UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark one)

x                               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

o                                  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)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o YES     x NO

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. x YES     o NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act). £ YES     x NO

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter (based upon the last sale price of the Common Stock as reported by the OTC Bulletin Board), was approximately $6,656,000.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES     x NO

As of February 20, 2006, 8,196,060 shares of Common Stock of the registrant were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement relating to its 2006 annual meeting of shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the close of the registrant’s last fiscal year, are incorporated by reference into Part III of this Report.

TABLE OF CONTENTS

 

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PART I

ITEM 1.                     BUSINESS

This 2005 Annual Report on Form 10-K contains statements which 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. Those statements include statements regarding the intent, belief or current expectations of the Company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements (See “Item 1A. Risk Factors”). The Company does not undertake to update its forward-looking statements to reflect actual events and outcomes or later events.

General

HemaCare Corporation (“HemaCare” or the “Company”) collects, processes and distributes blood products to hospitals and other customers in the United States. The Company operates and manages donor centers and mobile donor vehicles to collect blood products from donors. Additionally, the Company provides blood related services, principally therapeutic apheresis procedures, stem cell collection and other blood treatments to patients with a variety of disorders. Blood related services are usually provided under contract with hospitals as an outside purchased service.

The Company has operated in Southern California since 1979. In 1998, the Company expanded operations to include portions of the eastern U.S. In 2003, new management reduced the number of geographic regions served as part of a restructuring plan to return the Company to profitability. Since 2003, the Company’s earnings improved as a result of the successful implementation of management’s plan. The Company’s current strategy is to continue to focus on increasing the utilization of existing capacity in those markets currently served by the Company, expand the customer base for blood products to include biopharmaceutical companies and other organizations involved in research activities, and expand the market potential for therapeutic apheresis services through physician education and other marketing efforts.

Although most blood suppliers are organized as not-for-profit, tax-exempt organizations, all suppliers charge fees for blood products to cover their costs of operations. The Company believes that it is the only investor-owned and taxable organization operating as a blood supplier with significant operations in the U.S.

Recent Developments

Continued Improvement in Overall Profitability

The Company recorded income before income taxes of $1,686,000 in 2005, representing the highest annual pretax earnings in the history of the Company, exceeding the prior record of $1,563,000 recorded in 2004. This represents a substantial change from the $1,695,000 loss before income taxes recorded in 2003. This accomplishment was due to the successful implementation in late 2003 of a restructuring plan designed to eliminate poorly performing operations, reduce overhead costs and improve the product collection capabilities in the geographic areas served by the Company. In addition, the Company has experienced increasing demand for blood products from existing customers, as well as from new customers, who are attracted by the Company’s customized blood products delivery system. Since the implementation of the restructuring plan, the Company has recorded nine consecutive profitable quarters.

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Improvement in Revenue and Profitability for Blood Products Business Segment

The Company’s blood products segment generated substantially higher revenue and profits in 2005 compared with 2004. Revenue for this segment increased $5.2 million, or 27%, compared to 2004, which is mostly attributable to higher sales volumes of blood products in the Company’s California and Maine operations. The Company successfully increased the supply of blood products offered for sale through increased collections at Company operated donor centers and mobile operations, and through the purchase of products from other suppliers. In addition, this segment recorded a $1.7 million, or 49%, increase in gross profit in 2005 compared with 2004. This segment’s gross profit percentage improved to 20.6% in 2005 compared with 17.5% for 2004, mostly attributable to increased operational efficiencies realized from higher sales volumes.

Declining Revenue and Profitability for Blood Services Business Segment

The Company’s blood services segment generated lower revenue and profits in 2005 compared with 2004. This business segment recorded $800,000, or 10.9%, less revenue in 2005 compared with 2004, which is mostly attributable to a decrease in the number of therapeutic apheresis procedures performed. The revenues for the blood services segment fluctuate significantly with changes in the number of procedures performed. In addition, this segment recorded a $900,000, or 37%, decrease in gross profit in 2005 compared with 2004. This segment’s gross profit percentage decreased to 22.9% in 2005 compared with 32.4% for 2004, mostly attributable to a decrease in revenue, higher staff compensation, and higher expenses to manage and market this segment.

Infrastructure Investments

The Company began to invest the resources generated by recently improved profitability in infrastructure projects to enhance regulatory compliance, management reporting and long-term profit potential for the Company’s blood products business. Some of these investments include a document management system, a new accounting and financial reporting system, and investments in new facilities, equipment and vehicles. In addition, a new blood bank information management system is planned. These infrastructure enhancement projects are expected to cost approximately $2.5 million. Some of these projects are targeted for completion as early as Spring of 2006, while others are expected to finish in 2008.

Debt Reduction

Over the past three years, the Company has reduced outstanding debt by $2.8 million. During this same period, the Company’s cash balance increased by $1.6 million. As of December 31, 2005, the Company’s remaining debt balance was only $88,000. The recent improvement in the Company’s profitability, as well as improved management of the Company’s cash collection activities, provided management with the cash to reduce debt.

Business Segments

HemaCare operates two primary business segments. The first is the blood products segment, which supplies customers with red blood cells, apheresis platelets and other blood products. The second is the blood services segment which includes therapeutic apheresis procedures, stem cell collection and other blood therapies provided to patients typically in a hospital setting.

Blood Products Operations

The practice of medicine depends on a reliable, adequate and safe supply of blood products. Most blood products collections consist of single units of whole blood. The Company contracts with local hospitals to serve as their whole blood collection contractor. The Company solicits sponsor organizations,

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such as employers, schools or churches, to conduct blood drives on behalf of the hospital customer. The Company’s recruitment staff works with the staff of the sponsor organization to encourage individuals associated with the sponsor to donate blood at a blood drive usually conducted at the sponsor’s facilities. The actual collection process is simple and safe for the donor. Whole blood collected at blood drives is tested and processed into blood products, principally red blood cells and plasma, and then offered to the hospital customers for transfusion to patients.

The Company also performs collections of blood components, principally platelets, utilizing a cell separator. This process, known as apheresis, allows for the collection of only the desired components of a donor’s blood, returning the other components to the donor’s blood stream. Apheresis platelet collection is more complex and expensive than whole blood collection. Apheresis equipment is costly and requires longer donation times, which result in higher labor costs. Recruiting donors for apheresis platelet donations is considerably more difficult than recruiting whole blood donors because of the complexity of the donation process, and longer donation times. Recruiting and retaining donors is critical to the success of the Company’s blood products operations. Apheresis platelet donors are recruited from the most dedicated and committed subset of the whole blood donor population. The Company has demonstrated a consistent track record of donor recruitment for apheresis platelet donors.

Blood products revenue depends on a number of factors, including the success of the Company’s donor recruitment efforts, the success of the Company’s marketing efforts to attract and retain new customers, and the ability of the Company to properly process, store and transport blood products to customers prior to the products’ expiration dates. All bloods products have a limited therapeutic life.

Product safety is of paramount concern when dealing with blood products. The U.S. Food and Drug Administration (“FDA”) is the agency principally responsible for the regulation of the blood products industry in the U.S. The Company’s blood products operations are either licensed or registered with the FDA and are regularly inspected by FDA personnel. Additionally, the Company’s operations are licensed, regulated and inspected by various state agencies.

The AABB is the blood industry sponsored organization responsible for maintaining and improving science, safety, quality and education relating to blood. The Company is an institutional member, and the Company’s operations are accredited by the AABB.

The Company operates free standing blood collection centers and mobile blood collection operations in Southern California and Maine, and a hospital-based collection center in Massachusetts.

Blood Services Operations

Therapeutic apheresis is a technique for removing harmful components from a patient’s blood and is used in the treatment of autoimmune diseases and other disorders. Therapeutic services are generally provided upon the request of a hospital, which has received an order from a patient’s physician. Therapeutic treatments are administered using mobile equipment operated at the patient’s bedside, a hospital outpatient setting or physician office. The mobile therapeutic equipment includes a blood cell separator and the disposables needed to perform the procedure. Treatments are administered by trained, nurse-specialists, under the supervision of a specially trained physician, and acting in accordance with documented operating procedures and quality assurance protocols based on guidelines developed by the AABB and the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”).

Since requests for therapeutic apheresis treatments are often sporadic and unpredictable, many hospitals choose not to equip, staff and maintain an apheresis unit. The existing nurse shortage in the U.S. has also hindered hospital efforts to adequately staff apheresis units. The Company’s services enable hospitals to offer therapeutic apheresis services to their patients on an “as needed” basis without incurring

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the costs associated with maintaining a full-time team of apheresis specialists. In addition, the Company’s services can serve to supplement a hospital’s existing apheresis capability when demand exceeds capacity.

Blood services revenue depends on a number of factors, including the occurrence of disease states that are appropriately treated by these services, and the perceived benefits of blood therapies compared to alternative courses of treatment. The Company believes that physician education on the benefits of therapeutic apheresis results in an increase in the application of such treatments in medically appropriate circumstances. The Company’s affiliated medical directors conducteducational seminars for physicians to inform them of the benefits of therapeutic apheresis relative to other modes of patient treatment.

The Company provides therapeutic services using all currently recognized treatment methods:  plasma exchange and cell depletion; in-line immunoadsorbant columns; stem cell collection; and photopheresis. Patients suffering from diseases such as multiple myeloma, polyneuropathy, leukemia, systemic lupus erythematosus, scleroderma, hyperviscosity syndrome, thrombocytosis, thrombotic thrombocytopenic purpura, myasthenia gravis and Guillain-Barre syndrome may benefit from therapeutic apheresis treatments. The Company provides therapeutic apheresis services on a regional basis in several states. Major operations are in Southern California and the greater New York City area.

Competition

General

Most U.S. blood products suppliers are organized as not-for-profit, tax-exempt entities. However, all blood suppliers charge fees to hospitals for the products utilized. These fees are generally set at levels based on the supply and demand for specific products, and are influenced by the competition amongst blood products suppliers and federal reimbursement rates to hospital customers. Many suppliers have greater financial, technical and personnel resources than the Company. In addition, since many of the Company’s competitors are tax-exempt, they do not bear the tax burden the Company faces, and they have access to lower cost tax-exempt debt financing. Their status as charitable institutions may also give them an advantage in recruiting volunteer donors. The Company competes on the basis of responsiveness to customer needs, value-based pricing and the high quality of the services provided.

Blood Products

In the United States, approximately 50% of all blood products are supplied by the American Red Cross (“ARC”) through its national collection network, and approximately 40% are supplied by local and regional blood centers, including the Company. The remainder is collected by hospitals directly.

The Company competes in the marketplace through a strategy of offering blood product supply programs tailored to the requirements of individual customers. The Company consistently reevaluates and revises its product supply programs to respond to marketplace factors. Some competitors have advantages over the Company as a result of established positions and relationships within the communities they serve. In addition, the ARC’s size and market dominance provides them with greater resources to sustain periods of unprofitable sales, or to adopt aggressive pricing strategies for the purpose of defending or increasing market share.

Blood Services

The competition in the therapeutic blood services business is primarily regional and community blood banks, dialysis companies that also provide therapeutic blood services, and a wide range of small blood services companies. In addition, since some diseases treatable with therapeutic apheresis are also treatable by other medical therapies, the competition for the Company’s blood services business also includes companies that market or provide many of these competing medical therapies. The Company believes that

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it competes in this market by offering highly trained and experienced nurses and greater availability for customers with immediate needs. In addition, the Company provides education to the medical community on the benefits of therapeutic apheresis as a treatment solution for various diseases.

Sales to Major Customers

The Company provides products and services to individual hospitals, hospital groups and hospital management companies, all of which are referred to as “customers” for purposes of identifying concentration risk in this section. During 2005 only two customers represented more than 10% of the Company’s total revenue. One customer accounted for approximately 14.8% of total revenue, and the other accounted for approximately 10.1%. The next largest customer accounted for approximately 8.4% of total revenue. The Company’s ten largest customers accounted for 62.2% of total revenues. The Company has no relationship with any of these customers other than as a provider of blood products and services.

Marketing

The Company’s marketing programs include a combination of medical education, advertising and promotional programs, in-person sales and other marketing programs directed to selected physicians and hospitals. The Company markets its products and services in the form of supply programs that meet the specific needs of individual customers. As a smaller company than the main competitors in the blood products marketplace, HemaCare offers more flexibility in supply arrangements and pricing structure. This flexibility, a focus on customer service, and expertise, are the main messages communicated to potential customers. The Company promotes and markets its blood services segment through in-person sales, direct marketing, and physician education.

Human Resources

As of February 17, 2006, the Company had 244 employees, including 61 part-time employees. Most of the Company’s professional and management personnel possess prior experience in hospitals, medical service companies or blood banks.

None of the Company’s employees is represented by a labor union. The Company considers its relations with its employees to be good.

Suppliers

The Company maintains relationships with numerous suppliers who provide cell separator equipment, disposable supplies, replacement fluids, testing services and blood products. Generally, the Company has not experienced difficulty in obtaining most of its equipment and supplies; however, if there were material adverse changes in the sources of its supplies, the Company’s operations could be adversely affected. In particular, in the event of a war or other international conflict or natural disaster, the availability of critical supplies could be negatively affected and the cost of procuring these supplies could increase.

During 2005, the Company received goods and services from two major vendors that represented more than 10% of the Company’s total costs. One vendor, that represents 18% of total costs, provides products that support the Company’s apheresis activities. The other vendor, that represents 15% of total costs, provides laboratory services. The Company has no relationship with either vendor other than as a consumer of the goods and services provided by each.

The Company utilizes blood donors to provide the platelets and whole blood required to produce the blood products manufactured and sold by the Company. The Company competes with the ARC and other blood suppliers in recruiting its volunteer donors. The growth of the Company’s manufactured blood products business is dependent on the Company’s ability to attract, screen and retain qualified donors.

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Government Regulation

Blood Product Operations

Blood products suppliers are subject to extensive regulation by the FDA and various state licensing authorities. FDA regulations are comprehensive, complex and extend to virtually all aspects of the blood products industry, including: recruiting; screening blood donors; processing, testing, labeling, storing and shipping blood products; recordkeeping; and communications with hospital customers and donors. FDA regulations also extend to the manufacturers of all critical supplies and equipment used in the blood supply industry.

The Company views blood product safety and compliance with governmental regulations as paramount concerns at all times. The Company has developed extensive procedures and internal quality control programs to increase compliance with all governmental regulations and industry standards. Employees routinely participate in training classes. Employees are tested at the conclusion of these classes to insure that the desired level of understanding of the Company’s compliance and safety procedures is achieved. Finally, HemaCare’s Regulatory Affairs and Quality Assurance Department conducts periodic audits of each operating unit to identify the level of compliance with regulatory procedures.

During the past year, the FDA conducted inspections at selected HemaCare facilities. At the conclusion of each inspection, the FDA provided the Company with a list of observations of regulatory issues. The Company believes it has either adequately addressed the issues raised by the FDA, or is in the process of addressing these issues. As a result, the Company believes that it is in compliance with current FDA regulations.

Periodically, the Department of Health for the State of California conducts audits of the Company’s facilities located in California. These audits focus on compliance with specific California laws that cover HemaCare’s operations. At the conclusion of these audits, the Department of Health provides the Company with a list of observations to address. The Company believes that it is in compliance with California regulations governing the Company’s operations within the state.

Organizations within the blood supply industry are registered by the FDA to operate blood collection and/or blood processing facilities. All of the Company’s facilities operate under an FDA registration, with the exception of a blood collection facility within a hospital that operates under the hospital’s FDA registration.

The FDA also issues licenses to organizations within the blood supply industry to ship blood products across state lines if the qualifying organization can demonstrate adequate employee training programs, procedure documentation and quality control systems to insure the quality of the products shipped. HemaCare holds a license for its Sherman Oaks, California and Scarborough, Maine facilities to ship selected blood products across state lines. The Company has submitted expanded license requests to the FDA for additional blood products manufactured at Sherman Oaks, and for a license for blood products produced by the Company’s Bangor, Maine facility. These requests are pending with the FDA.

Other Matters

State and federal laws set forth anti-kickback and self-referral prohibitions, and otherwise regulate financial and referral relationships between blood suppliers, hospitals, physicians and others in the blood supply industry. The Company believes its present operations comply with all currently applicable regulations in this area.

Joshua Levy, M.D., the national medical director of the Company and a shareholder, through his private practice in Sherman Oaks, California, treats patients who require therapeutic services. Sales by the Company to hospital customers for therapeutic services provided to Dr. Levy’s patients amounted to

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approximately 2%, or less, of the Company’s total revenues in each of the three years ended December 31, 2005. There are no agreements between Dr. Levy and the Company’s hospital customers that require the hospitals to select HemaCare to provide therapeutic services to Dr. Levy’s patients.

New health care regulations are continuously under consideration by lawmakers at the federal level, and in many of the individual states in which the Company operates. New regulations could have a direct impact on the Company and its operations. A regulatory agency recently released a draft proposal to lengthen the time between donations that could negatively impact the Company’s collection efforts. Such a change may require costly compliance efforts, and may cause some of the Company’s operations to be prohibitively expensive or impossible to continue. The Company is not aware of any other specific proposed regulation that would have a material adverse impact on the Company; however, the Company is uncertain what changes may be made in the future regarding health care policies, especially those regarding hospital reimbursements, health insurance coverage, product testing, record keeping and managed care that may materially impact the Company’s operations.

Professional and Product Liability Insurance

The blood product and service business is inherently subject to substantial potential liabilities for personal injury claims. The Company maintains medical professional liability insurance in the amount of $3,000,000 for a single occurrence and $5,000,000 in the aggregate per year. There can be no assurance that potential insurance claims will not exceed present coverage or that continued or additional insurance coverage would be available at affordable premium costs. If such insurance were ineffective or inadequate for any reason, the Company could be exposed to significant liabilities.

Additional Information

The Company makes available free of charge through its website, www.hemacare.com, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as practical after those reports are filed with the Securities and Exchange Commission (the “SEC”). The Company’s filings may also be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

ITEM 1A                RISK FACTORS

The Company’s short and long-term success is subject to many factors that are beyond management’s control. Shareholders and prospective shareholders of the Company should consider carefully the following risk factors, in addition to other information contained in this report. The matters discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K that are not historical are forward-looking statements. These statements may also be identified by the use of words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “project,” “will” and similar expressions, as they relate to the Company, its management and its industry. Investors and prospective investors are cautioned that these forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which will be beyond the control of the Company. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including those in “Item 1A—Risk Factors” or in other filings by the Company with the Securities and Exchange Commission. The Company does not undertake to update its forward-looking statements to reflect later events and circumstances or actual outcomes.

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Changes in demand for blood products could affect profitability

The Company’s operations are structured to produce particular blood products based on customers’ existing demand, and perceived potential changes in demand, for these products. Sudden or unexpected changes in demand of these products could have an adverse impact on the Company’s profitability. Increasing demand could harm relationships with customers if the Company is unable to alter production capacity, or purchase products from other suppliers, adequately to fill orders. This could result in a net decrease in overall revenues and profits. Decreases in demand may require the Company to make sizeable investments to restructure operations away from declining products to the production of new products. Lack of access to sufficient capital, or lack of adequate time to properly respond to such a change in demand, could result in declining revenue and profits as customers transfer to other suppliers.

Declining blood donations could affect profitability

The business depends on the availability of donated blood. Only a small percentage of the population donates blood, and regulations intended to reduce the risk of introducing infectious diseases in the blood supply have decreased the pool of potential donors. If the level of donor participation declines, the Company may not be able to reduce costs sufficiently to maintain profitability in blood products.

Market prices may not rise as costs increase which could reduce profitability

The costs of collecting, processing and testing blood have risen significantly in recent years and will likely continue to increase. These cost increases are related to new and improved testing procedures to assure that blood is free of infectious disease, increased regulatory requirements related to blood safety, and increased costs associated with recruiting blood donors. New testing protocols have required the Company to outsource much of the required testing. Competition and fixed price contracts may limit the Company’s ability to pass these increased costs to customers. Some competitors have greater resources than the Company to sustain periods of unprofitable sales.  In this circumstance, the increased costs may reduce profitability and may have a material adverse effect on the business and results of operations.

Competition may cause a loss of customers and an increase in costs and impact profitability

Competition within the blood services and blood products industries is constantly changing. Recent consolidations of blood services providers has changed the competitive environment for the Company’s blood services segment. Competition for customers and trained apheresis nurses is increasing. This has caused the Company to incur significant recruitment costs to replace nurses, dramatically increase nurses’ compensation and incur higher marketing related expenses in order to attract and retain customers. In addition, consolidations and affiliations within the hospital industry have changed the market for the blood products segment. The newly consolidated or affiliated hospitals have started to negotiate with the Company as a group, and therefore exert greater price pressure on the Company. These changes may have a negative impact on the Company’s future revenue, and may negatively impact future profitability.

Operations depend on obtaining the services of qualified professionals and competition for their services is strong

The Company is highly dependent upon obtaining the services of qualified professionals. In particular, the Company’s operations depend on the services of registered nurses and other medical technologists, regulatory and quality assurance professionals, and others with knowledge of the blood industry. Nationwide, the demand for these professionals exceeds the supply and competition for their services is strong. If the Company is unable to attract and retain a staff of qualified professionals, operations may be adversely affected.

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Heavily regulated industry could increase operating costs

The business of collecting, processing and distributing blood products is subject to extensive and complex regulation by the state and federal governments. The Company is required to obtain and maintain numerous licenses in different legal jurisdictions regarding the safety of products, facilities and procedures, and regarding the purity and quality of blood products. In addition, state and federal laws include anti-kickback and self-referral prohibitions and other regulations that affect the shipping of blood products and the relationships between blood banks, hospitals, physicians and other persons who refer business to each other. Health insurers and government payers, such as Medicare and Medicaid, also limit reimbursement for products and services, and require compliance with certain regulations before reimbursement will be made.

The Company devotes substantial resources to complying with laws and regulations, and believes it is currently in compliance; however, the possibility cannot be eliminated that interpretations of existing laws and regulations will result in a finding that the Company has not complied with significant existing regulations. Such a finding could materially harm the business. Moreover, healthcare reform is continually under consideration by regulators, and the Company does not know how laws and regulations will change in the future. A regulatory agency recently released a draft proposal to lengthen the time between donations that could negatively impact the Company’s collection efforts. Such changes in the laws and regulations over blood product operations may require costly compliance efforts which may cause some of the Company’s operations to be prohibitively expensive or impossible to continue.

Decrease in reimbursement rates may affect profitability

Reimbursement rates for blood products and services provided to Medicaid and Medicare patients impact the fees that the Company is able to negotiate with hospitals. In addition, to the degree that the Company’s hospital customers receive lower reimbursement for the products and services provided by the Company, these customers may reduce their demand for these goods and services, and adversely affect the Company’s revenue. If the Company is unable to increase prices for goods and services, the Company’s profitability may be adversely affected.

Lease for a major production facility has expired and if the Company needs to vacate it may be unable to locate an alternative facility thereby disrupting business

The long-term lease for the Company’s Sherman Oaks production facility has expired. The Company has been unable to negotiate a lease renewal. Presently, the Company continues to occupy this facility with the possibility of receiving a 30-day notice to vacate at any time. The lack of a long-term lease agreement for this facility could have an adverse impact on profitability if the Company receives a 30-day notice to vacate and is unable to locate an alternative facility. The Company’s ability to produce platelet and whole blood products for Southern California customers may be severely impacted and result in a reduction of revenue and profitability.

Targeted partner blood drives involve higher collection costs

Part of the Company’s current operations involves conducting blood drives in partnership with hospitals. Blood drives are conducted under the name of the hospital partner and require that all promotional materials and other printed material include the name of the hospital partner. This strategy lacks the efficiencies associated with blood drives that are not targeted to benefit particular hospital partners. As a result, collection costs might be higher than those experienced by the Company’s competition and may affect profitability and growth plans.

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Not-For-Profit status gives advantages to competitors since they are exempt from taxes

HemaCare is the only significant blood products supplier to hospitals in the U.S. that is operated for profit and investor owned. The not-for-profit competition is exempt from federal and state taxes, and has substantial community support and access to tax-exempt financing. The Company may not be able to continue to compete successfully with not-for-profit organizations and the business and results of operations may suffer material adverse harm.

Reliance on relatively few vendors for significant supplies and services could affect the Company’s ability to operate

The Company currently relies on a relatively small number of vendors to provide important supplies and services. Disruptions in the ability of these vendors to provide products and services may force the Company to find alternative vendors. Alternative vendors may not be available, or may not provide their products and services at the same prices as the Company’s current vendors. In particular, the number of vendors supplying albumin, which is a critical supply used by the Company’s blood services business segment, has declined. If the Company cannot obtain the products and services it currently uses, the Company’s ability to produce products and provide services to its customers may be severely impacted and result in a reduction of revenue and profitability.

Limited access to insurance could affect ability to defend against possible claims

The Company currently maintains insurance coverage consistent with the industry; however, if the Company experiences losses or the risks associated with the blood products industry increase in the future, insurance may become more expensive or unavailable. The Company also cannot give assurance that as the business expands, or the Company introduces new products and services, that additional liability insurance on acceptable terms will be available, or that the existing insurance will provide adequate coverage against any and all potential claims. Also, the limitations on liability contained in various agreements and contracts may not be enforceable and may not otherwise protect the Company from liability for damages. The successful assertion of one or more large claims against the Company that exceed available insurance coverage, or changes in insurance policies, such as premium increases or the imposition of large deductibles or co-insurance requirements, may materially and adversely affect the business.

Potential adverse effect from changes in the healthcare industry, including consolidations, could affect access to customers

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. There has been significant consolidation among healthcare providers as providers seek to enhance efficiencies, and this consolidation is expected to continue. As a result of these trends, the Company may be limited in its ability to increase prices for products in the future, even if costs increase. Further, customer attrition as a result of consolidation or closure of hospital facilities may adversely impact the Company.

Future technological developments, including the development of synthetic substitutes for blood products, could jeopardize business

As a result of the risks posed by blood-borne diseases, many companies are currently seeking to develop alternative treatments for blood product transfusions or synthetic substitutes for human blood products. HemaCare’s business consists of collecting, processing and distributing human blood and blood products. The introduction and acceptance in the market of alternative treatments or synthetic blood substitutes may cause material adverse harm to the business. In addition, recent technological developments to extend the shelf-life of products currently offered by the Company, could increase the

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available supply in the market, and put downward pressure on the price for these products. This may cause a material adverse impact on the future profitability for these products.

Potential inability to meet future capital needs could affect plans to finance future expansion

Currently, the Company believes it has sufficient cash available through its cash on hand, bank credit facilities and funds from operations to finance its operations for the next year. The Company generated $1,655,000 in net income in 2005; however, there is no assurance this performance will be sustainable, and the Company may need to raise additional capital in the debt or equity markets. There can be no assurance that the Company will be able to obtain such financing on reasonable terms or at all. Additionally, there is no assurance that the Company will be able to obtain sufficient capital to finance future expansion.

Ability to attract, retain and motivate management and other skilled employees

The Company’s success depends significantly on the continued services of key management and skilled personnel. Competition for qualified personnel is intense and there are a limited number of people with knowledge of, and experience in, the blood product and blood service industries. The Company does not have employment agreements with most key employees, nor maintain life insurance policies on them. The loss of key personnel, especially without advance notice, or the Company’s inability to hire or retain qualified personnel, could have a material adverse affect on revenue and on the Company’s ability to maintain a competitive advantage. The Company cannot guarantee that it can retain key management and skilled personnel, or that it will be able to attract, assimilate and retain other highly qualified personnel in the future.

Product safety and product liability could provide exposure to claims and litigation

Blood products carry the risk of transmitting infectious diseases, including but not limited to hepatitis, HIV and Creutzfeldt-Jakob disease. HemaCare screens donors, uses highly qualified testing service providers to test its blood products for known pathogens in accordance with industry standards, and complies with all applicable safety regulations. Nevertheless, the risk that screening and testing processes might fail or that new pathogens may be undetected by them cannot be completely eliminated. There is currently no test to detect the pathogen responsible for Creutzfeldt-Jakob disease. If patients are infected by known or unknown pathogens, claims may exceed insurance coverage and materially and adversely affect the Company’s financial condition.

Environmental risks could cause the Company to incur substantial costs to maintain compliance

HemaCare’s operations involve the controlled use of bio-hazardous materials and chemicals. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company and its insurance coverage. The Company may incur substantial costs to maintain compliance with environmental regulations as it develops and expands its business.

Business interruption due to terrorism and increased security measures in response to terrorism

HemaCare’s business depends on the free flow of products and services through the channels of commerce and freedom of movement for patients and donors. Delays or stoppages in the transportation of perishable blood products and interruptions of mail, financial or other services could have a material adverse effect on the Company’s results of operations and financial condition. Furthermore, the Company may experience an increase in operating costs, such as costs for transportation, insurance and security, as a

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result of the terrorist activities and potential activities, which may target health care facilities or medical products. The Company may also experience delays in receiving payments from payers that have been affected by terrorist activities and potential activities. The U.S. economy in general is adversely affected by terrorist activities, and potential activities, and any economic downturn may adversely impact the Company’s results of operations, impair its ability to raise capital or otherwise adversely affect its ability to grow its business.

Articles of Incorporation and Rights Plan could delay or prevent an acquisition or sale of HemaCare

HemaCare’s Articles of Incorporation empower the Board of Directors to establish and issue a class of preferred stock, and to determine the rights, preferences and privileges of the preferred stock. This gives the Board of Directors the ability to deter, discourage or make more difficult for a change in control of HemaCare, even if such a change in control would be in the interest of a significant number of shareholders or if such a change in control would provide shareholders with a substantial premium for their shares over the then-prevailing market price for our common stock.

In addition, the Board of Directors has adopted a Shareholder’s Rights Plan designed to require a person or group interested in acquiring a significant or controlling interest in HemaCare to negotiate with the Board. Under the terms of our Shareholders’ Rights Plan, in general, if a person or group acquires more than 15% of the outstanding shares of common stock, all of the other shareholders would have the right to purchase securities from the Company at a discount to the fair market value of the common stock, causing substantial dilution to the acquiring person or group. The Shareholders’ Rights Plan may inhibit a change in control and, therefore, may materially adversely affect the shareholders’ ability to realize a premium over the then-prevailing market price for the common stock in connection with such a transaction. For a description of the Shareholders’ Rights Plan see the Company’s Current Report on Form 8-K filed with the SEC on March 5, 1998.

Quarterly revenue and operating results may fluctuate in future periods, and the Company may fail to meet investor expectations

The Company’s quarterly revenue and operating results have fluctuated significantly in the past, and are likely to continue to do so in the future due to a number of factors, many of which are not within the Company’s control. If quarterly revenue or operating results fall below the expectations of investors, the price of the Company’s common stock could decline significantly. Factors that might cause quarterly fluctuations in revenue and operating results include the following:

·       changes in demand for the Company’s products and services, and the ability to attain the required resources to satisfy customer demand;

·       ability to develop, introduce, market and gain market acceptance of new products or services in a timely manner;

·       ability to manage inventories, accounts receivable and cash flows;

·       ability to control costs; and

·       ability to attract qualified blood donors.

The amount of expenses incurred depends, in part, on expectation regarding future revenue. In addition, since many expenses are fixed in the short term, the Company cannot significantly reduce expenses if there is a decline in revenue to avoid losses.

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Stocks traded on the OTC Bulletin Board are subject to greater market risks than those of exchange-traded and Nasdaq stocks since they are less liquid

HemaCare’s common stock was delisted from the Nasdaq Small Cap Market on October 29, 1998 because of the failure to maintain Nasdaq’s requirement of a minimum bid price of $1.00. Since November 2, 1998 the common stock has traded on the OTC Bulletin Board, an electronic, screen-based trading system operated by the National Association of Securities Dealers, Inc. Securities traded on the OTC Bulletin Board are, for the most part, thinly traded and generally are not subject to the level of regulation imposed on securities listed or traded on the Nasdaq Stock Market or on a national securities exchange. As a result, an investor may find it difficult to dispose of our common stock or to obtain accurate quotations as to its price.

Stock price could be volatile

The price of HemaCare’s common stock has fluctuated in the past and may be more volatile in the future. Factors such as the announcements of government regulation, new products or services introduced by the Company or by the competition, healthcare legislation, trends in health insurance, litigation, fluctuations in operating results and market conditions for healthcare stocks in general could have a significant impact on the future price of HemaCare’s common stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that may be unrelated to the operating performance of particular companies. The generally low volume of trading in HemaCare’s common stock makes it more vulnerable to rapid changes in price in response to market conditions.

Future sales of equity securities could dilute the Company’s common stock

The Company may seek new financing in the future through the sale of its securities. Future sales of common stock or securities convertible into common stock could result in dilution of the common stock currently outstanding. In addition, the perceived risk of dilution may cause some shareholders to sell their shares, which may further reduce the market price of the common stock.

Lack of dividend payments

The Company intends to retain any future earnings for use in its business, and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. The declaration and payment of any cash dividends in the future will depend on the Company’s earnings, financial condition, capital needs and other factors deemed relevant by the Board of Directors. In addition, the Company’s credit agreement prohibits the payment of dividends during the term of the agreement.

Evaluation of internal control and remediation of potential problems will be costly and time consuming and could expose weaknesses in financial reporting

The regulations implementing Section 404 of the Sarbanes-Oxley Act of 2002 require an assessment of the effectiveness of the Company’s internal control over financial reporting beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2007. The Company’s independent auditors will be required to confirm in writing whether management’s assessment of the effectiveness of the internal control over financial reporting is fairly stated in all material respects, and separately report on whether they believe management maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007.

This process will be expensive and time consuming, and will require significant attention of management. Management can give no assurance that material weaknesses in internal controls will not be discovered. Management also can give no assurance that the process of evaluation and the auditor’s attestation will be completed on time. If a material weakness is discovered, corrective action may be time

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consuming, costly and further divert the attention of management. The disclosure of a material weakness, even if quickly remedied, could reduce the market’s confidence in the Company’s financial statements and harm the Company’s stock price, especially if a restatement of financial statements for past periods is required.

If the Company is unable to adequately design its internal control systems, or prepare an “internal control report” to the satisfaction of the Company’s auditors, the Company’s auditors may issue a qualified opinion on the Company’s financial statements.

Evaluation and consideration of strategic alternatives may distract management from reacting appropriately to business challenges and lead to reduced profitability

As a publicly traded Company, management must constantly evaluate and consider new strategic alternatives in an attempt to maximize shareholder value. The Company does not possess a large management team that can both consider strategic alternatives and manage daily operations. Therefore, management distractions associated with the evaluation and consideration of strategic alternatives, could prevent management from dedicating appropriate time to immediate business challenges or other significant business decisions. This may cause a material adverse impact on the future profitability for the Company.

ITEM 1B               UNRESOLVED STAFF COMMENTS

None.

ITEM 2                        PROPERTIES

The Company’s corporate offices and part of its distribution center are located in an 11,250 square foot facility in Woodland Hills, California. The rent for this facility is fixed at $17,300 per month and the lease on this space expires October 31, 2006. The Company has one five-year option to extend this lease at the then current market price.

The Company also operates an apheresis donor center, a laboratory, a manufacturing facility for blood components and a distribution center in a 9,300 square foot facility in Sherman Oaks, California. The Company currently rents this space on a month-to-month basis for a monthly amount of approximately $22,500. Thus far the Company has been unable to negotiate a long-term lease agreement regarding this space, please see “Item 1A—Risk Factors—Lease for Major Production Facility has Expired and if the Company needs to vacate it may be unable to locate an alternative facility thereby disrupting business.”

The Company leases space for offices, a laboratory, a manufacturing facility for blood components and a distribution center in a 3,600 square foot facility in Scarborough, Maine. The monthly rent is approximately $5,700 per month, with an escalation clause for changes in the Consumer Price Index. The lease term expires October 31, 2007.

The Company also leases space for a donor center in a 1,300 square foot facility in Scarborough, Maine. The monthly rent is approximately $1,700 per month. The lease term expires October 21, 2008, and the Company has the option to extend the lease for two additional two-year terms at escalated rental rates that adjust 3.5% annually.

The Company also leases space for a donor center in a 2,500 square foot facility in Bangor, Maine. The monthly rent is approximately $3,900 per month. The lease term expires December 31, 2006, and the Company has the option to extend the lease for two additional five-year terms at rates adjusted for changes in the Consumer Price Index.

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In addition, the Company leases a 1,278 square foot office space in Yonkers, New York which expires August 31, 2006, for a monthly amount of approximately $2,300 per month.

The Company occupies space on the campuses of two of its client hospitals. While the arrangements vary, the Company’s use of these facilities are either subject to lease agreements with the sponsoring hospital for periods concurrent with blood supply agreements, or grant the Company the right to utilize space and facilities on the hospital premises during the term of the blood supply agreement at no cost.

On February 24, 2006, the Company entered into a lease under which the Company will lease approximately 20,000 square feet (the “Premises”) located in Van Nuys, California. The Premises will contain the Company’s corporate offices, a laboratory, a manufacturing facility for blood components and a distribution center, which facilities currently are contained in separate properties as discussed above. The Company will continue to operate an apheresis donor center in Sherman Oaks, California. The Company will pay an average monthly base rent of $41,000, together with additional rent based on certain operating costs and taxes. The lease expires 128 months after the commencement date. It is anticipated that the lease will commence on August 1, 2006.

ITEM 3                        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.

ITEM 4                        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5                        MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Stock is quoted on the OTC Bulletin Board under the symbol HEMA.

The following table sets forth the range of high and low closing bid prices of the Common Stock, as reported by the OTC Bulletin Board, for the periods indicated. These prices reflect inter-dealer quotations, without retail markups, markdowns, or commissions, and do not necessarily represent actual transactions. The prices appearing below were obtained from the National Quotation Bureau. Shareholders are urged to obtain current market quotations for the Company’s Common Stock.

 

Shareholders are urged to obtain current market quotations for the Company’s Common Stock.

The Company intends to retain any future earnings for use in its business, and therefore, does not anticipate declaring or paying any cash dividends in the foreseeable future. Additionally, the Company’s line of credit prohibits the payment of dividends. The declaration and payment of any cash dividends in the future will depend upon the Company’s earnings, financial condition, capital needs, line of credit requirements and other factors deemed relevant by the Board of Directors.

On February 22, 2006, the approximate number of shareholders of record was 262 (excluding individual participants in nominee security position listings).

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ITEM 6                      SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the other information and financial statements, including the notes thereto, appearing elsewhere herein:

 

ITEM 7                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

HemaCare operates two primary business segments. The first is the blood products segment which supplies hospitals and other customers with red blood cells, apheresis platelets and other blood products. The Company operates and manages donor centers and mobile donor vehicles to collect blood products from donors, and purchases blood products from other suppliers. Additionally, the Company operates a blood services segment, wherein the Company performs therapeutic apheresis procedures, stem cell collection and other blood treatments to patients with a variety of disorders. Blood services are usually provided under contract with hospitals as an outside purchased service.

The earnings generated by the blood products segment improved dramatically during the past year. This was primarily the result of increasing demand for blood products from existing customers, as well as from new customers, who are attracted by the Company’s customized blood products delivery system. The Company successfully increased the supply of blood products to offer for sale through increased collections

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at Company operated donor centers and mobile operations, and through the purchase of products from other suppliers. As sales volumes increased, this segment experienced increased operational efficiencies that resulted in improved gross profit.

The Company’s blood services business segment recorded lower revenue and profits in 2005 compared with 2004. The demand for this segment’s services fluctuates based on the occurrence rate of diseases treated with therapeutic apheresis, the degree hospitals have fully staffed apheresis units available, and the degree of success of the Company’s efforts at physician education about the potential benefits of therapeutic apheresis as a treatment alternative. Over the past year this business segment experienced a decline in the number of procedures performed, especially in Southern California. Gross profit for this segment declined in 2005 as a result of the decrease in revenue, higher nurse compensation, and higher expenses to manage and market this business unit.

Results of Operations

The following table sets forth, for the periods indicated, the percentage that certain items in the statement of operations were of net revenue and the percentage dollar increase (decrease) of such items from period to period.

 

Year ended December 31, 2005 compared to the year ended December 31, 2004

Overview

The Company generated net income of $1,655,000, or $.20 basic and $.19 fully diluted, earnings per share for 2005, compared to $1,545,000, or $.20 basic and $.19 fully diluted, earnings per share in 2004.

Revenues increased $4,391,000, or 16.4%, to $31,227,000 in 2005 from $26,836,000 for all of 2004. The increase is attributable to an increase in blood products revenue of 26.9%, which was partially offset by a 10.9% decrease in blood services revenue.

Gross profit increased 13.1% to $6,576,000 in 2005 from $5,816,000 in 2004 due to improved gross profit for the Company’s blood products business segment. Increasing revenue, along with operational efficiencies from an increase in sales volumes, produced most of the improvement in blood products gross profit. This was partially offset by a decrease in gross profit for the Company’s blood services business segment as a result of decreasing revenue, higher nursing compensation, and higher expenses to manage and market this business unit.

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General and administrative expenses increased $470,000, or 10.6%, in 2005 to $4,890,000 from $4,420,000 in 2004. This is mostly attributable to an increase in expenses for outside services, salaries, and liability insurance. However, general and administrative expenses decreased as a percent of revenues from 16.5% in 2004 to 15.7% in 2005.

The Company recognized a $31,000 provision for income taxes for 2005, compared with $18,000 for 2004. The 2005 provision reflects the impact of net operating loss carryforwards from previous years.

Revenue and Gross Profit

Blood Products

Blood products revenue for 2005 increased 26.9%, or $5,207,000, to $24,552,000 from $19,345,000 in 2004. This increase is attributable to an increase in the number of units of blood products sold, despite the closing of donor centers in Chapel Hill, North Carolina, Whittier, California, and Lebanon, New Hampshire. The Company recorded $850,000 of revenue from these donor centers in 2004.

The following table illustrates the components included in blood products results for 2005 and 2004, and segregates that portion of blood products revenue associated with closed operations:

*                    Includes blood product sales, net of returns and credits

Revenue from ongoing operations increased $6,057,000, or 32.7%, in 2005 compared to 2004. This was primarily the result of increased sales to existing and new customers attracted by the Company’s customized blood products delivery system. The Company increased its supply of blood products through increased collections at Company operated donor centers and mobile operations, and through the purchase of products from other suppliers. Closed operations generated $850,000 of revenue in 2004.

Gross profit from ongoing operations increased $1,844,000, or 57.5%, in 2005 to $5,049,000 from $3,205,000 in 2004. This is mostly due to increased blood products revenue and operational efficiencies derived from an increase in sales volume. Gross profit from closed operations was $186,000 in 2004. Overall, the gross profit percentage for this segment improved to 21% in 2005 compared with 17% for all of 2004.

Blood Services

Revenue for this business segment was $6,675,000 in 2005, which represents a $816,000, or 10.9%, decrease from the $7,491,000 recognized in 2004. The revenues for the blood services segment fluctuate significantly with changes in the number of procedures performed. The Company performed 10.1% fewer procedures in 2005 compared to 2004, mostly as a result of reduced procedure volumes in the Southern California and New England markets. The decrease occurred principally as a result of competition in the Southern California market, and  ceasing in-patient services for a major customer in Maine. The Company recognized a 37% decrease in gross profit for this business segment from $2,425,000 in 2004 to $1,527,000 in 2005. The gross profit percentage of this segment decreased to 22.9% for 2005, from 32.4% for 2004. The decline in gross profit is attributable to a decrease in revenue, and higher expenses to staff, manage and market this business segment.

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General and Administrative Expenses

General and administrative expenses increased $470,000, or 10.6%, to $4,890,000 in 2005 from $4,420,000 in 2004. For all of 2005, general and administrative expenses represented 15.7% of revenue, which is a decrease from 16.5% reported for 2004. The increase in general and administrative expenses was attributable to a $230,000 increase in expenses for outside services, consultants and temporary personnel, a $265,000 increase in compensation expense, and an $80,000 increase in liability insurance. These increases in general and administrative expenses were partially offset by a $66,000 decrease in interest expense, which is directly related to a substantial reduction in outstanding debt during 2005.

Income Taxes

The Company has sufficient net operating loss carryforwards to avoid most federal income tax expense for 2005. However, management anticipates that the Company will be subject to federal alternative minimum tax in 2005, as well as various state and local taxes which are unaffected by the net operating loss carryfowards. Management has calculated an estimated tax liability that includes the potential for federal alternative minimum tax, and has calculated estimated tax liability for each state and local jurisdiction using the tax basis each jurisdiction uses to assess taxes. During 2005, the Company recorded $31,000 to the provision for income taxes based on these estimates, which represents an increase of $13,000 over the amount recorded to the provision in 2004.

During 2005, the Company maintained a 100% valuation reserve against deferred tax assets. Current accounting standards place significant weight on a history of recent cumulative losses in determining whether it is more likely than not that the Company will realize the tax benefits in the near future and accordingly whether a valuation allowance is necessary. Recent profitability, or forecasts of future taxable income, are not considered sufficient positive evidence to outweigh a history of losses. Accordingly, the assets remain fully reserved as of the end of 2005. The Company’s federal and state net operating loss carryforwards are not impacted by this valuation allowance and therefore are still available for future use for up to 20 years.

Year ended December 31, 2004 compared to the year ended December 31, 2003

Overview

The Company generated net income of $1,545,000, or $.20 basic and $.19 fully diluted, earnings per share for 2004, compared to a net loss of $4,679,000, or $.60 loss per share both basic and fully diluted, in 2003. The main reasons for this material change in the earnings of the Company are the reduction in costs realized by closing blood product operations as part of the successful implementation of management’s restructuring plan in late 2003, and the lack of any increase in the deferred tax asset valuation reserve in 2004, compared to the increase in 2003.

Gross profit increased 158.4% to $5,816,000 in 2004 from $2,251,000 in 2003 due to reduced operating costs as a result of the closure of underperforming donor centers as part of management’s restructuring plan, improved product sales volumes at the Company’s remaining operations and the reclassification of professional liability insurance expense from operating costs to general and administrative expenses.

General and administrative expenses increased 12.0% in 2004 to $4,420,000 from $3,946,000 in 2003. This is mostly attributable to a reclassification of professional liability insurance expense to general and administrative from operating costs, higher professional liability insurance premiums, higher nurse recruitment costs and an increase in bonuses as a result of achieving specific profitability targets.

The Company recognized $167,000 in other income in 2004 as a result of the receipt of a refund of sales taxes previously paid to one of the Company’s major suppliers.

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The Company recognized an $18,000 provision for income taxes for 2004, compared with $2,984,000 for 2003. This change was the result of an increase in the deferred tax asset valuation reserve in 2003 to 100%. The Company recognized a relatively low provision for 2004 because of net operating loss carryforwards from previous years.

Revenue and Gross Profit

Blood Products

Blood products revenue for 2004 decreased by 3.4%, or $685,000, to $19,345,000 from $20,030,000 in 2003. In late 2003, the Company implemented a restructuring plan that resulted in the closure of six donor centers in the eastern United States, which contributed $3,028,000 of revenues in 2003. In the first quarter of 2004, management closed the donor center in Chapel Hill, North Carolina as the final step to complete the implementation of this plan. This donor center contributed $65,000 of revenue in 2004. In the second quarter of 2004, the donor center management contracts between the Company and Presbyterian Intercommunity Hospital, located in Whittier, California, and between the Company and Dartmouth-Hitchcock Medical Center, located in Lebanon, New Hampshire, expired and were not renewed. The Company recorded revenues from the contract with Presbyterian Intercommunity Hospital in 2003 of $555,000, and $302,000 in the first six months of 2004. The Company recorded revenues from the contract with Dartmouth-Hitchcock Medical Center in 2003 of $897,000, and $483,000 in the first six months of 2004.

Gross profit for the blood products business segment increased $3,530,000 to $3,391,000 in 2004 from a loss of $139,000 in 2003. This is mostly attributable to the closure of underperforming donor centers in late 2003 and higher levels of efficiency that result from higher volumes in ongoing operations.

The following table illustrates the components included in blood products results for 2004 and 2003, and segregates that portion of blood products revenue associated with closed operations:

*                    Includes blood product sales, net of returns and credits

Revenue from ongoing operations increased $2,945,000, or 18.9%, in 2004 compared to 2003. This is mostly attributable to increased platelet collections at the Company’s donor centers in California and Maine. Following closure of underperforming donor centers in 2003, management has focused extensively on increasing collection volumes at the remaining facilities. Revenue from closed operations declined $3,630,000, or 81.0%, in 2004 compared to 2003. This is attributable to the fact that the Company closed five donor centers in late 2003, and three donor centers in the first half of 2004. One of the closures in early 2004 was the donor center in Chapel Hill, North Carolina that was closed as part of the restructuring plan implemented in late 2003. The other two were the donor centers at Presbyterian Intercommunity Hospital, located in Whittier, California, and at Dartmouth-Hitchcock Medical Center, located in Lebanon, New Hampshire. Both of these were closed when the management contracts between the Company and these hospitals expired and were not renewed.

Gross profit from ongoing operations increased $2,123,000, or 196%, to $3,205,000 from $1,082,000 in 2003. In addition, the gross profit margin for ongoing operations improved to 17% in 2004, from 7% in 2003. This is mostly due to increased collection volume at the Company’s remaining facilities. The increase

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in collection volume does not require a corresponding increase in many of the costs associated with the collection effort, such as facility costs, equipment costs and staffing costs. Gross profit for closed operations were $186,000 in 2004 and a loss of $1,221,000 in 2003. The donor centers closed in 2004 included Dartmouth-Hitchcock Medical Center and Presbyterian Intercommunity Hospital. These facilities were not part of management’s restructuring plan as they generally operated profitably. The contracts for these facilities were not renewed by the hospital customers. The donor centers closed in 2003 were generally underperforming operations.

Blood Services

Revenue for this business segment in 2004 was $7,491,000, which represents a 0.4% increase from the $7,458,000 recognized in 2003. The Company performed 13.0% fewer procedures in 2004 compared to 2003, mostly as a result of reduced procedure volumes in the New York and New England markets. The Company experienced difficulties recruiting trained apheresis nurses in these markets, which contributed to the decline in procedures performed. The Company was able to recognize a small increase in revenue for this segment, despite the decline in procedure volume, mostly due to a change in procedure mix to higher average price procedures. The Company recognized a 1.5% improvement in gross profit for this business segment from $2,390,000 in 2003 to $2,425,000 in 2004. This improvement is attributable to a change in procedure mix in 2004, the reduction in operating costs due to the reclassification of professional liability insurance expense to general and administrative expense from operating costs. In 2003, operating costs for the blood services business segment was charged $86,000 for liability insurance.

General and Administrative Expenses

General and administrative expenses increased $474,000, or 12%, to $4,420,000 from $3,946,000 in 2003. This is mostly attributable to the reclassification of liability insurance in 2004, an increase in overall insurance expense, higher nurse recruitment costs and an increase in management bonuses. Beginning in 2004, the Company charged general and administrative expenses for professional liability insurance premiums which had previously been charged to operating costs, but which are not specifically attributable to any specific operation or location. As a result of this reclassification, insurance expense included in general and administrative expenses in 2004 increased $341,000 compared to 2003. In addition, the Company experienced an increase in the cost for all forms of insurance coverage in 2004 of $151,000. Also in 2004, fees and other services related to nurse recruitment increased $298,000 compared to 2003. The 2004 bonus program for management provided for bonuses based on the Company’s achievement of specific profitability targets. The Company achieved these targets and recognized an increase of $155,000 in bonuses in 2004 compared to 2003. These increases in general and administrative expenses were partially offset by a reduction in bad debt expense incurred in 2004. As a result of the closure of several donor centers in late 2003, the Company recorded bad debt expense for certain hospital customers associated with these closed donor centers that would likely delay or withhold payment of outstanding invoices. In 2004, the Company did not experience any similar risk. As a result, bad debt expense recognized in 2004 declined by $299,000 compared with 2003. In 2004, the Company changed its audit firm and recognized a $74,000 reduction in audit fees associated with the examination of the Company’s 2004 financial statements.

Income Taxes

During 2003, the Company recorded a valuation allowance of $2,984,000 against deferred tax assets. This non-cash charge reduced the net value of the deferred tax assets on the balance sheet to zero. The assets were the result of income tax benefits that were recorded due to operating losses in prior years. Current accounting standards place significant weight on a history of recent cumulative losses in determining whether it is more likely than not that the Company will realize the tax benefits in the near

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future and accordingly whether a valuation allowance is necessary. Forecasts of future taxable income are not considered sufficient positive evidence to outweigh a history of losses. Accordingly, the assets were reserved in full, and remain fully reserved as of the end of 2004. The Company’s federal and state net operating loss carryforwards are not impacted by this change in valuation allowance and therefore are still available for future use for up to 20 years. In 2004, the Company utilized these carryforwards to substantially reduce income tax expense. Other than state franchise tax, the Company incurred an estimated $18,000 in California alternative minimum tax for 2004.

2005 and 2004 Quarterly Financial Data

The Company generated positive net income in every quarter of 2005, and recognized the highest level of quarterly revenue and pretax earnings in the Company’s history in the fourth quarter of 2005. Most of this positive result was due to increasing blood products revenue and improved blood products gross profit margins as a result of operational efficiencies.

The following table presents unaudited statement of operations data for each of the eight quarters ended December 31, 2005. Management believes that all necessary adjustments have been included to fairly present the quarterly information when read in conjunction with the consolidated financial statements. The operating results for any quarter are not necessarily indicative of the results for any subsequent quarter.

UNAUDITED
(In Thousands, Except Per Share Data)

 

The Company’s quarterly revenue and operating results have fluctuated significantly in the past, and are likely to continue to do so in the future due to a number of factors, many of which are not within the Company’s control. If quarterly revenue or operating results fall below the expectations of investors, the price of the Company’s common stock could decline significantly. Factors that might cause quarterly fluctuations in revenue and operating results include the following:

·       changes in demand for the Company’s products and services, and the ability to attain the required resources to satisfy customer demand;

·       ability to develop, introduce, market and gain market acceptance of new products or services in a timely manner;

·       ability to manage inventories, accounts receivable and cash flows;

·       ability to control costs; and

·       ability to attract qualified blood donors.

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The amount of expenses incurred depends, in part, on expectation regarding future revenue. In addition, since many expenses are fixed in the short term, the Company cannot significantly reduce expenses if there is a decline in revenue to avoid losses.

Critical Accounting Policies and Estimates

General

Management’s discussion and analysis of the Company’s financial condition and results of operations are based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to valuation reserves, income taxes and intangibles. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Allowance for Doubtful Accounts

The Company makes ongoing estimates relating to the collectibility of accounts receivable and maintains a reserve for estimated losses resulting from the inability of customers to meet their financial obligations to the Company. In determining the amount of the reserve, management considers the historical level of credit losses and makes judgments about the creditworthiness of significant customers based on ongoing credit evaluations. Since management cannot predict future changes in the financial stability of customers, actual future losses from uncollectible accounts may differ from the estimates. If the financial condition of customers were to deteriorate, resulting in their inability to make payments, a larger reserve may be required. In the event it is determined that a smaller or larger reserve is appropriate, the Company would record a credit or a charge to general and administrative expense in the period in which such a determination is made.

Income Taxes

As part of the process of preparing the financial statements, the Company is required to estimate income taxes in each of the jurisdictions that the Company operates. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the balance sheet. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income, and to the extent management believes that recovery is not likely, must establish a valuation allowance. To the extent a valuation allowance is created or adjusted in a period, the Company must include an expense, or benefit, within the tax provision in the statements of operations.

Significant management judgment is required in determining the provision for income taxes, deferred tax asset and liabilities and any valuation allowance recorded against net deferred tax assets. Management continually evaluates if the deferred tax asset is likely to be realized. If management determines that the deferred tax asset is likely to be realized, a write-up of that asset would be required and would be reflected as a benefit from income taxes in the accompanying period. If on the other hand management determines that a deferred tax asset is not likely to be realized, a write-down of that asset would be required and would be reflected in the provision for taxes in the accompanying period.

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Liquidity and Capital Resources

At December 31, 2005, the Company had cash and cash equivalents of $2,612,000 and working capital of $4,158,000.

The Company, together with Coral Blood Services, Inc., a subsidiary, has a working capital line of credit with Comerica Bank - California. This credit facility originally was scheduled to terminate as of June 30, 2005; however, on July 1, 2005, the Company, Coral Blood Services, Inc. and Comerica Bank entered into an amendment to the credit facility to extend the term of the facility to June 30, 2007. In addition, this amendment altered the interest rate calculation, established a $50,000 maximum limit for purchasing or disposing of assets without Comerica Bank’s approval, and removed the restriction in the agreement on the Company’s ability to purchase, acquire, repurchase, retire or redeem any of the Company’s capital stock. As of July 1, 2005, the amount the Company may borrow is the lesser of: 75% of eligible accounts receivable or $2 million. Interest is payable monthly at a rate of prime minus 0.25%; as of December 31, 2005 the rate associated with this note was 7.0%. In addition, the Company has the option to draw against this facility for thirty (30), sixty (60), or ninety (90) days using LIBOR as the relevant rate of interest. As of December 31, 2005, the Company had no net borrowing on this line of credit, and the Company had unused availability of $2,000,000. On January 31, 2006, the Company, Coral Blood Services, Inc. and Comerica Bank entered into an amendment to the credit facility which provides for the issuance of letters of credit by Comerica Bank on behalf of the Company in an amount not to exceed $1,000,000.

The Comerica line of credit is collateralized by substantially all of the Company’s assets and requires the maintenance of certain financial covenants that, among other things, require minimum levels of profitability and prohibits the payment of dividends. As of December 31, 2005, the Company was in full compliance with all of the financial covenants. The Company did not incur any interest expense associated with the Comerica loan in 2005.

The Company also has a capital equipment lease with GE Capital used to finance the acquisition of vehicles. As of December 31, 2005, the balance outstanding on this lease was $86,000, of which approximately $79,000 is included in current obligations. This lease is scheduled to terminate in January 2007, and has a fixed interest rate of 8.0%.

The Company had another note payable to One Source Financial. During the third quarter of 2005, the Company paid all of the remaining unpaid balance on this capital lease, totaling $12,000. The note was scheduled to terminate in January 2006, and had a fixed rate of 8.5%. This note was secured by specific equipment.

The Company also had a capital equipment lease with Gambro BCT to finance the acquisition of equipment used in the Company’s apheresis activities. During the third quarter of 2005, the Company paid all of the remaining unpaid balance on this capital lease, totaling $703,000. The lease was scheduled to terminate in December 2008 and had a fixed interest of 7.5%. The lease was secured by all of the equipment purchased through the lease financing.

The Company had a capital equipment lease with Dell Financial Services associated with the acquisition of computer equipment. During the third quarter of 2005, the Company paid all of the remaining unpaid balance on this capital lease, totaling $2,000. This lease was scheduled to terminate in August 2005, and had a fixed interest rate of 12.6%.

Finally, the Company has a capital equipment lease with Toshiba Financial Services associated with the acquisition of photocopier equipment. As of December 31, 2005, the balance outstanding on this lease was $3,000, all of which is included in current obligations. This lease is scheduled to terminate in May 2006.

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The following table summarizes our contractual obligations by year (in thousands).

 

Net cash provided by operating activities was $1,872,000 for 2005, and $2,325,000 for 2004, representing a decrease of $453,000. Most of the decrease was due to the fact that net accounts receivable increased $548,000 in 2005, whereas net accounts receivable increased only $259,000 in 2004. This increase was due to an increase in revenue during 2005, particularly in the fourth quarter. Receivable collection efforts improved during 2005 as represented by the days sales outstanding statistic which stood at 41 days as of December 31, 2005, compared with 45 days as of the end of 2004. Also contributing to the decrease in cash generated by operating activities was an increase in inventories, supplies and prepaid expenses of $58,000, whereas the Company recorded a decrease of $103,000 for all of 2004. A change in the termination date for the Company’s insurance policies resulted in an increase in the prepaid insurance balance as of December 31, 2005.

For 2005, net cash used in investing activities was $603,000, compared with $176,000 for 2004. The cash used in investing activities in 2005 was primarily for the acquisition of cell separators, computers, software and vehicles. In 2004, the cash used in investing activities was primarily for medical and computer equipment.

Cash used by financing activities in 2005 was $739,000, compared with $1,002,000 for 2004. Most of the cash utilized in both years was to reduce outstanding notes payable, capitalized leases and other debts.

The Company had previously decided to initiate a new information technology project to enhance the automation of its blood product operations. The Company has identified a preferred blood bank information system developer to provide this system, and is currently in contract negotiations. This project is expected to take approximately two years to complete, and will involve considerable financial and managerial resources. Management expects approximately $2 million will be needed to complete this project.

Management anticipates that cash on hand, availability on the bank line of credit and cash generated from operations will be sufficient to provide funding for the Company’s needs for the upcoming year, including working capital requirements, equipment purchases and lease commitments.

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-K and other materials filed or to be filed by the 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 the Company) are forward-looking, such as statements relating to operational and financing plans, competition, the impact of future price increases for blood products and demand for the Company’s products and services. These statements may also be identified by the use of words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “project,” “will” and similar expressions, as they relate to the Company, its management and its industry. Investors and prospective investors are cautioned that these forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which will be beyond the control of the Company. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various risks and uncertainties, including

26

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those above in “Item 1A—Risk Factors” or in other filings by the Company with the Securities and Exchange Commission. The Company does not undertake to update its forward-looking statements to reflect later events and circumstances or actual outcomes.

Such forward-looking statements involve important risks and uncertainties, many of which will be beyond the control of the 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 the Company. These risks and uncertainties include, but are not limited to those listed above as “Risk Factors” or in other filings by the Company with the Securities and Exchange Commission.

ITEM 7A                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, the Company’s operations are exposed to risks associated with fluctuations in interest rates. The Company manages its risks based on management’s judgment of the appropriate trade-off between risk, opportunity and costs. Management does not believe that interest rate risks are material to the results of operations or cash flows of the Company, and, accordingly, does not generally enter into interest rate hedge instruments.

At December 31, 2005, the Company had $88,000 of debt, all of which is from notes payable and capitalized leases with fixed interest rates. The interest rate payable on the Company’s working capital line of credit is based upon the prime interest rate. At December 31, 2005, no amount was outstanding on this line of credit.

In the normal course of business, the Company also faces risks that are either non-financial or not quantifiable, including those risks described earlier “Item 1A—Risk Factors.”

ITEM 8                        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Index to Financial Statements and Schedules appears on page F-1. The Reports of Independent Public Accountants appears on F-2 and F-3, and the Consolidated Financial Statements and Notes to Consolidated Financial Statements appear on pages F-4 to F-15.

ITEM 9                        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On April 5, 2004, the Company dismissed Ernst & Young LLP, an independent registered public accounting firm (“E&Y”), as the independent accountants of the Company. On April 8, 2004, the Company appointed Stonefield Josephson, Inc., an independent registered public accounting firm (“Stonefield”), as the independent accountants of the Company for the fiscal year ended December 31, 2004. The determination to dismiss E&Y and to appoint Stonefield was made by the Board of Directors of the Company upon the recommendation of the Audit Committee.

The reports of E&Y on the financial statements of the Company for the fiscal year ended December 31, 2003 did not contain any adverse opinion, disclaimer of opinion, or qualification or modification as to uncertainty, audit scope or accounting principles.

During the Company’s fiscal year ended December 31, 2003, and the interim period from January 1, 2004 through April 8, 2004, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of E&Y, would have caused them to make reference to the subject matter of the disagreement in connection with their reports on the Company’s financial statements for such year.

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During the Company’s fiscal year ended December 31, 2003, and the interim period from January 1, 2004 through April 8, 2004, no reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K) has occurred.

During the Company’s fiscal year ended December 31, 2003, and the interim period from January 1, 2003 through April 8, 2004, the Company did not consult with Stonefield on the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, or any matter which was the subject of any disagreement or any reportable event (as defined in Items 304(a)(1)(iv) and 304(a)(1)(v), respectively, of Regulation S-K).

E&Y was provided with a copy of the disclosures contained herein. A letter from E&Y confirming its agreement with the statements contained herein is attached as Exhibit 16.1 to the Company’s Form 8-K filed on April 9, 2004.

ITEM 9A                CONTROLS AND PROCEDURES

The Chief Executive Officer 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 Exchange Act Rule 13a-15(b). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective at the reasonable assurance level described below 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 objectives 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 was no change in the Company’s internal control over financial reporting known to the Chief Executive Officer or the Chief Financial Officer, that occurred during the Company’s fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B                 OTHER INFORMATION

None.

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PART III

ITEM 10                 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the directors and executive officers of the Company is incorporated herein by reference from the section entitled “Proposal 1—Election of Directors” contained in the definitive proxy statement of the Company to be filed pursuant to Regulation 14A within 120 days after the end of the Company’s last fiscal year (the “Proxy Statement”).

ITEM 11                 EXECUTIVE COMPENSATION

The information concerning executive compensation is incorporated herein by reference from the section entitled “Proposal 1—Election of Directors” contained in the Proxy Statement.

ITEM 12                 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information concerning the security ownership of certain beneficial owners and management and related stockholder matters is incorporated herein by reference from the section entitled “General Information—Security Ownership of Principal Stockholders and Management” and “Proposal 1—Election of Directors” contained in the Proxy Statement.

ITEM 13                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information concerning certain relationships and related transactions is incorporated herein by reference from the section entitled “Proposal 1—Election of Directors—Certain Relationships and Related Transactions” contained in the Proxy Statement.

ITEM 14                 PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information concerning the Company’s principal accountant’s fees and services is incorporated herein by reference from the section entitled “Independent Registered Public Accounting Firm” in the Proxy Statement.

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PART IV

ITEM 15                 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following are filed as part of this Report:

1.                Financial Statements

An index to Financial Statements and Schedules appears on page F-1.

2.                Financial Statement Schedules

The schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under related instructions or are inapplicable, and therefore have been omitted.

3.                Exhibits

The following exhibits listed are filed or incorporated by reference as part of this Report.

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*                   Management contracts and compensatory plans and arrangements.

+               Filed herewith.

31

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated:  March 20, 2006				HEMACARE CORPORATION
				By:		/s/ ROBERT S. CHILTON
						Robert S. Chilton, Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the twentieth day of March, 2006.

 

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Index to Consolidated Financial Statements and Schedules

 

All schedules are not submitted because either they are not applicable, not required or because the information required is included in the Consolidated Financial Statements, including the notes thereto.

F-1

REPORT OF STONEFIELD JOSEPHSON, INC., INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders of HemaCare Corporation:

We have audited the accompanying consolidated balance sheet of HemaCare Corporation and subsidiaries, as of December 31, 2005 and 2004, and the related consolidated statements of operations and shareholder’s equity and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HemaCare Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the two years then ended in conformity with U.S. generally accepted accounting principles.

/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS

Los Angeles, California
February 8, 2006

F-2

REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of HemaCare Corporation:

We have audited the accompanying consolidated statements of operations, shareholders’ equity, and cash flows of HemaCare Corporation (a California Corporation) and subsidiaries for the year ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of its operations and its cash flows for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Los Angeles, California
February 17, 2004

F-3

HEMACARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

The accompanying notes are an integral part of these consolidated financial statements.

F-4

HEMACARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,

 

The accompanying notes are an integral part of these consolidated financial statements.

F-5

HEMACARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2005, 2004, and 2003

 

The accompanying notes are an integral part of these consolidated financial statements.

F-6