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As filed with the Securities and Exchange Commission on March 30, 2000
UNITED STATES
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 the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .............. to ...............
Commission file number 0-19410
HemaSure Inc.
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(Exact name of registrant as specified in its charter)
Delaware 04-3216862
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
140 Locke Drive
Marlborough, Massachusetts 01752
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 485-6850
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
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Securities registered pursuant to Section 12(g) of the Act:
906583.4
Common Stock, par value $.01 per share
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(Title of class)
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 (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant was $102,138,300 on March 24, 2000.
Number of shares outstanding of the registrant's class of common stock as of
March 24, 2000: 19,795,667.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 2000 Annual Meeting of Stockholders - Part III
906583.4
EXPLANATORY NOTE
This Annual Report on Form 10-K contains predictions, projections and
other statements about the future that are intended to be "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (collectively, "Forward-Looking Statements"). Forward-Looking
Statements are included with respect to various aspects of the Company's
strategy and operations, including but not limited to, its product development
efforts, including regulatory requirements and approvals; potential development
and strategic alliances; and the Company's liquidity and capital resources. Each
Forward-Looking Statement that the Company believes is material is accompanied
by cautionary statements identifying important factors that could cause actual
results to differ materially from those described in the Forward-Looking
Statement. The cautionary statements are set forth following the Forward-Looking
Statement, and/or in other sections of the Annual Report on Form 10-K. IN
ASSESSING FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM
10-K, READERS ARE URGED TO READ CAREFULLY ALL CAUTIONARY STATEMENTS -- INCLUDING
THOSE CONTAINED IN OTHER SECTIONS OF THIS ANNUAL REPORT ON FORM 10-K.
906583.4
PART I
Item 1. Business
Overview
HemaSure Inc. (the "Company") was incorporated as a Delaware corporation in
December 1993. Its principal executive offices are located at 140 Locke Drive,
Marlborough, Massachusetts 01752. The shares of its common stock, par value $.01
per share (the "Common Stock"), trade on the OTC Bulletin Board under the symbol
"HMSR".
The Company develops and supplies innovative blood filtration technologies
designed to help meet today's increasing demand for a safer, more reliable blood
supply. Its blood filtration technologies are designed to reduce virus-carrying
white blood cells (leukocytes) in donated blood to nominal levels (a process
known as "leukoreduction").
While approximately 30% to 35% of donated blood in the United States is
currently leukoreduced, the Company believes this percentage will increase. In
September 1998, the Food and Drug Administration's (the "FDA") Blood Products
Advisory Committee announced a non-binding recommendation that 100% of the blood
supply in the United States be leukoreduced. In addition, the American Red
Cross, which collected over 6 million units of blood in 1999 representing
approximately 50% of the blood donated in the United States, publicly announced
that it is striving to achieve 100% leukoreduction by the end of 2000. Moreover,
many other countries in the past several years have mandated the leukoreduction
of their blood supply.
The Company believes that with the r\LS System, the Company is able to
offer a more effective product than those offered in the market today based on
low cost, ease of use and improved operational fit. According to industry
sources, the leukoreduction industry represents a market potential of
approximately $800 million. The Company believes its proprietary technology,
marketing and distribution arrangements will help it to capitalize on the
anticipated growth in this industry.
The Company's current focus is to increase the sales of its r\LS System
both in the United States and internationally. It commenced commercialization of
the r\LS System in early 1999. The demand for the r\LS System has exceeded its
original expectations and, as a result, the Company has initiated a production
expansion plan. See " -- Strategic Relationships."
The Blood Market
Blood Collection
Industry sources have estimated that approximately 40 to 45 million units
of blood are collected and transfused by developed countries annually and that
this number reaches 70 to 80 million units worldwide. Collection is typically
done by affiliated blood collection centers (for example, the American Red
Cross), consortiums of independent blood collection centers (for example, Blood
Centers of America), independent blood collection centers (for example, New York
Blood Center) or government affiliated blood centers in some foreign countries.
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Blood is collected either manually or with the use of automated blood
collection equipment. If collected manually, the donated blood is tested and
separated into components. If collected through the use of automated blood
collection equipment, the desired component is extracted and the remaining
components are returned to the donor. Whole blood is composed of platelets,
which assist in clotting; plasma, which is the fluid part of blood that contains
proteins that fight infections, aid in clotting and retain blood volume; red
blood cells, which help carry oxygen throughout the body; and leukocytes, or
white blood cells, which are used by the body's immune system to help fight
infections.
Individuals suffering physical trauma or anemia, undergoing complex
surgical procedures or hemodialysis or undergoing treatment for cancer are among
the diverse group of patients who require blood transfusions in the course of
their medical care. Health risks, such as transfusion complications and
infections, may arise from contaminated blood and blood products, although
infection risks are lower today than in the recent past as a result of improved
donor education and selection and implementation of screening procedures to
identify certain virus contaminated blood units prior to transfusion. Moreover,
these health risks can increase in patients who receive frequent transfusions,
such as those suffering from kidney and liver disorders, and patients who are
immune-suppressed, such as those undergoing treatment for cancer.
The number of units of whole blood, blood components or plasma a patient
receives in a blood transfusion varies significantly. A patient undergoing
routine surgery may typically receive three or four units, while a cancer
patient undergoing platelet transfusion may receive in excess of 100 units over
time. The risk of infection to a patient increases as the number of units
transfused increases.
Transfusion Risks
Health risks from transfusions, including complications and infections,
arise from the presence of leukocytes, viruses and other pathogens in blood,
cellular blood components and plasma. In addition, autologous blood recovery and
reinfusion result in an increased risk of contamination of a patient's blood.
The Company believes that the demand for filtered blood for transfusions will
continue to increase over the next several years due to the growing recognition
in the medical field of the benefits of leukocyte reduction.
Leukocytes. Leukocytes may cause adverse reactions in patients receiving
blood transfusions, such as fever, chills, immune system suppression or
development of immunological responses that could cause the affected patient to
reject subsequent blood transfusions. In addition, leukocytes may harbor
infectious viruses and other agents, including cytomegalovirus, new variant CJD
and human T-cell lymphocyte virus I (HTLV-I).
Pathogens. Viruses such as HIV, hepatitis B and hepatitis C may be
contained inside or outside of the leukocytes and may be transmitted during
transfusions. Other viruses may develop or become prevalent over time. Of the
currently known viruses, there has been significant public focus on hepatitis
and HIV.
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Recent Trend Toward Leukoreduction
Historically, approximately 20% of donated blood in developed countries was
filtered to remove leukocytes. Due primarily to cost, generally only those
patients with diseases that may cause immune system complications, such as HIV,
or those with severely compromised immune systems, such as patients undergoing
chemotherapy, received leukoreduced blood and because of the relatively low
number, these were done at the patients hospital beside.
However, the developed nations throughout the world are increasingly
mandating universal leukoreduction of their blood supplies. In North America and
Europe, numerous countries are committed to providing 100% leukoreduced blood
components or have received recommendations to provide 100% leukoreduced blood
components.
France committed to 100% leukocyte reduction in April 1998, both on
clinical grounds and as a precautionary tool ensuring the safety of its blood
supply. Ireland announced its plans to move to 100% leukocyte reduction in April
1998. The United Kingdom has also made the decision to require leukocyte
reduction for all blood units and blood products derived from whole blood.
Following a directive issued by the Canadian Government, the Canadian Blood
Services and Hema-Quebec in Canada have announced plans to adopt leukocyte
reduction of all blood and blood products. In July 1999, Japan announced it
planned to begin full leukoreduction of its blood supply. The Company believes
that additional countries will recommend leukoreduction as more people seek to
protect themselves from the dangerous transmission of disease through
transfusion. Scientific studies have shown that the use of leukoreduced blood
could result in shorter hospital stays, fewer postoperative infections and/or
cost savings per patient of approximately $3,000 to $6,000 per patient for
certain procedures, including thoracic surgery, heart bypass surgery and
gastrointestinal surgery.
The United States is also moving toward universal leukoreduction of its
blood supply. Approximately 30% to 35% of donated blood in the United States is
currently filtered to remove leukocytes and this percentage is expected to
increase. In September 1998, the FDA's Blood Products Advisory Committee
announced a non-binding recommendation that the United States adopt 100%
leukoreduction of its donated blood supply. The committee said that, "The
benefit-to-risk ratio associated with leukoreduction is sufficiently significant
to justify the universal leukoreduction of all non-leukocyte cellular
transfusion blood components." Pre-storage filtration (filtration done at the
blood collection center prior to storage for shipment to the hospital) was
recognized by the FDA's Blood Products Advisory Committee as the preferred
method of leukoreduction.
Pre-storage leukoreduction is typically done using two different processes.
One such process requires a filter that is an integral part of the blood
collection set ("in-line"). The second process requires a filter to be sterile
docked to the blood collection set after the blood is collected. Scientific use
of each process is dependent upon a particular blood center's manufacturing
flow-process.
Recent medical studies have demonstrated the patient benefits of
leukoreduction. For example, a study of open heart surgery patients published in
the Annals of Thoracic Surgery found that filtering leukocytes reduced the risks
associated with this type of surgery and improved patient outcomes. It also
determined that leukoreduction in the approximately 300,000 patients who undergo
heart bypass surgeries could result in a 20% decrease in hospital stays and
savings of approximately $3,000 to $6,000 in costs
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per patient. Another major study published in the American Journal of Surgery
found that gastrointestinal surgery patients had fewer postoperative infections
and shorter hospital stays after they received leukocyte-filtered red cells.
Hospital stays averaged 12 days for patients who received leukocyte-reduced
transfusions compared to 18 days for those who received non-leukoreduced blood,
at a savings of approximately $6,000 per patient.
The Company's Solution
The Company's blood filtration technologies initially were developed from
core technologies transferred to it from Sepracor Inc. ("Sepracor") at the
Company's inception in 1993 relating to the development, manufacture and use and
sale of blood, blood products and blood components and membrane filter design
technologies. Since that time, the Company has developed technologies designed
to make the process of filtering blood easy and cost effective. The Company is
utilizing its technologies as the basis for developing products and
methodologies to address the needs of the leukoreduction market.
Based primarily on its discussions with the American Red Cross, the Company
believes that a dockable filter used in conjunction with a manual collection
process is the optimal method of high-volume, pre-storage leukoreduction in the
United States. The Company's current product, the r\LS System, was developed to
provide high-volume, centralized, pre-storage leukoreduction in blood centers in
batch processes. The Company believes that its r\LS System is well positioned to
take advantage of the anticipated growth in leukoreduction, particularly in the
United States.
Currently, the Company does not have an in-line blood cell filtration
system available for sale, which the Company understands from Gambro Inc., its
distribution partner, is used predominantly in Europe. However, the Company is
in discussions with manufacturers of blood bag systems to develop and
commercialize in-line leukocyte reduction systems for red blood cells. The
Company is evaluating different product design options and discussing potential
agreements with respect to supply and manufacturing arrangements. The Company
believes that the core filter technology used in the r\LS System could be used
in an in-line system.
Technological Benefits
The Company believes that the r\LS System provides significant value to
leukoreduction market participants. By implementing a more functional design
that incorporates such features as self priming, draining and a unique air
removal system, which allows the blood center technician to essentially hang the
blood unit and "walk away," the Company believes that it has been able to
incorporate features considered desirable in leukoreduction products. In
addition, the Company's r\LS System does not require the time-consuming
"stripping" operation that is required with other filters. The r\LS System is
predicated on a simple design that requires fewer manipulations which the
Company believes provides for a more efficient process.
Low Cost Supplier
The Company designed the r\LS System to be a low cost filter and developed
a manufacturing process, which the Company believes enables it to manufacture
and market the r\LS System at a low cost, and which, as a result, allows it to
effectively compete in the marketplace. In the product development
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and commercialization process, the Company has worked very closely with key
component suppliers to ensure high quality, low cost parts and to ensure that
the suppliers will be able to meet the demand for product. The manufacturing
process has been designed to permit multiple site assembly capacity. The Company
believes that its pre-storage filters will capture increased market share as the
relative benefits of pre-storage filtration become more pronounced in the next
few years.
Focus on Blood Center Customers
Unlike Pall Corporation ("Pall") and Baxter, the Company's major
competitors, the Company's products are marketed solely to blood donor centers
rather than to hospitals. The top four blood center organizations account for
approximately 70% of the supply of blood and blood products in the United
States. The Company believes that this approach will enable it to keep sales
costs low and provide value-added services to these customers.
Strategic Relationships
Strategic Partnership with American Red Cross
In August 1998, the Company completed an amended and restated Master
Strategic Alliance Agreement with the American Red Cross BioMedical Services,
which provides for, among other things, the development and enhancement of a
number of filtration products, based on the Company's core technology including
red blood cell leukoreduction, leukocyte recovery, platelet filtration, whole
blood filtration and tumor cell filtration. The agreement has a term of five
years, unless previously terminated, and can be renewed or extended. There is no
assurance, however, that such products will ultimately be developed or that any
definitive development arrangements with respect to such products will result
from the strategic alliance with the American Red Cross BioMedical Services.
Pursuant to the strategic alliance agreement, the Company entered into a
master purchase agreement with the American Red Cross that provides for the sale
of the r\LS System by the Company to the American Red Cross on specified terms.
The master purchase agreement provides for a thirty-eight month term expiring on
August 31, 2002, subject to, among other things, earlier termination by the
American Red Cross in the event (i) of the availability on the market of certain
new products that provide substantial safety and efficiency improvements over
the r\LS System, (ii) the American Red Cross deems that it has no further
requirement for leukoreduction filters generally, or (iii) the American Red
Cross changes its policies toward leukoreduction. The Company currently is not
aware of the availability of any such products, any such changes in requirements
for leukoreduction filters or any such changes in policies toward
leukoreduction. Under the master purchase agreement, the American Red Cross is
required to purchase specified minimum annual quantities of the r\LS System,
subject to certain terms and conditions. The term of the master purchase
agreement may be extended by one year in certain circumstances if the American
Red Cross fails to meet its minimum purchase obligation in the third year of the
agreement.
If the Company's agreements with the American Red Cross are terminated, or
not implemented, for any reason, the Company's business, financial condition and
results of operations could be materially and adversely affected.
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Global Distribution Capabilities through Partnership with Gambro Inc.
In 1998, the Company completed a distribution and development agreement,
which was amended in May 1999, with Gambro Inc. to act as the Company's
exclusive distributor of its r\LS System worldwide, except for sales to the
American Red Cross. Furthermore, this agreement provides that Gambro Inc. may
(upon mutual agreement by the Company and Gambro Inc.) distribute additional
future products developed by the Company that filter blood and its components.
Gambro Inc. is a leading manufacturer and distributor of automated blood
component collection systems which markets and sells blood component apheresis
equipment to the blood center market. The agreement with Gambro Inc.
contemplates the development by the Company of an OEM filter for use with Gambro
Inc.'s Trima(R) Automated Blood Collection System. The distribution agreement
provides for a five year term that expires in June 2004, subject to automatic
three year renewals unless the agreement is previously terminated.
The Company believes that Gambro Inc. will be an effective marketing
partner for it with respect to its r\LS System because their sales force
currently targets customers who the Company had identified as potential
customers of its r\LS System. The Company's agreement also gives it access to
Gambro Inc.'s extensive international distribution network, which includes sales
offices in more than 100 locations worldwide. This agreement provides for the
cooperation by Gambro Inc. with the Company with respect to certain patent
defense costs related to current and potential future products. The product
development agreement contemplates the supply by the Company of filtration
devices that may be used in connection with Gambro Inc.'s Trima(R) Automated
Blood Collection System.
Under the distribution agreement, Gambro Inc. is required to meet certain
minimum purchase requirements and is required to purchase from the Company all
of its requirements for certain blood filtration products, in each case at
agreed upon prices. The distribution agreement also provides for Gambro Inc. to
cooperate with the Company in the pending litigation against Pall which was
initiated by the Company and by Gambro BCT in April 1999. Gambro Inc. must also
cooperate with the Company in any patent infringement proceeding arising
subsequent to the time the distribution agreement was entered into and pay
certain expenses incident to any such proceeding other than damages against the
Company. See Item 3. "Legal Proceedings."
The Company is dependent on Gambro Inc. for sales, marketing and
distribution of its products. If Gambro Inc. does not successfully market and
sell the Company's products or the distribution agreement is terminated for any
reason, the Company's business, financial condition and results of operations
could be materially and adversely affected.
Production Capacity Expansion Initiative
In December 1999, the Company engaged the international engineering
consulting firm, PA Consulting Group, to assist it in its production capacity
expansion initiative. With this initiative, the Company began in March 2000 and
expects to increase manufacturing capacity in increments to several times its
current level over the next two years. The capacity expansion effort will
include process flow review, capital equipment design, qualification,
implementation, validation and vendor supply chain management.
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In December 1999, the Company entered into an agreement with Filtertek Inc.
("Filtertek") that provides for Filtertek to act as its exclusive manufacturer
and supplier of the filters used in its r\LS System, subject to certain terms
and conditions. The agreement has a term of five years, subject to an automatic
one-year extension in the event the Company fails to purchase a specified number
of products by the fifth year. Thereafter, the agreement will be subject to
automatic one-year renewals unless the agreement is previously terminated.
Under the agreement, the Company is required to purchase a minimum number
of, and is required to purchase from Filtertek all of its requirements for, the
filters used in its r\LS System, in each case at agreed upon prices. Pursuant to
the agreement, pricing is fixed for the first three years, subject to certain
raw material price increases or decreases. Under its supply agreement with
Filtertek, the Company is obligated to provide to Filtertek, on a quarterly
basis, forecasts for anticipated purchases for the upcoming 12-month period.
Under the agreement, Filtertek is required to make capital investment in
their production equipment at certain levels and by certain times. If Filtertek
is unable to meet such requirements, the Company has the right to terminate
Filtertek's rights to exclusivity under the agreement, subject to certain terms
and conditions. The Company depends on Filtertek to (i) allocate sufficient
capacity to the Company's manufacturing needs, (ii) produce acceptable quality
at agreed pricing, and (iii) deliver on a timely basis. Any failure in
performance by Filtertek for any reason could have a material and adverse effect
on the Company's business. The Company has no supply agreements with component
suppliers and, accordingly, the Company is dependent on the future ability of
Filtertek to purchase components. Failure or delay by suppliers in supplying
necessary components could adversely affect the Company's ability to deliver
products on a timely and competitive basis in the future.
In January 2000, the Company entered into an agreement with Command Medical
Products Inc. ("Command") that provides for Command, on a non-exclusive basis,
to (i) act as the Company's manufacturer and supplier of dry bags used in its
r\LS System and (ii) assemble the filters used in its r\LS System, subject to
certain terms and conditions. The agreement has a term of three years, subject
to an automatic one-year extension in the event the Company fails to purchase a
specified number of products by the third year and, also, upon the mutual
agreement by the Company and Command. Thereafter, the agreement will be subject
to automatic one-year renewals unless the agreement is previously terminated.
Under the Command agreement, the Company is required to purchase a minimum
number of dry bags used in its r\LS System and assembly requirements of the
filters used in its r\LS System, in each case at agreed upon prices. Pursuant to
the agreement, pricing is fixed for the first three years, subject to the risk
of price fluctuations in respect of raw materials, overhead and labor. Under the
Company's supply and assembly agreement with Command, the Company is obligated
to provide to Command 90 days before each year of the supply and assembly
agreement forecasts for anticipated purchases of the dry bags and assembly
requirements for the upcoming 12-month period.
The Company depends on Command to (i) allocate sufficient capacity to the
Company's manufacturing needs, (ii) produce acceptable quality at agreed
pricing, and (iii) deliver on a timely basis. Any failure in performance by
Command for any reason could have a material and adverse effect on the Company's
business.
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Current Product and Products Under Development
The Company is working to develop a range of related leukocyte filtration
products that utilize its core technology, including an in-line pre-storage
filter (the In-Line RBC Filtersets) and whole blood pre-storage. The Company is
also exploring the possibility of utilizing its core filtration technology to
develop non-leukocyte reduction filtration applications.
Red Blood Cell Systems
r\LS System. The Company's r\LS System has been designed for leukocyte
filtration by blood centers and hospital blood banks immediately prior to blood
storage, a process which it believes results in improved quality leukocyte
reduced blood. The Company believes that the demand for filtered blood for
transfusions will continue to increase over the next several years and that,
while a significant amount of leukocyte filtration currently takes place at the
patient bedside, as the demand for filtered blood increases, leukocyte removal
will all be done through centralized filtration performed at blood centers.
The r\LS System is based on a proprietary filter medium comprised of
multiple fibrous components. Leukocytes are removed by a combination of
entrapment and adhesion. With a proprietary automatic internal prime and drain
design, the filter device reduces operator intervention and facilitates high
volume, centralized processing in a blood center environment. The Company is
focusing its marketing efforts exclusively on blood centers and hospital blood
banks for pre-storage leukocyte reduction.
The Company filed an application for 510(k) pre-market notification
clearance with respect to its r\LS System with the FDA in May 1998. The Company
commenced commercialization of the r\LS System in foreign countries in early
1999. It received 510(k) pre-market notification clearance from the FDA in May
1999 for its r\LS System which was classified as a Class II medical device.
However, there is no assurance that the r\LS System will achieve market
acceptance.
While the Company believes that the performance and ease-of-use of the r\LS
System will compare favorably with other blood filtration devices, there is no
assurance that the performance or price of the r\LS System will be sufficient to
achieve significant sales, particularly in view of the dominant position in the
market held by Pall. See " -- Competition."
In-Line RBC Filtersets. The Company is in discussions with manufacturers of
blood bag systems to develop and commercialize in-line leukocyte reduction
systems for red blood cells. In these systems, the filter and receiving bags are
integrated with the collection bag and therefore require no sterile docking.
Currently, the Company is evaluating different product design options, and is
discussing potential agreements covering supply and manufacturing arrangements.
Whole Blood Filters
The Company is pursuing technology which it believes will enable the
development of whole blood filtration systems aimed at meeting the needs of two
distinct market segments: (i) traditional manual collection users of whole blood
filtration sets who prefer to continue to operate within their existing blood
collection and processing infrastructure, and (ii) integrating filtration
technology with blood collection
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equipment to do real-time, simultaneous collection/leukocyte reduction and,
optionally, subsequent component separation. These different approaches will
require different technical solutions. The Company believes that it is well
positioned to apply its core proprietary know-how to providing such solutions
independently, or in collaboration with selected partners.
Automated Blood Collection Solutions
Gambro Inc. markets and sells automated blood component apheresis equipment
to the blood center market. The agreement with Gambro Inc. contemplates the
development of a red blood cell leukoreduction filter for use with Gambro Inc.'s
Trima(R)Automated Blood Collection System.
OEM Filters
Other potential partners have asked the Company to provide them with price
quotes for a basic filtration device to use in their own applications. The
Company is pursuing these requests and expects that any such filter would use
the Company's core filtration technology.
Technologies
The Company's current and its planned products are based on its proprietary
technologies that the Company has acquired or developed in the areas of affinity
separations, membrane technology and device design and fabrication.
Affinity Separations
The Company has proprietary affinity separations technology that utilizes
ligand, which are molecules that bind to complementary biomolecules, in
connection with its various filtration products. The Company has identified a
family of carbohydrate-based ligand that recognize and bind to the cell surface
receptors on leukocytes. It has filed patent applications covering the use of
these carbohydrate-based ligand for removing leukocytes.
Membrane Technology
The Company believes that, as a result of the research and development work
performed at Sepracor over an eight-year period and transferred to it on January
1, 1994, the Company has expertise in the field of separations technology using
both composite matrices and flat- and hollow-fiber membranes. Successful
separation of a substance from its source depends on matching the properties of
that substance, such as size, molecular weight and surface characteristics, to
appropriate separations media. The ability to select and modify the composition
and physical structure of the media is a key to successful separations
technology. The Company can utilize a variety of media compositions, custom made
structures and surface modifications, including the attachment of selective
ligand, to separate a diverse variety of substances. The Company's separations
technologies can be used to separate substances including particulates, such as
cells and debris, macromolecules, such as enzymes, and low molecular weight
substances, such as salts, nutrients and anti-viral chemicals.
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Device Design and Fabrication
The Company believes that the benefits of high performance separations
media can only be realized in a well-designed device where access to and
placement of the media, hydrodynamics and selection of biocompatible materials
have been optimized. The Company has expertise in module design, including
theoretical calculations of mass transfer, hydrodynamic modeling, prototyping,
testing and manufacturing engineering.
Drawing from this expertise, the Company is integrating its proprietary
technologies in device design and media development with blood flow control
systems, tubing, collection containers and other assembly components, in devices
which are designed to achieve efficiency in increasing the safety of donated
blood and improving certain blood transfusion and collection procedures. The
Company considers its device design and fabrication capabilities to be
proprietary and intends to file patent applications where appropriate.
The Company has undertaken preliminary studies on the use of its
proprietary media in other applications such as the removal of tumor cells from
peripheral stem cell preparations and in whole blood leukoreduction.
Research and Development Expenses
Research and development expenses were $2,681,000 in the year ended
December 31, 1999 and $3,794,000 for the year ended December 31, 1998. Amounts
expended in the year ended December 31, 1999 were lower than that expended in
the comparable period in 1998, primarily because the majority of research and
development expenditures relating to the r\LS System were made in the 1998
period.
Competition
The Company expects to encounter significant competition in the sale of its
proposed products. Its proposed products, if commercialized, will compete with
other products currently on the market as well as with future products developed
by other medical device companies, biotechnology and pharmaceutical companies,
hospital supply companies, national and regional blood centers, certain
governmental organizations and agencies and academic institutions. Many of the
Company's competitors in the field of leukocyte reduction have substantially
greater resources, manufacturing and marketing capabilities, research and
production staffs and production facilities than the Company. Moreover, some of
the Company's competitors are significantly larger than the Company, have
greater experience in pre-clinical testing, human clinical trials and other
regulatory approval procedures. In addition, many of the Company's competitors
have access to greater capital and other resources, may have management
personnel with more experience than the Company and may have other advantages
over the Company in conducting certain businesses and providing certain
services. The Company's ability to compete successfully will depend, in part, on
its ability to develop and maintain products which are technically superior to
and/or of lower cost than those currently on the market; develop proprietary
products; attract and retain scientific personnel; obtain patent or other
proprietary protection for its products and technologies; obtain required
regulatory approvals; and manufacture, assemble and successfully market any
products the Company develops. In addition, many of the Company's competitors
have long-standing
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relationships with the national and regional blood centers to which the Company
will market its products. There is no assurance that the Company will be able to
compete effectively against such companies.
Presently, there are approximately seven to nine competitors in the
leukoreduction filter market. The market leader is Pall with approximately 50%
to 60% market share. Pall offers products to all product/market segments, with
an emphasis in the bedside leukoreduction market. Baxter, which has
approximately 25% market share, also plays a significant role in all
product/market segments. The remaining 15% of the market is shared by the other
five to seven competitors. The Company believes that the competitive landscape
for the leukoreduction market will level off as the market moves toward 100%
leukoreduction and market participants with smaller market shares realize
greater market penetration. Some of these competitors have long-standing and, in
certain cases, exclusive, relationships, including long-term supply contracts,
with the blood centers that are the Company's target customers. The Company
expects that the principal competitive factors in the area of leukocyte removal
will be removal efficiency, cost and ease of use.
The Company is pursuing areas of product development in a rapidly growing
field in which there is a potential for technological innovation in relatively
short periods of time. Its competitors may succeed in developing technologies or
products that are more effective than those of the Company. Technological change
or developments by others may result in the Company's technology or proposed
products becoming obsolete or noncompetitive.
Licenses, Patents and Proprietary Information
The Company has a Technology Transfer and License Agreement with Sepracor
under which Sepracor transferred to the Company all rights to the technology
developed by Sepracor for the development, manufacture, use and sale of medical
devices for the separation and purification of blood and blood components,
including technology relating to (i) optimization of flat membranes, hollow
fiber membranes and fibrous supports; (ii) specific affinity and immunoaffinity
ligand; (iii) linking chemistries; (iv) surface modification including
hydrophilic polymers and coatings; (v) device designs and engineering; (vi)
fabrication and manufacturing including encapsulation and assembly techniques;
and (vii) organic chemical synthesis.
The Company believes that protection of the proprietary nature of its
products and technology is critical to its business. Accordingly, the Company
has adopted and will maintain a vigorous program to secure and maintain such
protection. The Company's practice is to file patent applications with respect
to technology, inventions and improvements that are important to its business.
The Company also relies on trade secrets, unpatented know-how, continuing
technological invention and the pursuit of licensing opportunities to develop
and maintain its competitive position. There is no assurance that others will
not independently develop substantially equivalent proprietary technology or
that the Company can meaningfully protect its proprietary position.
To date, the Company owns or has filed 31 patent applications in the United
States relating to blood filtration and pathogen inactivation technologies.
Corresponding foreign patent applications have been filed with respect to
certain of these United States patent applications. Where appropriate, the
Company intends to file, or cause to be filed on its behalf, additional patent
applications relating to future discoveries and improvements, including, among
other things, the use of certain ligands for affinity
906583.4
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separations. To date, 18 patents have been issued to the Company (which expire
at various dates from 2011 through 2017).
The Company success depends, in part, on its ability to obtain patents, to
protect trade secrets, to operate without infringing upon the proprietary rights
of others and to prevent others from infringing on its proprietary rights. See
Item 3. "Legal Proceedings." Proprietary rights relating to its planned products
will be protected from unauthorized use by third parties only to the extent that
they are covered by valid and enforceable patents or are maintained in
confidence as trade secrets. There is no assurance that any patents owned by or
licensed to the Company will afford protection against competitors or that any
pending patent applications now or hereafter filed by or licensed to the Company
will result in patents being issued. Competitors, including those with
substantially greater resources than those of the Company, may seek to challenge
the validity of the patents owned by or licensed to the Company or may use their
resources to design comparable products that do not infringe these patents. See
Item 3. "Legal Proceedings."
There are many issued third-party patents in the field of blood filtration,
including patents held by the Company's competitors. The Company may need to
acquire licenses to, or contest the validity of, some of such patents. It is
likely that significant funds would be required to defend any claim that the
Company infringes a third-party patent, and any such claim could adversely
affect sales of the challenged product until the claim is resolved. There is no
assurance that any license required under any such patent would be made
available on acceptable terms or that the Company would prevail in any
litigation involving such patent. See Item 3. "Legal Proceedings."
Much of the know-how of importance to the Company's technology and many of
its processes are dependent upon the unpatentable knowledge, experience and
skills of the Company's key scientific and technical personnel. To protect its
rights and to maintain the confidentiality of trade secrets and proprietary
information, the Company requires all of its employees, consultants and
commercial partners and members of its Scientific/Medical Advisory Board to
agree to keep its proprietary information confidential. These agreements
generally prohibit the disclosure of confidential information to anyone outside
HemaSure and require disclosure and assignment to the Company of ideas,
developments, discoveries and inventions. There is no assurance, however, that
these agreements will provide meaningful protection for the Company's
proprietary information in the event of unauthorized use or disclosure of such
information.
Government Regulation
The research, development, manufacturing and marketing of the Company's
products are subject to extensive regulation in the United States by numerous
regulatory authorities including the FDA under the Federal Food, Drug, and
Cosmetic Act (the "FDC Act") , the Federal Trade Commission (the "FTC") under
the Federal Trade Commission Act (the "FTC Act") and by comparable regulatory
authorities in foreign countries. These regulatory authorities and other
federal, state and local entities will regulate, among other things, the
pre-clinical and clinical testing, safety, effectiveness, approval, clearance,
manufacturing, labeling, packaging, export, storage, recordkeeping, adverse
event reporting, and promotion and advertising of the Company's products. FDA
approval or clearance of the Company's products, typically including a review of
the manufacturing processes and facilities used to produce such products, is
required before the products may be marketed in the United States. Further, if
cleared or approved, there may be significant conditions imposed, including
limitations on labeling and advertising
906583.4
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claims and post-market testing, tracking or surveillance requirements. In
addition, for products exported from the United States to any foreign country or
territory, applicable FDA export requirements must be met. Failure to meet
regulatory standards or to obtain required marketing permissions could have a
material and adverse effect on the Company's business, financial condition,
results of operations and ability to market its products.
The Company believes that its In-line RBC Filtersets will be regulated as
new drugs by the FDA. Development of a new drug product for human use under
applicable laws and regulations is a multi-step process. First, in vitro and/or
animal testing must be conducted in accordance with good laboratory practices to
establish the potential safety and effectiveness of the experimental product for
a given disease. If a product is found to be reasonably safe and potentially
effective in pre-clinical trials, the next step in the process is human clinical
trials. An Investigative New Drug application ("IND") containing, among other
things, the pre-clinical data, chemistry, manufacturing, and control
information, and an investigative plan, must be submitted to the FDA and allowed
to become effective by the agency before such trials may begin. There can be no
assurance that submission of an IND will result in the ability to commence
clinical trials. In addition, the FDA may place a clinical trial on hold or
terminate it if, among other reasons, it concludes that clinical subjects are
being exposed to an unacceptable health risk.
Clinical trials under IND, or for medical devices under an Investigation
Device Exemption ("IDE"), typically involve three phases, although those phases
can overlap. Phase I is conducted to evaluate the safety and pharmacokinetics of
the experimental product in humans, and if possible, to gain early indications
of effectiveness. Phase I studies may also evaluate various routes, dosages and
schedules of product administration. If acceptable product safety is
demonstrated, Phase II studies are initiated. In Phase II, clinical trials are
conducted in groups of patients afflicted with a specific disease or condition
for which the product is intended for use in order to further test safety, begin
evaluating effectiveness, optimize dosage amounts, and determine dose schedules
and routes of administration. If Phase II studies yield satisfactory results and
no hold is placed on further studies by the FDA, Phase III studies are
commenced. Phase III studies are usually randomized, double blind studies
testing for product safety and effectiveness in an expanded patient population
in order to evaluate the overall risk/benefit relationship of the product and to
provide an adequate basis for product labeling. These studies also may compare
the safety and effectiveness of the product with currently available products.
It is not possible to estimate the time in which Phase I, II and III studies
will be completed with respect to a given product, if at all. The time period
may last as long as several years.
Following completion of clinical investigations, the pre-clinical and
clinical data that has been accumulated, together with chemistry, manufacturing,
and controls specifications and information, are submitted to the FDA in a New
Drug Application ("NDA"). There can be no assurance that a product will be
approved in a timely manner, if at all. The approval process can be very lengthy
and depends upon, among other things, the time it takes to review the submitted
data, the FDA's comments on the application, and the time required for us to
provide satisfactory answers or additional clinical data if requested.
If an NDA is approved, continued compliance with strict FDA current good
manufacturing practices requirements, enforced by periodic inspections, as well
as any special requirements imposed as a part of the NDA approval will be
required to continue marketing the approved product. Changes to approved drug
products that affect safety or effectiveness require approved supplemental
applications, as do changes in manufacturing that have a substantial potential
to adversely affect product safety or
906583.4
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effectiveness. Such supplemental applications may require the submission of
clinical and/or manufacturing comparability data and must be approved before the
product may be marketed as modified. Manufacturers, packers and distributors are
also subject to adverse drug event reporting requirements, which depending on
their significance can result in, among other things, agency inspection,
recalls, and patient/physician notifications, and enforcement actions. Because
adverse drug experience reports are publicly available, they can also become the
basis for private lawsuits, including class actions. Depending on their
significance, such reports could have a material and adverse effect on the
Company's business, financial condition, results of operations and ability to
market its products.
The Company believes that its other products currently under development
will, like its r\LS System, be regulated as medical devices by the FDA. Before a
new device may be introduced into commercial distribution, the manufacturer must
generally obtain marketing clearance through a 510(k) pre-market notification
or approval through a pre-market approval application.
In the United States, medical devices for human use are classified into
three classes (Class I, Class II and Class III) on the basis of the controls
deemed reasonably necessary to assure their safety and effectiveness. Class I
devices are subject to general controls, unless exempt (for example, labeling,
pre-market notification under section 510(k) and quality system requirements).
Class II devices are devices for which general controls are insufficient to
provide a reasonable assurance of safety and effectiveness and for which there
is sufficient information to establish special controls (for example,
performance standards, FDA guidance documents or post-market surveillance) to
provide such assurance. Class III devices are those devices that are
life-supporting, life-sustaining or of substantial importance in preventing
impairment of human life and for which general and special controls are
insufficient to provide a reasonable assurance of safety and effectiveness, or
new devices for which a manufacturer cannot demonstrate substantial equivalence
to an already legally marketed device.
In order to demonstrate substantial equivalence, a manufacturer must submit
a pre-market notification ("510(k)") under section 510(k) of the FDC Act. The
FDA will clear a device if the manufacturer can demonstrate that the device is
"substantially equivalent" to an already legally marketed device. The FDA may or
may not require clinical data in support of a 510(k), and the FDA may require
additional data beyond that in the original submission to support a substantial
equivalence determination. There can be no assurance that the FDA will find a
device substantially equivalent. If the FDA finds that a device is not
substantially equivalent, the manufacturer may ask the FDA to make a risk-based
classification to place the device in Class I or Class II. However, if a timely
request for risk-based classification is not made, or if the FDA determines that
a Class III designation is appropriate, an approved pre-market application
("PMA") will be required before the device may be marketed.
The PMA approval process is lengthy, expensive and typically requires,
among other things, extensive data from pre-clinical testing and a
well-controlled clinical trial or trials that demonstrate a reasonable assurance
of safety and effectiveness. Clinical data for devices generally must be
obtained pursuant to Investigation Device Exemptions, which must be approved by
the FDA before a clinical trial may commence. Like an IND, an IDE contains,
among other things, the pre-clinical data, chemistry, manufacturing and control
information and an investigative plan, generally proceeding in three phases.
There is no guarantee that the agency will approve the IDE, and an IDE approval
process could result in significant delay. In addition, the FDA may place an IDE
on hold or terminate it if, among other reasons, it concludes that clinical
subjects are being exposed to an unacceptable health risk. There is no assurance
906583.4
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that review of a PMA will result in a timely PMA approval, if at all. Further,
if approved, there may be significant PMA conditions of approval, including
limitations on labeling and advertising claims and the imposition of post-market
testing, tracking or surveillance requirements.
Changes to devices cleared for marketing under section 510(k) that could
significantly affect safety and effectiveness will require clearance of a new
510(k). Changes to approved PMA products that affect safety and effectiveness
require the submission of a supplemental PMA. The Company would be prohibited
from marketing the modified device until it received FDA clearance or approval,
and there is no guarantee that the FDA would timely or at all clear or approve
the modified 510(k) or PMA device. Failure to obtain timely or any approval for
changes to marketed devices could have a material and adverse effect on the
Company's business, financial condition and results of operations.
The Company's r\LS System was cleared for marketing in 1999 in the United
States under section 510(k) with a post-market surveillance protocol to look for
filter-related transfusion reactions which was agreed to between the FDA and the
Company. The Company has found no filter-related transfusion reactions and
believe it has satisfied the FDA's post-market surveillance requirements. The
Company submitted a report to that effect in early March 2000. It anticipates
but cannot guarantee that the FDA will find its report satisfactory. The
post-market surveillance study does not currently affect the Company's ability
to market and sell the r\LS System.
The regulations relating to MDRs require that reports be submitted to the
FDA to report device-related deaths, serious injuries and malfunctions that
could result in death or serious injury were they to recur. MDRs can result in
agency action such as inspections, recalls and patient/physician notifications,
and are often the basis for agency enforcement actions. Because MDRs are
publicly available, they can also become the basis for private lawsuits,
including class actions. Failure to file MDRs constitutes a violation of the law
enforceable under the FDC Act. Depending on their significance, MDRs could have
a material and adverse effect on the Company's business, financial condition,
results of operations and ability to market its products.
The Company's marketed products will be subject to current good
manufacturing practice regulations for drugs and the quality system regulation
for medical devices. The Company cannot assure that it or its suppliers or
contractors will be able to attain or maintain compliance with these standards.
In addition, any changes to manufacturing facilities or methods may require FDA
clearance or approval.
The nature of marketing claims that the Company will be permitted to make
in the labeling and advertising of its products will be limited to those
specified in an FDA clearance or approval. Claims exceeding those that are
cleared or approved will constitute violations of the FDC Act. Advertisements of
the Company's products will also be subject to regulation by the FTC under the
FTC Act. The FTC Act prohibits unfair methods of competition and unfair or
deceptive acts in or affecting commerce. Violations of the FTC Act, such as
failure to have substantiation for product claims, would subject the Company to
a variety of enforcement actions, including compulsory process, cease and desist
orders and injunctions. FTC enforcement can result in orders requiring, among
other things, limits on advertising, corrective advertising, consumer redress
and recission of contracts. Violations of FTC enforcement orders can result in
substantial fines or other penalties.
906583.4
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Violations of the FDC Act or regulatory requirements at any time during the
product development process, approval process or after approval may result in
FDA enforcement actions, including voluntary or mandatory recall, license
suspension or revocation, seizure of products, fines, injunctions and/or civil
or criminal penalties. Any such agency action could have a material and adverse
effect on the Company's business, financial condition and results of operations.
The Company is also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and the
manufacturing and marketing of its products. The approval procedure varies among
countries. The time required to obtain foreign approvals often differs from that
required to obtain FDA approval. Moreover, approval by the FDA does not ensure
approval by regulatory authorities in other countries.
The Company cannot predict the nature of any future laws, regulations,
interpretations or applications. The Company also cannot predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. Any such requirements
could delay or prevent regulatory approval or clearance of products under
development. Any such requirements could have a material and adverse effect on
its business, financial condition, results of operations and ability to market
its products.
Manufacturing and Facilities
Currently, the Company occupies approximately 30,000 square feet of leased
office, laboratory and manufacturing space in a facility in Marlborough,
Massachusetts (which lease expires in February 2004, and provides for two
five-year renewal options thereafter). In June 2000, the Company plans to occupy
an additional 15,000 square feet in connection with its expansion plans. The
Company believes that these facilities are adequate and suitable for its needs
through 2000. See Item 1. "Business -- Strategic Relationships." The facility is
designed to conform to current good manufacturing practice regulations and other
applicable government standards.
In January 1998, the Company received ISO 9001 Registration and CE mark
EN46001 Certification, which was awarded by Bureau Veritas Quality
International. The ISO 9000 and EN46000 Series of international standards was
developed by the International Organization for Standardization to promote
homogeneous quality processes through the global trade community. ISO 9001
specifically addresses requirements for the manufacture, design, development,
installation and service of products and CE EN46001 addresses the requirements
to market medical devices in the European Union.
For manufacturing outside the United States, the Company will also be
subject to foreign regulatory requirements governing human clinical trials,
manufacturing and marketing approval for drugs or biologics and medical devices.
The regulatory requirements may vary widely from country to country. See "--
Government Regulation."
906583.4
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Source and Availability of Raw Materials
The Company acquires each of the main components of its products from
separate single suppliers. However, given that there are multiple sources
available to it for each such component, and based upon the Company's ongoing
relationship with each such supplier, the Company does not believe that the loss
of any of its current supply channels would result in a material and adverse
effect on its business or its results of operations.
Employees
As of March 24, 2000, the Company employed a total of 106 persons, of whom
23 were in research and development, 65 were in manufacturing and support and 18
were in sales and administration.
Relationships with Sepracor and Gambro
Sepracor. The Company was organized in December 1993 as a wholly-owned
subsidiary of Sepracor. Sepracor is engaged in the business of using chiral
chemistry to develop single-isomer forms of existing, widely sold
pharmaceuticals. Effective January 1, 1994, Sepracor transferred its blood
filtration and membrane filter design business to the Company in exchange for
3,000,000 shares of Common Stock. As of March 24, 2000, Sepracor owned 22% of
the Company's issued and outstanding Common Stock. As of the date hereof,
two executive officers of Sepracor serve as directors of the Company.
In September 1998, the Company completed a $5 million revolving line of
credit arrangement with a commercial bank. Sepracor has guaranteed to repay
amounts borrowed under the line of credit. In exchange for the guarantee, the
Company granted to Sepracor warrants to purchase up to 1,700,000 shares of the
Company's Common Stock at a price of $0.69 per share. The warrants will expire
in the year 2003 and have certain registration rights associated with them.
In March 1999, Sepracor purchased an additional 1,333,334 shares of common
stock of the Company for $1.50 per share and received warrants to purchase an
additional 667,000 shares at a price of $1.50 per share. Sepracor is entitled to
certain rights with respect to the registration under the Securities Act of
1933, as amended, of a total of 6,700,334 shares of Common Stock, including
shares of Common Stock issuable upon exercise of outstanding warrants. These
rights provide that Sepracor may require the Company to register shares subject
to certain conditions and limitations.
Any future arrangements and transactions between the Company and Sepracor
will continue to be on terms which the Company determines are fair and
reasonable to the Company.
Gambro. On May 3, 1999, the Company completed a private placement financing
with Gambro Inc. The stock subscription agreement, which the Company entered
into with Gambro Inc. in connection with this financing, provides for an initial
investment of $9,000,000 in exchange for 4,500,000 shares of the Company's
Common Stock. The stock subscription agreement also provides Gambro Inc. with an
option to purchase additional shares of the Company's Common Stock for up to an
aggregate purchase price of $3,000,000 at any time between August 3, 1999 and
May 3, 2000 with the price per share of Common Stock to be based upon the market
price of the Company's Common Stock. In October 1999,
906583.4
17
Gambro Inc. exercised this option in full. In connection with the exercise of
this option, Gambro Inc. purchased 498,355 shares at a price of $6.02 per share.
The price and number of shares reflects the average price of the Company's stock
in the 30 days prior to the exercise date of October 5, 1999. The stockholders'
agreement, which the Company entered into with Gambro Inc. in connection with
this financing, provides that Gambro Inc. will have representation on the
Company's board of directors of up to two directors and the Company's
representative committees and contains, among other things, various registration
rights and anti-dilution and standstill provisions. Subject to certain terms and
conditions, the anti-dilution provisions prohibit the Company from selling or
issuing the Company's common stock or securities convertible into the Company's
Common Stock in any offering to a third party without offering Gambro Inc. the
opportunity to purchase at the same price and terms that number of securities
necessary for Gambro Inc. to maintain its beneficial ownership of the Company's
outstanding Common Stock. Furthermore, in an offering or in certain other
limited situations, the Company must provide Gambro Inc. with notice of the
Company's intention to sell as well as a right to negotiate with the Company
first for the purchase of the Company's securities. Gambro Inc. agrees to
certain restrictions on its ability to sell the Company's Common Stock owned by
it and its permitted transferees. Gambro Inc. also agrees to refrain from
acquiring beneficial ownership of additional equity or debt securities of the
Company, engaging in certain proxy solicitation activities, seeking to control
the Company's management, policies or affairs and taking certain actions
relating to business combinations and similar transactions without prior
approval of the Company's board of directors. Gambro Inc. has purchased
1,178,680 shares of Common Stock in this offering. Gambro Inc. has agreed to
waive its registration rights in connection with the registration statement to
be filed by the Company in connection with this offering.
In 1998, the Company completed a distribution and development agreement,
which was amended in May 1999, with Gambro Inc. to act as the Company's
exclusive distributor of the Company's r\LS System worldwide, except for sales
to the American Red Cross. Furthermore, this agreement provides that Gambro Inc.
may (upon mutual agreement by the Company and Gambro Inc.) distribute additional
future products developed by the Company that filter blood and its components.
Gambro Inc. markets and sells blood component apheresis equipment to the blood
center market. The agreement with Gambro Inc. contemplates the development by
the Company of an OEM filter for use with Gambro Inc.'s Trima(R) Automated Blood
Collection System. The distribution agreement provides for a five year term that
expires in June 2004, subject to automatic three year renewals unless the
agreement is previously terminated.
Item 2. Properties
Currently, the Company occupies approximately 30,000 square feet of leased
office, laboratory and manufacturing space in a facility in Marlborough,
Massachusetts (which lease expires in February 2004, and provides for two
five-year renewal options thereafter). In June 2000, the Company plans to occupy
an additional 15,000 square feet in connection with its expansion plans. The
Company believes that these facilities are adequate and suitable for its needs
through 2000. See Item 1. "Business -- Strategic Relationships." The facility is
designed to conform to current good manufacturing practice regulations and other
applicable government standards. See Item 1. "Business -- Manufacturing and
Facilities."
906583.4
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Item 3. Legal Proceedings
The Company is a defendant in a lawsuit brought by Pall regarding its
LeukoNet System, which is no longer made or sold by the Company. In a complaint
filed in November 1996, Pall alleged that the Company's manufacture, use and/or
sale of the LeukoNet System infringed upon two patents held by Pall. Pall
dropped its allegations concerning infringement of one of the patents and
alleges only that the Company's LeukoNet System infringed the '572 Patent.
With respect to the allegations concerning the '572 Patent, the Company
answered the complaint stating that the LeukoNet System does not infringe any
claim of the asserted patents. Further, the Company counterclaimed for
declaratory judgment of invalidity, noninfringement and unenforceability of the
'572 Patent. Pall amended its complaint to add Lydall, Inc., whose subsidiary
supplied the filter media for the LeukoNet System, as a co-defendant. The
Company filed for summary judgment of non-infringement, and Pall cross-filed for
summary judgement of infringement at the same time. Lydall, Inc. supported the
Company's motion for summary judgment of non-infringement, and filed a motion
for summary judgment that the asserted claims of the '572 patent are invalid as
a matter of law. Discovery has been completed in the action. The court has not
acted on the summary judgment motions.
On April 5, 1999, the Company and Gambro filed a complaint for declaratory
relief against Pall in the United States District Court of Colorado. The Company
and Gambro seek declaratory relief that the '572 Patent, the '321 Patent and
Pall's U.S. Patent No.'s 5,229,012, 5,344,561, 5,501,795 and 5,863,436 are
invalid and not infringed by the Company's r\LS System and methods of using the
r\LS System. Pall moved to dismiss or transfer to the Eastern District of New
York or, in the alternative, to stay this action. The Company and Gambro opposed
Pall's motion. On July 16, 1999, the United States District Court of Colorado
denied Pall's motion to transfer or, in the alternative, to stay the action, and
the action is proceeding. On September 30, 1999, the Court denied Pall's motion
to dismiss the action and the case is proceeding. On October 20, 1999, Pall
submitted a counterclaim alleging that the Company's r\LS System infringes its
'572 patent and that the Company and Gambro BCT tortiously interfered and
unfairly competed with Pall's business. On March 22, 2000, Pall filed its second
amended answer and counterclaims alleging infringement of all the
patents-in-suit. Pall also added counterclaims against Gambro A.B.
On April 23, 1999, Pall filed a complaint against the Company and Gambro
BCT in the Eastern District of New York alleging that the Company's r\LS System
infringes Pall's '572 Patent and that the Company and Gambro BCT tortiously
interfered and unfairly competed with Pall's business. On May 19, 1999, Pall
amended its complaint and added Gambro Inc., Gambro A.B. and Sepracor as
defendants. The Company and Gambro have moved to dismiss, transfer or stay the
action and Pall has opposed the motion. There has been no decision on the
motion.
A prior lawsuit brought by Pall in February 1996 has concluded. In June
1999, the United States Court of Appeals for the Federal Circuit determined that
the LeukoNet System did not infringe claim 39 of the '321 Patent and Pall has
not appealed that decision.
The Company has engaged patent counsel to investigate the pending
litigations. The Company believes, based upon its review of these matters, that
a properly informed court should conclude that the manufacture, use and/or sale
by the Company or its customers of the LeukoNet System and the r\LS
906583.4
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System do not infringe any valid enforceable claims of the Pall patents.
However, there is no assurance that the Company will prevail in the pending
litigations, and an adverse outcome in a patent infringement action would have a
material and adverse effect on the Company's financial condition and future
business and operations, including the possibility of significant damages in the
litigations and an injunction against the sale of the r\LS System if the Company
does not prevail in the litigations.
In January 1997, the Company entered into a Restructuring Agreement of the
debt related to the Company's acquisition of Novo Nordisk A/S's plasma products
unit. In January 1998, the Company elected to convert all indebtedness under the
approximately $11,700,000 promissory note which was issued to Novo Nordisk A/S
in connection with the Restructuring Agreement into Common Stock at a conversion
price of $10.50 per share, or 827,375 shares. The Company also elected to treat
as forgiven $3,000,000 in principal amount of the note, pursuant to the terms of
the note. Novo Nordisk A/S has contested the conversion of the note, including
the forgiveness of the $3,000,000 amount. This dispute, with or without merit,
could be time-consuming and expensive to litigate or settle if brought into a
court of law, and could divert management attention from administering the
Company's core business. If Novo Nordisk A/S succeeds on its dispute and the
Company is deemed to have wrongfully converted the original note, then the
827,375 shares of common stock issued to Novo Nordisk A/S may no longer be
outstanding and the Company may be obligated to repay certain indebtedness under
the original note.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1999.
906583.4
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EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is the name, age, position and a brief account of the
business experience of each of the Company's current executive officers.
Name Age Position
---- --- --------
John F. McGuire, III 53 President, Chief Executive Officer and Director
James B. Murphy 43 Senior Vice President, Finance and Administration
Peter C. Sutcliffe 50 Vice President and Chief Operating Officer
John F. McGuire, III has served as the Company's Chief Executive Officer,
President and as one of the Company's directors since April 1997. Prior to that
time, Mr. McGuire served as Vice President and General Manager of Johnson &
Johnson's Ortho Diagnostic Systems Blood Bank Business Unit since January 1996.
From March 1995 to January 1996, Mr. McGuire held the position of Vice
President, Sales & Marketing, North America for Johnson & Johnson. From August
1990 to March 1995, Mr. McGuire served as Managing Director of Ortho Diagnostic
Systems in the United Kingdom and Belgium for Johnson & Johnson. From September
1988 to August 1990, Mr. McGuire held the position of Marketing Director for the
AIDS and Hepatitis Business Unit of Johnson & Johnson. From 1977 to 1988, Mr.
McGuire held various management positions at E. I. du Pont de Nemours and
Company, the last of which was National Sales Manager, AIDS & Hepatitis
Business. Mr. McGuire is a member of the board of trustees of the National Blood
Foundation Trust Fund.
James B. Murphy has served as the Company's Senior Vice President, Finance
and Administration since February 1996. From April 1994 to January 1996, he
served as the Company's Vice President and Corporate Controller. Prior to that,
from 1990 to April 1994, he served as Corporate Controller of Sepracor.
Previously, Mr. Murphy held the positions of Senior Corporate Accountant at BBN
Inc. and Senior Accountant at Arthur Andersen LLP.
Peter C. Sutcliffe has served as the Company's Chief Operating Officer
since April 1998. From May 1996 to April 1998, Mr. Sutcliffe served as the
Company's Vice President of Manufacturing Operations. From May 1982 to May 1996,
Mr. Sutcliffe held the position of Vice President, Manufacturing for Corning
Costar Incorporated. From 1976 to 1982, he was a plant manufacturing manager at
Millipore Corporation.
906583.4
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
1. Market Information.
The Common Stock of the Company has been included for quotation on the OTC
bulletin board under the symbol HMSR since January 14, 1998. From October 28,
1997 until January 13, 1998, the Common Stock was included for quotation on The
Nasdaq SmallCap Market under the symbol HMSRC. Prior to October 28, 1997 and
since April 7, 1994, the Common Stock of the Company was included for quotation
on the Nasdaq National Market under the symbol HMSR. Prior to April 7, 1994, the
Company's Common Stock was not publicly traded. The following table sets forth
for the periods indicated the range of high and low bid information per share of
the Common Stock as included for quotation on the Nasdaq National Market or The
Nasdaq SmallCap Market, as the case may be.
1999 High Low
---- ---- ---
First Quarter 2 1/2 1 13/32
Second Quarter 4 7/8 2 1/8
Third Quarter 7 3/8 3 7/8
Fourth Quarter 6 1/2 4 1/2
1998 High Low
---- ---- ---
First Quarter 2 3/16 3/8
Second Quarter 2 1/16 7/16
Third Quarter 2 15/32 1 3/16
Fourth Quarter 2 15/16 7/8
2. Holders.
On March 24, 2000, the Company's Common Stock was held by approximately 125
stockholders of record. On March 24, 2000, the last reported sale price of the
Company's Common Stock on the OTC bulletin board was $11.
3. Dividend Information.
The Company has never paid dividends on its Common Stock. The Company
currently intends to reinvest its earnings, if any, for use in the business and
does not expect to pay cash dividends in the foreseeable future.
906583.4
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4. Sales of Securities.
In March 2000, the Company completed a $28,000,000 private placement in
which institutional investors purchased 3,730,000 shares of the Company's common
stock at a purchase price of $7.50 per share. The Company has agreed to
register, prior to June 2, 2000, such shares for resale.
On May 3, 1999, the Company completed a private placement financing with
Gambro Inc. The stock subscription agreement, which the Company entered into
with Gambro Inc. in connection with this financing, provided for an initial
investment of $9,000,000 in exchange for 4,500,000 shares of the Company's
Common Stock. The stock subscription agreement also provided Gambro Inc. with an
option to purchase additional shares of the Company's Common Stock for up to an
aggregate purchase price of $3,000,000 at any time between August 3, 1999 and
May 3, 2000 with the price per share of Common Stock to be based upon the market
price of the Company's Common Stock. In October 1999, Gambro Inc. exercised this
option in full. In connection with the exercise of this option, Gambro Inc.
purchased 498,355 shares at a price of $6.02 per share. The price and number of
shares reflects the average price of HemaSure stock in the 30 days prior to the
exercise date of October 5, 1999.
In March 1999, Sepracor purchased an additional 1,333,334 shares of common
stock of the Company for $1.50 per share and received warrants to purchase an
additional 667,000 shares at a price of $1.50 per share. Sepracor is entitled to
certain rights with respect to the registration under the Securities Act of
1933, as amended, of a total of 6,700,334 shares of Common Stock, including
shares of Common Stock issuable upon exercise of outstanding warrants. These
rights provide that Sepracor may require the Company to register shares subject
to certain conditions and limitations.
In September 1998, the Company completed a $5 million revolving line of
credit arrangement with a commercial bank. Sepracor has guaranteed to repay
amounts borrowed under the line of credit. In exchange for the guarantee, the
Company granted to Sepracor warrants to purchase up to 1,700,000 shares of the
Company's Common Stock at a price of $0.69 per share. The warrants will expire
in the year 2003 and have certain registration rights associated with them.
In each case, the securities were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2).
Item 6. Selected Financial Data
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
Year Ended December 31, 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues:
Product sales $ 805 $ 25 $ 2,357 $ 725 $ 534
Collaborative research and development - - - 54 300
------- ------ -------- ------ -----
Total revenues 805 25 2,357 779 834
------- ------ -------- ------ -----
Costs and expenses:
Cost of products sold 2,408 657 4,158 3,785 1,073
906583.4
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Cost of collaborative research and
development - - - 41 283
Research and development 2,681 3,794 3,577 6,128 4,061
Legal expense related to patents 1,361 3,340 506 744 152
Selling, general and administrative 3,728 4,201 4,458 7,325 3,729
Restructuring charge - - 1,215 - -
------- -------- -------- ------- --------
Total costs and expenses 10,178 11,992 13,914 18,023 9,298
------- -------- -------- ------- --------
Loss from operations (9,373) (11,967) (11,557) (17,244) (8,464)
Other (expense) income (1,292) (203) 1,673 1,394 1,014
-------- ---------- -------- --------- ---------
Net loss from continuing operations (10,665) (12,170) (9,884) (15,850) (7,450)
-------- --------- --------- --------- ---------
Discontinued operations:
Loss from operations of discontinued
business - - - (9,550) -
Loss on disposal of discontinued business - - - (15,198) -
--------- ---------- ---------- --------- ---------
Net loss $ (10,665) $ (12,170) $ (9,884) $(40,598) $ (7,450)
---------- ---------- ---------- --------- ---------
Net loss per common share - basic and diluted:
Net loss from continuing operations $ (0.77) $ (1.35) $ (1.22) $ (1.96) $ (1.20)
Loss from operations of discontinued
business - - - (1.18) -
Loss on disposal of discontinued business - - - (1.88) -
---------- --------- --------- --------- ---------
Net loss $ (0.77) $ (1.35) $ (1.22) $ (5.03) $ (1.20)
------------ ----------- ----------- ----------- ----------
Weighted average number of shares of
common stock outstanding - basic and diluted: 13,766 9,025 8,127 8,069 6,205
----------- ---------- ---------- --------- ----------
BALANCE SHEET DATA
(In thousands)
Cash and marketable securities $ 5,243 $ 1,827 $ 8,156 $16,724 $47,841
Working capital (327) 37 6,071 14,844 46,905
Total assets 9,090 5,655 10,607 20,560 50,212
Capital lease obligations long term - 68 289 525 286
Notes payable long-term 43 5,073 72 - -
Convertible subordinated note payable long
term - - 8,687 8,687 -
Stockholders' equity (deficit) 1,227 (2,832) (1,467) 7,929 48,002
906583.4
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Overview
The Company was established in December 1993 as a wholly-owned subsidiary
of Sepracor. Effective as of January 1, 1994, in exchange for 3,000,000 shares
of Common Stock, Sepracor transferred to the Company its technology relating to
the manufacture, use and sale of medical devices for the separation and
purification of blood, blood products and blood components and its membrane
filter design technologies.
HemaSure develops and supplies innovative blood filtration technologies
designed to help meet today's increasing demand for a safer, more reliable blood
supply. The Company's blood filtration technologies are designed to reduce
virus-carrying white blood cells (leukocytes) in donated blood to nominal levels
(a process known as "leukoreduction").
In June 1995, the Company received clearance from the United States Food
and Drug Administration (the "FDA") for the LeukoNet System, a medical device
designed for the removal of contaminating leukocytes from donated blood. Fiscal
1996 was the first full year of commercial sale of its LeukoNet System. In
February 1998, the Company determined to discontinue manufacturing the LeukoNet
System and focus on the completion of development and market introduction of its
next generation red cell filtration product, the r\LS System.
In May 1999, the Company received 510(k) clearance from the FDA to market
its r\LS System in the United States. The Company initiated sales of the r\LS
System in the United States in the third quarter 1999.
All of the Company's other planned blood-related products are in the
research and development stage, and certain of these products may require
pre-clinical and clinical testing prior to submission of any regulatory
application for commercial use. The Company's success will depend on the
commercial acceptance of the r\LS System and development and commercial
acceptance of the other blood-related products.
Results of Continuing Operations
Revenues were $805,000 in 1999, $25,000 in 1998 and $2,357,000 in 1997. All
revenues in 1999, 1998 and 1997 were from the sale of the Company's
leukoreduction systems. In 1999, the Company initiated sales of its next
generation red blood cell leukoreduction system, the r\LS System. In February
1998, the Company decided to discontinue the manufacture and sale of its former
leukoreduction filter, the LeukoNet System, which accounts for the increase in
revenues in 1999 from those in 1998 and for the decrease in 1998 from those in
1997 when all revenues were attributed to the LeukoNet System. In 1999, one
customer represented 66% of total revenues and another customer represented 33%
of total revenues. In 1998 one customer represented 53% of total revenues and
another customer represented 10% of total revenues. In 1997, one customer
represented 86% of total revenues.
The cost of products sold was $2,408,000 in 1999, $657,000 in 1998 and
$4,158,000 in 1997. Cost of products sold exceeded product sales in all periods
due to the high costs associated with low volume
906583.4
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production and to the start-up costs of new product introduction. Cost of
products sold in 1997 includes a charge of approximately $800,000 related to the
Company's determination to discontinue manufacturing the LeukoNet System and to
focus exclusively on its next generation red cell filter.
Research and development expenses were $2,681,000 in 1999, $3,794,000 in
1998 and $3,577,000 in 1997. The decrease in 1999 from 1998 is primarily
attributable to costs associated with the development of the Company's next
generation red cell filtration system, the r\LS System, for which a majority of
the effort was expended in the 1998 period. The increase in 1998 over amounts
expended in 1997 is attributable to costs associated with development of the
Company's r\LS System.
Legal expense related to patents were $1,361,000 in 1999, $3,340,000 in
1998 and $506,000 in 1997. In 1998 the Company incurred significant expenses in
connection with expert witness and discovery related activities associated with
its outstanding patent litigation with Pall. The decrease in 1999 from those
expended in 1998 is due to a reduction in these costs as well as from
cooperation with Gambro BCT in connection with such costs consistent with the
Company's distribution and development agreement with Gambro. See " --
Litigation."
Selling, general and administrative expenses were $3,728,000 in 1999,
$4,201,000 in 1998 and $4,458,000 in 1997. The decrease in the amount expended
in 1999 from 1998 is primarily due to a lower level of general corporate
expenses. The decrease in the amount expended in 1998 from 1997 is primarily due
to a lower level of sales and marketing expense associated with the lower
revenues in 1998 compared to 1997. Sales and marketing costs may increase in
future periods from current levels as the Company continues its efforts to
market and launch sales of its blood filtration products.
In April 1997, the Company determined to focus management resources on its
core business of blood filtration technologies. In connection therewith, the
Company incurred a one-time restructuring charge of $1,215,000 in 1997 for
severance and related charges in connection with executive management
departures. At December 31, 1998 all amounts related to this charge were paid.
Interest income in 1999, 1998 and 1997 primarily represents interest earned
on available cash and marketable securities balances during those periods.
The increase in interest expense in 1999 compared to 1998 is primarily
related to amounts outstanding on the Company's line of credit which was
outstanding for all of 1999 and only for approximately three months in 1998. The
decrease in interest expense in 1998 compared to 1997 is primarily related to a
convertible subordinated note payable which was outstanding for all of 1997 and
converted to Common Stock in 1998 and lower average capital lease obligation
balances.
In September 1997, the Company reached an out-of-court settlement with
Pharmacia & Upjohn Inc. arising out of the alleged breach by Pharmacia & Upjohn
Inc. of an agreement to sell to the Company Pharmacia & Upjohn Inc.'s plasma
pharmaceutical business located in Stockholm, Sweden. The terms of settlement
included a cash payment to the Company and the granting of an option to
Pharmacia & Upjohn Inc. to license, on a non-exclusive basis, certain
intellectual property held by the Company and its subsidiaries relating to
plasma fractionation. The cash payment was recognized as other income in 1997
and represents the majority of the amount in other income for that year.
906583.4
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New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect such adoption to have
a material impact on its financial statements.
In December 1999, the Securities and Exchange Commission (the "Commission")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which is effective no later than the quarter ending June
30, 2000. SAB 101 clarifies the Commission's views related to revenue
recognition and disclosure. The Company will adopt SAB 101 effective in the
second quarter of 2000 and are presently determining the effect it will have on
the Company's financial statements, but management does not believe the effect
will be material.
Litigation
The Company is a defendant in a lawsuit brought by Pall regarding the
Company's LeukoNet System, which is no longer made or sold by the Company. In a
complaint filed in November 1996, Pall alleged that the manufacture, use and/or
sale of the LeukoNet System infringed upon two patents held by Pall. Pall
dropped its allegations concerning infringement of one of the patents and
alleges only that the LeukoNet System infringed Pall's U.S. Patent No. 4,952,572
(the "'572 Patent").
With respect to the allegations concerning the '572 Patent, the Company
answered the complaint stating that the LeukoNet System does not infringe any
claim of the asserted patents. Further, the Company counterclaimed for
declaratory judgment of invalidity, noninfringement and unenforceability of the
'572 Patent. Pall amended its complaint to add Lydall, Inc., whose subsidiary
supplied the filter media for the LeukoNet System, as a co-defendant. The
Company filed for summary judgment of non-infringement, and Pall cross-filed for
summary judgement of infringement at the same time. Lydall, Inc. supported the
Company's motion for summary judgment of non-infringement, and filed a motion
for summary judgment that the asserted claims of the '572 patent are invalid as
a matter of law. Discovery has been completed in the action. The court has not
acted on the summary judgment motions.
The Company and Gambro BCT filed a complaint for declaratory relief against
Pall in the United States District Court of Colorado. The Company and Gambro BCT
seek declaratory relief that the '572 Patent, Pall's U.S. Patent No. 5,451,321
(the "'321 Patent") and Pall's U.S. Patent No.'s 5,229,012, 5,344,561, 5,501,795
and 5,863,436 are invalid and not infringed by the Company's r\LS System and
methods of using the r\LS System. Pall moved to dismiss or transfer to the
Eastern District of New York or, in the alternative, to stay this action. The
Company and Gambro BCT opposed Pall's motion. On July 16, 1999, the United
States District Court of Colorado denied Pall's motion to transfer or, in the
alternative, to stay the action, and the action is proceeding. On September 30,
1999, the Court denied Pall's motion to dismiss the action and the case is
proceeding. On October 20, 1999,
906583.4
-27-
Pall submitted a counterclaim alleging that the Company's r\LS System infringes
its '572 patent and that the Company and Gambro BCT tortiously interfered and
unfairly competed with Pall's business.Pall has also asserted that the r\LS
System infringes one or more of the other patents that are the subject of the
lawsuit.
On April 23, 1999, Pall filed a complaint against the Company and Gambro
BCT in the Eastern District of New York alleging that the Company's r\LS System
infringes Pall's '572 Patent and that the Company and Gambro BCT tortiously
interfered and unfairly competed with Pall's business. On May 19, 1999, Pall
amended its complaint and added Gambro Inc., Gambro A.B. and Sepracor as
defendants. The Company and Gambro BCT have moved to dismiss, transfer or stay
the action and Pall has opposed the motion. There has been no decision on the
motion.
A prior lawsuit brought by Pall in February 1996 has concluded. In June
1999, the United States Court of Appeals for the Federal Circuit determined that
the LeukoNet System did not infringe claim 39 of the '321 Patent and Pall has
not appealed that decision.
The Company has engaged patent counsel to investigate the pending
litigations. The Company believes, based upon its review of these matters, that
a properly informed court should conclude that the manufacture, use and/or sale
by the Company or its customers of the LeukoNet System and the r\LS System do
not infringe any valid enforceable claims of the Pall patents. However, there
can be no assurance that the Company will prevail in the pending litigations,
and an adverse outcome in a patent infringement action would have a material and
adverse effect on the Company's financial condition and future business and
operations, including the possibility of significant damages in the litigations
and an injunction against the sale of the r\LS System if the Company does not
prevail in the litigations.
On November 1, 1996, the Company filed a complaint in the Supreme Court,
State of New York, County of New York, against Pharmacia & Upjohn Inc. In its
complaint, the Company sought damages arising out of the alleged breach by
Pharmacia & Upjohn Inc. of an agreement to sell to the Company Pharmacia &
Upjohn Inc.'s plasma pharmaceutical business located in Stockholm, Sweden. In
September 1997, the Company reached an out-of-court settlement with Pharmacia &
Upjohn Inc. The terms of settlement included a cash payment to the Company and
the granting of an option to Pharmacia & Upjohn Inc. to license, on a
non-exclusive basis, certain intellectual property held by the Company and its
subsidiaries relating to plasma fractionation. The cash payment was recognized
as other income in 1997.
Liquidity and Capital Resources
The net increase in cash and cash equivalents in 1999 was $3,416,000. This
net increase is attributable to net cash provided by financing activities of
$14,472,000 offset in part by net cash used in operating activities of
$10,539,000 and net cash used in investing activities of $517,000.
Net cash provided by financing activities relates to net proceeds from
issuance of Common Stock of $14,724,000 offset in part by repayments of capital
lease obligations of $225,000. Net cash used in operating activities is
primarily attributable to the net loss of $10,665,000, a reduction in accounts
payable of $343,000 and increases in accounts receivable of $443,000 and
inventories of $600,000, offset in part by non-cash charges to operating
activities of $1,024,000 related to warrant financing costs and depreciation and
amortization of $475,000. Net cash used in investing activities relates to
additions to property and equipment of $517,000.
906583.4
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In March 2000, the Company completed a $28,000,000 private placement in
which institutional investors purchased 3,730,000 shares of the Company's common
stock at a purchase price of $7.50 per share. The Company has agreed to
register, prior to June 2, 2000, such shares for resale. The Company intends to
use the proceeds of the financing for working capital, capital equipment and
general corporate purposes.
The Company believes, based on its current operating plan, that its
existing cash balances together with the financing provided in March 2000 will
be sufficient to fund the Company's operations beyond the first quarter 2001. If
the Company's plans or assumptions change, if the Company's assumptions prove to
be inaccurate or if the Company experiences unanticipated costs or competitive
pressures, it may seek to raise additional capital by pursuing strategic
partnerships, public or private equity and/or debt financing. If the Company
fails to generate such cash flow or obtain any such financing on terms favorable
to it or if other unforeseen circumstances occur, the Company may be unable to
continue to commercialize and market the r\LS System or complete the development
of the Company's proposed products and/or market such products successfully, or
to continue the Company's current operations as presently conducted, if at all,
beyond the first quarter 2001. The Company's cash requirements may vary
materially from those now planned because of factors such as successful
development of products, results of product testing, approval process at the FDA
and similar foreign agencies, commercial acceptance of its products, patent
developments and the introduction of competitive products.
On May 3, 1999, the Company completed a private placement financing with
Gambro Inc. The stock subscription agreement, which the Company entered into
with Gambro Inc. in connection with this financing, provided for an initial
investment of $9,000,000 in exchange for 4,500,000 shares of the Company's
Common Stock. The stock subscription agreement also provided Gambro Inc. with an
option to purchase additional shares of the Company's Common Stock for up to an
aggregate purchase price of $3,000,000 at any time between August 3, 1999 and
May 3, 2000 with the price per share of Common Stock to be based upon the market
price of the Company's Common Stock. In October 1999, Gambro Inc. exercised this
option in full. In connection with the exercise of this option, Gambro Inc.
purchased 498,355 shares at a price of $6.02 per share. The price and number of
shares reflects the average price of HemaSure stock in the 30 days prior to the
exercise date of October 5, 1999.
In March 1999, Sepracor purchased an additional 1,333,334 shares in a
private placement of Common Stock of the Company for $1.50 per share and
received warrants to purchase an additional 667,000 shares at a price of $1.50
per share. The financing agreement contains certain registration rights and
warrant exercise provisions.
In September 1998, the Company completed a $5 million revolving line of
credit arrangement with a commercial bank. As of December 31, 1999, the entire
$5 million was outstanding under the line. The revolving line of credit, which
expires in August 2000, is being used to help finance the Company's working
capital requirements and for general corporate purposes. Amounts borrowed under
the line bear interest at the bank's prime lending rate plus 1/2% payable
quarterly in arrears. The weighted-average borrowing rate for the period ended
December 31, 1999 was 8.67%. The Company recorded interest expense related to
borrowings under the line of $434,000 and $93,000 for the periods ended December
31, 1999 and 1998, respectively. The credit agreement contains customary
covenants and provisions. The bank has a first lien on all assets of the Company
including its intellectual property.
906583.4
-29-
Sepracor, the Company's largest shareholder, has guaranteed to repay amounts
borrowed under the line of credit. In exchange for the guarantee, the Company
granted to Sepracor warrants to purchase up to 1,700,000 shares of the Company's
Common Stock at a price of $0.69 per share. The warrants will expire in the year
2003 and have certain registration rights associated with them. HemaSure has
placed a value of $1,938,000 on the 1,700,000 warrants as of the date of the
final agreement and is amortizing this deferred financing charge on a monthly
basis over the term of the line of credit. The Company amortized $1,024,000 and
$189,000 of this deferred finance charge and recorded it as interest expense in
the Consolidated Statements of Operations for the periods ended December 31,
1999 and 1998, respectively.
In April 1997, the Company determined to focus management resources on its
core business of blood filtration technologies. In connection therewith, the
Company incurred a one-time restructuring charge of $1,215,000 in 1997 for
severance and related charges in connection with executive management
departures. At December 31, 1998 all amounts related to this charge were paid.
In March 1997, the Company exercised its right, under the lease arrangement
of its Marlborough, Massachusetts facility, to have a portion of its leasehold
improvements financed and received $140,000 in connection with this arrangement.
This amount will be repaid in 60 equal monthly installments at a rate of 12% per
annum. As of December 31, 1999, there was a balance of $73,000 remaining to be
paid on this note.
In January 1997, the Company entered into a Restructuring Agreement with
respect to the indebtedness incurred by the Company in connection with its
acquisition of the plasma pharmaceutical business unit of Novo Nordisk. Pursuant
to the Restructuring Agreement, approximately $23,000,000 of indebtedness owed
to Novo Nordisk was restructured by way of issuance by the Company to Novo
Nordisk of a 12% convertible subordinated promissory note in the principal
amount of approximately $11,700,000, which was due and payable on December 31,
2001, with interest payable quarterly (provided that up to approximately
$3,000,000 would be forgiven in certain circumstances). Approximately $8,500,000
of the reduction of such indebtedness was forgiven; such forgiveness is
reflected in the 1996 Statement of Operations as a reduction of the loss on
disposal of the discontinued plasma business. The remainder of the reduction
represented a net amount due from Novo Nordisk to the Company related to various
service arrangements between the two companies. The amount included in the
balance sheet at December 31, 1997 and 1996 includes the effect of the
Restructuring Agreement net of the $3,000,000 contingency amount to reflect the
most probable result of the Company's decision to exit the plasma business. All
amounts outstanding under such note were convertible by either party, commencing
January 1998, into shares of Common Stock at a conversion price equal to $10.50
per share. In December 1997, the Company's Danish subsidiary was placed in
bankruptcy and the Company notified the holder of the note of its intent to
convert in January 1998, $8,687,000 of debt, which it believes was the entire
amount outstanding as of the date of conversion. On January 6, 1998, the Company
converted the note, pursuant to its terms, into shares of Common Stock at a
conversion price of $10.50 per share, or 827,375 shares. The holder of the note
has contested the conversion of the note, including the forgiveness of the
$3,000,000 amount. The Company believes that such claims are without merit.
In 1994, in collaboration with Sepracor and certain of its other
subsidiaries, the Company executed an equipment leasing arrangement that
provided for a total of $2,000,000 to Sepracor and certain of its other
subsidiaries for purposes of financing capital equipment. Under certain
circumstances, Sepracor is the guarantor of any amounts outstanding under this
financing arrangement. In October 1996, the
906583.4
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Company executed a replacement leasing arrangement for the benefit of the
Company only with the same leasing company providing $1,100,000 of equipment
lease financing. This arrangement terminated in March 1997. All amounts
outstanding under the 1994 leasing facility are being repaid under the original
terms of that leasing arrangement. There was $71,000 outstanding under all
leasing arrangements as of December 31, 1999.
Future Operating Results
Certain of the information contained in this Annual Report, including
information with respect to the development and commercialization of the
Company's products under development and the Company's other plans and strategy
for its business, consists of forward-looking statements. Important factors that
could cause actual results to differ materially from the forward-looking
statements include the following:
The Company believes that the performance of its blood-related products
will be competitive with products sold by other vendors of blood filtration and
transfusion products and may encounter significant competition in the sale of
such products from biotechnology, pharmaceutical and hospital supply companies.
In the leukoreduction field, several of the Company's competitors have
substantially greater resources, manufacturing and marketing capabilities,
research and production staffs, and production facilities than the Company.
Moreover, some of the Company's competitors are significantly larger than the
Company, have greater experience in preclinical testing, human clinical trials
and other regulatory approval procedures. In addition, many of the Company's
competitors have access to greater capital and other resources, may have
management personnel with more experience than that of the Company and may have
other advantages over the Company in conducting certain businesses and providing
certain services. There can be no assurance that the Company will be able to
compete effectively against such companies. The Company is a defendant in a
lawsuit brought by Pall regarding its LeukoNet System, which is no longer made
or sold by the Company. In addition, the Company and Gambro BCT filed a
complaint for declaratory relief against Pall in the United States District
Court of Colorado regarding six patents related to its r\LS System. Pall has
filed a complaint against the Company and Gambro BCT in the Eastern District of
New York alleging that the Company's r\LS System infringes one of Pall's
patents.
The Company believes, based on its current operating plan, that its
existing cash balances together with the financing provided in March 2000 will
be sufficient to fund the Company's operations beyond the first quarter 2001. If
the Company's plans or assumptions change, if the Company's assumptions prove to
be inaccurate or if the Company experiences unanticipated costs or competitive
pressures, it may seek to raise additional capital by pursuing strategic
partnerships, public or private equity and/or debt financing. If the Company
fails to generate such cash flow or obtain any such financing on terms favorable
to it or if other unforeseen circumstances occur, the Company may be unable to
continue to commercialize and market the r\LS System or complete the development
of the Company's proposed products and/or market such products successfully, or
to continue the Company's current operations as presently conducted, if at all,
beyond the first quarter 2001. The Company's cash requirements may vary
materially from those now planned because of factors such as successful
development of products, results of product testing, approval process at the FDA
and similar foreign agencies, commercial acceptance of its products, patent
developments and the introduction of competitive products.
The customers for the Company's potential products are a limited number of
national and regional blood centers, which collect, store and distribute blood
and blood products. In the United States, the American Red Cross collects and
distributes approximately 50% of the nation's supply of blood products.
906583.4
-31-
Other major blood centers include the New York Blood Center, Blood Centers of
America, America's Blood Centers and United Blood Services, each of which
distributes 6% to 12% of the nation's supply of blood and blood products. In
Europe, various national blood transfusion services or Red Cross organizations
collect, store and distribute virtually all of their respective nation's blood
and blood products supply. The Company's principal competitors have
long-standing relationships with these blood centers and there can be no
assurance that the Company will be successful in marketing its products to these
centers.
In August 1998, the Company completed an amended and restated Master
Strategic Alliance Agreement with the American Red Cross BioMedical Services,
which provides for, among other things, the development and enhancement of a
number of filtration products, based on the Company's core technology including
red blood cell leukoreduction, leukocyte recovery, platelet filtration, whole
blood filtration and tumor cell filtration. Pursuant to the strategic alliance
agreement, the Company entered into a master purchase agreement with the
American Red Cross that provides for the sale of the r\LS System by the Company
to the American Red Cross on specified terms.
In 1998, the Company completed a distribution and development agreement,
which was amended in May 1999, with Gambro Inc. to act as the Company's
exclusive distributor of its r\LS System worldwide, except for sales to the
American Red Cross. Furthermore, this agreement provides that Gambro Inc. may
(upon mutual agreement by the Company and Gambro Inc.) distribute additional
future products developed by the Company that filter blood and its components.
In May 1999, the Company received 510(k) clearance from the FDA to market
its r\LS System in the United States. The Company initiated sales of the r\LS
System in the United States in the third quarter 1999. If the Company's
agreements with the American Red Cross are terminated, or not implemented, for
any reason, the Company's business, financial condition and results of
operations could be materially and adversely affected. If Gambro Inc. does not
successfully market and sell the Company's products or the distribution
agreement is terminated for any reason, the Company's business, financial
condition and results of operations could be materially and adversely affected.
All of the Company's other planned blood filtration and transfusion
products are in the research and development stage. The Company will be required
to conduct significant research, development, testing and regulatory compliance
activities on these products that, together with anticipated costs expenses,
could to result in additional losses through 2000. The Company's ability to
achieve a profitable level of operations will depend on successfully
implementing its supply and distribution agreements for its current product and
completing development, obtaining regulatory approvals and achieving market
acceptance of its other blood-related products.
Some or all of the Company's blood filtration and transfusion products may
require preclinical and clinical testing prior to submission of any regulatory
application for commercial use. The Company does not expect regulatory approval
for commercial sale in the United States of any of its other planned products
before the end of 2000.
To succeed in the implementation of the Company's business strategy, the
Company must implement effective planning and operating processes. In addition,
to manage anticipated growth, the Company must continue to expand and upgrade
core technologies, continue to implement and improve its operational, financial
and management information systems, and hire, train and retain additional
qualified
906583.4
-32-
personnel. The Company has limited experience with the manufacture of our
products on a commercial scale. The Company's systems and procedures may not be
adequate to support its operations, and its management may not be able to
achieve the rapid execution necessary to exploit the market for its products and
services.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The financial statements filed as part of this Annual Report on Form 10-K
are provided under Item 14 below.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
Not applicable.
906583.4
-33-
PART III
Items 10-13.
The information required for Part III in this Annual Report on Form 10-K is
incorporated by reference from the Company's definitive proxy statement for the
Company's 2000 Annual Meeting of Stockholders. Such information will be
contained in the sections of such proxy statement captioned "Stock Ownership of
Certain Beneficial Owners and Management," "Election of Directors," "Board and
Committee Meetings," "Compensation for Directors," "Compensation for Executive
Officers" and "Certain Relationships and Related Transactions." Information
regarding executive officers of the Company is also furnished in Part I of this
Annual Report on Form 10-K under the heading "Executive Officers of the
Registrant."
906583.4
-34-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a (1) Financial Statements
HemaSure Inc. Consolidated Financial Statements as of
December 31, 1999 and for each of the three years in
the period ended December 31, 1999. See pages F-1
through F-7, which are included herein.
a (2) Financial Statement Schedules
All schedules are omitted because they are
inapplicable, not required or the information is
included in the consolidated financial statements or
the notes thereto.
a (3) Exhibits
The exhibits listed in the Exhibit Index immediately
preceding the exhibits are filed as part of this Annual
Report on Form 10-K.
(b) No Current Reports on Form 8-K were filed by the
Company during the last quarter of the period covered
by this report.
The following trademarks are mentioned in this Annual Report on Form 10-K:
HemaSure r/LS and LeukoNet.
906583.4
-35-
HemaSure Inc.
Index to Financial Statements Page
-----------------------------
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets at December 31, 1999 and 1998.................................................. F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997..................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999, 1998 and 1997....................................................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997..................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
906583.4
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of HemaSure Inc.:
In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the financial
position of HemaSure Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 4, 2000
except for Note Q for
which the date is
March 2, 2000
906583.4
F-2
HemaSure Inc.
Consolidated Balance Sheets
December 31,
(In thousands, except par value amounts)
ASSETS 1999 1998
---- ----
Current assets:
Cash and cash equivalents (Note B) $ 5,243 $ 1,827
Accounts receivable (Note D) 443 -
Inventories (Note E) 806 206
Deferred financing costs (Note H) 725 1,024
Prepaid expenses and other current assets 276 326
--------- ---------
Total current assets 7,493 3,383
Property and equipment, net (Note F) 1,547 1,505
Deferred financing costs long-term (Note H) - 725
Other assets 50 42
---------- ----------
Total assets $ 9,090 $ 5,655
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,199 $ 1,542
Accrued expenses (Note G) 1,520 1,549
Current portion of notes payable (Note H) 5,030 27
Current portion of capital lease obligations (Note G) 71 228
---------
Total current liabilities 7,820 3,346
Capital lease obligations (Note G) - 68
Notes payable (Note H) 43 5,073
Total liabilities 7,863 8,487
------- -------
Commitments and contingencies (Notes G, H and I) Stockholders' equity (deficit)
(Notes K and L):
Preferred stock, $0.01 par value, 1,000 shares authorized, none issued
and outstanding in 1999 and 1998
Common stock, $0.01 par value, authorized shares 35,000
in 1999, issued and outstanding
15,823 in 1999 and 9,088 in 1998 158 91
Additional paid-in capital 86,241 71,584
Accumulated deficit (85,172) (74,507)
-------- ---------
Total stockholders' equity (deficit) 1,227 (2,832)
----- ---------
Total liabilities and stockholders' equity (deficit) $ 9,090 $ 5,655
======= ========
The accompanying notes are an integral part of the financial statements.
906583.4
F-3
HemaSure Inc.
Consolidated Statements of Operations
Year Ended December 31,
(In thousands, except per share amounts) 1999 1998 1997
---- ---- ----
Revenue $ 805 $ 25 $ 2,357
Costs and expenses:
Cost of products sold 2,408 657 4,158
Research and development 2,681 3,794 3,577
Legal expense related to patents 1,361 3,340 506
Selling, general and administrative 3,728 4,201 4,458
Restructuring charge - - 1,215
------------- ------------- ---------
Total costs and expenses 10,178 11,992 13,914
--------- --------- --------
Loss from operations (9,373) (11,967) (11,557)
Other income (expense):
Interest income 201 169 577
Interest expense (1,493) (372) (1,401)
Other income - - 2,497
------------ ------------- --------
Net loss $(10,665) $(12,170) $ (9,884)
========= ========= =========
Net loss per share - basic and diluted: $ (0.77) $ (1.35) $ (1.22)
========== ========== ==========
Weighted average number of shares of common stock
outstanding - basic and diluted 13,766 9,025 8,127
The accompanying notes are an integral part of the financial statements.
906583.4
F-4
HemaSure Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Year ended
December 31, 1999, 1998
and 1997 (In thousands)
Total
Additional Stockholders'
Common Stock Paid-in Unearned Accumulated Equity
Shares Amount Capital Compensation Other Deficit (Deficit)
-------- ------ --------- ------------ ----- --------- ---------
Balance at December 31, 1996 8,098 $81 $60,702 $(398) $(3) $(52,453) $7,929
Issuance of common stock to
employees under stock plans 66 1 176 177
Unearned compensation amortization 309 309
Other 2 2
Net loss (9,884) (9,884)
--------- ------- -------- --------- ------------- -----------
Balance at December 31, 1997 8,164 82 60,878 (89) (1) (62,337) (1,467)
Issuance of common stock to
employees under stock plans 97 1 89 90
Issuance of common stock for debt 827 8 8,679 8,687
Issuance of warrants 1,938 1,938
Unearned compensation amortization 89 89
Other 1 1
Net loss (12,170) (12,170)
--------- ------- -------- --------- ------------- -----------
Balance at December 31, 1998 9,088 91 71,584 - - (74,507) (2,832)
Issuance of common stock to
employees under stock plans 404 4 813 817
Issuance of common stock
in private placements, net of
issuance costs of $93 6,331 63 13,844 13,907
Net loss (10,665) (10,665)
--------- ------- -------- --------- ------------- -----------
Balance at December 31, 1999 15,823 $ 158 $ 86,241 $ - $ - $ (85,172) $ 1,227
====== ========== ========== ============ =========== ============ ==========
The accompanying notes are an integral part of the financial statements.
906583.4
F-5
HemaSure Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
(In thousands)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net loss $(10,665) $ (12,170) $ (9,884)
Adjustments to reconcile net loss to net
cash used in operating activities:
Financing costs related to warrants 1,024 189 -
Impairment of assets - - 475
Depreciation and amortization 475 479 859
Accretion of marketable securities discount - 20 4
Loss on disposal of equipment - 5 -
Changes in operating assets and liabilities:
Net assets of discontinued business - - 500
Accounts receivable (443) 436 (153)
Inventories (600) (48) 218
Prepaid expenses and other current assets 50 21 33
Accounts payable (343) 666 (736)
Accrued expenses (29) (297) 273
Other assets (8) (10) 20
----------- ---------- ---------
Net cash used in operating activities (10,539) (10,709) (8,391)
-------- -------- -------
Cash flows from investing activities:
Purchases of marketable securities - (20,255) (99,752)
Maturities of marketable securities - 27,117 104,235
Unrealized holding loss of available for sale marketable securities - 1 2
Additions to property and equipment (517) (422) (220)
----- ----- -----
Net cash provided by (used in) investing activities (517) 6,441 4,265
----- ----- -----
Cash flows from financing activities:
Net proceeds from issuance of common stock 14,724 90 177
Borrowing from notes payable arrangements - 5,000 140
Repayment of notes payable (27) (9) (31)
Repayments of capital lease obligations (225) (260) (241)
------- ------ ------
Net cash provided by financing activities 14,472 4,821 45
------ ----- -------
Net (decrease) increase in cash and cash equivalents 3,416 553 (4,081)
Cash and cash equivalents at beginning of period 1,827 1,274 5,355
------- ------- -------
Cash and cash equivalents at end of period $5,243 $1,827 $1,274
====== ====== ======
Supplemental schedule of cash flow information:
Cash paid during the year for interest $ 453 $503 $1,072
Noncash investing and financing activities:
Acquisition of fixed assets financed by capital leases $ - $ - $ 38
Common stock issued for convertible subordinated note $ - $8,687 $ -
Value of warrants issued for guaranteed line of credit $ - $1,938 $ -
The accompanying notes are an integral part of the financial statements.
906583.4
F-6
HemaSure Inc.
Notes to Consolidated Financial Statements
A. THE COMPANY:
Nature of the Business
HemaSure Inc. (the "Company") is utilizing its proprietary filtration
technologies to develop products to increase the safety of donated blood and to
improve certain blood transfusion procedures. The Company's currently-marketed
blood filtration product ("r/LS System") is designed for use by blood centers
and hospital blood banks worldwide. From the Company's inception through the
first quarter of fiscal 1996, HemaSure had sold non-blood related filter
products primarily to Sepracor Inc. ("Sepracor"), a related party, for use in
chemical processing applications. Subsequently and throughout 1997, the
Company's revenue was derived from the commercial sales of its LeukoNet System,
a medical device designed for the removal of contaminating leukocytes from
donated blood. In February 1998, the Company determined to discontinue
manufacturing the LeukoNet System and focus on the completion of development and
market introduction of its next-generation red cell filtration product. In May
1999, the Company received 510(k) clearance from the U.S. Food and Drug
Administration ("FDA") to market its r/LS System in the United States. The
Company initiated sales of the r/LS System in the United States in the third
quarter 1999.
The Company is subject to risks common to companies in the medical
technology industry, including, but not limited to, development by the Company
or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with regulations
of the FDA and similar foreign regulatory authorities and agencies.
Since its inception, the Company has suffered recurring losses from
operations and, as of December 31, 1999, had an accumulated deficit of $85.2
million. Other than the Company's r\LS System, all of its planned blood-related
products are in the research and development stage, and certain of these
products that the Company is currently developing may require pre-clinical and
clinical testing prior to submission of any regulatory application for
commercial use. The Company's success will depend on the commercial acceptance
of its r\LS System and the development and commercial acceptance of its other
planned blood-related products. The Company believes that the funds currently
available, including the funds raised in March 2000 (Note Q) will be sufficient
to fund operations through at least the next twelve months.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all demand deposits, money market instruments and
repurchase agreements to be cash and cash equivalents. Cash equivalents of
$4,743,000 and $2,138,000 and at December 31, 1999 and 1998, respectively,
consist of repurchase agreements with a commercial bank. The carrying amount
approximates fair value because of the short maturity of those instruments.
Marketable Securities
Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase. The Company held no
marketable securities at December 31, 1999 and 1998.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and equipment are stated at cost. Costs of major additions and
betterments are capitalized; maintenance and repairs, which do not improve or
extend the life of the respective assets, are charged to
906583.4
F-7
operations. On disposal, the related cost and accumulated depreciation or
amortization is removed from the accounts and any resulting gain or loss is
included in the results of operations. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. All
laboratory, manufacturing and office equipment have estimated useful lives of
three to 10 years.
Revenue Recognition
Revenues from product sales are recognized when goods are shipped.
Research and Development
Research and development costs are expensed in the year incurred.
Net Loss Per Share
The Company follows Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"), which established standards for
computing and presenting earnings per share ("EPS"). Net loss per common share
is based on the weighted average number of shares of common stock outstanding
during each period. Potential common stock has not been included because the
effect would be antidilutive. The potential common stock of the Company consist
of common stock warrants (see Notes C and H), stock options (see Note L) and a
convertible subordinated note payable (see Note I). The Company had 4,757,000,
4,214,000 and 2,846,000 potential common stock shares as of December 31, 1999,
1998, and 1997, respectively. The convertible subordinated note was converted
into 827,375 shares of common stock of the Company in January 1998.
Income Taxes
Deferred income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities reflect the estimated future tax
consequences attributable to tax benefit carryforwards and to "temporary
differences" between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. A valuation reserve is
established if it is more likely than not that all or a portion of the deferred
tax asset will not be realized.
Net operating losses of the Company incurred while operating as a
division of Sepracor are not available for carryforward because the Company's
results for those periods were included in the tax returns of Sepracor.
Additionally, based upon the Internal Revenue Code and changes in company
ownership, utilization of the Company's net operating loss may be subject to an
annual limitation.
Comprehensive Income
For all periods presented, net income and comprehensive income are the
same due to the realization of all previously unrealized gains and losses in the
statement of operations.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect such adoption to have
a material impact on its financial statements.
In December 1999, the Commission issued Staff Accounting Bulletin No.
101 ("SAB 101"), "Revenue Recognition in Financial Statements," which is
effective no later than the quarter ending June 30, 2000. SAB 101
906583.4
F-8
clarifies the Commission's views related to revenue recognition and disclosure.
The Company will adopt SAB 101 in the second quarter of 2000 and is presently
determining the effect it will have on the Company's financial statements,
although management does not believe the effect will be material.
Use of Estimates in the Preparation of Financial Statements
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 December 31, 1999 and 1998
and the reported amounts of revenues and expenses during the years ended
December 31, 1999, 1998 and 1997. Actual results could differ from those
estimates.
C. AGREEMENTS WITH SEPRACOR:
The Company was formerly a wholly-owned subsidiary of Sepracor. As of
January 31, 2000, Sepracor owned 27% of the common stock, $.01 par value, of the
Company (the"Common Stock").
Under a Technology Transfer and License Agreement, Sepracor transferred
to the Company all technology owned or controlled by Sepracor, including trade
secrets, patents and patent applications, that relates to and is used in
researching, developing or manufacturing products in the Company Field as
defined in the agreement. Further, Sepracor granted an exclusive license to the
Company for any improvements to the transferred technology, which were
developed, or otherwise acquired, by Sepracor during the period beginning on the
date of the Technology Transfer and License Agreement and terminating on the
earlier of January 1, 1998 or the acquisition of Sepracor or the Company (the
"Effective Period"). The Company granted to Sepracor an exclusive license to the
transferred technology for the development, manufacture, use or sale of any
products within the field of chiral synthesis, chiral separations and the
development, manufacture, use or sale of chiral drugs and chiral drug
intermediates, as well as a non-exclusive license to the transferred technology
for the development, manufacture, use or sale of any products outside of the
Company Field. All licenses were royalty-free. Sepracor also granted the Company
a right of first refusal to any product, which Sepracor proposed to sell, or
license a third party to sell during the Effective Period, for use within the
Company Field.
In addition, beginning in April 1998, Sepracor was entitled to certain
rights with respect to the registration under the Securities Act of 1933, as
amended, of a total of 3,000,000 shares of common stock related to the
technology transfer and establishment of the Company in 1993. These rights
provide that Sepracor may require the Company, on two occasions, to register
shares having an aggregate offering price of at least $5,000,000, subject to
certain conditions and limitations.
In September 1998, the Company obtained a $5 million revolving line of
credit arrangement with a commercial bank. Sepracor has guaranteed repayment of
amounts borrowed under the line of credit. In exchange for the guarantee, the
Company granted to Sepracor warrants to purchase up to 1,700,000 shares of the
Company's common stock at a price of $0.69 per share. The warrants will expire
in the year 2003 and have certain registration rights associated with them. (See
Note H)
In March 1999, the Company completed a private placement financing with
Sepracor in which the Company received $2,000,000 in exchange for 1,333,334
shares of the Company's common stock and warrants to purchase an additional
667,000 shares of common stock at $1.50 per share. The warrants will expire in
the year 2004 and have certain registration rights associated with them. In
certain circumstances, the Company is entitled to require Sepracor to exercise
these warrants.
D. ACCOUNTS RECEIVABLE:
The Company's 1999 and 1998 trade receivables primarily represent
amounts due for product sales. The allowance for doubtful accounts was $5,000
and $7,000 at December 31, 1999 and 1998, respectively.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.
906583.4
F-9
E. INVENTORIES:
Inventories consist of the following at December 31:
(In thousands) 1999 1998
---- ----
Raw materials $ 393 $ 206
Work in Progress 401 -
Finished goods 12 -
-------- ----------
$ 806 $ 206
======== ==========
F. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
(In thousands) 1999 1998
---- ----
Laboratory and manufacturing equipment $ 1,479 $ 874
Leased laboratory and manufacturing equipment 505 505
Office equipment 858 759
Leasehold improvements 772 766
-------
3,614 2,904
Accumulated depreciation and amortization (2,324) (1,849)
-------
1,290 1,055
Construction in progress 257 450
--------
$ 1,547 $ 1,505
======== ========
Depreciation and amortization expense was $475,000, $391,000 and
$548,000, in 1999, 1998 and 1997, respectively. In conjunction with its
determination to discontinue manufacture of the LeukoNet System in February
1998, a provision for impairment of $475,000 for manufacturing and related
assets was recorded for the period ended December 31, 1997.
Accumulated amortization of assets under lease was $106,000 and
$395,000 as of December 31, 1999 and 1998, respectively.
906583.4
F-10
G. ACCRUED EXPENSES AND COMMITMENTS AND CONTINGENCIES:
Accrued expenses consist of the following at December 31:
(In thousands) 1999 1998
---- ----
Compensation $ 189 $ 43
Professional fees 155 104
Interest on notes payable 41 26
Customer refunds 175 175
Services 678 750
Miscellaneous 282 451
====== =======
$1,520 $1,549
====== ======
Lease Obligations
The Company leased certain laboratory, research and office space from
Sepracor through 1995. In 1995, the Company executed a lease for these facility
requirements, which commenced in February 1996 and extends through February
2004. The lease provides for two five-year renewal options. Under the terms of
the lease, the Company is required to pay its allocated share of taxes and
operating costs in addition to the base annual rent.
In 1994, the Company, in collaboration with Sepracor and certain of its
other subsidiaries, executed an equipment leasing arrangement that provided for
a total of $2,000,000 to these companies for purposes of financing capital
equipment. In October 1996, the Company executed a separate follow-on equipment
leasing arrangement that provided $1,100,000 of equipment financing through
March 31, 1997. The Company has leased various laboratory, manufacturing and
computer equipment under noncancelable capital leases. Terms of arrangements
with the leasing company contain bargain purchase provisions at the expiration
of the lease term, which range from 36 months to 42 months. In some instances,
the Company is required to make a deposit of 20% of the original equipment cost,
which earns interest at an annual rate of 4%. As of December 31, 1999 the
Company had $68,000 on deposit at the leasing company under this leasing
arrangement. Under certain circumstances, Sepracor is the guarantor of debt
incurred to acquire equipment under the leasing facilities. The interest rate
charged on the Company's capital leases ranges from 14% to 21%.
906583.4
F-11
Future minimum payments under all noncancelable leases in effect at
December 31, 1999 are as follows:
(In thousands) Operating Capital
Year Leases Leases
- ---- ------ ------
2000 $ 236 $ 74
2001 236 -
2002 236 -
2003 236 -
2004 20 -
------- ---------
Total minimum lease payments $ 964 74
------ --------
Less amount representing interest 3
Present value of minimum lease payments $ 71
=======
Based on the borrowing rates currently available to the Company for capital
leases with similar terms and average maturities, the fair value of capital
leases approximates the carrying value.
The total charged to rent expense for all noncancelable leases
including amounts for building maintenance, utilities and other operating costs
was $660,000, $833,000, and $803,000, in 1999, 1998, and 1997, respectively.
In December 1999, the Company entered into an exclusive five-year
manufacturing and supply agreement with a major supplier of a component to the
Company's product. The agreement contains minimum purchase requirements in
future years, which if not met could require the Company to purchase certain
production equipment of the supplier as defined in the agreement. The supplier,
under certain conditions, will acquire such equipment during fiscal years 2000
and 2001. The agreement also contains provisions under which the agreement could
become non-exclusive under certain conditions as defined in the agreement and
for extensions of the term of the agreement.
H. NOTES PAYABLE
Notes payable consist of the following at December 31:
(In thousands) 1999 1998
---- ----
Leasehold improvements financing $ 73 $ 100
Revolving line of credit 5,000 5,000
----- -----
5,073 5,100
Less current portion 5,030 27
----- -------
$ 43 $ 5,073
======= =======
In March 1997, the Company exercised its right, under the lease, to
have a portion of its leasehold improvements financed and received $140,000 in
connection with this arrangement. This amount will be repaid in 60 equal monthly
installments with an interest rate of 12% per annum.
In September 1998, the Company completed a $5 million revolving line of
credit arrangement with a commercial bank. As of December 31, 1999, the entire
$5 million was outstanding under the line. The revolving line of credit, which
expires in August 2000, is being used to help finance the Company's working
capital requirements and for general corporate purposes. Amounts borrowed under
the line bear interest at the bank's prime lending rate plus 1/2% payable
monthly in arrears. The weighted average borrowing rate for the period ended
December 31, 1999 was 8.67%. For the period ended December 31, 1999, the Company
recorded interest expense related to borrowings under the line of $434,000. The
credit agreement contains customary covenants and provisions. The bank has a
first lien on all assets of the Company including its intellectual property.
906583.4
F-12
Sepracor, the Company's largest shareholder, has guaranteed to repay
amounts borrowed under the line of credit. In exchange for the guarantee, the
Company granted to Sepracor warrants to purchase up to 1,700,000 shares of the
Company's common stock at a price of $0.69 per share. The warrants will expire
in the year 2003 and have certain registration rights associated with them.
HemaSure has placed a value of $1,938,000 on the 1,700,000 warrants as of the
date of the final agreement and is amortizing this deferred financing charge on
a monthly basis over the term of the line of credit. For the periods ended
December 31, 1999 and 1998 the Company amortized $1,024,000 and $189,000,
respectively, of this deferred finance charge and recorded it as interest
expense in the Statement of Operations.
I. CONVERTIBLE SUBORDINATED NOTE PAYABLE
In May 1996, the Company acquired the plasma product unit of Novo
Nordisk A/S, a Denmark corporation ("Novo Nordisk"), through its Danish
subsidiary, HemaSure A/S (the "Denmark Acquisition"). The purchase price for the
transaction was comprised of a combination of promissory notes, convertible
subordinated notes (which would convert to common stock of the Company or a
subsidiary of the Company) and additional consideration payable in 1998 in cash
or stock, at the option of the Company, which would not be paid in certain
events. On February 20, 1997, the Company's board of directors voted to
discontinue the development and operation of the Danish Plasma Business,
retroactive to December 31, 1996.
In January 1997, the Company entered into a Restructuring Agreement of
the debt related to the Denmark Acquisition. Pursuant to the Restructuring
Agreement, approximately $23,000,000 of indebtedness owed to Novo Nordisk was
restructured by way of issuance by the Company to Novo Nordisk of a 12%
convertible subordinated promissory note in the principal amount of
approximately $11,700,000, which was due and payable on December 31, 2001, with
interest payable quarterly (provided that up to approximately $3,000,000 would
be forgiven in certain circumstances). Approximately $8,500,000 of the reduction
of such indebtedness was forgiven. The remainder of the reduction represented a
net amount due from Novo Nordisk to the Company related to various service
arrangements between the two companies. The amount included in the balance sheet
at December 31, 1997 included the effect of the Restructuring Agreement net of
the $3,000,000 contingency amount to reflect the most probable result of the
Company's decision to exit the plasma business. In December 1997, the Company
notified the holder of the note of its intent to convert in January 1998
$8,687,000 of debt, which it believes was the entire amount outstanding as of
the date of conversion. On January 6, 1998, the Company converted the note,
pursuant to its terms, into shares of common stock at a conversion price of
$10.50 per share, or 827,375 shares. The holder of the note has contested the
conversion of the note, including the forgiveness of the $3,000,000 amount. The
Company believes that such assertions are without merit.
J. SEGMENT INFORMATION
The Company operates exclusively in the blood filtration business,
which the Company considers to be one business segment.
Revenue from significant unaffiliated customers are as follows:
Year Ended December 31: 1999 1998 1997
---- ---- ----
Customer A. 66% 53% 86%
Customer B. 33% - -
Customer C. - 10% -
K. STOCKHOLDERS' EQUITY (DEFICIT)
In March 1999, the Company completed a private placement financing with
Sepracor in which the Company received $2,000,000 in exchange for 1,333,334
shares of the Company's common stock and warrants to purchase an additional
667,000 shares of common stock at $1.50 per share. The warrants will expire in
the year 2004 and have certain registration rights associated with them. In
certain circumstances, the Company is entitled to require Sepracor to exercise
these warrants.
906583.4
F-13
On May 3, 1999, the Company completed a private placement financing
with Gambro Inc ("Gambro"). The stock subscription agreement, which the Company
entered into with Gambro Inc. in connection with this financing, provided for an
initial investment of $9,000,000 in exchange for 4,500,000 shares of the Company
common stock. The stock subscription agreement also provided Gambro Inc. with an
option to purchase additional shares of the Company's common stock for up to an
aggregate purchase price of $3,000,000 at any time between August 3, 1999 and
May 3, 2000 with the price per share of common stock to be based upon the market
price of the Company's common stock. In October 1999, Gambro Inc. exercised this
option in full. In connection with the exercise of this option, Gambro Inc.
purchased 498,355 shares at a price of $6.02 per share. The price and number of
shares reflected the average price of the Company's stock in the 30 days prior
to the exercise date of October 5, 1999.
L. STOCK OPTION PLANS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
The Company has two stock options plans currently in effect under which
future grants may be issued: the 1994 Stock Option Plan, as amended, and the
1994 Director Option Plan, as amended (collectively, the "Plans"). A total of
3,000,000 shares have been authorized by the Company for grants of options or
shares, of which 155,000 are still available for grant. Stock options granted
during 1999 and 1998 generally have a maximum term of ten years and vest ratably
over a period of two to five years.
906583.4
F-14
A summary of the Company's stock option activity for the years ended
December 31 follows:
Number of Options Weighted Average
(In thousands) Exercise Price
- ----------------------------------------------------------------------------------------
Outstanding at December 31, 1996 2,373 $ 9.24
Granted 1,262 $ 3.02
Exercised (24) $ 2.25
Terminated (1,592) $12.06
-------
Outstanding at December 31, 1997 2,019 $ 3.25
Granted 2,029 $ 0.72
Exercised - -
Terminated (1,534) $ 3.06
-------
Outstanding at December 31, 1998 2,514 $ 1.31
Granted 302 $ 5.27
Exercised (363) $ 2.02
Terminated (63) $ 0.94
----
Outstanding at December 31, 1999 2,390 $ 1.72
===== =======
The following table summarizes the status of the Company's stock options at
December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Number
Number Average Average Exercisable Weighted
Outstanding As Remaining Exercise As of Average
Of 12/31/99 Contractual Price 12/31/99 Exercise
Range of Exercise Prices (In thousands) Life (In thousands) Price
- -------------------------------------------------------------------------------------------------------------------
$ .63 - $ .94 1,581 8.1 $ .64 408 $ .65
$ 1.25 - $ 1.75 294 8.5 $ 1.28 65 $ 1.34
$ 2.00 - $ 3.50 183 4.9 $ 2.54 138 $ 2.25
$ 3.88 - $ 5.94 284 9.6 $ 5.51 5 $ 5.50
$ 12.38 - $ 16.25 48 6.3 $14.74 40 $ 15.17
------ --- ----- --- -------
2,390 8.0 $ 1.72 656 $ 1.98
The weighted average grant date fair value for options granted during
1999, 1998 and 1997 was $3.57, $0.49 and $2.04 per option, respectively. The
fair value of these options at date of grant was estimated using the Black-
Scholes model with the following weighted average assumptions for 1999, 1998 and
1997: risk-free interest rate of 5.5%; dividend yields of 0%; volatility factor
of the market price of the Company's common stock of 75%; and a weighted average
expected life of the options of 5.5 years.
During 1994 and prior to the Company's initial public offering, options
to purchase 482,000 shares of common stock were granted under the Plans at an
exercise price of $2.00 per share. The estimated fair market value on the date
of grant was $4.00 per share. The Company recorded compensation expense of
$89,000 and $309,000 in 1998 and 1997, respectively, related to these options.
In January 1998, the Company adopted a one time stock option exchange
program. Upon employee consent, the program provides for the grant to each
employee of a new stock option in exchange for the cancellation of the old stock
option. The new stock option, granted at fair market value at date of issuance,
will become exercisable for a number of shares of common stock equal to the
number of shares covered by the old stock option.
906583.4
F-15
In 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the
"Stock Purchase Plan"). Under the Stock Purchase Plan, an aggregate of 500,000
shares of common stock may be purchased by employees at 85% of market value on
the first or last day of each six -month offering period, whichever is lower,
through accumulation of payroll deductions ranging from 1% to 10% of
compensation as defined, subject to certain limitations. Options were exercised
to purchase 41,071 shares for a total of $117,000 during the year ended December
31, 1999 and 96,695 shares for a total of $88,000 during the year ended December
31, 1998. At December 31, 1999, 291,397 shares of common stock were reserved for
future issuance under the plan.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1999, 1998
and 1997 consistent with the provisions of SFAS No. 123, the Company's net loss
and net loss per share would have been reduced to the pro forma amounts
indicated below. The application of SFAS No. 123 to the employee stock purchase
plan would not result in a significant difference from reported net income and
earnings per share.
1999 1998 1997
---- ---- ----
Net loss - as reported $(10,665) $ (12,170) $ (9,884)
Net loss - pro forma $(11,274) $ (12,610) $(10,415)
Net loss per share - as reported - basic and diluted $ (0.77) $ (1.35) $ (1.22)
Net loss per share - pro forma - basic and diluted $ (0.82) $ (1.40) $ (1.28)
The pro forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995 or anticipated future option activity.
In connection with the initial public offering, the Company granted to
the underwriter an option to purchase 217,500 shares of common stock at an
exercise price equal to 150% of the initial public offering price or $10.50 and
subject to adjustment in certain circumstances. The option was exercisable at
any time or from time to time after April 14, 1995 and before April 14, 1999.
The option was not exercised.
906583.4
F-16
M. INCOME TAXES
The components of the Company's deferred tax assets and liabilities are
as follows at December 31:
(In thousands) 1999 1998
---- ----
Deferred taxes:
Net operating loss carryforwards $31,315 $21,463
Research and development expense capitalization 4,392 3,892
Tax credit carryforwards 1,235 999
Inventory reserves 20 43
Deferred compensation 285 284
Accrued charges not paid 512 466
Other 7 21
Property and equipment 1 (16)
-----------
37,767 27,152
Valuation allowance (37,767) (27,152)
-------- --------
Net deferred taxes $ - $ -
=========== ===========
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets.
The Company's statutory and effective tax rates were 34% and 0%,
respectively, for 1999, 1998 and 1997. The effective tax rate was 0% due to a
net operating loss and the non-recognition of any net deferred tax asset. At
December 31, 1999, the Company had federal and state tax net operating loss
carryforwards ("NOLs") of approximately $73,000,000 and $67,000,000,
respectively, to offset future regular taxable earnings. The federal and state
NOLs begin to expire in 2009 and 2000. Approximately $4,000,000 of state NOLs
expired in 1999. The Company has research and development tax credits of
approximately $690,000 and $520,000, respectively, which both begin to expire in
2009. The Company has a state investment tax credit carryforward of
approximately $20,000, which begins to expire in 2000.
N. AGREEMENTS
In July 1999, the Company entered into a master purchase agreement with
the American Red Cross that provides for the sale of the r\LS System by the
Company to the American Red Cross on specified terms. The master purchase
agreement provides for a thirty-eight month term expiring on August 31, 2002,
subject to, among other things, earlier termination by the American Red Cross in
certain circumstances. Under the master purchase agreement, the American Red
Cross is required to purchase specified minimum annual quantities of the r\LS
System, subject to certain terms and conditions. The term of the master purchase
agreement may be extended by one year in certain circumstances if the American
Red Cross fails to meet its minimum purchase obligation in the third year of the
agreement.
In August 1998, the Company completed an amended and restated Master
Strategic Alliance Agreement with the American Red Cross BioMedical Services,
which provides for, among other things, the development and enhancement of a
number of filtration products, based on the Company's core technology. The
agreement has a term of five years, unless previously terminated, and can be
renewed or extended. In connection with this agreement, the American Red Cross
is eligible to receive warrants to purchase common stock of the Company up to a
maximum of 400,000 shares based on certain milestones and at a price of $1.51
per share, as determined at the date of this agreement.
In 1998, the Company completed a distribution and development
agreement, which was amended in May 1999, with Gambro Inc. to act as the
Company's exclusive distributor of the Company's r\LS System worldwide, except
for sales to the American Red Cross. Under the amended distribution and
development agreement, Gambro Inc. is required to purchase specified minimum
annual quantities of the r\LS System, subject to certain terms and conditions.
Furthermore, this agreement provides that Gambro Inc. may, upon mutual agreement
by the Company and Gambro Inc., distribute additional future products developed
by us that filter blood and its
906583.4
F-17
components. The distribution agreement provides for a five-year term that
expires in June 2004, subject to automatic three-year renewals unless the
agreement is previously terminated.
O. EMPLOYEES' SAVINGS PLAN
The Company has a 401(k) plan for all employees. Under the provisions
of the plan, employees may voluntarily contribute up to 15% of their
compensation subject to statutory limitations. In addition, the Company can make
a matching contribution at its discretion. In 1999, 1998 and 1997, the Company
provided matching contributions of approximately $40,000, $0, and $34,000,
respectively.
P. LITIGATION
The Company is a defendant in a lawsuit brought by Pall Corporation
("Pall") regarding the LeukoNet System, which is no longer made or sold by the
Company. In a complaint filed in November 1996, Pall alleged that the
manufacture, use and/or sale of the LeukoNet System infringed upon two patents
held by Pall. Pall dropped its allegations concerning infringement of one of the
patents and alleges only that the LeukoNet System infringed Pall's U.S. Patent
No. 4,952,572 (the "'572 Patent").
With respect to the allegations concerning the '572 Patent, the Company
answered the complaint stating that the LeukoNet System does not infringe any
claim of the asserted patents. Further, the Company counterclaimed for
declaratory judgment of invalidity, noninfringement and unenforceability of the
'572 Patent. Pall amended its complaint to add Lydall, Inc., whose subsidiary
supplied the filter media for the LeukoNet System, as a co-defendant. The
Company filed for summary judgment of non-infringement, and Pall cross-filed for
summary judgement of infringement at the same time. Lydall, Inc. supported the
Company's motion for summary judgment of non- infringement, and filed a motion
for summary judgment that the asserted claims of the '572 patent are invalid as
a matter of law. Discovery has been completed in the action. The court has not
acted on the summary judgment motions.
The Company and Gambro BCT filed a complaint for declaratory relief
against Pall in the United States District Court of Colorado. The Company and
Gambro BCT seek declaratory relief that the '572 Patent, Pall's U.S. Patent No.
5,451,321 ("'321 Patent") and Pall's U.S. Patent Nos. 5,229,012, 5,344,561,
5,501,795 and 5,863,436 are invalid and not infringed by the Company's r\LS
System and methods of using the r\LS System. Pall moved to dismiss or transfer
to the Eastern District of New York or, in the alternative, to stay this action.
The Company and Gambro BCT opposed Pall's motion. On July 16, 1999, the United
States District Court of Colorado denied Pall's motion to transfer or, in the
alternative, to stay the action, and the action is proceeding. On September 30,
1999, the Court denied Pall's motion to dismiss the action and the case is
proceeding. Pall submitted a counterclaim alleging that the r\LS System
infringes the'572 patent and that the Company and Gambro BCT tortiously
interfered and unfairly competed with Pall's business. Pall has also asserted
that the r\LS System infringes one or more of the other patents that are the
subject of the lawsuit.
On April 23, 1999, Pall filed a complaint against the Company and
Gambro BCT in the Eastern District of New York alleging that the r\LS System
infringes the '572 Patent and that the Company and Gambro BCT tortiously
interfered and unfairly competed with Pall's business. On May 19, 1999, Pall
amended its complaint and added Gambro Inc., Gambro A.B., a Swedish company, of
which Gambro Inc. is a business unit, and Sepracor as defendants. The Company
and Gambro BCT have moved to dismiss, transfer or stay the action and Pall has
opposed the motion. There has been no decision on the motion.
The Company has engaged patent counsel to investigate the pending
litigations. The Company believes, based upon its review of these matters, that
a properly informed court should conclude that the manufacture, use and/or sale
by the Company or its customers of the LeukoNet System and the r\LS System do
not infringe any valid enforceable claims of the Pall patents. However, there
can be no assurance that the Company will prevail in the pending litigations,
and an adverse outcome in a patent infringement action would have a material and
adverse effect on the Company's financial condition and future business and
operations, including the possibility of significant damages in the litigations
and an injunction against the sale of the r\LS System if the Company does not
prevail in the litigations.
906583.4
F-18
A prior lawsuit brought by Pall in February 1996 has concluded. In June
1999, the United States Court of Appeals for the Federal Circuit determined that
the LeukoNet System did not infringe claim 39 of the '321 Patent and Pall has
not appealed that decision.
Q. SUBSEQUENT EVENT
In March 2000, the Company completed a $28,000,000 private placement in
which institutional investors purchased 3,730,000 shares of its common stock at
a purchase price of $7.50 per share. The Company has agreed to register, prior
to June 2, 2000, 2,551,320 of such shares for resale. The Company intends to use
the proceeds of the private placement for working capital, capital equipment and
general corporate purposes.
The Company entered into an agreement with Command effective January
31, 2000 that provides for Command, on a non-exclusive basis, to (i) act as its
manufacturer and supplier of dry bags used in its r\LS System and (ii) assemble
the filters used in its r\LS System, subject to certain terms and conditions.
The agreement has a term of three years, subject to an automatic one-year
extension in the event the Company fails to purchase a specified number of
products by the third year and, also, upon the mutual agreement by the Company
and Command. Thereafter, the agreement will be subject to automatic one-year
renewals unless the agreement is previously terminated.
Under the agreement, the Company is required to purchase a minimum
number of dry bags used in its r\LS System and assembly requirements of the
filters used in its r\LS System, in each case at agreed upon prices. Pursuant to
the agreement, pricing is fixed for the first three years, subject to the risk
of price fluctuations in respect of raw materials, overhead and labor. Under the
Company's supply and assembly agreement with Command, the Company is obligated
to provide to Command 90 days before each year of the supply and assembly
agreement forecasts for anticipated purchases of the dry bags and assembly
requirements for the upcoming 12-month period.
906583.4
F-19
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, on the 30th day of
March, 2000.
HEMASURE INC.
By: /s/ John F. McGuire, III
-------------------------
John F. McGuire, III
President and Chief Executive 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 and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John F. McGuire, III President, Chief Executive March 30, 2000
- ---------------------------
John F. McGuire, III Officer and Director (Principal
Executive Officer)
/s/ James B. Murphy Senior Vice President, Finance March 30, 2000
- ---------------------------
James B. Murphy and Administration (Principal
Financial Officer)
/s/ Timothy J. Barberich Director March 30, 2000
- ---------------------------
Timothy J. Barberich
/s/ David S. Barlow Director March 30, 2000
- ---------------------------
David S. Barlow
/s/ Frank Corbin Director March 30, 2000
- ---------------------------
Frank Corbin
/s/ Justin E. Doheny Director March 30, 2000
- ---------------------------
Justin E. Doheny
/s/ Edward C. Wood Director March 30, 2000
- ---------------------------
Edward C. Wood
906583.4
S-1
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form 10-K:
Exhibit No. Description
---------- -----------
2.1(6) Heads of Agreement, dated as of January 31, 1996,
between the Company and Novo Nordisk A/S.
3.1(1) Certificate of Incorporation of the Company.
3.2(1) By-Laws of the Company.
4.1(1) Specimen Certificate for shares of Common Stock, $.01
par value, of the Company.
4.2(9) Registration Rights Agreement, dated January 23, 1997, by and among the
Company and Novo Nordisk A/S
4.3(10) Registration Rights Agreement, dated as of September 15, 1998, between the
Company and Sepracor.
4.4(11) Warrant Agreement, dated as of September 15, 1998,
between the Company and Sepracor.
4.5(11) Warrant Certificate, dated as of September 15, 1998,
between the Company and Sepracor.
4.6(13) Registration Rights Agreement, dated as of March 23, 1999, between the
Company and Sepracor.
4.7(13) Warrant Agreement, dated as of March 23, 1999, between the Company and
Sepracor.
4.8(13) Warrant Certificate, dated as of March 23, 1999, between the Company and
Sepracor.
4.9(14) Stock Subscription Agreement, dated as of May 3, 1999, between the Company
and COBE.
4.10(14) Stockholder's Agreement, dated as of May 3, 1999, between the Company and
COBE.
10.1(9) 1994 Stock Option Plan, as amended.
10.2(9) 1994 Director Option Plan.
10.3(1) Form of Technology Transfer and License Agreement between the Company and
Sepracor Inc.
10.4(6) Lease Agreement for 140 Locke Drive, Marlborough, MA,
dated as of November 1995, between the Company and
First Marlboro Development Trust.
10.5(4) Employment Agreement between the Company and Dr. Hans
Heiniger, dated January 10, 1994.
935681.2
10.6(7) Asset Purchase Agreement dated as of May 2, 1996
between the Company, HemaPharm Inc., HemaSure A/S and
Novo Nordisk A/S.
10.7(8) Restructuring Agreement, dated January 23, 1997,
between the Company, HemaPharm Inc., HemaSure A/S and
Novo Nordisk A/S.
10.8(9) Convertible Subordinated Note Due December 31, 2001 in
the amount of U.S. $11,721,989, issued by the Company
to Novo Nordisk A/S, dated January 23, 1997.
10.9(9) Amendment to the Company's 1994 Director Option Plan, dated June 25, 1996.
10.10(9) Amendment to the Company's 1994 Director Option Plan, effective as of May 16,
1996.
10.11(9) Amendment to the Company's 1994 Stock Option Plan, dated June 25, 1996.
10.12(9) Amendment to the Company's 1994 Stock Option Plan, effective as of May 16,
1996.
10.13(9) Sublease Agreement, between the Company and Novo
Nordisk A/S, dated May 2, 1996, for the Premises
(Denmark), as amended.
10.14(9) Sublease Agreement between the Company and Novo
Nordisk A/S, dated May 2, 1996, for the Warehouse
(Denmark), as amended.
10.15(12) Employment Agreement between the Company and John F. McGuire, dated April
1, 1997.
10.16(12) Settlement Agreement, dated September 1997, by and among the Company,
HemaSure AB, HemaPharm Inc., Pharmacia & Upjohn Inc. and Pharmacia &
Upjohn AB.
10.17(10) 1995 Employee Stock Purchase Plan, as amended.
10.18(11) Revolving Credit and Security Agreement, dated as of September 15, 1998,
between the Company and Fleet National Bank.
10.19(11) Intellectual Property Security Agreement, dated as of September 15, 1998,
between the Company and Fleet National Bank.
10.20(11) Promissory Note, dated as of September 15, 1998, made by the Company in
favor of Fleet National Bank.
10.21(11) Amended and Restated Master Strategic Alliance Agreement between the
Company and the American Red Cross.
10.22(14) Senior Management Retention Agreement, dated as of December 7, 1998, between
the Company and John F. McGuire.
10.23(14) Senior Management Retention Agreement, dated as of December 15, 1998,
between the Company and James B. Murphy.
10.24(14) Senior Management Retention Agreement, dated as of December 22, 1998,
between the Company and Peter C. Sutcliffe.
935681.2
10.25(13) Securities Purchase Agreement, dated as of March 23, 1999, between the
Company and Sepracor.
10.26(14 Amended and Restated Exclusive Distribution Agreement,
dated as of May 3, 1999, between the Company and COBE.
10.27(15) Master Purchase Agreement, dated as of July 1, 1999, between the Company and
The American National Red Cross.
10.28 Manufacturing and Supply Agreement, dated as of December 22, 1999, between
the Company and Filtertek Inc.
10.29 Supply and Assembly Agreement, dated as of January 31, 2000, between the
Company and Command Medical Products Inc.
10.30 Placement Agency Agreement, dated February 3, 2000, between the Company
and Warburg Dillon Read LLC.
10.31 Form of Purchase Agreement, dated March 2, 2000.
10.32 Schedule of purchasers which purchased shares of common stock pursuant to the
Form of Purchase Agreement set forth in 10.42.
21.1(12) Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule.
- ---------------------------------
(1) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-75930).
(2) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
(3) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
(4) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-95540).
(5) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994.
(6) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
(8) Incorporated by reference to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 27, 1997.
935681.2
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
(13) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999.
+ Confidential treatment requested as to certain portions.
935681.2