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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-15223
HEMACARE CORPORATION
(Exact name of registrant as specified in its charter)
California 95-3280412
--------------------------------- -------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.
21101 Oxnard Street
Woodland Hills, California 91367
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (818) 226-1968
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes / / No /X/
As of May 10, 2003, 7,751,090 shares of Common Stock of the registrant
were issued and outstanding.
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INDEX
HEMACARE CORPORATION AND SUBSIDIARIES
Page
Number
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PART I. FINANCIAL INFORMATION
-------------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2003
(unaudited) and December 31, 2002...................... 1
Consolidated Statements of Operations - Three Months
Ended March 31, 2003 and 2002 (unaudited).............. 2
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 2003 and 2002 (unaudited).............. 3
Notes to Consolidated Financial Statements - March
31, 2003............................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 6
Item 3. Qualitative and Quantitative Disclosures About Market
Risk................................................... 16
Item 4. Controls and Procedure................................. 16
PART II. OTHER INFORMATION
---------------------------
Item 1 Legal Proceedings...................................... 16
Item 2. Changes in Securities and Use of Proceeds.............. 16
Item 3. Defaults Upon Senior Securities........................ 16
Item 4. Submission of Matters to a Vote of Security Holders.... 17
Item 5. Other Information...................................... 17
Item 6. Exhibits and Reports on Form 8-K....................... 17
SIGNATURES...................................................... 17
CERTIFICATIONS.................................................. 18
i
1
PART 1. FINANCIAL INFORMATION
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Item 1. Financial Statements
HEMACARE CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 1,206,000 $ 1,048,000
Accounts receivable, net of allowance for
doubtful accounts - $205,000 (2003) and $208,000
(2002)............................................. 4,322,000 4,932,000
Product inventories and supplies..................... 978,000 795,000
Prepaid expenses..................................... 285,000 295,000
Deferred income taxes................................ 402,000 402,000
------------ ------------
Total current assets..................... 7,193,000 7,472,000
Plant and equipment, net of accumulated
depreciation and amortization of
$2,598,000 (2003) and $2,450,000 (2002).............. 3,367,000 3,308,000
Deferred taxes......................................... 2,576,000 2,582,000
Other assets........................................... 84,000 93,000
------------ ------------
$13,220,000 $13,455,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 1,957,000 $ 2,277,000
Accrued payroll and payroll taxes.................... 1,528,000 1,231,000
Other accrued expenses............................... 135,000 133,000
Current obligations under capital leases............. 90,000 90,000
Current obligations under notes payable.............. 200,000 199,000
Reserve for discontinued operations.................. 66,000 68,000
------------ ------------
Total current liabilities................ 3,976,000 3,998,000
Obligations under capital leases, net
of current portion................................... 228,000 246,000
Notes payable, net of current portion.................. 906,000 1,107,000
Other long-term liabilities............................ 15,000 17,000
Commitments and contingencies..........................
Shareholders' equity:
Common stock, no par value - 20,000,000 shares
authorized, 7,751,090 issued and outstanding in
2003 and 2002...................................... 13,316,000 13,316,000
Accumulated deficit.................................. (5,221,000) (5,229,000)
------------ ------------
Total shareholders' equity............... 8,095,000 8,087,000
------------ ------------
$13,220,000 $13,455,000
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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2
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
2003 2002
------------ ------------
Revenues:
Blood products.................... $4,946,000 $4,389,000
Blood services.................... 1,985,000 1,932,000
----------- -----------
Total revenue.................... 6,931,000 6,321,000
Operating costs and expenses:
Blood products.................... 4,721,000 4,276,000
Blood services.................... 1,268,000 1,287,000
----------- -----------
Total operating costs and
expenses....................... 5,989,000 5,563,000
Gross profit...................... 942,000 758,000
General and administrative
expenses............................ 928,000 977,000
----------- -----------
Income (loss) before income taxes...... 14,000 (219,000)
Provision (benefit) for income
taxes................................ 6,000 (81,000)
----------- -----------
Net income (loss)................... $ 8,000 $ (138,000)
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Basic and diluted per share amounts.... $ 0.00 $ (0.02)
=========== ===========
Weighted average shares
outstanding - basic................ 7,751,000 7,591,000
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Weighted average shares
outstanding - diluted.............. 7,834,000 7,591,000
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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3
HEMACARE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss)......................................... $ 8,000 $ (138,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 148,000 96,000
Non cash compensation related to employee severance.... - 56,000
Deferred income taxes used to offset current period
income................................................ 6,000 (81,000)
Changes in operating assets and liabilities:
Decrease in accounts receivable....................... 610,000 621,000
Increase in inventories, supplies and prepaid
expenses............................................. (173,000) (181,000)
Decrease in other assets.............................. 9,000 43,000
(Decrease) increase in accounts payable, accrued
expenses and other liabilities....................... (23,000) 55,000
Expenditures for discontinued operations.............. (2,000) (1,000)
----------- -----------
Net cash provided by operating activities............. 583,000 470,000
Cash flows from investing activities:
Purchase of plant and equipment, net...................... (207,000) (354,000)
----------- -----------
Net cash used in investing activities..................... (207,000) (354,000)
Cash flows from financing activities:
Proceeds from exercise of stock options................... - 4,000
Principal payments on line of credit, capital leases
and notes payable........................................ (218,000) (49,000)
Proceeds from capitalized leases.......................... - 100,000
----------- -----------
Net cash (used in) provided by financing activities....... (218,000) 55,000
----------- -----------
Increase in cash and cash equivalents....................... 158,000 171,000
Cash and cash equivalents at beginning of period............ 1,048,000 1,025,000
----------- -----------
Cash and cash equivalents at end of period.................. $1,206,000 $1,196,000
=========== ===========
Supplemental disclosure:
Interest paid............................................. $ 20,000 $ 10,000
=========== ===========
Income taxes paid......................................... $ - $ -
=========== ===========
Items not affecting cash flow:
Notes and capitalized leases issued in connection with
acquisition of plant and equipment....................... $ - $ 31,000
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
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4
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 accounting principles generally accepted in the
United States 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 months ended March 31, 2003
are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003. 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, 2002.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Estimates
also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts from the first quarter of 2002 have been reclassified
to conform to the current period presentation.
Note 2 - Line of Credit and Notes Payable
------------------------------------------
The Company has a working capital line of credit with a bank. The
amount the Company may borrow is the lesser of: 75% of eligible
accounts receivable less amounts outstanding on the notes payable
discussed below, or $2 million. Interest is payable monthly at a
rate of prime plus 0.5% (4.75% as of March 31, 2003). As of March
31, 2003, the Company's net borrowings on this line of credit were
$600,000 and the Company had unused availability of $1.4 million.
This line of credit matures in June 2004, and is included in notes
payable, net of current portion on the balance sheet.
In addition, the Company has various notes payable with the same
bank. At March 31, 2003, the total amount outstanding under these
notes is $409,000 and requires monthly principal payments of
approximately $14,000 plus interest at a weighted average fixed rate
of 6.6%.
These loans are collateralized by substantially all of the Company's
assets and are cross-defaulted. They also require the maintenance of
certain financial covenants that require among other things, minimum
levels of profitability and prohibit the payment of dividends or
stock repurchases. As of March 31, 2003, the Company was in
compliance with these loan covenants.
Additionally, the Company has another note payable with a finance
company. As of March 31, 2003, the balance on this note is $97,000.
The note requires quarterly payments of approximately $10,000
including interest at the rate of 8.5% and matures at January 2006.
It is collateralized by certain fixed assets.
Note 3 - Shareholders' Equity
------------------------------
The Company has elected to adopt SFAS 123, "Accounting for Stock-
Based Compensation," for disclosure purposes only and applies the
provision of APB Opinion No. 25. The Company did not recognize any
compensation expense related to the issuance of stock options in 2003
or 2002. Had compensation expense for all options granted to
employees and directors been recognized in accordance with SFAS 123,
the Company's net income and net income per share would have been as
follows:
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5
Quarter Ended March 31,
2003 2002
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Net income (loss) as reported................ $ 8,000 $(138,000)
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects..................................... (28,000) (163,000)
---------- ----------
Pro forma net loss........................... $ (20,000) $(301,000)
========== ==========
Net income (loss) per share - basic and
diluted
As reported.............................. $ 0.00 $ (0.02)
Pro forma................................ $ (0.00) $ (0.04)
Note 4 - Earnings per Share
---------------------------
The following table provides the calculation methodology for the
numerator and denominator for diluted earnings per share:
Quarter Ended March 31,
2003 2002
---------- ----------
Net income (loss)............................ $ 8,000 $(138,000)
========== ==========
Shares outstanding........................... 7,751,000 7,591,000
Net effect of diluted options................ 83,000 -
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Dilutive shares outstanding.................. 7,834,000 7,591,000
========== ==========
Options and warrants outstanding for 1,633,000 shares and 2,156,000
shares for the three months ended March 31, 2003 and 2002,
respectively, have been excluded from the above calculation because
their effect would have been anti-dilutive.
Note 5 - Provision for Income Taxes
-----------------------------------
The Company believes that it is more likely than not that it will be
able to utilize the deferred tax assets to offset taxable income in
future periods. In the event the Company does not achieve
profitability, this asset may be written off.
Note 6 - Business Segments
--------------------------
HemaCare operates in two business segments as follows:
- Blood Products - Collection, processing and distribution of
blood products and donor testing.
- Blood Services - Therapeutic apheresis and stem cell collection
procedures and other therapeutic services to patients.
Management uses more than one measure to evaluate segment performance.
However, the dominant measurements are consistent with HemaCare's
consolidated financial statements, which present revenue from external
customers and operating income for each segment.
5
6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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Factors Affecting Forward-Looking Information
---------------------------------------------
The matters addressed in this Item 2 that are not historical
information constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.
Although the Company believes that the expectations reflected in
these forward-looking statements are reasonable, such statements are
inherently subject to risks and the Company can give no assurances
that its expectations will prove to be correct. Actual results could
differ from those described in this report because of numerous
factors, many of which are beyond the control of the Company. These
factors include, without limitation, those described below under the
heading "Risk Factors Affecting the Company." The Company undertakes
no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events
or circumstances after the date of this report or to reflect the
occurrence of unexpected events.
The following discussion should be read in conjunction with the
Company's financial statements and the related notes provided under
"Item 1 - Financial Statements" above.
General
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Our business segments include blood products and blood services.
Our blood products segment supplies hospitals with a portion of their
blood product needs. We perform blood collection on behalf of our
hospital clients. We also provide our hospital clients with
apheresis platelets and specialty blood components purchased from
other blood centers, and donor testing services.
Blood services include therapeutic apheresis procedures, stem cell
collection and other blood treatments provided to patients, generally
in a hospital setting.
We have entered into blood management programs ("BMPs") with many of
our hospital customers. Under a BMP arrangement, a hospital, or a
group of hospitals, contracts with us to provide management services
which may include operation of a donor center, mobile blood drives
and blood services. A BMP provides our hospital customers with a
safe and reliable source of blood products and services at a
reasonable cost, as well as assistance in achieving their financial,
regulatory compliance and patient service goals related to blood
products and services.
Results of Operations
----------------------
Three months ended March 31, 2003 compared to the three months ended
March 31, 2002
OVERVIEW
Revenue for the three months ended March 31, 2003 was $6,931,000,
compared to $6,321,000 in the same period of 2002. The increase of
$610,000 (10%) reflects higher revenue from our new BMPs, the
expansion of our California mobile operations and increase in demand
for therapeutic apheresis procedures in higher priced regions. These
increases were partially offset by fewer single donor platelet
collections from our Sherman Oaks platelet program.
Gross profit was $942,000 (13.6% of revenue) for the three months
ended March 31, 2003, compared to $758,000 (12.0% of revenue) in the
first quarter of 2002. The increase is due to better pricing of red
blood cells, an increase in the number of therapeutic apheresis
procedures performed in higher margin locations and greater operating
efficiencies in our California mobile program. These items were
partially offset by BMP losses.
6
7
General and administrative expenses were $928,000 during the first
quarter of 2003, compared to $997,000 during the first quarter of
2002. During the first quarter of 2002, we incurred substantial
expenses related to our litigation against the American Red Cross
("ARC") and certain non cash compensation expense related to the
extension of certain employee stock options. These reductions were
partially offset by an expanded information technology department to
support our blood bank computer system and other technology
initiatives.
BLOOD PRODUCTS
Our revenues and expenses are summarized in the following table.
(In thousands)
Mature BMPs (1) California Mobiles New BMPs Total
------------------ ------------------ ---------------- ---------------
2003 2002 2003 2002 2003 2002 2003 2002
-------- ------- ------- -------- ------- ------ ------- -------
Revenue $ 2,737 $ 3,108 $ 1,805 $1,190 $ 404 $ 91 $ 4,946 $ 4,389
Gross Profit $ 277 $ 412 $ 237 $ (105) $ (289) $ (194) $ 225 $ 113
GP% 10.1% 13.3% 13.1% -8.9% -71.5% -213.4% 4.6% 2.6%
Collections
SDP 4,589 5,645 14 - 157 141 4,760 5,786
WB 2,967 3,470 9,165 7,444 1,998 299 14,130 11,213
SDP - Single donor platelets
WB - Whole Blood
(1) Mature BMPs are those that have been open for at least 18
months as of January 1, 2003. Our BMP in Chicago opened in
June 2001 and is included in new BMPs as of March 31, 2002.
Beginning in January of 2003, it is included in mature BMPs.
Mature BMPs
Revenue from our mature blood products programs provided first
quarter revenue of $2.7 million in 2003, compared to $3.l million in
the same period of 2002. Our gross profit margin from mature blood
management programs was 10.1% in the first quarter of 2003, compared
to 13.3% in the first quarter of 2002. The decrease in revenue and
gross profit percentage is primarily attributable to a 23% decrease
in platelet collections, or $416,000 of revenue and $133,000 in gross
profits, in our Sherman Oaks program. This decrease reflects the
change from a paid to volunteer donor program as of January 1, 2003.
Despite the decrease in collections, the gross profit margin of this
program has remained constant between periods. However, our platelet
pricing in Southern California has come under renewed pressure from
our competition. Our blood management program at Long Beach Memorial
Medical Center was terminated in August of 2002 and our blood
management program at the University of Irvine Medical Center was
terminated in January 2003. Together, these programs generated
$196,000 in revenue and a loss of $7,000 for the three months ended
March 31, 2002. The loss of revenue from these programs was
partially offset by greater whole blood collections in our other
programs; however, a number of these programs currently have whole
blood collection costs that exceed the associated revenue.
California Mobiles
Revenue from our California mobile operations increased to $1,805,000
during the first quarter of 2003, compared to $1,190,000 during the
same period of 2002. Our gross profit from mobiles was $237,000
(13.1% of revenue) during the quarter ended March 31, 2003, compared
to a loss of $105,000 during the quarter ended March 31, 2002. The
revenue increase of $615,000 (52%) reflects increased collections and
better red cell pricing. Our average revenue per red cell unit in
the first quarter of 2003 was $184 compared to $148 during the first
quarter of 2002. We believe the market price for red cells in
Southern California exceeds our current pricing. We continue to work
7
toward bringing our average red cell prices in line with current
market prices in Southern California. Our margins improved due to
the efficiencies associated with higher collection volumes and
increased production and sales of fresh frozen plasma.
New BMPs (open less than 18 months)
We operate new programs in Bangor, Maine; Williston, Vermont; Albany,
New York; and Durham, North Carolina. Together, these programs
generated revenue of $404,000 during the three months ended March 31,
2003 and an operating loss of $289,000. During the quarter ended
March 31, 2002, the Chicago program was our only new BMP with revenue
and it provided revenue of $91,000 and a loss of $89,000 (the results
of our Chicago program are now included with the mature programs in
2003). In addition to the Chicago program, we incurred pre-opening
expenses of $105,000 at our other programs during the three months
ended March 31, 2002. Our focus for these programs is to signifi-
cantly increase the number of whole blood and platelet donations.
During the quarter ended March 31, 2003, several additional donor
recruiters were hired with the expectation of higher collections
in future periods, although it often requires several months for
new recruiters to develop a significant donor base.
BLOOD SERVICES
Revenue from blood services was $1,985,000 during the quarter ended
March 31, 2003, compared to $1,932,000 during the same period of
2002. The increase of $53,000 (2.7%) reflects an increase of 2.4% in
the number of therapeutic apheresis procedures performed from 1,694
procedures performed in the first quarter of 2002 to 1,735 procedures
in the first quarter of 2003. Additionally, we performed more
procedures in higher margin regions and increased prices in some
regions. Consequently, our gross profits increased to $717,000 (36%
of revenue) during the three months ended March 31, 2003, compared to
$645,000 (33% of revenue) during the three months ended March 31,
2002. We continue to offer a physician education program in
California and New York and we are in the process of expanding that
program to other targeted geographic markets.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased to $928,000 during the
three months ended March 31, 2003, compared to $977,000 during the
same period of 2002. The decrease of $49,000 (5%) reflects a
reduction in legal fees associated with the settlement of the
American Red Cross litigation in 2002. Additionally, during the
first quarter of 2002, we incurred $56,000 of non cash compensation
expense associated with the extension of certain stock options to our
former President of West Coast Products who resigned during the third
quarter of 2001. These decreases were partially offset by increases
in our information technology department to support the expansion of
our blood bank computer system and other technology initiatives.
Critical Accounting Policies and Estimates
------------------------------------------
Use of Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates. Estimates were used to evaluate
the adequacy of the allowance for doubtful accounts, the reserve for
discontinued operations and the realization of deferred tax assets.
8
9
Allowance for Doubtful Accounts: We make ongoing estimates relating
to the collectibility of our accounts receivable and maintain a
reserve for estimated losses resulting from the inability of our
customers to meet their financial obligations to us. In determining
the amount of the reserve, we consider our historical level of credit
losses and make judgments about the creditworthiness of significant
customers based on ongoing credit evaluations. Since we cannot
predict future changes in the financial stability of our customers,
actual future losses from uncollectible accounts may differ from our
estimates. If the financial condition of our customers were to
deteriorate, resulting in their inability to make payments, a larger
reserve may be required. In the event we determined that a smaller
or larger reserve was appropriate, we would record a credit or a
charge to selling and administrative expense in the period in which
we made such a determination.
Income Taxes: As part of the process of preparing our financial
statements, we are required to estimate our income taxes in each of
the jurisdictions in which we operate. This process involves our
estimating our actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included in our balance sheet.
We must then assess the likelihood that our deferred tax assets will
be recovered from future taxable income and to the extent we believe
that recovery is not likely, we must establish a valuation allowance.
To the extent we establish a valuation allowance or increase this
allowance in a period, we must include an expense within the tax
provision in the statements of operations.
Significant management judgment is required in determining our
provision for income taxes, deferred tax asset and liabilities and
any valuation allowance recorded against our net deferred tax assets.
Management continually evaluates its deferred tax asset as to whether
it is likely that the deferred tax asset will be realized. If
management ever determined that its deferred tax asset was not likely
to be realized, a write-down of that asset would be required and
would be reflected in the provision for taxes in the accompanying
period.
Liquidity and Capital Resources
-------------------------------
As of March 31, 2003, we had cash and cash equivalents of $1,206,000
and working capital of $3,217,000.
The Company has a working capital line of credit with a bank. The
amount the Company may borrow is the lesser of: 75% of eligible
accounts receivable less amounts outstanding on the notes payable
discussed below, or $2 million. Interest is payable monthly at a
rate of prime plus 0.5% (4.75% as of March 31, 2003). As of March
31, 2003, the Company's net borrowings on this line of credit were
$600,000. This line of credit matures in June 2004, and is included
in notes payable, net of current portion on the balance sheet. As of
March 31, 2002, the unused portion of the Company's line of credit
was $1.4 million.
In addition, the Company has various notes payable with the same
bank. At March 31, 2003, the total amount outstanding under these
notes is $409,000 and requires monthly principal payments of
approximately $14,000 plus interest at a weighted average fixed rate
of 6.6%.
These loans are collateralized by substantially all of the Company's
assets and are cross-defaulted. They also require the maintenance of
certain financial covenants that among other things require minimum
levels of profitability and prohibit the payment of dividends or
stock repurchases. As of March 31, 2003, we were in compliance with
these covenants.
Additionally, the Company has another note payable with a finance
company. The note requires quarterly payments of approximately
$10,000 including interest at the rate of 8.5% and is secured by
certain fixed assets.
9
10
The following table summarizes our contractual obligations by year
(in thousands).
Payments Due by Year
Total 2004 2005 2006 2007 2008
------- ------- ------ ------ ------ ------
Operating leases $1,891 $ 523 $ 495 $ 455 $ 349 $ 69
Capitalized leases 362 114 98 88 62 -
Long-term debt 1,107 200 800 107 - -
------ ------ ------ ------ ------ ------
Totals $3,360 $ 837 $1,393 $ 650 $ 411 $ 69
====== ====== ====== ====== ====== ======
We are also committed to purchase approximately $17 million of blood
collection kits at established prices through 2006.
Cash flow provided from operations was $583,000 during the three
months ended March 31, 2003, compared to cash provided by operations
of $470,000 during the same period in 2002. During the first quarter
of 2003, we continued to work with our customers to reduce the number
of days sales outstanding. As a result of this effort, we decreased
the number of days sales outstanding to 57 at March 31, 2003, from 62
days at December 31, 2002.
Cash used in investing activities primarily represents the
acquisition of plant and equipment to support our blood products
segment.
Cash used in financing activities during the three months ended March
31, 2003 consists of net payments of $150,000 on our line of credit
and other principal payments on our various notes and capitalized
leases payable. During the first quarter of 2002, we received
$100,000 in proceeds from a capitalized lease used to finance the
purchase of equipment.
We anticipate that our cash on hand and borrowing on our bank line of
credit will be sufficient to provide funding for our needs during the
next 12 months, including financing our California mobile program and
new BMP operations and other working capital requirements, including
capital and operating lease commitments.
Our primary sources of liquidity include our cash on hand, available
line of credit and cash generated from operations. Our liquidity
depends, in part, on timely collections of accounts receivable. Any
significant delays in customer payments could adversely affect our
liquidity. Our liquidity also depends on our maintaining compliance
with our loan covenants. From time to time we have failed to comply
with these covenants and have obtained a waiver from our lender. If
in the future we are unable to comply with our loan covenants and the
bank does not issue a waiver, then our liquidity could be materially
affected.
RISK FACTORS AFFECTING THE COMPANY
Our short and long-term success is subject to many factors that are
beyond our control. Shareholders and prospective shareholders in the
Company should consider carefully the following risk factors, in
addition to other information contained in this report. This
Quarterly Report on Form 10-Q contains forward-looking statements.
Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various risks and
uncertainties, including those described below.
Operating Risk
Since 1976, California law has prohibited the transfusion of blood
products to 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 were exempted from this law by a
series of state statutes, the latest of which expired on January 1,
2003. Consequently, we are no longer able to offer cash compensation
to our apheresis platelet donors. In 2002, the Sherman Oaks paid
donor program provided revenue of $5.4 million, or 19% of total
revenue, and gross profits of $1.4 million. The Company converted
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its paid program to a 100% volunteer program as of January 1, 2003.
The ultimate success of this conversion cannot be determined. In the
event the Company is unable to maintain a substantial donor base, it
will close this program and may terminate some other blood product
activities in Southern California whose profitability depends on
sharing overhead with the paid donor program. The loss of this
program will have a material adverse financial affect on the Company.
Early indications are that the program is operating at approximately
73% of 2002 collection volume.
Nationally, in 2001 the prices for red blood cells increased 35% to
45%. As a result of the price increases, combined with chronic
product shortages in many parts of the U.S., we significantly
expanded our programs for the collection of whole blood. We added
one new BMP in 2001 and four new BMPs in 2002. Our expansion efforts
have resulted in new clients and additional blood product revenues.
However, to date, our costs relating to blood products operations
have increased in amounts greater than our revenues resulting in a
decline in profitability.
Management may not be successful in executing its operating plan.
Although platelet production activities have been historically
profitable, whole blood collections have not. Successful results of
both programs are dependent upon management's ability to effectively
recruit donors and control operating costs.
Market Prices for Blood Do Not Necessarily Reflect Costs
We depend on competitive pricing to gain sales. Our cost management
strategy has generally enabled us to profitably sell blood products
at or below the prices of our competition. But as our costs increase
we will not be able to raise our prices commensurately if our
competitors do not. Some of our competitors have greater resources
than we have to sustain periods of unprofitable sales. Cost
increases may therefore have a direct negative effect on our profits
and a material adverse affect on our business.
Declining Blood Donations
Our business depends on the availability of donated blood. Only a
small percentage of the population donates blood, and the rate
continues to decline. In addition, new regulations intended to
reduce the risk of introducing infectious diseases in the blood
supply have eliminated some groups of potential donors. If the level
of donor participation in our blood product programs declines, we
will not be able to achieve profitability or reduce costs
sufficiently to maintain profitability in our mature blood products
programs. While the Company has developed strategies to recruit
volunteer blood donors, there can be no assurance that these
strategies will result in sufficient blood collections to meet
hospital needs or to assure profitability.
We Face Increasing Costs
The costs of collecting, processing and testing blood have risen
significantly in recent years and will likely continue to rise.
These cost increases are related to new and improved testing
procedures to assure that blood is free of infectious disease,
increased regulatory requirements related to blood safety, and
increased costs associated with recruiting blood donors. New testing
protocols have required us to outsource some of our testing.
Competition, and in some cases multi-year contractual arrangements,
may limit our ability to pass these increased costs on to customers.
In this circumstance, the increased costs could reduce our
profitability and could have a material adverse effect on our
business and results of operations.
Increasing Reliance on Outside Laboratories
We maintain laboratories that are licensed and accredited to test
blood products for purity, potency and quality. Recently, we have
turned to outside laboratories for nucleic acid testing. As other
new testing and processing technologies are introduced, we may have
to increase our reliance on outside laboratories. In using outside
laboratories we will have less control over testing quality. In
addition, because laboratory facilities competent in these new
technologies are scarce, the loss of an outside laboratory because of
competition for capacity would have a material adverse effect on our
business.
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Our Targeted Donor Base Involves Higher Collection Costs
Part of our recruitment strategy involves conducting blood drives for
organizations that provide a relatively small number of donors.
Blood drives directed at a smaller donor sites lack the efficiencies
associated with larger blood drives. As a result, our collection
costs might be higher than our competition and may affect our
profitability and growth plans.
Access to Insurance
We currently maintain insurance coverage that we believe is
appropriate for our products and our industry. However, if we
experience losses or the risks associated with the blood products
industry increase in the future, insurance may become more expensive
or unavailable at reasonable prices or at all. We also cannot assure
you that as our business expands or we introduce new products and
services we will be able to obtain additional liability insurance on
acceptable terms, or that our insurance will provide adequate
coverage against any and all potential claims. Also, the limitations
of liability contained in agreements to which we are a party may not
be enforceable and may not otherwise protect us from liability for
damages. The successful assertion of one or more large claims
against us that exceeds available insurance coverage, or changes in
our insurance policies, such as premium increases or the imposition
of large deductibles or co-insurance requirements, could materially
and adversely affect our business.
Universal Leukoreduction
In January 2001, the Department of Health and Human Services Advisory
Committee on Blood Safety and Availability ("BSAC") recommended that
universal pre-storage leukoreduction be implemented as soon as
feasible. The leukoreduction process removes the white blood cells
or leukocytes from blood and platelets before they are transfused.
BSAC's recommendation was conditioned on an implementation process
that does not diminish blood supplies and also that HHS establishes
adequate funding for the effort. It is possible that the FDA will
mandate that all blood products distributed be leukoreduced.
Historically, only portions of blood component transfusions were
leukoreduced and the process was often performed in the hospital
setting immediately prior to transfusion rather than pre-storage (at
the time of collection or processing). While we have provided only
leukoreduced apheresis platelet products for several years, our whole
blood component products are not routinely leukoreduced. The adoption
of a universal leukoreduced policy for all blood products would raise
our costs to manufacturing whole blood products. Competition may
limit our ability to pass these increased costs on to customers. In
this circumstance, the increased costs could reduce our profitability
and could have a material adverse effect on our business and results
of operations.
We May Be Unable to Meet Future Capital Needs
Currently, the Company believes it has sufficient cash available
through its cash on hand, bank credit facilities and funds from
operations to finance its operations for the next twelve months.
However, the Company incurred a $591,000 loss in 2002, which reduced
available cash. The Company may need 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.
Additionally, there is no assurance that we will be able to obtain
sufficient capital to finance future expansion.
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Not-For-Profit Status Gives Advantages to Our Competitors
We believe we are the only significant blood supplier in the U.S.
that is operated for profit and investor owned. Our competitors are
nonprofit organizations, which are exempt from federal and state
taxes, have substantial community support and have access to tax-
exempt financing. We may not be able to continue to compete
successfully with nonprofit organizations and our business and
results of operations will suffer material adverse harm.
Reimbursement Rates Have Not Kept Pace with Cost Increases
The reimbursement rates for blood products provided to Medicaid and
Medicare patients were based on market prices prevailing several
years ago. Market prices have increased substantially since that
time, but the reimbursement rates have not. At present, the
Company's prices are less than the reimbursement rates in its
established markets and as a result, the Company's products are
profitable. But costs may continue to increase in the future, and
there can be no assurance that reimbursement rates will increase at
that time. If they do not, our profits could be reduced or
eliminated.
HemaCare's Business May Face Interruption Due to Terrorism and
Increased Security Measures In Response to Terrorism
HemaCare's business depends on the free flow of products and services
through the channels of commerce and freedom of movement for patients
and donors. The 2001 response to terrorist activities slowed or
stopped transportation, mail, financial and other services for a
period of time. Further delays or stoppages in transportation of
perishable blood products and interruptions of mail, financial or
other services could have a material adverse effect on HemaCare's
business, results of operations and financial condition.
Furthermore, HemaCare may experience an increase in operating costs,
such as costs for transportation, insurance and security, as a result
of the terrorist activities and potential activities, which may
target health care facilities or medical products. The Company may
also experience delays in receiving payments from payers that have
been affected by terrorist activities and potential activities. The
U.S. economy in general is being adversely affected by the terrorist
activities and potential activities and any economic downturn could
adversely impact the Company's results of operations, impair its
ability to raise capital or otherwise adversely affect its ability to
grow its business.
We Could Lose our Lines of Credit
In December 2002, we replaced our then existing lines of credit with
a new $2.0 million working capital line of credit that requires
HemaCare to maintain certain financial covenants including
profitability coverage. The Company was in compliance with these
covenants at March 31, 2003, but maintaining compliance is
dependent on achieving the required profitability coverage. In 2002,
the Company lost $591,000. Continued losses would violate the terms
of the new credit line. From time to time, the Company has failed to
comply with the covenants in its bank credit agreements, and has had
to seek waivers from its lenders. While in the past lenders have
granted these waivers when needed, we are not assured that they will
continue to grant them in the future. Failure to obtain such waivers
when, and if needed, could result in acceleration of payment
obligations under our credit facilities and severely reduce our
liquidity and available cash resources.
We May Be Adversely Affected by Changes in the Healthcare Industry
In the U.S., a fundamental change is occurring in the healthcare
system. Competition to gain patients on the basis of price, quality
and service is intensifying among healthcare providers who are under
pressure to decrease the costs of healthcare delivery. This trend is
expected to continue. In addition, there has been significant
consolidation among healthcare providers as providers seek to enhance
efficiencies, and this consolidation is expected to continue. As a
result of these trends, we may be limited in our ability to increase
prices for our products in the future, even if our costs increase.
Further, we could be adversely affected by customer attrition as a
result of consolidation among healthcare providers.
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Future Technological Developments Could Jeopardize Our Business
As a result of the risks posed by blood-borne diseases, many
companies are currently seeking to develop synthetic substitutes for
human blood products. Because our business consists of collecting,
processing and distributing human blood and blood products, the
introduction and acceptance in the market of synthetic blood
substitutes would cause material adverse harm to our business.
Our Operations Depend on Obtaining the Services of Qualified Medical
Professionals
We are highly dependent upon obtaining the services of qualified
medical professionals. In particular, our collection operations
depend on the services of registered nurses. Nationwide, the demand
for registered nurses exceeds the supply and competition for their
services is strong. This shortage could be aggravated in the event of
a war or other international conflict. If we were unable to attract
and retain a staff of qualified medical professionals, our operations
would be adversely affected.
We Operate in a Heavily Regulated Industry
Our business consists of the collection, processing and distribution
of blood and blood products, all activities that are subject to
extensive and complex regulation by the state and federal
governments. With regard to the safety of our products, facilities
and procedures and the purity and quality of our blood products, we
are required to obtain and maintain numerous licenses in different
locations and are subject to frequent regulatory inspections. In
addition, state and federal laws include anti-kickback and self-
referral prohibitions and other regulations that affect the
relationships between blood banks and hospitals, physicians and other
persons who refer business to them. Health insurers and government
payers such as Medicare and Medicaid also cap reimbursement for our
products and services and have regulations that must be complied with
before reimbursement will be made.
The Company devotes substantial resources to complying with laws and
regulations and believes it is currently in compliance. However, the
possibility cannot be eliminated that interpretations of existing
laws and regulations will result in a finding that we have not
complied with significant existing regulations, which could
materially harm our business. Moreover, healthcare reform is
continually under consideration by regulators, and we do not know how
laws and regulations will change in the future. Some of these
changes could require costly compliance efforts or expensive
outsourcing of functions we currently handle internally could make
some of the Company's operations prohibitively expensive or
impossible to continue.
Product Safety and Product Liability
Blood products carry the risk of transmitting infectious diseases,
including hepatitis, HIV and Creutzfeldt-Jakob Disease. HemaCare
carefully screens donors, uses the latest available technology to
test its blood products for known pathogens and complies with all
applicable safety regulations. Nevertheless, the risk that screening
and testing processes might fail or that new pathogens may be
undetected by them cannot be completely eliminated. There is
currently no test to detect the pathogen responsible for Creutzfeldt-
Jakob Disease. If patients are infected by known or unknown
pathogens, claims brought against us could exceed our insurance
coverage and materially and adversely affect our financial condition.
Furthermore, healthcare regulations are constantly changing and
certain changes could require costly compliance or make some of our
operations impossible to continue.
Environmental Risks
HemaCare's operations involve the controlled use of bio-hazardous
materials and chemicals. Although the Company believes that its
safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the
risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident,
the Company could be held liable for any damages that result, and any
such liability could exceed the resources of the Company and its
insurance coverage. The Company may incur substantial costs to
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maintain compliance with environmental regulations as it develops and
expands its business.
Our Articles of Incorporation and Rights Plan Could Delay or Prevent
an Acquisition or Sale of HemaCare
Our Articles of Incorporation empower the Board of Directors to
establish and issue a class of preferred stock, and to determine the
rights, preferences and privileges of the preferred stock. This
gives the Board of Directors the ability to deter, discourage or make
more difficult a change in control of HemaCare, even if such a change
in control would be in the interest of a significant number of our
shareholders or if such a change in control would provide our
shareholders with a substantial premium for their shares over the
then-prevailing market price for our common stock.
In addition, the Board of Directors has adopted a Shareholder's
Rights Plan designed to require a person or group interested in
acquiring a significant or controlling interest in HemaCare to
negotiate with the Board. Under the terms of our Shareholders' Rights
Plan, in general, if a person or group acquires more than 15% of the
outstanding shares of common stock, all of our other shareholders
would have the right to purchase securities from us at a discount to
the fair market value of our common stock, causing substantial
dilution to the acquiring person or group. The Shareholders' Rights
Plan may inhibit a change in control and, therefore, could materially
adversely affect our shareholders' ability to realize a premium over
the then-prevailing market price for our common stock in connection
with such a transaction. For a description of the Rights Plan see the
Company's Current Report on Form 8-K filed with the SEC on March 5,
1998.
Stocks Traded on the OTC Bulletin Board are Subject to Greater Market
Risks than Those of Exchange-Traded and NASDAQ Stocks
Our common stock was delisted from the NASDAQ Small Cap Market on
October 29, 1998 because we failed to maintain the market's
requirement of a minimum bid price of $1.00. Since November 2, 1998
our common stock has been traded on the OTC Bulletin Board, an
electronic, screen-based trading system operated by the National
Association of Securities Dealers, Inc. Securities traded on the OTC
Bulletin Board are, for the most part, thinly traded and generally
are not subject to the level of regulation imposed on securities
listed or traded on the NASDAQ Stock Market or on a national
securities exchange. As a result, an investor may find it difficult
to dispose of our common stock or to obtain accurate quotations as to
its price.
Our Stock Price Could Be Volatile
The price of our common stock has fluctuated in the past and may be
more volatile in the future. Factors such as the announcements of
government regulation, new products or services introduced by us or
our competitors, healthcare legislation, trends in the health
insurance and HMO industry, litigation, fluctuations in our operating
results and market conditions for healthcare stocks in general could
have a significant impact on the future price of our common stock.
In addition, the stock market has from time to time experienced
extreme price and volume fluctuations that may be unrelated to the
operating performance of particular companies. The generally low
volume of trading in our common stock makes it more vulnerable to
rapid changes in price in response to market conditions.
Future Sales of Equity Securities Could Dilute the Company's Common
Stock
The Company may seek new financing in the future through the sale of
its securities. Future sales of common stock or securities
convertible into common stock could result in dilution of the common
stock currently outstanding. In addition, the perceived risk of
dilution may cause some of our shareholders to sell their shares,
which could further reduce the market price of the Common Stock.
We Do Not Expect to Pay Any Dividends
The Company intends to retain any future earnings for use in its
business, and therefore does not anticipate declaring or paying any
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cash dividends in the foreseeable future. The declaration and
payment of any cash dividends in the future will depend on the
Company's earnings, financial condition, capital needs and other
factors deemed relevant by the Board of Directors. In addition, the
Company's credit agreement prohibits the payment of dividends during
the term of the agreement.
Item 3. Qualitative and Quantitative Disclosures About Market
Risk
------- -----------------------------------------------------
The Company has $1,424,000 of debt that includes $824,000 of notes
payable and capitalized leases with fixed interest rates. The
remaining $600,000 of debt represents advances on our working capital
line of credit and the interest rate is linked to the prime interest
rate. Accordingly, interest rate expense will fluctuate with rate
changes in the U.S. If interest rates were to increase or decrease
by 1% for the year, our interest expense would increase or decrease
by approximately $6,000.
Item 4. Controls and Procedures
------- -----------------------
Within 90 days prior to the filing date of this report, the Chief
Executive Office and the Chief Financial Officer of the Company, with
the participation of the Company's management, carried out an
evaluation of the effectiveness of the Company's disclosure controls
and procedures pursuant to the Exchange Act Rule 13a-14. Based upon
that evaluation, the Chief Executive Officer and Chief Financial
Officer believe that, as of the date of the evaluation, the Company's
disclosure controls and procedures are effective in making known to
them material information relating to the Company (including its
consolidated subsidiaries) required to be included in this report
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an
entity's disclosure objectives. The likelihood of achieving such
objections is affected by limitations inherent in disclosure controls
and procedures. These include the fact that human judgment in
decision-making can be faulty and that breakdowns in internal control
can occur because of human failures such as simple errors or mistakes
or intentional circumvention of the established process.
There were no significant changes in the Company's internal controls
or in other factors that could significantly affect internal
controls, known to the Chief Executive Officer or Chief Financial
Officer, subsequent to the date of the evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
------- -----------------
From time to time, the Company is involved in various routine legal
proceedings incidental to the conduct of its business. Management
does not believe that any of these legal proceedings will have a
material adverse impact on the business, financial condition or
results of operations of the Company, either due to the nature of the
claims, or because management believes that such claims should not
exceed the limits of the Company's insurance coverage. See
disclosure in Form 10-K for the year ended December 31, 2002.
Item 2. Changes in Securities and Use of Proceeds
------- -----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
------- -------------------------------
None.
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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
99.1 Certification Pursuant to 18 U.S.C. 1350 Adopted
Pursuant to Section 906 of the Sarbanes Oxley Act
of 2002
b. Reports on Form 8-K
On March 13, 2003, the Company filed a Form 8-K
disclosing under Item 5 (Other Information), a press
release dated March 13, 2003, announcing the Company's
2002 Fourth Quarter and Year End Financial Results.
On April 8, 2003, the Company filed a Form 8-K
disclosing under Item 5 (Other Information), a press
release dated April 8, 2003, announcing the
development of a liquid IVIG manufacturing process.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: May 15, 2003 HEMACARE CORPORATION
---------------- ---------------------------
(Registrant)
/s/ David E. Fractor
----------------------------
David E. Fractor, Chief
Financial Officer
(Duly authorized officer
and principal financial and
accounting officer)
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CERTIFICATION
I, David Fractor certify that:
1. I have reviewed this quarterly report on Form 10-Q of HemaCare
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in, all material respects, the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in the quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15b-14) for the
registrant, and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedure as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ David Fractor
____________________________
Chief Financial Officer
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CERTIFICATION
I, Judi Irving certify that:
1. I have reviewed this quarterly report on Form 10-Q of HemaCare
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present, in all material respects, the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in the quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15b-14) for the
registrant, and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedure as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls;
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Judi Irving
_______________________________
Chief Executive Officer
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