-----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, P1uLJUf9jInv1X2luA9e3S2c+jtYk/XwCLcjmV9aJvymfgSt9ThyNl/SmEI68LPx I/RxTsS8VSZAKNOoo4ZbSQ== 0000801748-04-000011.txt : 20040813 0000801748-04-000011.hdr.sgml : 20040813 20040813151207 ACCESSION NUMBER: 0000801748-04-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040813 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: 04973880 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 q22004.txt 10-Q FOR THE QUARTER ENDED JUNE 30, 2004 ========================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File Number 0-15223 HEMACARE CORPORATION (Exact name of registrant as specified in its charter) California 95-3280412 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification Number) organization) 21101 Oxnard Street Woodland Hills, California 91367 (Address of principal executive offices) (Zip Code) (818) 226-1968 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ As of August 10, 2004, 7,756,060 shares of Common Stock of the registrant were issued and outstanding. ============================================================================= HEMACARE CORPORATION AND SUBSIDIARIES INDEX TO FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004
Page Number ------ PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003..................................................... 1 Consolidated Statements of Income (Operations) for the three and six months ended June 30, 2004 and 2003 (unaudited)........................ 2 Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited).......................................... 3 Notes to Unaudited Consolidated Financial Statements................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 20 Item 4. Controls and Procedures................................................ 20 PART II OTHER INFORMATION Item 1. Legal Proceedings....................................................... 21 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.............................................................. 21 Item 3. Defaults Upon Senior Securities......................................... 21 Item 4. Submission of Matters to a Vote of Security Holders..................... 21 Item 5. Other Information....................................................... 22 Item 6. Exhibits and Reports on Form 8-K........................................ 22 SIGNATURES...................................................................... 22
i 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements - ------- -------------------- HEMACARE CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2004 2003 ------------ ----------- (Unaudited) (Audited) ASSETS Current assets: Cash and cash equivalents............................ $ 1,399,000 $ 935,000 Accounts receivable, net of allowance for doubtful accounts - $353,000 in 2004 and $351,000 in 2003............................................ 3,047,000 3,128,000 Product inventories and supplies..................... 583,000 494,000 Prepaid expenses..................................... 567,000 388,000 Note receivable...................................... - 20,000 ------------ ------------ Total current assets..................... 5,596,000 4,965,000 Plant and equipment, net of accumulated depreciation and amortization of $3,166,000 in 2004 and $2,919,000 in 2003............ 2,958,000 3,259,000 Deferred income taxes.................................. 47,000 - Other assets........................................... 54,000 62,000 ------------ ------------ $ 8,655,000 $ 8,286,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 1,947,000 $ 1,686,000 Accrued payroll and payroll taxes.................... 1,131,000 918,000 Other accrued expenses............................... 125,000 243,000 Current obligations under capital leases............. 248,000 229,000 Current obligations under notes payable.............. 203,000 710,000 ------------ ------------ Total current liabilities................ 3,654,000 3,786,000 Obligations under capital leases, net of current portion................................... 827,000 954,000 Notes payable, net of current portion.................. 21,000 124,000 Other long-term liabilities............................ 8,000 11,000 Commitments and contingencies.......................... Shareholders' equity: Common stock, no par value - 20,000,000 shares authorized, 7,756,060 issued and outstanding in 2004 and 2003...................................... 13,319,000 13,319,000 Accumulated deficit.................................. (9,174,000) (9,908,000) ------------ ------------ Total shareholders' equity............... 4,145,000 3,411,000 ------------ ------------ $ 8,655,000 $ 8,286,000 ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 1 2 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS) (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, 2004 2003 2004 2003 ------------ ------------ ----------- ----------- Revenues: Blood products.................... $5,036,000 $5,093,000 $ 9,881,000 $10,039,000 Blood services.................... 1,885,000 1,844,000 3,776,000 3,829,000 ----------- ----------- ------------ ----------- Total revenue.................... 6,921,000 6,937,000 13,657,000 13,868,000 Operating costs and expenses: Blood products.................... 4,179,000 5,102,000 8,237,000 9,786,000 Blood services.................... 1,239,000 1,383,000 2,486,000 2,630,000 ----------- ----------- ------------ ------------ Total operating costs and expenses....................... 5,418,000 6,485,000 10,723,000 12,416,000 ----------- ----------- ------------ ------------ Gross profit...................... 1,503,000 452,000 2,934,000 1,452,000 General and administrative expenses............................ 1,015,000 906,000 2,200,000 1,892,000 ----------- ----------- ------------ ------------ Income (loss) before income taxes...... 488,000 (454,000) 734,000 (440,000) Benefit from income taxes.............. - (182,000) - (176,000) ----------- ----------- ------------ ------------ Net income (loss)................... $ 488,000 $ (272,000) $ 734,000 $ (264,000) =========== =========== ============ ============ Basic and diluted earnings (loss) per share.......................... $ 0.06 $ (0.04) $ 0.09 $ (0.03) =========== =========== ============ ============ Weighted average shares outstanding - basic................ 7,756,060 7,751,060 7,756,060 7,751,060 =========== =========== ============ ============ Weighted average shares outstanding - diluted.............. 8,089,078 7,751,060 7,999,449 7,751,060 =========== =========== ============ ============
The accompanying notes are an integral part of these unaudited consolidated financial statements. 2 3 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, 2004 2003 ------------ ------------ Cash flows from operating activities: Net income (loss)......................................... $ 734,000 $ (264,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for bad debts................................ 90,000 - Recognition of deferred tax assets..................... (47,000) (176,000) Depreciation and amortization.......................... 334,000 291,000 Loss on disposal of assets............................. 18,000 - Changes in operating assets and liabilities: (Increase) decrease in accounts receivable............ (9,000) 731,000 (Increase) decrease in inventories, supplies and prepaid expenses..................................... (80,000) 24,000 Decrease in other assets.............................. 8,000 9,000 Increase (decrease) in accounts payable, accrued expenses and other liabilitiess...................... 353,000 (271,000) ----------- ----------- Net cash provided by operating activities............. 1,401,000 344,000 Cash flows from investing activities: Proceeds from sale of plant and equipment................. 16,000 - Proceeds from note receivables............................ 20,000 - Purchases of plant and equipment.......................... (67,000) (242,000) ----------- ---------- Net cash used in investing activities..................... (31,000) (242,000) Cash flows from financing activities: Principal payments on debt and capitalized leases......... (906,000) (586,000) Proceeds from line of credit.............................. - 150,000 ---------- ---------- Net cash used in financing activities..................... (906,000) (436,000) ----------- ----------- Increase (decrease) in cash and cash equivalents............ 464,000 (334,000) Cash and cash equivalents at beginning of period............ 935,000 1,048,000 ----------- ----------- Cash and cash equivalents at end of period.................. $1,399,000 $ 714,000 =========== =========== Supplemental disclosure: Interest paid............................................. $ 55,000 $ 42,000 =========== =========== Income taxes paid......................................... $ 30,000 $ - =========== =========== Items not affecting cash flow: Insurance premiums financed............................... $ 188,000 $ - =========== ===========
The accompanying notes are an integral part of these unaudited consolidated financial statements. 3 4 HemaCare Corporation Notes to Unaudited Consolidated Financial Statements Note 1 - Basis of Presentation and General Information - ------------------------------------------------------ BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited consolidated financial statements for the three and six months ended June 30, 2004 and 2003 include all adjustments (consisting of normal recurring accruals) which management considers necessary to present fairly the financial position of the Company as of June 30, 2004, the results of its operations for the three and six months ended June 30, 2004 and 2003, and its cash flows for the six months ended June 30, 2004 and 2003 in conformity with accounting principles generally accepted in the United States. These financial statements have been prepared consistently with the accounting policies described in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, as amended, as filed with the Securities and Exchange Commission on June 22, 2004 which should be read in conjunction with this Quarterly Report on Form 10-Q. The results of operations for the three and six months ended June 30, 2004 are not necessarily indicative of the consolidated results of operations to be expected for the full fiscal year ending December 31, 2004. Certain information and footnote disclosures normally included in the financial statements presented in accordance with accounting principles generally accepted in the United States have been condensed or omitted. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company maintains cash balances at various financial institutions. Deposits not exceeding $100,000 for each institution are insured by the Federal Deposit Insurance Corporation. At June 30, 2004 and December 31, 2003, the Company had uninsured cash and cash equivalents of $1,177,000 and $719,000, respectively. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current period presentation. Note 2 - Line of Credit and Notes Payable - ------------------------------------------ The Company has a working capital line of credit with Comerica Bank - California. The amount the Company may borrow is the lesser of: 75% of eligible accounts receivable less amounts outstanding on the notes payable discussed below, or $2 million. Interest is payable monthly at a rate of prime plus 0.5%; as of June 30, 2004 the rate associated with this note was 4.50%. As of June 30, 2004, the Company had no net borrowing on this line of credit, and the Company had unused availability of $2,000,000. The Company has entered into an amendment to the credit agreement with Comerica Bank to extend the term of the line of credit to June 30, 2005, and to revise the financial covenants to levels more favorable to the Company. As of June 30, 2004, the Company was in compliance with all of the revised covenants. 4 5 In addition, the Company previously had various other equipment notes payable with Comerica Bank - California. During the second quarter of 2004, the Company paid off these notes in the amount of $203,000. All of the Comerica loans are collateralized by substantially all of the Company's assets and are cross-defaulted. They also require the maintenance of certain financial covenants that among other things require minimum levels of profitability and prohibit the payment of dividends or stock repurchases. During the second quarter of 2004, the Company did incur interest expense associated with the Comerica obligations totaling $2,500. Additionally, the Company has another note payable to One Source Financial. As of June 30, 2004, the balance on this note was $57,000, which is due in full on January 25, 2006. The note requires quarterly payments of approximately $10,000 including interest at a fixed rate of 8.5% and is secured by certain fixed assets. Of the total amount of this note outstanding, $35,000 is included in current obligations under notes payable on the balance sheet. The Company also has a note payable to Bay Tree Finance Company related to financing certain insurance premiums. As of June 30, 2004, the balance due on this note was $167,000, all of which is included in current obligations under notes payable on the balance sheet. The note requires monthly payments of approximately $21,000, including interest at a fixed rate of 4.6%, and is scheduled to mature in February 2005, The Company also has a capital equipment lease with Gambro BCT to finance the acquisition of equipment used in the Company's apheresis activities. The total value of the equipment financed through this capital lease was $932,000. As of June 30, 2004, the balance outstanding on this lease was $871,000, of which approximately $168,000 is included in current obligations under capital leases on the balance sheet. The lease is scheduled to expire in December 2008 and has a fixed interest of 7.5%. The lease is secured by all of the equipment purchased through the lease financing. The Company also has a capital equipment lease with GE Capital used to finance the acquisition of vehicles. As of June 30, 2004, the balance outstanding on this lease was $193,000, of which approximately $70,000 is included in current obligations. This lease is scheduled to mature in January 2007, and has a fixed interest rate of 8.0%. Finally, the Company has a capital equipment lease with Dell Financial Services associated with the acquisition of computer equipment. As of June 30, 2004, the balance outstanding on this lease was $13,000, of which approximately $11,000 is included in current obligations. This lease is scheduled to mature in August 2005, and has a fixed interest rate of 12.6%. Note 3 - Shareholders' Equity - ----------------------------- The Company has elected to adopt SFAS 123, "Accounting for Stock-Based Compensation," for disclosure purposes only and applies the provision of APB Opinion No. 25. The Company did not recognize any compensation expense related to the issuance of stock options in 2004 or 2003. Had compensation expense for all options granted to employees and directors been recognized in accordance with SFAS 123, the Company's net income (loss) per share would have been as follows: 5 6
Three months ended Six months ended June 30, June 30, ------------------------- ------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Net income (loss) as reported............ $ 488,000 $ (272,000) $ 734,000 $ (264,000) Deduct: Total stock-based employee compensation expense determined under fair market value based method for all awards, net of related tax effects....... 23,000 (25,000) 63,000 (53,000) ----------- ----------- ---------- ----------- Pro forma net income (loss).............. $ 465,000 $ (297,000) $ 671,000 $ (317,000) =========== =========== ========== =========== Net income (loss) per share - basic and diluted As reported........................... $ 0.06 $ (0.04) $ 0.09 $ (0.03) Pro forma............................. $ 0.06 $ (0.04) $ 0.09 $ (0.04)
The Board of Directors approved, and the Company formally adopted the 2004 Stock Purchase Plan and filed an S-8 with the Securities and Exchange Commission to register the shares associated with this plan on June 10, 2004. The plan provides up to 1,000,000 shares of common stock of the Company for directors, officers and employees of the Company to purchase shares at market rates, but requires a minimum investment of $10,000. Note 4 - Earnings per Share - --------------------------- The following table provides the calculation methodology for the numerator and denominator for diluted earnings per share:
Three months ended Six months ended June 30, June 30, ------------------------- ----------------------- 2004 2003 2004 2003 ---------- ----------- ---------- ----------- Net income (loss)........................ $ 488,000 $ (272,000) $ 734,000 $ (264,000) =========== =========== ========== =========== Shares outstanding....................... 7,756,060 7,751,000 7,756,060 7,751,060 Net effect of diluted options and warrants............................... 333,018 - 243,389 - ----------- ----------- ---------- ----------- Dilutive shares outstanding.............. 8,089,078 7,751,060 7,999,449 7,751,060 =========== =========== ========== ===========
Options and warrants outstanding for 1,685,000 shares of common stock for the three and six months ended June 30, 2003, have been excluded from the above calculation because their effect would have been anti-dilutive. Note 5 - Provision for Income Taxes - ----------------------------------- The Company has substantial net operating losses from prior periods that will be available in 2004 to eliminate most of any potential federal tax liability. The Company has recognized income in each of the last three quarters, and as a result, and to the degree that the Company incurs any tax liability, the Company will reduce the valuation reserve against its deferred tax assets to reflect some potential future benefit from the future utilization of the Company's net operating losses. The Company will continue to evaluate the deferred tax asset valuation reserve each quarter based on the reportable income for each quarter. The Company estimates that $13,000 and $34,000 respectively in taxes has been incurred as a result of reportable income during the first and second quarters of 2004. Therefore, the Company reduced the valuation reserve by $13,000 in the first quarter, and $34,000 in the second quarter, thus eliminating any recognition of income taxes in the first six months of 2004. 6 7 Note 6 - Business Segments - -------------------------- HemaCare operates two business segments as follows: - - Blood Products - Collection, processing and distribution of blood products and donor testing. - - Blood Services - Therapeutic apheresis, stem cell collection procedures and other therapeutic services to patients. Management uses more than one measure to evaluate segment performance. However, the dominant measurements are consistent with HemaCare's consolidated financial statements, which present revenue from external customers and operating income for each segment. Note 7 - Exit and Disposal Activities - ------------------------------------- As the result of an evaluation of the overall operations of the Company, management implemented a plan to cease operations at several donor centers, as well as the mobile operations associated with these centers, in the third and fourth quarters of 2003. Costs associated with the closures are reflected in the Company's third and fourth quarter 2003 results in accordance with generally accepted accounting principles. Of the total $598,000 recorded in 2003 as incurred and anticipated costs associated with these closures, the Company has determined that $23,000 of these accrued costs were not incurred. This amount was reversed in the second quarter of 2004. During the second quarter of 2004, the Company was informed by Dartmouth- Hitchcock Medical Center in Lebanon, New Hampshire and Presbyterian Intercommunity Hospital in Whittier, California that the Company's blood center management contracts with these hospitals would not be renewed upon expiration in June 2004. As a result, the Company incurred $4,000 for moving expenses associated with the closure of the donor center at Dartmouth-Hitchcock Medical Center. There were no closure costs related to the closure of the donor center at Presbyterian Intercommunity Hospital. Note 8 - Subsequent Events - -------------------------- The Company has received notice from Gambro BCT ("Gambro"), one of the Company's largest suppliers, that the California Board of Equalization was conducting an audit of Gambro's sales tax records. Gambro communicated to the Company that preliminary results of this audit indicated that the Company is likely to receive a refund of previously paid sales taxes. The amount of the potential refund has not yet been determined; however, preliminary indications are that the amount could be material. The Company will record the benefit of this refund, if any, as soon as the amount can be reasonably estimated and is certain. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - ------- ----------------------------------------------------------------- The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's financial statements and the related notes provided under "Item 1-Financial Statements" above. The matters discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may also be identified by the use of words such as "anticipate," "believe," "continue," "estimate," "expect," "intend," "may," "project," "will" and similar expressions, as they relate to the Company, its management and its industry. Investors and prospective investors are cautioned that these forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results could differ from those described in this report because of numerous factors, many of which are beyond the Company's 7 8 control. These factors include, without limitation, those described below under the heading "Risk Factors Affecting our Business." The Company does not undertake to update its forward-looking statements to reflect later events and circumstances or actual outcomes. General - ------- HemaCare Corporation ("HemaCare" or the "Company") collects, processes and distributes blood products to hospitals in the United States. Additionally, the Company provides blood related services, principally therapeutic apheresis procedures, stem cell collection and other blood treatments to patients with a variety of disorders. Blood related services are provided on an in-patient and out-patient basis under contract with hospitals, as an outside purchased service. The Company has operated in Southern California since 1978. In 1998, the Company expanded operations to include portions of the eastern U.S. In 2003, new management completed a comprehensive evaluation of the Company's operations, and at the conclusion of this review developed a restructuring plan to reduce the number of geographic areas served, reduce the overhead costs associated with supporting the organization, and improve the collection capability in the remaining geographic areas served by the Company. The remaining collection capacity for the Company's blood products business segment is in Maine, Massachusetts and Southern California. Management's strategy was to return the Company to a profitable foundation before exploring opportunities for growth in other geographic areas or into new lines of business. The implementation of this plan started in the third quarter of 2003, continued into early 2004, and is now completed. Management is focused on improving the profitability of the remaining operations including growth within existing geographic markets, expanding therapeutic apheresis market share and exploring new customer opportunities such as research companies. Although most blood suppliers are organized as not-for-profit, tax-exempt organizations, all suppliers charge fees for blood products to cover their costs of operations. The Company believes that it is the only investor- owned and taxable organization operating as a blood supplier with significant operations in the U.S. In the second quarter of 2004, the donor center management contracts between the Company and Presbyterian Intercommunity Hospital, located in Whittier, California, and between and Company and Dartmouth-Hitchcock Medical Center, located in Lebanon, New Hampshire expired and were not renewed. The Company recorded revenues from the contract with Presbyterian Intercommunity Hospital in 2003 of $555,000. In addition, the Company recorded $294,000 of revenue from this contract in the first six months of 2004, and $129,000 in the second quarter of 2004. The Company recorded revenues from the contract with Dartmouth-Hitchcock Medical Center in 2003 of $1,053,000. In addition, the Company recorded $595,000 of revenue from this contract in the first six months of 2004, and $243,000 in the second quarter of 2004. Results of Operations - --------------------- Three months ended June 30, 2004 compared to the three months ended June 30, 2003 Overview In the third and fourth quarters of 2003, management implemented a plan to cease operations at several donor centers, as well as the mobile operations associated with these centers. The operations management chose to close were under-performing or required excessive overhead resources to support, in comparison with other operations of the Company. All of the costs associated with these closures were reflected in the Company's third and fourth quarter 2003 results in accordance with generally accepted accounting principles. As a result of the successful implementation of management's restructuring plan, the gross profit for the Company's blood products segment significantly improved. Revenues for the quarter ended June 30, 2004 were $6,921,000, which represents a decline in revenue of $16,000, or 0.2%, from $6,937,000 generated during the same period in 2003. Blood products revenue decreased 8 9 $57,000, or 1.1%, as a result of the elimination of revenue generated by operations closed in the third and fourth quarters of 2003, although portions of the lost revenue were recovered through increased revenues from remaining operations. Blood services revenue increased $41,000, or 2.2%, mostly as a result of changes in procedure mix to higher average price procedures and an increased frequency in supplemental charges that increased the average price per procedure performed during the second quarter of 2004 compared with the same period in 2003. Supplemental charges include overtime fees, off hour procedure fees, holiday procedure fees and supply charges. Operating costs and expenses decreased $1,067,000, or 16.5%, to $5,418,000 in the second quarter of 2004, from $6,485,000 in the same period of 2003. Most of this reduction is the result of the closure of donor centers as part of the implementation of management's restructuring plan in late 2003. General and administrative expenses increased $109,000, or 12%, to $1,015,000 during the quarter, compared with $906,000 for the same quarter in 2003. Much of this increase is the result of increases in accrued management bonuses and 401(k) profit sharing contributions due to the improved profitability of the Company, and the result of increases in insurance costs. For the three months ended June 30, 2004, the Company generated $488,000 of net income compared with a net loss of $272,000 for the same period in 2003. The increase in net income of $760,000, is mainly due to i) the elimination of expenses associated with operating under-performing donor centers closed in late 2003, ii) increased sales volume of single donor platelets at all of the ongoing donor centers, and iii) increases in product pricing. Blood Products For this business segment, the following table summarizes the revenues, gross profit and sales volumes associated with donor centers still operated by the Company, and donor centers no longer operated as of June 30, 2004:
For the three month period ended June 30, 2004 (Revenues and Gross Profit in Thousands) Ongoing Centers Closed Centers Total Company ------------------ ------------------ ------------------- 2004 2003 2004 2003 2004 2003 -------- -------- -------- -------- -------- --------- Revenues $ 4,713 $ 3,903 $ 323 $ 1,190 $ 5,036 $ 5,093 Gross Profit 806 131 51 (140) 857 (9) Gross Profit % 17.1% 3.4% 15.8% (11.8%) 17.0% (0.2%) Units Sold: Single Donor Platelet 4,019 3,118 353 1,559 4,372 4,677 Whole Blood 10,659 10,729 907 3,204 11,566 13,933
For the three months ended June 30, 2004, revenues from ongoing donor centers increased by $810,000, or 20.8%, to $4,713,000 from $3,903,000 in the same period of 2003. This increase in revenues was due to an increase in platelet product sales during the quarter. Platelet volumes increased 28.9% during the second quarter of 2004 compared with the same period last year. In addition, ongoing efforts to increase product pricing has contributed to improved blood product revenues. Revenues from the closed donor centers declined by $867,000, or 72.9%, to $323,000 from $1,190,000, which offset the growth in revenues from the ongoing centers. The decline in revenue from closed centers was due to the fact that most of the facilities included in this category were closed in the third and fourth quarters of 2003. The closed center category also includes revenue from the recently expired Dartmouth-Hitchcock Medical Center and Presbyterian Intercommunity Hospital donor center contracts. For the three months ended June 30, 2004, gross profit from ongoing donor centers increased by $675,000, or 515.3%, to $806,000 compared with the second quarter of 2003. The gross profit percentage increased to 17.1% in 2004 from 3.4% in 2003, for ongoing centers. This improvement in gross profit is the result of i) increases in product prices, and ii) increased operational efficiencies realized from higher volumes. The gross profit for closed centers increased by $191,000 to $51,000 in the second quarter of 9 10 2004, from a loss of $140,000 in the same period in 2003. Most of the loss in 2003 was due to under-performing donor centers that were closed in the third and fourth quarters of 2003. The only centers included in the closed center category for the second quarter of 2004 are the centers at Dartmouth- Hitchcock Medical Center and Presbyterian Intercommunity Hospital, which expired in the second quarter. Blood Services Revenues from blood services increased by $41,000, or 2.2%, to $1,885,000 in the second quarter of 2004 from $1,844,000 in the same period of 2003. The number of procedures performed during the second quarter of 2004 decreased 11.4% to 1,489 from 1,680 in 2003. This decrease in the number of procedures performed was due to decline in procedures in the New York market, and the closure of the Company's operations in Illinois, North Carolina, New Jersey and Pennsylvania. The impact on revenue from the decrease in volume was offset by an increase in the average price charged per procedure in 2004 compared with 2003. The reasons for the increase in the average price per procedure in the second quarter of 2004 compared with the second quarter of 2003 include an increase in the number of California procedures, which have a higher average price per procedure than other regions served by the Company, and an increase in the surcharges associated with each procedure performed during this period. Gross profit for the blood services segment increased $185,000, or 40.1%, from $461,000 generated in the second quarter of 2003 to $646,000 generated during the same period in 2004. This increase is primarily the result of an increase in the number of higher margin procedures performed during the period compared with 2003. The number of procedures and product mix in the blood services business segment is highly variable, and the Company is uncertain whether the improved performance in this segment during this quarter is sustainable. As previously mentioned, the Company closed the donor center located at Dartmouth-Hitchcock Medical Center in June 2004. During the second quarter of 2004, this donor center generated $49,000 in blood services revenue. General and Administrative Expenses General and administrative expenses increased by $109,000, or 12.0%, to $1,015,000 in the second quarter of 2004 from $906,000 in the same period of 2003. This increase was primarily due to the recognition of $78,000 more in management bonuses in the second quarter of 2004 compared with the same period in 2003 based on achievement of profit targets. In addition, the Company experienced a $52,000 increase in insurance expense in the second quarter of 2004 compared with 2003 due to a large increase in the premium for professional liability insurance. Finally, the Company accrued $28,000 in potential contributions to the Company's 401(k) profit sharing plan in the second quarter of 2004. In the same quarter in 2003, the Company reversed a similar accrual of $36,000 recorded in the first quarter of 2003 because of losses recorded in the second quarter of 2003 eliminated the Company's expectation for a 401(k) contribution. Therefore, the net change related to the Company's 401(k) profit sharing plan between the second quarter of 2003 and 2004 was an increase in expenses of $64,000. These increases in general and administrative expenses were offset in part by decreases in wage expenses mostly attributable to the elimination of several overhead positions as a result of the restructuring plan completed in late 2003. Income Taxes The Company has sufficient net operating loss carryforward to avoid most federal income tax expense for the second quarter of 2004. However, management anticipates that the Company will be subject to federal alternative minimum tax in 2004. In addition, management anticipates the Company will be subject to various state and local taxes which are unaffected by the net operating loss carryforward. Management has calculated an estimated tax liability that includes the potential for federal alternative minimum tax, and has calculated estimated tax liability for each state and local jurisdiction using the tax basis each jurisdiction uses to assess taxes. During the second quarter of 2004, the Company recorded an adjustment to the deferred tax asset valuation reserve of $34,000, which eliminated any provision for income taxes from the statement of income. 10 11 This adjustment represents less than 1% of the total potential deferred tax asset. Management believes a small adjustment is appropriate considering the Company has recorded net income in each of the last three fiscal quarters, thereby constituting evidence that the Company may derive some future benefit from the deferred tax asset. Six months ended June 30, 2004 compared to the six months ended June 30, 2003 Overview As a result of the successful implementation of management's restructuring plan as previously discussed, the gross profit for the Company's blood products segment significantly improved during the first six months of 2004 compared with the same period in 2003. Revenues for the period ended June 30, 2004 were $13,657,000, which represents a decline in revenue of $211,000, or 1.5%, from $13,868,000 generated during the same period in 2003. Blood products revenue decreased $158,000, or 1.6%, as a result of the elimination of revenue generated by operations closed in the third and fourth quarters of 2003. Blood services revenue decreased $53,000, or 1.4%, to $3,776,000 as a result of a decrease in the number of therapeutic apheresis procedures performed, offset by increases in the average price charged per procedure, and a higher level of surcharges per procedure. Operating costs and expenses decreased $1,693,000, or 13.6%, to $10,723,000 in the first six months of 2004, from $12,416,000 in the same period of 2003. This decrease is mostly the result of the closure of donor centers as part of the implementation of management's restructuring plan in late 2003. General and administrative costs increased $308,000, or 16.3%, to $2,200,000 in the first six months of 2004, from $1,892,000 in the same period of 2003. This was caused by increases in 2004 accrued management bonuses and 401(k) profit sharing contributions as a result of improved Company profitability, increases in insurance costs, increases in nurse recruitment expenses and additional bad debt expense compared with 2003. For the six months ended June 30, 2004, the Company generated $734,000 of net income compared with net loss of $264,000 for the same period in 2003. The increase in net income of $998,000, is mainly due to i) the elimination of expenses associated with operating under-performing donor centers closed in late 2003, ii) increased sales volume at all the ongoing donor centers, and iii) increases in product pricing. Blood Products For this business segment, the following table summarizes the revenues, gross profit and sales volumes associated with donor centers operated by the Company, and those donor centers the Company no longer operates:
For the six month period ended June 30, 2004 (Revenues and Gross Profit in Thousands) Ongoing Centers Closed Centers Total Company ------------------ ------------------ ------------------ 2004 2003 2004 2003 2004 2003 -------- -------- -------- -------- -------- -------- Revenues $ 9,039 $ 7,621 $ 842 $ 2,418 $ 9,881 $10,039 Gross Profit 1,462 563 182 (310) 1,644 253 Gross Profit % 16.2% 7.4% 21.6% (12.8%) 16.6% 2.5% Units Sold: Single Donor Platelet 7,818 6,268 876 3,169 8,694 9,437 Whole Blood 20,974 20,842 2,394 6,386 23,368 27,228
For the six months ended June 30, 2004, revenues from ongoing donor centers increased by $1,418,000, or 18.6%, to $9,039,000 from $7,621,000 in the same period of 2003. This increase in revenues was mostly due to an increase in platelet volume of 24.7% to 7,818 in the first six months of 2004 from 6,268 11 12 in the same period of 2003. In addition, ongoing efforts to increase product pricing has contributed to improved blood product revenues. Revenues from the closed donor centers declined by $1,576,000, or 65.2%, to $842,000 during the first six months of 2004 from $2,418,000 in 2003. This decrease in revenues from the closed donor centers is partially offset by an increase in revenues from the ongoing centers resulting in an overall decline in revenues. The decline in revenues from the closed centers is due to the fact that the Company closed several under-performing donor centers in the third and fourth quarters of 2003. The closed center category also includes revenue from the recently expired Dartmouth-Hitchcock Medical Center and Presbyterian Intercommunity Hospital donor center contracts. For the six months ended June 30, 2004, gross profit from ongoing donor centers increased by $899,000, or 159.7%, to $1,462,000 compared with $563,000 recorded in the first six months of 2003. The gross profit percentage also increased to 16.2% in 2004 from 7.4% in 2003. This improvement in gross profit is the result of i) increases in product prices, and ii) increased operational efficiencies realized from higher volumes. The gross profit for closed centers improved $492,000 in the first six months of 2004 to $182,000, from a loss of $310,000 for the same period of 2003. The loss in 2003 was caused by under-performing donor centers that were closed in the third and fourth quarters of 2003. The donor centers previously operated by the Company at Dartmouth-Hitchcock Medical Center, Presbyterian Intercommunity Hospital and the University of North Carolina are reflected in the closed centers category for 2004. Blood Services Revenues from blood services decreased by $53,000, or 1.4%, to $3,776,000 in the first six months of 2004 from $3,829,000 in the same period of 2003. The decrease was mainly due to an 11.4% decrease in the number of therapeutic apheresis procedures performed, from 3,415 in the first six months of 2003 to 3,026 procedures in 2004. This reduction in procedures is primarily due to a reduction in the number of procedures performed in the New York market, and the closure of the Company's operations in Illinois, North Carolina, New Jersey, Pennsylvania and Tennessee in 2003. The revenue decrease caused by this reduction in volume was partially offset by an increase in revenue due to an increase in the average price charged per procedure and due to a higher level of surcharges in 2004 compared with 2003. The increase in the average price is mostly the result of a change in procedure mix to higher average price procedures. Gross profit for the blood services segment increased $91,000, or 7.6%, to $1,290,000 in the first six months of 2004 from $1,199,000 during the same period in 2003. This is primarily due to a change in procedure mix to higher profit margin procedures. As previously mentioned, the Company closed the donor center located at Dartmouth-Hitchcock Medical Center in June 2004. During the first six months of 2004, this donor center generated $112,000 in blood services revenue. General and Administrative Expenses General and administrative expenses increased by $308,000, or 16.3%, to $2,200,000 in the first six months of 2004 from $1,892,000 in the same period of 2003. This increase was primarily due to the recognition of $99,000 more in management bonuses in the first six months of 2004 compared with the same period in 2003 based on achievement of profit targets. In addition, the Company experienced a $120,000 increase in insurance expense in the first six months of 2004 compared with 2003 due to a large increase in the premium for professional liability insurance. The Company also experienced a $91,000 increase in outside service costs in 2004 compared with 2003, mostly for recruiting fees to attract and hire nurses. Finally, the Company recorded an increase in bad debt expense of $85,000 compared with 2003. This was the result of management's decision to increase the allowance for bad debts to reflect the recent rise in receivable write-offs associated with the closure of donor centers in late 2003. These increases in general and administrative expenses were offset by lower wage expenses of $114,000, which is the result of the elimination of several overhead positions as part of the Company's restructuring plan, which was completed in late 2003. 12 13 Income Taxes The Company has sufficient net operating loss carryforward to avoid most federal income tax expense for the first six months of 2004. However, the management anticipates that the Company will be subject to federal alternative minimum tax in 2004. In addition, management anticipates the Company will be subject to various state and local taxes which are unaffected by the net operating loss carryforward. Management has calculated an estimated tax liability that includes the potential for federal alternative minimum tax, and has calculated estimated tax liability for each state and local jurisdiction using the tax basis each jurisdiction uses to assess taxes. During the first six months of 2004, the Company recorded an adjustment to the deferred tax asset valuation reserve of $47,000, which eliminated any provision for income taxes from the statement of income. This adjustment represents less than 1% of the total potential deferred tax asset. Management believes a small adjustment is appropriate considering the Company has recorded net income in each of the last three fiscal quarters, thereby constituting evidence that the Company may derive future benefit from the deferred tax asset. Critical Accounting Policies and Estimates - ------------------------------------------ Use of Estimates The Company's discussion and analysis of its financial condition and results of operations are based on the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to valuation reserves, income taxes and intangibles. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Allowance for Doubtful Accounts The Company makes ongoing estimates relating to the collectibility of accounts receivable and maintain a reserve for estimated losses resulting from the inability of customers to meet their financial obligations to the Company. In determining the amount of the reserve, management considers the historical level of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since management cannot predict future changes in the financial stability of customers, actual future losses from uncollectible accounts may differ from the estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve may be required. In the event it is determined that a smaller or larger reserve was appropriate, the Company would record a credit or a charge to general and administrative expense in the period in which such a determination is made. Income Taxes As part of the process of preparing the financial statements, the Company is required to estimate income taxes in each of the jurisdictions that the Company operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the balance sheet. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent management believes that recovery is not likely, must establish a valuation allowance. To the extent a valuation allowance is created or adjusted in a period, the Company must include an expense, or benefit, within the tax provision in the statements of income. 13 14 Significant management judgment is required in determining the provision for income taxes, deferred tax asset and liabilities and any valuation allowance recorded against net deferred tax assets. Management continually evaluates if the deferred tax asset is likely to be realized. If management determines that the deferred tax asset is not likely to be realized, a write-down of that asset would be required and would be reflected in the provision for taxes in the accompanying period. Liquidity and Capital Resources As of June 30, 2004, the Company's cash and cash equivalents equaled $1,399,000 and it had working capital of $1,942,000. The Company has a working capital line of credit with Comerica Bank - California ("Comerica"). The amount the Company may borrow is the lesser of: 75% of eligible accounts receivable, less amounts outstanding on the notes payable discussed below, or $2 million. Interest is payable monthly at a rate of prime plus 0.5%; as of June 30, 2004 the rate paid by the Company was 4.5%. As of June 30, 2004, the Company had no net borrowing on this line of credit, and the unused portion of the Company's line of credit was $2,000,000. The Company has entered into an amendment to the credit agreement with Comerica which extends the term of the line of credit to June 30, 2005, and to revise the financial covenants related to quick assets to current liabilities, and debt to net worth, to levels more favorable to the Company. As of June 30, 2004, the Company was in compliance with all of the revised covenants. In addition, the Company had other equipment notes payable with Comerica. The Company paid off $203,000 of these notes during the second quarter of 2004 and no amounts remained outstanding as of the end of the quarter. All of the Comerica loans are collateralized by substantially all of the Company's assets and are cross-defaulted. They also require the maintenance of certain financial covenants that among other things require minimum levels of profitability and prohibit the payment of dividends or stock repurchases. The Company incurred $2,500 in interest expense associated with the Comerica obligations during the second quarter of 2004. Additionally, the Company has a note payable with One Source Financial. As of June 30, 2004, the balance on this note was $57,000. The note requires quarterly payments of approximately $10,000 including interest at the rate of 8.5% and is secured by certain fixed assets. Of the total amount of this note outstanding, $35,000 is included in current obligations under notes payable on the balance sheet. The Company also has a note payable with Bay Tree Finance Company related to financing certain insurance premiums. As of June 30, 2004, the balance due on this note was $167,000, all of which is included in current obligations under notes payable on the balance sheet. The note requires monthly payments of approximately $21,000, including interest at a rate of 4.6%. The Company also has a capital lease with Gambro BCT to finance the acquisition of equipment used in the Company's apheresis activities. The total value of the equipment financed through this capital lease was $932,000. The lease is scheduled to expire in December 2008 and has a fixed interest rate of 7.5%. As of June 30, 2004, the balance of this lease was $871,000, of which $168,000 is included in current obligations under capital leases. The lease is secured by all of the equipment purchased through the lease financing. The Company also has a capital equipment lease with GE Capital used to finance the acquisition of vehicles. As of June 30, 2004, the balance outstanding on this lease was $193,000, of which approximately $70,000 is included in current obligations. This lease is scheduled to mature in January 2007, and has a fixed interest rate of 8.0%. Finally, the Company has a capital equipment lease with Dell Financial Services associated with the acquisition of computer equipment. As of June 30, 2004, the balance outstanding on this lease was $13,000, of which approximately $11,000 is included in current obligations. This lease is scheduled to mature in August 2005, and has a fixed interest rate of 12.6%. 14 15 The following table summarizes our contractual obligations by year (in thousands).
Less More Than 1-3 3-5 Than Total 1 Year Years Years 5 Years ------- ------- ------ ------ ------- Operating leases $ 643 $ 285 $ 358 $ - $ - Capitalized leases 1,245 317 577 351 - Notes payable 224 203 21 - - ------- ------- ------ ------ ------ Totals $ 2,112 $ 805 $ 956 $ 351 $ - ======= ======= ====== ====== ======
For the six months ended on June 30, 2004, net cash provided by operating activities was $1,401,000, compared to $344,000 for the six months ended June 30, 2003. The increase of $1,057,000 is primarily due to an increase in net income to $734,000 compared to a net loss of $264,000 in 2003. The adjustments to reconcile net income (loss) to net cash also reveals that during the first six months of 2003, the Company recorded a net benefit from income taxes of $176,000, whereas only $47,000 of income tax benefit was recorded during the same period of 2004. During the first six months of 2003, the balance of net accounts receivable decreased $731,000, whereas there was only a $9,000 increase in accounts receivable during the same period of 2004. Although this represents a substantial swing from last year to this year, the days sales outstanding statistic as of June 30, 2004 stood at 40 days, which compares favorably to 42 days outstanding as of December 31, 2003. Therefore, the accounts receivable balance did not change significantly during the first six months of 2004, but the relative age and collectability of the accounts receivables on the books as of June 30, 2004 remains very good. Offsetting the change in account receivable balances during the first quarter of 2004 compared with the same period in 2003 was an increase in the change in accounts payable, accrued expenses and other liabilities of $624,000. This increase is the result of i) an increase in the accounts payable obligation during the first six months of 2004 due to the timing of invoice payments, ii) an increase in the 401(k) matching accrual that was not recorded during the same period in 2003, and iii) an increase in the accrued bonuses compared with the same period in 2003. For the six months ended on June 30, 2004, net cash used in investing activities was $31,000, compared with $242,000 for the same period in 2003. The decrease of $211,000 is primarily due to the Company's investments in new vehicles and leasehold improvement expenditures during the first six months of 2003. The Company did not make similar investments in plant or equipment during the same period of 2004. For the six months ended June 30, 2004, net cash used in financing activities was $906,000 compared with net cash used of $436,000 for the six months ended June 30, 2003. The difference in the cash used for financing activities is primarily due to management's decision to use a portion of the cash generated by operations to reduce debt by $906,000 The Company has decided to initiate a new information technology project to enhance the automation of its blood product operations. This project is expected to take approximately two years to complete, and will involve considerable financial and managerial resources. Management anticipates that cash on hand and available borrowing on the bank line of credit will be sufficient to provide funding for the Company's needs during the next year, including working capital requirements, equipment purchases, operating lease commitments and to fund the new information technology project. The Company has entered into an amendment to the credit agreement with Comerica that extends the term of the line of credit to June 30, 2005. The Company's primary sources of liquidity include our cash on hand, available borrowing on the line of credit and cash generated from operations. Liquidity depends, in part, on timely collections of accounts receivable. Any significant delays in customer payments could adversely affect the Company's liquidity. Liquidity also depends on maintaining compliance with the various loan covenants. From time to time the Company has failed to comply with some or all of these covenants. The Company has obtained waivers from the bank for each of these covenant violations. If in the future the Company is unable to comply with a loan covenant and the bank does not issue a waiver, the Company's bank debt could immediately be due and payable in full and the Company's liquidity could be materially affected. As of June 30, 2004, the Company was in full compliance with all of the required covenants. 15 16 Risk Factors Affecting the Company - ---------------------------------- Short and long-term success is subject to many factors that are beyond management's control. Shareholders and prospective shareholders of the Company should consider carefully the following risk factors, in addition to other information contained in this report. This Quarterly Report on Form 10-Q contains forward-looking statements. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those described below. Operating Risk Could Affect Ability to Generate Consistent Profit The Company recently completed a plan to eliminate underperforming facilities to improve the profitability of the Company. The future of the Company now depends on generating sufficient operating profit from the remaining facilities to cover overhead expenses. The remaining facilities have not always been consistently profitable. Therefore, the Company is at risk if management is unable to execute an operating plan that will produce consistent profits from the remaining facilities. Potential Loss of Lines of Credit Could Adversely Impact Liquidity In December 2002, the Company replaced the then existing lines of credit with a new $2.0 million working capital line of credit with Comerica Bank that requires the Company maintain certain financial covenants including profitability each quarter. The Company has entered into an amendment to the credit agreement with Comerica that extends the term of the line of credit to June 30, 2005, and to revise the financial covenants to levels more favorable to the Company. As of June 30, 2004, the Company was in compliance with the revised covenants. Maintaining compliance is dependent, among other things, on achieving the required profitability. The Company generated losses of $591,000 and $4,679,000 for 2002 and 2003, respectively. Although the Company has recorded profits in each of the last three quarters, future losses would violate the terms of the credit line. While in the past the bank granted covenant violation waivers when needed, the Company cannot assure that the bank will continue to grant waivers in the future. Failure to obtain such waivers when, and if, needed could result in acceleration of payment obligations under the credit agreement and severely reduce liquidity. In addition, the existing credit agreement expires on June 30, 2005. Management will make efforts to replace this facility or negotiate an extension of the existing line of credit; however, the Company cannot assure that alternative financing will be available or that the existing line of credit can be extended on terms acceptable to the Company. Failure to replace this facility will adversely impact liquidity and could deprive the Company of the working capital needed to continue to operate. Potential Inability to Meet Future Capital Needs Could Affect Plans to Finance Future Expansion Currently, the Company believes it has sufficient cash available through its cash on hand, bank credit facilities and funds from operations to finance its operations for the next year. However, the Company incurred a $4,679,000 loss during 2003. While the Company generated $734,000 in net income during the first six months of 2004, there is no assurance this performance will be sustainable, and the Company may need to raise additional capital in the debt or equity markets. There can be no assurance that the Company will be able to obtain such financing on reasonable terms or at all. Additionally, there is no assurance that the Company will be able to obtain sufficient capital to finance future expansion. Market Prices for Blood Do Not Necessarily Reflect Costs The Company depends on competitive pricing to obtain and maintain sales. As costs increase, the Company may not be able to raise prices commensurately if competitors do not. Some competitors have greater resources than the Company to sustain periods of unprofitable sales. Cost increases may therefore have a direct negative effect on profits and a material adverse affect on the business. 16 17 Declining Blood Donations Could Affect Profitability The business depends on the availability of donated blood. Only a small percentage of the population donates blood, and new regulations intended to reduce the risk of introducing infectious diseases in the blood supply have decreased the pool of potential donors. If the level of donor participation declines, the Company may not be able to achieve profitability or reduce costs sufficiently to maintain profitability in blood products. Increasing Costs Could Affect Profitability The costs of collecting, processing and testing blood have risen significantly in recent years and will likely continue to increase. These cost increases are related to new and improved testing procedures to assure that blood is free of infectious disease, increased regulatory requirements related to blood safety, and increased costs associated with recruiting blood donors. New testing protocols have required the Company to outsource much of the required testing. Competition, and in some cases multi-year contractual arrangements, may limit the Company's ability to pass these increased costs to customers. In this circumstance, the increased costs could reduce profitability and could have a material adverse effect on the business and results of operations. Impact of Reimbursement Rates Reimbursement rates for blood products and services provided to Medicaid and Medicare patients impact the fees that the Company is able to negotiate with hospitals. Decreases in reimbursement rates or increases which do not keep pace with higher costs, may impact the Company's profitability. Increasing Reliance on Outside Laboratories Could Increase Testing Costs The Company maintains laboratories that are licensed and accredited to test blood products for purity, potency and quality. The Company also utilizes outside laboratories for a variety of tests. As other new testing and processing technologies are introduced, the Company has increased its reliance on outside laboratories. In using outside laboratories the Company will have less control over testing costs. In addition, because laboratory facilities competent in these new technologies are scarce, the loss of an outside laboratory because of competition for capacity would have a material adverse effect on the business. Targeted Donor Base Involves Higher Collection Costs Part of the Company's current operations involves conducting blood drives for organizations that provide a relatively small number of donors. Blood drives directed at smaller donor sites lack the efficiencies associated with larger blood drives. As a result, collection costs might be higher than the competition and may affect profitability and growth plans. Access to Insurance Could Affect Ability to Defend Against Possible Claims The Company currently maintains insurance coverage consistent with the industry; however, if the Company experiences losses or the risks associated with the blood products industry increase in the future, insurance may become more expensive or unavailable. The Company also cannot give assurance that as the business expands, or the Company introduces new products and services, that additional liability insurance on acceptable terms will be available, or that the existing insurance will provide adequate coverage against any and all potential claims. Also, the limitations on liability contained in various agreements and contracts may not be enforceable and may not otherwise protect the Company from liability for damages. The successful assertion of one or more large claims against the Company that exceed available insurance coverage, or changes in insurance policies, such as premium increases or the imposition of large deductibles or co-insurance requirements, could materially and adversely affect the business. Not-For-Profit Status Gives Advantages to Competitors HemaCare Corporation is the only significant blood products supplier to hospitals in the U.S. that is operated for profit and investor owned. The not-for-profit competition is exempt from federal and state taxes, and has 17 18 substantial community support and access to tax-exempt financing. The Company may not be able to continue to compete successfully with not-for- profit organizations and the business and results of operations may suffer material adverse harm. Potential Adverse Affect from Changes in the Healthcare Industry Could Affect Access to Customers In the U.S., a fundamental change is occurring in the healthcare system. Competition to gain patients on the basis of price, quality and service is intensifying among healthcare providers who are under pressure to decrease the costs of healthcare delivery. A national hospital chain has announced plans to sell 19 of its facilities in California, many of which are customers of the Company. In addition, there has been significant consolidation among healthcare providers as providers seek to enhance efficiencies, and this consolidation is expected to continue. As a result of these trends, the Company may be limited in its ability to increase prices for products in the future, even if costs increase. Further, the Company could be adversely affected by customer attrition as a result of consolidation or closure of hospital facilities. Future Technological Developments Could Jeopardize Business As a result of the risks posed by blood-borne diseases, many companies are currently seeking to develop synthetic substitutes for human blood products. HemaCare's business consists of collecting, processing and distributing human blood and blood products. The introduction and acceptance in the market of synthetic blood substitutes would cause material adverse harm to the business. Operations Depend on Obtaining the Services of Qualified Medical Professionals The Company is highly dependent upon obtaining the services of qualified medical professionals. In particular, operations depend on the services of registered nurses and other medical technolgists. Nationwide, the demand for these professionals exceeds the supply and competition for their services is strong. This shortage could be aggravated in the event of a war or other international conflict. If the Company is unable to attract and retain a staff of qualified medical professionals, operations would be adversely affected. Heavily Regulated Industry Could Increase Operating Costs The business of collecting, processing and distributing blood and blood products are all subject to extensive and complex regulation by the state and federal governments. The Company is required to obtain and maintain numerous licenses in different legal jurisdictions regarding the safety of products, facilities and procedures, and regarding the purity and quality of blood products. In addition, state and federal laws include anti-kickback and self-referral prohibitions and other regulations that affect the relationships between blood banks, hospitals, physicians and other persons who refer business to each other. Health insurers and government payers, such as Medicare and Medicaid, also limit reimbursement for products and services, and require compliance with certain regulations before reimbursement will be made. The Company devotes substantial resources to complying with laws and regulations, and believes it is currently in compliance; however, the possibility cannot be eliminated that interpretations of existing laws and regulations will result in a finding that the Company has not complied with significant existing regulations. Such a finding could materially harm the business. Moreover, healthcare reform is continually under consideration by regulators, and the Company does not know how laws and regulations will change in the future. Some of these changes could require costly compliance efforts or expensive outsourcing of functions which could make some of the Company's operations prohibitively expensive or impossible to continue. Product Safety and Product Liability Could Provide Exposure to Claims and Litigation Blood products carry the risk of transmitting infectious diseases, including hepatitis, HIV and Creutzfeldt-Jakob Disease. HemaCare carefully screens donors, uses highly qualified testing service providers to test its blood products for known pathogens in accordance with industry standards, and complies with all applicable safety regulations. Nevertheless, the risk that screening and testing processes might fail or that new pathogens may be undetected by them cannot be completely eliminated. There is currently no 18 19 test to detect the pathogen responsible for Creutzfeldt-Jakob Disease. If patients are infected by known or unknown pathogens, claims could exceed insurance coverage and materially and adversely affect the Company's financial condition. Furthermore, healthcare regulations are constantly changing and certain changes could require costly compliance or make some of our operations impossible to continue. Environmental Risks HemaCare's operations involve the controlled use of bio-hazardous materials and chemicals. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company and its insurance coverage. The Company may incur substantial costs to maintain compliance with environmental regulations as it develops and expands its business. Business Interruption Due to Terrorism and Increased Security Measures in Response to Terrorism HemaCare's business depends on the free flow of products and services through the channels of commerce and freedom of movement for patients and donors. The 2001 response to terrorist activities slowed or stopped transportation, mail, financial and other services for a period of time. Further delays or stoppages in transportation of perishable blood products and interruptions of mail, financial or other services could have a material adverse effect on the Company's results of operations and financial condition. Furthermore, the Company may experience an increase in operating costs, such as costs for transportation, insurance and security, as a result of the terrorist activities and potential activities, which may target health care facilities or medical products. The Company may also experience delays in receiving payments from payers that have been affected by terrorist activities and potential activities. The U.S. economy in general is adversely affected by terrorist activities, and potential activities, and any economic downturn could adversely impact the Company's results of operations, impair its ability to raise capital or otherwise adversely affect its ability to grow its business. Articles of Incorporation and Rights Plan Could Delay or Prevent an Acquisition or Sale of HemaCare HemaCare's Articles of Incorporation empower the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. This gives the Board of Directors the ability to deter, discourage or make more difficult for a change in control of HemaCare, even if such a change in control would be in the interest of a significant number of shareholders or if such a change in control would provide shareholders with a substantial premium for their shares over the then-prevailing market price for our common stock. In addition, the Board of Directors has adopted a Shareholder's Rights Plan designed to require a person or group interested in acquiring a significant or controlling interest in HemaCare to negotiate with the Board. Under the terms of our Shareholders' Rights Plan, in general, if a person or group acquires more than 15% of the outstanding shares of common stock, all of the other shareholders would have the right to purchase securities from the Company at a discount to the fair market value of the common stock, causing substantial dilution to the acquiring person or group. The Shareholders' Rights Plan may inhibit a change in control and, therefore, could materially adversely affect the shareholders' ability to realize a premium over the then-prevailing market price for the common stock in connection with such a transaction. For a description of the Rights Plan see the Company's Current Report on Form 8-K filed with the SEC on March 5, 1998. Stocks Traded on the OTC Bulletin Board are Subject to Greater Market Risks than Those of Exchange-Traded and NASDAQ Stocks HemaCare's common stock was delisted from the NASDAQ Small Cap Market on October 29, 1998 because of the failure to maintain NASDAQ's requirement of a minimum bid price of $1.00. Since November 2, 1998 the common stock has traded on the OTC Bulletin Board, an electronic, screen-based trading system operated by the National Association of Securities Dealers, Inc. Securities traded on the OTC Bulletin Board are, for the most part, thinly traded and 19 20 generally are not subject to the level of regulation imposed on securities listed or traded on the NASDAQ Stock Market or on a national securities exchange. As a result, an investor may find it difficult to dispose of our common stock or to obtain accurate quotations as to its price. Stock Price Could Be Volatile The price of HemaCare's common stock has fluctuated in the past and may be more volatile in the future. Factors such as the announcements of government regulation, new products or services introduced by the Company or by the competition, healthcare legislation, trends in the health insurance, litigation, fluctuations in operating results and market conditions for healthcare stocks in general could have a significant impact on the future price of HemaCare's common stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that may be unrelated to the operating performance of particular companies. The generally low volume of trading in HemaCare's common stock makes it more vulnerable to rapid changes in price in response to market conditions. Future Sales of Equity Securities Could Dilute the Company's Common Stock The Company may seek new financing in the future through the sale of its securities. Future sales of common stock or securities convertible into common stock could result in dilution of the common stock currently outstanding. In addition, the perceived risk of dilution may cause some shareholders to sell their shares, which could further reduce the market price of the common stock. Lack of Dividend Payments The Company intends to retain any future earnings for use in its business, and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. The declaration and payment of any cash dividends in the future will depend on the Company's earnings, financial condition, capital needs and other factors deemed relevant by the Board of Directors. In addition, the Company's credit agreement prohibits the payment of dividends during the term of the agreement. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------- ----------------------------------------------------------- The Company has $1,299,000 of debt, all of which is in the form of notes payable and capitalized leases with fixed interest rates. As of June 30, 2004, the Company has no debt at variable interest rates, and therefore there is no risk from changes in interest rates at this time. The Company has the ability to draw against the working capital line of credit, which has an interest rate linked to the prime interest rate. Accordingly, if the Company did draw against this line of credit, interest rate expense could fluctuate with rate changes in the U.S. Item 4. Controls and Procedures - ------- ------------------------ The Company's chief executive officer and the principal financial officer, with the participation of the Company's management, carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the chief executive officer and the principal financial officer believe that, as of the end of the period covered by this report, except as described below, the Company's disclosure controls and procedures are effective in timely making known to them material information relating to the Company (including its consolidated subsidiaries required to be included in this report). Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objections is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors, mistakes or intentional circumvention of the established process. 20 21 There was no change in the Company's internal controls over financial reporting, known to the chief executive officer or the principal financial officer, that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company recently conducted an extensive evaluation of the existing internal control structure. Management identified several internal control weaknesses. Of these, the Company has alternative controls in place, which management believes prevents any material misstatement of the Company's financial statements. Nevertheless, management intends to modify the existing internal control structure to eliminate any significant weaknesses with the objective of eliminating or reducing reliance on alternative controls. PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------- ----------------- From time to time, the Company is involved in various routine legal proceedings incidental to the conduct of its business. Management does not believe that any of these legal proceedings will have a material adverse impact on the business, financial condition or results of operations of the Company, either due to the nature of the claims, or because management believes that such claims should not exceed the limits of the Company's insurance coverage. See disclosure in Form 10-K, as amended, for the year ended December 31, 2003. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities - ------- ----------------------------------------------------------- None. Item 3. Defaults Upon Senior Securities - ------- -------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders - ------- --------------------------------------------------- a. The Company's Annual Meeting of Shareholders (the "Meeting") was held on May 25, 2004. b. The following table shows the tabulation of votes for all matter put to vote at the Meeting: Matters Put to Vote For Against/Withheld ----------------------------- ---------- ---------------- 1. Election of Five Directors Julian L. Steffenhagen 6,913,998 565,292 Steven B. Gerber, M.D. 7,428,659 50,631 Judi Irving 7,397,409 81,881 Robert L. Johnson 6,918,198 561,092 Terry Van Der Tuuk 7,417,809 61,481 Item 5. Other Information - ------- ----------------- None. 21 22 Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- a. Exhibits 11 Net Income per Common and Common Equivalent Share 31.1 Certification Pursuant to Rule 15d-14(a) Under the Securities Exchange Act 31.2 Certification Pursuant to Rule 15d-14(a) Under the Securities Exchange Act 32 Certification Pursuant to 18 U.S.C. 1350 and Rule 15d- 14(a) Under the Securities Exchange Act b. Reports on Form 8-K On April 9, 2004, the Company filed a Current Report on Form 8-K disclosing under Item 4 (Changes in Registrant's Certifying Accountant) the dismissal of Ernst & Young, LLP as the Company's independent accountants, and the appointment of Stonefield Josephson, Inc. as the Company's new independent accountants. On June 18, 2004, the Company filed a Current Report on Form 8-K disclosing under Item 5 (Other Events) the text of a press release dated June 17, 2004 announcing an investigational site agreement with Otsuka America Pharmaceutical and the termination of Dartmouth-Hitchcock Medical Center blood center management contract. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date August 13, 2004 HEMACARE CORPORATION ------------------------- ---------------------------------- (Registrant) /s/ Judi Irving ------------------------------------- Judi Irving, Chief Executive Officer /s/ Robert S. Chilton ------------------------------------- Robert S. Chilton, Chief Financial Officer EX-11 2 ex1122004.txt EXHIBIT 11 HemaCare Corporation EXHIBIT 11 Basic and Diluted Net Loss per Share
Three Months Ended Six Months Ended June 30, June 30, --------------------------- ---------------------- 2004 2003 2004 2003 ----------- ------------ ---------- ---------- BASIC ----------------- Weighted average common shares used to compute basic earnings per share.. 7,756,060 7,751,060 7,756,060 7,751,060 =========== =========== =========== =========== Net income......... $ 488,000 $ (272,000) $ 734,000 $ (264,000) =========== =========== =========== =========== Basic net income (loss) per share..... $ 0.06 $ (0.04) $ 0.09 $ (0.03) =========== =========== =========== =========== DILUTED ---------------- Weighted average common shares used to compute diluted earnings per share. 7,756,060 7,751,060 7,756,060 7,751,060 =========== =========== =========== =========== Dilutive common equivalent shares attributable to stock options (based on average market price)...... 284,056 - 204,082 - Dilutive common equivalent shares attributable to warrants (based on average market price)............. 48,962 - 39,307 - ----------- ------------ ----------- ----------- Weighted average common shares used to compute diluted earnings per share. 8,089,079 7,751,060 7,999,449 7,751,060 =========== =========== =========== =========== Net income (loss).. $ 488,000 $ (272,000) $ 734,000 $ (264,000) =========== =========== =========== =========== Dilutive net income (loss) per share.. $ 0.06 $ (0.04) $ 0.09 $ (0.03) =========== =========== =========== ===========
24 25 EX-31.1 3 ex311204.txt EXHIBIT 31.1 CERTIFICATION 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: August 13, 2004 /s/ Judi Irving ________________________________________ Judi Irving (Chief executive officer) 25 26 EX-31.2 4 ex312204.txt EXHIBIT 31.2 CERTIFICATION 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: August 13, 2004 /s/ Robert Chilton ________________________________________ Robert Chilton (Chief Financial Officer and Principal Accounting Officer) 26 27 EX-32 5 exh322q.txt CERTIFICATION EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. 1350 ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q for the quarter ended June 30, 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 /s/ Robert Chilton ___________________________ Robert Chilton Chief Financial Officer (Principal Accounting Officer) Dated: August 13, 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. 27 -----END PRIVACY-ENHANCED MESSAGE-----