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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 September 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 I.R.S. Employer I.D. Number
jurisdiction of
incorporation or
organization
4954 Van Nuys Boulevard 91403
Sherman Oaks, California
(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 November 8, 2001, 7,590,175 shares of Common Stock of the Registrant
were issued and outstanding.
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INDEX
HEMACARE CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated balance sheets - September 30, 2001 (unaudited)
and December 31, 2000
Consolidated income statements - Three and nine months ended
September 30, 2001 and 2000 (unaudited)
Consolidated statements of cash flows - Nine months ended
September 30, 2001 and 2000 (unaudited)
Notes to consolidated financial statements - September 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
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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
----------
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
September30, December 31,
2001 2000
------------ -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,176,000 $ 1,362,000
Marketable securities................................ 200,000 868,000
Accounts receivable, net of allowance for
doubtful accounts - $202,000 in 2001 and $204,000
in 2000............................................ 5,273,000 3,996,000
Product inventories and supplies..................... 718,000 723,000
Prepaid expenses..................................... 227,000 187,000
Deferred taxes....................................... 600,000 1,239,000
------------ ------------
Total current assets..................... 8,194,000 8,375,000
Plant and equipment, net of accumulated
depreciation and amortization of
$2,162,000 (2001) and $1,988,000 (2000).............. 1,836,000 799,000
Goodwill, net of amortization of $155,000 (2001) and
$115,000 (2000)...................................... 375,000 415,000
Deferred taxes......................................... 2,296,000 1,854,000
Other assets........................................... 59,000 34,000
------------ ------------
$12,760,000 $11,477,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 2,212,000 $ 2,044,000
Accrued payroll and payroll taxes.................... 1,112,000 874,000
Other accrued expenses............................... 77,000 156,000
Current obligations under capital leases............. 36,000 51,000
Current obligations under notes payable.............. 84,000 -
Reserve for discontinued operations.................. 75,000 76,000
------------ ------------
Total current liabilities................ 3,596,000 3,201,000
Obligations under capital leases, net
of current portion................................... 173,000 46,000
Notes payable, net of current portion.................. 483,000 -
Other long-term liabilities............................ 27,000 27,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, no par value - 20,000,000 shares
authorized, 7,590,205 issued and outstanding in
2001 and 7,689,657 in 2000......................... 13,065,000 13,164,000
Accumulated deficit.................................. (4,584,000) (4,961,000)
------------ ------------
Total shareholders' equity............... 8,481,000 8,203,000
------------ ------------
$12,760,000 $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 Sept. 30, Nine months ended Sept. 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues:
Blood management programs.... $ 3,068,000 $ 2,404,000 $ 8,498,000 $ 6,999,000
Regional operations
Blood products............. 1,316,000 1,341,000 4,083,000 3,660,000
Blood services............. 2,056,000 1,632,000 6,154,000 5,063,000
------------- ------------ ------------- -------------
Total revenue............. 6,440,000 5,377,000 18,735,000 15,722,000
Operating costs and expenses:
Blood management programs.... 2,799,000 2,039,000 7,598,000 5,821,000
Regional operations
Blood products............. 1,106,000 1,087,000 3,565,000 2,843,000
Blood services............. 1,390,000 1,115,000 4,024,000 3,438,000
------------- ------------ ------------- -------------
Total operating costs and
expenses................ 5,295,000 4,241,000 15,187,000 12,102,000
------------- ------------ ------------- -------------
Gross profit............... 1,145,000 1,136,000 3,548,000 3,620,000
General and administrative
expenses..................... 1,138,000 819,000 2,950,000 2,621,000
------------- ------------ ------------- -------------
Income before income taxes...... 7,000 317,000 598,000 999,000
Provision for income taxes...... 2,000 16,000 221,000 47,000
------------- ------------ ------------- -------------
Net income................... $ 5,000 $ 301,000 $ 377,000 $ 952,000
============= ============ ============= =============
Income per shares:
Basic........................ $ 0.00 $ 0.04 $ 0.05 $ 0.13
============= ============ ============= =============
Diluted...................... $ 0.00 $ 0.03 $ 0.05 $ 0.11
============= ============ ============= =============
Weighted average shares
outstanding - basic........ 7,541,000 7,584,000 7,509,000 7,569,000
============ =========== ============ =============
Weighted average shares
outstanding - diluted...... 8,426,000 8,885,000 8,247,000 8,892,000
============ =========== ============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
5
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended Sept. 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net Income................................................ $ 377,000 $ 952,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization.......................... 214,000 183,000
Issuance of common stock and options for compensation.. 93,000 75,000
Deferred income taxes used to offset current period
income................................................ 197,000 -
Changes in operating assets and liabilities:
(Increase) in accounts receivable..................... (1,277,000) (713,000)
(Increase) decrease in inventories, supplies and
prepaid expenses..................................... (35,000) 79,000
Increase in accounts payable, accrued
expenses and other liabilities....................... 327,000 347,000
(Expenditures) for discontinued operations............ (1,000) -
----------- -----------
Net cash (used in) provided by operating activities... (105,000) 923,000
Cash flows from investing activities:
Increase (decrease) in other assets....................... (25,000) 7,000
Decrease in marketable securities......................... 668,000 171,000
(Purchase) of plant and equipment, net.................... (1,067,000) (189,000)
----------- -----------
Net cash used in investing activities..................... (424,000) (11,000)
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 194,000 34,000
Principal payments on line of credit, capital leases
and notes payable........................................ (49,000) (536,000)
Borrowings from equipment line of credit.................. 584,000 -
Repurchase of common stock................................ (386,000) (126,000)
----------- -----------
Net cash provided by (used in) financing activities....... 343,000 (628,000)
----------- -----------
(Decrease)increase in cash and cash equivalents............. (186,000) 284,000
Cash and cash equivalents at beginning of period............ 1,362,000 1,490,000
----------- -----------
Cash and cash equivalents at end of period.................. $1,176,000 $1,774,000
=========== ===========
Supplemental disclosure:
Interest paid............................................. $ 15,000 $ 21,000
=========== ===========
Income taxes paid......................................... $ 74,000 $ 110,000
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Supplemental disclosure of non-cash items:
Increase in capital lease obligations..................... $ 144,000 $ -
=========== ===========
(/TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
HEMACARE CORPORATION
Notes to Consolidated Financial Statements
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 nine months ended September 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 Notes Payable
------------------------------------------
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%
(6.25% as of September 30, 2001). This line matures on June 30,
2003 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 September 30, 2001, there were
no borrowings on this line of credit and the Company was in
compliance with all loan covenants.
In addition the Company has a credit facility which provides for
$1.2 million to be used to acquire vehicles and equipment.
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% (6.1% as of September 30, 2001). This loan is
collateralized by substantially all of the Company's assets and is
cross defaulted with the Company's working capital line of credit.
At September 30, 2001 the total amount financed under the equipment
line of credit is $584,000 and requires 48 monthly principal
payments of $12,165 plus interest at a weighted average fixed rate
of 6.76% per annum.
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.
During the six months ended June 30, 2001, the Company
repurchased 332,000 shares at an average price of $1.16. No stock
repurchases were made during the three months ended September 30,
2001.
Note 5 - Business Segments
--------------------------
HemaCare operates in three business segments. The segments and a
description of their business activities follow:
- 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. The most significant
effect on our financial statements upon adoption will be
discontinuing goodwill amortization. The Company's management is
currently analyzing these statements to determine any additional
impact, if any, on the Company's financial position and results
of operations.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
---------------------------------------------------------------------
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 U.S. 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 or near
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 hospital's reliance 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 June 2001, we
started a Blood Management Program with Children's Memorial Hospital in
Chicago, Illinois. Additionally, we recently entered agreements to
begin blood management programs at WakeMed in Raleigh, North Carolina
and Eastern Maine Medical Center in Bangor, Maine.
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; and the UNC Hospitals affiliated with
University of North Carolina in Chapel Hill.
Effective August 31, 2001 the Company's BMP arrangement with St.
Vincent's Hospital in Worcester, Massachusetts was terminated. This
arrangement, which we had operated since October 1998, required the
Company to either purchase or to collect and manufacture 100% of the
hospital's blood product needs. As a result of the continuing blood
shortages and certain pricing practices of the American Red Cross (ARC),
the Company had sought to amend this program to eliminate the
requirement that it purchase blood products from other blood centers,
particularly the ARC. Blood product price negotiations between the
Company and the hospital and, separately, between the hospital and the
ARC resulted in the hospital electing to purchase 100% of its blood
needs from the ARC despite the lower prices for blood products provided
by the Company.
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 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
-------------------
Effective July, 2001, the ARC, which has a market share approaching 50%
nationally and 100% in certain regions of the U.S., significantly raised
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 obtaining blood products. 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 the production and sale 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
prices that are lower than those charged by the ARC. 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 significant
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. During 2001, we
began red cell collection programs for several new hospitals in
Southern California, additionally we have entered agreements for three
new BMP programs and are in active discussions with several hospital
organizations for additional new programs.
Our expanded marketing efforts, our efforts to increase production and
sales of whole blood (from which red blood cells are derived), our
new BMP programs and the expanded scope of existing programs all require
that we expand our marketing, donor recruiting, collections, and
manufacturing staffs. Investments in these areas negatively impacted
earnings in 2001 as further discussed below.
All comparisons within the following discussions are to the previous
year.
RESULTS OF OPERATIONS
Three-months ended September 30, 2001 compared to the three-months
ended September 30, 2000
-------------------------------------------------------------------
Revenue, Gross Profit and Net Income Overview
---------------------------------------------
Revenue for the three-months ended September 30, 2001 was $6,440,000
compared to $5,377,000 in the same period of 2000. The increase of
$1,063,000 (20%) reflects the continued expansion of our BMP and Blood
Services segments partially offset by a decrease in Blood Products.
Gross profits were $1,145,000 (18% of revenues) in 2001 compared to
$1,136,000 (21% of revenues) in 2000. The decrease in gross profit
margins primarily resulted from continuing start-up losses for a new BMP
in Chicago and lower profitability in our regional Blood Products
operations. This decrease was partially offset by increases in
profitability in our Blood Services segment.
General and administrative expenses were significantly higher during the
third quarter of 2001 as compared to the same period in 2000 as a result
of costs associated with the installation of a new computer system,
increased marketing costs, costs associated with litigation against the
ARC, and certain employee severance expenses associated with
reorganizing the Company's California operations to achieve greater
profitability.
Income before taxes totaled $7,000 in 2001, compared to $317,000 in
2000. Net income for the three months ended September 30, 2001 was
$5,000 compared to $301,000 in the same period last year. Earnings per
share (basic and diluted) for the quarter totaled $0.00 in 2001 compared
to $0.04 basic and $0.03 diluted in the same period last year.
Blood Products
--------------
Blood Products revenue during the three-months ended September 30, 2001
was $1,316,000 compared to $1,341,000 in the same period of 2000 a
decrease of 2% ($25,000). Gross profits of the Blood Products segment
declined to $210,000 (16% of revenues) in 2001 from $254,000 (19% 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 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; 3)
continued aggressive price competition from the ARC for single donor
platelets in California; and 4) less than optimum inventory management
controls in place at our Sherman Oaks facility resulting in increased
product outdates and imports of products from other blood centers
to meet customer needs.
Management has undertaken several steps to address the decline in
profitability of our Sherman Oaks product operations. These
include: a reorganization of the administration and management
structure of the operation; implementation of new laboratory
technology to improve the average product yield per platelet
collection; intensified donor recruiting efforts to expand
our donor base and reduce our reliance on imported products.
We cannot assure that these efforts will be successful.
Blood Services
--------------
Blood Services revenue for the three-months ended September 30, 2001 was
$2,056,000 compared to $1,632,000 in the same period of 2000, an
increase of $424,000 (26%). Gross profit as a percentage of revenue was
32% for both periods. The increase in revenue is the result of increased
demand for therapeutic apheresis procedures, primarily in California.
Blood Management Programs ("BMP")
-------------------------------
BMP revenue during the three-months ended September 30, 2001 was
$3,068,000 compared to $2,404,000 for the same period of 2000, an
increase of $664,000 (28%). The revenue increases are due to
increases in the total number of products provided hospitals and
the addition of new hospital BMP customers. These revenue
increases were partially offset by the termination of the St.
Vincent's BMP on August 31, 2001.
Gross profit as a percentage of revenue was 9% ($269,000) in the three
months ended September 30, 2001 compared to 15% ($365,000) in the same
period of 2000. The decrease in gross profits and gross profit margins
relates to continuing start-up losses at our new program at Children's
Memorial Hospital BMP in Chicago ($127,000), significant costs
associated with our expanded mobile whole blood collection programs in
Southern California and costs associated with expanding our whole blood
collection efforts at certain BMPs that previously were limited to
apheresis platelet and plasma collections.
General and Administrative Expenses
-----------------------------------
General and administrative expenses were $1,138,000 for the three-months
ended September 30, 2001 compared to $819,000 during the same period of
2000, an increase of $319,000 (39%). The increase is primarily the
result of expenditures associated with the installation of a new computer
system, increased legal fees related to the ARC litigation, increased
marketing expenses and severance benefits provided to certain employees
related to the reorganization of California blood product operations.
General and administrative expenses as a percentage of revenue were 18%
for the three months ended September 30, 2001 and 15% in the same period
of 2000.
Nine-months ended September 30, 2001 compared to the nine-months ended
September 30, 2000
-----------------------------------------------------------------------
Revenue, Gross Profit and Net Income Overview
---------------------------------------------
Revenue for the nine months ended September 30, 2001 was $18,735,000
compared to $15,722,000 in same period of 2000. The increase of
$3,013,000 (19%) reflects the expansion of all of our business segments.
Gross profits were $3,548,000 (19% of revenues) in 2001 compared to
$3,620,000 (23% of revenues) in 2000.
The decrease in gross profits and gross profit margins is primarily the
result of lower levels of profitability in California Blood Products
operations, start-up costs for a new BMP in Chicago, and costs
associated with expanding the scope of our programs to collect whole
blood products for BMP clients. These decreases were partially offset
by increases in profits and profit margins in our Blood Services
segments.
General and administrative expenses were $2,950,000 for the nine months
ended September 30, 2001, compared to $2,621,000 in the same period of
last year, an increase of $329,000 (13%). The increase is primarily the
result of additional expenditures associated with a new computer system,
increased marketing costs, legal fees related to the ARC litigation, and
severance benefits provided to certain employees related to the
reorganization of California Blood Products organization.
Income before taxes totaled $598,000 for the nine months ended September
30, 2001, compared to $999,000 in the same period of 2000. Net income
in 2001 was $377,000 compared to $952,000 in 2000. Basic and diluted
earnings per share were $0.05 for nine months ended September 30,
2001 compared to $0.13 and $0.11, respectively, in the same period of the
prior year.
Blood Products
--------------
Blood Products revenue for the first nine months of 2001 was $4,083,000
compared to $3,660,000 in the comparable period of 2000. The increase
of $423,000 (12%) reflects increased sales to our existing customers and
the addition of new hospital customers. Gross profits of the Blood
Products segment declined to $518,000 (13% of revenues) in the first
nine months of 2001 from $817,000 (22% 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;
3) continued aggressive price competition from the ARC for single donor
platelets in California (See Litigation Against the American Red Cross
below); and 4) less than optimum inventory management controls in place
at our Sherman Oaks collection and production facility resulting in
increased needs to import products and increased product outdates.
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 most
other areas of the U.S., and that Los Angeles is a high cost market for
both blood products and other healthcare services relative to most other
parts of the U.S.
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 nine months ended September 30, 2001 was
$6,154,000 compared to $5,063,000 in the same period of 2000, an
increase of $1,091,000 (22%). Gross profits as a percentage of revenue
were 35% ($2,130,000) in 2001, compared to 32% ($1,625,000) in 2000.
The increase in revenue is a result of higher demand for therapeutic
services. The increase in gross profit percentages reflects increased
operating effectiveness associated with higher procedure volumes
partially offset by the recruitment and training costs associated with
hiring additional registered nurses needed to perform additional patient
procedures.
Blood Management Programs ("BMP")
-------------------------
BMP revenue during the first nine months of 2001 was $8,498,000
compared to $6,999,000 in the same period of 2000, an increase
of $1,499,000 (21%). The revenue increases are due to increases
in the total number of products provided hospitals and the
addition of new hospital BMP customers, partially offset by
the termination of the St. Vincent's BMP on August 31, 2001.
Gross profit as a percentage of revenue was 11% ($900,000) for the
nine months ended September 30, 2001, compared to 17% ($1,178,000)
during the same period last year. The decrease in gross profit
and gross profit margins relates to start-up losses at our
new BMP at Children's Memorial Hospital in Chicago ($224,000),
significant costs to expand our mobile whole blood collection
programs in Southern California and costs associated with
expanding our whole blood collection efforts at certain BMPs
that were previously limited to apheresis platelet and plasma
collections.
General and Administrative Expenses
-----------------------------------
General and administrative expenses were $2,950,000 for the nine
months ended September 30, 2001, compared to $2,621,000 for 2000
an increase of $329,000 (13%). The increase is primarily the
result of expenditures associated with the installation of a
new computer system, increased legal fees related to the ARC
litigation, increased marketing expenses and severance benefits
provided to certain employees related to the reorganization of
California Blood Products operations. General and administrative
expenses as a percentage of revenue were 16% during the nine
months ended September 30, 2001 and 17% in the same period of 2000.
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 September 30, 2001 is
$2,896,000. For financial statement reporting purposes, we have
classified $600,000 as a current asset and $2,296,000 as a non-current
asset. We will continue to use our net operating losses to offset
future taxable income and minimize the amount of taxes we pay to
federal and state agencies.
Liquidity and Capital Resources
-------------------------------
At September 30, 2001, HemaCare had cash and cash equivalents and
marketable securities of $1,376,000 and working capital of $4,598,000.
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% (6.25% as of September 30, 2001).
The second line of credit provides $1,200,000 for equipment purchases.
Periodically, we can convert equipment purchase loans into a long-term,
fully amortized note payable. During the nine months ended September
30, 2001, we borrowed $584,000 under our equipment line of credit to
finance property and equipment additions. The note requires monthly payments
including interest equal to the bank's internal cost of funds plus 2.5%
(6.1% as of September 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 September 30, 2001, we were in compliance with these 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 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 $1.16
per share. In total, HemaCare repurchased 764,000 shares at an average
price of $1.37 per share through June 30, 2001. The company made no
additional stock repurchases in the quarter ended September 30, 2001.
During 2001, we have experienced an increase in our accounts receivable
balances. As of December 31, 2000 the average number of days revenue in
accounts receivable was 63 days. As of September 30, 2001 that average
was 76 days. This increase is due to a variety of factors but generally
reflects a trend on the part of our hospitals to lengthen the cycle
associated with payment processing. We are pursuing a variety of
tactics to shorten the amount of time associated with revenue collection
including: more frequent customer contacts and stricter adherence to our
credit and collection policies.
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 nine months of 2001 was $4,499,000.
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 renew and comply
with the convenants 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 is 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
-------------------------------------------------------------
None
Item 5. Other Information
--------------------------
None
Item 6. Exhibits and Reports on Form 8-K
------------------------------------------
a. Exhibits
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 September 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 November 14, 2001 HEMACARE CORPORATION
------------------- -------------------------------
(Registrant)
David E. Fractor
---------------------------------
David E. Fractor, Chief Financial
Officer
(Duly authorized officer
and principal financial and
accounting officer)