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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, 2000
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) 490-9500
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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:
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 $6,840,864 on March 2, 2001.
Number of shares outstanding of the registrant's class of common stock as of
March 2, 2001: 19,903,589. Effective with the return of 1,011,692 shares of
common stock by Gambro Inc. in connection with the termination and release of
the supply and development agreement between the Company and Gambro Inc., there
will be 18,891,897 shares outstanding- See Recent Events -.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for 2001 Annual Meeting of Stockholders - Part III
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.
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 40% to 50% 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 and in January 2000 recommended that
universal leukoreduction be implemented as soon as feasible. In addition, the
American Red Cross ("ARC"), which collects over 6 million units of blood per
year representing approximately 50% of the blood donated in the United States,
is striving to achieve 100% leukoreduction as soon as feasible. Moreover, many
other countries in the past several years have mandated the leukoreduction of
their blood supply.
According to industry sources, the leukoreduction industry represents a
market potential of approximately $800 million. The Company has been utilizing
its technologies as the basis for developing products and methodologies to
address the needs of the leukoreduction market. The first such product developed
by the Company was the LeukoNet System, which received clearance from the FDA in
June 1995. 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. The r\LS System was designed to offer a more effective product than
those offered in the market today based on low cost, ease of use and improved
operational fit.
The Company initiated sales of the r\LS System in the United States in the
third quarter 1999. In May 1999, the Company completed an amended distribution
and development agreement with Gambro to act as the Company's exclusive
distributor of its r\LS System worldwide, except for sales to the ARC. In July
1999, the Company entered into a master purchase agreement with the ARC that
provided for the sale of the r\LS System by the Company to the ARC on specified
terms.
Significant Events
In April 2000, the Company was notified that the ARC, the Company's
largest customer at the time, was suspending use of the Company's r\LS System
pending the outcome of an investigation of a small number of non-critical
adverse reactions in patients who had received a transfusion of blood filtered
with the r\LS. In September 2000, the Company was notified that the ARC
terminated its
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supply contract for the r\LS System based on the extended period of time taken
by the Company to prove product improvements resolved these reactions. The
Company and the ARC are currently negotiating a termination of the purchase
contract and a release of any and all claims that either party may have against
the other, with certain exceptions. It is uncertain at this time when and if the
ARC and the Company will complete a termination agreement or when and if the ARC
will resume the purchase and use of the r\LS System.
In March 2001, the Company signed a termination and release agreement with
Gambro Inc. ("Gambro"), effective November 2000, which ended the distribution
and development agreement. Gambro cited the termination of the Company's supply
contract with ARC and other recent business conditions as the reasons for
terminating the agreement. In consideration for the Company's inventory (net
book value at December 31, 2000 of $332,000) of products bearing Gambro's
company name, and by way of complete resolution of all issues now outstanding
between the Company and Gambro, Gambro agreed to return 1,011,692 shares of
common stock with a fair market value at closing of $332,000.
The termination of both the purchase contract by ARC and the distribution
and development agreement with Gambro has had an adverse impact on the Company's
ability to generate revenues from the sale of the Company's r\LS product and on
the Company's supply contracts with manufacturers of key components to the r\LS.
See "Strategic Relationships" below for additional detail regarding these events
and the ARC and Gambro.
Recent Events
On February 3, 2001, the Company agreed to sell substantially all of the
Company's non-cash assets to Whatman Bioscience Inc., a Massachusetts
corporation ("Whatman"), a wholly owned subsidiary of Whatman plc, an English
corporation ("Whatman plc"), pursuant to the terms of an Asset Purchase
Agreement (the "Purchase Agreement").
Following any approval and adoption of the Purchase Agreement by the
Stockholders of the Company and the satisfaction or waiver of certain other
conditions, the Company will sell substantially all of its non-cash assets to
Whatman. Under the terms of the Purchase Agreement, the consideration to be
received by the Company for the Asset Sale (the "Consideration") will consist of
(1) $10 million in cash, which will be paid to the Company at the Closing; (2)
an additional payment by Whatman, in cash or common stock of Whatman plc at
Whatman's option, which effectively reimburses the Company for its net operating
costs and expenses incurred in connection with the Company's business during the
period beginning on November 1, 2000 and ending on the Closing Date (the
"Reimbursement Portion"), which amount is currently anticipated to be
approximately $4 million and is expected to be paid to the Company in the second
quarter of 2001; and (3) a royalty of 4% on sales by Whatman, Whatman plc or
their affiliates of certain filtration products, including products that utilize
the Company's technology, up to a total royalty of $12 million, subject to
certain reductions described in the Royalty Agreement, which include the offset
of certain potential liabilities associated with the Company's patent litigation
with Pall Corporation that Whatman will assume. Accordingly, the total amount of
the Consideration to be paid by Whatman to the Company will be approximately $14
million to $26 million in cash or cash and common stock of Whatman plc.
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Under the terms of the Purchase Agreement, Whatman will assume and be
legally responsible for certain liabilities of the Company, and Whatman plc will
guarantee Whatman's obligation to pay the Consideration to the Company. In
addition, in the event that Whatman elects to pay the approximately $4 million
reimbursement portion of the Consideration in shares of Whatman plc's common
stock, the Purchase Agreement provides that Whatman plc will guarantee a minimum
per share price to the Company of $4.3864 with respect to any share of Whatman
plc's common stock resold by the Company within 60 days after such shares are
issued to the Company. The Company currently anticipates that any share of
Whatman plc's common stock issued to the Company will be resold by the Company
within 60 days of the issuance to the Company of such share.
The Company has the right to terminate the Purchase Agreement under
certain circumstances, including if the Board of Directors determines, upon the
written opinion of the Company's counsel, that the failure to terminate the
Purchase Agreement could be expected to be a breach of, or be inconsistent with,
the fiduciary duties of the Board of Directors under applicable law. In the
event of termination for the foregoing reason, the Company is required to pay
Whatman a fee of $500,000 upon the termination of the Purchase Agreement.
It is currently anticipated that the Closing Date will occur on or as
promptly as practicable following the approval and adoption of the Purchase
Agreement by the Stockholders of the Company and the satisfaction or waiver of
all of the other conditions set forth in the Purchase Agreement. Either party
may terminate the Purchase Agreement if the closing does not occur by May 31,
2001. Accordingly, there can be no assurance as to if or when the Asset Sale
will be consummated.
In connection with the sale of the non-cash assets, the Company expects to
realize a gain of approximately $3,500,000 after all anticipated costs and
expenses associated with the sale. The Company does not expect to incur a tax
liability in connection with the sale, as it believes it has sufficient federal
and state net operating loss carryforwards and tax credits to offset any gains
realized.
Upon closing of the Purchase Agreement with Whatman, the Company is
expected to have approximately $17.5 million in a combination of cash, cash
equivalents, marketable securities and Whatman plc stock (based on current cash
and marketable securities levels, the Company's expected "burn rate" through
closing and the terms of the Purchase Agreement). In that regard, the Company is
in the preliminary stages of considering various strategic business combinations
and other transactions with a view toward further enhancing stockholder value
following the consummation of the sale of its assets and business to Whatman.
In the event that the Asset Sale does not occur, the Company will consider
other business alternatives, including but not limited to, other business
combinations and a liquidation of the Company's assets. Given that any proceeds
from any such liquidation and any other cash on hand would be first used to pay
the Company's creditors and outstanding payables, and given certain legal
requirements that the Company maintain certain cash on hand for certain mandated
time periods, there is no assurance as to when, if ever, any proceeds from a
liquidation would be distributed to the Company's Stockholders.
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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 ARC), 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.
Whole blood is composed of four major components, (i) platelets, which
assist in clotting; (ii) plasma, which is the fluid part of blood that contains
proteins that fight infections, aid in clotting and retain blood volume; (iii)
red blood cells, which help carry oxygen throughout the body; and (iv)
leukocytes, or white blood cells, which are used by the body's immune system to
help fight infections. 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.
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
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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.
Recent Trend Toward Leukoreduction
Historically, approximately 20% to 30% 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 bedside.
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 40% to 50% 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 and in January 2000 recommended that
universal leukoreduction be implemented as soon as feasible. 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
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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 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 Approach
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 has
been utilizing its technologies as the basis for developing products and
methodologies to address the needs of the leukoreduction market.
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. The r\LS System,
was developed to provide high-volume, centralized, pre-storage leukoreduction in
blood centers in batch processes.
Strategic Relationships
Strategic Partnership with ARC
In August 1998, the Company completed an amended and restated Master
Strategic Alliance Agreement with the ARC 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 ARC BioMedical Services.
Pursuant to the strategic alliance agreement, in July 1999, the Company
entered into a master purchase agreement with the ARC that provided for the sale
of the r\LS System by the Company to the
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ARC on specified terms. The master purchase agreement provided for a
thirty-eight month term expiring on August 31, 2002, subject to, among other
things, earlier termination by the ARC 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 ARC deems that it has no
further requirement for leukoreduction filters generally, or (iii) the ARC
changes its policies toward leukoreduction.
In April 2000, the Company was notified that the ARC, its largest customer
at the time, was suspending use of the r\LS System pending the outcome of an
investigation of a small number of non-critical adverse reactions in patients
who have received a transfusion of blood filtered with the r\LS System. As of
April 2000, there had been approximately 25 reactions reported to the Company
from about 14 patients out of approximately 150,000 units of blood transfused
utilizing the r\LS System. The patients involved with these reactions were
primarily hematology or oncology patients who had received multiple
transfusions. The reaction rate was less than .02 percent, and generally
involved pain in the back, head or neck area. The Company also commissioned an
epidemiology study at a major U.S. medical center to further investigate these
reactions. This study revealed that the types of reactions reported to the
Company by the ARC occurred in patients transfused with blood filtered with
other manufacturers' filters as well as blood filtered with the r\LS filter and,
indeed, in blood that was not filtered at all. The study also revealed that the
reactions occurred in from 1 to 12 per 10,000 transfusions, but were at the
upper end of this scale with the r\LS filter. These reactions were not permanent
and were treatable using standard practices. In September 2000, the Company was
notified that the ARC terminated its supply contract for the r\LS System based
on the extended period of time taken to prove product improvements resolved
these reactions. The Company and the ARC are currently negotiating a termination
of the purchase contract and a release of any and all claims that either party
may have against the other, with certain exceptions. It is uncertain at this
time when and if the ARC and the Company will complete such an agreement.
Global Distribution Capabilities through Partnership with Gambro.
In 1998, the Company completed a distribution and development agreement,
which was amended in May 1999, with Gambro to act as the Company's exclusive
distributor of its r\LS System worldwide, except for sales to the ARC.
Furthermore, this agreement provided that Gambro may (upon mutual agreement by
the Company and Gambro) distribute additional future products developed by the
Company that filter blood and its components.
Under the distribution agreement, Gambro was required to meet certain
minimum purchase requirements and was 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 provided for Gambro 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 also cooperated
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."
In March 2001, the Company signed a termination and release agreement with
Gambro, effective November 2000, which ended the distribution and development
agreement. Gambro cited the termination of the Company's supply contract with
the ARC and other recent business conditions as the
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reasons for terminating the agreement. In connection with the termination and
release agreement, Gambro agreed to return 1,011,692 shares of the Company's
common stock.
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
expected to increase manufacturing capacity in increments to several times its
current level over fiscal 2000 and 2001. The capacity expansion effort was
anticipated to include process flow review, capital equipment design,
qualification, implementation, validation and vendor supply chain management.
The termination of both the purchase contract by the ARC and the distribution
and development agreement with Gambro resulted in the suspension of this
capacity expansion effort.
In December 1999, the Company entered into an agreement, which was amended
in September 2000 and December 2000, 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. In the
fiscal 2000 amendments, the Company agreed to pay Filtertek a total of $705,000
to reimburse the supplier for costs and expenses incurred after the ARC's
decision to suspend use of the r\LS. No commitments have been made to make such
payments in the future. 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. It is expected that
this agreement will be assigned to or renegotiated with Whatman upon the closing
of the Purchase Agreement.
In January 2000, the Company entered into an agreement with Command
Medical Products Inc. ("Command") that provided 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
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r\LS System, subject to certain terms and conditions. In December 2000, due to
the termination of several key supply contracts, the Company completed a
termination and release of its supply and assembly agreement with Command. The
Company agreed to pay Command $600,000 in connection with the termination and
release.
Current Product
Red Blood Cell Systems
r\LS System. The Company's r\LS System was 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 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 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.
Since the notification by the ARC of the suspension of use of the r\LS and
the termination of the distribution and development agreement with Gambro, the
Company has been developing production process improvements as a result of the
findings in connection with the adverse reactions reported by the ARC.
Currently, the Company is not producing any products for sale.
While the Company believes that the performance and ease-of-use of the
r\LS System compares favorably with other blood filtration devices, there is no
assurance that the production process improvements will be completed, that these
improvements will adequately address the concerns of the ARC and other potential
customers with the adverse reactions, that the r\LS system made using these
production process improvements will be accepted in the market or 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."
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 product is 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.
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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.
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 $4,450,000 in the year ended
December 31, 2000 and $2,681,000 for the year ended December 31, 1999. Amounts
expended in the year ended December 31, 2000 were higher than that expended in
the comparable period in 1999 primarily because of costs associated with the
formulation and design of process alternatives to support the then expected
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increase in demand for the Company's r\LS System, and the costs associated with
the transfusion reactions reported by the ARC.
Competition
The Company has encountered significant competition in the sale of its
product. Its product, if re-commercialized, would 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 relationships
with the national and regional blood centers to which the Company will market
its products. There is no assurance that the Company would 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's competitors may succeed in developing technologies or
products that are more effective than those of the Company. Technological change
or developments by others could result in the Company's technology or product
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
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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 expects that this
Technology Transfer and License Agreement with Sepracor will be assigned to
Whatman in connection with the expected closing of the Purchase Agreement.
The Company believes that protection of the proprietary nature of its
products and technology is critical to its business. Accordingly, the Company
has adopted a vigorous program to secure and maintain such protection. The
Company's practice has been to file patent applications with respect to
technology, inventions and improvements that are important to its business. The
Company also relied 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 34 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
separations. To date, 20 patents have been issued to the Company (which expire
at various dates from 2011 through 2018).
The Company's viability depends, in part, and among other things, 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, could 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
would 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."
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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
the Company 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 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
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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 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
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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
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.
-15-
The regulations relating to medical device reports ("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.
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.
-16-
Manufacturing and Facilities
Currently, the Company occupies approximately 45,000 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. The Company believes that these facilities
are adequate and suitable for its needs through 2001. See Item 1. "Business --
Strategic Relationships." The facility is designed to conform to current good
manufacturing practice regulations and other applicable government standards. It
is anticipated that the lease of this facility will be assigned to Whatman upon
the expected closing of the Purchase Agreement.
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."
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 2, 2001, the Company employed a total of 73 persons, of whom
24 were in research and development, 27 were in manufacturing and support and 22
were in sales and administration. It is anticipated that Whatman will employ
these employees upon the expected closing of the Purchase Agreement.
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 the date hereof, one executive officer
of Sepracor serves as a director of the Company.
-17-
In September 1998, the Company obtained a $5 million revolving line of
credit arrangement with a commercial bank. Sepracor 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. In
September 2000, the revolving line of credit expired and the $5 million
outstanding balance was repaid by the Company in accordance with the agreement.
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.
As of March 2, 2001, Sepracor owned 22% of the Company's issued and
outstanding Common Stock. Effective with the return of 1,011,692 shares of
common stock by Gambro in connection with the termination and release of the
supply and development agreement between the Company and Gambro, Sepracor will
own 23% of the issued and outstanding common stock of the Company.
Gambro. On May 3, 1999, the Company completed a private placement
financing with Gambro. The stock subscription agreement, which the Company
entered into with Gambro 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
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
exercised this option in full. In connection with the exercise of this option,
Gambro 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 in connection with this financing,
provides that Gambro 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 the opportunity to
purchase at the same price and terms that number of securities necessary for
Gambro 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 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 agrees to certain restrictions on its ability to
sell the Company's Common Stock owned by it and its permitted transferees.
Gambro 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
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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 purchased 1,178,680 shares of Common Stock in the
offering. Gambro agreed to waive its registration rights in connection with the
registration statement to be filed by the Company in connection with the
offering.
In 1998, the Company completed a distribution and development agreement,
which was amended in May 1999, with Gambro to act as the Company's exclusive
distributor of the Company's r\LS System worldwide, except for sales to the ARC.
Furthermore, this agreement provided that Gambro may (upon mutual agreement by
the Company and Gambro) distribute additional future products developed by the
Company that filter blood and its components. Gambro markets and sells blood
component apheresis equipment to the blood center market. The agreement with
Gambro contemplated the development by the Company of an OEM filter for use with
Gambro's Trima(R) Automated Blood Collection System. The distribution agreement
provided for a five year term that expires in June 2004, subject to automatic
three year renewals unless the agreement is previously terminated.
In March 2001, the Company signed a termination and release agreement with
Gambro, effective November 2000, which ended the distribution and development
agreement. Gambro cited the termination of the Company's supply contract with
the ARC and other recent business conditions as the reasons for terminating the
agreement. In consideration for the Company's inventory (net book value at
December 31, 2000 of $332,000) of products bearing Gambro's company name, and by
way of complete resolution of all issues now outstanding between the Company and
Gambro, Gambro agreed to return 1,011,692 shares of common stock with a fair
market value at closing of $332,000.
As of March 2, 2001, Gambro owned 31% of the Company's issued and
outstanding Common Stock. Effective with the return of 1,011,692 shares of
common stock by Gambro in connection with the termination and release of the
supply and development agreement between the Company and Gambro, Gambro will own
27% of the issued and outstanding common stock of the Company.
Item 2. Properties
Currently, the Company occupies approximately 45,000 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). The Company believes that these
facilities are adequate and suitable for its needs through 2001. See Item 1.
"Business -- Strategic Relationships." The facility is designed to conform to
current good manufacturing practice regulations and other applicable government
standards. It is anticipated that the lease of this facility will be assigned to
Whatman upon the expected closing of the Purchase Agreement. See Item 1.
"Business -- Manufacturing and Facilities."
Item 3. Legal Proceedings
The Company is a defendant in a lawsuit brought by Pall Corporation
("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
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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 held a
hearing on the summary judgment motions on April 18, 2000. No decision has been
made on the motions.
The Company and Gambro BCT, Inc. 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. On September 30, 1999, the Court denied Pall's
motion to dismiss the action. On October 20, 1999, Pall submitted a counterclaim
alleging that the Company's r\LS System infringes its patents that are the
subject of the lawsuit and that the Company and Gambro BCT tortiously interfered
and unfairly competed with Pall's business. The Company and Gambro BCT replied
to Pall's counterclaim and denied Pall's allegations of tortious interference,
unfair competition and patent infringement.
On July 13, 2000, Pall filed a Complaint in the United States District
Court for the District of Colorado against the Company, Gambro BCT, Inc. and
Gambro AB alleging that the Company's r\LS system infringes Pall's U.S. Patent
No. 6,086,770 (the "'770 Patent"). On August 11, 2000, this action was
consolidated with the earlier declaratory relief action in the United States
District Court for the District of Colorado. The Company, Gambro BCT, Inc. and
Gambro AB answered the complaint, denied the allegations of infringement and
submitted a counterclaim alleging that Pall's '770 patent is invalid, not
infringed and unenforceable. In September 2000, Pall answered the counterclaim
and denied the allegations of noninfringement, invalidity and unenforceability.
Discovery is proceeding.
On December 15, 2000, Pall filed a complaint against Filtertek, Inc.
("Filtertek") alleging that Filtertek, a manufacturer of the r\LS filter,
infringes the seven above-mentioned Pall patents. Filtertek answered the
complaint on January 31, 2001, denied Pall's allegations of infringement and
asserted that the claims of the Pall patents are invalid and/or unenforceable
and that Pall is estopped from asserting infringement against Filtertek by
reason of Pall's prior conduct with Filtertek. This action has been consolidated
with the other actions pending in Colorado. Discovery is now ongoing.
On December 22, 2000, Gambro AB and Gambro BCT moved to dismiss the
consolidated actions based on a settlement agreement with Pall Corporation. On
January 10, 2001, the Court dismissed the action with respect to all claims
between Pall, Gambro BCT, and Gambro AB.
-20-
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, 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. On April 18, 2000, Pall moved, without
opposition from the defendants, to dismiss the action and the Court granted
Pall's 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 claim 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.
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, 2000.
-21-
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 54 President, Chief Executive Officer and Director
James B. Murphy 44 Senior Vice President, Chief Financial Officer
Peter C. Sutcliffe 51 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, Chief
Financial Officer since April 1998 and as its 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.
-22-
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.
2000 High Low
---- ---- ---
First Quarter 19 1/2 5 3/8
Second Quarter 10 1/2 2 7/32
Third Quarter 5 3/4 1 1/4
Fourth Quarter 2 25/32 13/64
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
2. Holders.
On March 2, 2001, the Company's Common Stock was held by approximately 150
stockholders of record. On March 2, 2001, the last reported sale price of the
Company's Common Stock on the OTC bulletin board was $0.3437.
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.
-23-
4. Sales of Securities.
In March 2000, the Company completed a private placement financing
yielding gross proceeds of $27,975,000 in which institutional and corporate
investors purchased 3,730,000 shares of its common stock at a purchase price of
$7.50 per share. The Company has registered 2,551,320 of such shares for resale.
The Company has used the majority of the net proceeds of such financing, which
aggregated $25,791,000, for working capital, capital equipment and general
corporate purposes.
In May 1999, the Company completed a private placement financing with
Gambro. The stock subscription agreement, which the Company entered into with
Gambro 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 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 exercised this option in full.
In connection with the exercise of this option, Gambro 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 obtained a $5 million revolving line of
credit arrangement with a commercial bank. Sepracor 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. In
September 2000, the revolving line of credit expired and was repaid by the
Company in accordance with the agreement.
In each case, the securities were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2).
-24-
Item 6. Selected Financial Data
STATEMENT OF OPERATIONS DATA
(In thousands, except per share
data)
Year Ended December 31, 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues:
Product sales $3,219 $ 805 $ 25 $2,357 $ 725
Collaborative research and - - - - 54
development ------ ----- ----- ------ ------
Total revenues
3,219 805 25 2,357 779
------ ----- ----- ------ ------
Costs and expenses:
Cost of products sold 9,095 2,408 657 4,158 3,785
Cost of collaborative research
and development - - - - 41
Research and development 4,450 2,681 3,794 3,577 6,128
Legal expense related to patents 1,134 1,361 3,340 506 744
Selling, general and
administrative 4,191 3,728 4,201 4,458 7,325
Other operating 425 - - - -
Restructuring charge - - - 1,215 -
------ ------ ------ ------ -------
Total costs and expenses 19,295 10,178 11,992 13,914 18,023
------ ------ ------ ------ -------
Loss from operations (16,076) (9,373) (11,967) (11,557) (17,244)
Other (expense) income (147) (1,292) (203) 1,673 1,394
------- ------- ------- ------- --------
Net loss from continuing
operations (16,223) (10,665) (12,170) (9,884) (15,850)
-------- -------- -------- ------- --------
Discontinued operations:
Loss from operations of
discontinued business - - - - (9,550)
Loss on disposal of
discontinued business - - - - (15,198)
Net loss $(16,223) $(10,665)$(12,170) $(9,884) $(40,598)
-------- -------- -------- -------- ---------
Net loss per common share -
basic and diluted:
Net loss from continuing
operations $ (0.85) $ (0.77) $ (1.35) $ (1.22) $ (1.97)
Loss from operations of
discontinued business - - - - (1.18)
Loss on disposal of
discontinued business - - - - (1.88)
------ ----- ----- ------ ------
Net loss $ (0.85) $ (0.77) $ (1.35) $ (1.22) $ (5.03)
-------- -------- -------- -------- ---------
Weighted average number of
shares of common stock
outstanding - basic and diluted: 19,046 13,766 9,025 8,127 8,069
------ ------ ----- ----- ------
BALANCE SHEET DATA
(In thousands)
Cash and marketable securities $8,678 $5,243 $ 1,827 $ 8,156 $16,724
Working capital 9,234 (327) 37 6,071 14,844
Total assets 13,158 9,090 5,655 10,607 20,560
Capital lease obligations long
term - - 68 289 525
Notes payable long-term 9 43 5,073 72 -
Convertible subordinated note
payable long term - - - 8,687 8,687
Stockholders' equity (deficit) 11,115 1,227 (2,832) (1,467) 7,929
Dividends - none
-25-
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. In May 1999, the Company completed an
amended distribution and development agreement, with Gambro to act as the
Company's exclusive distributor of the Company's r\LS System worldwide, except
for sales to the ARC. In July 1999, the Company entered into a master purchase
agreement with the ARC that provided for the sale of the r\LS System by the
Company to the ARC on specified terms. The Company initiated sales of the r\LS
System in the United States in the third quarter 1999.
In April 2000, the Company was notified that the ARC, the Company's
largest customer, was suspending use of the Company's r\LS System pending the
outcome of an investigation of a small number of non-critical adverse reactions
in patients who had received a transfusion of blood filtered with the r\LS. In
September 2000, the Company was notified that the ARC terminated its supply
contract for the r\LS System based on the extended period of time taken to prove
product improvements resolved these reactions. The Company and the ARC are
currently negotiating a termination of the purchase contract and a release of
any and all claims that either party may have against the other, with certain
exceptions.
In March 2001, the Company signed a termination and release agreement with
Gambro BCT, effective November 2000, which ended the distribution and
development agreement. In consideration for the Company's inventory (net book
value at December 31, 2000 of $332,000) of products bearing Gambro's company
name, and by way of complete resolution of all issues now outstanding between
the Company and Gambro, Gambro agreed to return 1,011,692 shares of common stock
with a fair market value at closing of $332,000.
-26-
The termination of the purchase contract by the ARC and the distribution
and development agreement with Gambro has had an adverse impact on the Company's
ability to generate revenues from the sale of the Company's r\LS product and on
the Company's supply contracts with manufacturers of key components to the r\LS.
It is uncertain at this time when and if the Company will resume selling the
r\LS products to its potential customers, if at all.
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.
Sale of the Non-Cash Assets of the Company
On February 3, 2001, the Company agreed to sell substantially all of the
Company's non-cash assets to Whatman Bioscience Inc., a Massachusetts
corporation ("Whatman"), a wholly owned subsidiary of Whatman plc, an English
corporation ("Whatman plc") pursuant to the terms of an Asset Purchase Agreement
("Purchase Agreement") executed by the two companies. See Item 1. "Recent
Events".
The obligations of the Company, Whatman and Whatman plc to consummate the
Asset Sale are subject to a number of customary conditions, including, among
others, approval and adoption of the Purchase Agreement by the affirmative vote
of the holders of a majority of the outstanding Shares entitled to vote thereon.
It is currently anticipated that the Closing Date will occur on or as
promptly as practicable following the approval and adoption of the Purchase
Agreement by the Stockholders of the Company and the satisfaction or waiver of
all of the other conditions set forth in the Purchase Agreement. Either party
may terminate the Purchase Agreement if the closing does not occur by May 31,
2001. Accordingly, there can be no assurance as to if or when the Asset Sale
will be consummated.
In connection with the sale of the non-cash assets, the Company expects to
realize a gain of approximately $3,500,000 after all anticipated costs and
expenses associated with the sale. The Company does not expect to incur a tax
liability in connection with the sale, as it believes it has sufficient federal
and state net operating loss carryforwards and tax credits to offset any gains
realized.
Upon closing of the Purchase Agreement with Whatman, the Company is
expected to have approximately $17.5 million in a combination of cash, cash
equivalents, marketable securities and Whatman plc stock (based on current cash
and marketable securities levels, the Company's expected "burn rate" through
closing and the terms of the Purchase Agreement). In that regard, the Company is
in the preliminary stages of considering various strategic business combinations
and other transactions with a view toward further enhancing stockholder value
following the consummation of the sale of its assets and business to Whatman.
In the event that the Asset Sale does not occur, the Company will consider
other business alternatives, including but not limited to, other business
combinations and a liquidation of the Company's assets. Given that any proceeds
from any such liquidation and any other cash on hand would be first used to pay
the Company's creditors and outstanding payables, and given certain legal
requirements that the Company maintain certain cash on hand for certain mandated
time periods, there is no assurance as to when, if ever, any proceeds from a
liquidation would be distributed to the
-27-
Company's Stockholders. In certain instances, if the Purchase Agreement is
terminated, the Company will pay Buyer certain fees.
Results of Continuing Operations
Revenues were $3,219,000 in 2000, $805,000 in 1999 and $25,000 in 1998.
The majority of revenues in 2000, 1999 and 1998 were from the sale of the
Company's leukoreduction systems. In February 1998, the Company decided to
discontinue the manufacture and sale of its former leukoreduction filter, the
LeukoNet System. In September of 1999, the Company initiated sales in the United
States of its next generation red blood cell leukoreduction system, the r\LS
System, which accounts for the increase in revenues in 1999 from those in 1998
and the increase in revenues in 2000 from those in 1999. In 2000, the ARC
represented 50% of total revenues and Gambro represented 49% of total revenues.
In 1999, the ARC represented 66% of total revenues and Gambro represented 33% of
total revenues. In 1998 the ARC represented 53% of total revenues and another
customer represented 10% of total revenues.
In September 2000, the Company was notified that the ARC terminated its
supply contract for the r\LS System based on the extended period of time taken
to prove product improvements resolved these reactions. The Company and the ARC
are currently negotiating a termination of the purchase contract and a release
of any and all claims that either party may have against the other, with certain
exceptions. In March 2001, the Company signed a termination and release
agreement with Gambro BCT, effective November 2000, which ended the distribution
and development agreement. It is uncertain at this time when and if the ARC and
other potential customers of the Company will resume the purchase and use of the
r\LS System.
The cost of products sold was $9,095,000 in 2000, $2,408,000 in 1999 and
$657,000 in 1998. Total cost of products sold exceeded total product sales in
all periods due to the high costs associated with new product manufacturing
start up and low volume production. Included in cost of products sold for fiscal
2000 are charges of approximately $2,554,000 for product warranty and inventory
write-down. These charges were primarily in connection with the decision by the
ARC to terminate its purchase contract with the Company in September 2000 and
Gambro BCT's decision to terminate its distribution and development agreement in
November 2000. The Company incurred additional charges of $1,305,000 to
terminate and amend certain key contractual supply agreements, with Filtertek
and Command as disclosed in "Liquidity and Capital Resources".
Research and development expenses were $4,450,000 in 2000, $2,681,000 in
1999 and $3,794,000 in 1998. The increase in 2000 from 1999 is primarily
attributable to costs associated with the formulation and design of process
alternatives to support the then expected increase in demand for the Company's
r\LS System, and the costs associated with investigating and studying potential
causes for the transfusion reactions reported by the ARC. 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.
Legal expenses related to patents were $1,134,000 in 2000, $1,361,000 in
1999 and $3,340,000 in 1998. The expenses in all three periods are primarily
related to costs associated with defending the Company's patent position in its
outstanding litigation with Pall Corporation. 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 2000 and 1999 from 1998 is
-28-
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. Due to the termination and release agreement
signed with Gambro BCT in March, 2001, there can be no assurance that such costs
will remain at the same level in future periods. A substantial increase in such
costs could have a material and adverse effect on the Company's financial
condition and future business and operations. See " -- Litigation."
Selling, general and administrative expenses were $4,191,000 in 2000,
$3,728,000 in 1999 and $4,201,000 in 1998. The increase in 2000 from 1999 is
primarily attributable to higher administrative personnel of $221,000, travel
and related costs of $41,000 and general professional services of $207,000 in
connection with the Company's expected increasing level of sales of its r\LS
System. The decrease in the amount expended in 1999 from 1998 is primarily due
to lower general professional services of $319,000 and costs associated with the
discontinuation of the Leukonet System.
Other operating expenses in 2000 represents the Company's fixed asset
write-down of two production units to their net scrap value, as they will no
longer be used in the manufacturing process.
Interest income in 2000, 1999 and 1998 primarily represents interest
earned on available cash and marketable securities balances during those
periods.
Interest expense decreased in 2000 compared to 1999 due primarily to the
completion of the amortization of deferred financing charges in September 2000,
the repayment of the revolving line of credit in September 2000 and a lower
average capital lease obligation balance. The increase in interest expense in
1999 compared to 1998 is primarily related to the amortization of deferred
financing charges and amounts outstanding on the Company's line of credit which
was outstanding for all of 1999 and only for approximately three months in 1998.
New Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued
SAB No. 101, "Revenue Recognition in Financial Statements," as amended by SAB
101A and 101B, which is effective no later than the quarter ended December 31,
2000. SAB No. 101 clarifies the SEC's views regarding the recognition of
revenue. The Company adopted SAB No. 101 in fiscal 2000. The adoption of SAB No.
101 did not have a significant impact on the Company's financial position or
results of operations.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125" ("SFAS 140"). SFAS 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. This Statement is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company is currently analyzing this new standard.
In March 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB Opinion No. 25." FIN
-29-
No. 44 primarily clarifies (a) the definition of an employee for purposes of
applying APB Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of previously fixed stock option awards and (d) the
accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN No. 44 did not have a significant impact on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and SFAS No. 138, which establishes accounting and
reporting standards for derivative instruments and hedging activities. The
standard requires that the Company recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The Company, to date, has not engaged in derivative and hedging activities, and
accordingly does not believe that the adoption of SFAS No. 133 will have a
material impact on its financial statements and related disclosures. The Company
will adopt SFAS No. 133 as amended by SFAS No. 137 and SFAS No. 138 in fiscal
year 2001.
Litigation
The Company is a defendant in a lawsuit brought by Pall Corporation
("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 held a
hearing on the summary judgment motions on April 18, 2000. No decision has been
made on the motions.
The Company and Gambro BCT, Inc. 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. On September 30, 1999, the Court denied Pall's
motion to dismiss the action. On October 20, 1999, Pall submitted a counterclaim
alleging that the Company's r\LS System infringes its patents that are the
subject of the lawsuit and that the Company
-30-
and Gambro BCT tortiously interfered and unfairly competed with Pall's business.
The Company and Gambro BCT replied to Pall's counterclaim and denied Pall's
allegations of tortious interference, unfair competition and patent
infringement.
On July 13, 2000, Pall filed a Complaint in the United States District
Court for the District of Colorado against the Company, Gambro BCT, Inc. and
Gambro AB alleging that the Company's r\LS system infringes Pall's U.S. Patent
No. 6,086,770 (the "'770 Patent"). On August 11, 2000, this action was
consolidated with the earlier declaratory relief action in the United States
District Court for the District of Colorado. The Company, Gambro BCT, Inc. and
Gambro AB answered the complaint, denied the allegations of infringement and
submitted a counterclaim alleging that Pall's '770 patent is invalid, not
infringed and unenforceable. In September 2000, Pall answered the counterclaim
and denied the allegations of noninfringement, invalidity and unenforceability.
Discovery is proceeding.
On December 15, 2000, Pall filed a complaint against Filtertek, Inc.
("Filtertek") alleging that Filtertek, a manufacturer of the r\LS filter,
infringes the seven above-mentioned Pall patents. Filtertek answered the
complaint on January 31, 2001, denied Pall's allegations of infringement and
asserted that the claims of the Pall patents are invalid and/or unenforceable
and that Pall is estopped from asserting infringement against Filtertek by
reason of Pall's prior conduct with Filtertek. This action has been consolidated
with the other actions pending in Colorado. Discovery is now ongoing.
On December 22, 2000, Gambro AB and Gambro BCT moved to dismiss the
consolidated actions based on a settlement agreement with Pall Corporation. On
January 10, 2001, the Court dismissed the action with respect to all claims
between Pall, Gambro BCT, and Gambro AB.
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, 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. On April 18, 2000, Pall moved, without
opposition from the defendants, to dismiss the action and the Court granted
Pall's 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 claim 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.
-31-
Liquidity and Capital Resources
The net decrease in cash and cash equivalents in 2000 was $2,028,000. This
decrease is attributable primarily to net cash used in operating activities of
$16,216,000 and net cash used in investing activities of $6,822,000, offset in
part by net cash provided from financing activities of $21,010,000.
Net cash used in operating activities is primarily attributable to the net
loss of $16,223,000, an increase in inventory of $3,423,000 and a decrease in
accounts payable of $588,000. This was offset in part by non-cash operating
charges for financing costs related to warrants of $725,000, depreciation and
amortization of $636,000, write-down of fixed asset charge of $425,000,
write-down of inventories of $1,944,000 and a decrease in accounts receivable of
$322,000. Net cash used in investing activities resulted principally from the
net purchase of available-for-sale marketable securities of $5,402,000 and the
acquisition of property and equipment of $1,420,000 in the period. Net cash
provided from financing activities relates primarily to the net proceeds from
the issuance of common stock of $26,111,000, the majority of which is due to the
Company's March 2000 private placement financing, offset in part by a $5,000,000
repayment of the Company's commercial line of credit.
In March 2000, the Company completed a private placement financing
yielding gross proceeds of $27,975,000 in which institutional and corporate
investors purchased 3,730,000 shares of its common stock at a purchase price of
$7.50 per share. The Company has registered 2,551,320 of such shares for resale.
The Company has used the majority of the net proceeds of such financing, which
aggregated $25,791,000, for working capital, capital equipment and general
corporate purposes.
In April 2000, the Company was notified that the ARC, the Company's
largest customer, was suspending use of the Company's r\LS System pending the
outcome of an investigation of a small number of non-critical adverse reactions
in patients who had received a transfusion of blood filtered with the r\LS. In
September 2000, the Company was notified that the ARC terminated its supply
contract for the r\LS System after the completion of these studies. The extended
period of time taken to prove product improvements that resolve the reactions
was the basis for the termination. The Company and the ARC are currently
negotiating a termination of the purchase contract and a release of any and all
claims that either party may have against the other, with certain exceptions.
In November 2000, the Company was notified that Gambro intended to
terminate its distribution and development contract with the Company and in
March 2001, signed a termination and release agreement with Gambro, effective
November 2000, which ended the distribution and development agreement. In
consideration for the Company's inventory (net book value at December 31, 2000
of $332,000) of products bearing Gambro's company name, and by way of complete
resolution of all issues now outstanding between the Company and Gambro, Gambro
agreed to return 1,011,692 shares of common stock with a fair market value at
closing of $332,000.
The termination of the purchase contract by the ARC and the distribution
and development agreement with Gambro, has had an adverse impact on both the
Company's supply contracts with manufacturers of key components to the r\LS and
inventories it had built in anticipation of expected increased demand for the
Company's product.
In September 2000, the Company agreed to pay Filtertek Inc. $525,000 in
connection with an amendment to its manufacturing supply agreement and in
December 2000 the Company agreed to pay
-32-
Filtertek Inc. an additional $180,000 in connection with a second amendment to
its manufacturing supply agreement. No commitments have been made to make such
payments in the future. 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.
In December 2000, the Company agreed to pay Command Medical Products Inc.
$600,000 in connection with the termination of its supply and assembly agreement
and release.
On May 3, 1999, the Company completed a private placement financing with
Gambro. The stock subscription agreement, which the Company entered into with
Gambro 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 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 exercised this option in full.
In connection with the exercise of this option, Gambro 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. In September 2000, the revolving line
of credit expired and the $5 million outstanding balance was repaid by the
Company in accordance with the agreement. The revolving line of credit was being
used to help finance the Company's working capital requirements and for general
corporate purposes. Amounts borrowed under the line bore interest at the bank's
prime lending rate plus 1/2% payable monthly in arrears. For the period ended
December 31, 2000, the Company recorded interest expense related to borrowings
under the line of $322,000.
Sepracor 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. The Company placed a value of $1,938,000 on the
1,700,000 warrants as of the date of the final agreement and amortized this
deferred financing charge on a monthly basis over the term of the line of
credit. The Company amortized $725,000, $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, 2000, 1999, and 1998
respectively.
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, 2000, there was a balance of $43,000
remaining to be paid on this note.
-33-
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 for a net amount,
after certain reductions and the forgiveness of a $3,000,000 amount, of
$8,687,000. 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 initially contested the conversion of the
note, however, in March 2001, the holder surrendered the note consistent with
the terms of the Resructuring Agreement.
Future Operating Results
On February 3, 2001, the Company agreed to sell substantially all of the
Company's non-cash assets to Whatman, a wholly owned subsidiary of Whatman plc,
pursuant to the terms of the Purchase Agreement executed by the two companies.
See Item 1. "Recent Events".
In the event that the Asset Sale does not occur, the Company will consider
other business alternatives, including but not limited to, other business
combinations and a liquidation of the Company's assets. Given that any proceeds
from any such liquidation and any other cash on hand would be first used to pay
the Company's creditors and outstanding payables, and given certain legal
requirements that the Company maintain certain cash on hand for certain mandated
time periods, there is no assurance as to when, if ever, any proceeds from a
liquidation would be distributed to the Company's Stockholders.
In certain instances, if the Purchase Agreement is terminated, the Company
will pay Buyer certain fees. Based on our current cash utilization rate our
existing cash and marketable securities balances will be sufficient to fund our
operations only into the second quarter of 2001. Although currently no
definitive plans have been approved by the Board of Directors, they will
continue to examine all other business alternatives in order to prepare for
future contingencies.
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.
PART III
Items 10-13.
-34-
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 2001 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."
-35-
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, 2000 and for each of the three years in the
period ended December 31, 2000. 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.
-36-
HemaSure Inc.
Page
----
Index to Financial Statements
-----------------------------
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the Years
Ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
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, of stockholders' equity (deficit)
and of cash flows present fairly, in all material respects, the financial
position of HemaSure Inc. and its subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 of America, 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 our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has incurred losses from operations since
inception that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note A, under the heading "Sale of the non-cash assets of the Company". The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 20, 2001
F-2
HemaSure Inc.
Consolidated Balance Sheets
December 31,
(In thousands, except par value amounts)
ASSETS 2000 1999
---- ----
Current assets:
Cash and cash equivalents (Note B) $ 3,215 $ 5,243
Marketable securities (Note B) 5,463 -
Accounts receivable (Note C) 121 443
Inventories (Note D) 2,285 806
Deferred financing costs (Note H) - 725
Prepaid expenses and other current assets 184 276
------- ------
Total current assets 11,268 7,493
Property and equipment, net (Note E) 1,850 1,547
Other assets 40 50
------- ------
Total assets $ 13,158 $ 9,090
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 611 $ 1,199
Accrued expenses (Note F) 1,389 1,520
Current portion of notes payable (Note H) 34 5,030
Current portion of capital lease obligations(Note G) - 71
------- ------
Total current liabilities 2,034 7,820
Notes payable (Note H) 9 43
Total liabilities 2,043 7,863
------- ------
Commitments and contingencies (Notes F and G)
Stockholders' equity (Notes J and K):
Preferred stock, $0.01 par value, 1,000 shares
authorized, no shares issued or outstanding
Common stock, $0.01 par value, 35,000 shares
authorized, 19,904 and 15,823 shares issued
and outstanding at December 31, 2000 and
December 31, 1999 respectively 199 158
Additional paid-in capital 112,311 86,241
Accumulated deficit (101,395) (85,172)
--------- --------
Total stockholders' equity 11,115 1,227
--------- --------
Total liabilities and stockholders' equity $ 13,158 $ 9,090
====== ======
The accompanying notes are an integral part of the financial statements.
F - 3
HemaSure Inc.
Consolidated Statements of Operations
Year Ended December 31, 2000 1999 1998
----- ---- ----
(In thousands, except per share amounts)
Revenue $ 3,219 $ 805 $ 25
Costs and expenses:
Cost of products sold 9,095 2,408 657
Research and development 4,450 2,681 3,794
Legal expense related to patents 1,134 1,361 3,340
Selling, general and administrative 4,191 3,728 4,201
Other operating 425 - -
------- ------ ------
Total costs and expenses 19,295 10,178 11,992
------- ------ ------
Loss from operations (16,076) (9,373) (11,967)
Other income (expense):
Interest income 935 201 169
Interest expense (1,056) (1,493) (372)
Other expense (26) - -
--------- -------- ---------
Net loss $(16,223) $(10,665) $(12,170)
========= ========= =========
Net loss per share - basic and diluted: $ (0.85) $ (0.77) $ (1.35)
======== ======== ========
Weighted average number of shares of common
stock Outstanding - basic and diluted 19,046 13,766 9,025
The accompanying notes are an integral part of the financial statements.
F - 4
HemaSure Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Year ended
December 31, 2000, 1999
and 1998 (In thousands)
Total
Additional Stockholders'
Common Stock Paid-in Unearned Accumulated Equity
Shares Amount Capital Compensation Other Deficit (Deficit)
------ ------ ------- ------------ ----- ------- ---------
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
Issuance of common stock to
employees under stock plans 351 4 316 320
Issuance of common stock
in private placements, net of
issuance costs of $2,184 3,730 37 25,754 25,791
Net loss (16,223) (16,223)
------ ---- -------- ------ ------ -------- --------
Balance at December 31, 2000 19,904 $ 199 $112,311 $ - $ - $(101,395) $ 11,115
====== ===== ======== ===== ==== ========== ========
The accompanying notes are an integral part of the financial statements.
F - 5
HemaSure Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
(In thousands)
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Net loss $(16,223) $(10,665) $(12,170)
Adjustments to reconcile net loss to net
cash used in operating activities:
Financing costs related to warrants 725 1,024 189
Write-down of fixed assets 425 - -
Depreciation and amortization 636 475 479
Accretion of marketable securities discount (61) - 20
Loss on disposal of equipment 56 - 5
Write-down in inventories 1,944 - -
Changes in operating assets and liabilities:
Accounts receivable 322 (443) 436
Inventories (3,423) (600) (48)
Prepaid expenses and other current assets 92 50 21
Accounts payable (588) (343) 666
Accrued expenses (131) (29) (297)
Other assets 10 (8) (10)
------- -------- ---------
Net cash used in operating activities (16,216) (10,539) (10,709)
-------- -------- ---------
Cash flows from investing activities:
Purchases of marketable securities (31,402) - (20,255)
Maturities of marketable securities 26,000 - 27,117
Unrealized holding loss of available for
sale marketable securities - - 1
Additions to property and equipment (1,420) 517) (422)
------- ----- -----
Net cash provided by (used in) investing
activities (6,822) (517) 6,441
------- ----- -----
Cash flows from financing activities:
Net proceeds from issuance of common stock 26,111 14,724 90
Borrowing from notes payable arrangements - - 5,000
Repayment of notes payable (5,030) (27) (9)
Repayments of capital lease obligations (71) (225) (260)
------- ----- ------
Net cash provided by financing activities 21,010 14,472 4,821
------ ------ -----
Net (decrease) increase in cash and cash
equivalents (2,028) 3,416 553
Cash and cash equivalents at beginning of period 5,243 1,827 1,274
------ ----- -----
Cash and cash equivalents at end of period $3,215 $5,243 $1,827
====== ====== ======
Supplemental schedule of cash flow information:
Cash paid during the year for interest $ 372 $ 453 $ 503
Noncash investing and financing activities:
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.
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 current 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. In April 2000, the Company was notified that the American
Red Cross ("ARC"), the Company's largest customer, was suspending use of the
Company's r\LS System pending the outcome of an investigation of a small number
of non-critical adverse reactions in patients who had received a transfusion of
blood filtered with the r\LS. In September 2000, the Company was notified that
the ARC terminated its supply contract for the r\LS System based on the extended
period of time taken to prove product improvements resolved these reactions. In
March 2001, the Company signed a termination and release agreement with Gambro
BCT, effective November 2000, which ended their exclusive distribution rights of
the r\LS.
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, 2000, had an accumulated deficit of $101.4
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 may require pre-clinical and clinical testing prior to submission
of any regulatory application for commercial use.
The accompanying financial statements have been prepared on a basis which
assumes that the Company will continue as a going concern and which contemplates
the realization of assets and the satisfaction of liabilities and commitments in
the normal course of business. The termination and cancellation of the Company's
distribution and sales agreements respectively and the losses from operations
raise substantial doubt with respect to the Company's ability to continue as a
going concern. Management's plans with regard to these matters include the sale
of the non-cash assets of the Company as described below. Although management
continues to pursue this plan, there is no assurance that the Company will be
successful in obtaining shareholder approval. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties
Sale of the non-cash assets of the Company
On February 3, 2001, the Company agreed to sell substantially all of the
Company's non-cash assets to Whatman Bioscience Inc., a Massachusetts
corporation ("Whatman"), a wholly owned subsidiary of Whatman plc, an English
corporation ("Whatman plc") pursuant to the terms of an Asset Purchase Agreement
("Purchase Agreement") executed by the two companies.
F - 7
Following approval and adoption of the Purchase Agreement by the
Stockholders of the Company and the satisfaction or waiver of certain other
conditions, the Company will sell substantially all of its non-cash assets to
Whatman. Under the terms of the Purchase Agreement, the consideration to be
received by the Company for the Asset Sale (the "Consideration") will consist of
(1) $10 million in cash, which will be paid to the Company at the Closing; (2)
an additional payment by Whatman, in cash or common stock of Whatman plc at
Whatman's option, which effectively reimburses the Company for its net operating
costs and expenses incurred in connection with the Company's business during the
period beginning on November 1, 2000 and ending on the Closing Date, which
amount is currently anticipated to be approximately $4 million and is expected
to be paid to the Company in the second quarter of 2001; and (3) a royalty of 4%
on sales by Whatman, Whatman plc or their affiliates of certain filtration
products, including products that utilize the Company's technology, up to a
total royalty of $12 million, subject to certain reductions described in the
Royalty Agreement, which include the offset of certain potential liabilities
associated with the Company's patent litigation with Pall Corporation that
Whatman will assume. Accordingly, the total amount of the Consideration to be
paid by Whatman to the Company will be approximately $13 million to $25 million
in cash or cash and common stock of Whatman plc.
Under the terms of the Purchase Agreement, Whatman will assume and be
legally responsible for certain liabilities of the Company, and Whatman plc will
guarantee Whatman's obligation to pay the Consideration to the Company. In
addition, in the event that Whatman elects to pay the approximately $4 million
reimbursement portion of the Consideration in shares of Whatman plc's common
stock, the Purchase Agreement provides that Whatman plc will guarantee a minimum
per share price to the Company of $4.3864 with respect to any share of Whatman
plc's common stock resold by the Company within 60 days after such shares are
issued to the Company. The Company currently anticipates that any share of
Whatman plc's common stock issued to the Company will be resold by the Company
within 60 days of the issuance to the Company of such share.
The Company has the right to terminate the Purchase Agreement under
certain circumstances, including if the Board of Directors determines, upon the
written opinion of the Company's counsel, that the failure to terminate the
Purchase Agreement could be expected to be a breach of, or be inconsistent with,
the fiduciary duties of the Board of Directors under applicable law. In the
event of termination for the foregoing reason, the Company is required to pay
Whatman a fee of $500,000 upon the termination of the Purchase Agreement.
The obligations of the Company, Whatman and Whatman plc to consummate the
Asset Sale are subject to a number of customary conditions, including, among
others, approval and adoption of the Purchase Agreement by the affirmative vote
of the holders of a majority of the outstanding Shares entitled to vote thereon.
It is currently anticipated that the Closing Date will occur on or as
promptly as practicable following the approval and adoption of the Purchase
Agreement by the Stockholders of the Company and the satisfaction or waiver of
all of the other conditions set forth in the Purchase Agreement. Either party
may terminate the Purchase Agreement if the closing does not occur by May 31,
2001. Accordingly, there can be no assurance as to if or when the Asset Sale
will be consummated.
Upon closing of the Purchase Agreement with Whatman, the Company is
expected to have approximately $17.5 million in a combination of cash, cash
equivalents, marketable securities and Whatman plc stock (based on current cash
and marketable securities levels, the Company's expected "burn rate" through
closing and the terms of the Purchase Agreement). In that regard, the Company is
in the preliminary stages of considering various strategic business combinations
and other transactions with a view toward further enhancing stockholder value
following the consummation of the sale of its assets and business to Whatman.
In the event that the Asset Sale does not occur, the Company will consider
other business alternatives, including but not limited to other business
combinations and a liquidation of the Company's assets. Given that any proceeds
from any such liquidation and any other cash on hand would be first used to pay
the Company's creditors and outstanding payables, and given certain legal
requirements that the Company maintain certain cash on hand for certain mandated
time periods, there is no assurance as to when, if ever, any proceeds from a
liquidation would be distributed to the Company's Stockholders. In certain
instances, if the Purchase Agreement is terminated, the Company will pay Buyer
certain fees.
F - 8
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidation financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made to the prior
years consolidated financial statements to conform to current presentation.
These reclassifications have no effect on the Company's financial position or
results of operations.
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
$1,221,000 and $4,743,000 and at December 31, 2000 and 1999, 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. At December 31, 2000, all
marketable securities were classified as available for sale and carried at fair
value, with the unrealized gains and losses, if any, reported as a separate
component of stockholders' equity. The Company held no marketable securities at
December 31, 1999 and 1998.
The amortized cost of debt securities classified as available for sales is
adjusted for accretion of discounts to maturity. Such accretion is included in
interest income. Realized gains and losses are included in other income or
expense. The cost of securities sold is based on the specific identification
method.
The fair value of available for sale marketable securities at December 31,
2000 was $5,463,000 and represented Commercial Paper and United State Government
Agency Obligations of $2,488,000 and $ 2,975,000, respectively.
The Company's policy when applicable is to diversify the investment
portfolio to reduce exposure of principal to credit and investment sector risk.
At December 31, 2000, investments were placed with a variety of high credit
quality financial institutions or other issuers.
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 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
The Company recognizes revenue from product sales upon transfer of title
to its customers, typically upon shipment. The Company accrues for estimated
warranty costs, sales returns, and other allowances at the time of shipment
based on its experience.
F - 9
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 M and H), stock options (see Note K). The Company had
4,920,000, 4,757,000 and 4,214,000 potential common stock shares as of December
31, 2000, 1999, and 1998, respectively.
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 December 1999, the Securities and Exchange Commission ("SEC") issued
SAB No. 101, "Revenue Recognition in Financial Statements," as amended by SAB
101A and 101B, which is effective no later than the quarter ended December 31,
2000. SAB No. 101 clarifies the SEC's views regarding the recognition of
revenue. The Company adopted SAB No. 101 in fiscal 2000. The adoption of SAB No.
101 did not have a significant impact on the Company's financial position or
results of operations.
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities--a
replacement of FASB Statement No. 125" ("SFAS 140"). SFAS 140 revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. This Statement is effective for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company is currently analyzing this new standard.
In March 2000, the FASB issued FASB Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB Opinion No. 25." FIN No. 44 primarily clarifies (a) the
definition of an employee for purposes of applying APB Opinion No. 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan, (c)
the accounting consequence of various modifications to the terms of previously
fixed stock option awards and (d) the accounting for an exchange of stock
compensation awards in a business combination. The adoption of FIN No. 44 did
not have a significant impact on the Company's financial position or results of
operations.
F - 10
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137 and SFAS No. 138, which establishes accounting and
reporting standards for derivative instruments and hedging activities. The
standard requires that the Company recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The Company, to date, has not engaged in derivative and hedging activities, and
accordingly does not believe that the adoption of SFAS No. 133 will have a
material impact on its financial statements and related disclosures. The Company
will adopt SFAS No. 133 as amended by SFAS No. 137 and SFAS No. 138 in fiscal
year 2001.
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, 2000 and 1999
and the reported amounts of revenues and expenses during the years ended
December 31, 2000, 1999 and 1998. Actual results could differ from those
estimates.
C. ACCOUNTS RECEIVABLE:
The Company's 2000 and 1999 trade receivables primarily represent amounts
due for product sales. The allowance for doubtful accounts was $0 and $5,000 at
December 31, 2000 and 1999, respectively.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.
D. INVENTORIES:
Inventories consist of the following at December 31:
(In thousands) 2000 1999
---- ----
Raw materials $ 2,200 $393
Work in Progress 78 401
Finished goods 7 12
------- ------
$ 2,285 $806
======= ====
E. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31:
(In thousands) 2000 1999
---- ----
Laboratory and manufacturing equipment $1,430 $1,835
Leased laboratory and manufacturing
equipment - 149
Office equipment 704 858
Leasehold improvements 858 772
------- ------
2,992 3,614
Accumulated depreciation and amortization (1,759) (2,324)
------- -------
1,233 1,290
Construction in progress 617 257
------ ------
$ 1,850 $1,547
======= ======
F - 11
Depreciation and amortization expense was $636,000, $475,000 and $391,000,
in 2000, 1999 and 1998, respectively. In 2000, the Company recorded to other
operating expense a $425,000 charge related to the fixed asset write-down of two
production units to their net scrap value, as they will no longer be used in the
manufacturing process.
Accumulated amortization of assets under lease was $106,000 for the period
ended December 31, 1999.
F. ACCRUED EXPENSES AND COMMITMENTS AND CONTINGENCIES:
Accrued expenses consist of the following at December 31:
(In thousands) 2000 1999
---- ----
Employee Compensation $ 91 $189
Professional fees 428 155
Interest on notes payable - 41
Customer refunds 664 175
Services 12 678
Miscellaneous 194 282
====== ======
$1,389 $1,520
In the event of a termination of the Purchase Agreement with Whatman, the
Company is required to pay Whatman a fee of $500,000.
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 for a net amount,
after certain reductions and the forgiveness of a $3,000,000 amount, of
$8,687,000. 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 initially contested the conversion of the
note, however, in March 2001, the holder surrendered the note consistent with
the terms of the Resructuring Agreement.
G. 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.
The Company 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 was required to make a deposit of 20% of the original equipment cost,
which earned interest at an annual rate of 4%. As of December 31, 2000, all
lease agreements have expired and there are no amounts outstanding under the
Lease Agreements. Under certain circumstances, Sepracor was 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%.
Future minimum payments under all noncancelable leases in effect at
December 31, 2000 are as follows:
(In thousands) Operating
Year Leases
---- ------
2001 $295
2002 306
2003 306
2004 26
2005 and thereafter -
------
Total minimum lease payments $933
----
The total charged to rent expense for all noncancelable leases including
amounts for building maintenance, utilities and other operating costs was
$872,000, $660,000, and $833,000, in 2000, 1999, and 1998, 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 Company completed two amendments to this agreement in
both September and December 2000 in which it agreed to pay Filtertek a total of
$705,000. No commitments have been made to make such payments in the future. 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) 2000 1999
---- ----
Leasehold improvements financing $43 $ 73
Revolving line of credit - 5,000
------- ------
43 5,073
Less current portion 34 5,030
-- -----
$ 9 $ 43
=== =======
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. In September 2000, the revolving line
of credit expired and was repaid by the Company in accordance with the
agreement. The revolving line of credit was 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. For the year ended December 31, 2000, the
Company recorded interest expense related to borrowings under the line of
$322,000.
Sepracor 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 placed a value of $1,938,000 on the
1,700,000 warrants as of the date of the final agreement and amortized this
deferred financing charge on a monthly basis over the term of the line of
credit. For the periods ended December 31, 2000 and 1999 the Company amortized
$725,000 and $1,024,000, respectively, of this deferred finance charge and
recorded it as interest expense in the Statement of Operations.
F - 13
I. SEGMENT INFORMATION:
The Company operates exclusively in the blood filtration business, which
the Company considers to be one business segment.
Revenue from significant customers are as follows:
Year Ended December 31: 2000 1999 1998
---- ---- ----
American Red Cross 50% 66% 53%
Gambro, Inc. 49% 33% -
Other - - 10%
J. STOCKHOLDERS' EQUITY:
In March 2000, the Company completed a private placement financing
yielding gross proceeds of $27,975,000 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 registered 2,551,320 of such shares for resale. The
Company has used the majority of the net proceeds of such financing, which
aggregated $25,791,000, for working capital, capital equipment and general
corporate purposes.
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.
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 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 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 exercised this
option in full. In connection with the exercise of this option, Gambro 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. In March 2001, the Company signed a
termination and release agreement with Gambro, effective November 2000, which
ended the distribution and development agreement. In consideration for the
Company's inventory (net book value at December 31, 2000 of $332,000) of
products bearing Gambro's company name, and by way of complete resolution of all
issues now outstanding between the Company and Gambro, Gambro agreed to return
1,011,692 shares of common stock with a fair market value at closing of
$332,000.
K. 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
F - 14
"Plans"). A total of 3,528,400 shares have been authorized by the Company for
grants of options or shares, of which 410,400 are still available for grant.
Stock options granted during 2000 and 1999 generally have a maximum term of ten
years and vest ratably over a period of two to five years.
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, 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
Granted 357 $4.62
Exercised (110) $1.45
Terminated (84) $5.22
---- -----
Outstanding at December 31, 2000 2,553 $2.03
===== =====
The following table summarizes the status of the Company's stock options
at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------- ----------------------
Weighted Weighted Number Weighted
Number Average Average Exercisable Average
Outstanding As Remaining Exercise As of Exercise
Of 12/31/00 Contractual Price 12/31/00 Price
Range of Exercise Prices (In thousands) Life (In thousands)
- ------------------------ -------------- ----------- -------- -------------- -------
$ .63 - $ .94 1,490 7.1 $ .64 727 $ .64
$ 1.25 - $ 1.75 288 7.5 $1.27 118 $ 1.29
$ 2.00 - $ 2.12 157 5.1 $2.04 107 $ 2.00
$ 3.22 - $ 4.88 57 6.7 $3.77 38 $ 3.75
$ 5.00 - $ 5.94 523 9.0 $5.30 53 $ 5.60
$12.38 - $16.25 38 5.3 $14.35 34 $14.57
----- --- ------ --- ------
2,553 7.4 $ 2.03 1,077 $ 1.65
The weighted average grant date fair value for options granted during
2000, 1999 and 1998 was $3.12, $3.57 and $0.49 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 2000,
1999 and 1998: 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 from
1994 through 1998, which expense was $89,000 in 1998.
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 240,117 shares for a total of $159,000 during the year ended
December 31, 2000 and 41,071 shares for a total of $117,000 during the year
ended December 31, 1999. At December 31, 2000, 51,280 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 2000, 1999 and 1998
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.
(In thousands; except per share amounts) 2000 1999 1998
---- ---- -----
Net loss - as reported $(16,223) $(10,665) $ (12,170)
Net loss - pro forma $(17,062) $(11,274) $ (12,610)
Net loss per share - as reported - basic
and diluted $ (0.85) $ (0.77) $ (1.35)
Net loss per share - pro forma - basic
and diluted $ (0.90) $ (0.82) $ (1.40)
The pro forma effect on net income for 2000, 1999 and 1998 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.
L. INCOME TAXES:
The components of the Company's deferred tax assets and liabilities are as
follows at December 31:
(In thousands) 2000 1999
---- ----
Deferred taxes:
Net operating loss carryforwards $35,747 $31,315
Research and development expense
capitalization 5,180 4,392
Tax credit carryforwards 1,632 1,235
Inventory reserves 803 20
Deferred compensation 285 285
Accrued charges not paid 527 512
Other - 7
Property and equipment 214 1
-------- --------
44,388 37,767
Valuation allowance (44,388) (37,767)
-------- --------
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 2000 and 1999. The effective tax rate was 0% due to a net
operating loss and the non-recognition of any net deferred tax asset. At
F - 16
December 31, 2000, the Company had federal and state tax net operating loss
carryforwards ("NOLs") of approximately $85,000,000 and $73,000,000,
respectively, to offset future regular taxable earnings. The federal and state
NOLs begin to expire in 2009 and 2001. Approximately $7,000,000 of state NOLs
expired in 2000. The Company has federal and state research and development tax
credits of approximately $890,000 and $680,000, respectively, which both begin
to expire in 2009. The Company has a state investment tax credit carryforward of
approximately $50,000, of which approximately $6,900 expired in 2000.
M. AGREEMENTS:
In January 2000, the Company entered into a non-exclusive agreement with
Command Medical Products, Inc. ("Command"), 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. In December 2000,
the Company agreed to pay Command $600,000 in connection with the termination of
its supply and assembly agreement and release.
In December 1999, the Company entered into an exclusive five-year
manufacturing and supply agreement with Filtertek, Inc. ("Filtertek"), a major
supplier of a component to the Company's product. The Company completed two
amendments to this agreement in both September and December 2000 in which it
agreed to pay Filtertek a total of $705,000. No commitments have been made to
make such payments in the future. 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.
In July 1999, the Company entered into a master purchase agreement with
the ARC that provides for the sale of the r\LS System by the Company to the ARC
on specified terms. In April 2000, the Company was notified that the ARC, the
Company's largest customer, was suspending use of the Company's r\LS System
pending the outcome of an investigation of a small number of non-critical
adverse reactions in patients who had received a transfusion of blood filtered
with the r\LS. In September 2000, the Company was notified that the ARC
terminated its supply contract for the r\LS System based on the extended period
of time taken to prove product improvements resolved these reactions. The
Company and the American Red Cross are currently negotiating a termination of
the purchase contract and a release of any and all claims that either party may
have against the other, with certain exceptions.
In August 1998, the Company completed an amended and restated Master
Strategic Alliance Agreement with the ARC 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 ARC 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. As of December 31, 2000 no warrants
have been issued under this Agreement.
In 1998, the Company completed a distribution and development agreement,
which was amended in May 1999, with Gambro to act as the Company's exclusive
distributor of the Company's r\LS System worldwide, except for sales to the ARC.
In March 2001, the Company signed a termination and release agreement with
Gambro BCT, effective November 2000, which ended the distribution and
development agreement. In March 2001, the Company signed a termination and
release agreement with Gambro, effective November 2000, which ended the
distribution and development agreement. In consideration for the Company's
inventory (net book value at December 31, 2000 of $332,000) of products bearing
Gambro's company name, and by way of complete resolution of all issues now
outstanding between the Company and Gambro, Gambro agreed to return 1,011,692
shares of common stock with a fair market value at closing of $332,000.
As of March 2, 2001, Gambro owned 31% of the Company's issued and
outstanding Common Stock. Effective with the return of 1,011,692 shares of
common stock by Gambro in connection with the termination and
F - 17
release of the supply and development agreement between the Company and Gambro,
Gambro will own 27% of the issued and outstanding common stock of the Company.
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 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. In
September 2000, the revolving line of credit expired and the $5 million
outstanding was repaid by the Company in accordance with the agreement. (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.
As of March 2, 2001, Sepracor owned 22% of the Company's issued and
outstanding Common Stock. Effective with the return of 1,011,692 shares of
common stock by Gambro in connection with the termination and release of the
supply and development agreement between the Company and Gambro, Sepracor will
own 23% of the issued and outstanding common stock of the Company.
N. 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 the Company provided approximately
$40,000 of matching contributions. There were no employer contributions to the
plan in 2000.
O. LITIGATION:
The Company is a defendant in a lawsuit brought by Pall Corporation
("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").
F - 18
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 held a
hearing on the summary judgment motions on April 18, 2000. No decision has been
made on the motions.
The Company and Gambro BCT, Inc. 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. On September 30, 1999, the Court denied Pall's
motion to dismiss the action. On October 20, 1999, Pall submitted a counterclaim
alleging that the Company's r\LS System infringes its patents that are the
subject of the lawsuit and that the Company and Gambro BCT tortiously interfered
and unfairly competed with Pall's business. The Company and Gambro BCT replied
to Pall's counterclaim and denied Pall's allegations of tortious interference,
unfair competition and patent infringement.
On July 13, 2000, Pall filed a Complaint in the United States District
Court for the District of Colorado against the Company, Gambro BCT, Inc. and
Gambro AB alleging that the Company's r\LS system infringes Pall's U.S. Patent
No. 6,086,770 (the "'770 Patent"). On August 11, 2000, this action was
consolidated with the earlier declaratory relief action in the United States
District Court for the District of Colorado. The Company, Gambro BCT, Inc. and
Gambro AB answered the complaint, denied the allegations of infringement and
submitted a counterclaim alleging that Pall's '770 patent is invalid, not
infringed and unenforceable. In September 2000, Pall answered the counterclaim
and denied the allegations of noninfringement, invalidity and unenforceability.
Discovery is proceeding.
On December 15, 2000, Pall filed a complaint against Filtertek, Inc.
("Filtertek") alleging that Filtertek, a manufacturer of the r\LS filter,
infringes the seven above-mentioned Pall patents. Filtertek answered the
complaint on January 31, 2001, denied Pall's allegations of infringement and
asserted that the claims of the Pall patents are invalid and/or unenforceable
and that Pall is estopped from asserting infringement against Filtertek by
reason of Pall's prior conduct with Filtertek. This action has been consolidated
with the other actions pending in Colorado. Discovery is now ongoing.
On December 22, 2000, Gambro AB and Gambro BCT moved to dismiss the
consolidated actions based on a settlement agreement with Pall Corporation. On
January 10, 2001, the Court dismissed the action with respect to all claims
between Pall, Gambro BCT, and Gambro AB.
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, 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. On April 18, 2000, Pall moved, without
opposition from the defendants, to dismiss the action and the Court granted
Pall's 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
F - 19
and/or sale by the Company or its customers of the LeukoNet System and the r\LS
System do not infringe any valid enforceable claim 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.
P. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Q1 2000 Q2 2000 Q3 2000 Q4 2000
------- ------- ------- -------
(In thousands, except for share amounts)
Total revenues $1,816 $ 643 $ 288 $ 472
Loss from operations (3,091) (3,293) (4,735) (4,957)
Net Loss $(3,319) $(3,346) $(4,709) $(4,849)
Net loss per share basic and diluted $(0.19) $(0.17) $(0.24) $(0.25)
Weighted average number of shares of 17,039 19,652 19,704 19,773
common stock
Outstanding - basic and diluted
Q1 1999 Q2 1999 Q3 1999 Q4 1999
------- ------- ------- -------
Total revenues $ 4 $ 9 $ 119 $ 673
Loss from operations (2,544) (2,173) (2,236) (2,420)
Net Loss $(2,918) $(2,473) $(2,543) $(2,731)
Net loss per share basic and diluted $ (0.32) $ (0.17) $(0.17) $(0.17)
Weighted average number of shares of 9,221 14,830 15,145 15,782
common stock
Outstanding - basic and diluted
Q. SUBSEQUENT EVENTS:
In March 2001, the Company signed a termination and release agreement with
Gambro, effective November 2000, which ended the distribution and development
agreement. Gambro cited the termination of the Company's supply contract with
ARC and other recent business conditions as the reasons for terminating the
agreement. In consideration for the Company's inventory (net book value at
December 31, 2000 of $332,000) of products bearing Gambro's company name, and by
way of complete resolution of all issues now outstanding between the Company and
Gambro, Gambro agreed to return 1,011,692 shares of common stock with a fair
market value at closing of $332,000.
On February 3, 2001, the Company agreed to sell substantially all of the
Company's non-cash assets to Whatman Bioscience Inc., a Massachusetts
corporation ("Whatman"), a wholly owned subsidiary of Whatman plc, an English
corporation ("Whatman plc") pursuant to the terms of an Asset Purchase Agreement
("Purchase Agreement") executed by the two companies.
Following approval and adoption of the Purchase Agreement by the
Stockholders of the Company and the satisfaction or waiver of certain other
conditions, the Company will sell substantially all of its non-cash assets to
Whatman. Under the terms of the Purchase Agreement, the consideration to be
received by the Company for the Asset Sale (the "Consideration") will consist of
(1) $10 million in cash, which will be paid to the Company at the Closing; (2)
an additional payment by Whatman, in cash or common stock of Whatman plc at
Whatman's option, which effectively reimburses the Company for its net operating
costs and expenses incurred in connection with the Company's business during the
period beginning on November 1, 2000 and ending on the Closing Date (the
"Reimbursement Portion"), which amount is currently anticipated to be
approximately $4 million and is expected to be paid to the Company in the second
quarter of 2001; and (3) a royalty of 4% on sales by Whatman, Whatman plc or
their affiliates of certain filtration products, including products that utilize
the Company's technology, up to a total royalty of $12 million, subject to
certain reductions described in the Royalty Agreement, which include the offset
of certain potential liabilities associated with the Company's patent litigation
with Pall
F - 20
Corporation that Whatman will assume. Accordingly, the total amount of the
Consideration to be paid by Whatman to the Company will be approximately $14
million to $26 million in cash or cash and common stock of Whatman plc.
Under the terms of the Purchase Agreement, Whatman will assume and be
legally responsible for certain liabilities of the Company, and Whatman plc will
guarantee Whatman's obligation to pay the Consideration to the Company. In
addition, in the event that Whatman elects to pay the approximately $4 million
reimbursement portion of the Consideration in shares of Whatman plc's common
stock, the Purchase Agreement provides that Whatman plc will guarantee a minimum
per share price to the Company of $4.3864 with respect to any share of Whatman
plc's common stock resold by the Company within 60 days after such shares are
issued to the Company. The Company currently anticipates that any share of
Whatman plc's common stock issued to the Company will be resold by the Company
within 60 days of the issuance to the Company of such share.
The Company has the right to terminate the Purchase Agreement under
certain circumstances, including if the Board of Directors determines, upon the
written opinion of the Company's counsel, that the failure to terminate the
Purchase Agreement could be expected to be a breach of, or be inconsistent with,
the fiduciary duties of the Board of Directors under applicable law. In the
event of termination for the foregoing reason, the Company is required to pay
Whatman a fee of $500,000 upon the termination of the Purchase Agreement.
The obligations of the Company, Whatman and Whatman plc to consummate the
Asset Sale are subject to a number of customary conditions, including, among
others, approval and adoption of the Purchase Agreement by the affirmative vote
of the holders of a majority of the outstanding Shares entitled to vote thereon.
It is currently anticipated that the Closing Date will occur on or as
promptly as practicable following the approval and adoption of the Purchase
Agreement by the Stockholders of the Company and the satisfaction or waiver of
all of the other conditions set forth in the Purchase Agreement. Either party
may terminate the Purchase Agreement if the closing does not occur by May 31,
2001. Accordingly, there can be no assurance as to if or when the Asset Sale
will be consummated.
Upon closing of the Purchase Agreement with Whatman, the Company is
expected to have approximately $17.5 million in a combination of cash, cash
equivalents, marketable securities and Whatman plc stock (based on current cash
and marketable securities levels, the Company's expected "burn rate" through
closing and the terms of the Purchase Agreement). In that regard, the Company is
in the preliminary stages of considering various strategic business combinations
and other transactions with a view toward further enhancing stockholder value
following the consummation of the sale of its assets and business to Whatman.
In the event that the Asset Sale does not occur, the Company will consider
other business alternatives, including but not limited to other business
combinations and a liquidation of the Company's assets. Given that any proceeds
from any such liquidation and any other cash on hand would be first used to pay
the Company's creditors and outstanding payables, and given certain legal
requirements that the Company maintain certain cash on hand for certain mandated
time periods, there is no assurance as to when, if ever, any proceeds from a
liquidation would be distributed to the Company's Stockholders.
F - 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 26th day of
March, 2001.
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 26, 2001
- --------------------- Officer and Director (Principal
John F. McGuire, III Executive Officer)
/s/ James B. Murphy Senior Vice President, Finance March 26, 2001
- --------------------- and Administration (Principal
James B. Murphy Financial Officer and Principal
Accounting Officer)
/s/ Timothy J. Barberich Director March 26, 2001
- ---------------------
Timothy J. Barberich
/s/ Justin E. Doheny Director March 26, 2001
- ------------------------
Justin E. Doheny
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.
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.
I - 1
Exhibit No. Description
----------- -----------
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 ARC.
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.
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(16) Manufacturing and Supply Agreement, dated as of December
22, 1999, between the Company and Filtertek Inc.
I - 2
Exhibit No. Description
----------- -----------
10.29(16) Supply and Assembly Agreement, dated as of January 31,
2000, between the Company and Command Medical Products
Inc.
10.30(16) Placement Agency Agreement, dated February 3, 2000,
between the Company and Warburg Dillon Read LLC.
10.31(16) Form of Purchase Agreement, dated March 2, 2000.
10.32(16) Schedule of purchasers which purchased shares of common
stock pursuant to the Form of Purchase Agreement set
forth in 10.42.
10.33(17) Indemnification Agreement, dated as of July 13, 2000
between the Company and Ahlstrom Technical Specialties
LLC.
10.34 Termination of Supply and Assembly Agreement and
Release, dated as of December 8, 2000, by and between
the Company and Command.
10.35 Amendment No. 1 to Manufacturing and Supply Agreement,
dated as of September 21, 2000, by and between the
Company and Filtertek.
10.36 Amendment No. 2 to Manufacturing and Supply Agreement,
dated as of December 15, 2000, by and between the
Company and Filtertek.
10.37 Termination and Release Agreement, dated as of March 5,
2001, by and between the Company and Gambro.
21.1(12) Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP
- ----------------------------------
(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.
I - 3
(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.
(16) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
(17) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000.
I - 4