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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
/ / 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 No.)
organization)
21101 Oxnard Street
Woodland Hills, California 91367
(Address of principal executive offices) (Zip Code)
(818) 226-1968
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes/ / No /X/
As of November 10, 2004, 7,986,060 shares of Common Stock of the registrant
were issued and outstanding.
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HEMACARE CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2004
Page
Number
------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
2004 (unaudited) and December 31, 2003................. 1
Consolidated Statements of Income (Operations) for the
three months and nine months ended September 30, 2004
and 2003 (unaudited)................................... 2
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003 (unaudited)... 3
Notes to Unaudited Consolidated Financial Statements... 4
Item 2. Management's Discussion and Analysis of Financial
ondition and Results of Operations..................... 7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk................................................... 21
Item 4. Controls and Procedures................................ 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................... 21
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds............................................... 22
Item 3. Defaults Upon Senior Securities........................ 22
Item 4. Submission of Matters to a Vote of Security Holders.... 22
Item 5. Other Information...................................... 22
Item 6. Exhibits............................................... 22
SIGNATURES..................................................... 22
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PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2004 2003
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,506,000 $ 935,000
Accounts receivable, net of allowance for
doubtful accounts - $230,000 in 2004 and $351,000
in 2003............................................ 3,259,000 3,128,000
Product inventories and supplies..................... 562,000 494,000
Prepaid expenses..................................... 566,000 388,000
Note receivable...................................... - 20,000
------------ ------------
Total current assets..................... 5,893,000 4,965,000
Plant and equipment, net of accumulated
depreciation and amortization of
$3,312,000 in 2004 and $2,919,000 in 2003............ 2,886,000 3,259,000
Deferred taxes......................................... 76,000 -
Other assets........................................... 53,000 62,000
------------ ------------
$ 8,908,000 $ 8,286,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 1,586,000 $ 1,686,000
Accrued payroll and payroll taxes.................... 1,321,000 918,000
Other accrued expenses............................... 134,000 243,000
Current obligations under capital leases............. 252,000 229,000
Current obligations under notes payable.............. 36,000 710,000
------------ ------------
Total current liabilities................ 3,329,000 3,786,000
Obligations under capital leases, net
of current portion................................... 764,000 954,000
Notes payable, net of current portion.................. 12,000 124,000
Other long-term liabilities............................ 6,000 11,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, no par value - 20,000,000 shares
authorized, 7,986,060 and 7,756,060 issued and
outstanding in 2004 and 2003 respectively.......... 13,496,000 13,319,000
Accumulated deficit.................................. (8,699,000) (9,908,000)
------------ ------------
Total shareholders' equity............... 4,797,000 3,411,000
------------ ------------
$ 8,908,000 $ 8,286,000
============ ============
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (OPERATIONS)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------ ------------ ----------- -----------
2004 2003 2004 2003
------------ ------------ ----------- -----------
Revenues
Blood products.................... $4,444,000 $ 5,166,000 $14,325,000 $15,205,000
Blood services.................... 1,874,000 1,814,000 5,650,000 5,643,000
----------- ------------ ------------ -----------
Total revenue.................... 6,318,000 6,980,000 19,975,000 20,848,000
Operating costs and expenses
Blood products.................... 3,706,000 5,754,000 11,943,000 15,540,000
Blood services.................... 1,242,000 1,306,000 3,728,000 3,936,000
----------- ------------ ------------ ------------
Total operating costs and
expenses....................... 4,948,000 7,060,000 15,671,000 19,476,000
----------- ------------ ------------ ------------
Gross profit...................... 1,370,000 (80,000) 4,304,000 1,372,000
General and administrative
expenses............................ 1,062,000 1,439,000 3,262,000 3,331,000
----------- ------------ ------------ ------------
Income (loss) from operations.......... 308,000 (1,519,000) 1,042,000 (1,959,000)
Other income........................... 167,000 - 167,000 -
----------- ------------ ------------ ------------
Income (loss) before income taxes...... 475,000 (1,519,000) 1,209,000 (1,959,000)
Provision for income taxes............. - 3,160,000 - 2,984,000
----------- ------------ ------------ ------------
Net income (loss)................... $ 475,000 $(4,679,000) $ 1,209,000 $(4,943,000)
=========== ============ ============ ============
Earnings (loss) per share - basic...... $ 0.06 $ (0.60) $ 0.16 $ (0.64)
Earnings (loss) per share - diluted.... $ 0.06 $ (0.60) $ 0.15 $ (0.64)
Weighted average shares
outstanding - basic................ 7,795,571 7,754,430 7,769,326 7,752,196
Weighted average shares
outstanding - diluted.............. 8,255,209 7,754,430 8,076,949 7,752,196
The accompanying notes are an integral part of these unaudited
consolidated financial statements.
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HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income (loss)......................................... $1,209,000 $(4,943,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for bad debt................................. 84,000 216,000
Recognition of deferred tax assets..................... (76,000) -
Depreciation and amortization.......................... 493,000 1,003,000
Loss on disposal of assets............................. 25,000 5,000
Impaired deferred taxes................................ - 2,984,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable................ (215,000) 1,295,000
Increase in inventories, supplies and
prepaid expenses........................................ (58,000) (52,000)
Decrease in other assets.................................. 9,000 25,000
Increase in accounts payable, accrued
expenses and other liabilitiess.......................... 189,000 271,000
----------- ------------
Net cash provided by operating activities................. 1,660,000 804,000
Cash flows from investing activities:
Proceeds from sale of plant and equipment................. 17,000 4,000
Proceeds from note receivable............................. 20,000 -
Purchases of plant and equipment.......................... (162,000) (291,000)
----------- ------------
Net cash used in investing activities..................... (125,000) (287,000)
Cash flows from financing activities:
Proceeds from the exercise of stock options............... 47,000 3,000
Proceeds from the sale of common stock.................... 130,000 -
Principal payments on debt and capitalized leases......... (1,141,000) (661,000)
Proceeds from line of credit.............................. - 150,000
---------- ------------
Net cash used in financing activities..................... (964,000) (508,000)
----------- ------------
Increase in cash and cash equivalents....................... 571,000 9,000
Cash and cash equivalents at beginning of period............ 935,000 1,048,000
----------- -------------
Cash and cash equivalents at end of period.................. $1,506,000 $ 1,057,000
=========== =============
Supplemental disclosure:
Interest paid............................................. $ 76,000 $ 62,000
=========== =============
Income taxes paid......................................... $ 70,000 $ -
=========== =============
Items not affecting cash flow:
Insurance premiums financed................................$ 188,000 $ -
=========== =============
The accompanying notes are an integral part of
these unaudited consolidated financial statements.
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HemaCare Corporation
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and General Information
- -------------------------------------------------------
BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements for the three and nine months ended September 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 September 30, 2004, the results of its
operations for the three and nine months ended September 30, 2004 and 2003,
and its cash flows for the nine months ended September 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 nine months ended September 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 September 30, 2004 and December
31, 2003, the Company had uninsured cash and cash equivalents of $1,287,000
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 September 30, 2004 the rate associated with this note
was 5.25%. As of September 30, 2004, the Company had no net borrowing on
this line of credit, and the Company had unused availability of $2 million.
On March 22, 2004, the Company 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 related to the ratio of
quick assets to current liabilities, and debt to net worth, to levels more
favorable to the Company. In addition, there is a covenant that requires
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the maintenance of minimum levels of profitability, and limitations on the
payment of dividends and stock repurchases. As of September 30, 2004, the
Company was in compliance with all of the covenants contained within the
amended credit agreement. Any borrowing on the Comerica line of credit is
collateralized by substantially all of the Company's assets.
Additionally, the Company has a note payable with One Source Financial. As
of September 30, 2004, the balance on this note was $48,000. 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, $36,000 is included in current obligations under
notes payable on the balance sheet.
The Company previously had a note payable to Bay Tree Finance Company
related to financing certain insurance premiums. During the third quarter,
the Company paid off the remaining balance of this note of $167,000 and
incurred interest expense of $1,000.
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 September 30, 2004, the balance of this lease
was $830,000, of which $171,000 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 Healthcare
Financial Services used to finance the acquisition of vehicles. As of
September 30, 2004, the balance outstanding on this lease was $176,000, of
which approximately $71,000 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
September 30, 2004, the balance outstanding on this lease was $10,000, all
of which 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:
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ------------ ----------- ------------
Net income (loss) as reported............ $ 475,000 $(4,679,000) $1,209,000 $(4,943,000)
Deduct: Total stock-based employee
compensation expense determined under
fair market value based method for all
awards, net of related tax effects....... (21,000) (20,000) (62,000) (68,000)
----------- ------------ ---------- ------------
Pro forma net income (loss).............. $ 454,000 $(4,699,000) $1,147,000 $(5,011,000)
=========== ============ ========== ============
Net income (loss) per share
As reported - basic................... $ 0.06 $ (0.60) $ 0.16 $ (0.64)
Pro form - basic...................... $ 0.06 $ (0.61) $ 0.15 $ (0.65)
As reported - diluted................. $ 0.06 $ (0.60) $ 0.15 $ (0.64)
Pro forma - diluted................... $ 0.05 $ (0.61) $ 0.14 $ (0.65)
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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 $2,000.
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 Nine months ended
September 30, September 30,
-------------------------- ------------------------
2004 2003 2004 2003
----------- ------------ ---------- ------------
Net income (loss)........................ $ 475,000 $(4,679,000) $1,209,000 $(4,943,000)
=========== ============ ========== ============
Shares outstanding....................... 7,795,571 7,754,430 7,769,326 7,752,196
Net effect of diluted options and
warrants............................... 459,638 - 307,623 -
----------- ----------- ---------- -----------
Dilutive shares outstanding.............. 8,255,209 7,754,430 8,076,949 7,752,196
=========== =========== =========== ============
Options and warrants outstanding for 510,000 shares and 635,000 shares of
common stock for the three and nine months, respectively, ended September
30, 2003, have been excluded from the above calculation because the exercise
price associated with these options and warrants would have resulted in an
anti-dilutive effect on earnings per share.
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 four
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, $34,000 and $29,000, respectively, in taxes has been incurred as a
result of reportable income during the first, second and third quarters of
2004. Therefore, the Company reduced the deferred tax asset valuation
reserve by $76,000 in 2004, which eliminated any recognition of income taxes
in the first nine months of 2004.
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, such
as sales and procedure volumes. However, the dominant measurements are
consistent with HemaCare's consolidated financial statements, which present
revenue from external customers, operating expenses and operating income for
each segment.
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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 - Other Income
- ---------------------
During the third quarter, the Company received a $167,000 sales tax refund
from Gambro BCT ("Gambro"), one of the Company's largest suppliers. This
refund was the result of an audit of Gambro's sales tax records by the
California Board of Equalization. The audit revealed that Gambro had
collected, in error, a significant amount of sales taxes from the Company in
prior periods. During the third quarter of 2004, Gambro received the final
report on the results of this audit, and received a refund from the
California Board of Equalization. The Company has reported the benefit of
this refund as "Other Income," in the third quarter 2004 financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
- ----------------------------------------------------------------------
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
financial statements and the related notes provided under "Item 1 - Financial
Statements" above.
The matters discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Quarterly Report
on Form 10-Q that are not historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
statements may also be identified by the use of words such as
"anticipate," "believe," "continue," "estimate," "expect,"
"intend," "may," "project," "will" and similar expressions, as they
relate to the Company, its management and its industry. Investors and
prospective investors are cautioned that these forward-looking statements
are not guarantees of future performance and involve risks and
uncertainties. Actual results could differ from those described in this
report because of numerous factors, many of which are beyond the Company's
control. These factors include, without limitation, those described below
under the heading "Risk Factors Affecting our Business." The Company does
not undertake to update its forward-looking statements to reflect later
events and circumstances or actual outcomes.
General
- -------
HemaCare Corporation ("HemaCare" or the "Company") collects, processes
and distributes blood products to hospitals in the United States.
Additionally, the Company provides blood related services, principally
therapeutic apheresis procedures, stem cell collection and other blood
treatments to patients with a variety of disorders. Blood related services
are provided on an in-patient and out-patient basis under contract with
hospitals, as an outside purchased service.
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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 revenue
potential from the remaining geographic areas served by the Company. The
remaining geographic areas served include Maine, Massachusetts, the greater
metropolitan New York area and Southern California. Management's strategy
associated with the implementation of the restructuring plan 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 the 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. Revenue from this contract was $302,000 and
$8,000 for the nine month and three month periods ended September 30, 2004,
respectively. 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 and $0 revenue from this contract in the nine
month and three month periods ended September 30, 2004.
Results of Operations
- ---------------------
Three months ended September 30, 2004 compared to the three months ended
September 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.
Total revenues for the quarter ended September 30, 2004 were $6,318,000,
which represents a decline in revenue of $662,000, or 9.5%, from $6,980,000
generated during the same period in 2003. Blood products revenue for the
three months ended September 30, 2004 decreased $722,000, or 14.0%, compared
to the same period of 2003 primarily as a result of the elimination of
revenue generated by operations closed in the third and fourth quarters of
2003, offset in part by increased revenues from remaining operations. Blood
services revenue in the third quarter of 2004 increased $60,000, or 3.3%, as
a result of changes in procedure mix to higher average price procedures
compared with the same period in 2003, which offset a 7.6% decrease in the
number of procedures performed.
Operating costs and expenses decreased $2,112,000, or 29.9%, to $4,948,000
in the third quarter of 2004, from $7,060,000 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.
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General and administrative expenses decreased $377,000, or 26.2%, to
$1,062,000 during the quarter, compared with $1,439,000 for the same quarter
in 2003. Much of this decrease is the result of a reduction in overhead
expenses associated with the implementation of management's restructuring
plan in the third quarter of 2003.
For the three months ended September 30, 2004, the Company generated
$475,000 of net income compared with a net loss of $4,679,000 for the same
period in 2003. The increase in net income of $5,154,000, is mainly due to
i) elimination of losses associated with operating under-performing donor
centers closed in late 2003, ii) elimination of costs associated with the
implementation of management's restructuring plan in 2003, iii) recording a
100% valuation reserve of the Company's deferred tax assets in 2003, iv)
increased sales volume of single donor platelets at all of the ongoing donor
centers, and v) increases in product prices.
Blood Products
For this business segment, the following table summarizes the revenues,
gross profit and net sales volumes associated with donor centers currently
operated by the Company, and donor centers no longer operated as of
September 30, 2004:
For the three month period ended September 30, 2004
(Revenues* and Gross Profit in Thousands)
Ongoing Centers Closed Centers Total Company
------------------ ------------------ ------------------
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------- --------
Revenues* $ 4,436 $ 3,923 $ 8 $ 1,243 $ 4,444 $ 5,166
Gross Profit 734 168 4 (756) 738 (588)
Gross Profit % 16.5% 4.3% 50.0% (60.8%) 16.6% (11.4%)
Net Units Sold:
Single Donor
Platelets 4,387 3,331 - 1,576 4,387 4,907
Whole Blood 8,630 9,882 - 2,833 8,630 12,715
* Includes sales for platelets, whole blood and other frozen blood products,
net of returns and credits
For the three months ended September 30, 2004, revenues from ongoing donor
centers increased by $513,000, or 13.1%, to $4,436,000 from $3,923,000 in
the same period of 2003. This increase in revenues was primarily due to an
increase in platelet product revenue during the quarter. Platelet net sales
volume increased 31.7% during the third quarter of 2004 compared with the
same period last year. In addition, ongoing efforts to increase product
pricing have contributed to improved blood product revenues. Revenue from
whole blood declined in the quarter compared with the same quarter in 2003
primarily due to a decline in California collections as a result of staffing
shortages in the mobile drive collection operations. Revenues from the
closed donor centers declined by $1,235,000, or 99.4%, to $8,000 from
$1,243,000, 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
Dartmouth-Hitchcock Medical Center and Presbyterian Intercommunity Hospital
donor centers, which the Company ceased to operate as of June 2004 upon the
expiration of the donor center contracts.
For the three months ended September 30, 2004, gross profit from ongoing
donor centers increased by $566,000, or 336.9%, to $734,000 compared with
the third quarter of 2003. The gross profit percentage increased to 16.5%
in 2004 from 4.3% 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 net sales volume for platelet
products. The gross profit for closed centers increased by $760,000 to
$4,000 in the third quarter of 2004, from a loss of $756,000 in the same
period in 2003. The loss in 2003 was due to i) operating losses from under-
performing donor centers that were closed in the third and fourth quarters
of 2003, and ii) costs incurred related to the implementation of
management's restructuring plan to close these centers. The only centers
included in the closed center category for the third quarter of 2004 are the
centers at Dartmouth-Hitchcock Medical Center and Presbyterian
Intercommunity Hospital, which the Company no longer operates as of the
second quarter.
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10
Blood Services
Revenues from blood services increased by $60,000, or 3.3%, to $1,874,000 in
the third quarter of 2004 from $1,814,000 in the same period of 2003. The
number of procedures performed during the third quarter of 2004 decreased
7.6% to 1,502 from 1,626 in 2003. This decrease in the number of procedures
performed was due to a decline in procedures in the New York market, and the
closure of the Company's operations in Illinois, North Carolina, 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. This increase in the average price per procedure is due to a
17.4% increase in the number of California procedures performed compared
with the same period in 2003. California procedures generally have a higher
average price per procedure than other regions served by the Company because
they usually include charges for the use of Company owned equipment which is
not always included in the procedure price in other regions.
Gross profit for the blood services segment increased $124,000, or 24.4%,
from $508,000 in the third quarter of 2003 to $632,000 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 third quarter of
2004 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.
General and Administrative Expenses
General and administrative expenses decreased by $377,000, or 26.2%, to
$1,062,000 in the third quarter of 2004 from $1,439,000 in the same period
of 2003. This decrease was primarily due to i) a $217,000 reduction in bad
debt expense, ii) a $55,000 reduction in accounting fees, iii) a $58,000
reduction in depreciation expense and iv) a $57,000 reduction in overhead
salary expense. The reduction in bad debt expense reflects additions to the
doubtful account reserve in the third quarter of 2003 associated with the
implementation of management's restructuring plan. Management determined
certain accounts associated with the closed donor centers might not be
collectable, and therefore recorded additional bad debt expense when these
centers were closed. The reduction in accounting fees is the result of a
change to a lower cost auditing firm in first quarter of 2004 and a change
in the third quarter of 2003 to expense audit and tax return preparation
fees in the year under audit and in the year of the return, rather than
expense these fees as paid, as had been the prior practice. The reduction
in depreciation expense is primarily the result of the recognition of
additional depreciation expense in the third quarter of 2003 associated with
selected assets that management determined no longer had any remaining
useful value. Finally, the reduction in overhead salary expense is
primarily attributable to the elimination of overhead positions in 2003 as
part of management's restructuring plan. These reductions in expenses were
offset by a net increase of $48,000 in bonus expense in the third quarter of
2004 compared with the same period in 2003 based on achievement of profit
targets.
Income Taxes
The Company has sufficient net operating loss carryforward to avoid most
federal income tax expense for the third 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 third quarter of 2004, the Company
recorded an adjustment of $29,000 to the deferred tax asset valuation
reserve, 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 four
fiscal quarters, thereby constituting evidence that the Company may derive
some future benefit from the deferred tax asset.
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11
Nine months ended September 30, 2004 compared to the nine months ended
September 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 nine months of 2004
compared with the same period in 2003.
Total revenues for the period ended September 30, 2004 were $19,975,000,
which represents a decline in revenue of $873,000, or 4.2%, from $20,848,000
generated during the same period in 2003. Blood products revenue for the
nine months ended September 30, 2004 decreased $880,000, or 5.8%, compared
to the same period in 2003 as a result of the elimination of revenue
generated by operations closed in the third and fourth quarters of 2003.
Blood services revenue for the nine months ended September 30, 2004
increased $7,000, or essentially unchanged compared with the same period of
2003, to $5,650,000 from $5,643,000 as a result of an increase in the
average price charged per procedure, offset by a decrease in the number of
therapeutic apheresis procedures performed.
Operating costs and expenses decreased $3,805,000, or 19.5%, to $15,671,000
in the first nine months of 2004, from $19,476,000 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 decreased $69,000, or 2.1%, to $3,262,000
in the first nine months of 2004, from $3,331,000 in the same period of
2003. This was caused primarily by expenses incurred in late 2003
associated with the implementation of management's restructuring plan.
For the nine months ended September 30, 2004, the Company generated
$1,209,000 of net income compared with net loss of $4,943,000 for the same
period in 2003. The increase in net income of $6,152,000, is primarily due
to i) the elimination of losses associated with operating under-performing
donor centers closed in late 2003, ii) elimination of costs associated with
the implementation of management's restructuring plan in 2003, iii)
recording a 100% valuation reserve of the Company's deferred tax assets in
2003, iv) increased net sales volume of platelet products from ongoing donor
centers, v) increases in product pricing, and vi) improved margins in the
blood services segment as a result of changes in product mix to higher
margin procedures.
Blood Products
For this business segment, the following table summarizes the revenues,
gross profit and net sales volumes associated with donor centers operated by
the Company, and those donor centers the Company no longer operates:
For the nine month period ended September 30, 2004
(Revenues* and Gross Profit in Thousands)
Ongoing Centers Closed Centers Total Company
------------------ ------------------ ------------------
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------- --------
Revenues* $13,475 $11,544 $ 850 $ 3,661 $14,325 $15,205
Gross Profit 2,196 731 186 (1,066) 2,382 (335)
Gross Profit % 16.3% 6.3% 21.9% (29.1%) 16.6% (2.2%)
Net Units Sold:
Single Donor
Platlets 12,096 9,427 970 4,530 13,066 13,957
Whole Blood 29,241 30,473 2,383 9,121 31,624 39,594
* Includes sales for platelets, whole blood and other frozen blood products,
net of returns and credits
For the nine months ended September 30, 2004, revenues from ongoing donor
centers increased by $1,931,000, or 16.7%, to $13,475,000 from $11,544,000
in the same period of 2003. This increase in revenues was mostly due to an
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12
increase in platelet volume of 28.3% to 12,096 units in the first nine
months of 2004 from 9,427 units in the same period of 2003. In addition,
ongoing efforts to increase product pricing have contributed to improved
blood product revenues. A 4% net decline in whole blood units sold at the
ongoing centers offset some of the positive trends in product revenues for
the period. Revenue from whole blood declined as a result of lower
collection volume in California due to staffing shortages in the mobile
drive collection operations. Revenues from the closed donor centers
declined by $2,811,000, or 76.8%, to $850,000 during the first nine months
of 2004 from $3,661,000 in 2003. This decrease in revenues from the closed
donor centers is partially offset by the 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 Dartmouth-
Hitchcock Medical Center and Presbyterian Intercommunity Hospital donor
center that the Company ceased to operate in June 2004 upon the expiration
of the donor center contracts.
For the nine months ended September 30, 2004, gross profit from ongoing
donor centers increased by $1,465,000, or 200.4%, to $2,196,000 compared
with $731,000 recorded in the first nine months of 2003. The gross profit
percentage also increased to 16.3% in 2004 from 6.3% in 2003. This
improvement in gross profit is the result of i) increases in product prices,
and ii) increased operational efficiencies realized from higher net sales
volumes of platelet products. The gross profit for closed centers improved
$1,252,000 in the first nine months of 2004 to $186,000, from a loss of
$1,066,000 for the same period of 2003. The loss in 2003 was caused by i)
operating loss associated with under-performing donor centers that were
closed in the third and fourth quarters of 2003 and ii) costs incurred
associated with the implementation of management's restructuring plan. The
gross profits from the donor centers closed by the Company in 2004, mainly
the donor centers at Dartmouth-Hitchcock Medical Center, Presbyterian
Intercommunity Hospital and the University of North Carolina, represent all
of the gross profit reflected in the closed category for 2004. Generally,
these donor centers generated positive gross profits for the Company,
resulting in the improved results from 2003 to 2004.
Blood Services
Revenues from the blood services segment increased by $7,000 to $5,650,000
in the first nine months of 2004, or essentially unchanged compared with the
same period in 2003. The Company performed 11.1% fewer procedures in the
first nine months of 2004 compared with the same period in 2003. 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, Pennsylvania and Tennessee
in 2003. The decrease in revenue resulting from the decline in procedures
performed was offset by an increase in the number of procedures performed in
California during 2004 compared with 2003. The average procedure price for
California procedures exceeds that for other regions served by the Company
because the typical California procedure price includes a charge for the use
of Company owned equipment. Not all procedures performed in other regions
include the use of, and corresponding charge for, the Company's equipment.
Gross profit for the blood services segment increased $215,000, or 12.6%, to
$1,922,000 in the first nine months of 2004 from $1,707,000 during the same
period in 2003. This is primarily due to a change in procedure mix to
higher profit margin procedures.
General and Administrative Expenses
General and administrative expenses decreased by $69,000, or 2.1%, to
$3,262,000 in the first nine months of 2004 from $3,331,000 in the same
period of 2003. This decrease in expense is primarily due a $131,000
decrease in bad debt expense and a variety of other expenses that have
declined as a result of the implementation of management's restructuring
plan in late 2003. These expense reductions are offset by a $145,000
increase in insurance expense, and a $78,000 increase in personnel
recruitment expenses. The reduction in bad debt expense is primarily the
result of sizeable additions to the allowance for doubtful accounts in the
third quarter of 2003 associated with the implementation of management's
restructuring plan. The implementation of management's restructuring plan
also resulted in a reduction in other expenses in 2004, such as overhead
salaries, payroll processing fees, travel, telephone and severance expense.
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13
The increase in insurance expense is primarily the result of the sizeable
increase in professional liability insurance premiums associated with the
renewal of this policy in the middle of 2003. Finally, the Company has
incurred higher recruitment expenses in the first nine months of 2004
compared with the same period of 2003 as a result of increased competition
for nurses and other clinicians.
Income Taxes
The Company has sufficient net operating loss carryforward to avoid most
federal income tax expense for the first nine months 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 first nine months of 2004, the Company
recorded an adjustment to the deferred tax asset valuation reserve of
$76,000, 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 four
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 collectability of
accounts receivable and maintains 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.
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14
To the extent a valuation allowance is created or adjusted in a
period, the Company must include an expense, or
benefit, within the tax provision in the statements of income.
Significant management judgment is required in determining the provision for
income taxes, deferred tax asset and liabilities and any valuation allowance
recorded against net deferred tax assets. Management continually evaluates
if the deferred tax asset is likely to be realized. If management
determines that the deferred tax asset is not likely to be realized, a
write-down of that asset would be required and would be reflected in the
provision for taxes in the accompanying period.
Liquidity and Capital Resources
As of September 30, 2004, the Company's cash and cash equivalents equaled
$1,506,000 and it had working capital of $2,564,000.
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 September 30, 2004 the rate paid by the
Company was 5.25%. As of September 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 million. On March 22, 2004, the Company 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 related to the ratio of quick assets to current liabilities, and
debt to net worth, to levels more favorable to the Company. In addition, the
line of credit also requires minimum levels of profitability and prohibits
the payment of dividends or stock repurchases. As of September 30, 2004,
the Company was in compliance with all of the revised covenants. Any
borrowing on the Comerica line of credit is collateralized by substantially
all of the Company's assets.
Additionally, the Company has a note payable with One Source Financial. As
of September 30, 2004, the balance on this note was $48,000. 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, $36,000 is included in current obligations under
notes payable on the balance sheet.
The Company previously had a note payable to Bay Tree Finance Company
related to financing certain insurance premiums. During the third quarter,
the Company paid off the remaining balance of this note.
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 September 30, 2004, the balance of this lease
was $830,000, of which $171,000 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 Healthcare
Financial Services used to finance the acquisition of vehicles. As of
September 30, 2004, the balance outstanding on this lease was $176,000, of
which approximately $71,000 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
September 30, 2004, the balance outstanding on this lease was $10,000, all
of which is included in current obligations. This lease is scheduled to
mature in August 2005, and has a fixed interest rate of 12.6%.
The following table summarizes our contractual obligations by year (in
thousands) as of September 30, 2004.
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Less More
Than 1-3 3-5 Than
Total 1 Year Years Years 5 Years
------- ------- ------ ------ -------
Operating leases $ 720 $ 320 $ 396 $ 4 $ -
Capitalized leases 1,165 315 554 296 -
Notes payable 48 36 12 - -
------- ------- ------ ------ ------
Totals $ 1,933 $ 671 $ 962 $ 300 $ -
======= ======= ====== ====== ======
For the nine months ended September 30, 2004, net cash provided by operating
activities was $1,660,000, compared to $804,000 for the nine months ended
September 30, 2003. The increase of $856,000 is primarily due to an increase
in net income to $1,209,000 compared to a net loss of $4,943,000 in 2003.
The adjustments to reconcile net income (loss) to net cash also reveals that
during the first nine months of 2003, the Company recorded additional bad
debt expense of $216,000, whereas only $84,000 of bad debt expense was
recorded during the same period of 2004. During the first nine months of
2003, depreciation and amortization expense of $1,003,000 was recorded
compared with only $493,000 during the same period in 2004. Most of this
change is due to additional depreciation recognized in 2003 associated with
the implementation of management's restructuring plan at which time
management determined that selected assets no longer had any useful value to
the Company. In addition, during the first nine months of 2003, $2,984,000
of deferred tax assets was written off, whereas $76,000 of deferred tax
assets were recognized in the same period of 2004. The write off was
performed due to the recent history of losses as of the third quarter of
2003. The small addition to deferred tax assets is the result of the recent
return to profitability. During the first nine months of 2003, the balance
of net accounts receivable decreased $1,295,000, whereas net accounts
receivable actually increased $215,000 for the same period in 2004.
Although this represents a substantial swing from last year to this year,
the days for which sales remain outstanding statistic as of September 30,
2004 stood at 47 days, which is similar to 42 days outstanding as of
December 31, 2003. Therefore, the accounts receivable balance did not
change significantly during the first nine months of 2004, but the relative
age and collectability of the accounts receivables on the books as of
September 30, 2004 remains very good. During the third quarter of 2004, the
Company wrote off $117,000 in receivables associated with one of the donor
centers closed as part of management's restructuring plan. Management
determined this receivable was not collectable, but had previously included
this receivable in the allowance for doubtful accounts. The write off of
this receivable against the allowance is the main reason for the decrease in
the allowance since December 31, 2003.
For the nine months ended on September 30, 2004, net cash used in investing
activities was $125,000, compared with $287,000 for the same period in 2003.
The decrease of $162,000 is primarily due to the Company reducing the amount
invested in new equipment and leasehold improvement expenditures during the
first nine months of 2004 as compared with the same period of 2003.
For the nine months ended September 30, 2004, net cash used in financing
activities was $964,000 compared with net cash used of $508,000 for the nine
months ended September 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 $1,141,000.
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 expects
approximately $2 million will be needed to complete this project.
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.
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16
The Company's primary sources of liquidity include 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. If in the future the Company is unable to
comply with a loan covenant and the bank does not issue a waiver, the
Company may not have access to the line of credit and the Company's
liquidity could be materially affected. As of September 30, 2004, the
Company was in full compliance with all of the required covenants.
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 under-performing
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, although the Company has now
produced four consecutive profitable quarters. Therefore, the Company is at
risk if management is unable to execute an operating plan that will produce
consistent profits from the remaining facilities.
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.
Changes in Demand for Blood Products Could Affect Profitability
The Company's operations are structured to produce particular blood products
based on the existing demand, and perceived potential changes in demand, for
these products by customers. Sudden and unexpected changes in demand of
these products could have an adverse impact on the Company's profitability.
Increasing demand could harm relationships with customers if the Company is
unable to alter production capacity adequately to fill orders. This could
result in a net decrease in overall revenues and profits. Decreases in
demand may require the Company to make sizeable investments to restructure
operations away from declining products to the production of new products.
Lack of access to sufficient capital, or lack of adequate time to properly
respond to such a change in demand, could result in declining revenue and
profits as customers transfer to other suppliers.
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.
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17
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.
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, the Company's blood services business
segment depends on the services of registered nurses and other medical
technologists. 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.
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.
Lease for a Major Production Facility has Expired
The long-term lease for the Company's Sherman Oaks production facility has
expired. The Company has been unable to negotiate a lease renewal.
Presently, the Company continues to occupy this facility with the
possibility of receiving a 30 day notice to vacate at any time. The lack of
a long-term lease agreement for this facility could have an adverse impact
on profitability if the Company receives a 30 day notice to vacate and is
unable to locate an alternative facility. The Company's ability to produce
platelet and whole blood products for Southern California customers could be
severely impacted and result in a reduction of revenue and profitability.
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 $1,209,000 in net income
during the first nine 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.
Targeted Partner Blood Drives Involve Higher Collection Costs
Part of the Company's current operations involves conducting blood drives in
partnership with hospital partners. Blood drives are conducted under the
name of the hospital partner and require that all promotional materials and
other printed material include the name of the hospital partner. This
strategy lacks the efficiencies associated with blood drives that are not
targeted to benefit particular hospital partners. As a result, collection
costs might be higher than those experienced by the Company's competition
and may affect profitability and growth plans.
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18
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
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.
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
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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
but not limited to hepatitis, HIV and Creutzfeldt-Jakob Disease. HemaCare
carefully screens donors, uses highly qualified testing service providers to
test its blood products for known pathogens in accordance with industry
standards, and complies with all applicable safety regulations.
Nevertheless, the risk that screening and testing processes might fail or
that new pathogens may be undetected by them cannot be completely
eliminated. There is currently no test to detect the pathogen responsible
for Creutzfeldt-Jakob Disease. If patients are infected by known or unknown
pathogens, claims could exceed insurance coverage and materially and
adversely affect the Company's financial condition. Furthermore, healthcare
regulations are constantly changing and certain changes could require costly
compliance or make some of our operations impossible to continue.
Environmental Risks
HemaCare's operations involve the controlled use of bio-hazardous materials
and chemicals. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held
liable for any damages that result, and any such liability could exceed the
resources of the Company and its insurance coverage. The Company may incur
substantial costs to maintain compliance with environmental regulations as
it develops and expands its business.
Business Interruption Due to Terrorism and Increased Security Measures in
Response to Terrorism
HemaCare's business depends on the free flow of products and services
through the channels of commerce and freedom of movement for patients and
donors. The 2001 response to terrorist activities slowed or stopped
transportation, mail, financial and other services for a period of time.
Further delays or stoppages in transportation of perishable blood products
and interruptions of mail, financial or other services could have a material
adverse effect on the Company's results of operations and financial
condition. Furthermore, the Company may experience an increase in operating
costs, such as costs for transportation, insurance and security, as a result
of the terrorist activities and potential activities, which may target
health care facilities or medical products. The Company may also experience
delays in receiving payments from payers that have been affected by
terrorist activities and potential activities. The U.S. economy in general
is adversely affected by terrorist 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
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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 Shareholders' Rights Plan see the
Company's Current Report on Form 8-K filed with the SEC on March 5, 1998.
Stocks Traded on the OTC Bulletin Board are Subject to Greater Market Risks
than Those of Exchange-Traded and NASDAQ Stocks
HemaCare's common stock was delisted from the NASDAQ Small Cap Market on
October 29, 1998 because of the failure to maintain NASDAQ's requirement of
a minimum bid price of $1.00. Since November 2, 1998 the common stock has
traded on the OTC Bulletin Board, an electronic, screen-based trading system
operated by the National Association of Securities Dealers, Inc. Securities
traded on the OTC Bulletin Board are, for the most part, thinly traded and
generally are not subject to the level of regulation imposed on securities
listed or traded on the NASDAQ Stock Market or on a national securities
exchange. As a result, an investor may find it difficult to dispose of our
common stock or to obtain accurate quotations as to its price.
Stock Price Could Be Volatile
The price of HemaCare's common stock has fluctuated in the past and may be
more volatile in the future. Factors such as the announcements of government
regulation, new products or services introduced by the Company or by the
competition, healthcare legislation, trends in the health insurance,
litigation, fluctuations in operating results and market conditions for
healthcare stocks in general could have a significant impact on the future
price of HemaCare's common stock. In addition, the stock market has from
time to time experienced extreme price and volume fluctuations that may be
unrelated to the operating performance of particular companies. The
generally low volume of trading in HemaCare's common stock makes it more
vulnerable to rapid changes in price in response to market conditions.
Future Sales of Equity Securities Could Dilute the Company's Common Stock
The Company may seek new financing in the future through the sale of its
securities. Future sales of common stock or securities convertible into
common stock could result in dilution of the common stock currently
outstanding. In addition, the perceived risk of dilution may cause some
shareholders to sell their shares, which could further reduce the market
price of the common stock.
Lack of Dividend Payments
The Company intends to retain any future earnings for use in its business,
and therefore does not anticipate declaring or paying any cash dividends in
the foreseeable future. The declaration and payment of any cash dividends in
the future will depend on the Company's earnings, financial condition,
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.
Evaluation of Internal Control and Remediation of Potential Problems will be
Costly and Time Consuming and could Expose Weaknesses in Financial Reporting
The regulations implementing Section 404 of the Sarbanes-Oxley Act of 2002
require an assessment of the effectiveness of the Company's internal
controls over financial reporting beginning with our Annual Report on Form
10-K for the fiscal year ending December 31, 2005. The Company's
independent auditors will be required to confirm in writing whether
management's assessment of the effectiveness of the internal controls over
financial reporting is fairly stated in all material respects, and
separately report on whether they believe management maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005.
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This process will be expensive and time consuming, and will require
significant attention of management. Management cannot state that material
weaknesses in internal controls will not be discovered. Management also
cannot state that the process of evaluation and the auditor's attestation
will be completed on time. If a material weakness is discovered, corrective
action may be time consuming, costly and further divert the attention of
management. The disclosure of a material weakness, even if quickly
remedied, could reduce the market's confidence in the Company's financial
statements and harm the Company's stock price, especially if a restatement
of financial statements for past periods is required.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company has $1,064,000 of debt, all of which is in the form of notes
payable and capitalized leases with fixed interest rates. As of September
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 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.
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
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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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
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None.
Item 5. Other Information
- -------------------------
None.
Item 6. Exhibits
- ----------------
a. Exhibits
3.1 Restated Articles of Incorporation of the Registrant
incorporated by reference to Exhibit 3.1 to Form
10-K of the Registrant for the year ended December
31, 2002, File No. 000-15223.
3.2 Amended and Restated Bylaws of the Registrant,
as amended, incorporated by reference to Exhibit
3.1 to Form 8-K of the Registrant dated February
20, 2003, File No. 000-15223.
11 Net Income (Loss) per Common and Common Equivalent
Share
31.1 Certification Pursuant to Rule 13a-14(a) Under the
Securities Exchange Act
31.2 Certification Pursuant to Rule 13a-14(a) Under the
Securities Exchange Act
32.1 Certification Pursuant to 18 U.S.C. 1350 and Rule 15d-
14(a) Under the Securities Exchange Act
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date November 15, 2004
HEMACARE CORPORATION
------------------------------------
(Registrant)
/s/ Judi Irving
-------------------------------------
Judi Irving, Chief
Executive Officer
/s/ Robert S. Chilton
-------------------------------------
Robert S. Chilton, Chief
Financial Officer
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