-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VM58xQ9EwddQQftNgIDfMCFZ+xGaRjgLMpzvjBlY/RkWIwXL4hirvcYbr4tcgrHn o1Lnn6kCJRo5FI3ldjuIdQ== 0000801748-99-000002.txt : 19990402 0000801748-99-000002.hdr.sgml : 19990402 ACCESSION NUMBER: 0000801748-99-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEMACARE CORP /CA/ CENTRAL INDEX KEY: 0000801748 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISC HEALTH & ALLIED SERVICES, NEC [8090] IRS NUMBER: 953280412 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-15223 FILM NUMBER: 99581294 BUSINESS ADDRESS: STREET 1: 4954 VAN NUYS BLVD 2ND FLR CITY: SHERMAN OAKS STATE: CA ZIP: 91403 BUSINESS PHONE: 8189863883 MAIL ADDRESS: STREET 1: 4954 VAN NUYS BLVD, 2ND FL. CITY: SHERMAN STATE: CA ZIP: 91403 10-K405 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1998 ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark one) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For fiscal year ended December 31, 1998 / / 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) State or other jurisdiction of I.R.S. Employer I.D. incorporation or organization: California Number: 95-3280412 ----------- ---------- 4954 Van Nuys Boulevard Sherman Oaks, California 91403 (Address of principal executive offices) (Zip Code) ----------------- Registrant's telephone number, including area code: (818) 986-3883 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (without par value) Rights to Purchase Preferred Stock Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES X NO ___ Indicate by check mark 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: X As of March 26, 1999, 7,281,120 shares of Common Stock of the Registrant were issued and outstanding. The aggregate market value of the Common Stock held by non-affiliates of the Registrant on that date (based upon the closing price of the Common Stock as reported by NASDAQ National Market System was approximately $4,578,970. Portions of the Registrant's definitive Proxy Statement for its June 17, 1999 Annual Meeting of Shareholders (which has not been filed as of the date of this filing) are incorporated by reference into Part III. Such proxy statement shall be filed with the Securities and Exchange Commission not later than 120 days after the registrant's fiscal year ended December 31, 1998. ============================================================================= PART I ITEM 1. BUSINESS. General - ------- HemaCare Corporation and its wholly owned subsidiary Coral Blood Services, Inc. offer a full range of blood services and products to hospitals and medical centers. HemaCare is the first publicly traded company to be licensed by the Food and Drug Administration, which regulates the blood industry, and accredited by the American Association Blood Banks. The Company has been providing blood services and products in Southern California since 1978. In October 1998, Coral Blood Services, Inc. was formed to acquire blood products and services operations in the eastern United States. The Company now has operations in 12 states. During the last decade, hospitals, which spend more than $4 billion annually on blood products and services, have experienced increasing cost containment pressures. As a result, these institutions are continuously looking for ways of providing more cost-effective health services. HemaCare has responded to this need by developing customized blood services programs designed to meet the specific requirements of each individual hospital customer. The Company's customers include university teaching hospitals, medical centers and regional hospitals located in California, Connecticut, Massachusetts, Maine, New Hampshire, New Jersey, New York, North Carolina, Rhode Island, Tennessee and West Virginia. Products and services are provided to these customers under contractual agreements, and in some cases, under interim arrangements while contractual agreements are being negotiated. Each customer selects the products and services provided by the Company which best meet its needs,including: - - Product procurement. (Apheresis platelets and plasma and whole blood derived components.) - - Therapeutic apheresis. (Plasma exchange, cell depletion and immunadsorption procedures.) - - Stem cell collection and cryopreservation. - - Interoperative autologous transfusion. - - Donor center management. - - Donor sample testing. - - Blood management consulting. - - Research and clinical trial protocols. Several of the Company's customers have elected to outsource some or all of their blood services to the Company in a blood management program arrangement. The Company's corporate headquarters are located in Sherman Oaks, California, north of downtown Los Angeles. This location also serves as the regional office for Southern California operations. Other regional offices are located in Portland, Maine, Yonkers, New York and Chapel Hill, North Carolina. The HemaCare scientific advisory board, established in 1997, provides input and counsel to the Company's board of directors and management on technical and regulatory matters as well as participating in periodic management meetings. Chaired by Joshua Levy, MD, the advisory board is comprised of nationally recognized experts in the fields of blood banking, apheresis technology and application, and regulatory compliance. Certain medical terms included in the following discussions are further explained in a glossary located at the end of this Item 1. HemaCare Corporation and its wholly owned subsidiaries are collectively referred to herein as "HemaCare" or the "Company", and Coral Blood Services, Inc. is referred to as "CBS". Blood Management Programs - ------------------------- A HemaCare Blood Management Program ("BMP")is an arrangement in which a hospital outsources some or all of its blood procurement and donor center management functions to HemaCare while retaining the convenience and efficiencies of an in-house program. HemaCare supplies the BMP customer with blood products from collections at the customer's donation center or from collections at other HemaCare donation sites or products purchased by HemaCare from outside suppliers. HemaCare establishes and operates a blood donation center under the name of the sponsoring BMP hospital. Typically, the center is staffed, operated and managed by the Company which is also responsible for regulatory compliance. A Blood Management Program aligns the interests of the Company and its hospital customer, providing the customer with a "partner" in achieving its financial, regulatory compliance and patient service goals. The BMP model continues to evolve in response to the changing needs of the Company's customers. Dartmouth-Hitchcock Medical Center Mary Hitchcock Memorial Hospital at Dartmouth-Hitchcock Medical Center ("DHMC") outsources its apheresis platelet and plasma collections, autologous and directed donation collection services, therapeutic apheresis and stem cell collection services and blood related research in a BMP arrangement. Located in Lebanon, New Hampshire, DHMC, a 430 bed hospital, is affiliated with Dartmouth College and is the teaching hospital for Dartmouth College Medical School. DHMAC, a major research center, serves as the tertiary care center for New Hampshire and adjacent areas of Vermont. The Company collects apheresis products for the hospital and provides autologous and directed donations services and conducts a donor-retested plasma program. Therapeutic apheresis and stem cell collection services are provided in the hospital-based donor room or at the patient's bedside, as directed by the responsible physician. The Company's current BMP agreement with DHMC extends through October 2001. Maine Medical Center Located in Portland, Maine, the Maine Medical Center ("MMC"), a 600 bed teritiary care, teaching hospital, is the largest medical center in northern New England. In 1994, MMC elected to outsource its apheresis platelet collections and, in 1997, added therapeutic apheresis functions and stem cell collections to its BMP arrangement. The Company provides substantially all of the apheresis platelets used by MMC from products collected at its donor facility in Portland and on mobile platelet drives conducted in the greater Portland area. Mobile therapeutic apheresis and stem cell collection services are provided to MMC's patients and physicians by specially trained registered nurses. In addition, the Company offers low density lipoprotein ("LDL") therapeutic services to patients with extremely high blood cholesterol levels which are resistant to dietary and drug treatments. St. Vincent Hospital Located in Worcester, Massachusetts, St. Vincent Hospital ("St. Vincent") is a 330 bed tertiary and acute care hospital serving central Massachusetts. In March 1998, St. Vincent outsourced its entire blood procurement and donor room function on an exclusive basis. Services provided by the Company to St. Vincent include procurement of blood products, whole blood and apheresis platelet collections, autologous and directed donations services and therapeutic apheresis services. An integral part of these services is the operation of a donor room located in St. Vincent hospital. This facility provides a convenient location for patients and their families to donate blood. University of North Carolina The University of North Carolina's BMP arrangement designates the Company as the primary provider of apheresis products to the UNC Hospitals in Chapel Hill, North Carolina ("UNC"). The Company also provides apheresis platelet plasma products to UNC. The Company collects these products in its hospital- based donor room and on mobile blood drives. The 660 bed UNC facility is the teaching hospital for the University of North Carolina School of Medicine and is an active blood-banking research institution. University of Southern California The University of Southern California ("USC") BMP agreement established HemaCare as the primary provider of blood products and services to the patients and physicians of USC/Norris Comprehensive Cancer Center and Hospital and USC University Hospital. Together these hospitals comprise a 340 bed tertiary care and research center. An integral part of the USC program is a blood donation center located on the USC Health Sciences Campus. In addition, the Company provides mobile therapeutic apheresis and stem cell collection services to USC. The BMP agreement, which was recently renewed, is in effect until March 2002. Citrus Valley Health System In October 1996, Citrus Valley Health Partners named HemaCare as the exclusive provider of blood services to its three-hospital network in the Los Angeles metropolitan area. This program proved to be uneconomic, and in July 1998 was terminated. Blood Products - -------------- General The Company sells single donor apheresis platelet products ("apheresis platelets" or "platelets"), apheresis plasma and whole blood derived components ("components") such as red blood cells and fresh frozen plasma to more than 25 hospital customers. Blood products are collected at each of the BMP donor centers. These products are generally sold to the BMP hospital. Components are manufactured at the Sherman Oaks facility and at St. Vincent Hospital. Single Donor Apheresis Platelets The Company collects single donor platelets, using automated blood separation technology, at its Sherman Oaks, California location, each of the BMP locations and at two sponsoring hospitals in the metropolitan New York area. Platelets are sold to hospitals for transfusion into cancer patients undergoing chemotherapy, patients undergoing major surgery such as open heart surgery or transplant procedures, and trauma or other conditions associated with massive blood loss. Platelet apheresis technology involves the use of a cell separator operated by a trained clinician. The procedure removes blood from a donor through a needle in one arm, pumping the blood through the cell separator where the desired platelet component is retained and returning the blood, including the red cells, to the donor. The procedure typically requires one to three hours and may be done up to 24 times per year, since donating platelets does not deplete donors of red blood cells. Temperature control and constant movement (using a rotator) maintain the platelets' viability for five days. When necessary to meet its customers' needs, the Company also purchases platelet products for resale. Such platelet suppliers are Food and Drug Administration ("FDA") licensed and accredited by the American Association of Blood Banks ("AABB"). Approximately 4% of platelets sold by the Company in 1998 were purchased from outside suppliers. In order to attract and retain qualified donors at its Sherman Oaks, California location, the Company reimburses these donors for their time and commitment. As a result, the Company has developed a select group of repeat donors who are tested regularly in connection with their frequent donations. Cash reimbursement to donors is variable, based on the number and frequency of donations, and includes a bonus program. Most southern California platelets products are obtained from paid donations made at the Company's Sherman Oaks location. Unless extended, the law enabling HemaCare to sell apheresis platelets obtained from compensated donors in California will expire in December 2001, which could have a material adverse affect on the Company's revenue and net income. The Company is evaluating a number of alternatives with regard to continuing its California based apheresis platelet business after the year 2001. The Company also recruits non-cash compensated donors for its BMP donor centers and hospital sponsored collection programs. Platelet donors who are compensated must pass the Company's stringent donor screening standards which include a pre-donation and annual physical examination by a physician. Volunteer and compensated donors are subject to a prescreening interview before each donation, and all platelet donations are subject to infectious disease testing. After each collection, the platelets are tested, labeled and delivered to hospital customers. Component Blood Products HemaCare provides whole blood derived component products such as red blood cells, fresh frozen plasma and cryoprecipitate to its BMP and other customers. These component blood products included both purchased products and products collected and manufactured by the Company under its FDA license and under the registration of BMP customers. The Company began collecting whole blood donations and manufacturing component products primarily for sale to its BMP customers in December 1995. Whole blood donors must pass stringent FDA and AABB endorsed screening standards. Donations are tested at FDA licensed laboratories, including the Company's Sherman Oaks laboratory, and component products are manufactured at the Sherman Oaks and St. Vincent Hospital facilities. In 1998, the component products were sold primarily to the USC Hospitals, Citrus Valley Hospitals and St. Vincent Hospital, under the terms of the BMP agreements with these hospitals. In 1997 and 1996, a significant volume of component sales were made to non-BMP customers in California. Most of these component products were purchased. All purchased components sold are acquired under contractual relationships with blood centers located in the U.S. All such suppliers are FDA licensed and accredited by the AABB. Blood Services - -------------- General The Company provides therapeutic apheresis, interoperative autologous transfusion and donor testing services. Since its inception, the Company has performed more than 36,900 therapeutic apheresis procedures in the treatment of more than 27 diseases. The Company now provides these services in 11 states on the east and west coasts. Therapeutic Apheresis Therapeutic apheresis ("therapeutics" or "therapeutic services") 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 provided upon the request of a hospital which has received an order from a patient's physician. Therapeutic treatments are administered using mobile units operated at the patient's bedside or in a hospital outpatient setting. The mobile therapeutics equipment includes a state-of-the-art blood cell separator and the disposables and supplies needed to perform the procedure. Treatments are administered by trained, nurse-specialists, 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 Hospital Organizations ("JCAHO"), under the supervision of a specially trained physician. The Company provides therapeutic services using all currently recognized treatment methods: 1) plasma exchange and cell depletion, 2) in-line immunoadsorbant columns, and 3) stem cell rescue and cryopreservation. Plasma Exchange and Cell Depletion The primary blood services provided by the Company, accounting for 88% of therapeutics procedures in 1998, were conventional plasma exchange and cell depletion therapy. These procedures involve removing harmful substances from a patient's blood, using automated blood separation equipment. As the patient's blood flows through the cell separator, abnormal or excess proteins or components associated with the disease being treated are selectively removed. The remaining blood components are returned to the patient. Most treatments involve the removal of two to four liters of abnormal plasma or certain cellular components. Replacement fluids, most commonly albumin, are used to maintain the patient's blood volume. In late 1996, a shortage of albumin arose when a major U.S. manufacturer was required by regulatory agencies to temporarily cease operations. This manufacturer has not yet fully resumed operation. As a result, the price of albumin more than doubled during 1997, and demand for albumin continues to exceed the supply. Although HemaCare has increased the price charged to its customers for albumin, the Company has not been able to recover the full amount of the cost increase. Patients suffering from diseases such as multiple myeloma, HIV- polyneuropathy, leukemia, systemic lupus erythematosus, scleroderma, hyperviscosity syndrome, thrombocytosis, myasthenia gravis and Guillain-Barre syndrome may benefit from therapeutic apheresis treatments. A patient may require from four to twenty treatments over a period of time ranging from a few days to several months. Each treatment may last from two to four hours. Immunoadsorption Since 1988, the Company has provided a second-generation therapeutic treatment which uses an in-line immunoadsorption column to modify the immune response. Recently, the FDA approved this procedure for the treatment of moderate to severe rhemuatoid arthritis ("RA"). This application may significantly increase the demand for immunasdsorption column procedures. It is anticipated that additional research will demonstrate the efficacy of further of immunadsorption therapy in additional applications. Stem Cell Rescue and Cryopreservation Since 1990, the Company has been providing peripheral stem cell collection services in California. In this application, stem cells (those cells which mature into all the different cellular components of blood) are collected from a cancer patient using apheresis technology. The patient then receives a series of intensive chemotherapy treatments followed by reinfusion of the patient's own stem cells. In 1994, the Company added cryopreservation (processing, freezing and short-term storage of stem cells) to stem cell collection to provide a full-service program. This program consists of mobile, peripheral stem cell collection for certain cancer patients, followed by cryopreservation of the stem cells prior to reinfusion into the treated patient. The addition of cryopreservation capability enables the Company to provide a full- service stem cell program to community hospitals which may choose not to establish their own in-house capabilities in the early development of this technology. The Company's cryopreservation service capacity is currently under- utilized because of the reluctance of third party payors to reimburse community hospital customers for this procedure. The procedure is generally reimbursed only to larger hospitals with established in-house programs. The Company believes that increasing pressure from physicians and patients may, in the future, result in greater acceptance of the procedure for reimbursement by third party payors to community hospitals and that the Company will be well positioned to perform the service with its experienced and qualified personnel. Joshua Levy, M.D., a shareholder, founder and medical director of the Company, through his private practice, treats patients who require therapeutic services. The Company's ability to provide these services may be limited by Federal self-referral laws and regulations. (See "Government Regulation.") Interoperative Autologous Transfusion Interoperative autologous transfusions ("IAT") services offer an alternative to allogeneic transfusion, providing important benefits to the patient. The Company offers IAT services primarily in California and West Virginia. An IAT procedure involves recovery of blood lost during surgery, cleaning of this blood and reinfusion of the recovered blood into the surgery patient. IAT may eliminate the risk of alloimmunizaton, hepatitis and AIDS from transfused blood. The Company provides IAT services using standard operating procedures designed to insure strict adherence to the highest quality standards. HemaCare's IAT procedures are based on guidelines developed by the AABB and the JCAHO and comply with the requirements of applicable federal and state regulatory agencies. Discontinued Operations From 1990 through 1995, the Company, through its wholly-owned subsidiary HemaBiologics, Inc., conducted research and development activities relating to Immupath, an anti-HIV hyperimmune plasma product. In November 1995, the Company's Board of Directors decided to terminate the research and development activities. As a result of this decision, the Company established a $1 million reserve for losses during the disposal period, including $600,000 for a contingent liability related to a dispute with Medicorp, Inc. ("Medicorp"), a licensor of the research product. In July 1996, the Medicorp dispute was settled without any payment by the Company. As a result, the Company recognized a $600,000 gain on disposal of discontinued operations in the third quarter of 1996. In June 1996, the Company agreed to sell most of its research and development assets, including its FDA plasma licenses and a plasma collection center for which the Company received cash and a promissory note, collateralized by certain of the assets sold. The note was repaid in March 1997, resulting in a gain of $120,000 on disposal of discontinued operations in the first quarter of 1997. During the wind down of the research and development operations, the Company manufactured a supply of Immupath sufficient for the patients still receiving treatment for a limited period of time. There are currently two patients receiving Immupath treatments. In the fourth quarter of 1997, the Company reviewed and revised its estimate of the remaining costs of discontinued operations, including the costs to treat remaining patients and the other continuing liabilities of the discontinued operations, and recognized an additional gain on disposal of $173,000. The Company does not expect discontinued operations to have a material impact on its future operating performance. Sales to Major Customers Sales of products and services to USC/Norris Comprehensive Cancer Center and Hospital and USC University Hospital (the "USC Hospitals") comprised 16%, 18% and 16% of the Company's revenues in 1998, 1997 and 1996, respectively. Although the USC Hospitals are not under common ownership, the Company's agreements with these hospitals are interrelated. Loss of sales to the USC Hospitals could have a material, adverse impact on the Company's net income. The Citrus Valley Health Partners Hospitals accounted for approximately 13% of the Company's total 1997 sales. Competition - ------------ General The Company competes on the basis of its responsiveness to customer needs, value-based pricing and the high quality of its services and products. The Company's competitors are generally not for profit entities including the American Red Cross ("ARC"), and regional and community blood banks. Many of these competitors have greater financial, technical and personnel resources than the Company, and additional companies may enter the field, increasing competition. In addition, some larger hospitals have in-house blood collection and therapeutic apheresis service capabilities which do not compete directly with the Company, but do reduce the market for its services. To date, the ARC has aggressively responded to competition from the Company, and management believes that such competition will continue. An example is the Company's experience in St. Louis. Prior to the opening of Gateway, a blood management program initiated by the Company in late 1995, the ARC provided virtually all blood products to hospitals in the greater St. Louis area. Immediately following the opening of Gateway, the ARC decreased its price for red blood cells in excess of 10%. This price decrease materially impacted Gateway's ability to market its products and services profitably, and Gateway was subsequently sold in August 1997. In Southern California, the Los Angeles Region Blood Service of the American Red Cross (the "Los Angeles ARC") employed pricing practices which the Company alleged were in violation of antitrust laws. These pricing practices may have compelled Los Angeles ARC customers to purchase certain blood products from the ARC at higher prices than those offered by the Company, unfairly limiting the Company's ability to market its products in this region. In December 1995, the Company filed an antitrust and unfair competition complaint against the ARC with the United States District Court in the Central District of California to recover damages and secure injunctive relief. In June 1997, this suit was settled. Although the terms of the settlement are confidential, the Company believes that the settlement has improved its ability to obtain and retain blood product customers. The Company has developed several blood product and service programs in response to the needs of its customers. These include a depot system and, most recently, its BMP outsourcing program. The Company believes that its strategy of offering blood product and service programs tailored to the requirements of individual customers favorably differentiates it from other suppliers of blood products and services and that outsourcing programs provide opportunities for expansion of the Company's businesses. Management consistently reevaluates and revises its outsourcing programs to meet competitive demand. However, there can be no assurance that the Company's future outsourcing programs will be well received by hospital customers or be profitable, or that others will not successfully introduce similar programs that will compete with those of the Company. In addition, further growth may require that the Company obtain additional financing or partner with other blood product and service providers. Accordingly, there can be no assurance that the Company will be successful in marketing revised outsourcing programs or that, if successful, it will be able to obtain the funds necessary to finance such programs. Blood Products The primary competitor for the Company's single donor platelet and whole- blood component business is the ARC. Community and hospital-based blood banks also compete with HemaCare to a lesser extent. Key competitive factors in the industry include price, responsive service and quality of product. Blood Services Competitors for the Company's therapeutic blood services business are primarily regional and community blood banks and local kidney specialists (nephrologists) who supplement hemodialysis services with therapeutic apheresis services. In addition, some of the diseases that are treated by therapeutic apheresis can also be treated by other medical therapies. Since therapeutic apheresis treatment requests are often sporadic and unpredictable, most community hospitals cannot afford to equip, staff and maintain an apheresis unit. The Company's mobile service enables such hospitals to offer state-of-the-art therapeutic apheresis services to their patients on an "as needed" basis without incurring the fixed costs associated with providing these services from in-house resources. Marketing - --------- HemaCare markets its products and services as components of custom-tailored programs developed to meet the needs of specific customers. The Blood Management Program is the most recent application of this marketing strategy. The Company uses a depot system for distributing its blood products to BMP and other large volume customers which enhances convenience and product availability. The depot system provides the customer with an on- site inventory of blood products stocked by the Company under a standing order. Other marketing tools include a combination of medical education, technical and tradeshow presentations, advertising and promotional programs, in-person sales and other marketing programs directed to selected physicians, hospitals and donor groups. Human Resources - --------------- At March 1, 1999, the Company had approximately 81 full-time and 76 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 are represented by a labor union. The Company considers its relations with its employees to be good. Supplies - --------- The Company maintains relationships with numerous suppliers who provide cell separator equipment, disposables, supplies, replacement fluids, testing services and purchased blood products. Generally, the Company has experienced little difficulty in obtaining most of its equipment and supplies from its sources. However, if there were material changes in the sources of its supplies, the Company's operations could be adversely affected. Since late 1996, the Company has experienced difficulty in obtaining red blood cell products from suppliers, and the cost of products obtained has increased. Industry data indicates that HemaCare's experience reflects a nationwide decrease in the availability of red blood cell products. According to the National Blood Data Resource Center, collections of whole blood units decreased 6% between 1994 and 1997, while blood transfusions increases slightly. Whole blood donations collected at the Company's BMP donor centers provided approximately 15% of the red blood cell products sold by the Company in 1998. Although this percentage is expected to increase in 1999, the Company will continue to rely heavily on purchased red blood cells for the foreseeable future. If the Company is unable to manufacture or to purchase red blood cells at a price that exceeds its contract prices to customers, the Company's profitability will be adversely affected. The Company relies on blood donors to provide the platelets and whole blood required to produce the blood products manufactured and sold by the Company. The Company, unlike the ARC and most community blood banks, compensates platelet donors who donate at its Sherman Oaks facility thereby enhancing its ability to retain a pool of repeatedly tested platelet donors. Sales of apheresis platelets from paid donors may be prohibited by California law after December 2001. (See Government Regulation). Platelet and whole blood donors at the Company's BMP donor centers are not compensated. The Company competes directly with the American Red Cross and other blood banks 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 compensated and non-compensated donors. Albumin is the most commonly used replacement fluid in therapeutic apheresis procedures. In late 1996, a shortage of albumin arose when a major U.S. manufacturer was required by regulatory agencies to temporarily cease operations. This manufacturer has not yet fully resumed its operations, and albumin continues to be in short supply. As a result of the shortage, the price of albumin to HemaCare has more than doubled. Government Regulation - ---------------------- Providers of blood products and services are regulated by the FDA and state licensing authorities, as well as being subject to accreditation by the AABB. An FDA Establishment License allows the license holder to sell licensed products across state lines. In contrast, an FDA registration permits sales of blood products only within a state. Most of the products produced at the Company's Sherman Oaks location are licensed for interstate distribution under the Company's Food and Drug Administration Establishment license. In 1998, the Maine center operated under the FDA registration of Maine Medical Center. Effective January 1999, the Maine center is authorized to distribute products intrastate under its own FDA registration. Other east coast centers operate under the FDA registration of the sponsoring hospital, and accordingly, may only distribute products collected as directed by the sponsoring hospital. It is the Company's intention to extend its FDA licensure to certain CBS locations. In response to the potential dangers of blood borne infections such as hepatitis and HIV, the FDA now requires that blood products be manufactured in accordance with Current Good Manufacturing Practices ("cGMPs") which have long been applied to the manufacturing of pharmaceuticals. HemaCare has maintained a near perfect regulatory record for 20 years. This record, along with its licenses and accreditations, are critical to the Company's ability to attract and retain customers who want to decrease their regulatory compliance burden by outsourcing all or a portion of their blood-related activities. The Company's licensed and accredited laboratory performs the various tests required by the FDA and State of California to ensure the purity, potency and quality of the blood products that it sells in California. This laboratory is staffed by state licensed medical technologists and laboratory technicians. Testing for products collected in other locations is outsourced to FDA licensed laboratories under contract arrangements. The Company carefully qualifies its outsource vendors and regularly audits their operations to assure compliance with stated standards. Since 1976, California law has prohibited the infusion of blood products into patients if the donors of those products were paid unless, in the opinion of the recipient's physician, blood from a non-paid donor was not immediately available. Apheresis platelet products obtained from paid donors, including the Company's Sherman Oaks center's paid donors, are exempted from this law by a state statute passed in late 1994 which contains a "sunset" provision. Unless a new exemption is obtained, the existing exemption will expire under its sunset provision on December 31, 2001, which could have a material adverse affect on the Company's revenue and net income. The Company is evaluating a number of available options with regard to the expiration of the extension. State and federal laws set forth antikickback and self-referral prohibitions and otherwise regulate financial relationships between blood banks and hospitals, physicians and other persons who refer business to them. While the Company believes its present operations comply with applicable regulations, there can be no assurance that future legislation or rule making, or the interpretation of existing laws and regulations will not prohibit or adversely impact the delivery by HemaCare of its services and products. Joshua Levy, M.D., medical director of the Company and a shareholder, through his private practice, treats patients who require therapeutic services. Sales by the Company to unaffiliated hospital customers for therapeutic services provided to Dr. Levy's patients amounted to approximately 4% ($589,000), 5% ($584,000) and 6% ($675,000) of the Company's total revenues for 1998, 1997 and 1996, respectively. There are no agreements between Dr. Levy, or the Company, and the Company's hospital customers that require the hospitals to select HemaCare to provide therapeutic services to the hospital's patients. Amendments to the Federal self-referral laws and related regulations which became effective in 1995 could restrict the Company's ability to provide therapeutic services to Dr. Levy's patients who are covered by Medicare or MediCal. It is estimated that revenues from these patients represented approximately 2% ($295,000)of the Company's 1998 revenues. These regulations are complex, and in early 1996, the Company requested a clarification of their application to its business from Health Care Financing Administration ("HCFA"). To date, the Company has not received a response to this request. However, in January 1998, proposed new regulations were issued for comment. The proposed regulations do not specifically address therapeutic apheresis services, and the Company has requested a revision of these regulations to provide a clear exemption for these services. The comment period for the proposed regulations ended in May 1998, but the new regulations have not yet been issued. If the new regulations do not provide an exemption for therapeutic apheresis services, the Company could lose the future revenue from its services for Dr. Levy's Medicare and MediCal patients. Health care reform is continuously under consideration by lawmakers, and it is not certain as to what changes may be made in the future regarding health care policies. However, policies regarding reimbursement, universal health insurance and managed competition may materially impact the Company's operations. Professional and Product Liability Insurance - -------------------------------------------- The nature of the Company's business is such that it may be subject to substantial liabilities for personal injury. There can be no assurance that potential insurance claims will not exceed present coverage or that 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. HemaCare has medical professional liability insurance in the amount of $2,000,000 for a single occurrence and $5,000,000 in the aggregate per year. California law and the laws of virtually all other states classify the provision and use of whole blood, plasma and blood products for the purpose of injections and transfusions into human beings as a service rather than the sale of a product. Therefore, the Company does not believe it is subject to product liability claims as a result of injuries arising out of the therapeutic infusion of its blood products and does not intend to obtain product liability insurance at this time. Glossary - --------- Albumin - A protein based fluid derived from human plasma, commonly used to replace the plasma removed in a plasma exchange or cell depletion therapeutic apheresis procedure. Antibodies - Protective substances, protein in nature, circulating in body fluids as the result of exposure to a specific antigen. Chemically active against that antigen only. Autoimmune Diseases - Those diseases in which the patient's immune system has become overly active to the point where it produces antibodies which are directed against its own tissues or cells. Autologous - A blood product obtained from a patient and subsequently reinfused into that patient. Components - The products manufactured from whole blood donations, including red blood cells, fresh frozen plasma and cryoprecipitate. Cryopreservation - The process of freezing tissues or cells, usually in protective fluids, and storage at extremely low temperatures in a frozen state (e.g., -70 degrees C or colder). Human Immunodeficiency Virus (HIV) - The infectious agent of the disease commonly referred to as Acquired Immune Deficiency Syndrome (AIDS). Immunoadsorbant Column - A device through which plasma is passed in order to separate or remove certain harmful components such as immune complexes. Plasma - The liquid portion of whole blood; composed of a mixture of soluble proteins including antibodies, minerals and nutrients. Platelets - One of the cellular components of blood involved in the blood clotting process. Platelet Apheresis - The process of removing blood from a donor, separating it into its various components and retaining the concentrated platelets which will then be transfused into a patient deficient in platelets. The remaining blood components are returned to the donor. Stem Cells - Cells which originate in the bone marrow and mature into the different cellular components of blood. Frequently transfused into certain cancer patients in order to facilitate regeneration of blood components after bone marrow has been purposely destroyed by chemotherapy or radiation. Therapeutic Apheresis - The application of apheresis technology to the clinical treatment of autoimmune diseases and blood cell disorders by removing selected, abnormal components or cells and returning all other components. ITEM 2. PROPERTIES. The Company occupies a 12,000-square foot facility in Sherman Oaks, California, where it maintains its corporate office and operates a platelet apheresis center, a blood bank laboratory, a manufacturing facility for whole blood components and a distribution center. On August 1, 1998, the lease on this space was extended for a four-year period ending October 31, 2002. The USC Blood Donor Center occupies a 1,600 square foot facility located in Los Angeles, California, under a lease with a rolling one year term. The Citrus Valley Blood Donor Center, which was closed in July 1998, occupied a 2,300 square foot facility located in Covina, California. The Company is currently seeking to sublease this space. Under its terms, the Citrus Valley Center lease expires in April 2003, however, HemaCare may terminate this lease any time after April 2000, under certain circumstances. The Company assumed several existing leases in connection with the October 23, 1998 purchase of the assets of Coral Therapeutics, Inc. The Company now occupies a 2,121 square foot donor center facility in South Portland, Maine and a 1,278 square foot office space in Yonkers, New York. The Maine lease expires September 30, 1999 and the New York lease expires August 31, 2001. The St. Vincent BMP Donor Center occupies a 879 square foot facility located in St. Vincent Hospital in Worcester, Massachusetts under the terms of the related BMP agreement. The UNC Blood Donor Center is located in a 1,200 square foot facility in the UNC Hospitals. The lease on this space term is concurrent with the term of the BMP agreement. ITEM 3. LEGAL PROCEEDINGS. In December 1995, the HemaCare filed an antitrust and unfair competition complaint to recover damages and secure injunctive relief against the American Red Cross ("ARC") in connection with ARC pricing practices in Southern California. The Company believed that these pricing practices may have compelled Southern California ARC customers to purchase certain blood products from the ARC at prices higher than those offered by the Company. In June 1997, this suit was settled. Although the terms of the settlement are confidential, the Company believes that the settlement may ultimately improve its ability to obtain and retain blood product customers. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market for Common Stock - ----------------------- Effective November 2, 1998, the Company's common stock is quoted on the OTC Bulletin Board under the symbol HEMA. Prior to that date, the Company's common stock was listed on the Nasdaq Small Cap Market ("Nasdaq") under the same symbol. The following table sets forth the range of high and low closing bid prices of the Common Stock, as reported by Nasdaq and the Nasdaq market system, for the quarters ended March 31, June 30, September 30 and December 31, 1998 and 1997. These prices reflect inter-dealer quotations, without retail markups, markdowns or commissions, and do not necessarily represent actual transactions.
1998 1997 Quarter ended High Low High Low - -------------- ---- ---- ---- ---- March 31 $0.78 $0.38 $3.13 $2.03 June 30 $0.88 $0.38 $2.50 $1.06 September 30 $0.53 $0.28 $1.56 $0.75 December 31 $0.81 $0.13 $0.97 $0.38
No cash dividends had been paid as of March 1, 1999. The Company does not anticipate paying cash dividends in the foreseeable future. As of March 1, 1999, there were approximately 334 holders of record of the Company's Common Stock. On October 22, 1998, the Company issued 450,000 shares of its Series B Senior Convertible Preferred Stock ("Series B Preferred Shares") to Comdisco, Inc. ("Comdisco") in connection with the acquisition from Comdisco of assets of Coral Therapeutics, Inc. ("Coral"). The Series B Preferred Shares are convertible into 500,000 shares of HemaCare Common Stock, at the option of the holder, one year after issuance without payment of further consideration. In addition, and as part of the asset purchase, HemaCare (i) has entered into non-competition agreements with certain former managers of Coral pursuant to which the Company expects to issue 60,000 common shares and warrants to purchase 90,000 shares of Common stock at an exercise price per share of $0.90 per share, and (ii) expects to issue warrants for 35,000 shares of common stock at an exercise price of $0.31 per share to consultants who assisted in the acquisition. The warrants to be issued will expire in October 2003. The Company has relied Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D, thereunder, in connection with the issuance of these securities. 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.
Year Ended December 31, (In Thousands, except Per Share Data) 1998 1997 1996 1995 1994 ------ ------- ------ ------- ------ Revenues........................ $13,124 $11,101 $10,921 $10,783 $10,847 Operating profit................ 3,122 1,907 1,234 2,559 2,963 Income (loss) from continuing operations..................... 745 37 (1,090) 480 676 Discontinued Operations: Loss from discontinued operations..................... - - - (902) (2,964) Gain (loss) on disposal of discontinued operations..... - 293 600 (3,114) - Net income (loss)............... 745 330 (490) (3,536) (2,288) Basic Per Share Amounts: - ------------------------- Income (loss) from continuing operations..................... $ 0.10 $ 0.01 $ (0.17) $ 0.08 $ 0.13 Income (loss) from discontinued operations..................... - 0.04 0.09 (0.70) (0.59) Net income (loss)............... 0.10 0.05 (0.08) (0.62) (0.45) Diluted Per Share Amounts: - --------------------------- Income (loss) from continuing operations..................... 0.10 0.01 (0.17) 0.08 0.13 Income (loss) from discontinued operations..................... - 0.04 0.09 (0.69) (0.57) Net income (loss)............... 0.10 0.05 (0.08) (0.61) (0.44) Total assets.................... $ 7,662 $ 4,384 $ 4,776 $ 4,456 $ 6,289 Long-term debt and capital lease obligations, net of current portion........................ 1,118 209 503 649 287 Shareholders' equity............ 3,291 2,402 2,023 1,226 3,900
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. All comparisons within the following discussions are to the previous year. In October 1998, the Company, through its subsidiary Coral Blood Services, Inc. ("CBS"), acquired existing blood products and services operations in the eastern United States. These operations are primarily comprised of blood management programs and other blood services provided to hospitals and medical centers. Presently, CBS is providing services to its customers under interim arrangements, while negotiating new contractual agreements. The Company operates five blood management programs. The University of Southern California ("USC") program, initiated in 1996, and four east coast programs which were operated by Coral Therapeutics, Inc. prior to October 1998. The east coast programs are Dartmouth-Hitchcock Medical Center ("DHMC"), Maine Medical Center ("MMC"), St. Vincent Hospital ("St. Vincent") and University of North Carolina ("UNC"). In late 1995, the Company initiated the Gateway Community Blood Program ("Gateway") located in St. Louis, Missouri, and in October 1996 the Citrus Valley Health Partners ("Citrus Valley") Blood Management Program located in southern California, commenced. Both the Gateway and Citrus Valley BMPs failed to meet the Company's profitability criteria. Gateway was sold in August 1997, and the Citrus Valley contract was terminated in July 1998. The above programs are collectively referred to as the "Blood Management Programs" or "BMPs" in the following discussions. Revenues - -------- Total revenues increased 18% ($2,023,000) in 1998, compared to an increase of 2% ($180,000) in 1997. The 1998 increase was due to higher Regional Blood Services ($1,595,000) and Blood Products ($941,000) revenue, partially offset by a decrease in Blood Management Program revenue. The acquisition of CBS contributed $1,366,000 of this increase. The 1997 increase was due primarily to higher Blood Management Program and Regional Blood Services revenue, offset by lower Regional Blood Products revenue. Blood Management Programs Blood Management Program revenue decreased by $513,000 in 1998 and increased by $1,388,000 in 1997. The 1998 decrease was due primarily to the disposition of Gateway ($587,000) and termination of the Citrus Valley contract ($703,000), partially offset by the addition of the CBS BMPs in ($771,000). The increase in 1997 Blood Management Program revenue was related to Citrus Valley, which commenced in the third quarter of 1996. Both Gateway and Citrus Valley were terminated because they failed to meet the Company's profitability criteria. Regional Operations Blood Products Blood products (apheresis and whole blood component) revenues increased 36% ($941,000) in 1998 after decreasing 41% ($1,789,000) in 1997. The 1998 increase resulted from an increase in the volume of apheresis platelet sales, partially offset by a small decrease in the sales price of these products, and a decrease in the volume of whole blood components sold. The decrease in 1997 revenue was due primarily to the conversion of the Citrus Valley business to a blood management program. In addition, the volume and sales prices of apheresis platelets and whole blood components sold to other customers decreased in 1997. Blood Services Regional Blood Services revenue increased by 36% ($1,595,000) in 1998 and 15% ($581,000) in 1997. The 1998 increase resulted from sales of albumin, the addition of CBS's operations ($565,000) and a higher volume of southern California therapeutic procedures. In 1997, revenue increased due to a higher volumes of southern California therapeutic apheresis procedures and donor testing. Albumin, a protein replacement fluid, has been in short supply since regulatory agencies required the shut down of a major manufacturing facility in late 1996. In 1998, the Company was able to purchase albumin at favorable prices and sell a portion of this albumin to non-hospital customers. The volume of southern California therapeutic apheresis procedures increased 8% in 1998 and 11% in 1997. Revenue per procedure increased 1% in 1998 and 8% in 1997. The 1997 price increase resulted from passing through a portion of the increased cost of albumin. The choice of therapeutic apheresis rather than an alternative treatment for a particular diagnosis often depends on general acceptance by the medical community and the willingness of third-party payors to reimburse hospitals for the cost of this treatment. Although HemaCare enjoys a large share of the southern California therapeutics market, the Company reduced its basic therapeutic procedure fees to retain a number of its high volume customers in 1997. There was no change in the basic fee in 1998. The volume of donor tests remained constant in 1998, while the average price per unit tested increased 7%. In 1997, the Company expanded its outside donor testing services, more than tripling the number of units tested for customers in 1996. The increases in testing volume in 1997 were partially offset by decreases in the average price per unit tested. Operating Profit - ---------------- Operating profit as a percentage of revenue ("operating profit margin") increased 7% in 1998 and 6% in 1997. Both increases resulted primarily from improved performance of Blood Management Programs and decreased sales of low profit margin whole blood components. Blood Management Programs Blood Management Programs generated profit of $312,000 in 1998 compared to losses of $210,000 and $963,000 in 1997 and 1996, respectively. The 1998 operating profit resulted from improved performance of the USC program and elimination of operating losses from Gateway and Citrus Valley. Operating profit from the USC program increased in 1998 due both to more efficient donor center operations and a lower cost of apheresis products produced by the Sherman Oaks operation and sold to the USC hospitals. Of the losses, $316,000 in 1997 and $1,106,000 in 1996 were related to Gateway's operations which were sold in August 1997. In addition, the Citrus Valley BMP, which failed to achieve profitability, was terminated in July 1998. In October 1998, CBS took over operation of four existing BMP's. These operations contributed to operating profit in the fourth quarter of 1998. Regional Operations Blood Products The operating profit margin on blood product sales increased to 32% in 1998, from 27% in 1997 and 22% in 1996. Both increases were due primarily due to a higher profit margin on apheresis platelet sales and decreased sales of low margin whole blood component products. Apheresis platelet profit margin increased in 1998 and 1997 as a result of lower per unit production costs, partially offset by lower per unit sales prices. In late 1996, the price of red blood cells began to increase and their availability and profit margin decreased. As a result, Regional Blood Products revenue from components, principally red blood cells, as a percentage of total Regional Blood Products revenue, decreased to 8% in 1998, from 17% in 1997 and 36% in 1996. A portion of the 1997 decrease in Regional Operations sales of components also resulted from the conversion of Citrus Valley sales to a BMP arrangement. Blood Services The gross profit margin for the blood services decreased by 4% in 1998 and 2% in 1997. The 1998 decrease was due to the mix of services provided. In particular, the gross profit margin on albumin is typically lower than on therapeutic apheresis services. In 1997, the decrease was due to increased cost of albumin used in therapeutic procedures. The average price per therapeutic procedure increased in 1997 in response to an increase in the cost of albumin, a replacement fluid used in most therapeutic procedures. General and Administrative Expenses - ----------------------------------- General and administrative expenses increased 18% ($356,000) in 1998 and decreased 14% ($326,000) in 1997. The 1998 increase was due to severance payments, compensation cost associated with forgiveness of a related-party loan, higher CEO compensation and higher legal, director and consulting fees. In addition, 1997 general and administrative expenses were reduced by a $71,000 recovery of previously expensed legal fees related to the Company's lawsuit against the American Red Cross, which was settled in June 1997. Discontinued Operations - ----------------------- From 1990 through 1995, the Company, through its wholly-owned subsidiary HemaBiologics, Inc., conducted research and development activities relating to Immupath, an anti-HIV hyperimmune plasma product. In November 1995, the Company's Board of Directors decided to terminate the research and development activities. As a result of this decision, the Company established a $1 million reserve for losses during the disposal period, including $600,000 for a contingent liability related to a dispute with Medicorp, Inc. ("Medicorp"), a licensor of the research product. In July 1996, the Medicorp dispute was settled without any payment by the Company. As a result, the Company recognized a $600,000 gain. In June 1996, the Company agreed to sell most of its research and development assets, including its FDA plasma licenses and a plasma collection center for which the Company received cash and a promissory note, collateralized by certain of the assets sold. The note was repaid in March 1997, resulting in a gain of $120,000 on disposal of discontinued operations in the first quarter of 1997. During the wind down of the research and development operations, the Company manufactured a supply of Immupath sufficient for the patients still receiving treatment for a limited period of time, and all remaining HIV positive plasma was disposed of in 1997. There are currently two patients receiving Immupath treatments. In the fourth quarter of 1997, the Company reviewed and revised its estimated costs of discontinued operations, including on-going cost of patient treatment and other continuing liabilities related to discontinued operations, and recognized an additional gain of $173,000. The Company does not expect the discontinued operations to have a material impact on its future operating performance. Liquidity and Capital Resources - ------------------------------- At December 31, 1998, the Company had cash and short-term investments of $1,660,000 and $600,000 of short-term debt outstanding with the commercial bank. In February 1999, the commercial bank increased the Company's line of credit borrowing limit to $1.2 million and converted the $600,000 of debt to a four year term loan due in 2003, at an interest rate of prime plus 1%. Under the terms of the credit line agreement, which is in effect until May 31, 1999, the Company may borrow up to 70% of eligible accounts receivable, up to a maximum of $1.2 million and must maintain certain ratios. The credit line bears interest at prime plus 0.5%. The Company was in compliance with all covenants of its borrowing agreement at December 31, 1998, and is the process of renewing the credit agreement. Effective November 2, 1998, the Company's common stock is quoted on the OTC Bulletin Board. Prior to that date, the Company's common stock was listed on the Nasdaq Small Cap Market ("Nasdaq"). Issuers listed on the Nasdaq SmallCap Market are required to maintain a minimum bid price of $1.00, and the Company's common stock has been trading below the minimum price for some time. Despite requests to Nasdaq for an exception to the minimum bid price listing requirement, on October 29, 1998, the Company was informed that its stock would be delisted from the Nasdaq SmallCap market effective the end of that day. Although the Company's common stock is quoted on the OTC Bulletin Board, the liquidity of the Company's common stock and the Company's ability to raise capital may be impaired by the Nasdaq delisting. The Company's blood products and services businesses, other than certain blood donor center operations established for the Blood Management Programs ("Centers"), are profitable and cash flow positive. The Company periodically evaluates the profitability and viability of each of its operating units. As the result of such an evaluation, the Company sold Gateway's unprofitable St. Louis-based operations in August 1997 and terminated the Citrus Valley BMP in July 1998. The Company is providing services to most of its east coast customers under interim arrangements, while contractual agreements are negotiated and finalized. The Company believes that contractual agreements will be satisfactorily concluded with most of these customers. However, there can be no assurance that satisfactory contracts can be negotiated with all major customers, and the loss of one or more major customers could have an adverse effect on the Company's revenue and operating profit. Since 1976, California law has prohibited the infusion of blood products into patients if the donors of those products were paid unless, in the opinion of the recipient's physician, blood from a non-paid donor was not immediately available. Apheresis platelet products obtained from paid donors, including the Company's Sherman Oaks center's paid donors, are exempted from this law by a state statute passed in late 1994 which contains a "sunset" provision. Unless a new exemption is obtained, the existing exemption will expire under its sunset provision on December 31, 2001, in the event the existing exemption is not extended. The Company is evaluating a number of alternatives with regard to continuing its California based apheresis platelet business after the year 2001. However, there can be no assurance that these initiatives will be successful. Should the Company be unable to continue to sell apheresis platelets collected from paid donors, the Company's revenue and operating profit could be materially adversely effected. Joshua Levy, M.D., medical director of the Company and a shareholder, treats patients through his private practice, who require therapeutic services. Amendments to the Federal self-referral laws and related regulations which became effective in 1995 could restrict the Company's ability to provide therapeutic services to Dr. Levy's patients who are covered by Medicare or MediCal. It is estimated that revenues from these patients represented approximately 2% ($295,000), 2.6% ($292,000) and 3%($337,000) of the Company's 1998, 1997 and 1996 revenues, respectively. New regulations which have been proposed but not yet issued may provide an exemption for therapeutic apheresis services. If the new regulations do not provide an exemption for therapeutic apheresis services, the Company could lose the revenue from its services for Dr. Levy's Medicare and MediCal patients. (See "Government Regulation.") Management is evaluating opportunities to develop and implement new outsourcing models, including its Blood Management Program. Because of the increase in the cost of acquiring red blood cells and their decreasing availability, it is likely that future HemaCare outsourcing arrangements will either involve fixed price supply contracts for these products or will focus on providing specialized donation services, apheresis based products and services, and other technology based blood therapies. However, development and introduction of a revised Blood Management Program model or other outsourcing programs may require that the Company obtain additional financing or partner with other blood product and service providers. There can be no assurance that the Company will be successful in developing and marketing its outsourcing programs, that it will be able to obtain the funds necessary to finance such programs, that it will be able to obtain a supply of red blood cells at an economic price or that required partnering relationships can be developed. The Company anticipates that positive cash flow from its operations and its cash and investments on hand will be sufficient to provide funding for its needs during the next 12 months, including (i) anticipated operating deficits of certain Centers, (ii) the remaining costs of its discontinued operations and (iii) other working capital requirements, including capital and operating lease commitments. Year 2000 Disclosure - -------------------- The Company has developed and is implementing a comprehensive program to address year 2000 issues. The program considers the effect of the Year 2000 on the Company's internal systems, customers, products and services, production systems, and suppliers and other critical business partners. Implementation of the Company's plan is substantially complete, and the Company believes that all identified potential Year 2000 issues have been effectively resolved. The cost to identify and resolve Year 2000 issues was not material to the Company's financial results and has been expensed as incurred. Management does not believe that the there will be a significant disruption to the Company's business due to Year 2000 issues. However, the Company has begun contingency planning to address any situations which may arise in which the planning of the Company or third parties prove to be inadequate, and where practical alternatives are available. There can be no assurance that the Company's Year 2000 program or the programs of critical business partners will be successful, and failure could have a material adverse affect on the Company's business and results of operations. 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 effects of discontinued operations, demand for the Company's products and services, and the anticipated outcome of contingent claims against the Company. 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 relating to the ability of the Company to develop and market profitable outsourcing programs, obtain additional financing, to achieve profitability in certain Blood Management Centers, to continue its paid donor business, to retain existing customers, to improve the profitability of the Company's other operations, to successfully negotiate contracts with its east coast customers, to expand its operations, to renew and comply with the covenants under its bank line of credit, to effectively compete against the ARC and other competitors, and the effects of the Year 2000. Each of these risks and uncertainties as well as others are discussed in greater detail in the preceding paragraphs of this Management's Discussion and Analysis of Financial Condition and Results of Operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Index to Financial Statements and Schedules appears on page F-1, the Report of Independent Public Accountants appears on F-2, and the Consolidated Financial Statements and Notes to Consolidated Financial Statements appear on pages F-3-F-16. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by this reference as if set forth in full. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by this reference as if set forth in full. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is set forth under the caption "Principal Shareholders" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by this reference as if set forth in full. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is set forth under the caption "Certain Transactions" in the Company's definitive Proxy Statement to be filed with the Securities and Exchange Commission and is incorporated herein by this reference as if set forth in full. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. The following are filed as part of this Report: (a) 1. Financial Statements An index to Financial Statements and Schedules appears on page F-1. (a) 2. Financial Statement Schedules The following financial statement schedule is filed herewith: Schedule II - Valuation and Qualifying Accounts All other 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. (a) 3. Exhibits The following exhibits listed are filed or incorporated by reference as part of this Report. 2.1 Amended and Restated Asset Purchase Agreement between the Registrant, HemaBiologics, Inc. (a wholly owned subsidiary of the Registrant) and Atopix Pharmaceuticals Corporation, dated June 26, 1996 incorporated by reference to Exhibit 2.1 to Form 10-Q of the Registrant for the quarter ended June 30, 1996. 2.2 Asset Purchase Agreement between the Registrant, Gateway Community Blood Program and Haemonetics Corporation, dated August 1, 1997-- incorporated by reference to Exhibit 2.1 to Form 10-Q of the Registrant for the quarter ended September 30, 1997. 3.1 Restated Articles of Incorporation of the Registrant--incorporated by reference to Exhibit 3.1 to Form 10-K of the Registrant for the year ended December 31, 1995. 3.2 Bylaws of the Registrant, as amended--incorporated by reference to Exhibit 3.1 to Form 10-Q of the Registrant for the quarter ended March 31, 1998. 4.1 Warrant Agreement between the Registrant and Medicorp Inc. dated February 17, 1993--incorporated by reference to Exhibit 4 to the Current Report on Form 8-K of the Registrant dated February 17, 1993. 4.2 Form of Warrant Agreement between the Registrant and each of the following consultants: British Far East Holdings, Ltd., Joseph T. McDonald and E. Keene Wolcott dated September 30, 1994-- incorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended September 30, 1994. 4.3 Warrant Agreement between the Registrant and Torrey Pines Securities, Inc., dated April 8, 1994--incorporated by reference to Exhibit 4.2 to Form 10-Q of the Registrant for the quarter ended March 31, 1994. 4.4 Amendment to Warrant Agreement between the Registrant and Torrey Pines Securities dated April 3, 1995--incorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended March 31, 1995. 4.5 Warrant Agreement between the Registrant and M.A. Levy and Associates dated March 1, 1995--incorporated by reference to Exhibit 4.7 to Form 10-K of the Registrant for the year ended December 31, 1994. 4.6 Warrant Agreement between the Registrant and Joseph T. McDonald dated November 1, 1996--incorporated by reference to Exhibit 4.9 to Form 10-K of the Registrant for the year ended December 31, 1996. 4.7 Rights Agreement between the Registrant and U.S. Stock Transfer Corporation dated March 3, 1998--incorporated by reference to Exhibit 4 to Form 8-K of the Registrant dated March 5, 1998. 4.8 Amended Certificate of Determination, dated March 18. 1998-- incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the year ended December 31, 1997. 4.9 Certificate of Determination of the Registrant's Series B Senior Convertible Preferred Stock between the Registrant and Comdisco Health Care Group dated October 23, 1998--incorporated by reference to Exhibit 4.1 of Form 8-K of the Registrant dated November 5, 1998. 4.10 Registration Rights of Shareholders' incorporated by reference to Exhibit 4.9 to the Current Report on Form 8-K of the Registrant dated August 19, 1996. 10.1 1986 Employee Stock Option Plan, as amended and restated through October 1994--incorporated by reference to Exhibit 10.4 to Form 10-Q of the Registrant for the quarter ended September 30, 1994. 10.2 1996 Stock Incentive Plan, as amended, of the Registrant-- incorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended September 30, 1996. 10.3 Office Building Lease dated August 21, 1998 between the Registrant and Tar Asset Addison Place, L.P.--incorporated by reference to Form 10-Q for the quarter ended September 30, 1998. 10.4 Employment Agreement between Harold I. Lieberman and the Registrant, dated September 19, 1988-- incorporated by reference to Exhibit 10.4 to Form 10-K of the Registrant for the year ended December 31, 1994. 10.5 Amendment to Employment Agreement between the Registrant and Harold I. Lieberman, dated September 19, 1989--incorporated by reference to Exhibit 10.5 to Form 10-K of the Registrant for the year ended December 31, 1994. 10.6 Revolving Credit Agreement between the Registrant and Bank Leumi USA, dated February 5, 1999 and related Promissory Note. 10.7 Promissory Note between the Registrant and Bank Leumi USA, dated February 5, 1999 10.8 Promissory Note to HemaBiologics, Inc., a wholly owned subsidiary of the Registrant, from Joshua Levy dated January 1, 1996 -- incorporated by reference to Exhibit 10.10 to Form 10-K of the Registrant for the year ended December 31, 1995. 10.9 Pledge Agreement between HemaBiologics, Inc., a wholly owned subsidiary of the Registrant, and Joshua Levy dated January 1, 1996 -- incorporated by reference to Exhibit 10.11 to Form 10-K of the Registrant for the year ended December 31, 1995. 10.10 Loan Reimbursement Agreement between HemaBiologics, Inc., a wholly owned subsidiary of the Registrant, and Joshua Levy dated January 30, 1998--incorporated by reference to Exhibit 10.10 to Form 10-K of the Registrant for the year ended December 31, 1997. 10.11 Settlement Agreement between the Registrant and Medicorp, Inc. -- incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Registrant dated July 19, 1996. 10.12 Foreclosure Sale Agreement between the Registrant and Comdisco Health Care Group, Inc dated October 23, 1998--incorporated by reference to Exhibit 2.1 of Form 8-K of the Registrant dated November 5, 1998. 10.13 Employment agreement between the Registrant and William D. Nicely dated May 27, 1998--incorporated by reference to Form 10-Q for the quarter ended June 30, 1998. 11 Computation of earnings (loss) per common equivalent share. 21 Subsidiaries of the Registrant 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule (b) Reports on Form 8-K. On November 5, 1998, the Company filed a Report on Form 8-K dated October 22, 1998. The Company reported under Item 2 that the Company acquired the assets of Coral Therapeutics, Inc. for Coral's secured lender. On December 30, 1998, the Company filed an amended Report on Form 8-K/A dated October 22, 1998. The Company reported under Item 7 the financial statements of Coral Therapeutics and pro forma financial information of HemaCare Corporation and Coral Therapeutics, Inc. 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. HEMACARE CORPORATION Dated: March 31, 1999 \s\ Sharon C. Kaiser ---------------------------- Sharon C. Kaiser, 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 31st day of March, 1999. Signature Title \s\ Alan C. Darlington Alan C. Darlington - -------------------------- Chairman of the Board \s\ William D. Nicely William D. Nicely - -------------------------- Chief Executive Officer and Director (Principal Executive Officer) \s\ Sharon C. Kaiser Sharon C. Kaiser - -------------------------- Vice President, Finance, Chief Financial Officer (Principal Financial and Accounting Officer) \s\ Charles R. Schwab, Jr. Charles R. Schwab, Jr. - -------------------------- Director \s\ Jay Steffenhagen Jay Steffenhagen - -------------------------- Director Index to Consolidated Financial Statements and Schedules Item 14(a)(1) and (2) Sequential Page Number ---------- Report of Independent Public Accountants...................... F-2 Consolidated balance sheets at December 31, 1998 and December 31, 1997........................................ F-3 For the years ended December 31, 1998, 1997 and 1996: Consolidated statements of operations..................... F-4 Consolidated statements of shareholders' equity........... F-5 Consolidated statements of cash flows..................... F-6 Notes to consolidated financial statements................ F-7 Report of Independent Public Accountants on Financial Statement Schedule........................................... S-1 Schedule II - Valuation and Qualifying Accounts............... S-2 All other 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 INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of HemaCare Corporation: We have audited the accompanying consolidated balance sheets of HemaCare Corporation (a California corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HemaCare Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP ---------------------------- ARTHUR ANDERSEN LLP Los Angeles, California March 25, 1999 F-2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HEMACARE CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1998 1997 ------------- ------------ ASSETS Current assets: Cash and cash equivalents.................... $ 1,372,000 $ 1,249,000 Marketable securities........................ 288,000 363,000 Accounts receivable, net of allowance for doubtful accounts - $596,000 (1998) and $81,000 (1997).............................. 3,038,000 1,561,000 Product inventories.......................... 87,000 63,000 Supplies..................................... 604,000 341,000 Prepaid expenses............................. 160,000 123,000 Note receivable from related party - current. 24,000 24,000 ------------- ------------- Total current assets................ 5,573,000 3,724,000 Plant and equipment, net of accumulated depreciation and amortization of $1,869,000 (1998) and $1,690,000 (1997)...... 1,289,000 585,000 Goodwill, net of accumulated amortization of $11,000...................................... 742,000 - Note receivable from related party - non-current.................................. 49,000 65,000 Other assets................................... 9,000 10,000 ------------- ------------- $ 7,662,000 $ 4,384,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................. $ 1,414,000 $ 659,000 Accrued payroll and payroll taxes............ 802,000 493,000 Accrued professional fees.................... 173,000 130,000 Other accrued expenses....................... 418,000 236,000 Current obligations under capital leases..... 203,000 140,000 Current notes payable........................ 109,000 - Reserve for discontinued operations.......... 110,000 115,000 ------------- ------------- Total current liabilities........... 3,229,000 1,773,000 Obligations under capital leases, net of current portion........................... 627,000 209,000 Notes payable, net of current portion.......... 491,000 - Other long-term liabilities.................... 24,000 - Commitments and contingencies.................. Shareholders' equity: Preferred stock no par value - 5,000,000 shares authorized, 450,000 issued and outstanding in 1998......................... 75,000 - Common stock, without par value - 20,000,000 shares authorized, 7,281,120 issued and outstanding in 1998 and 7,190,710 in 1997.. 13,584,000 13,515,000 Accumulated deficit.......................... (10,368,000) (11,113,000) ------------- ------------- Total shareholders' equity.......... 3,291,000 2,402,000 ------------- ------------- $ 7,662,000 $ 4,384,000 ============= =============
The accompanying notes are an integral part of these consolidated balance sheets. F-3 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998 1997 1996 ------------ ------------ ------------ Revenues: Blood management programs......... $ 3,592,000 $ 4,105,000 $ 2,717,000 Regional operations Blood products.................. 3,530,000 2,589,000 4,378,000 Blood services.................. 6,002,000 4,407,000 3,826,000 ------------- ------------- ------------ Total revenue................... 13,124,000 11,101,000 10,921,000 Operating costs and expenses: Blood management programs......... 3,280,000 4,315,000 3,680,000 Regional operations Blood products.................. 2,394,000 1,879,000 3,402,000 Blood services.................. 4,328,000 3,000,000 2,605,000 ------------- ------------- ------------ Total operating costs and expenses...................... 10,002,000 9,194,000 9,687,000 ------------- ------------ ------------ Operating profit................ 3,122,000 1,907,000 1,234,000 General and administrative expense.. 2,354,000 1,998,000 2,324,000 Gain on sale of Gateway Community Blood Program..................... - 128,000 - ------------- ------------- ------------ Income (loss) from continuing operations before income taxes.... 768,000 37,000 (1,090,000) Provision for income taxes.......... (23,000) - - ------------- ------------- ------------ Income (loss) from continuing operations........................ 745,000 37,000 (1,090,000) Discontinued operations: Gain from disposal of discontinued operations........................ - 293,000 600,000 ------------- ------------- ------------ Net income (loss)............... $ 745,000 $ 330,000 $ (490,000) ============= ============= ============ Basic and diluted per share amounts: Income (loss) from continuing operations...................... $ 0.10 $ 0.01 $ (0.17) Income from discontinued operations...................... - 0.04 0.09 ------------- ------------- ------------ Net income (loss)............... $ 0.10 $ 0.05 $ (0.08) ============= ============= ============ Weighted average shares outstanding - basic............................ 7,268,000 7,189,000 6,350,000 ============= ============= ============ Weighted average shares oustanding - dilutive......................... 7,373,000 7,205,000 6,350,000 ============= ============= ============
The accompanying notes are an integral part of these consolidated financial statements. F-4 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Preferred Stock Common Stock Accumulated Shares Amount Shares Amount Deficit Total -------- ---------- ---------- ------------ ------------- ----------- Balances at December 31, 1995.. - $ - 5,911,285 $12,179,000 $(10,953,000) $ 1,226,000 Exercise of stock options and warrants........... - - 53,750 107,000 - 107,000 Issuance of common stock, net......... - - 1,200,000 1,136,000 - 1,136,000 Issuance of common stock for employee 401(k) and incentive bonus plans.............. - - 12,480 44,000 - 44,000 Net income/(loss)... - - - - (490,000) (490,000) ------- -------- ---------- ------------ ------------- ------------ Balances at December 31, 1996........... - - 7,177,515 13,466,000 (11,443,000) 2,023,000 Issuance of common stock for employee 401(k) and incentive bonus plans.............. - - 13,195 41,000 - 41,000 Non-cash compensation....... - - - 8,000 - 8,000 Net income/(loss)... - - - - 330,000 330,000 ------- -------- ---------- ------------ ------------- ------------ Balances at December 31, 1997........... - - 7,190,710 13,515,000 (11,113,000) $ 2,402,000 Issuance of common stock for employee 401(k) and incentive bonus plans.............. - - 90,410 42,000 - 42,000 Issuance of pre- ferred stock....... 450,000 75,000 - - - 75,000 Non-cash compensation....... - - - 27,000 - 27,000 Net income/(loss)... - - - - 745,000 745,000 ------- -------- ----------- ------------ ------------- ------------ Balances at December 31, 1998........... 450,000 $75,000 7,281,120 $13,584,000 $(10,368,000) $ 3,291,000 ======= ======== =========== ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 HEMACARE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31, 1998 1997 1996 ------------ ------------ ------------- Cash flows from operating activities: Net Income (loss)............................... $ 745,000 $ 330,000 $ (490,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on disposal of discontinued operations.. - (293,000) (600,000) Gain on sale of Gateway Community Blood Program..................................... - (128,000) - Provision (benefit) for losses on accounts receivable.................................. - 35,000 (25,000) Depreciation and amortization................ 175,000 187,000 359,000 Issuance of preferred stock, common stock and options for compensation................ 69,000 50,000 44,000 Changes in operating assets and liabilities: Increase (decrease) in accounts receivable... (415,000) 196,000 (70,000) Increase(decrease) in inventories, supplies and prepaid expenses........................ (203,000) (1,000) 59,000 Increase (decrease) in other assets, net..... 6,000 41,000 28,000 Increase (decrease) in accounts payable, accrued expenses and other liabilities...... (213,000) (185,000) 267,000 Proceeds from (expenditures for) discontinued operations.................................. (6,000) 8,000 (30,000) ------------ ------------ ------------ Net cash provided by (used in) operating activities.................................. 158,000 240,000 (458,000) Cash flows from investing activities: Purchase of assets, net of cash acquired........ (555,000) - - (Increase) decrease in note receivable from related party................................. 16,000 14,000 6,000 (Increase) decrease in marketable securities.... 75,000 (52,000) (415,000) (Purchase) disposition of plant and equipment, net........................................... (23,000) 46,000 (32,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities.................................... (487,000) 8,000 (441,000) Cash flows from financing activities: Net proceeds from issuance of common stock...... - - 1,243,000 Net borrowings on line of credit................ 600,000 - - Principal payments on line of credit, net, and capital leases................................ (148,000) (135,000) (205,000) ------------ ------------ ------------ Net cash (used in) provided by financing activities.................................... 452,000 (135,000) 1,038,000 ------------ ------------ ------------ Increase in cash and cash equivalents........... 123,000 113,000 139,000 Cash and cash equivalents at beginning of period........................................ 1,249,000 1,136,000 997,000 ------------ ------------ ------------ Cash and cash equivalents at end of period...... 1,372,000 $ 1,249,000 $ 1,136,000 ============ ============ ============ Supplemental disclosure: Interest paid................................... $ 23,000 $ 51,000 $ 78,000 ============ ============ ============ Income taxes paid............................... $ - $ - $ - ============ ============ ============ Items not impacting cash flow: Increase in capital lease obligations........... $ 629,000 $ 38,000 $ 92,000 ============ ============ ============ Liability for issuance of stock and warrants with the purchase of assets.................... $ 22,000 $ - $ - ============ ============ ============ Issuance of preferred stock in the purchase of assets...................................... $ 75,000 $ - $ - ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-6 HEMACARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Organization - --------------------- HemaCare Corporation was incorporated in California in 1978 for the purpose of providing blood products and blood services to hospitals and medical centers. Coral Blood Service, Inc., a wholly owned subsidiary of the Company was formed in October 1998, for the purpose of purchasing substantially all of the assets of a company which had been in the business of supplying blood products and services to hospitals primarily in the Eastern United States. (See Note 3.) In September 1995, the Company formed Gateway Community Blood Program, Inc. ("Gateway"), a wholly owned subsidiary incorporated in Missouri, to provide blood products and services in Missouri and Illinois. In August 1997, Gateway"s operations were sold. In 1992, the Company acquired Georgia Hemapheresis Services ("GHS"), a company it had previously managed. GHS was closed in July 1996. From 1990 to November 1995, the Company, through its wholly-owned subsidiary HemaBiologics, Inc. ("HBI"), conducted research and development of Immupath, an anti-HIV hyperimmune plasma-based product intended to be used in the treatment of Acquired Immune Deficiency Syndrome ("AIDS"). In November of 1995, the Company's Board of Directors decided to discontinue the operations of HBI. (See Note 12.) HemaCare Corporation and its wholly owned subsidiaries are referred to as "HemaCare" or the "Company" in the accompanying consolidated financial statements and notes to consolidated financial statements. Note 2 - Summary of Accounting Policies - --------------------------------------- Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash, Cash Equivalents and Marketable Securities: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Marketable securities consist of U.S. government treasury bills and certificates of deposit held at financial institutions. Financial Instruments: Cash and cash equivalents, marketable securities, accounts receivable and accounts payable are carried at cost which approximates fair value. The interest rate applied to notes receivable and capital leases is equal to the Company's borrowing rate, and therefore their carrying value approximates fair value. Revenues and Accounts Receivable: Revenues are recognized upon acceptance of the of blood products or the performance of blood services. Blood services revenues consist primarily of mobile therapeutics sales, while blood product revenues consist primarily of sales of single donor platelets and whole blood components that are manufactured or purchased and distributed by the Company. Accounts receivables are reviewed periodically for collectability. F-7 Inventories and Supplies: Inventories consist of Company- manufactured platelets and whole blood components as well as component blood products purchased for resale. Supplies consist primarily of medical supplies for collecting and manufacturing products and providing therapeutic services. Inventories are accounted for on a first-in, first-out basis. Plant and Equipment: Plant and equipment is stated at original cost. Furniture, fixtures, equipment and automobiles are depreciated using the straight-line method over three to seven years. Leasehold improvements are amortized over the lesser of the their useful life or the length of the lease, ranging from three to five years. Capital equipment leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the equipment at the beginning of the lease term. The cost of normal repairs and maintenance are expensed as incurred. Goodwill: Goodwill is being amortized on a straight-line basis over ten years. It is the Company's policy to periodically evaluate goodwill for recoverability. In the event of a permanent impairment, the goodwill balance would be reduced to net realizable value, and the write down would be charge to expense. Income Taxes: Income taxes are computed under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Per Share Data: Per share data is computed in accordance with SFAS 128 "Earnings Per Share". The Company adopted SFAS No. 128 effective December 31, 1997 and restated prior years' per share data in accordance with the requirements of SFAS 128. Warrants and options to purchase 1,443,300, 1,289,800, and 995,800 shares of common stock outstanding at December 31, 1998, 1997 and 1996, respectively, were not included in the computation of diluted earnings per share because the exercise price of the warrants and options was greater than the average market price of the common stock. Reclassification: Certain 1997 and 1996 amounts have been reclassified to conform to 1998 presentations. Recent Accounting Pronouncement: In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures About Segments of An Enterprise and Related Information." SFAS 131, which is effective for years beginning after December 15, 1997, revises the requirements for segment disclosures. The Company adopted this standard in the fourth quarter of 1998. Note 3 - Acquisition - -------------------- In October 1998, the Company purchased, through its wholly owned subsidiary CBS, substantially all of the assets of Coral Therapeutics, Inc. ("Coral") from Coral's secured lender. Prior to the acquisition, Coral provided blood services to major university, teaching and community hospitals in Maine, New Hampshire, Massachusetts, Connecticut, New York, North Carolina and other states. The acquired assets, included (i) approximately $1.6 million in accounts receivable, $600,000 of which were over 90 days old, (ii) inventory and supplies with a net book value of approximately $113,000 (iii) fixed assets with a net book value of approximately $248,000 and (iv) Coral's rights under its hospital contracts. HemaCare is in the process of completing the negotiation of separate agreements with the hospitals previously served by Coral and is providing services to hospitals that have not signed a new agreement under interim arrangements. Concurrent with the closing of the asset purchase, HemaCare extended offers of employment to most of Coral's employees. HemaCare expects to satisfy certain liabilities of Coral to its ex-employees and to make payments necessary to maintain essential business relationships totaling approximately $1.5 million. F-8 The acquisition was accounted for as a purchase, and the operations of the acquired assets are included in the Company's consolidated operations for the period from the acquisition date (October 23, 1998) through December 31, 1998. The acquisition price of the assets was $950,000 in cash and 450,000 shares of HemaCare's Series B senior convertible preferred stock. The Company financed the acquisition by (i) utilizing existing cash balances, (ii) borrowing $600,000 on its line of credit and (iii) issuing 450,000 shares of HemaCare Series B senior convertible preferred stock. In addition, HemaCare has entered into or expects to enter into non-competition agreements with certain former managers of Coral pursuant to which HemaCare will make (i) cash payments, (ii) issue 60,000 shares of HemaCare common stock and (iii) issue warrants to purchase 90,000 shares of HemaCare common stock with an exercise price of $.90 per share, expiring in October, 2003. In addition, warrants for 35,000 shares of HemaCare common stock exercisable at $0.31 per share will be issued to consultants who assisted in the acquisition. These warrants will expire October 2003 and are in the process of being issued. The purchase price has been allocated to assets and liabilities based on preliminary estimates and fair value as of the of the acquisition. The final allocation of the purchase price will be determined when all liabilities are settled. Based on the allocation of the purchase price over the assets acquired and liabilities incurred, the Company recorded goodwill of $753,000, which is being amortized on a straight line basis over ten years. The following unaudited pro forma combined condensed results of operations have been prepared as if the acquisition has occurred at the beginning of the period presented. They do not purport to be indicative of the results of results of operations which would have occurred if the acquisiton had been effected on the dates indicated, nor do they purport to be indicative of future results of operations. Year Ended December 31, 1998 1997 (Unaudited) ----------- ------------ Revenue.......................... $18,582,000 $ 16,968,000 =========== ============ Income before extraordinary items........................... $ 179,000 $(1,851,000) =========== ============ Net income....................... $ 179,000 $(1,851,000) =========== ============ Basic and diluted earnings per share........................ $ 0.02 $ (0.26) =========== ============ Note 4 - Plant and Equipment - ---------------------------- Plant and equipment consists of the following: December 31, 1998 1997 ------------ ------------ Furniture, fixtures and equipment.... $ 2,969,000 $ 2,089,000 Leasehold improvements............... 189,000 186,000 ------------ ------------ 3,158,000 2,275,000 Less accumulated depreciation and amortization......................... (1,869,000) (1,690,000) ------------ ------------ $ 1,289,000 $ 585,000 ============ ============ Equipment with a cost of $1,369,000 in 1998 and $740,000 in 1997 was financed by capital leases. In 1997, the Company disposed of equipment and leasehold improvements with a cost of $347,000, including $188,000 financed by capital leases, in connection with the sale of Gateway's operations. Note 5 - Line of Credit and Note Payable - ----------------------------------------- Line of Credit The Company maintains a line of credit with a commercial bank secured by its accounts receivable, inventory and equipment. In February 1999, the commercial bank increased the Company's line of credit borrowing limit to $1.2 million, from $700,000, and converted the $600,000 balance then outstanding on the line of credit to a four-year term loan. Under the terms of the credit line agreement, which is in effect until June 1, 1999, the Company may borrow up to 70% of eligible accounts receivable, up to a maximum of $1.2 million, at an interest rate of prime plus 0.5%, and must maintain certain ratios. The F-9 Company was in compliance with all covenants of its borrowing agreement at December 31, 1998, and the Company is in the process of renewing its credit agreement. As of December 31, 1997, and during the year then ended, there were no balances outstanding under the line of credit. Note Payable The Company has a term note with a bank, payable in 48 monthly payments of principal and interest of approximately $15,000 through February 2003. The note bears interest at the prime rate plus one percent (8.75% at December 31, 1998). Minimum future payments under the note at December 31, 1998 are as follow: Year ending December 31, 1999 $109,000 2000 140,000 2001 155,000 2002 168,000 2003 28,000 -------- $600,000 ======== The Company incurred $9,000 of interest expense in connections with the note payable and line of credit agreements in 1998. No interest expense was incurred in connection with the line of credit agreement in 1997 or 1996. Note 6 - Leases - ---------------- The Company has entered into several capital leases for equipment. Future minimum, capital lease payments, which expire at various times during the period from 1999 to 2004, are as follows: Year Ending December 31, 1999 $ 265,000 2000 196,000 2001 168,000 2002 163,000 2003 128,000 Thereafter 4,000 ---------- Total minimum lease payments 924,000 Less: Amount representing interest (94,000) ---------- Present value of minimum lease payments 830,000 Less current portion (203,000) ---------- $ 627,000 ========== F-10 The Company leases its facilities and certain equipment under operating leases which expire through the year 2003. Future minimum rentals under operating leases are as follows: Year ending December 31, 1999 $ 436,000 2000 362,000 2001 348,000 2002 283,000 2003 21,000 Thereafter - ----------- $ 1,450,000 Total rent expense under all operating leases was $424,000, $600,000, and $664,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Note 7 - Income Taxes - --------------------- The provision for income taxes for the year ended December 31, 1998, which was primarily due to the effect of the alternative minimum tax. The provision which is all current, consists of $20,000 of federal income tax expense and $3,000 of state income tax expense. There was no current or deferred income tax provision for 1997 and 1996. The Company utilized net operating loss carryforwards ("NOL") in 1997 and incurred losses in 1996. A reconciliation of income tax expense at the statutory rate to income tax recognized follows. 1998 1997 1996 ---------- ---------- --------- Income tax expense at statutory rate............................ $ 261,000 $ 13,000 $(371,000) State income taxes, net of Federal benefit................. 46,000 2,000 (65,000) Generation (Utilization) of NOL. (284,000) (15,000) 436,000 ---------- --------- ---------- Income tax expense.............. $ 23,000 $ - $ - ========== ========= ========== The approximate tax effects of temporary differences which gave rise to significant deferred tax assets and liabilities at December 31, 1998 and 1997, are as follows: 1998 1997 ----------- ----------- Current: Reserve for doubtful accounts.. $ 238,000 $ 32,000 Accrued expenses and other..... 323,000 286,000 Noncurrent: Depreciation and amortization.. 220,000 290,000 Deferred research and development expenses.......... 200,000 210,000 Other.......................... 8,000 93,000 Net operating loss carryforwards................. 2,725,000 3,124,000 Tax credit carryforwards....... 878,000 881,000 ------------ ------------ Total deferred assets.......... 4,592,000 4,916,000 Valuation allowance............ (4,592,000) (4,916,000) ------------ ------------ $ - $ - ============ ============ F-11 A valuation allowance is recorded if the weight of available evidence suggests it is more likely that not that some portion or all of the deferred tax asset will not be recognized. There is no assurance that the Company will continue to be profitable in future periods. Accordingly, a valuation allowance has been recorded for the full amount of the deferred tax assets in 1998 and 1997. At December 31, 1998, the Company had net operating loss carryforwards available for federal income and state tax purposes of $7,300,000 and $2,700,000, respectively, expiring through 2010. Acquisitions of common stock which result in changes in equity ownership in the Company could result in an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), thereby imposing an annual limitation (the "Section 382 Limitation") on the Company's ability to utilize its net operating loss carryforwards to reduce future taxable income. In the event of a Section 382 Limitation, the Company's utilization of its net operating loss carryforwards would be restricted to an annual amount equal to the product of the equity value, as defined in the Code, of the Company at the time of the applicable ownership change multiplied by the long- term tax-exempt rate as published monthly by the Internal Revenue Service. The expiration dates of the net operating loss carryforwards would not be extended, and accordingly, a Section 382 Limitation could result in the expiration of a portion of Company's net operating loss carryforwards. The long-term, tax- exempt rate is currently 5.5%; such rate, however, is subject to change, and it is impossible to predict whether the equity value of the Company and such rate will increase, or decrease, and to what extent. At December 31, 1998, the Company had federal income tax credit carryforwards of approximately $562,000 expiring through 2010, and state tax credit carryforwards of approximately $316,000 which are not subject to expiration. Note 8 - Shareholders' Equity - ----------------------------- Stock Options In July 1996, the Board of Directors approved and adopted a new stock incentive plan (the "1996 Plan") which provides for grants of both stock options and shares of restricted stock. Prior to that date, options were granted under the Company's 1986 Stock Option Plan, as amended (the "1986 Plan"). A total of 1,400,000 shares may be granted under the terms of the 1996 Plan. The term of the options granted is determined by Company's Board of Directors, but in no event may be longer than ten years. The exercise price of options granted generally is required to be not less than the fair market value of the common stock on the date of grant. Options granted to employees must vest at a rate of at least 20% per year. The 1986 Plan expired in July 1996. At December 31, 1998, 65,800 options were outstanding under this plan. A one-time grant of options typically is made to each non-employee director at the time of joining the Board, and, beginning in 1999, an additional 15,000 options will be granted annually to non- employee directors. The table below summarizes transactions in the Plans and weighted average exercise prices ("Price") during 1998, 1997 and 1996. F-12
1998 1997 1996 ------------------ ----------------- ----------------- Shares Price Shares Price Shares Price --------- ------- --------- ------- -------- ------- Outstanding at beginning of year................... 495,800 $2.36 185,800 $4.01 395,800 $3.12 Granted................... 535,000 0.67 372,500 1.74 63,000 3.41 Exercised................. - - - - 53,750 1.99 Canceled.................. 107,500 3.58 62,500 2.78 219,250 2.59 ------- ----- ------- ----- -------- ----- Outstanding at end of year..................... 923,300 1.12 495,800 2.36 185,800 4.01 ======= ===== ======= ===== ======= ===== Exercisable at end of year..................... 386,300 $1.61 184,550 $3.05 140,300 $4.12 ======= ===== ======= ===== ======= =====
The following table summarizes the range of exercise price, weighted average remaining contractual life ("Life") and weighted average exercise price ("Price") for all stock options outstanding as of December 31, 1998:
Options Outstanding Options Exercisable -------------------------------- ------------------- Range of Exercise price Shares Life Price Shares Price - ------------------------- --------- ---------- ---------- --------- -------- $0.59 to $1.74 792,500 9.2 years $0.81 288,500 $1.12 $1.75 to $2.43 20,000 9.5 years 2.00 20,000 2.00 $2.44 to $4.99 110,800 6.8 years 3.16 77,800 3.31 ------- ----- ------- ----- 923,300 $1.12 386,300 $1.61 ======= ===== ======= =====
The Company grants stock options to employees and others in accordance with the terms of its stock option plans. Warrants are granted upon the Board of Directors' approval. The Company has elected to adopt SFAS 123 "Accounting for Stock-Based Compensation" for disclosure purposes only and applies the provisions of APB Opinion No. 25. The Company recognized $27,000, $8,000, and $5,000 of compensation expense related to consulting options in 1998, 1997 and 1996, respectively. Had compensation expense for all options granted been recognized in accordance with SFAS 123, the Company's net income (loss) and net income (loss) per share would have been as follows: Years ended December 31, 1998 1997 1996 --------- --------- --------- Pro forma net income (loss).. $617,000 $288,000 $(622,000) Pro forma basic and diluted net income (loss) per share....................... $ 0.08 $ 0.04 $ (0.10) The above pro forma amounts were calculated by estimating the fair value of each option or warrant granted on the date of grant using the Black-Scholes option-pricing model as follows: Years ended December 31, 1998 1997 1996 --------- --------- --------- Expected life............... 3 Years 3 Years 3 Years Expected volatility......... 75% 68% 60% Dividend yield.............. - - - Interest rate............... 5.5% 5.0% 5.75% Warrants At December 31, 1998, 1997 and 1996, the Company had a total of 520,000, 810,000 and 810,000 warrants to purchase common stock outstanding, at weighted average exercise prices of $4.89, $4.54 and $4.54, respectively. Of the outstanding warrants, 500,000, 790,000 and 790,000 were exercisable, at weighted average exercise prices of $4.96, $4.57 and $4.57, in 1998, 1997 and 1996, respectively. At December 31, 1998, 1997 and 1996, 70,000 warrants for consulting services were outstanding. These warrants, of which 50,000 were exercisable, had exercise prices between $2.63 and $3.69 and expire between June 1999 and June 2002. In connection with stock sales in 1993 and 1994, the Company issued warrants to finders. Warrants to purchase 50,000 shares of the Company's stock are still outstanding at prices ranging from $1.45 and $4.00, expiring between April 1999 and July 2000. In 1993, the Company issued warrants to purchase 400,000 shares of stock at $5.50 per share in connection with the acquisition of the Immupath license. (See Note 11, "Discontinued Operations".) These options expire in February 2003. F-13 Preferred Stock In October, 1998 as part of the purchase price of the acquisition (see Note 3), 450,000 shares of no par value Senior Convertible Series B preferred stock ("Series B Preferred") were issued to the seller. The Series B preferred stock is convertible into 500,000 shares of HemaCare common stock, at the option of the holder at any time after one year from the date of issuance. The Series B Preferred stock holders are entitled to dividends when declared by the Company's Board of Directors and, if dividends are declared on the Company's common stock, Series B Preferred stock holders are entitled to participate in the common stock dividend on an as converted basis. In the event of liquidation, dissolution or wind up of the Company, Series B Preferred stock holders are entitled to a preferential distribution of $0.90 per share. Note 9 - Employee Salary Deferral Plan - --------------------------------------- HemaCare's Employee Salary Deferral Plan qualifies under Section 401(k) of the Internal Revenue Service Code (the "401(k) Plan"). Eligible employees may contribute up to 12 percent of their pre- tax salaries, subject to certain limitations. HemaCare may elect to match a portion of the employees' contribution. In 1998, 1997 and 1996, the Company elected to match 50 percent of the of each participants contribution, up to 5% of the participants annual salary, with HemaCare common stock. During 1998, 1997 and 1996, HemaCare issued 90,410 shares ($42,000), 13,195 shares ($41,000), and 12,480 shares ($44,000) of common stock as matching contributions for the 1997, 1996 and 1995 plan years, respectively. HemaCare plans to issue approximately 96,462 shares ($44,000) in 1999 as matching contributions for the 1998 plan year. Note 10 - Commitments and Contingencies - --------------------------------------- On March 12, 1997, the Company was notified of a lawsuit filed by an investment banking firm retained by the Company in connection with the August 1996 private placement of its common stock, seeking recovery of damages in the amount of approximately $60,000. In July 1998, this suit was settled on terms favorable to the Company. The effect of the settlement did not have a material effect on the Company's financial condition or results of operations. Since 1976, California law has prohibited the infusion of blood products into patients if the donors of those products were paid unless, in the opinion of the recipient's physician, blood from a non-paid donor was not immediately available. Apheresis platelet products obtained from paid donors, including the Company's Sherman Oaks center's paid donors, are exempted from this law by a state statute passed in late 1994 which contains a "sunset" provision. Unless a new exemption is obtained, the existing exemption will expire under its sunset provision on December 31, 2001. The Company is evaluating a number of available options with regard to the expiration of the extension. State and federal laws set forth antikickback and self-referral prohibitions and otherwise regulate financial relationships between blood banks and hospitals, physicians and other persons who refer business to them. While the Company believes its present operations comply with applicable regulations, there can be no assurance that future legislation or rule making, or the interpretation of existing laws and regulations will not prohibit or adversely impact the delivery by HemaCare of its services and products. Health care reform is continuously under consideration by lawmakers, and it is not certain as to what changes may be made in the future regarding health care policies. However, policies regarding reimbursement, universal health insurance and managed competition may materially impact the Company's operations. Note 11 - Segment and Related Party Information - ----------------------------------------------- Business Segments The Company operates in three business segments, each of which represent a separate business activity. The segments and a description of their business activity follows: - - Blood Management Programs ("BMP"). Outsource programs which provide all or a major portion of the blood banking functions to a hospital. - - Blood Products. Apheresis and whole blood derived products. - - Blood Services. Therapeutic apheresis and stem cell collection procedures, autologous interoperative transfusion and donor testing. Management uses more than one measure to measure segment performance. However, the dominant measurements are consistent with the Company's consolidated financial statements which present revenue from external customers and pretax income for each segment. Supplemental measurement data are as follows:
BMP Blood Products Blood Services ----------- -------------- --------------- 1998 - ----- Depreciation and amortization $ 56,000 $18,000 $ 52,000 Expenditures for long-lived assets 484,000 4,000 388,000 1997 - ---- Depreciation and amortization $ 74,000 $18,000 $ 54,000 Expenditures for long-lived assets 38,000 - - 1996 - ----- Depreciation and amortization $105,000 $66,000 $ 94,000 Expenditures for long-lived assets 92,000 - -
Management evaluates segment performance based primarily on operating income. Interest expenses and income, general and administrative expense, amortization of goodwill, income taxes and non-recurring gains and losses are not allocated to the segments. The accounting policies of the segments are the same as those described in the significant accounting policies Sales of products and services to an unaffiliated hospital group accounted for $2,051,000 (16%) of the Company's revenues in 1998. In 1997, Sales to two unaffiliated hospital groups accounted for $2,044,000 (18%) and $1,473,000 (13%) of the Company's revenues. In 1996, sales to one unaffiliated hospital group accounted for $1,769,000 (16%) of the Company's revenues. At December 31, 1998 and 1997, no customer accounted for over 10% of the Company's accounts receivable. F-15 Related Party Loan In 1995 and 1994, the Company made a series of personal loans to Dr. Joshua Levy, then an officer and director of the Company totaling $98,000. The proceeds of these loans were used to refinance existing debt that was collateralized by HemaCare stock owned by Dr. Levy. In January 1996, these individual notes were consolidated into a promissory note, collateralized by HemaCare stock owned by Dr. Levy, which accrued interest at a rate equal to the rate paid by the Company under its line of credit. The Company received installment payments in accordance with the terms of this note of $15,000 in January 1996 and January 1997. Effective July 31, 1997, the Company entered into an agreement with Dr. Levy that superceded the 1996 note. Under the terms of this agreement, the Company agreed to forgive the remaining balance of Dr. Levy's note, including interest accrued at a 10% annual rate, over a five-year period so long as Dr. Levy remains employed by the Company. Note 12 - Discontinued Operations - --------------------------------- In November 1995, the Company discontinued the operations of HBI, including the research and development of Immupath and the associated specialty plasma business. The reserve established for estimated HBI operating losses during the period of disposal, included a $600,000 contingent liability for the resolution of the dispute with Medicorp. In July 1996, the dispute was settled without any payment by the Company, and the Company recognized a $600,000 gain on disposal of discontinued operations. In June 1996, the Company agreed to sell substantially all the tangible assets of the discontinued operations and the FDA source plasma licenses. The sale and transfer of the licenses was contingent upon obtaining FDA approval that was received on October 21, 1996. The buyer delivered a promissory note, in payment of the purchase price for certain tangible assets sold which is collateralized by these assets. The note was repaid in March 1997, resulting in a gain on disposal of $120,000 in the first quarter of 1997. During the wind down of the research and development operations, the Company manufactured a supply of Immupath to supply the patients still receiving treatment for a limited period of time. There are currently six patients receiving Immupath treatments. In the fourth quarter of 1997, the Company reviewed and revised its estimate of the remaining costs of discontinued operations and recognized an additional gain on disposal of $173,000. The Company does not expect discontinued operations to have a material impact on future operating results. F-16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of HemaCare Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in HemaCare Corporation's annual report to shareholders included in this Form 10-K, and have issued our report thereon dated March 25, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index of consolidated financial statements is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP ------------------------ ARTHUR ANDERSEN LLP Los Angeles, California March 25, 1999 S-1 HEMACARE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For The Years Ended December 31, 1998, 1997 and 1996
Additions ---------------------- Balance at Charged to Charged Balance beginning costs and to other at end of Description of period expenses accounts Write-offs period - --------------------- --------- ----------- ---------- ---------- --------- Year ended December 31, 1997 - Allowance for uncollectible accounts $81,000 $ -- $515,000(1) $ -- $596,000 Year ended December 31, 1997 - Allowance for uncollectible accounts $47,000 $ 35,000 $ -- $ 1,000 $ 81,000 Year ended December 31, 1996 - Allowance for uncollectible accounts $94,000 $(25,000)(2) $ -- $ 22,000 $ 47,000
(1) Represents allowance for doubtful accounts of acquired assets at date of acquisition. (2) Includes a net reduction in the reserve of $48,000, based on an analysis of the aging of accounts receivable at December 31, 1996. S-2 INDEX TO EXHIBITS
Sequential Page Number ----------- 2.1 Amended and Restated Asset Purchase Agreement between the Registrant, HemaBiologics, Inc. (a wholly owned subsidiary of the Registrant) and Atopix Pharmaceuticals Corporation, dated June 26,1996 incorporated by reference to Exhibit 2.1 to Form 10-Q of the Registrant for the quarter ended June 30, 1996.................................................. 2.2 Asset Purchase Agreement between the Registrant, Gateway Community Blood Program and Haemonetics Corporation, dated August 1, 1997--incorporated by reference to Exhibit 2.1 to Form 10-Q of the Registrant for the quarter ended September 30, 1997....................................................... 3.1 Restated Articles of Incorporation of the Registrant--incorp- orated by reference to Exhibit 3.1 to Form 10-K of the Registrant for the year ended December 31, 1995................ 3.2 Bylaws of the Registrant, as amended--incorporated by reference to Exhibit 3.1 to Form 10-Q of the Registrant for the quarter ended March 31, 1998............................... 4.1 Warrant Agreement between the Registrant and Medicorp Inc. dated February 17, 1993--incorporated by reference to Exhibit 4 to the Current Report on Form 8-K of the Registrant dated February 17, 1993.............................................. 4.2 Form of Warrant Agreement between the Registrant and each of the following consultants: British Far East Holdings, Ltd., Joseph T. McDonald and E. Keene Wolcott dated September 30, 1994--incorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended September 30, 1994..... 4.3 Warrant Agreement between the Registrant and Torrey Pines Securities, Inc., dated April 8, 1994--incorporated by reference to Exhibit 4.2 to Form 10-Q of the Registrant for the quarter ended March 31, 1994............................... 4.4 Amendment to Warrant Agreement between the Registrant and Torrey Pines Securities dated April 3, 1995--incorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended March 31, 1995............................... 4.5 Warrant Agreement between the Registrant and M.A. Levy and Associates dated March 1, 1995--incorporated by reference to Exhibit 4.7 to Form 10-K of the Registrant for the year ended December 31, 1994.............................................. 4.6 Warrant Agreement between the Registrant and Joseph T. McDonaldd dated November 1, 1996--incorporated by reference to Exhibit 4.9 to Form 10-K of the Registrant for the year ended December 31, 1996.............................................. 4.7 Rights Agreement between the Registrant and U.S. Stock Transfer Corporation dated March 3, 1998--incorporated by reference to Exhibit 4 to Form 8-K of the Registrant dated March 5, 1998.... 4.8 Amended Certificate of Determination, dated March 18, 1998-- incorporated by reference to Exhibit 4.8 of Form 10-K of the Registrant for the year ended December 31, 1997................ 4.9 Certificate of Determination of the Registrant's Series B Senior Convertible Preferred Stock between the Registrant and Comdisco Health Care Group dated October 23, 1998--incorporated by reference to Exhibit 4.1 of Form 8-K of the Registrant dated November 5, 1998............................................... 4.10 Registration Rights of Shareholders'--incorporated by reference to Exhibit 4.9 to the Current Report on Form 8-K of the Registrant dated August 19, 1996............................... 10.1 1986 Employee Stock Option Plan, as amended and restated through October 1994--incorporated by reference to Exhibit 10.4 to Form 10-Q of the Registrant for the quarter ended September 30, 1994............................................. 10.2 1996 Stock Incentive Plan, as amended, of the Registrant-- incorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended September 30, 1996............ 10.3 Office Building Lease dated August 21, 1998 between the Registrant and Tar Asset Addison Place, L.P.--incorporated by reference to Form 10-Q for the quarter ended September 30, 1998........................................................... 10.4 Employment Agreement between Harold I. Lieberman and the Registrant, dated September 19, 1988-- incorporated by reference to Exhibit 10.4 to Form 10-K of the Registrant for the year ended December 31, 1994............................... 10.5 Amendment to Employment Agreement between the Registrant and Harold I. Lieberman, dated September 19, 1989--incorporated by reference to Exhibit 10.5 to Form 10-K of the Registrant for the year ended December 31, 1994............................... 10.6 Revolving Credit Agreement between the Registrant and Bank Leumi USA, dated February 5, 1999 and related Promissory Note........................................................... Filed herewith electronically 10.7 Promissory Note between the Registrant and Bank Leumi USA, dated February 5, 1999......................................... Filed herewith electronically 10.8 Promissory Note to HemaBiologics, Inc., a wholly owned subsidiary of the Registrant, from Joshua Levy dated January 1, 1996 -- incorporated by reference to Exhibit 10.10 to Form 10-K of the Registrant for the year ended December 31, 1995.... 10.9 Pledge Agreement between HemaBiologics, Inc., a wholly owned subsidiary of the Registrant, and Joshua Levy dated January 1, 1996 -- incorporated by reference to Exhibit 10.11 to Form 10-K of the Registrant for the year ended December 31, 1995.... 10.10 Loan Reimbursement Agreement between HemaBiologics, Inc., a wholly owned subsidiary of the Registrant, and Joshua Levy dated January 30, 1998--incorporated by reference to Exhibit 10.10 to Form 10-K of the Registrant for the year ended December 31, 1997.............................................. 10.11 Settlement Agreement between the Registrant and Medicorp, Inc. -- incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Registrant dated July 19, 1996....................................................... 10.12 Foreclosure Sale Agreement between the Registrant and Comdisco Health Care Group, Inc dated October 23, 1998-- incorporated by reference to Exhibit 2.1 of Form 8-K of the Registrant dated November 5, 1998.......................... 10.13 Employment agreement between the Registrant and William D. Nicely dated May 27, 1998--incorporated by reference to Form 10-Q for the quarter ended June 30, 1998....................... 11 Computation of earnings (loss) per common equivalent share..... Filed herewith electronically 21 Subsidiaries of the Registrant................................. Filed herewith electronically 23 Consent of Arthur Andersen LLP................................. Filed herewith electronically 27 Financial Data Schedule........................................ Filed herewith electronically
EX-10.6 2 EXHIBIT 10.6 [LOGO] BANK LEUMI USA - ------------------------- - ------------------------- - ------------------------- Member FDIC
LOAN AGREEMENT - --------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $1,200,000.00 02-05-1999 06-01-1999 1-1 04A0 030 xxxxxxxxxx KXA - --------------------------------------------------------------------------------------------------------- References in the shaded area are for lender's use only and do not limit the applicability of this document to any particular loan or item. - ---------------------------------------------------------------------------------------------------------
BORROWER: HEMACARE CORPORATION LENDER: BANK LEUMI LE-ISRAEL, B.M. 4954 VAN NUYS BLVD., #201 8383 WILSHIRE BLVD. STE. 400 SHERMAN OAKS, CA 91403 BEVERLY HILLS, CA 90211 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THIS LOAN AGREEMENT BETWEEN HEMACARE CORPORATION ("BORROWER") AND BANK LEUMI LE-ISRAEL, B.M. ("LENDER") IS MADE AND EXECUTED ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT. TERM. This Agreement shall be effective as of FEBRUARY 5, 1999, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. ACCOUNT. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity obligated upon an Account. ADVANCE. The word "Advance" means a disbursement of Loan funds under this Agreement. BORROWER. The word "Borrower" means HEMACARE CORPORATION. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." BORROWING BASE. The words "Borrowing Base" mean: (a) $1,200,000 or (b) the sum of Seventy percent (70.000%) of Eligible Accounts. Lender may, in its discretion, from time to time, upon not less than five (5) days prior notice to Borrower, reduce the Borrowing Base to the extent that Lender determines in good faith that:(a) the dilution with respect to the Accounts for any period (based on the ratio of (i) the aggregate amount of reductions in Accounts other than as a result of payments in cash to (ii) the aggregate amount of total sales) has increased in any material respect or may be reasonably anticipated to increase in any material respect above historical levels, or (b) the general creditworthiness of Account Debtors has declined. BUSINESS DAY. The words "Business Day" mean a day on which commercial banks are open for business in the State of California. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. COLLATERAL. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." DEBT. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (e) Accounts which are subject to dispute, counterclaim, or setoff. (f) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (g) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (h) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (i) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (j) Accounts which have not been paid in full within 90 DAYS from the invoice date. The entire balance of any Account of any single Account debtor will be ineligible whenever the portion of 1he Account which has not been paid within 90 DAYS from the invoice date is in excess of 25.000% of the total amount outstanding on the Account. (k) That portion of Accounts due from an Account Debtor which are in excess of 10.000% of the Debtor's aggregate dollar amount of all outstanding Accounts. ELIGIBLE EQUIPMENT. The words "Eligible Equipment" mean, at any time, all of Borrower's Equipment as defined below except: (a) Equipment which is not owned by Borrower free and clear of all security interests, liens, encumbrances, and claims of third parties. (b) Equipment which Lender, in its sole discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for operation. ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all of Borrower's Inventory as defined below except: (a) Inventory which is not owned by Borrower free and clear of all security interests, liens, encumbrances, and claims of third parties. (b) Inventory which Lender, in its sole discretion, deems to be obsolete, unsalable, damaged, defective, or unfit for further processing. EQUIPMENT. The word "Equipment" means all of Borrower's goods used or bought for use primarily in Borrower's business and which are not included in inventory, whether now or hereafter existing. 02-05-1999 LOAN AGREEMENT Page 2 (Continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." EXPIRATION DATE. The words "Expiration Date" mean the date of termination of Lender's commitment to lend under this Agreement. GRANTOR. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. INDEBTEDNESS. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. INVENTORY. The word "Inventory" means all of Borrower's raw materials, work in process, finished goods, merchandise, parts and supplies, of every kind and description, and goods held for sale or lease or furnished under contracts of service in which Borrower now has or hereafter acquires any right, whether held by Borrower or others, and all documents of title, warehouse receipts, bills of lading, and all other documents of every type covering all or any part of the foregoing. Inventory includes inventory temporarily out of Borrower's custody or possession and all returns on Accounts. LENDER. The word "Lender" means BANK LEUMI LE-ISRAEL, B.M., its successors and assigns. LETTER OF CREDIT. The words "Letter of Credit" mean a letter of credit issued by Lender on behalf of Borrower as described below in the section entitled "Letter of Credit Facility." LINE OF CREDIT. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. LOAN. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. NOTE. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. SECURITY AGREEMENT. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. SCURITY INTEREST. The words "Security Interest" mean and include wthout limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. WORKING CAPITAL. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (e) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, Inventory, Equipment books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable. (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested either orally or in writing subject to the limitations set forth below. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. Under no circumstances shall Lender be required to make any Advance in an amount less than $5,000.00. MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. LOAN ACCOUNT. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"). Lender's 02-05-1999 LOAN AGREEMENT Page 3 (Continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any Insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. With respect to the Inventory, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Inventory and records itemizing and describing the kind, type, quality, and quantity of Inventory, Borrower's Inventory costs and selling prices, and the daily withdrawals and additions to Inventory. With respect to the Equipment, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Equipment and records itemizing and describing the kind, type, quality, and quantity of Equipment, Borrower's Equipment costs, and the daily withdrawals and additions to Equipment. The following is an accurate and complete list of all locations at which Borrower keeps or maintains business records concering Borrower's Accounts, Inventory and Equipment: 4954 VAN NUYS BOULEVARD, #201, SHERMAN OAKS, CA 91403. COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender schedules of Accounts, Inventory and Equipment and schedules of Eligible Accounts, Eligible Inventory and Eligible Equipment, in form and substance satisfactory to the Lender. Thereafter Supplemental schedules shall be delivered according to the following schedule: SUBMISSION OF MONTHLY ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AGINGS WITHIN FIFTEEN (15) DAYS OF THE FOLLOWING MONTH. REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (c) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the Inventory, Borrower represents and warrants to Lender: (a) All Inventory represented by Borrower to be Eligible Inventory for purposes of this Agreement conforms to the requirements of the definition of Eligible Inventory; (b) All Inventory values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (c) The value of the Inventory will be determined on a consistent accounting basis; (d) Except as agreed to the contrary by Lender in writing, all Eligible Inventory is now and at all times hereafter will be in Borrower's physical possession and shall not be held by others on consignment, sale on approval, or sale or return; (e) Except as reflected in the Inventory schedules delivered to Lender, all Eligible Inventory is now and at all times hereafter will be of good and merchantable quality, free from defects; (f) Eligible Inventory is not now and will not at any time hereafter be stored with a bailee, warehouseman, or similar party without Lender's prior written consent, and, in such event, Borrower will concurrently at the time of bailment cause any such bailee, warehouseman, or similar party to issue and deliver to Lender, in form acceptable to Lender, warehouse receipts in Lender's name evidencing the storage of Inventory; and (g) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect and examine the Inventory and to check and test the same as to quality, quantity, value, and condition. REPRESENTATIONS AND WARRANTIES CONCERNING EQUIPMENT. With respect to the Equipment, Borrower represents and warrants to Lender: (a) All Equipment represented by Borrower to be Eligible Equipment for purposes of this Agreement conforms to the requirements of the definition of Eligible Equipment; (b) All Equipment values listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; (c) The value of the Equipment will be determined on a consistent accounting basis; (d) Except as agreed to the contrary by Lender in writing, all Eligible Equipment is now and at all times hereafter will be in Borrower's physical possession; (e) Except as reflected in the Equipment schedules delivered to Lender, all Eligible Equipment is now and at all times hereafter will be of good and merchantable quality, free from defects; (f) Eligible Equipment is not now and will not at any time hereafter be stored with a bailee, warehouseman, or similar party without Lender's prior written consent, and, in such event, Borrower will concurrently at the time of bailment cause any such bailee, warehouseman, or similar party to issue and deliver to Lender, in form acceptable to Lender, warehouse receipts in Lender's name evidencing the storage of Equipment; and (g) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect and examine the Equipment and to check and test the same as to quality, quantity, value, and condition. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: ORGANIZATION. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. AUTHORIZATION. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. FINANCIAL INFORMATION. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section 02-05-1999 LOAN AGREEMENT PAGE 4 (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnity, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. TAXES. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. BINDING EFFECT. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 4954 VAN NUYS BLVD., #201, SHERMAN OAKS, CA 91403. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. INFORMATION. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: LITIGATION. Promptly inform lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. FINANCIAL RECORDS. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no event later than ninety (90) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than forty-five (45) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. ADDITIONAL INFORMATION. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios: TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less than $2,200,000.00. NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 2.50 to 1.00. WORKING CAPITAL. Maintain Working Capital in excess of $500,000.00. CURRENT RATIO. Maintain a ratio of Current Assets to Current Liabilities in excess of 1.00 to 1.00. OTHER RATIO. Maintain a ration of"EBITDA", WHICH MEANS FOR ANY PERIOD, THE SUME OF (A) NET INCOME FOR SUCH PERIOD AND (B) THE FOLLOWING, TO THE EXTENT DEDUCTED IN DETERMINING SUCH NET INCOME: (I) DEPRECIATION AND AMORTIZATION, (II) INCOME TAXES, AND (III) INTEREST EXPENSE OF 2.50 TO 1.00. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. INSURANCE. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. OTHER AGREEMENTS. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. PERFORMANCE. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. OPERATIONS. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business 02-05-1999 LOAN AGREEMENT PAGE 5 (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. INSPECTION. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (b) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume additional indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrowers accounts, except to Lender. CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs A material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred. NOTICE OF LITIGATION. Debtor will promptly give notice to Lender in writing of any proceedings against Debtor involving amounts in excess of $25,000.00 not fully covered by insurance, any substantial claim or dispute which may exist between Debtor and any Person, any labor controversy resulting in or threatening to result in a strike against Debtor, or any proposal by any public authority to acquire a material portion of the assets or business of Debtor. NOTICE OF UNINSURED LOSS. Debtor shall give Lender written notice of any uninsured loss in excess of $25,000.00 in each instance. ADDITIONAL FINANCIAL COVENANT. 1. Monthly internal financial statements and cash flows within Twenty (20) days of the following month. 2. Quarterly 10Q statements within forty five (45) days after the close of each quarter. 3. Fiscal year end Certified Public Accountant audited 10K Financial Statements due within one hundred twenty days of year end. REPLACEMENT OF PRIOR LOAN AGREEMENT. This Agreement replaces and supersedes that certain Loan Agreement, dated as of June 30, 1998, as amended from time to time, between Borrower and Lender. YEAR 2000 BORROWER REPRESENTATIONS AND COVENANT. The borrower has (i) undertaken a sufficient inventory, review and assessment of all areas within its business and operations that could be adversely affected by the failure of the borrower to be Year 2000 Compliant on a timely basis, (ii) developed a plan and timeline for becoming Year 2000 compliant on a timely basis, (iii) to date, implemented that plan in accordance with that timeline in all material respects and, (iv) made inquiry of its key suppliers, vendors and customers as to whether such person(s) will, on a timely basis, be Year 2000 Complaint in all material respects and on the basis of such inquiry reasonably believes that all such person(s) will, on a timely basis, be Year 2000 Compliant. "Year 2000 Compliant" shall mean that, in all material respects, all computer and software related applications shall be able to recognize and perform properly, date sensitive functions involving dates prior to and after December 31, 1999. No later than December 31, 1998, the borrower shall have completed testing to verify whether all of its computer and software related applications are Year 2000 Compliant. The borrower shall take all action necessary to ensure that the borrower shall be Year 2000 Compliant and that no material adverse change will arise in the borrower's financial condition as a result of its efforts or failure to be Year 2000 Compliant. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on the Loans. OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. 02-05-1999 LOAN AGREEMENT PAGE 6 (CONTINUED) =============================================================================== DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrowers deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender, in good faith, deems itself insecure. RIGHT TO CURE. If any default, other than a Default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the Borrowers signing below is responsible for ALL obligations in this Agreement. CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post- judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimilie, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. SURVIVAL. All warranties, representations, and covenants made by Borrower In this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. TIME IS OF THE ESSENCE. Time is of the essence in the performance of this Agreement. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute 02-05-1999 LOAN AGREEMENT PAGE 7 (CONTINUED) =============================================================================== continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF FEBRUARY 5, 1999. BORROWER: HEMACARE CORPORATION BY: /s/ Sharon C. Kaiser BY: /s/ Williamd D. Nicely --------------------------- ------------------------- Authorized Officer Authorized Officer LENDER: BANK LEUMI LE-ISRAEL, B.M. BY: /s/ -------------------------- AUTHORIZED OFFICER [LOGO] BANK LEUMI USA - --------------------------- - --------------------------- - --------------------------- Member FDIC
PROMISSORY NOTE - --------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $1,200,000.00 02-05-1999 06-01-1999 1-1 04A0 030 xxxxxxxxxx KXA - --------------------------------------------------------------------------------------------------------- References in the shaded area are for lender's use only and do not limit the applicability of this document to any particular loan or item. - ---------------------------------------------------------------------------------------------------------
BORROWER: HEMACARE CORPORATION LENDER: BANK LEUMI LE-ISRAEL, B.M. 4954 VAN NUYS BLVD., #201 8383 WILSHIRE BLVD. STE. 400 SHERMAN OAKS, CA 91403 BEVERLY HILLS, CA 90211 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT: $1,200,000 INITIAL RATE: 8.750% DATE OF NOTE: FEBRUARY 5, 1999
PROMISE TO PAY. HEMACARE CORPORATION ("BORROWER") PROMISES TO PAY TO BANK LEUMI USA ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF ONE MILLION TWO HUNDRED THOUSAND & 00/100 DOLLARS ($1,200,000.00), TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE. PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUSTANDING PRINCIPAL PLUS ALL ACCRUED UNPAID INTEREST ON jUNE 1, 1999. IN ADDITION BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING MARCH 1, 1999, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collections costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the reference rate as established by Bank Leumi USA from time to time as its base rate. (the AIndex@). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. THE INDEX CURRENTLY IS 7.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 0.500 PERCENTAGE POINTS OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 8.250%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $250.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by the Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 DAYS OF MORE LATE, Borrower will be charged 3.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT OF $25.000, WHICHEVER IS GREATER. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (d) Borrower has become insolvent, a receiver is appointed for any part of Borrower's property. Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (h) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days: or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to product compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Note to 5.500 percentage points over the Index. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuite, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgement collection services. Borrower also will pay court costs, in addition to all other sums provided by law. THE NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT: This Note evidences a revolving line of credit. Advances under this Note may be requested either orally or in writing by Borrower or as provided in this paragraph. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized as provided in this paragraph to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: SHARON KAISER, VICE PRESIDENT / CHIEF FINANCIAL OFFICER; WILLIAM D. NICELY, CHIEF EXECUTIVE OFFICER; AND JOANN STOVER, SECRETARY. (MINIMUM OF $5,000 PER REQUEST). Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. 02-05-1999 PROMISSORY NOTE PAGE 2 (Continued) - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETE COPY OF THE NOTE. BORROWER: HEMACARE CORPORATION x /s/ Sharon C. Kaiser x /s/ William D. Nicely ------------------------- ------------------------ Authorized Officer Authorized Officer - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO] BANK LEUMI USA - --------------------------- - --------------------------- - --------------------------- Member FDIC
DISBURSEMENT REQUEST AND AUTHORIZATION - --------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $1,200,000.00 02-05-1999 06-01-1999 1-1 04A0 030 xxxxxxxxxx KXA - --------------------------------------------------------------------------------------------------------- References in the shaded area are for lender's use only and do not limit the applicability of this document to any particular loan or item. - ---------------------------------------------------------------------------------------------------------
BORROWER: HEMACARE CORPORATION LENDER: BANK LEUMI LE-ISRAEL, B.M. 4954 VAN NUYS BLVD., #201 8383 WILSHIRE BLVD. STE. 400 SHERMAN OAKS, CA 91403 BEVERLY HILLS, CA 90211 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LOAN TYPE. This is a Variable Rate (0.500% over reference rate as established by Bank Leumi USA from time to time as its base rate., making an initial rate of 8.20%), Revolving Line of Credit Loan to a Corporation for $1,200,000.00 due on June 1, 1999. This is an unsecured renewal loan. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for: / / PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT /x/ BUSINESS (INCLUDING REAL ESTATE INVESTMENT) SPECIFIC PURPOSE. The specific purpose on this loan is: WORKING CAPITAL DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions for making the loan have been satisfied. Please disburse the loan proceeds of $1,200,000.00 as follows: UNDISBURSED FUNDS: $ 500,000.00 AMOUNT PAID ON BORROWER'S ACCOUNT: $ 700,000.00 $700,000.00 Payment on Loan #xxxxxxxx-1-1 (I/R) -------------- NOTE PRINCIPAL: $1,200,000.00 CHARGES PAID IN CASE. Borrower has paid or will pay in cash as agreed the following charges: PREPAID FINANCE CHARGES PAID IN CASH: $ 0.00 OTHER CHARGES PAID IN CASH: $150.00 $150.00 Documentation Fee ------- TOTAL CHARGES PAID IN CASH: $150.00 AUTOMATIC PAYMENTS. Borrower hereby authorized Lender automatically to deduct from Borrower's account numbered xx-xxxxxx the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. At any time and for any reason, Borrower or Lender may voluntarily terminate automatic Payments. COSTS AND CHARGES. Debit DDA #xx-xxxxxx for the fees shown above. FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED FEBRUARY 5, 1999. BORROWER: HEMACARE CORPORATION x /s/ Sharon C. Kaiser x /s/ William D. Nicely ------------------------- ----------------------- Authorized Officer Authorized Officer - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EX-10.7 3 EXHIBIT 10.7 [LOGO] BANK LEUMI USA - --------------------------- - --------------------------- - --------------------------- Member FDIC
PROMISSORY NOTE - --------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $600,000.00 02-05-1999 02-18-2003 8921 04A0 030 xxxxxxxx KXA - --------------------------------------------------------------------------------------------------------- References in the shaded area are for lender's use only and do not limit the applicability of this document to any particular loan or item. - ---------------------------------------------------------------------------------------------------------
BORROWER: HEMACARE CORPORATION LENDER: BANK LEUMI LE-ISRAEL, B.M. 4954 VAN NUYS BLVD., #201 8383 WILSHIRE BLVD. STE. 400 SHERMAN OAKS, CA 91403 BEVERLY HILLS, CA 90211 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT: $600,000 INITIAL RATE: 8.750% DATE OF NOTE: FEBRUARY 5, 1999
PROMISE TO PAY. HEMACARE CORPORATION ("BORROWER") PROMISES TO PAY TO BANK LEUMI USA ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF SIX HUNDRED THOUSAND & 00/100 DOLLARS ($600,000.00), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE FROM FEBRUARY 5, 1999, UNTIL PAID IN FULL. PAYMENT. SUBJECT TO ANY PAYMENT CHANGES RESULTING FROM CHANGES IN THE INDEX, BORROWER WILL PAY THIS LOAN IN 48 PAYMENTS OF $14,938.75 EACH PAYMENT. BORROWER'S FIRST PAYMENT IS DUE MARCH 18, 1999, AND ALL SUBSEQUENT PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. BORROWER'S FINAL PAYMENT WILL BE DUE ON FEBRUARY 18, 2003, AND WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST NOT YET PAID. PAYMENTS INCLUDE PRINCIPAL AND INTEREST. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collections costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the reference rate as established by Bank Leumi USA from time to time as its base rate. (the AIndex@). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. THE INDEX CURRENTLY IS 7.750%. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 1.000 PERCENTAGE POINT OVER THE INDEX, RESULTING IN AN INITIAL RATE OF 8.750%. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (a) increase Borrower's payments to ensure Borrower's loan will pay off by its original final maturity date, (b) increase Borrower's payments to cover accruing interest, (c) increase the number of Borrower's payments, and (d) continue Borrower's payments at the same amount and increase Borrower's final payment. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $250.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by the Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, they will reduce the principal balance due and may result in Borrower making fewer payments. LATE CHARGE. If a payment is 10 DAYS OF MORE LATE, Borrower will be charged 3.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT OF $25.000, WHICHEVER IS GREATER. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (d) Borrower has become insolvent, a receiver is appointed for any part of Borrower's property. Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (f) Any guarantor dies or any of other events described in this default section occurs with respect to any guarantor of this Note. (g) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days: or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to product compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Note to 6.000 percentage points over the Index. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorney's fees and Lender's legal expenses whether or not there is a lawsuit, including attorney's fees and legal expense for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post- judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. THE NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF LOS ANGELES COUNTY, THE STATE OF CALIFORNIA. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. 02-05-1999 PROMISSORY NOTE Page 2 (Continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETE COPY OF THE NOTE. BORROWER: HEMACARE CORPORATION x /s/ Sharon C. Kaiser x /s/ William D. Nicely ------------------------- ------------------------ Authorized Officer Authorized Officer - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO] BANK LEUMI USA - --------------------------- - --------------------------- - --------------------------- Member FDIC
DISBURSEMENT REQUEST AND AUTHORIZATION - --------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS $600,000.00 02-05-1999 02-18-2003 8921 04A0 030 xxxxxxxxx KXA - --------------------------------------------------------------------------------------------------------- References in the shaded area are for lender's use only and do not limit the applicability of this document to any particular loan or item. - ---------------------------------------------------------------------------------------------------------
BORROWER: HEMACARE CORPORATION LENDER: BANK LEUMI LE-ISRAEL, B.M. 4954 VAN NUYS BLVD., #201 8383 WILSHIRE BLVD. STE. 400 SHERMAN OAKS, CA 91403 BEVERLY HILLS, CA 90211 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LOAN TYPE. This is a Variable Rate (1.000% over reference rate as established by Bank Leumi USA from time to time as its base rate., making an initial rate of 8.750%), Installment Loan to a Corporation for $600,000.00 due on February 18, 2003. PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for: / / PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT /x/ BUSINESS (INCLUDING REAL ESTATE INVESTMENT) SPECIFIC PURPOSE. The specific purpose on this loan is ACQUISITION COSTS. DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions for making the loan have been satisfied. Please disburse the loan proceeds of $600,000.00 as follows: Amount paid to others on Borrower's behalf: $600,000.00 $600,000.00 DISBURSE AS REQUESTED ----------- NOTE PRINCIPAL: $600,000.00 CHARGES PAID IN CASE. Borrower has paid or will pay in cash as agreed the following charges: PREPAID FINANCE CHARGES PAID IN CASH: $ 0.00 OTHER CHARGES PAID IN CASH: $150.00 $150.00 Documentation Fee ------- TOTAL CHARGES PAID IN CASH: $150.00 AUTOMATIC PAYMENTS. Borrower hereby authorized Lender automatically to deduct from Borrower's account numbered 02-016606 the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. At any time and for any reason, Borrower or Lender may voluntarily terminate automatic Payments. COSTS AND CHARGES. Debit DDA #xx-xxxxxx for the fees shown above. FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED FEBRUARY 5, 1999. BORROWER: HEMACARE CORPORATION x /s/ Sharon C. Kaiser x /s/ William D. Nicely ------------------------- ----------------------- Authorized Officer Authorized Officer - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EX-11 4 EXHIBIT 11 NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Three Months Ended Twelve Months Ended December 31, December 31, ---------------------------- ------------------------- 1998 1997 1998 1997 ------------ ------------- ------------ ----------- BASIC Weighted average common shares used to compute basic earnings (loss) per share............................ 7,281,120 7,190,710 7,267,753 7,188,511 =========== =========== =========== =========== Net income (loss)....... $ 420,000 $ 278,000 $ 745,000 $ 330,000 =========== =========== =========== =========== Basic net income (loss) per share..... $ 0.06 $ 0.04 $ 0.10 $ 0.05 =========== =========== =========== =========== DILUTED Weighted average common shares used to compute basic earnings (loss) per share........................... 7,281,120 7,190,710 7,267,753 7,188,511 Dilutive preferred equivalent shares. 376,344 - 94,086 - Dilutive effect of common stock issuable in connection with the acquisition......................... 45,000 11,342 Dilutive common equivalent shares attributable to stock options (based on average market price)..... - 5,864 - 10,542 Dilutive common equivalent shares attributable to warrants (based on average market price)............ - - - 4,602 ----------- ----------- ----------- ----------- Weighted average common shares and equivalents used to compute diluted earnings (loss) per share........... 7,702,464 7,196,574 7,373,181 7,203,655 =========== =========== =========== =========== Net income (loss)..... $ 420,000 $ 278,000 $ 745,000 $ 330,000 =========== =========== =========== =========== Diluted net income (loss) per share.. $ 0.06 $ 0.04 $ 0.10 $ 0.05 =========== =========== =========== ===========
EX-21 5 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT HemaBiologics, Inc., a California corporation Comprehensive Blood Services, Inc., a Missouri corporation Coral Blood Services, Inc., a California corporation EX-23 6 EXHIBIT 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K, of our report dated March 25, 1999 included in Registration Statements on Form S-8 File No. 33-30991, File No. 33-52622, File No. 33-60101 and File No. 333-18601 and on Form S-3 File No. 33-44869 and File No. 333-18599. It should be noted that we have not audited any financial statements of the company subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP ----------------------- ARTHUR ANDERSEN LLP Los Angeles, California March 30, 1999 EX-27 7
5 This schedule contains summary financial information extracted from audited financial statements contained in Form 10-K for the year ended December 31, 1998 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1998 DEC-31-1998 1,372,000 288,000 3,038,000 596,000 691,000 5,573,000 1,289,000 1,869,000 7,662,000 3,229,000 0 0 75,000 13,584,000 (10,368,000) 7,662,000 13,124,000 13,124,000 10,002,000 10,002,000 2,354,000 596,000 23,000 768,000 23,000 745,000 0 0 0 745,000 .10 .10
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