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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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 I.D. Number)
of incorporation or
organization)
4954 Van Nuys Boulevard
Sherman Oaks, California 91403
(Address of principal executive offices) (Zip Code)
___________________
Registrant's telephone number, including area code: (818) 986-3883
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 [ ]
As of August 9, 2001, 7,531,275 shares of Common Stock of the Registrant
were issued and outstanding.
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INDEX
HEMACARE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets - June 30, 2001 (unaudited) and
December 31, 2000
Consolidated income statements - Three and six months ended
June 30, 2001 and 2000 (unaudited)
Consolidated statements of cash flows - Six months ended June
30, 2001 and 2000 (unaudited)
Notes to consolidated financial statements - June 30, 2001
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Qualitative and Quantitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,194,000 $ 1,362,000
Marketable securities................................ 296,000 868,000
Accounts receivable, net of allowance for
doubtful accounts - $202,000 in 2001 and $204,000
in 2000............................................ 4,535,000 3,996,000
Product inventories and supplies..................... 648,000 723,000
Prepaid expenses..................................... 298,000 187,000
Deferred income taxes................................ 1,239,000 1,239,000
------------ ------------
Total current assets..................... 8,210,000 8,375,000
Plant and equipment, net of accumulated
depreciation and amortization of
$2,102,000 (2001) and $1,988,000 (2000).............. 1,081,000 799,000
Goodwill, net of amortization of $142,000 (2001) and
$115,000 (2000)...................................... 388,000 415,000
Deferred taxes......................................... 1,673,000 1,854,000
Other assets........................................... 19,000 34,000
------------ ------------
$11,371,000 $11,477,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 1,984,000 $ 2,044,000
Accrued payroll and payroll taxes.................... 666,000 874,000
Other accrued expenses............................... 155,000 156,000
Current obligations under capital leases............. 42,000 51,000
Current obligations under note payable............... 29,000 --
Reserve for discontinued operations.................. 75,000 76,000
------------ ------------
Total current liabilities................ 2,951,000 3,201,000
Obligations under capital leases, net
of current portion................................... 33,000 46,000
Note payable, net of current portion................... 78,000 --
Other long-term liabilities............................ 27,000 27,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, no par value - 20,000,000
shares authorized, 7,458,205 issued and
outstanding in 2001 and 7,689,657 in 2000........... 12,871,000 13,164,000
Accumulated deficit.................................. (4,589,000) (4,961,000)
------------ ------------
Total shareholders' equity............... 8,282,000 8,203,000
------------ ------------
$11,371,000 $11,477,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
4
HEMACARE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
Three months ended March 31, Six months ended June 30,
2001 2000 2001 2000
------------- ------------- ------------- -----------
Revenues:
Blood management programs......................... $ 2,710,000 $ 2,342,000 $ 5,430,000 $ 4,595,000
Regional operations
Blood products.................................. 1,387,000 1,280,000 2,767,000 2,319,000
Blood services.................................. 2,141,000 1,751,000 4,098,000 3,431,000
------------ ------------ ------------ ------------
Total revenue................................. 6,238,000 5,373,000 12,295,000 10,345,000
Operating costs and expenses:
Blood management programs......................... 2,455,000 1,962,000 4,799,000 3,782,000
Regional operations
Blood products.................................. 1,210,000 968,000 2,459,000 1,756,000
Blood services.................................. 1,362,000 1,190,000 2,634,000 2,323,000
------------ ------------ ------------ ------------
Total operating costs and expenses........... 5,027,000 4,120,000 9,892,000 7,861,000
------------ ------------ ------------ ------------
Gross profit................................. 1,211,000 1,253,000 2,403,000 2,484,000
General and administrative expenses................. 967,000 911,000 1,812,000 1,802,000
------------ ------------ ------------ ------------
Income before income taxes.......................... 244,000 342,000 591,000 682,000
Provision for income taxes.......................... 91,000 16,000 219,000 31,000
------------ ------------ ------------ ------------
Net income..................................... $ 153,000 $ 326,000 $ 372,000 $ 651,000
============ ============ ============ ============
Income per share
Basic............................................. $ 0.02 $ 0.04 $ 0.05 $ 0.09
============ ============ ============ ============
Diluted........................................... $ 0.02 $ 0.04 $ 0.04 $ 0.07
============ ============ ============ ============
Weighted average shares outstanding - basic......... 7,431,000 7,625,000 7,508,000 7,561,000
============ ============ ============ ============
Weighted average shares outstanding - diluted....... 8,119,000 8,905,000 8,297,000 8,905,000
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
4
5
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income............................................... $ 372,000 $ 651,000
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization......................... 141,000 123,000
Issuance of common stock and options for compensation. 93,000 75,000
Deferred income taxes used to offset current period
income.............................................. 181,000 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable..................... (539,000) (952,000)
(Increase) decrease in inventories, supplies and
prepaid expenses.................................... (36,000) 25,000
(Decrease) increase in accounts payable, accrued
expenses and other liabilities...................... (269,000) (56,000)
(Expenditures) for discontinued operations............ (1,000) -
----------- -----------
Net cash used in operating activities................. (58,000) (134,000)
Cash flows from investing activities:
Decrease in other assets.................................. 15,000 4,000
Decrease (increase) in marketable securities.............. 572,000 (204,000)
(Purchase) of plant and equipment, net.................... (396,000) (160,000)
---------- -----------
Net cash provided by (used in) investing activities....... 191,000 (360,000)
Cash flows from financing activities:
Proceeds from issuance of common stock.................... - 34,000
Principal payments on line of credit, capital leases
and note payable........................................ (31,000) (521,000)
Borrowings from equipment line of credit.................. 116,000 -
Repurchase of common stock................................ (386,000) -
----------- -----------
Net cash used in financing activities..................... (301,000) (487,000)
----------- -----------
Decrease in cash and cash equivalents....................... (168,000) (981,000)
Cash and cash equivalents at beginning of period............ 1,362,000 1,490,000
----------- -----------
Cash and cash equivalents at end of period.................. $ 1,194,000 $ 509,000
=========== ===========
Supplemental disclosure:
Interest paid............................................. $ 8,000 $ 20,000
=========== ===========
Income taxes paid......................................... $ 46,000 $ 36,000
=========== ===========
5
The accompanying notes are an integral part of these
consolidated financial statements.
6
Note 1 - Basis of Presentation and General Information
------------------------------------------------------
The accompanying unaudited consolidated financial statements of
HemaCare Corporation (the "Company" or "HemaCare") have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 2001, are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2001. For further information, refer to
the consolidated financial statements and footnotes thereto included
in HemaCare's Annual Report on Form 10-K for the year ended December
31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Note 2 - Lines of Credit and Note Payable
-----------------------------------------
In February 2001, HemaCare financed the acquisition of certain
vehicles with a note payable to a bank in the amount of $116,500.
The note requires monthly principal payments of $2,428 plus interest
at the rate of 8.3% per annum. The note matures in February 2005
and is secured by the acquired vehicles.
Subsequent to June 30, 2001, and subject to final bank approval,
the Company signed a new loan commitment with its bank to
modify the terms and conditions of the equipment purchase line
of credit. The new agreement will provide for a maximum of
$1.25 million to be used to acquire equipment and vehicles.
Payments will be made on a straight-line basis over a
period of four years including interest equal to the bank's
internal cost of funds plus 2.5% (7% as of June 30, 2001). This
line of credit is collateralized by substantially all of the
Company's assets and is cross defaulted with the Company's
working capital line of credit. This new loan commitment,
if approved by the bank, will replace the existing $350,000
equipment line of credit. The terms and conditions of the
working capital line of credit remain unchanged.
Additionally, the Company has a working capital line of credit
whereby the Company may borrow the lesser of 75% of eligible
accounts receivable or $2.0 million at an interest rate of prime
plus .25% (7% as of June 30, 2001). This line matures on June 30,
2002 and requires the maintenance of certain financial ratios and
covenants. This line of credit is collateralized by substantially
all of the Company's assets. As of June 30, 2001, there were no
borrowings on this line of credit and the Company was in
compliance with all loan covenants.
Note 3 - Commitments and Contingencies
---------------------------------------
Since 1976, California law has prohibited the infusion of blood
products into patients if the donors of those products were paid
unless, in the opinion of the recipient's physician, blood from a
non-paid donor was not immediately available. Apheresis platelet
products obtained from paid donors have been exempted from this law
by a series of state statutes the latest of which expires on
December 31, 2002. Unless a new exemption is obtained, the existing
exemption will expire under its sunset provision and could have a
material adverse effect on HemaCare's revenue and net income.
State and Federal laws set forth antikickback and self-referral
prohibitions and otherwise regulate financial relationships between
blood banks and hospitals, physicians and other persons who refer
business to them. While HemaCare believes its present operations
comply with applicable regulations, there can be no assurance that
future legislation or rule making, or the interpretation of existing
laws and regulations will not prohibit or adversely impact the
delivery by HemaCare of its services and products.
Note 4 - Common Stock
---------------------
On July 5, 2000, HemaCare announced its intention to repurchase up
to 15% of its outstanding shares, or up to 1.1 million shares.
HemaCare repurchases these shares from time to time in open market
and private transactions depending on price and availability. As of
June 30, 2001, HemaCare repurchased 764,000 shares at an average
cost per share of $1.37. During the six months ended June 30, 2001,
the Company repurchased 332,000 shares at an average price of $1.18.
Note 5 - Business Segments
--------------------------
HemaCare operates in three business segments. The segments and a
description of their business activities follows:
- Blood Products - the collection, manufacture and distribution of
blood components derived from whole blood collections and blood
component collections using a specialized blood separation
process called apheresis.
- Blood Services - therapeutic apheresis and stem cell collection
procedures, and donor testing.
- Blood Management Programs (BMP) - outsource programs that
provide all or a major portion of the blood products and blood
services to a specific hospital client under a multiyear
contractual agreement.
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 6 - New Pronouncements
---------------------------
The FASB recently approved two statements: SFAS No. 141, Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets," which provide guidance on the accounting for business
combinations, requires all future business combinations to be
accounted for using the purchase method, discontinues
amortization of goodwill, defines when and how intangible
assets are amortized, and requires an annual impairment
test for goodwill. We will adopt these statements effective
January 1, 2002. We are currently reviewing these standards
to determine the impact on our results of operation
and financial position. The most significant anticipated
effect on our financial statements on adoption would
be discontinuing goodwill amortization and the possible
recording of a goodwill impairment loss measured as of
the date of the adoption.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Our business activities include regional sales of blood products ("Blood
Products") and blood related services ("Blood Services") and blood
management programs ("Blood Management Programs" or "BMPs").
Our regional Blood Products operations provide blood components to all
hospitals in a region where we can obtain supplier relationships. Blood
Products include apheresis platelets and whole blood components, such as
red blood cells and plasma products. Our operations specialize in
providing single donor platelets, a blood component that promotes
clotting and is essential to stop bleeding. Single donor platelets are
generally in short supply in the US and have a very short useful life
after collection (5 days).
Our Blood Services include therapeutic apheresis procedures and stem cell
collections utilizing specialized equipment and specially trained nursing
staff, generally in a hospital setting. Additionally, Blood Services
operations include blood testing services performed for hospitals that
operate their own blood collection programs.
Our Blood Management Programs are customized contractual arrangements
under which HemaCare assumes responsibility for providing blood products
and blood services to a specific hospital. Generally each BMP involves
HemaCare managing and staffing a blood collection center on the hospital
campus, conducting blood component collection drives in the hospital's
local community and assuming responsibility for regulatory compliance of
blood collection operations. Each BMP provides the hospital with a
substantial portion of its blood product needs, thereby reducing the
reliance of the hospital on blood supplies provided by a regional blood
center. Recently, we have developed BMP relationships with hospitals
whereby we collect red blood cells and plasma on mobile blood drives
conducted exclusively for and in the name of the hospital. In these
instances we do not operate a blood collection center on the hospital's
campus.
In February 2000, we started a Blood Management Program with Long Beach
Memorial Medical Center ("LBMMC") and in May 2000 opened a Blood
Management Program with Presbyterian Intercommunity Hospital ("PIH") both
of which are located in Southern California. In 2001, we started a Blood
Management Program with Children's Memorial Hospital in Chicago, Illinois,
that began operations in June 2001. Nationally, we now operate nine
major blood management programs and several smaller programs.
In addition to the new programs, we operate BMP programs for two
hospitals affiliated with the University of Southern California
(University Hospital and Kenneth Norris Cancer Hospital); the Medical
Center operated by the University of California, Irvine; Dartmouth-
Hitchcock Medical Center ("DHMC"), affiliated with Dartmouth Medical
College in New Hampshire; St. Vincent Hospital at Worcester Medical
Center ("St. Vincent") in Massachusetts; and the UNC Hospitals affiliated
with University of North Carolina in Chapel Hill.
We also operate a Blood Management Program for Maine Medical Center in
Scarborough, Maine. During 2000, we expanded our operations in Maine and
our Maine Blood Center now provides some blood products and services to
other hospitals in the region. For comparability purposes, we continue
to classify these activities as a Blood Management Program.
Recent Developments
-------------------
In May 2001, the American Red Cross (ARC), which has a market share
approaching 50% nationally and 100% in certain regions of the US,
announced that it was significantly raising the price of red blood cells
nationwide. The ARC stated it needed to increase prices to
offset operating losses resulting from several years of selling
blood products below cost. In addition, the ARC has implemented certain
other product delivery and availability practices that further increase
the cost of blood products to hospitals. The effect of the ARC
actions is to substantially increase hospitals' costs of blood. In many
instances the increases exceed 60% of the hospitals' total expenditures
for blood products.
Several other major blood center organizations have also recently
announced increases in the prices they charge hospitals for blood
products.
Historically, our profit margins from blood products have been derived
from production and sales of blood components other than red blood cells.
While we have collected and produced red blood cells since 1995, the
artificially low prices for these products have produced either marginal
returns or operating losses. The new pricing levels for red blood cells
established by the ARC present opportunities to earn reasonable profit
margins on sales of these products while charging competitive prices.
Additionally, the new pricing structure enables us to offer our BMP
programs to many hospitals that previously would have been uneconomic
since the hospitals' blood product utilization consists primarily of red
blood cells with minimal use of other blood components (platelets,
plasma, etc.). However, pursuing this initiative will require
signficant expenditures, and we cannot assure that we will be
successful in deriving increased earnings from these new opportunities.
Virtually all our existing hospital customers have requested that we
expand the scope of our existing BMP operations to include increased red
blood cell production. Additionally, we have increased our marketing
efforts to hospitals in both existing and new markets.
Our efforts to increase production and sales of whole blood (from which
red blood cells are derived) require that we expand our donor recruiting
staff and increase staffing in the collections and processing area.
Investments in these areas negatively impacted earnings in 2001 as
further discussed below.
All comparisons within the following discussions are to the previous
year.
Three-months ended June 30, 2001 compared to the three-months ended June
30, 2000
------------------------------------------------------------------------
Revenue and Gross Profit and Net Income Overview
------------------------------------------------
Revenue for the three-months ended June 30, 2001 was $6,238,000 compared
to $5,373,000 in the same period of 2000. The increase of $865,000 (16%)
reflects the expansion of all of our business segments. Gross profits
were $1,211,000 (19% of revenues) in 2001 compared to $1,253,000 (23% of
revenues) in 2000. The decrease in gross profits and gross profit
margins primarily resulted from lower levels of profitability in our
California BMP and regional Blood Products operations, start-up costs for
a new BMP in Chicago and operating losses in a BMP in Massachusetts. This
decrease was partially offset by increases in profitability in our Blood
Services segment.
Income before taxes totaled $244,000 in 2001, compared to $342,000 in
2000. Net income in 2001 was $153,000 compared to $326,000 in 2000.
Earnings per share (basic and diluted) for the quarter totaled $0.02 in
2001 compared to $0.04 in the prior year.
BLOOD PRODUCTS
Blood Products revenue during the three-months ended June 30, 2001 was
$1,387,000 compared to $1,280,000 in the same period of 2000. The
increase of $107,000 (8%) reflects increased sales to our existing
customers and the addition of new hospital customers. Gross profits of
the Blood Products segment declined to $177,000 (13% of revenues) in 2001
from $312,000 (24% of revenue) in 2000.
Most Blood Products revenues and activities are generated from our donor
center operation in Sherman Oaks, California. This center specializes in
producing single donor platelets. The decrease in profitability in this
segment, despite higher sales, results from several factors. These
include: 1) full implementation of a new regulatory requirement that
reduced the average number of saleable platelet units obtained with each
collection procedure; 2) higher donor recruiting and compensation costs
incurred to meet additional unanticipated product demand; 3) high rates
of product returns and consequent product outdating during certain weeks
of the quarter; 4) continued aggressive price competition from the ARC
for single donor platelets in California; and 5) less than optimum
inventory management controls in place at our Sherman Oaks collection and
production facility.
During the second quarter of 2001, management undertook several steps to
address the low profitability of Sherman Oaks product operations. These
included: 1) evaluation of new laboratory technology to improve the
average product yield per collection procedure; 2) improved inventory
monitoring and production scheduling to reduce extra donor recruiting
costs and product outdates; 3) stricter controls on labor costs and
employee overtime; and 4) better product inventory management. As a
result of these adjustments, the gross profit margin improved from
10% during the first quarter of 2001 to 13% during the second
quarter. We are continuing our efforts to further improve the
profitability of our Sherman Oaks operation, but cannot assure
that those efforts will be successful.
BLOOD SERVICES
Blood Services revenue for the three-months ended June 30, 2001 was
$2,141,000 compared to $1,751,000 in the same period of 2000, an
increase of $390,000 (22%). We believe the increase in revenue is
the result of increased demand for services and is partially
attributable to our increased marketing efforts in the
area of physician education. Gross profit as a percentage of
revenue was 36% ($779,000) in 2001, compared to 32% ($561,000)
in 2000. The increase in gross profit percentages reflects
increased operating effectiveness associated with higher
procedure volumes.
BLOOD MANAGEMENT PROGRAMS
Revenue during the three-months ended June 30, 2001 was $2,710,000
compared to $2,342,000 for the same period of 2000, an increase of
$368,000 (16%). Revenues for 2001 include three months of
revenue from PIH BMP (opened in May 2000). Additionally, revenues
at existing centers increased as a result of greater blood product
collections. Gross profit as a percentage of revenue was 9%
($255,000) for 2001, compared to 16% ($380,000) in 2000. The
decrease in BMP gross profits and profit margins between periods
relates to poor cost controls in California BMPs, higher
blood product purchase costs in our BMP at St. Vincent's and
significant start up costs related to Children's Memorial
Hospital BMP. Additionally, California BMP profit margins were
negatively impacted by lower profit margins associated with
single donor platelets collected and manufactured at our Sherman
Oaks facility and supplied to these hospitals.
The California BMP cost increases also relate to the expansion of our
blood collection programs with the objective of collecting
significantly greater quantities of whole blood products in
response to increased demand for these products. We expect
that our expanded collection capabilities will benefit income
and revenues in future periods as collections increase and
market prices of whole blood products continue to increase.
However, many of our expansion initiatives are just underway
and are operating on a break-even or loss basis. We,
therefore, cannot assure that they will be successful.
Unlike our other BMPs, our arrangement at St. Vincent's Hospital in
Worcester, Massachusetts requires us to supply all of the hospital's
blood needs at fixed prices. Blood that we are unable to collect
in the donor center or in mobile blood drives must be purchased
from other blood centers. During the second quarter of 2001, the
hospital's demand for blood significantly increased compared
to the same period of 2000, while we were unable to increase
the number of units we collected. As a result, we were required
to purchase significant amounts of blood products from other
blood centers, including the ARC in Massachusetts, to meet the
hospital's needs. During the three-months ended June 30, 2001,
we purchased from the ARC 203 units of red cells at a cost of
$41,000 compared to 42 units of red cells at a cost of $7,000
during the same period of 2000. As a result this program
generated a loss in the second quarter of 2001. Our contractual
arrangement expired on December 31, 2000 and we are operating
under the terms of the old contract while we negotiate a new
contract. We anticipate that the new arrangement will be
profitable. In particular, the terms of the new agreement
eliminate the requirement that we purchase blood from the ARC
or other blood centers, effective September 1, 2001. If we
are unable to reach an acceptable agreement with the
hospital, this program will be terminated.
During the quarter ended June 30, 2001, we opened our BMP at Chicago's
Children's Hospital. Under this agreement we operate a blood donor
center on the hospital premises and provide therapeutic apheresis and
stem cell collection services. During the quarter ended June 30, 2001,
we incurred substantial start-up expenses and initial product collections
were limited. As a result, we incurred start up losses of $85,000 during
the quarter. We expect start-up losses to continue in the short term as
this BMP builds a donor base and becomes fully operational.
General and Administrative Expenses
-----------------------------------
General and administrative expenses were $967,000 for the three-months
ended June 30, 2001 compared to $911,000 during the same period of 2000,
an increase of $56,000 (6%). This increase is partially caused by
expenditures associated with the acquisition of a new computer system.
These increases were partially offset by reductions in other expenses.
General and administrative expenses as a percentage of revenue were
16% in 2001 and 17% in 2000.
Six-months ended June 30, 2001 compared to the six-months ended
June 30, 2000
---------------------------------------------------------------
Revenue and Gross Profit and Net Income Overview
-------------------------------------------------
Revenue for the six-months ended June 30, 2001 was $12,295,000 compared
to $10,345,000 in same period of 2000. The increase of $1,950,000 (19%)
reflects the expansion of all of our business segments. Gross profits
were $2,403,000 (20% of revenues) in 2001 compared to $2,484,000 (24% of
revenues) in 2000.
Income before taxes totaled $591,000 in 2001, compared to $682,000 in
2000. Net income in 2001 was $372,000 compared to $651,000 in 2000.
Basic and diluted earnings per share were $0.05 and $0.04 in 2001
compared to $0.09 and $0.07 in the prior year.
The decrease in gross profits and gross profit margins is primarily the
result of lower levels of profitability in our California BMP and
regional Blood Products operations, start-up costs for a new BMP in Chicago
and operating losses in a BMP in Massachusetts. These decreases were
partially offset by increases in profits and profit margins in our Blood
Services segments.
BLOOD PRODUCTS
Blood Products revenue for the first six-months of 2001 was
$2,768,000 compared to $2,319,000 in the comparable period of
2000. The increase of $449,000 (19%) reflects increased sales to our
existing customers, the addition of new hospital customers and sales to
hospitals normally supplied by the ARC when the ARC was not able to
supply their platelet needs. Gross profits of the Blood Products segment
declined to $308,000 (11% of revenues) in 2001 from $563,000 (24% of
revenue) in 2000.
Most Blood Products revenues and activities are generated from our donor
center operation in Sherman Oaks, California. This center specializes in
producing single donor platelets. The decrease in profitability in this
segment, despite higher sales, results from several factors. These
include: 1) full implementation of a new regulatory requirement that
reduced the average number of saleable platelet units obtained with each
collection procedure; 2) higher donor recruiting and compensation costs
incurred to meet additional unanticipated product demand; 3) high rates
of product returns and consequent product outdating during certain weeks
of the quarter; 4) continued aggressive price competition from the ARC
for single donor platelets in California (See Litigation Against the
American Red Cross below); and 5) less than optimum inventory management
controls in place at our Sherman Oaks collection and production facility.
During the second quarter of 2001, management undertook several steps to
address the low profitability of Sherman Oaks product operations. These
included: 1) evaluation of new laboratory technology to improve the
average product yield per collection procedure; 2) improved inventory
monitoring and production scheduling to reduce extra donor recruiting
costs and product outdates; 3) stricter controls on labor costs and
employee overtime; and 4) better product inventory management.
Management undertook these changes late in the second quarter and
as a result, they did not offset the decrease in profit margins
mentioned above. Continued efforts in this area are anticipated
to further improve profit margins in Sherman Oaks.
We anticipate that our costs to produce platelets will decrease as a
result of improved cost controls and better inventory management.
However, competitive pricing pressure in this segment is expected to
continue to negatively affect our profit margins from sales of single
donor platelets in California unless the ARC revises its pricing
strategy.
Blood Product Pricing and Litigation Against the American Red Cross
-------------------------------------------------------------------
Blood product prices in the greater Los Angeles area are effectively set
by the ARC which supplies more than 95% of the area's whole blood derived
products (red blood cells and plasma products for transfusion) and
approximately 70% of single donor platelets. HemaCare estimates that we
provide approximately 30% of the area's single donor platelets. Since
1997 the ARC has lowered its prices for single donor platelets in the Los
Angeles area by more than 30%. The ARC price reductions have been
implemented despite the increasing costs of producing the product (these
costs are associated with new infectious disease testing protocols,
consequent shorter product shelf life and higher product expirations) and
despite the fact that the ARC reports that its blood product operations
generate operating losses in Southern California.
HemaCare has filed a lawsuit against the ARC alleging violation of
Federal antitrust laws and unfair competition. Our lawsuit contends that
ARC business practices are designed to prevent or eliminate competition
in the blood products and services industry. Specific to Southern
California, our lawsuit alleges that ARC pricing practices for single
donor platelets in the Los Angeles area are predatory and are designed to
eliminate HemaCare as a competitor in this market. Our contentions in
the lawsuit are supported by the fact that ARC prices for single donor
platelets in Los Angeles are lower than ARC prices in all other areas of
the US, and that Los Angeles is a high cost market for both blood
products and other healthcare services relative to most other parts of
the US.
While the ARC announced major increases in its nationwide pricing
structure effective July 1, 2001 for red blood cells, in the Los Angeles area
the changes also involved further reductions in prices of single donor
platelets. We expect continued pricing and margin pressure in Southern
California platelet sales unless we can successfully conclude our
litigation with the ARC.
BLOOD SERVICES
Blood Services revenue for the six-months ended June 30, 2001 was
$4,097,000 compared to $3,431,000 in the same period of 2000, an increase
of $666,000 (19%). The increase in revenue is the result of increased
demand for services and, we believe, is partially attributable to our
increased marketing efforts in the area of physician education. Gross
profit as a percentage of revenue was 36% ($1,465,000) in 2001, compared
to 32% ($1,108,000) in 2000. The increase in gross profit percentages
reflects increased operating effectiveness associated with higher
procedure volumes.
BLOOD MANAGEMENT PROGRAMS
Revenue during the first six-months of 2001 was $5,430,000 compared to
$4,595,000 in the same period of 2000, an increase of $835,000 (18%).
Revenues for 2001 include six months of revenue from LBMMC BMP (opened in
February 2000) and PIH BMP (opened in May 2000). Additionally, revenues
at existing centers increased as a result of greater blood product
collections. Gross profit as a percentage of revenue was 12% ($630,000)
for 2001, compared to 18% ($813,000) in 2000. The decrease in BMP gross
profits and profit margins between periods relates to increased labor
costs in California BMPs, higher blood product purchase costs in our BMP
at St. Vincent's and significant start up costs related to Children's
Memorial Hospital BMP. Additionally, California BMP profit margins were
negatively impacted by lower profit margins associated with single donor
platelets collected and manufactured at our Sherman Oaks facility and
supplied to these hospitals.
The California BMP cost increases also relate to the expansion of our
whole blood and red cell collection programs with the objective of
collecting significantly greater quantities of products in response to
increased demand and increasing prices for these products. We expect
that our expanded collection capabilities will benefit income and
revenues in future periods as collections increase and market prices of
whole blood products continue to increase. However, many of these
initiatives are just underway and are operating on a break-even or
loss basis and we cannot assure that they will be successful.
Our BMP arrangement at St. Vincent's Hospital in Worcester, Massachusetts
requires us to supply all of the hospital's blood needs at fixed prices.
Blood that we are unable to collect in the donor center or in mobile
blood drives must be purchased from other blood centers. During the
first six months of 2001, the hospital's demand for blood significantly
increased compared to the same period of 2000 while we were unable to
increase the number of units we collected. As a result, we were required
to purchase significant amounts of blood products from other blood
centers, including the ARC in Massachusetts, to meet the hospitals needs.
During the six-months ended June 30, 2001, we purchased from the ARC 323
units of red cells at a cost of $65,000 compared to 80 units of red
cells at a cost of $14,000 during the same period of 2000. As a
result, this program generated a loss in the six-months of 2001.
The BMP arrangement with St. Vincent's is currently being
renegotiated and we anticipate that the new arrangement will be
profitable. If we are unable to reach an acceptable agreement
with the hospital, we will terminate this program.
During the six-months ended June 30, 2001, we opened our BMP at Chicago's
Children's Hospital. We operate a blood donor center and collect blood
products in mobile blood drives. Additionally, we provide therapeutic
apheresis services. During the six-months ended June 30, 2001, we
incurred substantial start-up expenses and initial product collections
were limited. As a result, we incurred losses of $97,000 during the six-
months ended June 30, 2001. We expect losses to continue in the short
term as this BMP builds a donor base.
General and Administrative Expenses
------------------------------------
General and administrative expenses were $1,812,000 for 2001, compared to
$1,802,000 for 2000 an increase of $10,000 (1%). General and
administrative expenses as a percentage of revenue were 15% in 2001 and
17% in 2000. The lower percentage reflects economies of scale associated
with greater sales volumes.
Provision for Income Taxes
--------------------------
Prior to 1997 we incurred operating losses that are used to offset
current income for income tax purposes. During the fourth quarter of
2000, we recorded a deferred tax asset for the expected future tax
benefit of the net operating loss carryforwards. In 2001, we are
reporting income tax expense at our effective tax rate (37%) for
financial reporting purposes. Income tax expense reduces our deferred
tax assets. The amount of the tax benefit as of June 30, 2001
is $2,912,000. Of this amount, $1,239,000 is recorded as a current
asset and $1,673,000 is recorded as non-current assets. We
will continue to use our net operating losses to offset future taxable
income and minimize the amount of taxes we pay to the federal and state
agencies.
Liquidity and Capital Resources
-------------------------------
At June 30, 2001, HemaCare had cash and cash equivalents and marketable
securities of $1,490,000 and working capital of $5,259,000. We have two
lines of credit with a commercial bank. The first line of credit is a
working capital line. We can borrow the lesser of 75% of eligible
accounts receivable or $2.0 million. Interest is payable monthly at a
rate of prime plus 0.25% (7% as of June 30, 2001). The second line of
credit provides $350,000 for equipment purchases. Periodically, we can
convert equipment purchase loans into a long-term, fully amortized note
payable. The note requires monthly payments including interest equal to
the bank's internal cost of funds plus 3% (7.2% as of June 30, 2001).
These lines of credit are secured by substantially all of our
assets and require us to maintain certain financial covenants. These
lines of credit mature on June 30, 2003. As of June 30, 2001, we
were in compliance with these covenants.
Subsequent to June 30, 2001, and subject to final bank approval,
we signed a new loan commitment with our bank to modify the
terms and conditions of the equipment purchase line of credit.
The new agreement will provide for a maximum of $1.25 million to
be used to acquire equipment and vehicles. Payments will be made
on a straight-line basis over a period of four years
including interest equal to the bank's internal cost of
funds plus 2.5%. This line of credit is collateralized by
substantially all of our assets and is cross collateralized
with our working capital line of credit and requires
us to maintain certain financial covenants. This new loan
commitment, if approved by the bank, will replace the existing
$350,000 equipment line of credit. The terms and conditions
of the working capital line of credit remain unchanged.
In March 2001, we used our equipment line of credit to purchase equipment
and have converted the obligation to a long-term note payable. As of
June 30, 2001 the outstanding balance is $107,000. The note requires 48
monthly principal payments of $2,428.02 plus interest at the fixed rate
of 8.3%. As of June 30, 2001 we were in compliance with all of the
covenants.
Our programs to expand whole blood collections for existing customers
and to extend our blood collection and blood management programs to
new hospital customers will require significant capital investments
in new equipment for new blood collection centers, mobile collection
units ("bloodmobiles"), blood processing laboratories and other
supporting facilities. Additionally, these new programs will
require capital to finance start-up costs and working capital
requirements. The amounts of such capital needs have not, as
of yet, been determined but will likely exceed our existing
sources of capital (operating cash flow and unused borrowing
facilities) and require us to raise additional capital in the
debt or equity markets. There can be no assurance that
we will be able to obtain such financing on reasonable terms
or at all.
In July 2000, we announced our intention to repurchase up to 15% of our
outstanding common stock, or up to 1.1 million shares. Purchases are
made in the open market or in private transactions depending on price and
availability. We are funding the purchases from cash and cash
equivalents and marketable securities along with profits generated in the
normal course of business. For the six months ended June 30, 2001, we
repurchased an additional 332,000 shares at an average price of $1.18 per
share. In total, HemaCare has repurchased 764,000 shares at an average
price of $1.37 per share through June 30, 2001.
Since 1976, California law has prohibited the infusion of blood products
into patients if the donors of those products were paid unless, in the
opinion of the recipient's physician, blood from a non-paid donor was not
immediately available. Apheresis platelet products obtained from paid
donors, including our Sherman Oaks center's paid donors, have been
exempted from this law by a series of state statutes. Unless a new
exemption is obtained, the existing exemption will expire on December 31,
2002. This could have a material adverse effect on HemaCare's revenue and
net income. Revenue from products collected from paid platelet donors
in the first six months of 2001 was $2,919,000.
We anticipate that positive cash flow from our operations, cash and
investments on hand and borrowing from the bank lines of credit will be
sufficient to provide funding for our current operating needs. However,
depending on the rate of our growth, we may need additional sources of
capital.
Factors Affecting Forward-Looking Information
---------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" from liability for forward-looking statements. Certain
information included in this Form 10-Q and other materials filed or to be
filed by our Company with the Securities and Exchange Commission (as well
as information included in oral statements or other written statements
made or to be made by or on behalf of our Company) are forward-looking,
such as statements relating to operational and financing plans,
competition, the impact of future price increases for blood products,
demand for our Company's products and services, and the anticipated
outcome of litigated matters. Such forward-looking statements involve
important risks and uncertainties, many of which will be beyond the
control of our Company. These risks and uncertainties could significantly
affect anticipated results in the future, both short-term and long-term,
and accordingly, such results may differ from those expressed in forward-
looking statements made by or on behalf of our Company. These risks and
uncertainties include, but are not limited to, those relating to the
ability of our Company to develop and market profitable outsourcing
programs, obtain additional financing, to maintain profitability in
certain Blood Management Programs centers, expansion into new geographic
territories, to continue its practice of compensating its donors, to
retain existing customers, to improve the profitability of our Company's
other operations, to renegotiate our contract at St. Vincent's Hospital,
to expand its operations, to renew and comply with the covenants under
its bank lines of credit and to effectively compete against the ARC and
other competitors. Each of these risks and uncertainties as well as
others are discussed in greater detail in the 10-K and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
See disclosure in Form 10-K for the year ended December 31, 2000.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
a. The Company's Annual Meeting of Shareholders (the "Meeting") held
on June 13, 2001.
b. The following table shows the tabulation of votes for all
matters put to vote at the Meeting.
Against/
Matters Put to Vote For Withheld Abstain
------------------------------ --------- --------- -------
1. Election of Five Directors
Alan C. Darlington.......... 6,926,949 7,630
Stephen Wallace............. 6,926,949 7,630
Julian L. Steffenhagen...... 6,926,949 7,630
William D. Nicely........... 6,926,949 7,630
Robert L. Johnson........... 6,926,949 7,630
2. Ratification of appointment
of independent auditors..... 6,925,519 4,900 4,160
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
2.0 Bylaws of the Registrant, as amended
11 Net Income per Common and Common Equivalent Share
b. HemaCare did not file any reports on Form 8-K during the
three months ended June 30, 2001.
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 14, 2001 HEMACARE CORPORATION
(Registrant)
/s/ David E. Fractor
----------------------------
David E. Fractor, Chief
Financial Officer
(Duly authorized officer
and principal financial and
accounting officer)