a person or group interested in acquiring a significant or controlling interest in HemaCare to negotiate with the Board. Under the terms of our Shareholders' Rights Plan, in general, if a person or group acquires more than 15% of the outstanding shares of common stock, all of the other shareholders would have the right to purchase securities from the Company at a discount to the fair market value of the common stock, causing substantial dilution to the acquiring person or group. The Shareholders' Rights Plan may inhibit a change in control and, therefore, could materially adversely affect the shareholders' ability to realize a premium over the then-prevailing market price for the common stock in connection with such a transaction. For a description of the Rights Plan see the Company's Current Report on Form 8-K filed with the SEC on March 5, 1998. Stocks Traded on the OTC Bulletin Board are Subject to Greater Market Risks than Those of Exchange-Traded and NASDAQ Stocks HemaCare's common stock was delisted from the NASDAQ Small Cap Market on October 29, 1998 because of the failure to maintain NASDAQ's requirement of a minimum bid price of $1.00. Since November 2, 1998 the common stock has traded on the OTC Bulletin Board, an electronic, screen-based trading system operated by the National Association of Securities Dealers, Inc. Securities traded on the OTC Bulletin Board are, for the most part, thinly traded and generally are not subject to the level of regulation imposed on securities listed or traded on the NASDAQ Stock Market or on a national securities exchange. As a result, an investor may find it difficult to dispose of our common stock or to obtain accurate quotations as to its price. Stock Price Could Be Volatile The price of HemaCare's common stock has fluctuated in the past and may be more volatile in the future. Factors such as the announcements of government regulation, new products or services introduced by the Company or by the competition, healthcare legislation, trends in the health insurance, litigation, fluctuations in operating results and market conditions for healthcare stocks in general could have a significant impact on the future price of HemaCare's common stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that may be unrelated to the operating performance of particular companies. The generally low volume of trading in HemaCare's common stock makes it more vulnerable to rapid changes in price in response to market conditions. Future Sales of Equity Securities Could Dilute the Company's Common Stock The Company may seek new financing in the future through the sale of its securities. Future sales of common stock or securities convertible into common stock could result in dilution of the common stock currently outstanding. In addition, the perceived risk of dilution may cause some shareholders to sell their shares, which could further reduce the market price of the common stock. Lack of Dividend Payments The Company intends to retain any future earnings for use in its business, and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. The declaration and payment of any cash dividends in the future will depend on the Company's earnings, financial condition, 16 17 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 $1,733,000 of debt, which includes $1,433,000 of notes payable and capitalized leases with fixed interest rates. The remaining $300,000 of debt represents advances on our working capital line of credit at an interest rate 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 $3,000. 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. 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, 2003. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities - ------------------------------------------------------------------- None. Item 3. Defaults Upon Senior Securities - --------------------------------------- None. 17 18 Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- None Item 5. Other Information - ------------------------- None. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- a. Exhibits 10.1 First Modification to Loan and Security Agreement between HemaCare Corporation and Coral Blood Services, Inc., as borrower, and Comerica Bank dated March 22, 2004 11 Net Income per Common and Common Equivalent Share 31.1 Certification Pursuant to Rule 15d-14(a) Under the Securities Exchange Act 31.2 Certification Pursuant to Rule 15d-14(a) Under the Securities Exchange Act 32 Certification Pursuant to 18 U.S.C. 1350 and Rule 15d-14(a) Under the Securities Exchange Act b. Reports on Form 8-K On April 9, 2004, the Company filed a Current Report on Form 8-K disclosing under Item 4 (Changes in Registrant's Certifying Accountant) the dismissal of Ernst & Young, LLP as the Company's independent accountants, and the appointment of Stonefield Josephson, Inc. as the Company's new independent accountants. 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 May 14, 2004 HEMACARE CORPORATION ---------------- ------------------------------ (Registrant) /s/ Judi Iriving ------------------------------- Judi Irving, Chief Executive Officer /s/ Robert S. Chilton ------------------------------- Robert S. Chilton, Chief Financial Officer 18 19 INDEX TO EXHIBITS
Page Exhibit Number - ------- -------- 10.1 First Modification to Loan and Security Agreement 20 between HemaCare Corporation and Coral Blood Services, Inc., as borrower, and Comerica Bank dated March 22, 2004 11 Net Income per Common and Common Equivalent Share 22 31.1 Certification Pursuant to Rule 15d-14(a) Under the Securities Exchange Act 23 31.2 Certification Pursuant to Rule 15d-14(a) Under the 24 Securities Exchange Act 32 Certification Pursuant to 18 U.S.C. 1350 and Rule 25 15d-14(a) Under the Securities Exchange Act 19
20 EX-10.1 2 ex101bnk.txt FIRST MODIFICATION TO LOAN AND SECURITY AGREEMENT EXHIBIT 10.1 COMERICA FIRST MODIFICATION TO LOAN AND SECURITY AGREEMENT This First Modification to Loan ad Security Agreement (this "Modification") is entered into by and between HEMACARE CORPORATION AND CORAL BLOOD SERVICES, INC., ("Borrower") and COMERICA BANK ("Bank") as of this 22nd day of March, 2004, at San Jose, California. RECITALS This Modification is entered into upon the basis of the following facts and understandings of the parties, which facts and understandings are acknowledged by the parties to be true and accurate: Bank and Borrower previously entered into a Loan and Security Agreement (Accounts and inventory) dated November 19, 2002. The Loan and Security Agreement as so modified, and as such may be otherwise modified, amended, restated, supplemented, revised or replaced from time to time prior to the date hereof shall collectively be referred to herein as the "Agreement." NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as set forth below. AGREEMENT 1. Incorporation by Reference. The Recitals and the documents referred to therein are incorporated herein by this reference. Except as otherwise noted, the terms not defined herein shall have the meaning set forth in the Agreement. 2. Modification to the Agreement. Subject to the satisfaction of the conditions precedent as set forth in Section 3 hereof, the Agreement is hereby modified as set forth below. a. In Section 3.1 of the Agreement, the date "June 30, 2004" is hereby deleted in its entirety and replaced with "June 30, 2005." b. Subsection 6.17(a) of Section 4 of Addendum "A" to the Agreement is hereby deleted in its entirety and replaced with the following: "(a). a ratio of Quick Assets to Current Liabilities of not less than 0.90:1.00." c. Subsection 6.17(b) of Section 4 of Addendum "A" to the Agreement is hereby deleted in its entirety and replaced with the following: "(b) a Debt-to-Worth Ratio of less than 1.50:1.00." d. Subsection 6.17(c) of Section 4 of Addendum "A" to the Agreement is hereby deleted in its entirety and replaced with the following: "(c) A net profit after taxes equal to at least (i) $1.00 for quarter ending March 31, 2004, and (ii) $75,000 for each quarter thereafter." 3. Legal Effect. a. Except as specifically set forth in this Modification, all of the terms and conditions of the Agreement remain in full force and effect. Except as expressly set forth herein, the execution, delivery, and performance of this Modification shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Bank under the Agreement, as in effect prior to the date hereof. Borrower ratifies and reaffirms the continuing effectiveness of all promissory notes, guaranties, security agreements, mortgages, deeds of trust, environmental agreements, and all other instruments, documents and agreements entered into in connection with the Agreement. b. Borrower represents and warrants that each of the representations and warranties contained in the Agreement are true and correct as of the date of this Modification, and that no Event of Default has occurred and is continuing. c. The effectiveness of this Modification and each of the documents, instruments and agreements entered into in connection with this Modification is conditioned upon receipt by Bank of this Modification and any other documents which Bank may require to carry out the terms. D. In consideration for Bank's willingness to enter into this Modification, Borrower shall pay to Bank a non-refundable fee in the sum of Two Thousand Five Hundred and no/100 Dollars ($,2500.00), which shall be deemed earned by Bank as of the date of this Modification and shall be payable by Borrower concurrently with Borrower's execution of this Modification. 1 20 21 4. Miscellaneous Provisions. a. This is an integrated Modification and supersedes all prior negotiations and agreements regarding the subject matter hereof. All amendments hereto must be in writing and signed by the parties. b. This Modification may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties have agreed as of the date first set forth above. HEMACARE CORPORATION COMERICA BANK By: /s/ Robert S. Chilton By: /s/ Rudy Cedillos -------------------------- ------------------------------- Rudy Cedillos itle: Ex. VP and CFO Vice President-Western Division ------------------------ CORAL BLOOD SERVICES, INC. By: /s/ Robert S. Chilton ------------------------- Title: Ex. VP & CFO ----------------------- 2 21 22 EX-11 3 ex1112004.txt BASIC AND DILUTED NET INCOME PER SHARE HemaCare Corporation EXHIBIT 11 Basic and Diluted Net Income per Share
Three months ended March 31, --------------------------- 2004 2003 ----------- ------------ BASIC ----- Weighted average common shares used to compute basic earnings per share............................... 7,756,060 7,751,060 =========== =========== Net income......... $ 246,000 $ 8,000 =========== =========== Basic net income share................ $ 0.03 $ 0.00 =========== =========== DILUTED ------- Weighted average common shares used to compute basic earnings per share.... 7,756,060 7,751,060 Dilutive common equivalent shares attributable to stock options and warrants based on average market price).............................. 191,000 82,458 ----------- ----------- Weighted average common shares and equivalents used to compute diluted earnings per share........... 7,947,060 7,833,518 =========== =========== Net income............. $ 246,000 $ 8,000 =========== =========== Diluted net income per share ......... $ 0.03 $ 0.00 =========== ===========
22 23 EX-31.1 4 ex311104.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: May 14, 2004 /s/ Judi Irving ________________________________________ Judi Irving (Chief executive officer) 23 24 EX-31.2 5 ex312104.txt EXHIBIUT 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: May 14, 2004 /s/ Robert Chilton ________________________________________ Robert Chilton (Chief Financial Officer and Principal Accounting Officer) 24 25 EX-32 6 exh321q.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 March 31, 2004 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: May 14, 2004 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. 25 -----END PRIVACY-ENHANCED MESSAGE-----