-----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, GN+kZ5CvKGBQUW2Crq87ovRnQiuoekaTRdecvNOgYS01SWg3wlrO1xxYab/eQ1SZ QCN4pmdIT9VvMAaPq7rMCA== 0000801748-98-000007.txt : 19980331 0000801748-98-000007.hdr.sgml : 19980331 ACCESSION NUMBER: 0000801748-98-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD 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-K SEC ACT: SEC FILE NUMBER: 000-15223 FILM NUMBER: 98577377 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-K 1 ============================================================================= 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, 1997 [ ] 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 tele,phone 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) 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: ______ As of March 26, 1998, 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 on NASDAQ) was approximately $4,982,190. Portions of the Registrant's definitive Proxy Statement for its June 29, 1998 Annual Meeting of Shareholders (which has not been filed as of the date of this filing) are incorporated by reference into Part III. ============================================================================= PART I Item 1. Business. - ------- --------- GENERAL HemaCare Corporation, founded in 1978, provides blood products and services to healthcare institutions. HemaCare was the first publicly traded company in the $2 billion U.S. blood industry to be licensed by the Food and Drug Administration and accredited by the American Association of Blood Banks. The healthcare institution customers which comprise the U.S. blood industry are faced with increasing cost containment pressures and are continuously looking for new ways of providing cost-effective health services. In response, these institutions are consolidating hospitals under common corporate umbrellas or into affiliated purchasing or operational groups. The consolidated entities rely on their combined purchasing power to solicit the lowest competitive bids for their purchases, and increasingly, choose to outsource various hospital functions to decrease costs and improve patient services. HemaCare provides apheresis platelet and whole blood component products, therapeutic apheresis and donor testing services to some of the leading healthcare institutions in Southern California. The Company is meeting the challenges of cost containment and consolidation by continuing its 20-year strategy of providing customized solutions to its customers' blood products and services needs. As a part of this strategy, the Company has developed a blood management outsourcing model for hospitals which want the convenience and efficiencies of an in-house blood program without the associated regulatory and management burdens and related financial risks. In 1997, HemaCare established a scientific advisory board which provides input and counsel to the Company's board of directors and management on technical and regulatory matters as well as participating in an annual meeting reviewing medical and scientific developments in the blood services industry. Chaired by HemaCare's medical director, Joshua Levy, MD, the advisory board is comprised of nationally known experts in the fields of blood banking, apheresis technology and regulatory compliance. The second annual meeting of the advisory board, which is scheduled for May 1998, will address new apheresis technologies, medical advancements in blood banking and regulatory changes on the horizon. The Company's corporate headquarters are located in Sherman Oaks, California, north of downtown Los Angeles. operations are conducted from this location and from blood donor centers located on the University of Southern California Health Sciences Campus near downtown Los Angeles and in the San Gabriel Valley, east of Los Angeles. In December 1995, the Company commenced operations in St. Louis, Missouri, with a satellite location near Belleville, Illinois. These operations were sold in August 1997. 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". BLOOD MANAGEMENT PROGRAMS General - ------- HemaCare introduced its "Blood Management Program" or "BMP" model in late 1995 with the Gateway Community Blood Program ("Gateway") in St. Louis, Missouri. In 1996, two Southern California BMPs were established with the University of Southern California, in February 1996, and with Citrus Valley Health Partners, in October 1996. A HemaCare Blood Management Program is an arrangement in which a hospital outsources its blood procurement and donor center management functions to HemaCare. 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. A Blood Management Program aligns 2 the interests of the Company and its hospital customer, providing the customer with a "partner" in achieving its financial and patient service goals. The BMP model continues to evolve in response to changes in customer demand and marketplace dynamics. Although each BMP is customized to meet the specific needs of the individual customer, HemaCare's primary responsibilities in a BMP arrangement are to procure and deliver the blood products and services required by the BMP hospital and to operate the BMP blood donor center. Red blood cells are the principal blood product required by most hospitals. Beginning in the fourth quarter of 1996 and continuing throughout 1997, the price of red blood cells purchased by the Company steadily increased and their availability decreased. In 1997, the volume of red blood cells units available for sale through the American Association of Blood Banks' National Blood Exchange decreased by 11%, and HemaCare's cost to purchase a unit of red blood cells increased more than 10%. The terms of HemaCare's BMP agreements, combined with competitive factors in the blood products marketplace, have prevented the Company from recovering the increased costs from its customers. The increase in the cost of red blood cells, combined with their lack of availability, have caused HemaCare to reevaluate its existing Blood Management Program model. It is likely that future HemaCare BMP arrangements will be focused less on providing all of a hospital's blood products needs and more on providing specialized donation services, apheresis based products and services, and other technology-based blood therapies. 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 (the "USC Hospitals") for the three- year period ending in March 1999. An integral part of the program is a blood donation center located on the USC Health Sciences Campus. The center is staffed, operated and managed by the Company which is also responsible for regulatory compliance. Pathologists on the USC medical faculty provide medical services for the USC Blood Center. Citrus Valley - ------------- Under the terms of the Citrus Valley Health Partners ("Citrus Valley") BMP, the Company is the exclusive provider of blood services to a three-hospital network in the Los Angeles metropolitan area. These hospitals, Queen of the Valley Medical Center, Foothill Presbyterian Hospital and Inter-Community Medical Center (the "Citrus Valley Hospitals"), serve a community of 720,000 in the San Gabriel Valley. The Citrus Valley blood donation center, which opened in August 1997, is located in a community-based center convenient to all three hospitals. The center is staffed, operated and managed by the Company which is also responsible for regulatory compliance. Although the structure of the Citrus Valley BMP is similar to the USC program, the mix of products and services used by the Citrus Valley Hospitals is more heavily weighted toward red blood cells. In addition, the Citrus Valley BMP includes a fee structure which provides financial incentives to HemaCare and the Citrus Valley Hospitals for the efficient utilization of blood resources. The Citrus Valley BMP is in the second year of a three-year agreement ending September 30, 1999. Gateway - ------- Gateway was established by the Company as a regional BMP in the St. Louis, Missouri metropolitan area at the request of a number of local hospitals, including St. Louis University Medical Center, the Barnes-Jewish-Christian hospital system and the Unity Medical Groups. These hospitals expressed their need for an additional vendor of blood products and services in the region. Although Gateway was successful in building donor and community support for its fixed site collections and mobile blood drives with local businesses, schools, churches and civic organizations, it was unable to compete with the price reductions introduced by its principal competitor, the American Red Cross ("ARC"). Immediately following the opening of Gateway, the ARC decreased its price for red cells by more than 10%. This price decrease materially impacted Gateway's ability to market its products and services profitably, and Gateway was sold in August 1997. 3 BLOOD PRODUCTS General - ------- The Company provides a full range of blood products to hospital customers, including BMP customers, in southern California. These products include single donor apheresis platelet products ("apheresis platelets" or "platelets") and whole-blood components ("components") such as red blood cells and fresh frozen plasma. Currently, the Company produces most of the platelet products it sells from donations made at its Sherman Oaks location. However, platelets are also collected at the USC Donor Center and platelet collections are expected to commence at the Citrus Valley Donor Center in the second quarter of 1998. In February 1996, component manufacturing commenced at the Sherman Oaks, California location. The Company collects whole blood at the USC Blood Donor Center, the Citrus Valley Blood Donor Center and on mobile blood drives. Southern California component sales in 1997 and 1996 consisted of both purchased products (imported from other licensed blood centers) and products manufactured by the Company. Prior to 1996, Southern California sales of components consisted entirely of products purchased from third- party providers. Substantially all Gateway sales of component and apheresis products in 1997 and 1996 consisted of produced products. Single Donor Apheresis Platelets - -------------------------------- The Company collects single donor platelets, using automated blood separation technology, at its Sherman Oaks, California location and at the USC Blood Donor Center. Apheresis platelet collections are expected to commence at the Citrus Valley Blood Donor Center in the second quarter of 1998. All centers are operated under the Company's Food and Drug Administration establishment license. (See "Government Regulation".) HemaCare's platelet donors must pass the Company's stringent donor screening standards. After collection, the platelets are tested, labeled and delivered to hospital customers. Temperature control and constant movement (using a rotator) maintain the platelets' viability for five days. 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. When necessary to meet its customers' needs, the Company also purchases platelet products for resale. Such platelet suppliers are FDA licensed and accredited by the American Association of Blood Banks ("AABB"). Approximately 6% of platelets sold by the Company in 1997 were purchased from outside suppliers. Platelet apheresis technology involves the use of a cell separator operated by a trained nurse-specialist. 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 every two weeks, up to 24 times per year, since donating platelets does not deplete donors of red blood cells. In order to attract and retain qualified donors at its Sherman Oaks, California location, the Company reimburses these donors for their time and commitment. The cash reimbursement is variable, based on the number and frequency of donations, and includes a bonus program. The Company recruits non-cash compensated donors for its BMP donor centers. Unless extended, the law enabling HemaCare to compensate platelet donors will expire in December 2001. The Company is evaluating a number of available options regarding the expiration of the extension. Component Blood Products - ------------------------ HemaCare provides component blood products such as red blood cells, fresh frozen plasma and cryoprecipitate to its BMP and other customers. In 1997, component blood products sold included both purchased products and products collected and manufactured by the Company under its FDA license. 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. 4 Donations are tested and component products are manufactured at the Sherman Oaks facility. The component products are sold primarily to the USC Hospitals and Citrus Valley Hospitals under the terms of the BMP agreements with these hospitals. Component products manufactured by Gateway were sold to hospitals in the St. Louis metropolitan area and adjacent communities. From 1991 through 1995, all component products sold were purchased under contractual relationships with blood centers located throughout the U.S. All such suppliers are FDA licensed and accredited by the AABB. BLOOD SERVICES General - ------- Since its inception, the Company has performed more than 33,500 therapeutic apheresis procedures in the treatment of more than 27 diseases. 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. The Company customarily bills the hospital directly for its therapeutic services. Therapeutic treatments are administered using mobile units operated at the patient's bedside or in a hospital outpatient setting. The mobile therapeutics equipment is self-contained and 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, under the supervision of a specially trained physician. Joshua Levy, M.D., a shareholder, founder and medical director of the Company, 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 5% ($584,000) of the Company's total revenues for 1997. 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 their patients. Federal self-referral laws and related regulations could restrict the Company's ability to provide therapeutic services to Dr. Levy's patients who are covered by Medicare or MediCal (approximately 50% of Dr. Levy's therapeutics patients). These regulations are complex, and in 1996, the Company requested a clarification of their application to its business. In early 1997, the Company's legal counsel was informed that new regulations were under discussion, and the Company's request for clarification could not be answered at that time. In January 1998, the proposed new regulations were issued for comment. Since the proposed regulations do not specifically address therapeutic apheresis services, the Company has requested a revision of these regulations to provide a clear exemption for these services. The comment period for the proposed regulations ends in May 1998, and the new regulations will be issued sometime after that date. 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 (approximately $292,000 in 1997). (See "Government Regulation") The Company provides therapeutic services using all currently recognized treatment methods: 1) conventional plasma exchange and cell depletion, 2) in-line immunoadsorbant columns, and 3) stem cell rescue and cryopreservation. Conventional Plasma Exchange and Cell Depletion - ----------------------------------------------- The primary blood services provided by the Company, accounting for 88% of therapeutics procedures in 1997, 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 individual treatments involve the removal of two to four liters of abnormal plasma or certain cellular components. Replacement fluids, most 5 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, and as a result, albumin is in short supply and its price more than doubled during 1997. 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, lupus nephritis, 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 selectively remove immune complexes. Currently, there are only two manufacturers of apheresis columns approved by the FDA for two specific applications. As additional research demonstrates the efficacy of new applications, the Company anticipates additional business will result. Autologous 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 programs. In 1997, the Company provided only 3 full-service stem cell procedures to two community hospitals. The Company believes that increasing pressure from physicians and patients will, 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. 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 late 1994, the Company determined that ongoing Immupath research and development activities could no longer be funded internally, and 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. 6 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 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 the 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 18%, 16% and 13% of the Company's revenues in 1997, 1996 and 1995, 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' net income. The Citrus Valley Health Partners Hospitals accounted for approximately 13% of the Company's total 1997 sales. Loss of the Citrus Valley Health Partners sales would not have a significant adverse effect on the Company's net income. COMPETITION General - ------- The Company competes on the basis of its responsiveness to customer needs and the price and quality of the services and products it supplies. However, many blood providers, including the American Red Cross ("ARC"), have greater financial, technical and personnel resources than the Company, and additional companies may enter the field, increasing competition. In addition, some teaching and other hospitals have in-house blood banking and therapeutic apheresis service capabilities which do not compete directly with the Company, but do reduce the market for its services. In many instances, the Company competes against the ARC in providing its products and services to healthcare institutions. To date, the ARC has aggressively responded to competition from the Company, and management believes that such competition will continue. In St. Louis, prior to the opening of Gateway, 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 may improve 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, it BMP outsourcing program. Management is reevaluating and revising its BMP model to focus on providing specialized donation services, apheresis based products and services, and other technology based blood therapies, as well as considering a number of opportunities to implement customized outsourcing programs in a variety of healthcare settings. 7 The Company believes that its strategy of offering blood product and service programs tailored to the requirements of individual customers will favorably differentiate it from other suppliers of blood products and services and that outsourcing programs may provide opportunities for expansion of the Company's businesses. However, there can be no assurance that the Company's future outsourcing programs will be well received by hospital customers or 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 of the Company's therapeutic blood services business include the ARC, Coral Therapeutics, a Georgia-based company, and a number of small 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, 1998, the Company had approximately 49 full-time and 28 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 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. In the last quarter of 1996, the Company began experiencing increased difficulty in obtaining red blood cell products from suppliers, and the cost of products that were obtained increased. This trend has continued in 1997. 8 Industry data indicates that HemaCare's experience reflects a nationwide shortage of red blood cell products. Whole blood donations collected at the Company's BMP donor centers provided approximately 16% of the red blood cell products sold by the Company in 1997. Although this percentage is expected to increase in 1998, 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. Platelet and whole blood donors at the USC Blood Center and Citrus Valley Blood Donor Center 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. As a result, albumin is in short supply and its price to HemaCare has more than doubled IN 1997. 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 American Association of Blood Banks ("AABB"). 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 blood products business is operated under an FDA Establishment License, a State of California Biologics License and AABB accreditation. The Company primarily relies on its licensed and accredited laboratory to perform 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. The laboratory is staffed by state licensed, medical technologists and laboratory technicians. 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 regarding 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. 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 9 MediCal. It is estimated that revenues from these patients represented approximately 2.5% of the Company's 1997 revenues ($292,000). 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. Upon inquiry in early 1997, the Company's legal counsel was informed by HCFA that new regulations were under discussion, and the Company's request for clarification could not be answered at that time because of the uncertainty of the situation. In January 1998, the proposed new regulations were issued for comment. However, 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 ends in May 1998, and the new regulations will be issued sometime after that date. 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. 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. The state laws of California 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 should not be 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 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. Antigen - Any substance which is foreign to the recipient and triggers the body's immune mechanism resulting in the production of specific antibodies. 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. 10 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. The lease has been extended for a rolling four-month period. Either the Company or the landlord may terminate the lease upon four months written notice. The Company is currently seeking to either renew the lease on its existing facility on terms favorable to the Company or negotiate a lease for another facility. The USC Blood Donor Center occupies a 1,600 square foot facility located in Los Angeles, California, under a lease that terminates in February 1999. The Citrus Valley Blood Donor Center occupies a 2,300 square foot facility located in Covina, California. 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 also leases approximately 17,000 square feet of space in Valencia, California. This space, which was leased for the research and development operations that were discontinued in November 1995, is subleased through July 1998 when the Company's lease expires. Item 3. Legal Proceedings. - ------- ------------------ On March 11, 1994, the Company was served with a lawsuit filed by a former employee against the Company and its wholly owned subsidiary, HBI, in the Superior Court of the State of California, related to the termination of this employee and seeking relief in the amount of $550,000. The lawsuit was settled in October 1997. Although the terms of the settlement are confidential, they did not have a material effect on the Company's 1997 operating results or financial position. 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. 11 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------- ---------------------------------------------------------------------- Market for Common Stock - ----------------------- The Company's Common Stock is traded in the NASDAQ Small-Cap Issues market under the symbol HEMA. The following table sets forth the range of high and low closing bid prices of the Common Stock, as reported by NASDAQ, for the quarters ended March 31, June 30, September 30 and December 31, 1997 and 1996. These prices reflect inter-dealer quotations, without retail markups, markdowns or commissions, and do not necessarily represent actual transactions.
1997 1996 Quarter ended High Low High Low - ------------- ----- ------ ------ ------ March 31 $3.13 $2.03 $4.25 $2.94 June 30 $2.50 $1.06 $6.00 $3.13 September 30 $1.56 $0.75 $3.75 $1.88 December 31 $0.97 $0.38 $3.69 $2.63
No cash dividends had been paid as of March 1, 1998. The Company does not anticipate paying cash dividends in the foreseeable future. As of March 1, 1998, there were approximately 324 holders of record of the Company's Common Stock. On February 23, 1998, the new minimum bid price requirements contained in NASD Marketplace Rule 4310(c)(04) (the "Rule") became effective. The Rule requires, among other things, that issuers listed on Nasdaq maintain a minimum bid price of one dollar. On February 27, 1998, Nasdaq notified the Company that it is not in compliance with the minimum bid price requirement. The Company has until May 28, 1998 to regain compliance with the Rule. Compliance may be achieved if the Company's common stock trades at or above the minimum requirement of one dollar for at least 10 consecutive trade days. If the Company is unable to achieve compliance by May 28, 1998, Nasdaq has informed the Company that it will issue a delisting letter that will identify the review procedures available to the Company at that time. The Company is presently assessing the options available to achieve compliance with the Rule. However, there can be no assurance that the Company will be successful in retaining its Nasdaq listing. 12 Item 6. Selected Financial Data. - ------- -------------------------
Year Ended December 31, (In Thousands, except Per Share Data) 1997 1996 1995 1994 1993 ------ ------- ------ ------- ------ Revenues........................ $11,101 $10,921 $10,783 $10,847 $11,556 Operating profit................ 1,907 1,234 2,559 2,963 3,307 Income (loss) from continuing operations..................... 37 (1,090) 480 676 763 Discontinued Operations: Loss from discontinued operations..................... - - (902) (2,964) (3,309) Gain (loss) on disposal of discontinued operations..... 293 600 (3,114) - - Net income (loss)............... 330 (490) (3,536) (2,288) (2,546) Basic Per Share Amounts: - ------------------------- Income (loss) from continuing operations..................... $ 0.01 $ (0.17) $ 0.08 $ 0.13 $ 0.17 Income (loss) from discontinued operations..................... 0.04 0.09 (0.70) (0.59) (0.72) Net income (loss)............... 0.05 (0.08) (0.62) (0.45) (0.55) Diluted Per Share Amounts: - --------------------------- Income (loss) from continuing operations..................... 0.01 (0.17) 0.08 0.13 0.16 Income (loss) from discontinued operations..................... 0.04 0.09 (0.69) (0.57) (0.68) Net income (loss)............... 0.05 (0.08) (0.61) (0.44) (0.52) Total assets.................... $ 4,384 $ 4,776 $ 4,456 $ 6,289 $ 6,717 Long-term debt and capital lease obligations, net of current portion........................ 209 503 649 287 432 Shareholders' equity............ 2,402 2,023 1,226 3,900 4,585
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 late 1995 and in 1996, the Company initiated three blood management programs. The Gateway Community Blood Program ("Gateway") opened in St. Louis, Missouri, in December 1995. The University of Southern California ("USC") Blood Management Program commenced in February 1996 and the Citrus Valley Health Partners ("Citrus Valley") Blood Management Program commenced in October 1996. These programs are collectively referred to as the "Blood Management Programs" or "BMPs" in the following discussions. REVENUES Total revenues increased 2% ($180,000) in 1997, compared to an increase of 1% ($138,000) in 1996. The 1997 increase was due primarily to higher Blood Management Program and Regional Blood Services revenue, offset by lower Regional Blood Products revenue. The 1996 revenue increase was due to higher Blood Management Program revenue, offset by lower Regional Blood Products and Services revenues. The decreases in Regional Blood Products revenue in 1997 and 1996 were due primarily to the conversion of two significant customers to Blood Management Program arrangements. In addition, the volume of blood products sold to non-BMP customers and the prices for these products decreased in 1997 and 1996. Blood Management Programs - -------------------------- Blood Management Program revenue increased to $4.1 million in 1997 from $2.7 million in 1996. Blood Management Programs revenues were insignificant in 1995. The increases in Blood Management Program revenues in 1997 and 1996 reflect the commencement of the Gateway, USC and Citrus Valley BMPs. 13 The USC and Citrus Valley BMPs converted existing Regional Blood Products and Services revenue to a BMP revenue. Gateway was a new operation for the Company. Despite significant increases in collections and sales, Gateway's operations failed to achieve profitability and were sold in August 1997. Regional Operations - ------------------- Blood Products Blood products (apheresis platelet and whole blood component) revenues decreased 41% ($1,789,000) in 1997 and 37% ($2,526,000) in 1996. The 1997 and 1996 revenue decreases were due primarily to the conversion of the USC and Citrus Valley business to blood management programs. In addition, the volume and sales prices of apheresis platelets sold to non-BMP customers decreased in both 1997 and 1996. In 1997, the sales volume and prices of whole-blood components sold to non-BMP customers also decreased. The Company believes that the 1997 and 1996 decreases in apheresis platelet sales resulted from unfair ARC pricing practices. In August 1997, the ARC modified these practices in a way which the Company believes may ultimately improve its ability to obtain and retain apheresis platelet customers. Future growth of the Company's apheresis platelet product sales is largely dependent upon regaining and retaining the customers it lost in 1997 and 1996. Although demand for component products is expected to remain strong, sales of component products are limited by the Company's ability to produce or purchase red blood cells at an economic price. Blood Services Regional Blood Services revenue increased by 15% ($581,000) in 1997 and decreased by 1% ($53,000) in 1996. The 1997 revenue increase resulted from higher Southern California therapeutic apheresis and donor testing revenue. The 1996 revenue decrease resulted from lower Southern California and Georgia therapeutic apheresis revenue, largely offset by increased donor testing revenue. The decrease in Georgia apheresis therapeutic revenues resulted from the closure of this operation in July 1996. In 1997, the volume of Southern California therapeutic apheresis procedures increased 11% and the price per procedure increased 8%. The price increase resulted from higher albumin charges, partially offset by lower average basic, procedure fees. The cost to the Company for albumin, a replacement fluid used in most therapeutic procedures, more than doubled in 1997. A portion of this increase was passed through to customers as higher albumin charges. In 1996, a 2% increase in the volume of Southern California therapeutic apheresis procedures was offset by 1% price decrease. 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. In 1997 and 1996, 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 and 1996 were partially offset by decreases in the average price per unit tested. As the number of providers of donor testing services increases, competition for testing business will increase and prices are likely to continue to decrease. OPERATING PROFIT Operating profit as a percentage of revenue ("operating profit margin") increased 6% in 1997 and decreased 12% in 1996. Both changes resulted primarily from Blood Management Program operating losses. The operating profit margin from stabilized operations was 25% in 1997 and 26% in 1996 and 1995. Increased costs to acquire red blood cells and an increase in the price of albumin had an adverse impact on the 1997 stabilized operating profit margin. 14 Blood Management Programs - ------------------------- The loss from Blood Management Program operations was $210,000, $963,000 and $290,000 in 1997, 1996 and 1995, respectively. Of these amounts, $316,000 in 1997, $1,106,000 in 1996 and $234,000 in 1995 related to Gateway's operations which were sold in August 1997. The profitability of the Southern California BMPs was adversely affected in 1997 and 1996 by losses incurred at the blood donor centers. In 1997, USC Donor Center single donor platelet and whole blood collections increased significantly, but these gains were offset by the cost of starting up the Citrus Valley Donor Center. In addition, 1997 BMP operating profit was reduced by increases in the cost of acquiring red blood cells. Regional Operations - ------------------- Blood Products The operating profit margin on blood product sales increased to 27% in 1997, from 22% in 1996, and 23% in 1995. The 1997 increase was due primarily to a change in the mix of products sold, partially offset by lower apheresis platelet operating profit margins. The 1996 decrease resulted from lower operating profit margins on apheresis platelets, partially offset by a change in product mix. The percentage of Regional Operations Blood Products revenue from components, principally red blood cells, decreased to 53% in 1997, from 78% in 1996, and 79% in 1995. The operating profit margin on red blood cells is substantially lower than that of other blood products sold by the Company. The 1997 and 1996 decreases in Regional Operations sales of red blood cells resulted from the conversion of red blood cell customers to BMP arrangements. The 1997 and 1996 decreases in the apheresis platelet operating profit margin resulted from decreases in the average sales price (3% in 1997 and 4% in 1996), partially offset by lower production costs. Blood Services The gross profit margin for the blood services remained stable between 1997 and 1995. In 1997, a small decrease in the operating profit margin for Los Angeles therapeutic services was offset by elimination of losses from the Company's Georgia therapeutic services operation which was closed in July 1996. 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. However, the price increase did not entirely offset the increased albumin cost. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased 14% ($326,000) in 1997 and increased 12% ($246,000) in 1996. In both years, corporate spending controls, including staffing reductions, were in effect, but in 1996, the positive effect of these controls was more than offset by increased legal fees, an increase in regulatory personnel costs and the addition of a business development department. DISCONTINUED OPERATIONS From 1990 through 1995, the Company, thorough its wholly-owned subsidiary HemaBiologics, Inc., conducted research and development activities relating to Immupath, an anti-HIV hyperimmune plasma product. In late 1994, the Company determined that ongoing Immupath research and development activities could no longer be funded internally, and 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. 15 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 six patients receiving Immupath treatments. In the fourth quarter of 1997, the Company reviewed and revised its estimated costs of 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 CAPTIAL RESOURCES At December 31, 1997, the Company had cash and short-term investments of $1.6 million. The Company's $700,000 line of credit with a commercial bank is in effect until April 30, 1998. Under the terms of the credit line agreement, the Company may borrow up to 70% of eligible accounts receivable, up to a maximum of $700,000 and must maintain certain ratios. The Company was in compliance with all covenants of its borrowing agreement at December 31, 1997. At December 31, 1997, there were no borrowings outstanding on the line of credit, and the Company has requested its bank to renew the credit agreement. The Company's common stock is listed on the Nasdaq Small Cap Market ("Nasdaq"). In August 1997, Nasdaq adopted NASD Marketplace Rule 4310(c)(04) (the "Rule") to strengthen both the quantitative and qualitative listing requirements for issuers. The Rule, which became effective February 23, 1998, requires among other things, that issuers listed on the Nasdaq SmallCap Market maintain a minimum bid price of $1 and net tangible assets, as defined, of at least $2 million. The minimum bid price of the Company's stock as of March 27, 1998 was less than $1.00 and its net tangible assets at December 31, 1997 were $2.4 million. On February 27, 1998, Nasdaq notified the Company that it is not in compliance with the minimum bid price requirement. The Company has until May 28, 1998 to regain compliance with the Rule. Compliance may be achieved if the Company's common stock trades at or above the minimum requirement of one dollar for at least 10 consecutive trade days. If the Company is unable to achieve compliance by May 28, 1998, Nasdaq has informed the Company that it will issue a delisting letter which will identify the review procedures available to the Company at that time. The Company is presently assessing the options available to achieve compliance with the Rule. In the event that the Company's common stock is no longer listed on the Nasdaq SmallCap Market or a national securities exchange, the liquidity of the Company's common stock would be adversely affected and the Company's ability to raise capital may be impaired. The Company's blood products and services businesses, other than blood donor center operations established for the Blood Management Programs, 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 as evaluation, the Company sold Gateway's unprofitable St. Louis- based operations in August 1997. At December 31, 1997, the blood donor center ("Center") activities of the Blood Management Programs were the Company's only operations which were not generating operating profits. Center operations are expected to continue to be unprofitable until a higher level of Center blood collections can be achieved. The operating losses of the Centers reduce the overall profitability of the USC and Citrus Valley BMP arrangements to the Company. The Company has implemented plans to achieve a profitable level of collections and sales for these Centers. Although these plans have decreased the USC and Citrus Valley Center losses, there can be no assurance that the USC and Citrus Valley Centers will be able to achieve and maintain a profitable level of collections. In addition, a high percentage of the products sold to the Citrus Valley BMP are red blood cells. Despite an 8% increase in the Citrus Valley price for red blood cells which was effective October 1, 1997, increases in the cost the Company must pay to acquire or produce red blood cells has reduced the operating profit margin on these sales. 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 2.5% ($292,000) of the Company's 1997 revenues. These regulations are complex, and the Company requested a clarification of their application to its business from Health Care Financing Administration ("HCFA"), in early 1996. To date, the Company has not received a response to this request. Upon inquiry in early 1997, the Company's legal counsel 16 was informed by HCFA that new regulations were under discussion, and the Company's request for clarification could not be answered at that time because of the uncertainty of the situation. In January 1998, the proposed new regulations were issued for comment. However, 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 ends in May 1998, and the new regulations will be issued sometime after that date. If the new regulations do not provide an exemption for therapeutic apheresis services, the Company could lose the revenue from its services to Dr. Levy's Medicare and MediCal patients. Management is evaluating opportunities to develop and implement new outsourcing models and these models, including its Blood Management Program. These opportunities include a revision and extension of the existing USC Blood Management Agreement that expires in March 1999. Because of the increase in the cost of acquiring red blood cells, it is likely that future HemaCare outsourcing arrangements will be focused 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 or that it will be able to obtain the funds necessary to finance such programs. 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 the Blood Management Program Centers, (ii) the remaining costs of its discontinued operations and (iii) other working capital requirements, including capital and operating lease commitments. YEAR 2000 DISCLOSURE Company software is designed to function following the millenium. The Company does not believe that year 2000 compliance poses a risk to its continuing operations. 17 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 its Blood Management Programs, to retain existing customers, to improve the profitability of the Company's other operations, to expand its operations, to comply with the covenants under its bank line of credit and to effectively compete against the ARC and other competitors. Each of these risks and uncertainties as well as others are discussed in greater detail in the 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-3-14. 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. 18 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--incorporated by reference to Exhibit 3.2 to Form 10-K of the Registrant for the year ended December 31, 1992. 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 Warrant Agreement between the Registrant and Huss Kealy Sinclair dated May 7, 1993--incorporated by reference to Registration Statement on Form S-3 of the Registrant (File No. 33-44869). 4.3 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. 4.4 Offshore Securities Subscription Agreement between the Registrant and Tesoma Overseas, Inc., dated April 8, 1994-- incorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended March 31, 1994. 19 4.5 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. 4.6 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. 4.7 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. 4.8 Form of Warrant Agreement between the Registrant and Tesoma Overseas, Inc. dated February 9, 1995--incorporated by reference to Exhibit 4.8 to Form 10-K of the Registrant for the year ended December 31, 1994. 4.9 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. 4.10 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. 4.11 Amended Certificate of Determination, dated March 18. 1998. 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 Lease dated July 10, 1986 between the Registrant and Addison Place Partners--incorporated by reference to Registration Statement on Form S-18 of the Registrant (File No. 33-8513- LA). 10.4 Amendment No. 1 to Lease between the Registrant and Addison Place Partners dated March 30, 1993--incorporated by reference to Exhibit 10.3 to Form 10-K of the Registrant for the year ended December 31, 1994. 10.5 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. 10.6 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. 10.7 Revolving Credit Agreement between the Registrant and Bank Leumi Le-Israel, B.M., dated April 30, 1997 and related security agreements--incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for the quarter ended June 30, 1997. 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. 20 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 subisidary of the Registrant, and Joshua Levy dated January 30, 1998. 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 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. 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 March 5, 1998, the Company filed a Report on Form 8-K dated March 5, 1998. The Company reported under Item 2 that the Company entered into a Rights Agreement with its transfer agent, U.S. Stock Transfer Corporation. 21 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 27, 1998 \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 27th day of March, 1998. Signature Title \s\ Alan C. Darlington Chairman of the Board - --------------------------- Alan C. Darlington \s\ Hal I. Lieberman President, Chief Executive Officer - --------------------------- (Principal Executive Officer) Hal I. Lieberman \s\ Sharon C. Kaiser Sr. Vice President, Finance, Chief - --------------------------- Financial Officer (Principal Sharon C. Kaiser Financial and Accounting Officer) \s\ Charles R. Schwab, Jr. Director - --------------------------- Charles R. Schwab, Jr. \s\ Jay Steffenhagen Director - --------------------------- Jay Steffenhagen 22 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, 1997 and December 31, 1996............................................ F-3 For the years ended December 31, 1997, 1996 and 1995: 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP --------------------------- ARTHUR ANDERSEN LLP Los Angeles, California February 12, 1998 F-2 Part I. Financial Information Item 1. Financial Statements HEMACARE CORPORATION CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1997 1996 ------------- ------------ ASSETS Current assets: Cash and cash equivalents.................... $ 1,249,000 $ 1,136,000 Marketable securities........................ 363,000 415,000 Accounts receivable, net of allowance for doubtful accounts - $81,000 (1997) and $47,000 (1996).............................. 1,561,000 1,722,000 Product inventories.......................... 63,000 74,000 Supplies..................................... 341,000 306,000 Prepaid expenses............................. 123,000 146,000 Note receivable from related party - current. 24,000 15,000 ------------- ------------- Total current assets................ 3,724,000 3,814,000 Plant and equipment, net of accumulated depreciation and amortization of $1,690,000 (1997) and $1,875,000 (1996)...... 585,000 823,000 Note receivable from related party - non-current.................................. 65,000 88,000 Other assets................................... 10,000 51,000 ------------- ------------- $ 4,384,000 $ 4,776,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................. $ 659,000 $ 909,000 Accrued blood purchases...................... - 175,000 Accrued payroll and payroll taxes............ 493,000 335,000 Other accrued expenses....................... 366,000 284,000 Current obligations under capital leases..... 140,000 241,000 Reserve for discontinued operations.......... 115,000 306,000 ------------- ------------- Total current liabilities........... 1,773,000 2,250,000 Obligations under capital leases, net of current portion........................... 209,000 503,000 Commitments and contingencies.................. Shareholders' equity: Common stock, without par value-20,000,000 shares authorized, 7,190,710 issued and outstanding in 1997 and 7,177,515 in 1996.. 13,515,000 13,466,000 Accumulated deficit.......................... (11,113,000) (11,443,000) ------------- ------------- Total shareholders' equity.......... 2,402,000 2,023,000 ------------- ------------- $ 4,384,000 $ 4,776,000 ============= =============
The accompanying notes are an integral part of these consolidated balance sheets. F-3 HEMACARE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997 1996 1995 ------------ ------------ ------------ Revenues: Blood management programs......... $ 4,105,000 $ 2,717,000 $ - Regional operations Blood products.................. 2,589,000 4,378,000 6,904,000 Blood services.................. 4,407,000 3,826,000 3,879,000 ------------- ------------- ------------ Total revenue................... 11,101,000 10,921,000 10,783,000 Operating costs and expenses: Blood management programs......... 4,315,000 3,680,000 290,000 Regional operations Blood products.................. 1,879,000 3,402,000 5,291,000 Blood services.................. 3,000,000 2,605,000 2,643,000 ------------- ------------- ------------ Total operating costs and expenses...................... 9,194,000 9,687,000 8,224,000 ------------- ------------ ------------ Operating profit................ 1,907,000 1,234,000 2,559,000 General and administrative expense.. 1,998,000 2,324,000 2,078,000 Gain on sale of Gateway Community Blood Program..................... 128,000 - - ------------- ------------- ------------ Income (loss) from continuing operations before income taxes.... 37,000 (1,090,000) 480,000 Provision for income taxes.......... - - - ------------- ------------- ------------ Income (loss) from continuing operations........................ 37,000 (1,090,000) 480,000 Discontinued operations: Gain (loss) from disposal of discontinued operations......... 293,000 600,000 (3,114,000) Loss from discontinued operations. - - (902,000) ------------- ------------- ------------ Net income (loss)............... $ 330,000 $ (490,000) $(3,536,000) ============= ============= ============ Basic per share amounts: Income (loss) from continuing operations...................... $ 0.01 $ (0.17) $ 0.08 Income (loss) from discontinued operations...................... 0.04 0.09 (0.70) ------------- ------------- ------------ Net income (loss)............... $ 0.05 $ (0.08) $ (0.62) ============= ============= ============ Diluted per share amounts: Income (loss) from continuing operations...................... $ 0.01 $ (0.17) $ 0.08 Income (loss) from discontinued operations...................... 0.04 0.09 (0.69) ------------- ------------- ------------ Net income (loss)............... $ 0.05 $ (0.08) $ (0.61) ============= ============= ============
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, 1997, 1996 AND 1995
Common Stock Accumulated Shares Amount Deficit Total ------------ ------------ ------------- ---------- Balances at December 31, 1994.......... 5,366,381 $11,317,000 $ (7,417,000) $ 3,900,000 Exercise of stock options and warrants. 528,083 796,000 - 796,000 Compensation expense related to the issuance of common stock options at a price below market............... - 12,000 - 12,000 Issuance of common stock for employee 401(k) and incentive bonus plans...... 16,821 54,000 - 54,000 Net Income/(loss)...................... - - (3,536,000) (3,536,000) ---------- ------------ ------------- ------------ 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 ========== ============ ============= ============
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, 1997 1996 1995 ------------ ------------ ------------- Cash flows from operating activities: Net Income (loss)............................... $ 330,000 $ (490,000) $(3,536,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Write-off of assets from discontinued operations.................................. - - 2,079,000 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) 29,000 Depreciation and amortization................ 187,000 359,000 498,000 Issuance of common stock and options for compensation................................ 50,000 44,000 67,000 Changes in operating assets and liabilities: Increase (decrease) in accounts receivable... 196,000 (70,000) (49,000) Increase(decrease) in inventories, supplies and prepaid expenses........................ (1,000) 59,000 (34,000) Decrease (increase) in other assets, net..... 41,000 28,000 (92,000) Increase (decrease) in accounts payable, accrued expenses and deferred revenue....... (185,000) 267,000 (240,000) Proceeds from (expenditures for) discontinued operations.................................. 8,000 (30,000) 936,000 ----------- ------------ ------------ Net cash provided by (used in) operating activities.................................. 240,000 (458,000) (342,000) Cash flows from investing activities: (Increase) decrease in note receivable from related party................................. 14,000 6,000 (18,000) (Increase) decrease in marketable securities.... (52,000) (415,000) 295,000 (Purchase) disposition of plant and equipment, net........................................... 46,000 (32,000) (181,000) ----------- ------------ ------------ Net cash provided by (used in) investing activities.................................... 8,000 (441,000) 96,000 Cash flows from financing activities: Net proceeds from issuance of common stock...... - 1,243,000 796,000 Principal payments on line of credit and capital leases................................ (135,000) (205,000) (339,000) ----------- ------------ ------------ Net cash (used in) provided by financing activities.................................... (135,000) 1,038,000 457,000 ----------- ------------ ------------ Increase in cash and cash equivalents........... 113,000 139,000 211,000 Cash and cash equivalents at beginning of period........................................ 1,136,000 997,000 786,000 ----------- ------------ ------------ Cash and cash equivalents at end of period...... 1,249,000 $ 1,136,000 $ 997,000 =========== ============ ============ Supplemental disclosure: Interest paid................................... $ 51,000 $ 78,000 $ 47,000 =========== ============ ============ Items not impacting cash flow: Increase in capital lease obligations........... $ 38,000 $ 92,000 $ 487,000 =========== ============ ============
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 healthcare institutions. 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 11.) In 1992, the Company acquired Georgia Hemapheresis Services ("GHS"), a company it had previously managed. GHS was closed in July 1996. 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. 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. 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 the sale 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 blood components that are manufactured or purchased and distributed by the Company. Accounts receivables are reviewed periodically for collectibility. 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 F-7 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 length of the lease, ranging from three to ten 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. Other Assets: As of December 31, 1997 other assets consisted primarily of deposits. At December 31, 1996, other assets consisted primarily of deposits and organizational costs of Gateway which were being amortized using the straight-line method, over a period of five years. The organizational costs were written off when Gateway's operations were sold in August 1997. Income Taxes: Income taxes are computed under the provisions of 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" which was issued in March 1997, effective fiscal for years ending after December 15, 1997. 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. The following table reconciles the number of shares used in the computations of basic and diluted earning (loss) per share:
December 31, 1997 1996 1995 ----------- ----------- ----------- Weighted average common shares used to compute basic earnings (loss) per share 7,189,000 6,350,000 5,693,000 Effective of dilutive securities: Options 11,000 - 122,000 Warrants 5,000 - 29,000 ---------- ---------- ---------- Weighted average common shares and equivalents used to compute diluted earnings (loss) per share 7,205,000 6,350,000 5,844,000 ========== ========== ==========
Warrants and options to purchase 1,289,800, 995,800 and 1,034,800 shares of common stock outstanding at December 31, 1997, 1996 and 1995, 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 1996 and 1995 amounts have been reclassified to conform with 1997 presentations. F-8 Note 3 - Plant and Equipment - ---------------------------- Plant and equipment consists of the following: December 31, 1997 1996 ------------ ------------ Furniture, fixtures and equipment $ 2,089,000 $ 2,497,000 Leasehold improvements 186,000 201,000 ------------ ------------ 2,275,000 2,698,000 Less accumulated depreciation and amortization (1,690,000) (1,875,000) ------------ ------------ $ 585,000 $ 823,000 ============ ============ Equipment with a cost of $740,000 in 1997 and $1,097,000 in 1996 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 4 - Line of Credit - ----------------------- The Company maintains a line of credit with a commercial bank secured by its accounts receivable, inventory and equipment. The credit line is in effect through April 30, 1998. Under the terms of the credit line agreement, as amended, the Company may borrow up to 70% of eligible accounts receivable, up to a maximum of $700,000 and must maintain certain ratios. The Company was in compliance with all covenants of its borrowing agreement, as amended, at December 31, 1997. Interest on credit line borrowings is at the lender's prime rate (8.50% at December 31, 1997) plus one-half of a percentage point. As of December 31, 1997 and 1996, and during the years then ended, there were no balances outstanding under the line of credit. Note 5 - 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 1998 to 2003, are as follows: Year Ending December 31, 1998 $ 157,000 1999 118,000 2000 54,000 2001 26,000 2002 21,000 Thereafter 25,000 ---------- Total minimum lease payments 401,000 Less: Amount representing interest 52,000 ---------- Present value of minimum lease payments $ 349,000 ========== F-9 Future minimum rentals under operating leases, which expire in 1998 through 2003, are as follows: Year ending December 31, 1998 $ 382,000 1999 88,000 2000 49,000 2001 39,000 2002 39,000 Thereafter 32,000 ---------- $ 629,000 ========== Total rent expense under all operating leases was $600,000, $664,000 and $561,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Note 6 - Income Taxes - ---------------------- There is no current or deferred income tax expense for the three years ended December 31, 1997. The Company utilized net operating loss carryforwards in 1997 and incurred losses in 1996 and 1995. The approximate tax effects of temporary differences which gave rise to significant deferred tax assets and liabilities at December 31, 1997 and 1996, are as follows: 1997 1996 ----------- ------------ Current: Accrued expenses and other $ 318,000 $ 249,000 Noncurrent: Depreciation and amortization 290,000 415,000 Deferred research and development expenses 210,000 160,000 Other 93,000 (99,000) Net operating loss carryforwards 3,124,000 2,484,000 Tax credit carryforwards 881,000 963,000 ------------ ------------ Total deferred assets 4,916,000 4,172,000 Valuation allowance (4,916,000) (4,172,000) ------------ ------------ $ -- $ -- ============ ============ At December 31, 1997 and 1996, the Company had net operating loss carryforwards available for federal income tax purposes of $8,509,000, expiring from 2004 to 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 5.8%; 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. F-10 The Company also had net operating loss carryforwards available for state income tax purposes of approximately $3,839,000 at December 31, 1997 expiring from 1998 to 2000. At December 31, 1997, the Company had federal income tax credit carryforwards of approximately $573,000 expiring from 1998 to 2010, and state tax credit carryforwards of approximately $308,000 which are not subject to expiration. Note 7 - Shareholders' Equity - ------------------------------ 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 accounts for these plans and recognizes compensation expense in accordance with APB Opinion No. 25. Under the provisions of this opinion, the Company recognized $8,000 and $5,000 of compensation expense in 1997 and 1996, respectively. Had compensation expense for these plans been recognized in accordance with SFAS 123 "Accounting for Stock-Based Compensation", the Company's net income (loss) and net income (loss) per share would have been as follows: Years ended December 31, -------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Net income (loss): As reported $ 330,000 $ (490,000) $(3,536,000) Pro forma 83,000 (622,000) (3,579,000) Basic net income (loss) per share: As reported $ 0.05 $ (0.08) $ (0.63) Pro forma 0.01 (0.10) (0.61) Diluted net income (loss) per share: As reported $ 0.05 $ (0.08) $ (0.61) Pro forma 0.01 (0.10) (0.61) 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, ------------------------------------- 1997 1996 1995 ----------- ---------- ---------- Weighted average risk free interest rate 5.00% 5.75% 6.50% Expected volatility 68% 60% 52% Weighted average fair value of options and warrants $0.73 $1.53 $1.16 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 750,000 shares may be granted under the terms of the 1996 Plan, of which 372,500 were granted during 1997. 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 be exercisable at a rate of at least 20% per year. The 1986 Plan expired in July 1996. At December 31, 1997, 128,300 options were outstanding under this plan. F-11 A one-time grant of options typically is made to each non-employee director at the time of joining the Board, and additional options may be granted to non-employee directors at other times. The table below summarizes transactions in the Plans and weighted average exercise prices ("Price") during 1997, 1996 and 1995.
1997 1996 1995 -------------------- ------------------- ----------------- Shares Price Shares Price Shares Price -------- --------- --------- -------- -------- ------- Outstanding at beginning of year 185,800 $ 4.01 395,800 $ 3.12 581,083 $ 3.60 Granted 372,500 1.74 63,000 3.41 37,800 2.23 Exercised 0 - 53,750 1.99 28,083 1.83 Canceled 62,500 2.78 219,250 2.59 195,000 4.55 ------- ------ ------- ------ ------- ------ Outstanding at end of year 495,800 2.36 185,800 4.01 395,800 3.12 ======= ====== ======= ====== ======= ====== Exercisable at end of year 184,550 $ 3.05 140,300 $ 4.12 339,967 $ 2.85 ======= ====== ======= ====== ======= ======
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, 1997:
Options Outstanding Options Exercisable ----------------------------- -------------------- Range of Exercise price Shares Life Price Shares Price - ------------------------ -------- ----------- ------ --------- -------- $0.59 to $1.74 182,500 9.9 years $1.35 50,000 $0.95 $1.75 to $2.43 125,000 9.5 years 2.00 2,500 2.00 $2.44 to $4.99 149,800 7.2 years 3.12 93,550 3.23 $5.00 to $6.13 38,500 10 months 5.39 38,500 5.39 ------- ------ ------- ----- 495,800 $2.36 184,550 $3.05 ======= ===== ======= =====
At December 31, 1997, 1996 and 1995, the Company had a total of 810,000, 810,000 and 790,000 warrants to purchase common stock outstanding, respectively. Of the outstanding warrants, 790,000 were exercisable in 1997, 1996 and 1995. In connection with stock sales in 1993 and 1994, the Company issued warrants to finders to purchase 90,000 shares of the Company's stock at prices ranging from $1.45 and $6.50, expiring between May 1998 and July 2000. In 1995 the Company issued an additional 250,000 warrants to purchasers of the stock sold in 1994. These warrants are exercisable at a price of $3.50 per share through December 1998. Up to 12,500 additional finder warrants may be issued at $3.50 per share, depending on the number of the fourth group of 250,000 warrants which are exercised. 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. At December 31, 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. At December 31, 1995, 50,000 warrants issued for consulting services were outstanding. These warrants, all of which were exercisable, had exercise prices between $2.63 and $3.69 and expired between June 1999 and June 2002. Note 8 - 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 1997, 1996 and 1995, the Company elected to match 50 percent of the of each participants contribution, up to 5% of the participants annual salary, with F-12 HemaCare common stock. Matching contributions were suspended effective January 1, 1998 on the advise of the Plan Administrator, based on the decrease in the market price of the Company's stock in 1997. During 1997, 1996 and 1995, HemaCare issued 13,195 shares ($41,000), 12,480 shares ($44,000) and 16,821 shares ($55,000) of common stock as matching contributions for the 1996, 1995 and 1994 plan years, respectively. HemaCare plans to issue approximately 90,410 shares ($42,000) in 1998 as matching contributions for the 1997 plan year. Note 9 - Commitments and Contingencies - --------------------------------------- On March 11, 1994, the Company was served with a lawsuit filed by a former employee against the Company and its wholly owned subsidiary, HBI, in the Superior Court of the State of California, related to the termination of this employee and seeking relief in the amount of $550,000. The lawsuit was settled in October 1997. Although the terms of the settlement are confidential, they did not have a material effect on the Company's 1997 operating results or financial position. 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. The Company intends to vigorously defend this claim, and its ultimate resolution is not expected to have a material impact on the Company's financial condition or its results of operations. Note 10 - Segment and Related Party Information - ----------------------------------------------- The Company operates within one industry, blood services and products. Sales of products and services to two unaffiliated hospital groups accounted for $2,044,000 (18%) and $1,473,000 (13%) of the Company's revenues in 1997. In 1996 and 1995, sales to one unaffiliated hospital group accounted for $1,769,000 (16%) and $1425,000 (13%) of the Company's revenues, respectively. 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 11 - 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. In connection with this decision, the Company wrote off the remaining book value of HBI's assets ($2,079,000) and provided a reserve for estimated operating losses ($1,035,000) from the November 30, 1995 measurement date through December 1996, the expected date of substantial completion of disposal. The loss on the disposition of HBI's operations has been accounted for as a discontinued operation. 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 F-13 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-14 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 February 12, 1998. 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 audits 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 February 12, 1998 S-1 HEMACARE CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For The Years Ended December 31, 1997, 1996 and 1995
Additions ------------------------ Balance at Charged to Charged to Balance beginning costs and other at end of Description of period expenses accounts Write-offs period - ------------------ ----------- ----------- ---------- ---------- -------- 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)(1) $ -- $ 22,000 $ 47,000 Year ended December 31, 1995 - Allowance for uncollectible accounts $141,000 $ 29,000 $ -- $ 76,000 $ 94,000
(1) 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-K 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--incorporated by reference to Exhibit 3.2 to Form 10-K of the Registrant for the year ended December 31, 1992....................................................... 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 Warrant Agreement between the Registrant and Huss Kealy Sinclair dated May 7, 1993--incorporated by reference to Registration Statement on Form S-3 of the Registrant (File No. 33-44869)....................................................... 4.3 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....................................................... 4.4 Offshore Securities Subscription Agreement between the Registrant and Tesoma Overseas, Inc., dated April 8, 1994-- incorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended March 31, 1994............ 4.5 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........................................... 4.6 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................................... 4.7 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.............................................. 4.8 Form of Warrant Agreement between the Registrant and Tesoma Overseas, Inc. dated February 9, 1995--incorporated by reference to Exhibit 4.8 to Form 10-K of the Registrant for the year ended December 31, 1994........................... 4.9 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 Decmeber 31, 1996.............................................. 4.10 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.................................................. 4.11 Amended Certificate of Determination, dated March 18, 1998..... Filed herewith electronically 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 of the Registrant, as amended-- incorporated by reference to Exhibit 4.1 to Form 10-Q of the Registrant for the quarter ended September 30, 1996............ 10.3 Lease dated July 10, 1986 between the Registrant and Addison Place Partners--incorporated by reference to Registration Statement on Form S-18 of the Registrant (File No. 33-8513-LA). 10.4 Amendment No. 1 to Lease between the Registrant and Addison Place Partners dated March 30, 1993--incorporated by reference to Exhibit 10.3 to Form 10-K of the Registrant for the year ended December 31, 1994........................................ 10.5 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........................................ 10.6 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............................... 10.7 Revolving Credit Agreement between the Registrant and Bank Leumi Le-Israel, B.M., dated April 30, 1997 and related security agreements--incorporated by reference to Exhibit 10.1 to Form 10-Q of the Registrant for the quarter ended June 30, 1997.................................................. 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......................................... Filed herewith electronically 10.11 Settlement Agreement between the Registrant and Medicorp Inc.- incorporated by reference to Exhibit 10.1 to Form 8-K of the Registrant dated July 19, 1996............................. 10.12 Registration Rights of Shareholders - incorporated by reference to Exhibit 4.9 to the Current Report on Form 8-K of the Registrant dated July 19, 1996.......................... 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-4.11 2 EXHIBIT 4.11 CERTIFICATE OF DETERMINATION of the SERIES A JUNIOR PARTICIPATING PREFERRED STOCK (WITHOUT PAR VALUE) of HEMACARE CORPORATION (Pursuant to Section 401 of the General Corporation Law of the State of California) _____________________________________ The undersigned, Hal I. Lieberman and Sharon C. Kaiser, DO HEREBY CERTIFY that: 1. They are the duly elected and acting President and Chief Financial Officer, respectively, of HemaCare Corporation, a corporation organized and existing under the General Corporation Law of the State of California (the "Company"). 2. The resolution attached hereto was adopted by the Board of Directors of the Company as required by Section 401 of the General Corporation Law at a meeting duly called and held on February 23, 1998. 3. The number of shares of Series A Junior Participating Preferred Stock of the Company is 250,000, of which none have been issued. -1- The undersigned further declare under penalty of perjury under the laws of the State of California that the matters set forth in the Certificate of Determination are true and correct of our own knowledge. Executed at Sherman Oaks, California on March 17, 1998 /s/ Hal I. Lieberman ----------------------------- Hal I. Lieberman, President /s/ Sharon C. Kaiser ------------------------------- Sharon C. Kaiser, Chief Financial Officer -2- EXHIBIT A RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of this Company in accordance with the provisions of the Company's Articles of Incorporation, as amended (the "Articles of Incorporation"), this Board of Directors hereby authorizes the issuance of a series of the serial Preferred Stock of the Company (the "Preferred Stock") which shall consist of 250,000 shares of the Company's Preferred Stock, and hereby fixes the powers, designations, preferences, and relative participating, optional, or other special rights, and the qualifications, limitations, or restrictions thereof, of the shares of such series (in addition to the powers, designations, preferences, and relative participating, optional or other special rights, and the qualifications, limitations, or restrictions thereof, set forth in the Articles of Incorporation of the Company which are applicable to the Preferred Stock) as follows: Series A Junior Participating Preferred Stock: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 250,000. Prior to the issuance of any such shares, such number of shares may be increased or decreased by resolution of the Board of Directors. Section 2. Dividends and Distributions. (a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, without par value (the "Common Stock"), of the Company, and of any other junior stock, shall be entitled to receive, when, as, and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on January 15, April 15, July 15, and October 15 of each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $0.02 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly -3- Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination, or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Company shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (a) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $0.02 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. -4- Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Company. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein, in any other Certificate of Determination creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Company. (c) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Company shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; -5- (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided, that the Company may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock or shares of any stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series and classes. (b) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Articles of Incorporation, or in any other Certificate of Determination creating a series of Preferred Stock or any similar stock or as otherwise required by law. -6- Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $1.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided, that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (b) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (a) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, Etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares -7- of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all other series of the Company's Preferred Stock which may be authorized hereafter. Section 10. Amendment. The Articles of Incorporation and any Certificates of Determination issued under the authority of the Articles of Incorporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. -8- EX-10.10 3 EXHIBIT 10.10 HEMACARE CORPORATION LOAN REIMBURSEMENT AGREEMENT This Loan Reimbursement Agreement is made and entered into by and between HemaCare Corporation, a California corporation having its principal place of business at 4954 Van Nuys Boulevard, Sherman Oaks, California 91403 (hereinafter, "HemaCare") and Joshua Levy, M.D., a resident of Valley Village, California (hereinafter, the "Medical Director"), effective July 31, 1997. RECITALS A. WHEREAS, the Medical Director is currently employed by HemaCare; B. WHEREAS, Hemabiologics, Inc. ("Hemabiologics"), a wholly-owned subsidiary of HemaCare, loaned the Medical Director a total of Ninety-Eight Thousand, Three Hundred and Seven Dollars ($98,307.00) in 1994 and 1995 (the "Loan"); and C. WHEREAS, the Medical Director and Hemabiologics desire to set forth in writing their agreement with respect to the outstanding loan. D. WHEREAS, it is agreed that this Loan Reimbursement Agreement supersedes the terms, conditions, and limitations of any prior loan notes. AGREEMENT NOW, THEREFORE, for and in consideration of the promises, covenants and agreements herein contained, the parties agree as follows: ARTICLE 1 Employment ---------- 1.1 Employment. The Medical Director is currently an employee of HemaCare. 1.2 Term. This agreement shall be for a five (5) year term commencing on July 31, 1997, subject to the provisions of Article 3. 1.3 Supersedes Prior Agreement. This agreement supersedes the loan agreement dated January 1996 between the Medical Director and Hemabiologics. ARTICLE 2 Loan Repayment -------------- The outstanding balance of the loan, adjusted for accrued interest, will be reduced each year of the Medical Director's employment as follows:
August 1 Year Annual Reduction Loan Balance - -------- ---------------- ------------ 1996/97 $92,909 1997/98 $23,689 77,833 1998/99 23,689 61,178 1999/2000 23,689 42,779 2000/01 23,689 24,226 2001/02 23,689 0
Hemabiologics currently holds 40,000 shares of HemaCare stock as collateral against the loan. If the value of the shares exceeds the loan balance value on any of the loan reduction dates above, after loan reduction, Hemabiologics will return any excess shares to the Medical Director. If the value of the shares is less than the loan balance value on any of the loan reduction dates above, no shares will be returned to the Medical Director. ARTICLE 3 Termination of Agreement ------------------------ Either the Medical Director or HemaCare may terminate this Agreement, at any time, without cause, and without notice. 3.1 Termination by HemaCare Without Cause. In the event that HemaCare exercises its right to terminate this Agreement without cause, Hemabiologics shall agree to fully forgive the then outstanding Loan balance owed by the Medical Director and return all HemaCare stock held as collateral against the loan at that date. 3.2 Termination by HemaCare With Cause. In the event that HemaCare terminates this agreement for cause (as defined below), the Medical Director will be obligated to immediately repay the then outstanding Loan balance to Hemabiologics, and Hemabiologics will return all HemaCare stock held as collateral against the loan at that date For purposes of this Agreement, the term "for cause" shall include, but not be limited to, any of the following: a) Any actual conflict of interest or competition against HemaCare. The willful failure of the Medical Director to substantially perform his duties as Medical Director. No act, or failure to act, on the Medical Director's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of HemaCare; -3- b) The Medical Director's conviction of a crime involving a felony, fraud, embezzlement or the like; or c) The engaging by the Medical Director in conduct, or the taking by the Medical Director of any action, which is materially injurious to HemaCare or any of its affiliated entities. 3.3 Resignation. In the event that the Medical Director resigns from his employment, the Medical Director will be required to immediately reimburse the full amount of the then outstanding Loan balance to Hemabiologics, and thereafter, Hemabiologics will return all HemaCare stock held as collateral against the loan at that date. 3.4 Termination on Disability or Death. This Agreement will terminate automatically upon the death of the Medical Director or upon the legal, physical or mental incapacity of the Medical Director to perform his duties for any period in excess of six (6) months. If the Medical Director dies or is mentally and/or physically incapacitated for a period of more than six (6) months, Hemabiologics will fully forgive the outstanding Loan balance and return all HemaCare stock held as collateral against the loan at that date. 3.5 Loan Balance. For purposes of this agreement, the outstanding Loan balance shall be determined by increasing the Loan balance at the July 31st date immediately preceding the event of employment termination as follows: Interest will be calculated at an annual interest rate of 10% (the "Updated Loan"), decreasing the Updated Loan by a pro rata share of the annual reduction amount. The pro rata share will be calculated by multiplying the annual reduction amount of $24,212 by a fraction of the numerator of the number of days of employment since the August 1st date immediately preceding the date of employment termination, the denominator of which is 365. For example, if employment termination occurred on September 12, 2000, the Loan balance would be calculated as follows: Loan Balance at July 31, 2000 $42,779 Interest at 10% from August 1 to September 12, 2000 494 -------- Updated Loan 43,273 Pro Rata Share of Annual Reduction (43/365 x $23,689) (2,790) -------- Loan Balance $40,483 ======== -4- ARTICLE 4 Miscellaneous ------------- 4.1 Entire Agreement. This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matter hereof and supersedes any and all other agreements, communications, understandings, promises, stipulations, arrangements, whether any of the same are either oral or in writing, or express or implied, between the parties hereto with respect to the subject matter hereof . No change to or modification of this Agreement shall be valid or binding unless the same shall be in writing and signed by both the Medical Director and the president of HemaCare. 4.2 Waivers. A waiver of any provision of this Agreement shall not be valid unless such waiver is in writing and signed by the party or person to be charged, and no waiver of any provision hereof shall be deemed or construed as a waiver of the same or any different provisions in the future. Furthermore, the failure of a party to insist upon strict adherence to any term of this provision of this Agreement, shall not (a) be a waiver of that term or provision, (b) estop the party from enforcing that term or provision, or (c) preclude that party from enforcing that term or provision by laches. The receipt of a party of any benefit under this Agreement shall not effect a waiver or estoppel of the right of that party to enforce any provision of this Agreement. 4.3 Assignment. This Agreement shall not be assignable, in whole or in part, by the Medical Director. HemaCare shall have the right and power to assign this Agreement, as well as its rights and obligations hereunder, by advising the Medical Director of such an assignment in writing. -5- 4.4 Severability. In the event that any one or more of the provisions of this Agreement shall be held invalid, illegal, or unenforceable, in any respect, by a court of competent jurisdiction, the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected thereby. IN WITNESS WHEREOF, the parties hereto acknowledge that they have read this Agreement, fully understand it, and have freely and voluntarily entered into it. "Medical Director: Dated: 1/30/98 By: /s/ Joshua Levy ------------------ -------------------------- Joshua Levy, M.D. HemaCare" Dated: 1/30/98 By: /s/ Hal I. Lieberman ------------------- -------------------------- Hal Lieberman, President and Chief Executive Officer for HemaCare Corporation -6- EX-11 4 HemaCare Corporation EXHIBIT 11 Net Income (Loss) per Common and Common Equivalent Share
Years Ended December 31, ------------------------------------------ 1997 1996 1995 ----------- ------------ ------------ INCOME (LOSS) ------------- Income from continuing operations........ $ 37,000 $(1,090,000) $ 480,000 Loss from discontinued operations........ - - (902,000) Gain(loss) on disposal of discontinued operations, including provision for operating losses during phase-out period................................ 293,000 600,000 (3,114,000) ----------- ------------ ------------ Net income (loss)....................... $ 330,000 $ (490,000) $(3,536,000) =========== ============ ============ BASIC ----- Weighted average number of shares outstanding.......................... 7,189,000 6,350,000 5,693,000 =========== ============ ============ Basic income (loss) per share based on common and common equivalent shares - primary: Income from continuing operations...... $ 0.01 $ (0.17) $ 0.08 Loss from discontinued operations...... - - (0.15) Gain (loss) on disposal of discontinued operations, including provision for operating losses during phase-out period................................ 0.04 0.09 (0.55) ----------- ------------ ------------ Net income (loss)...................... $ 0.05 $ (0.08) $ (0.62) =========== ============ ============ DILUTED ------- Weighted average number of shares outstanding......................... 7,189,000 6,350,000 5,693,000 =========== =========== ============ Dilutive common equivalent shares attributable to stock options (based on higher of ending or average market price)........................ 11,000 - 122,000 Dilutive common equivalent shares attributable to warrants (based on higher of ending or average market price)............................... 5,000 - 29,000 ----------- ----------- ------------ Total common and common equivalent shares - fully loaded................ 7,205,000 6,350,000 5,844,000 =========== =========== ============ Diluted income(loss) per share based on common and common equivalent shares: Income from continuing operations...... $ 0.01 $ (0.17) $ 0.08 Loss from discontinued operations...... - - (0.16) Gain (loss) on disposal of discontinued operations, including provision for operating losses during phase-out period................................ 0.04 0.09 (0.53) ----------- ----------- ------------ Net income (loss)...................... $ 0.05 $ (0.08) $ (0.61) =========== =========== ============
EX-21 5 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT HemaBiologics, Inc., a California corporation Comprehensive Blood Services, Inc., a Missouri 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 February 12, 1998 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, 1997 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP ---------------------------- ARTHUR ANDERSEN LLP Los Angeles, California March 26, 1998 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, 1997 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1997 DEC-31-1997 1,249,000 363,000 1,642,000 81,000 404,000 3,715,000 2,275,000 1,690,000 4,384,000 1,773,000 0 0 0 13,515,000 11,113,000 4,384,000 11,101,000 11,101,000 9,187,000 9,187,000 2,005,000 81,000 51,000 30,000 0 30,000 293,000 0 0 330,000 .05 .05
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