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, 1997
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.
(Exact name of registrant as specified in its charter)
Delaware 04-3216862
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
140 Locke Drive
Marlborough, Massachusetts 01752
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 485-6850
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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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 $3,931,621 on January 31, 1998.
Number of shares outstanding of the registrant's class of common stock as of
January 31, 1998: 8,991,042.
DOCUMENTS INCORPORATED BY REFERENCE
1997 Annual Report to Stockholders - Part II
Proxy Statement for 1998 Annual Meeting of Stockholders - Part III
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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. 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.
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PART I
Item 1. BUSINESS
HemaSure Inc. (the "Company") was established in December 1993 as a
wholly-owned subsidiary of Sepracor Inc. ("Sepracor"). Prior to that date, its
business was conducted as part of Sepracor's bioprocessing division. Effective
as of January 1, 1994, in exchange for 3,000,000 shares of common stock, par
value $.01 per share (the "Common Stock"), of the Company, 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.
The Company is applying its proprietary filtration technologies to
develop products to increase the safety of donated blood and to improve certain
blood transfusion and collection procedures. The Company is developing the
following products for use by blood centers, hospital blood banks and hospitals:
o The Red Cell Leukoreduction System (the "r\LS System") is
designed for use by blood centers and hospital blood banks to
remove harmful leukocytes (white blood cells) from donated red
blood cells.
o The LeukoVir-MB-Filter is designed for use by blood centers
and hospital blood banks to remove methylene blue that has
been used to inactivate viruses in blood plasma and to remove
contaminating leukocytes, microaggregates and excess lipids
that may compromise the integrity of plasma.
o The Platelet Leukoreduction Filtration System (the "p\LS
System") is designed for use by hospitals to remove leukocytes
from pooled donor platelet concentrates.
Industry Background
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 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.
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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 results in an increased risk of contamination of a patient's blood.
Leukocytes. Leukocytes (white blood cells) may cause adverse reactions
in patients receiving blood transfusions, such as fever, chills, immune system
suppression or development of immunological responses that could cause the
affected patient to reject subsequent blood transfusions. In addition,
leukocytes may harbor infectious viruses, including cytomegalovirus and human
T-cell lymphocyte virus I (HTLV-I). 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.
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.
Other Blood-Borne Pathogens. In addition to viruses, other blood-borne
pathogens may be transmitted by blood transfusions. These include the parasites
which cause malaria and Chagas' disease and the spirochetes which cause syphilis
and Lyme disease.
Other Contaminants. During surgical procedures, the walls of red blood
cells can break down and release hemoglobin, the oxygen carrying chemical
component normally contained within red blood cells. In its free form,
hemoglobin is toxic and can result in renal shutdown if present in sufficient
quantities. The contamination of blood by free hemoglobin has limited the use of
reinfusion of recovered blood.
Products and Products Under Development
Red Blood Cell Systems
r\LS System
The Company's r\LS System is being designed for leukocyte filtration by
blood centers and hospital blood banks immediately prior to blood storage, a
process which the Company believes results in improved quality leukocyte reduced
blood. The Company believes that the demand for filtered blood for transfusions
will continue to increase over the next several years and that, while leukocyte
filtration currently takes place primarily at the patient bedside, as the demand
for filtered blood increases, leukocyte removal will shift from bedside
filtration of individual units on an "as needed" basis to centralized filtration
performed at blood centers.
The r\LS System is based on a proprietary filter medium comprised of
multiple fibrous components. Leukocytes are removed by a combination of
entrapment and adhesion. With a proprietary automatic internal prime and drain
design, the filter device reduces operator intervention and facilitates high
volume, centralized processing in a regional blood center environment. The
Company is focusing its marketing efforts exclusively on blood centers and
hospital blood banks for pre-storage leukocyte reduction.
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The Company expects to file an application for 510(K) premarket
notification clearance with respect to its r\LS System with the United States
Food and Drug Administration (the "FDA") in 1998. There can be no assurance that
the r\LS System will receive the necessary regulatory approval or achieve market
acceptance.
While the Company believes that the performance and ease-of-use of the
r\LS System will compare favorably with other blood filtration devices, there
can be no assurance that the performance or price of the r\LS System will be
sufficient to achieve significant sales, particularly in view of the dominant
position in the market held by Pall Corporation. See "-- Competition."
LeukoNet System
In December 1994, the Company filed a 510(k) premarket notification
clearance with the FDA for the LeukoNet Pre-Storage Leukoreduction System (the
"LeukoNet System"), the Company's first generation leukoreduction system, and in
June 1995 the Company received such clearance. The Company commenced
commercialization of the LeukoNet System in the United States and in foreign
countries in the second half of 1995. In February 1998, the Company determined
to discontinue manufacturing the LeukoNet System and focus on the completion of
development and market introduction of the r\LS System.
Sales of the Company's LeukoNet System to the American Red Cross
Biomedical Services accounted for 86% of the Company's total revenues in 1997
and 83% of the Company's total revenues in 1996.
Plasma System
LeukoVir-MB Filter
The Company expects to complete clinical trials of its LeukoVir-MB
Filter in Europe in 1998. Developed in collaboration with the German Red Cross
of Lower Saxony and the Swiss Red Cross, the Company's LeukoVir-MB Filter is
designed to remove the virucidal agent methylene blue, which is used to treat
plasma for transfusion. Methylene blue has not been approved for use in the
United States. The LeukoVir-MB Filter, currently awaiting marketing approval in
Europe, is designed to process individual units of plasma by a single,
disposable system, eliminating the potential infection-spreading danger of
systems requiring pooling of many units before processing. The Company believes
that the reduction of this viral inactivation agent to undetectable levels
should eliminate concerns regarding methylene blue's potential toxicity.
Additionally, the LeukoVir-MB Filter is designed to remove contaminating
leukocytes and eliminate microaggregates, bacteria and excess lipids that may
compromise the integrity of plasma.
There can be no assurance however that the LeukoVir-MB Filter will
receive marketing approval or achieve market acceptance.
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Platelet System
p\LS System
Platelets are a cellular component of peripheral blood, used
therapeutically to prevent bleeding. There are two sources of platelets:
1. Pooled platelets, a by-product of whole blood donation and
subsequent component preparation, and
2. Single donor platelets produced by a platelet apheresis
procedure and typically leukoreduced at that time.
Pooled platelets (from whole blood) account for approximately 4.4
million transfusions worldwide. Anywhere from 30% (Asia-Pacific) to 70% (United
States) of these pooled platelets are leukoreduced.
The p\LS System is designed to remove leukocytes from pooled donor
platelet concentrates. The Company is engaged in preliminary discussions
pertaining to a cooperative agreement with a manufacturer of leukoreduction
medium for platelets. This medium has been extensively used in Europe and the
Near East for platelet leukoreduction.
The Company expects to file an application for 510(K) premarket
notification clearance with the FDA and introduce the product for sale in the
United States in 1998. There can be no assurance, however, that the p\LS System
will receive the necessary regulatory approval or achieve market acceptance.
Regulatory Approval
The Company believes that its blood filtration products under
development will be classified as medical devices and that it will be able to
secure regulatory approval in the United States for each of its medical device
products through 510(k) premarket notification clearance with the FDA. There is
no assurance, however, that the FDA will determine that any of the Company's
products will meet the requirements for its expected classification. If the FDA
concludes that any product does not meet such requirements, then the process for
obtaining regulatory approval for such product in the United States would be
significantly lengthened. See "-- Government Regulation."
Membrane Products
Since its inception in December 1993 through the first quarter of 1996,
the Company manufactured and sold certain non-blood related process-scale
membrane devices used for the separation and purification of certain
pharmaceuticals, chemicals and biologics. See "-- Relationship with Sepracor."
Substantially all of the Company's revenues through the first quarter of 1996
were attributable to sales of these non- blood related membrane filter products.
Revenues from these products were $13,000 and $517,000 in 1996 and 1995,
respectively.
In 1996 and 1995, sales to Sepracor with respect to membrane products
accounted for 2% and 57% of the Company's total revenues, respectively. Revenues
from the U.S. Department of the Army related
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to such products represented 7% and 36% of the Company's revenues in 1996 and
1995, respectively. The Company's agreement with the U.S. Department of the Army
concluded in 1996.
Technologies
The Company's planned products are based on its proprietary
technologies in the areas of affinity separations, membrane technology and
device design and fabrication.
Affinity Separations
The Company has proprietary affinity separations technology that
utilizes ligands, which are molecules that bind to complementary biomolecules,
in connection with the Company's various filtration products. The Company has
identified a family of carbohydrate-based ligands that recognize and bind to the
cell surface receptors on leukocytes. The Company has filed patent applications
covering the use of these carbohydrate-based ligands 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 the
Company 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 ligands, 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. See "-- Relationship with Sepracor."
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.
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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 $3,577,000 in 1997, $6,128,000
in 1996 and $4,061,000 in 1995. The decrease in 1997 is primarily attributable
to a decrease in expenses associated with the Company's SteriPath Blood Pathogen
Inactivation System, which program was discontinued in 1997. The increase in
1996 over the amounts expended in 1995 is primarily attributable to a higher
level of spending associated with development of the Company's SteriPath Blood
Pathogen Inactivation System and preparation for commercialization of the
Company's LeukoNet System.
Plasma Pharmaceuticals
In May 1996, the Company acquired, through its United States and Danish
subsidiaries, the plasma product unit of Novo Nordisk A/S, a Danish company
("Novo Nordisk"). See "--Agreements." The Company's plasma product unit
processed blood plasma into plasma pharmaceutical products. In February 1997,
the Company determined to discontinue the development and operation of its
Danish plasma business due, in large part, to Pharmacia & Upjohn's ("P&U")
wrongful termination of the Company's planned acquisition of P&U's plasma
division in Sweden, which was a critical part of the Company's initial strategy
to enter the plasma business, as well as certain other factors. See "--
Agreements," Item 3, "Legal Proceedings" and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The Company
recorded a one-time charge of $15,200,000 in the fourth quarter of 1996
associated with its determination to exit the plasma business.
Agreements
Under the terms of the May 1996 agreement relating to the Company's
acquisition of the plasma product unit of Novo Nordisk (the "Denmark
Acquisition"), the purchase price to be paid for the plasma product unit was to
be comprised of three portions: (i) $1,800,000 was to be payable in 1998 in cash
or Common Stock of the Company or a subsidiary of the Company, at the Company's
option; (ii) approximately $13,000,000 was to be payable from time to time upon
the sale of acquired inventory (valued at approximately $13,000,000) but in any
event no later than 1998, provided that up to approximately $3,000,000 of such
portion could be forgiven in certain circumstances; and (iii) approximately
$8,000,000 was to be payable in 1998 in cash or Common Stock of the Company or a
subsidiary of the Company, at the Company's option, provided that all of this
portion would be forgiven in certain circumstances. In January 1997, the Company
and Novo Nordisk entered into a Restructuring Agreement relating to the Novo
Acquisition (the "Restructuring Agreement"). Pursuant to the Restructuring
Agreement, approximately $23,000,000 million of indebtedness owed to Novo
Nordisk was restructured by way of issuance by the Company to Novo Nordisk of a
12% convertible subordinated promissory note in the principal amount of
approximately $11,722,000, which was due and payable on December 31, 2001 (the
"Note"), with interest payable quarterly (provided that up to approximately
$3,000,000 would be forgiven in certain circumstances). Approximately $8,500,000
of the reduction of such indebtedness was forgiven. The remainder of the
reduction represents a net amount due from Novo Nordisk to the Company related
to various service arrangements between the two companies. On January 6, 1998,
the Company elected to convert all indebtedness under the Note, pursuant to the
terms thereof,
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into shares of Common Stock of the Company at a conversion price equal to $10.50
per share, or 827,375 shares. Pursuant to a registration rights agreement, the
Company previously granted Novo Nordisk certain registration rights with respect
to any shares of Common Stock acquired by Novo Nordisk upon conversion of the
Note. Novo Nordisk has contested the conversion of the Note, including the
forgiveness of the $3,000,000 amount. The Company believes that such claims are
without merit.
In June 1996, the Company entered into a ten-year Master Strategic
Alliance Agreement with the American Red Cross BioMedical Services, a
not-for-profit, charitable corporation ("ARCBS"), which provides for, among
other things, the development and enhancement of a number of filtration
practices based on the Company's core technology including red blood cell
leukoreduction, leukocyte recovery, platelet filtration, whole blood filtration
and tumor cell filtration. No assurance can be given, 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 ARCBS.
In March 1996, the Company entered into a three-year agreement with
ARCBS for the sale of the LeukoNet System. The agreement provides for target
purchases by ARCBS over the term of this agreement. The Agreement does not
include minimum purchase obligations by ARCBS. The ARCBS has the right to
terminate the agreement under certain circumstances. Pursuant to that agreement,
the Company agrees to indemnify the ARCBS against all losses, damages and
liabilities incurred for, among other things, infringement of patent rights
owned or held by Pall Corporation in connection with the use of Company products
delivered under the terms and conditions of the contract. See Item 3, "Legal
Proceedings."
In February 1996, the Company signed a cooperation agreement with the
German Red Cross of Lower Saxony. Under the terms of the agreement, the Company
will be the worldwide nonexclusive licensing agent for the methylene blue
process (excluding the United States, Canada, Puerto Rico and Switzerland). Both
parties have agreed to collaborate on advancing the methylene blue process in
order to broaden its acceptance worldwide.
Competition
The Company expects to encounter intense competition in the sale of its
proposed products. The Company's proposed products, if commercialized, will
compete with other products currently on the market as well as with future
products developed by other medical device companies' biotechnology and
pharmaceutical companies, hospital supply companies, national and regional blood
centers, certain governmental organizations and agencies and academic
institutions. Many of the Company's competitors in the field of leukocyte
reduction have substantially greater resources, manufacturing and marketing
capabilities, research and production staffs and production facilities than the
Company. Moreover, some of the Company's competitors are significantly larger
than the Company, have greater experience in preclinical testing, human clinical
trials and other regulatory approval procedures. In addition, many of the
Company's competitors have access to greater capital and other resources, may
have management personnel with more experience than that of the Company and may
have other advantages over the Company in conducting certain businesses and
providing certain services. 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 it develops. In addition, many of the Company's competitors have
long-
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standing relationships with the national and regional blood centers to which the
Company will market its products. There can be no assurance that the Company
will be able to compete effectively against such companies.
In the area of leukocyte removal, the Company will compete primarily
with Pall Corporation, which manufactures and sells a substantial majority of
leukocyte removal filters currently on the market and has long-standing and, in
certain cases, exclusive, relationships, including long-term supply contracts,
with the blood centers that are the Company's target customers. In addition, the
Company will compete with Baxter Healthcare Corporation ("Baxter") and Asahi
America, Inc. ("Asahi") which have formed an alliance pursuant to which Baxter
exclusively markets Asahi's leukocyte removal products in North America. The
Company expects that the principal competitive factors in the area of leukocyte
removal will be removal efficiency, cost and ease of use.
The Company is pursuing areas of product development in a relatively
new field in which there is a potential for extensive technological innovation
in relatively short periods of time. The Company's competitors may succeed in
developing technologies or products that are more effective than those of the
Company. Rapid technological change or developments by others may result in the
Company's technology or proposed products becoming obsolete or noncompetitive.
Licenses, Patents and Proprietary Information
The Company entered into a Technology Transfer and License Agreement
with Sepracor under which Sepracor transferred to the Company all rights to the
technology developed by Sepracor for the development, manufacture, use and sale
of medical devices for the separation and purification of blood and blood
components, including technology relating to (1) optimization of flat membranes,
hollow fiber membranes and fibrous supports; (2) specific affinity and
immunoaffinity ligands; (3) linking chemistries; (4) surface modification
including hydrophilic polymers and coatings; (5) device designs and engineering;
(6) fabrication and manufacturing including encapsulation and assembly
techniques; and (7) organic chemical synthesis. The Technology Transfer and
License Agreement expired on January 1, 1998 pursuant to its terms. The Company
does not expect such termination to have a material effect upon its business,
future operating results or financial condition. See "-- Relationship with
Sepracor."
The Company believes that protection of the proprietary nature of its
products and technology is critical to its business. Accordingly, it has adopted
and will maintain a vigorous program to secure and maintain such protection. The
Company's practice is to file patent applications with respect to technology,
inventions and improvements that are important to its business. The Company also
relies on trade secrets, unpatented know-how, continuing technological invention
and the pursuit of licensing opportunities to develop and maintain its
competitive position. There can be 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 21 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, nine patents have been issued to the Company (which expire
at various dates from 2011 through 2017).
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The Company's success depends in part on its ability to obtain patents,
to protect trade secrets, to operate without infringing upon the proprietary
rights of others and to prevent others from infringing on the proprietary rights
of the Company. See Item 3, "Legal Proceedings." Proprietary rights relating to
the Company's 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 can be 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
the Company, may seek to challenge the validity of the patents owned by or
licensed to the Company or may use their resources to design comparable products
that do not infringe these patents. See Item 3, "Legal Proceedings."
There are many issued third-party patents in the field of blood
filtration, including patents held by competitors of the Company. The Company
may need to acquire licenses to, or contest the validity of, some of such
patents. It is likely that significant funds would be required to defend any
claim that the Company infringes a third-party patent, and any such claim could
adversely affect sales of the challenged product until the claim is resolved.
There can be no assurance that any license required under any such patent would
be made available on acceptable terms or that the Company would prevail in any
litigation involving such patent. See Item 3, "Legal Proceedings."
Much of the know-how of importance to the Company's technology and many
of its processes are dependent upon the unpatentable knowledge, experience and
skills of its 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 the
Company's 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 can be no assurances, 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
Government regulations in the United States and other countries are a
significant factor in the research, development and commercialization of the
Company's products. The products manufactured and marketed by the Company are
subject to regulation by the FDA and similar authorities in foreign countries.
The Company believes that all of its products will be classified as "devices"
under federal law and FDA regulations. The process of obtaining approvals from
the FDA and other regulatory authorities can be costly, time consuming and
subject to unanticipated delays. There can be no assurance that the FDA will
approve any of the Company's products for marketing or, if they are approved,
that they will be approved on a timely basis.
Among the conditions for FDA approval of a drug, biologic or device is
the requirement that the manufacturer's quality control and manufacturing
procedures conform to cGMP, which must be followed at all times. Although the
Company's facilities and manufacturing procedures are designed to conform to
cGMP, there can be no assurance that the FDA will determine that they conform.
These practices control every phase of production from the incoming receipt of
raw materials, components and subassemblies to
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the labeling of the finished product, tracing of consignees after distribution
and follow-up and reporting of complaint information.
The Company believes that its blood filtration products will be
classified as medical devices. All medical devices introduced to the market
since 1976 are required by the FDA, as a condition of marketing in the U.S., to
secure either a 510(k) premarket notification clearance or an approved PMA. A
510(k) premarket notification clearance indicates FDA agreement with an
applicant's determination that the product for which clearance has been sought
is substantially equivalent to another medical device that was on the market
prior to 1976. An approved PMA application indicates that the FDA has determined
that the device has been proven, through the submission of clinical data and
manufacturing information, to be safe and effective for its labeled indications.
The process of obtaining a 510(k) clearance typically takes at least six months,
and may take several years, and involves the submission of clinical data and
supporting information, while the PMA process typically lasts at least several
years and requires the submission of significant quantities of clinical data and
supporting information. The Company intends to seek 510(k) premarket
notification clearance for its blood filtration products. There can be no
assurance that the FDA will conclude that any of the Company's products, other
than the LeukoNet System, meet the requirements for 510(k) premarket
notification clearance.
In the event the FDA does not classify the Company's planned blood
filtration products as medical devices, these products would probably be
regulated as drugs or biologics. If regulated as drugs or biologics, the
products would require premarket approval, as described below. The Company
believes that the FDA will classify the Company's blood filtration products as
medical devices.
Manufacturing and Facilities
The Company's facilities consist of approximately 30,000 square feet of
leased office, laboratory and manufacturing space in a modern facility in
Marlborough, Massachusetts. The Company believes that these facilities are
adequate and suitable for its needs through 1998. See Item 2, "Properties."
The leased facilities in Massachusetts include 25,000 square-feet of
product development and manufacturing space. This space is expected to be
adequate to address clinical and early commercial-scale production requirements
of the Company through 1998. The facility is designed to conform to cGMP and
other applicable government standards. The Company anticipates that its facility
will be subject to ongoing inspections by the FDA and foreign regulatory
authorities in connection with their review of the Company's products.
In January 1998, the Company received ISO 9001 Registration, which was
awarded by Bureau Veritas Quality International. The ISO 9000 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.
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.
-10-
<PAGE>
Employees
As of March 1, 1998, the Company employed a total of 45 persons of whom
13 were in research and development, 19 were in manufacturing and development
support and 13 were in sales and administration. Three of the Company's
employees hold Ph.D. degrees.
Relationship with Sepracor
The Company was organized in December 1993 as a wholly-owned subsidiary
of Sepracor. 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 January 31, 1998, Sepracor owned 33% of
the Company's Common Stock.
Sepracor is engaged in the business of using chiral chemistry to
develop single-isomer forms of existing, widely sold pharmaceuticals and to
supply major pharmaceutical companies with bulk quantities of chiral
intermediates.
Sale of Membrane Products. From inception through December 31, 1995,
the Company's sales of membrane models to Sepracor amounted to $668,000. Such
sales did not continue in any material respect beyond December 31, 1995. See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Continuing Operations."
Registration Rights. Beginning in April 1998, Sepracor will be 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. 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.
All 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.
Item 2. PROPERTIES
The Company's facilities consist of approximately 30,000 square feet of
leased office, laboratory and manufacturing space in a modern 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 1998. See Item 1.
"Business -- Manufacturing and Facilities."
Item 3. LEGAL PROCEEDINGS
The Company is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged
that the Company's manufacture, use and/or sale of the LeukoNet product
infringes upon three patents held by Pall.
-11-
<PAGE>
On October 14, 1996, in connection with the first action concerning
U.S. Patent No. 5,451,321, (the "'321 Patent") the Company filed a motion for
summary judgment of noninfringement. Pall filed a cross motion for summary
judgment of infringement at the same time.
In October 1997, the Eastern District of New York granted in part
Pall's summary judgment motion relating to the '321 patent. The Company has
agreed to terminate the manufacture, use, sale and offer for sale of the filter
subject to the court's order. The court has not yet ruled on the validity of
Pall's '321 patent claims, which HemaSure has asserted are invalid and
unenforceable. No date has been set for the proceeding to determine the validity
and enforceability of Pall's '321 patent claims.
With respect to the second action concerning U.S. Patent Nos. 4,340,479
(the "'479 patent") and 4,952,572 (the "'572 patent"), the Company has answered
the complaint stating that it does not infringe any claim of the asserted
patents. Further, the Company has counterclaimed for declaratory judgment of
invalidity, noninfringement and unenforceability of the '572 patent, and a
declaratory judgment of noninfringement of the '479 patent, as a result of a
license. Pall has attempted to withdraw the '479 patent from the second action.
The Company believes, based on advice of its patent counsel, that a
properly informed court should conclude that the manufacture, use and/or sale by
the Company or its customers of the present LeukoNet product does not infringe
any valid enforceable claim of the three asserted 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
adverse effect on the Company's future business and operations.
On November 1, 1996, the Company filed a complaint in the Supreme
Court, State of New York, County of New York, against P&U. In its complaint, the
Company sought to receive damages arising out of the alleged breach by P&U of an
agreement to sell to the Company P&U's plasma pharmaceutical business located in
Stockholm, Sweden. In September 1997, the Company reached an out-of-court
settlement with P&U. The terms of settlement included a cash payment to HemaSure
and the granting of an option to P&U to license, on a non-exclusive basis,
certain intellectual property held by HemaSure Inc. and its subsidiaries
relating to plasma fractionation. The cash payment was recognized as other
income in the third quarter ended September 30, 1997.
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, 1997.
-12-
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) 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.
1997 High Low
---- ---- ---
First Quarter 8 3 3/4
Second Quarter 4 1/16 1 9/16
Third Quarter 4 5/8 2 1/4
Fourth Quarter 4 1/4 11/16
1996 High Low
---- ---- ---
First Quarter 19 1/4 11 3/4
Second Quarter 17 1/4 12 1/2
Third Quarter 15 6 1/2
Fourth Quarter 10 7/8 4 7/8
(b) Holders.
On March 13, 1998, the Company's Common Stock was held by approximately
99 stockholders of record. On March 13, 1998, the last reported sale price of
the Company's Common Stock on the OTC bulletin board was $1.00.
-13-
<PAGE>
(c) 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.
Item 6. SELECTED FINANCIAL DATA
The information under the heading "Selected Financial Data" contained
in the Company's 1997 Annual Report to Stockholders is incorporated by reference
herein and filed as Exhibit 13.1 hereto. With the exception of the information
specifically incorporated herein by reference, the Company's 1997 Annual Report
to Stockholders is not to be deemed filed as part of this report for the
purposes of this Item.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information under the heading "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained in the Company's
1997 Annual Report to Stockholders is incorporated by reference herein and filed
as Exhibit 13.1 hereto. With the exception of the information specifically
incorporated herein by reference, the Company's 1997 Annual Report to
Stockholders is not to be deemed filed as part of this report for the purposes
of this Item.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements filed as part of this Annual Report on Form
10-K are (i) provided under Item 14 below and (ii) the information under the
heading "Financial Statements and Notes" contained in the Company's 1997 Annual
Report to Stockholders is incorporated by reference herein and filed as Exhibit
13.1 hereto. With the exception of the information specifically incorporated
herein by reference, the Company's 1997 Annual Report to Stockholders is not to
be deemed filed as part of this report for the purposes of this Item.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Items 10-13.
The information required for Part III in this Annual Report on Form
10-K is incorporated by reference from the Company's definitive proxy statement
for the Company's 1998 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," "Executive Officers of the
Registrant," "Compensation for Executive Officers" and "Certain Relationships
and Related Transactions."
-14-
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are incorporated by reference or included
as part of this Annual Report on Form 10-K.
1. The following financial statements (and related notes) of
the Company are incorporated by reference from the Company's
1997 Annual Report to Stockholders:
<TABLE>
<S> <C> <C>
Page
Report of Independent Accountants 15*
Consolidated Balance Sheets at December 31, 1997 and 1996 16*
Consolidated Statements of Operations for the Years Ended 17*
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity (Deficit) 18*
for the Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended 19*
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 20*
* Refers to page number of 1997 Annual Report to Stockholders
</TABLE>
2. All schedules are omitted as the information required is
inapplicable or the information is presented in the
consolidated financial statements or the related notes.
3. The Exhibits listed in the Exhibit Index immediately
preceding the Exhibits hereto are filed as a 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, LeukoNet and LeukoVir.
-15-
<PAGE>
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 31st day of
March, 1998.
HEMASURE INC.
Date: March 31, 1998 By: /s/ John F. McGuire
-------------------
John F. McGuire, 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John F. McGuire President, Chief Executive Officer March 31, 1998
- ------------------------ and Director (Principal Executive
John F. McGuire Officer)
/s/ James B. Murphy Senior Vice President, Finance and March 31, 1998
- ------------------------ Administration (Principal Financial
James B. Murphy Officer)
/s/ Timothy J. Barberich Director March 31, 1998
- ------------------------------------
Timothy J. Barberich
/s/ David S. Barlow Director March 31, 1998
- ------------------------------------
David S. Barlow
/s/ Rolf S. Stutz Director March 31, 1998
- ------------------------------------
Rolf S. Stutz
</TABLE>
S-1
<PAGE>
Exhibit Index
The following exhibits are filed as part of this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page No.
- ---------- ----------- --------
<S> <C>
2.1(7) Heads of Agreement, dated as of January 31, 1996,
between the Company and Novo Nordisk A/S.
3.1(2) Certificate of Incorporation of the Company. 3.2(2)
By-Laws of the Company.
4.1(2) Specimen Certificate for shares of Common Stock, $.01
par value, of the Company. 4.2(10) Registration Rights
Agreement, dated January 23, 1997, by and among the Company
and Novo Nordisk A/S.
10.1(10) 1994 Stock Option Plan, as amended.
10.2(10) 1994 Director Option Plan.
10.3(2) Form of Technology Transfer and License Agreement between
the Company and Sepracor Inc.
10.4(7) Lease Agreement for 140 Locke Drive, Marlborough, MA,
dated as of November 1995, between the Company and
First Marlboro Development Trust.
10.5(3) Purchase Agreement, dated as of September 14, 1994,
between the Company and Lydall Central, Inc./Westex
Division.
10.6(3) Letter of Intent, dated as of February 2, 1995,
between the Company and DRK-Niederschsen.
10.7(4) Amendment of Solicitation/Modification of Contract
issued by the United States Army Medical Research
Acquisition Activity effective March 15, 1995.
10.8(5)+ Purchase Agreement, dated July 28, 1995, by and
between the Company and Blood Centers of America.
10.9(5) Employment Agreement between the Company and Dr. Hans
Heiniger, dated January 10, 1994.
10.10(7)+ Purchase Agreement between the Company and American
Red Cross Biomedical Services, dated March 11, 1996.
10.11(7) Employment Agreement between the Company and Steven
H. Rouhandeh, dated February 16, 1996.
10.12(7)+ Cooperation Agreement dated February 26, 1996 between
the Company and the German Red Cross.
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page No.
- ---------- ----------- --------
<S> <C>
10.13(6)+ Purchase Agreement between the Company and Blood
Centers of America, dated September 11, 1995.
10.14(8) Asset Purchase Agreement dated as of May 2, 1996 between
the Company, HemaPharm Inc., HemaSure A/S and Novo Nordisk A/S.
10.15(10) Employment Agreement between the Company and Jeffrey
B. Davis, dated May 23, 1996. 10.16(9) Restructuring Agreement,
dated January 23, 1997, between the Company, HemaPharm
Inc., HemaSure A/S and Novo Nordisk A/S.
10.17(10) 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.
10.18(10) Master Strategic Alliance Agreement, dated June 5, 1996, by
and between the Company and American Red Cross BioMedical Services.
10.19(10) Amendment to the Company's 1994 Director Option Plan,
dated June 25, 1996. 10.20(10) Amendment to the Company's 1994
Director Option Plan, effective as of May 16, 1996. 10.21(10)
Amendment to the Company's 1994 Stock Option Plan, dated June
25, 1996. 10.22(10) Amendment to the Company's 1994 Stock Option
Plan, effective as of May 16, 1996. 10.23(10) Sublease
Agreement, between the Company and Novo Nordisk A/S, dated May
2, 1996, for the Premises (Denmark), as amended.
10.24(10) Sublease Agreement between the Company and Novo Nordisk A/S, dated
May 2, 1996, for the Warehouse (Denmark), as amended.
10.25(1) Employment Agreement between the Company and John F. McGuire, dated
April 1, 1997. 10.26(1) Settlement Agreement, dated September 1997,
by and among the Company, HemaSure AB, HemaPharm Inc., Pharmacia &
Upjohn Inc. and Pharmacia & Upjohn AB.
13.1 Selected pages of the Company's 1997 Annual Report to Stockholders
incorporated by reference into Part II of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule.
</TABLE>
I-2
<PAGE>
- ----------------------------
<TABLE>
<S> <C>
(1) Management contract or other contract or arrangement filed as an exhibit to this Form pursuant
to Items 14(a) and 14(c) of Form 10-K.
(2) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-75930).
(3) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
(4) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995.
(5) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-95540).
(6) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1994.
(7) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(9) Incorporated by reference to the Company's Current Report on Form 8-K filed with the Securities
and Exchange Commission on February 27, 1997.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
+ Confidential treatment requested as to certain portions.
</TABLE>
I-3
Exhibit 10.32
-------------
HemaSure HemaSure Inc.
140 Locke Drive
Marlborough, MA
01752 U.S.A.
Tel. 508-490-9500
Fax 508-485-6045
April 1, 1997
Mr. John F. McGuire
9 Glennon Farm Lane
Tewksbury, NJ 08833
Dear Jack:
On behalf of the Board of Directors of HemaSure, and contingent upon approval of
the Board, I am delighted to extend to you our offer for the position of
President, Chief Executive Officer, and Director of HemaSure.
In this role, you will report directly to the Board of Directors of the Company.
You will have overall responsibilities for all aspects of the Company, including
the development and execution of strategic, operating, and financing plans.
Your compensation in this role will include a base salary of $14,583 per month,
with an annual bonus of $75,000, earned upon achievement of goals mutually
endorsed by the Compensation Committee and you.
In addition, you will be granted an option to purchase 600,000 shares of
HemaSure Common Stock, "the initial grant". The exercise price of the options
will be the "low" as quoted on the Nasdaq for the week ended April 4, 1997.
These options will vest over four years in equal installments of 25% commencing
on your first anniversary of employment.
An additional 200,000 shares of incentive stock options will be granted at the
earliest possible date in fiscal 1988. The Options will begin to vest upon
achievement of certain three-year "stretch" goals (see Exhibit A, attached)
which will be mutually agreed to by you and the Committee and will vest over
four years in equal installments of 25%. The exercise price will be the lower of
the fair market price on the date of the grant or the exercise price established
for "the initial grant".
<PAGE>
Page Two
In the event of a consolidation or merger or sale of all or substantially all of
the assets of the Company, in no event will you receive less than $1.00 per
share then exercisable upon the event.
The Company agrees to cover all direct relocation costs up to a maximum of $70K,
including reasonable house-hunting trips, moving of household goods, real estate
fees, and temporary housing for the first three months. In addition, in the
event you are unable to sell your New Jersey home within a reasonable period of
time after commencing employment, HemaSure will continue to pay the mortgage on
your New Jersey home until sold after you have relocated to Massachusetts.
In the event you are terminated other than for cause, you will be paid up to the
equivalent of one year's salary plus the previous year's bonus, paid monthly
over the course of 12 months from time of termination, or until such time as you
have secured employment in an equivalent role.
Jack, I truly feel that you are uniquely qualified for this role. I am genuinely
excited about working closely together with you to create an exciting and
successful company at HemaSure.
Please acknowledge your acceptance of this position and the terms of this
agreement by signing below and returning one signed original to me.
Best regards,
/s/ Timothy J. Barberich
Timothy J. Barberich
Director
HemaSure, Inc.
I accept your offer of employment as described above.
/s/ John F. McGuire
- ----------------------- Date: 4/1/97
John F. McGuire -------------
<PAGE>
HemaSure
Exhibit A
The stretch goals shall constitute the following:
1. Successful completion of at least $5 million of financing to the Company.
OR
2. The Company becomes cash flow positive.
Whichever comes first.
/s/ Timothy J. Barberich
- ---------------------------
Timothy J. Barberich
Chairman of the Board
/s/ Rolf S. Stutz
- ---------------------------
Rolf S. Stutz
Compensation Committee
/s/ John F. McGuire
- ---------------------------
John F. McGuire
President and CEO
Exhibit 10.33
SETTLEMENT AGREEMENT
1. Parties
HemaSure Inc., 140 Locke Drive, Marlborough, MA 01752-1146, USA ("HemaSure") and
HemaSure AB, reg.no. 556307-7311, c/o Lagerlof & Leman, Box 5402, S-114 84
Stockholm, Sweden, hereinafter jointly referred to as ("HemaSure"), and
HemaPharm Inc., c/o HemaSure Inc., a Delaware corporation ("HemaPharm"), on one
side, all such parties hereinafter jointly referred to as ("HemaSure Parties"),
however, HemaPharm is not a party to the Clauses 3.1(i) and 3.5, and Pharmacia &
Upjohn Inc., Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware,
USA and Pharmacia & Upjohn AB, reg.no. 556131-9608, S-112 87 Stockholm, Sweden,
on the other side, hereinafter jointly referred to as ("Pharmacia").
2. Background
Pharmacia and HemaSure have previously negotiated an acquisition by HemaSure of
Pharmacia's plasma fractionation business. To recover damages from Pharmacia for
alleged breach of contract, misrepresentations and omissions and certain other
causes of action, HemaSure has sued Pharmacia in a law suit currently pending in
the United States District Court for the Southern District of New York.
Pharmacia has denied all of HemaSure's allegations.
The parties have now agreed to settle the above mentioned dispute according to
the terms set forth herein.
3. Terms of Settlement
3.1 Pharmacia AB agrees to pay to HemaSure Inc. (i) USD five hundred
thousand (500,000), in full and final settlement of all HemaSure's
alleged claims against Pharmacia and (ii) Pharmacia AB further agrees
<PAGE>
2
to pay to HemaSure Inc. on behalf of the HemaSure Parties (as designated by
HemaSure Inc.) USD two million (2,000,000) for the option under clause 3.2.1
below. Payment shall be made by wire transfer to HemaSure Inc.'s bank Fleet Bank
of Massachussets N.A. 75 State Street, Boston, MA 02109, United States of
America ABA # 011000138 Beneficiary Account: HemaSure Inc. 140 Locke Drive,
Marlborough, MA 01752, United States of America, Acct # 937288-2391 concurrent
with the execution and delivery hereof.
3.1.1 HemaSure Inc. and HemaPharm Inc. severally and not jointly,
respectively agree to grant Pharmacia & Upjohn AB an option to acquire
not later than on 15 September 1999 a non-exclusive license to the
intellectual property rights (collectively, the "Rights") relating to
the respective technologies held by HemaSure Inc. and HemaPharm Inc.
respectively as shown in Appendix 1, as attached hereto. Pharmacia &
Upjohn AB shall not later than on 15 September 1998 choose six (6)
technologies of the technologies listed in Appendix 1 and notify the
respective holder of the chosen six technologies. The option to acquire
a non-exclusive licence to the intellectual property rights may only be
exercised in respect of the Rights relating to three (3) of such chosen
six technologies and notice shall be given not later than on 15
September 1999. Pharmacia & Upjohn AB shall inform the respective
holder of each technology included in the six chosen technologies and,
subsequently, the respective holder of the three chosen technologies.
Such information shall be delivered in writing to the licensor in
question at the address stated above not later than on the respective
date. The respective holder of the technology shall not be bound by
this Clause 3.2.1, should Pharmacia waive the option or fail to act as
required herein, and in such event, no HemaSure Party shall have any
obligation or liability to return or repay to Pharmacia any of the
amounts received by HemaSure Inc. hereunder.
3.1.2 Any acquired licence shall be granted on the terms and conditions as
set forth in the Licence Agreement attached hereto as Appendix 2 and
the
<PAGE>
3
license shall be deemed to come into force upon the mere exercise of the option.
However, irrespective thereof the parties shall upon request execute such
licence agreement within three (3) weeks from Pharmacia exercising its option
according to article 3.2.1. The three technologies chosen as the subject matter
of the licence shall be inserted as Appendix A in separate Licence Agreements,
should the holder of the technology not be the same entity, and shall form an
integral part of such license agreement.
3.2 Provided that the payments, referred to in Clause 3.1, are made in full
to HemaSure Inc. on the date hereof, HemaSure acknowledges and ratifies
that there are no debts of money, goods or services owing from
Pharmacia or any of its subsidiaries, or its present or former
employees, to HemaSure or any of its subsidiaries, nor are there any
other unsettled obligations resulting from the negotiations and the
dispute mentioned under Clause 2. above, except for obligations which
may arise under Clause 3.2 above or otherwise hereunder.
3.3 Likewise Pharmacia acknowledges and ratifies that there are no debts of
money, goods or services owing from HemaSure or any of its
subsidiaries, or any of their present or former employees, to
Pharmacia, nor are there any other unsettled obligations resulting from
the dispute mentioned above, except for the obligations under Clauses
3.2.1 and 3.2.2.
3.4 HemaSure agrees to promptly, upon receipt of full payment under the
Settlement Agreement, withdraw the pending action against Pharmacia
with prejudice. Pharmacia and HemaSure shall bear their own legal fees,
other costs and expenses incurred during this dispute.
4. Assignment
The option granted in this Agreement may only be assigned by Pharmacia & Upjohn
AB to a third party in direct connection with the divestment of Pharmacia &
Upjohn AB's plasma fractionation and refacto business for use in that business.
<PAGE>
4
5. Confidentiality
Except as may be required by applicable law, the parties agree to keep the terms
of this settlement agreement confidential.
6. Disputes
6.1 This settlement agreement shall be governed by Swedish law.
6.2 All disputes arising out of this agreement shall be finally settled by
arbitration in accordance with the rules of the Arbitration Institute
of the Stockholm Chamber of Commerce. The arbitration proceedings shall
be held in Stockholm and be conducted in the English language.
7. Entire Understanding
This Agreement constitutes the entire understanding of the parties and may not
be amended or supplemented unless such an amendment or supplement is made in
writing and signed by the parties.
8. Effective Date
This Agreement has been made and entered into this Day of September 1997.
This Agreement has been drawn up in five copies of which the parties have taken
one each.
<PAGE>
5
PHARMACIA & UPJOHN INC. HEMASURE INC.
/s/ A. Weitzberg /s/ M. Lundius
- ------------------------- ---------------------------
PHARMACIA & UPJOHN AB HEMASURE AB
/s/ A. Weitzberg, /s/ Hans Sievertsson /s/ M. Lundius
- ------------------------- ---------------------------
HEMAPHARM INC.
expect for Clauses 3.1(i) and 3.5.
/s/ M. Lundius
- -------------------------
<PAGE>
Appendix 1
----------
HemaSure Inc. pending and Issued U.S. Patents
As of March 24, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Docket S.N. Filing Title U.S. Patent No. Issued/
No. Date Expiration
- ------------------------------------------------------------------------------------------------------------------------------------
HEMALIC1 105,340 10/07/87 Method of Inactivating HTLV-III Virus in USP 4,883,165 05/23/89
Blood 05/23/06
HEMALIC2 328,322 03/24/89 Method of Treating White Blood Cells USP 4,978,688 03/24/89
12/18/90
90-01 08/403,237 03/23/93 Method and Apparatus for Eluting Proteins in USP 5,310,688 05/10/94
Affinity Membrane Process 05/10/11
0901.003 08/148,883 11/08/93 Device and Process for Removing Free USP 5,456,835 10/10/95
Hemoglobulin from Blood 10/10/15
0901.004B 08/190,732 02/02/94 Covalent Attachment of Macromolecules to USP 5,462,867 10/31/95
Polysulfones or Polyethersulfones Modified 10/31/15
to Contain Functionalizable Chain Ends
0901.005 08/209,523 03/10/94 Filtration Device Useable for Removal of USP 5,472,605 12/05/95
Leukocytes and Other Blood Components 12/05/15
0901.006 08/215,201 03/21/94 Removal of Small Exogenous Molecules from USP 5,486,293 01/23/96
Biological Fluids 01/23/16
0901.006A 08/564,994 11/30/95 Porous Support for Removal of Small USP 5,609,763 03/11/97
Exogenous Molecules from Biological Fluids 03/11/17
0901.002B 08/347,564 01/23/95 Device and Method for Removing Leukocytes Allowed -----
and Viral Inactivating Agents from Blood 01/17/97
80903 08/368/780 01/04/95 Method for Inactivating Non-enveloped Allowed -----
Viruses Using a Viracide Potentiating Agent 11/20/96
0901.002C 08/377,741 01/23/95 Device and Method for Removing Leukocytes PENDING
and Viral Inactivating Agents from Blood
0901.002D not yet 03/28/97 Device and Method for Removing Leukocytes PENDING
and Viral Inactivating Agents from Blood
0901.005A 08/449,362 05/24/95 A Filtration Device Useable for Removal of PENDING
Leukocytes and Other Blood Components
</TABLE>
<PAGE>
(HemaSure 2
Dock List
Cont.)
<TABLE>
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Docket S.N. Filing Title U.S. Patent No. Issued/
No. Date Expiration
- ------------------------------------------------------------------------------------------------------------------------------------
0901.005B 08/661,804 06/11/96 A Filtration Device Useable for Removal of PENDING
Leukocytes and Other Blood Components
0901.005C 08/680,674 07/16/96 A Filtration Device Useable for Removal of PENDING
Leukocytes and Other Blood Components
0901.007 08/524,049 09/06/95 An In-Line Liquid Filtration Device Useable PENDING
for Blood, Blood Products, or the Like
0901-012 08/496,478 06/29/95 Inactivation of Pathogens Using PENDING
Hydroxymenthylamines
0901-012 08/4526,658 09/11/95 Inactivation of Pathogens Using PENDING
CIP Hydroxymenthylamines
0901.19A 60/034,758 01/06/97 Method for Removing Tumor Cells from PENDING
Cell-Contaminated Stem Cell Products
0901.025 not yet 03/06/97 In-Line Gravity Driven Liquid Filtration PENDING
Device useable to Filter Blood or Blood
Products
HEMA 08/735,966 10/23/96 Extra-Luminal Crossflow plasmaphoresis PENDING
102US Devices
4821-170 08/083,859 06/28/93 Membrane Affinity Apparatus and PENDING
Purification Methods related Thereto
4821-225 08/465,479 06/28/93 Membrane Affinity Apparatus and PENDING
Purification Methods related Thereto
80822 08/179,437 01/10/94 Inactivation of Viruses Present in Blood PENDING
components Using Chemically-Activated
Compounds
80822A 08/465,831 06/06/95 Inactivation of Viruses Present in Blood PENDING
components Using Chemically-Activated
Compounds
80924B 08/403,237 03/10/95 Inactivation of Pathogens in Blood or Blood PENDING
Products using Formaldehyde
</TABLE>
<PAGE>
(HemaSure 3
Dock List
Cont.)
<TABLE>
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Docket S.N. Filing Title U.S. Patent No. Issued/
No. Date Expiration
- ------------------------------------------------------------------------------------------------------------------------------------
DK 95000823 07/13/95 Purification of protein or peptide solution
(Denmark) containing polyethylene glycol
DK 95000970 09/04/95 Purification of protein or peptide solution
(Denmark) containing polyethylene glycol
PCT/96DK/00314 07/10/96 Purification of protein or peptide solution
containing polyethylene glycol
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Appendix 2
----------
LICENSE AGREEMENT
This Agreement has been made and entered into this ______ day of ______________,
199__, by and between,
I. [HemaSure Inc/HemaPharm Inc]. ____________________________________
(hereinafter referred to as the "Licensor") and
II. Pharmacia & Upjohn AB, reg.no. 556131-9608, S-112 87 Stockholm, Sweden,
(hereinafter referred to as "the Licensee").
WHEREAS:
(A) Licensor owns, possesses and controls certain intellectual property rights
relating to the technologies set forth in Appendix A attached hereto.
(B) Licensee desires to obtain the right and licence to utilize the said
intellectual property rights and Licensor desires to grant the Licensee such
right and licence.
NOW, THEREFORE, Licensor and the Licensee agree as follows:
1. Grant
The Licensor hereby grants to the Licensee the royalty free, world-wide,
non-exclusive right and license of perpetual duration to, solely within and
directly related to the Licensee's plasma fractionation and refacto business,
use, make, have made, sell, have sold products under the patents listed in
Appendix A, including all modifications and improvements thereto developed or
created by Licensor within its plasma fractionation business prior to the entry
into force of this Agreement (hereinafter collectively referred to as "the
Rights"). At Licensee's request and expense, the Licensor shall procure that
Licensee receives
<PAGE>
2
all necessary know-how and reasonable technical assistance to utilize the
licensed Rights.
2. Improvements made by the Licensor
Licensor further agrees to grant Licensee an option to acquire a non-exclusive
license for such future modifications and improvements to the Rights that may be
developed by Licensor within its plasma fractionation business before 15
September 2000. Licensor shall forthwith inform Licensee of such modifications
and improvements to the Rights and of the terms and conditions upon which such
license is offered to Licensee. Licensee shall have three (3) months to respond
to such offer, which response shall be in writing and delivered to the address
stated above. Should Licensee accept such offer, Licensee shall in such response
give Licensor a written confirmation that Licensee accepts the offer on the same
terms and conditions as otherwise are set forth in this license agreement. Such
terms and conditions shall be reasonable market conditions. Licensor shall not
be bound by this Clause 2. or by the terms and conditions offered to Licensee,
should Licensee decline the offer or fail to respond as required herein.
3. Maintenance of patents
The Licensor will during the life of this Agreement use reasonably efforts to
maintain the patents and patent applications set forth in Appendix A attached
hereto in good standing, provided that, in the sole reasonable opinion of the
Licensor, such efforts are commercially justifiable. Licensor shall offer
Licensee the opportunity to acquire such patents/patent applications at no cost
if Licensor has decided that it is not commercially justifiable for it to
maintain these rights as aforesaid.
4. Infringements by third parties
The Licensor and the Licensee shall give each other notice of any acts of
infringement by third parties involving intellectual property rights relating to
the Rights anywhere in the world of which the Licensor or the Licensee has know-
<PAGE>
3
ledge and they shall consult together in a view to determine the course of
action, if any, to be taken in such circumstances. The Licensee shall assist the
Licensor in any and all proceedings against an infringer.
5. Secrecy
Parties shall hold in confidence and not disclose to third parties and refrain
from using for any purpose other than for which it was disclosed all
confidential information disclosed by the other party under this Agreement,
provided, however, that these obligations shall not apply to information - which
at the time of receipt is in the public domain or in the possession of the
receiving party as it can demonstrate,
- - which after receipt becomes part of the public domain through no fault of
the receiving party,
- - which after receipt is obtained by the receiving party from third parties
in a legitimate way,
- - which is independently developed by the receiving party by personnel of the
receiving party who have not been exposed to the disclosing party's
information.
The secrecy obligations set forth above shall apply during the term of this
Agreement and five (5) years thereafter.
6. Taxes
All taxes of whatever kind levied in the country of the Licensee or where the
Licensee utilizes the licence shall be paid and borne by the Licensee.
7. Sublicense
Licensee may not sublicense the technology licensed under this agreement other
than to subsidiaries of the Licensee for use in a plasma fractionation and
refacto business.
<PAGE>
4
8. Assignment
The rights and licence granted to the Licensee hereunder may only be assigned by
the Licensee to any third party in direct connection with a divestment of the
Licensee's plasma fractionation and refacto business.
9. Approvals from authorities
Promptly upon execution of this Agreement the parties shall jointly apply for
the approval hereof to any authority, the approval of which is required by any
applicable law. The expenses connected with such an obligation shall be borne by
the Licensee.
10. Governing law and disputes
This Agreement shall be construed in accordance with and be governed by the laws
of Sweden.
All disputes arising out of this agreement shall be finally settled by
arbitration in accordance with the rules of the Arbitration Institute of the
Stockholm Chamber of Commerce.
------------------------
This Agreement has been drawn up in two copies of which the parties have taken
one each.
Place: Place:
Date: Date:
[HemaSure Inc./HemaPharm Inc.] Pharmacia & Upjohn AB
- ----------------------------- -----------------------------
Exhibit 13.1
SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales $ 2,357 $ 725 $ 534 $ 339 $ 475
Collaborative research and development - 54 300 50 33
-------- ------- -------- -------- -------
Total revenues 2,357 779 834 389 508
-------- ------- -------- -------- -------
Costs and expenses:
Cost of products sold 4,158 3,785 1,073 353 471
Cost of collaborative research and development - 41 283 32 21
Research and development 3,577 6,128 4,061 3,249 1,671
Selling, general and administrative 4,964 8,069 3,881 1,584 578
Restructuring charge 1,215 - - - -
-------- ------- -------- -------- -------
Total costs and expenses 13,914 18,023 9,298 5,218 2,741
-------- ------- -------- -------- -------
Loss from operations (11,557) (17,244) (8,464) (4,829) (2,233)
Other income 1,673 1,394 1,014 424 -
-------- --------- --------- -------- --------
Net loss from continuing operations (9,884) (15,850) (7,450) (4,405) (2,233)
--------- --------- --------- -------- --------
Discontinued operations:
Loss from operations of discontinued business - (9,550) - - -
Loss on disposal of discontinued business - (15,198) - - -
-------- ------- -------- -------- -------
Net loss $ (9,884) $(40,598) $(7,450) $(4,405) $(2,233)
-------- ------- -------- -------- -------
Net loss per common share - basic and diluted:
Net loss from continuing operations $ (1.22) $ (1.96) $(1.20) $(0.92) -
Loss from operations of discontinued business - (1.18) - - -
Loss on disposal of discontinued business - (1.88) - - -
-------- ------- -------- -------- -------
Net loss $ (1.22) $ (5.03) $(1.20) $(0.92) -
-------- ------- -------- -------- -------
Weighted average number of shares of common stock
outstanding - basic and diluted: 8,127 8,069 6,205 4,767 -
-------- ------- -------- -------- -------
BALANCE SHEET DATA
(In thousands)
Cash and marketable securities $ 8,156 $16,724 $47,841 $11,704 $ -
Working capital 6,071 14,844 46,905 11,261 392
Total assets 10,607 20,560 50,212 13,048 983
Capital lease obligations--long term 289 525 286 52 -
Convertible subordinated note payable--long term 8,687 8,687 - - -
Stockholders' equity (deficit) (1,467) 7,929 48,002 11,949 983
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was established in December 1993 as a wholly-owned
subsidiary of Sepracor Inc. ("Sepracor"). Effective as of January 1, 1994, in
exchange for 3,000,000 shares of common stock, $.01 par value, of the Company
(the "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.
In the second quarter of 1994, the Company completed the initial public
offering of its Common Stock resulting in net proceeds to the Company of
approximately $15 million. In September 1995, the Company completed a follow-on
public offering of its Common Stock. The net proceeds from that public offering
were approximately $43 million. As of January 31, 1998, Sepracor owned
approximately 33% of the outstanding Common Stock of the Company.
Substantially all of the Company's revenues through 1995 were
attributable to sales of non- blood-related membrane filter products to
Sepracor. Revenues from these products were $13,000 and $517,000 in 1996 and
1995, respectively. 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. All of the
Company's planned blood-related products are in the research and development
stage, and certain of these products may require preclinical and clinical
testing prior to submission of any regulatory application for commercial use.
The Company's success will depend on development and commercial acceptance of
these blood- related products and its ability to raise capital through strategic
partnerships, public or private equity and/or debt financing.
Through 1995, the Company's operations were located in facilities
subleased from Sepracor for which the Company was allocated and charged a
portion of Sepracor's rent and operating costs based upon the amount of space it
occupied. During this period, Sepracor also provided support services, including
laboratory support, data processing, accounting and finance, legal and other
administrative functions. Sepracor allocated a portion of the costs of these
activities to the Company based upon its pro rata usage of such services. The
Company signed a long-term lease with a third party for its manufacturing,
laboratory, research and office space, which took effect in February 1996.
Commencing in 1996, the Company provided the necessary data processing,
accounting and finance and other support services through its own employees or
outside contractors engaged directly by the Company.
In May 1996, the Company acquired (the "Denmark Acquisition") the
plasma product unit of Novo Nordisk A/S, a Danish company ("Novo Nordisk"), and
in January 1997, entered into a Restructuring Agreement with Novo Nordisk with
respect to the indebtedness incurred by the Company in connection with the
Denmark Acquisition. In February 1997, the Company determined to discontinue the
development and operation of its Danish plasma business due in large part to
Pharmacia & Upjohn's ("P&U") wrongful termination of the Company's planned
acquisition of P&U's plasma business in Sweden. The Company recorded a one-time
charge as a result of its exit from the plasma business of $15,200,000 in 1996.
See "-- Discontinued Business" and "-- Liquidity and Capital Resources."
Results of Continuing Operations
Revenues were $2,357,000 in 1997, $779,000 in 1996 and $834,000 in
1995. All of the Company's revenues in 1997 were from the sale of the LeukoNet
System. Revenues from product sales to Sepracor, a related party, as a
percentage of total revenues were 2% in 1996 and 57% in 1995 and represent the
sale of membrane filter products. Product sales to Sepracor were recorded at
prices based on a pricing agreement between the Company and Sepracor. Under this
pricing agreement, product sales to Sepracor for Sepracor's use were at cost
while product sales to Sepracor for subsequent sale or lease to third parties
were at cost plus a 25% margin. Revenues in 1996 include $54,000 related to the
Company's Phase II SBIR program with the United States Department of the Army.
In 1997, 1996 and 1995, one customer represented 86%, 83% and 36% of total
revenues, respectively.
The cost of products sold was $4,158,000 in 1997, $3,785,000 in 1996
and $1,073,000 in 1995. Cost of products sold exceeded product sales in all
periods due to the start-up costs of new product introduction and the high costs
associated with low volume production, particularly in 1996, the first full year
of production of its LeukoNet System. Cost of products sold in 1997 includes a
charge of approximately $800,000 related to the Company's determination to
discontinue manufacturing the LeukoNet System and to focus exclusively on its
next-generation red cell filter.
The cost of collaborative research and development was $41,000 in 1996
and $283,000 in 1995. The decrease in 1996 over 1995 reflects the completion in
the first quarter of 1996 of the Company's obligations under Phase II of the
SBIR program.
Research and development expenses were $3,577,000 in 1997, $6,128,000
in 1996 and $4,061,000 in 1995. The decrease in 1997 is primarily attributable
to a decrease in expenses associated with the Company's SteriPath
10
<PAGE>
Blood Pathogen Inactivation System which program was discontinued in May 1997.
The increase in 1996 over the amounts expended in 1995 is primarily attributable
to a higher level of spending associated with development of the Company's
SteriPath Blood Pathogen Inactivation System and preparation for
commercialization of the Company's LeukoNet System.
Selling, general and administrative expenses were $4,964,000 in 1997,
$8,069,000 in 1996 and $3,881,000 in 1995. The 1996 expense includes expenses
for personnel, consultants and travel in connection with the Company's efforts
to expand into other blood-related businesses and a one-time charge of
approximately $1,500,000 in connection with the Company's efforts to acquire
P&U's plasma business. See "--Discontinued Business." These costs did not recur
in 1997 and are the primary reason for the decrease in 1997 from 1996. The
increase in 1996 over 1995 is primarily attributable to expenses associated with
preparation for commercialization of the LeukoNet System, increased costs
related to the hiring of management with specific industry experience and
administrative costs associated with being a public company. Sales and marketing
costs may increase in future periods from current levels as the Company
continues its efforts to market and launch sales of its blood filtration
products.
In April 1997, the Company determined to focus management resources on
its core business of blood filtration technologies, consistent with its earlier
decision to exit the plasma business. In connection therewith, four officers
were relieved of their duties. The Company incurred a one-time restructuring
charge of $1,215,000 in 1997 for severance and related charges in connection
with this action. At December 31, 1997 there was a balance of $437,000 remaining
to be paid related to this charge.
Interest income in 1997, 1996 and 1995 primarily represents interest
earned on available cash and marketable securities balances during those
periods.
The increase in interest expense in 1997 compared to 1996 and 1995 is
primarily attributable to a convertible subordinated note payable that was not
in existence during either 1996 or 1995.
In September 1997, the Company reached an out-of-court settlement with
P&U arising out of the alleged breach by P&U of an agreement to sell to the
Company P&U's plasma pharmaceutical business located in Stockholm, Sweden. The
terms of settlement included a cash payment to the Company and the granting of
an option to P&U to license, on a non-exclusive basis, certain intellectual
property held by the Company and its subsidiaries relating to plasma
fractionation. The cash payment was recognized as other income in 1997 and
represents the majority of the amount in other income for that year.
Discontinued Business
In May 1996, the Company consummated the Denmark Acquisition. The
purchase price for the transaction was comprised of a combination of Promissory
Notes, Convertible Subordinated Notes (which would convert to common stock of
the Company or a subsidiary of the Company) and additional consideration payable
in 1998 in cash or Common Stock, at the option of the Company, which would not
be paid in certain events.
The loss from operations of discontinued business of $9,550,000
reflects the loss from the date of the acquisition through December 31, 1996.
During this eight-month period, this business recorded revenues from the sale of
plasma products of $8,200,000 and cost of products sold of $13,400,000. The cost
of products sold includes a reserve for the write-down of inventories to the
lower of cost or market of approximately $2,500,000 and loss on the sale of raw
materials inventories of approximately $800,000. Operating costs of this
business during this period were approximately $4,000,000.
In January 1997, the Company and Novo Nordisk entered into a
Restructuring Agreement of the debt related to the Denmark Acquisition. Pursuant
to the Restructuring Agreement, approximately $23,000,000 of indebtedness owed
to Novo Nordisk was restructured by way of issuance by the Company to Novo
Nordisk of a 12% convertible subordinated promissory note in the principal
amount of $11,700,000, which was due and payable on December 31, 2001, with
interest payable quarterly (provided that up to $3,000,000 would be forgiven in
certain circumstances). Approximately $8,500,000 of the reduction of such
indebtedness was forgiven. The remainder of the reduction represented a net
amount due from Novo Nordisk to the Company related to various service
arrangements between the two companies.
On February 20, 1997, the Company's Board of Directors voted to
discontinue the development and operation of its Danish plasma business due in
large part to P&U's wrongful termination of the Company's planned acquisition of
P&U's plasma business in Sweden, which was part of the Company's initial
strategy to enter the plasma business, as well as other factors. In connection
with this determination, the Company recorded a one-time charge of $15,200,000
in 1996 as a result of its exit from the plasma business. The loss reflected
management's assessment of the most probable outcome from this decision, is net
of the $8,500,000 forgiveness of indebtedness and assumed the $3,000,000
forgiveness contingency. In December 1997, the Company notified the holder of
the note of its intent to convert in January 1998, $8,687,000 of debt, which it
believes was the entire amount outstanding as of the date of conversion. On
January 6, 1998, the Company converted the note, pursuant to its terms, into
shares of Common Stock at a conversion price of $10.50 per share, or 827,375
shares. The holder of the note has contested the conversion of the note,
including the forgiveness of the $3,000,000 amount. The Company believes that
such claims are without merit.
11
<PAGE>
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 requires the reporting and display, in a full set of
general purpose financial statements, of all items that are required to be
recognized under accounting standards as components of comprehensive income.
SFAS 130 is effective for statements issued for periods beginning after December
15, 1997 and reclassification of financial statements for earlier periods for
comparative purposes is required. Management believes that the adoption of SFAS
130 will not have a material impact on the Company's financial statements.
Litigation
The Company is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged
that the Company's manufacture, use and/or sale of the LeukoNet product
infringes upon three patents held by Pall.
On October 14, 1996, in connection with the first action concerning
U.S. Patent No. 5,451,321 (the "'321 patent"), the Company filed a motion for
summary judgment of noninfringement. Pall filed a cross motion for summary
judgment of infringement at the same time.
In October 1997, the Eastern District of New York granted in part
Pall's summary judgment motion relating to the '321 patent. The Company has
agreed to terminate the manufacture, use, sale and offer for sale of the filter
subject to the court's order. The court has not yet ruled on the validity of
Pall's '321 patent claims, which the Company has asserted are invalid and
unenforceable. No date has been set for the proceeding to determine the validity
and enforceability of Pall's '321 patent claims.
With respect to the second action concerning U.S. Patent Nos. 4,340,479
(the "'479 patent") and 4,952,572 (the "'572 patent"), the Company has answered
the complaint stating that it does not infringe any claim of the asserted
patents. Further, the Company has counterclaimed for declaratory judgment of
invalidity, noninfringement and unenforceability of the '572 patent, and a
declaratory judgment of noninfringement of the '479 patent, as a result of a
license. Pall has attempted to withdraw the '479 patent from the second action.
The Company believes, based on advice of its patent counsel, that a
properly informed court should conclude that the manufacture, use and/or sale by
the Company or its customers of the present LeukoNet product does not infringe
any valid enforceable claim of the three asserted 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 could have a material
adverse effect on the Company's financial condition and future business and
operations.
On November 1, 1996, the Company filed a complaint in the Supreme
Court, State of New York, County of New York, against P&U. In its complaint, the
Company sought damages arising out of the alleged breach by P&U of an agreement
to sell to the Company P&U's plasma pharmaceutical business located in
Stockholm, Sweden. In September 1997, the Company reached an out-of-court
settlement with P&U. The terms of settlement included a cash payment to the
Company and the granting of an option to P&U to license, on a non-exclusive
basis, certain intellectual property held by the Company and its subsidiaries
relating to plasma fractionation. The cash payment was recognized as other
income in 1997.
Liquidity and Capital Resources
The net decrease in cash and cash equivalents in 1997 was $4,081,000.
This net decrease is attributable to net cash used in operating activities of
$8,391,000 offset in part by net cash provided by investing activities of
$4,265,000.
Net cash used in operating activities is primarily attributable to the
net loss of $9,884,000, an increase in accounts receivable of $153,000 and a
reduction in accounts payable of $736,000 offset in part by a decrease in
inventories of $218,000, impairment of assets of $475,000 in conjunction with
the determination to discontinue manufacture of the LeukoNet System,
depreciation and amortization of $859,000, an increase in accrued expenses of
$273,000, and the receipt of $500,000 related to the net assets of discontinued
business. Net cash provided from investing activities relates to
available-for-sale marketable securities investing activities of $4,483,000
offset in part by additions to property and equipment of $220,000.
The Company believes, based on its current operating plan, that, in
addition to its available cash balances, it will need additional financing in
order to fund the Company's operations beyond the first half of 1998. Possible
sources of capital include strategic partnerships, public or private equity
and/or debt financing, all of which the Company is pursuing. No assurance can be
given, however, that the Company will be able to obtain additional financing on
terms acceptable to the Company, if at all.
In January 1997, the Company entered into the Restructuring Agreement
with respect to the indebtedness incurred by the Company in connection with the
Denmark Acquisition. Pursuant to the Restructuring Agreement, approximately
$23,000,000 of indebtedness owed to Novo Nordisk was restructured by way of
issuance by the Company to Novo Nordisk of a 12% convertible subordinated
promissory note in the principal amount of approximately $11,700,000, which was
due and payable on December 31, 2001, with interest payable quarterly (provided
that up to approximately $3,000,000 would be forgiven in certain circumstances).
Approximately $8,500,000 of the reduction of such indebtedness was forgiven;
such forgiveness is reflected in the 1996 Statement of Operations as a reduction
of the loss on disposal of the discontinued plasma business. The remainder of
the reduction represented a net amount due from Novo Nordisk
12
<PAGE>
to the Company related to various service arrangements between the two
companies. The amount included in the balance sheet at December 31, 1997 and
1996 includes the effect of the Restructuring Agreement net of the $3,000,000
contingency amount to reflect the most probable result of the Company's decision
to exit the plasma business. All amounts outstanding under such note were
convertible by either party, commencing January 1998, into shares of Common
Stock at a conversion price equal to $10.50 per share. In December 1997, the
Company notified the holder of the note of its intent to convert in January
1998, $8,687,000 of debt, which it believes was the entire amount outstanding as
of the date of conversion. On January 6, 1998, the Company converted the note,
pursuant to its terms, into shares of Common Stock at a conversion price of
$10.50 per share, or 827,375 shares. The holder of the note has contested the
conversion of the note, including the forgiveness of the $3,000,000 amount. The
Company believes that such claims are without merit.
In 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, 1997, there was a balance of $109,000
remaining to be paid on this note.
In April 1997, the Company determined to focus management resources on
its core business of blood filtration technologies, consistent with its earlier
decision to exit the plasma business. In connection therewith, four officers
were relieved of their duties. In connection therewith, the Company incurred a
one-time charge of $1,215,000 in 1997 related to these actions. At December 31,
1997 there was a balance of $437,000 remaining to be paid related to this
charge.
In June 1994, the Company executed an agreement with a third party to
license certain technology. Pursuant to the terms of the agreement, the Company
committed to paying license and consulting fees of $1,200,000 payable in four
equal annual installments, and royalties for commercial sales of any product
incorporating this technology. As of December 31, 1997, all license and
consulting fees pursuant to that agreement have been paid and charged to
expense.
In 1994, in collaboration with Sepracor and certain of its other
subsidiaries, the Company executed an equipment leasing arrangement that
provided for a total of $2,000,000 to Sepracor and certain of its other
subsidiaries for purposes of financing capital equipment. Under certain
circumstances, Sepracor is the guarantor of any amounts outstanding under this
financing arrangement. In October 1996, the Company executed a replacement
leasing arrangement for the benefit of the Company only with the same leasing
company providing $1,100,000 of equipment lease financing. This arrangement
terminated in March 1997. All amounts outstanding under the 1994 leasing
facility are being repaid under the original terms of that leasing arrangement.
There was $556,000 outstanding under all leasing arrangements as of December 31,
1997.
Future Operating Results
Certain of the information contained in this Annual Report, including
information with respect to the development and commercialization of the
Company's products under development and the Company's other plans and strategy
for its business, consists of forward-looking statements. Important factors that
could cause actual results to differ materially from the forward-looking
statements include the following:
The Company believes that the performance of its blood-related products
will be competitive with products sold by other vendors of blood filtration and
transfusion products and may encounter intense competition in the sale of such
products from biotechnology, pharmaceutical and hospital supply companies. In
the Leukoreduction field, several of the Company's competitors have
substantially greater resources, manufacturing and marketing capabilities,
research and production staffs, and production facilities than the Company.
Moreover, some of the Company's competitors are significantly larger than the
Company, have greater experience in preclinical testing, human clinical trials
and other regulatory approval procedures. In addition, many of the Company's
competitors have access to greater capital and other resources, may have
management personnel with more experience than that of the Company and may have
other advantages over the Company in conducting certain businesses and providing
certain services. There can be no assurance that the Company will be able to
compete effectively against such companies. Pall, a principal competitor of the
Company, has filed two complaints against the Company alleging that the
manufacture, use and sale of the Company's LeukoNet System infringes certain
patents held by Pall.
The customers for the Company's potential products are a limited number
of national and regional blood centers, which collect, store and distribute
blood and blood products. In the United States, the American Red Cross collects
and distributes approximately 45% of the nation's supply of blood products.
Other major blood centers include the New York Blood Center, Blood Centers of
America and United Blood Services, each of which distributes 6% to 12% of the
nation's supply of blood and blood products. In Europe, various national blood
transfusion services or Red Cross organizations collect, store and distribute
virtually all of their respective nation's blood and blood products supply. The
Company's principal competitors have long-standing and, in some cases, exclusive
relationships (including long-term supply contracts) with these blood centers
and there can be no assurance that the Company will be successful in marketing
its products to these centers.
In June 1995, the Company received clearance from the FDA for the
LeukoNet System. Fiscal 1996 was the first full year of production of the
LeukoNet System and all of the Company's revenues in 1997 were from such
product. In February 1998, the Company determined to discontinue manufacturing
the LeukoNet System and
13
<PAGE>
focus on the completion of development and market introduction of its
next-generation red cell filtration product. There can be no assurance however
that the Company will successfully complete the development and
commercialization of this product, or that such product will be accepted by
potential customers in the marketplace.
All of the Company's planned blood filtration and transfusion products
are in the research and development stage. The Company will be required to
conduct significant research, development, testing and regulatory compliance
activities on these products that, together with anticipated general and
administrative expenses, are expected to result in substantial losses through
1998. The Company's ability to achieve a profitable level of operations will
depend on successfully completing development, obtaining regulatory approvals
and achieving market acceptance of its blood-related products.
Some or all of the Company's blood filtration and transfusion products
may require preclinical and clinical testing prior to submission of any
regulatory application for commercial use. The Company expects to receive
regulatory approval for its next-generation red cell filter before the end of
1998. The Company does not expect regulatory approval for commercial sale in the
United States of any of its other planned products before the end of 1998.
Until relatively recently, computer designs that used microprocessors
had consistently abbreviated dates by eliminating the first two digits of the
year under the assumption that these two digits would always be 19. As the year
2000 approaches, such systems will be unable to accurately process certain
date-based information. This problem is commonly referred to as "the Year 2000
Issue." Management is in the process of assessing the implications of the Year
2000 Issue on its information and other systems, and those of its vendors and
other relationships. The Company currently believes that with modifications to
existing software and/or conversions to new software, the Year 2000 Issue will
not have a significant adverse effect on its information and other systems or on
its business, nor will it result in a significant commitment of resources to
resolve potential problems associated with this event.
The Company believes, based on its current operating plan, that, in
addition to its available cash balances, it will need additional financing in
order to fund the Company's operations beyond the first half of 1998. Possible
sources of capital include strategic partnerships, public or private equity
and/or debt financing, all of which the Company is pursuing. No assurance can be
given, however, that the Company will be able to obtain additional financing on
terms acceptable to the Company, if at all. Should the Company fail to obtain
any such financing, or to obtain such financing on terms favorable to the
Company, the Company may be unable to continue or complete the development of
its proposed products and/or market such products successfully, or to continue
its current operations as presently conducted, if at all. The Company's cash
requirements may vary materially from those now planned because of factors such
as successful development of products, results of product testing, approval
process at the FDA and similar foreign agencies, commercial acceptance of its
products, patent developments and the introduction of competitive products.
Because of the foregoing factors, past financial results should not be
relied upon as an indication of future performance. The Company believes that
period-to-period comparisons of its financial results to date are not
necessarily meaningful and expects that its results of operations may fluctuate
from period to period in the future. See "-- Overview."
14
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of HemaSure Inc.
We have audited the accompanying consolidated balance sheets of
HemaSure Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
HemaSure Inc. as of December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
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 suffered recurring losses from operations
and has a stockholders' deficit that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note A. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 4, 1998
15
<PAGE>
HemaSure Inc.
Consolidated Balance Sheets
December 31,
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note C) $ 1,274 $ 5,355
Marketable securities (Note C) 6,882 11,369
Accounts receivable (Note E) 436 283
Inventories (Note F) 158 376
Net assets of discontinued business (Note B) - 500
Prepaid expenses and other current assets 347 380
-------- -------
Total current assets 9,097 18,263
Property and equipment, net (Note G) 1,478 2,245
Other assets 32 52
-------- -------
Total assets $ 10,607 $ 20,560
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 876 $ 1,612
Accrued expenses (Note H) 1,846 1,573
Current portion of note payable 37 -
Current portion of capital lease obligations (Note H) 267 234
--------- ------
Total current liabilities 3,026 3,419
Capital lease obligations (Note H) 289 525
Note payable 72 -
Convertible subordinated note payable (Note I) 8,687 8,687
-------- ------
Total liabilities 12,074 12,631
------- ------
Commitments and contingencies (Notes H and I)
Stockholders' equity (deficit): (Note K)
Preferred stock, $0.01 par value, 1,000 shares
authorized, none issued and outstanding in 1997 and 1996
Common stock, $0.01 par value, authorized 20,000 shares
in 1997 and 1996, issued and outstanding 8,164 shares
in 1997 and 8,098 shares in 1996 82 81
Additional paid-in capital 60,878 60,702
Unearned compensation (89) (398)
Unrealized holding loss of available-for-sale marketable securities (1) (3)
Accumulated deficit (62,337) (52,453)
-------- --------
Total stockholders' equity (deficit) (1,467) 7,929
-------- -------
Total liabilities and stockholders' equity (deficit) $10,607 $20,560
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
16
<PAGE>
HemaSure Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share amounts) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product sales $ 2,357 $ 712 $ 20
Product sales to related parties (Note C) - 13 514
Collaborative research and development (Note C) - 54 300
--------- ------- ------
Total revenues 2,357 779 834
--------- --------- --------
Costs and expenses:
Cost of products sold 4,158 3,772 662
Cost of products sold to related parties (Note C) - 13 411
Cost of collaborative research and development - 41 283
Research and development 3,577 6,128 4,061
Selling, general and administrative 4,964 8,069 3,881
Restructuring charge 1,215 - -
--------- --------- --------
Total costs and expenses 13,914 18,023 9,298
--------- --------- --------
Loss from operations (11,557) (17,244) (8,464)
Other income (expense):
Interest income 577 1,679 1,052
Interest expense (1,401) (105) (38)
Other income (expense) 2,497 (180) -
--------- --------- --------
Net loss from continuing operations (9,884) (15,850) (7,450)
--------- --------- --------
Discontinued operations: (Note B)
Loss from operations of discontinued business - (9,550) -
Loss on disposal of discontinued business - (15,198) -
--------- --------- --------
Net loss $ (9,884) $(40,598) $(7,450)
========= ========= ========
Net loss per share - basic and diluted:
Net loss from continuing operations $ (1.22) $ (1.96) $ (1.20)
Loss from operations of discontinued business - (1.18) -
Loss on disposal of discontinued business - (1.88) -
--------- --------- --------
Net loss $ (1.22) $ (5.03) $ (1.20)
========= ========= ========
Weighted average number of shares of common stock
outstanding - basic and diluted 8,127 8,069 6,205
</TABLE>
The accompanying notes are an integral part of the financial statements.
17
<PAGE>
HemaSure Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Year ended
December 31, 1997, 1996
and 1995 (In thousands)
<TABLE>
<CAPTION>
Common Additional
Stock Paid-in Unearned Accumulated
Shares Amount Capital Compensation Other Deficit
-------- ------ --------- ------------ ----- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 5,501 $ 55 $17,093 $ (794) - $ (4,405)
Issuance of common stock to
employees under stock plans 30 95
Unearned compensation amortization 199
Issuance of common stock in follow-on
offering (net of expenses totaling
$3,041) 2,500 25 43,184
Net loss (7,450)
-------- --------- -------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 8,031 80 60,372 (595) (11,855)
Issuance of common stock to employees
under stock plans 67 1 330
Unearned compensation amortization 197
Other $ (3)
Net loss (40,598)
-------- --------- -------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1996 8,098 81 60,702 (398) (3) (52,453)
Issuance of common stock to employees
under stock plans 66 1 176
Unearned compensation amortization 309
Other 2
Net loss (9,884)
-------- --------- -------- ---------- ---------- -----------
8,164 $ 82 $60,878 $ (89) $ (1) $ (62,337)
======== ========= ======== ========== ========== ===========
BALANCE AT DECEMBER 31, 1997
</TABLE>
Total
Common Stockholders'
Stock Equity
Shares (Deficit)
-------- ---------
BALANCE AT DECEMBER 31, 1994 5,501 $ 11,949
Issuance of common stock to
employees under stock plans 30 95
Unearned compensation amortization 199
Issuance of common stock in follow-on
offering (net of expenses totaling
$3,041) 2,500 43,209
Net loss (7,450)
-------- -----------
BALANCE AT DECEMBER 31, 1995 8,031 48,002
Issuance of common stock to employees
under stock plans 67 331
Unearned compensation amortization 197
Other (3)
Net loss (40,598)
-------- -----------
BALANCE AT DECEMBER 31, 1996 8,098 7,929
Issuance of common stock to employees
under stock plans 66 177
Unearned compensation amortization 309
Other 2
Net loss (9,884)
-------- -----------
BALANCE AT DECEMBER 31, 1997 8,164 $ (1,467)
======== ===========
The accompanying notes are an integral part of the financial statements.
18
<PAGE>
HemaSure Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,884) $(40,598) $(7,450)
Adjustments to reconcile net loss to net
cash used in operating activities:
Discontinued business - 24,748 -
Impairment of assets 475 - -
Depreciation and amortization 859 819 468
Accretion of marketable securities discount 4 (24) (173)
Loss on disposal of equipment - 176 -
Changes in operating assets and liabilities:
Net assets of discontinued business 500 (500) -
Accounts receivable (153) (201) (72)
Inventories 218 380 (434)
Prepaid expenses 33 (174) 66
Accounts payable (736) 317 591
Accrued expenses 273 1,051 200
(Increase) decrease in other assets 20 45 (18)
--------- --------- -------
Net cash used in continuing operations (8,391) (13,961) (6,822)
Net cash used in discontinued business - (11,969) -
--------- --------- -------
Net cash used in operating activities (8,391) (25,930) (6,822)
--------- --------- -------
Cash flows from investing activities:
Purchases of marketable securities (99,752) (219,933) (28,140)
Maturities of marketable securities 104,235 233,401 3,500
Acquisition of business net of cash acquired - (4,092) -
Unrealized holding loss of available for sale
marketable securities 2 (3) -
Additions to property and equipment (220) (1,213) (516)
--------- --------- -------
Net cash provided by (used in) investing activities 4,265 8,160 (25,156)
--------- --------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock 177 331 43,304
Borrowing from notes payable arrangements 140 - -
Repayment of notes payable (31) - -
Repayments of capital lease obligations (241) (178) (58)
--------- --------- -------
Net cash provided by financing activities 45 153 43,246
--------- --------- -------
Net (decrease) increase in cash and cash equivalents (4,081) (17,617) 11,268
Cash and cash equivalents at beginning of period 5,355 22,972 11,704
--------- --------- -------
Cash and cash equivalents at end of period $ 1,274 $ 5,355 $22,972
========= ======== =======
Supplemental schedule of cash flow information:
Cash paid during the year for interest $ 1,072 $ 87 $ 38
Noncash investing and financing activities:
Acquisition of fixed assets financed by capital leases $ 38 $ 544 $ 378
Reconciliation of assets acquired and liabilities assumed:
Fair value of assets acquired $ 27,092
Liabilities assumed 23,000
--------
Cash paid for acquisition $ 4,092
</TABLE>
The accompanying notes are an integral part of the financial statements.
19
<PAGE>
HemaSure Inc.
Notes to Consolidated Financial Statements
A. The Company
Nature of the Business
HemaSure Inc. (the "Company") is utilizing its proprietary filtration
technologies to develop products to increase the safety of donated blood and to
improve certain blood transfusion procedures. The Company's currently-marketed
blood filtration products are designed for use by blood centers and hospital
blood banks worldwide. From the Company's inception through the first quarter of
fiscal 1996, HemaSure has 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. The Company's collaborative
research and development efforts in 1995 and 1996 were with the United States
Department of the Army for blood filtration-related practices.
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 United States Food and Drug Administration and similar foreign regulatory
authorities and agencies.
Since its inception, the Company has suffered recurring losses from
operations, accumulated deficits and at December 31, 1997 had a net capital
deficiency. These conditions raise substantial doubt about its ability to
continue as a going concern. The ultimate success of the Company is dependent
upon its ability to raise capital through strategic partnerships, public or
private equity and/or debt financing and the proposed introduction of a new
product into the market. However, the Company's capital requirements may change
depending upon numerous factors, including compliance with regulatory
requirements, the time necessary to commercialize the Company's proposed new
product and the demand for the Company's proposed product. No assurance can be
given that the Company will be able to obtain additional financing on terms
acceptable to the Company, if at all, or that the Company will successfully
develop or effect the new product introduction into the market. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
In view of the Company's current financial condition, the Company plans to
manage aggressively its working capital and expenses while pursuing product
sales opportunities, as well as strategic or other business relationships.
Certain prior year amounts have been reclassified to be consistent with the
current year presentation.
B. Discontinued Business
In May 1996, the Company acquired the plasma product unit of Novo Nordisk
A/S, a Denmark corporation ("Novo Nordisk"), through its Danish subsidiary,
HemaSure A/S (the "Denmark Acquisition"). The purchase price for the transaction
was comprised of a combination of Promissory Notes, Convertible Subordinated
Notes (which would convert to common stock of the Company or a subsidiary of the
Company) and additional consideration payable in 1998 in cash or stock, at the
option of the Company, which would not be paid in certain events. The
acquisition was accounted for under the purchase method of accounting. Results
of operations performed for the Denmark Acquisition have not been presented
because the subsequent decision to discontinue the business (as described below)
eliminates any comparable continuing impact on the Company's financial
statements.
The loss from operations of discontinued business of $9,550,000 in 1996
reflects the loss from the date of the acquisition. During this eight-month
period, this business recorded revenues from the sale of plasma products of
$8,200,000 and cost of products sold of $13,400,000. The cost of products sold
includes a reserve for the write-down of inventories to the lower of cost or
market of approximately $2,500,000 and loss on the sale of raw materials
inventories of approximately $800,000. Operating costs of this business during
this period were approximately $4,000,000.
In January 1997, the Company and Novo Nordisk entered into a Restructuring
Agreement of the debt related to the Denmark Acquisition. Pursuant to the
Restructuring Agreement, approximately $23,000,000 of indebtedness owed to Novo
Nordisk was restructured by way of issuance by the Company to Novo Nordisk of a
12% convertible subordinated promissory note in the principal amount of
approximately $11,700,000, which was due and payable on December 31, 2001, with
interest payable quarterly (provided that up to approximately $3,000,000 would
be forgiven in certain circumstances). Approximately $8,500,000 of the reduction
of such indebtedness was forgiven; such forgiveness was reflected in the 1996
Statement of Operations as a reduction of the loss on disposal of the
discontinued plasma business. The remainder of the reduction represented a net
amount due from Novo Nordisk to the Company related to various service
arrangements between the two companies. See Note I (Convertible Subordinated
Note Payable) below.
20
<PAGE>
On February 20, 1997, the Company's Board of Directors voted to discontinue
the development and operation of its Danish plasma business due in large part to
Pharmacia & Upjohn's ("P&U") wrongful termination of the Company's planned
acquisition of P&U's plasma business in Sweden, which was part of the Company's
initial strategy to enter the plasma business, as well as other factors. In
connection with its exit from the plasma business, the Company recorded a
one-time charge of $15,200,000 in 1996. The loss reflected management's
assessment of the most probable outcome from this decision and is net of the
$8,500,000 forgiveness of indebtedness and assumed the $3,000,000 forgiveness
contingency.
In April 1997, the Company determined to focus management resources on its
core business of blood filtration technologies, consistent with its earlier
decision to exit the plasma business. In connection therewith, four officers
were relieved of their duties. The Company incurred a one-time restructuring
charge of $1,215,000 in 1997 for severance and related charges in connection
with this determination. At December 31, 1997 there was a balance of $437,000
remaining to be paid related to this charge.
C. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all demand deposits, money market instruments and
repurchase agreements to be cash and cash equivalents. Cash equivalents of
$1,025,000 and $5,407,000 at December 31, 1997 and 1996, respectively, consist
of repurchase agreements with a commercial bank and money market instruments
with a financial management institution. 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, 1997 and
1996, all marketable securities have been classified as available for sale and
are carried at fair value, with the unrealized gains and losses, if any,
reported as a separate component of stockholders' equity.
The amortized cost of debt securities classified as available for sale 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 following is a summary of the fair value of available for sale
marketable securities at December 31:
1997 1996
---- ----
U.S. Government Agency Obligations $6,882,000 $11,369,000
The unrealized holding loss of available for sale marketable securities
approximated $1,200 as of December 31, 1997 and $2,600 as of December 31, 1996.
All debt securities available for sale at December 31, 1997 and 1996 are
due in three months or less.
The Company's policy is to diversify the investment portfolio to reduce
risk to principal from credit and investment sector risk. At December 31, 1997
and 1996, 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 are removed from
the accounts and any resulting gain or loss is included in the results of
operations. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. All laboratory, manufacturing and office
equipment have estimated useful lives of three to 10 years.
Revenue Recognition
Revenues from product sales are recognized when goods are shipped. Revenues
for research and development contracts are recorded under the percentage of
completion method wherein costs and estimated gross margin are recorded as
revenue as the work is performed.
21
<PAGE>
Product Sales to Related Parties
Revenues for product sales to Sepracor are recorded at prices based on a
pricing agreement between the Company and Sepracor. Under this agreement,
product sales to Sepracor for Sepracor's use are at cost while product sales to
Sepracor for subsequent sale or lease to third parties are at cost plus a 25%
margin. Revenues for product sales to Sepracor subsidiaries are recorded at
prices that reflect transactions made on an arm's length basis.
Research and Development
Research and development costs are expensed in the year incurred.
Net Loss Per Share
Net loss per common share is based on the weighted average number of shares
of common stock outstanding during each period. Common share equivalents have
not been included because the effect would be antidilutive. The common share
equivalents of the Company consist of stock options (see Note K) and a
convertible subordinated note payable (see Note I).
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
was effective for financial statements issued for periods ending after December
15, 1997. SFAS 128 established standards for computing and presenting earnings
per share ("EPS"). This statement simplifies the standards for computing
earnings per share previously found in Accounting Principles Board Opinion No.
15, "Earnings Per Share," and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. This statement requires restatement of all prior period EPS data
presented. The Company adopted SFAS 128 in December of 1997, which did not have
a significant effect on its financial statements for the current or prior
periods.
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.
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, 1997 and 1996
and the reported amounts of revenues and expenses during the years ended
December 31, 1997, 1996 and 1995. Actual results could differ from those
estimates.
Other
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 requires the reporting and display, in a full set of general
purpose financial statements, of all items that are required to be recognized
under accounting standards as components of comprehensive income. SFAS 130 is
effective for statements issued for periods beginning after December 15, 1997
and reclassification of financial statements for earlier periods for comparative
purposes is required. Management believes that the adoption of SFAS 130 will not
have a material impact on the Company's financial statements.
D. Allocations from and Agreements with Sepracor
The Company was formerly a wholly-owned subsidiary of Sepracor. As of
January 31, 1998, Sepracor owned 33% of the common stock, $.01 par value, of the
Company ("Common Stock"). Since the Company's inception through December 31,
1995, all facilities and support services of the Company, including
administrative support, were provided by Sepracor. For these facilities and
services, the Company was charged $771,000 for 1995. These charges represent an
allocation of the Company's proportionate share of Sepracor's overhead costs
using formulas developed by management
22
<PAGE>
based upon the Company's use of such facilities and services. All costs incurred
by the Company prior to the Company's initial public offering in April 1994,
including payroll costs, were paid by Sepracor on behalf of the Company.
Under a Corporate Services Agreement, effective from January 1, 1994
through December 31, 1995, the Company received certain basic support services
from Sepracor in exchange for a fixed monthly payment, adjusted annually. The
Company recorded an expense of $244,000 for these services in 1995. These basic
services included laboratory support as well as assistance with certain
administrative services, including recruiting and benefits administration,
purchasing, data processing, risk management, corporate communications, patents
and legal, accounting, finance and treasury activities. Effective in 1996, the
Company provided these services through its own employees or outside contractors
engaged directly by the Company.
Under Sublease Agreements, the Company leased certain laboratory, research
and office space from Sepracor through 1995 in exchange for fixed monthly rent
payments which increased at various dates and which approximate the Company's
proportionate share of Sepracor's cost of providing the facilities including
building maintenance, cleaning, and certain utilities and other operating costs.
The Company signed a long-term lease with a third party for its manufacturing,
laboratory, research and office space in February 1996 (see Note H below).
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 had 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 had 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 had 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. The Technology Transfer and License Agreement expired
on January 1, 1998 pursuant to its terms and the Company does not expect such
termination to have a material effect upon its business, future operating
results or financial condition.
In addition, beginning in April 1998, Sepracor will be 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. 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.
E. Accounts Receivable
The Company's 1997 and 1996 trade receivables primarily represent amounts
due for product sales. The allowance for doubtful accounts was $25,000 and
$10,000 at December 31, 1997 and 1996, respectively.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.
F. Inventories
Inventories consist of the following at December 31:
(In thousands) 1997 1996
---- ----
Raw materials - $ 240
Work in progress - 122
Finished goods 158 14
----- -----
$ 158 $ 376
===== =====
23
<PAGE>
G. Property and Equipment
Property and equipment consists of the following at December 31:
(In thousands) 1997 1996
---- ----
Laboratory and
manufacturing
equipment $ 894 $ 1,308
Leased laboratory and
manufacturing
equipment 842 889
Office equipment 742 723
Leasehold improvements 698 698
------ -----
3,176 3,618
Accumulated depreciation
and amortization (1,771) (1,421)
------- -------
1,405 2,197
Construction in progress 73 48
------ --
$ 1,478 $ 2,245
------- -------
Depreciation and amortization expense was $548,000, $622,000 and $269,000,
in 1997, 1996 and 1995, respectively. In conjunction with its determination to
discontinue manufacture of the LeukoNet System, provision for impairment of
$475,000 for manufacturing and related assets was recorded.
Accumulated amortization of assets under lease was $481,000 and $278,000 as
of December 31, 1997 and 1996, respectively.
H. Commitments, Contingencies and Accrued Expenses
Accrued Expenses consist of the following at December 31:
1997 1996
(In thousands)
Compensation $ 440 $ 344
Fees 185 300
Interest on notes payable 347 -
Customer refunds 170 162
Services 500 767
Miscellaneous 204 -
------ ------
Total Accrued Expenses $1,846 $1,573
------ ------
Lease Obligations
The Company leased certain laboratory, research and office space from
Sepracor through 1995. In 1995, the Company executed a lease for these facility
requirements which commenced in February 1996 and extends through February 2004.
The lease provides for two five year renewal options. Under the terms of the
lease, the Company is required to pay its allocated share of taxes and operating
costs in addition to the base annual rent. In 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. As of December 31, 1997 there was a balance of $109,000 remaining to be
paid on this note.
In 1994, the Company, in collaboration with Sepracor and certain of its
other subsidiaries, executed an equipment leasing arrangement that provided for
a total of $2,000,000 to these companies for purposes of financing capital
equipment. In October 1996, the Company executed a separate follow-on equipment
leasing arrangement that provided $1,100,000 of equipment financing through
March 31, 1997. The Company also executed a leasing arrangement with another
leasing company that provides for a total of $100,000 of equipment financing.
The Company leases various laboratory, manufacturing and computer equipment
under noncancellable capital leases. Terms of arrangements with the two leasing
companies contain bargain purchase provisions at the expiration of the lease
term which range from 24 months to 42 months. In some instances, the Company is
required to make a deposit of 20% of the original equipment cost, which earns
interest at an annual rate of 4%. Under certain circumstances, Sepracor is the
guarantor of debt incurred to acquire equipment under the leasing facilities.
The interest rate charged on the Company's capital leases ranges from 14% to
21%.
24
<PAGE>
Future minimum payments under all noncancellable leases in effect at
December 31, 1997 are as follows:
(In thousands) Operating Capital
Year Leases Leases
1998 $ 214 $ 310
1999 234 257
2000 236 79
2001 236 -
2002 236 -
Thereafter 279 -
-------- -------
Total minimum
lease payments $1,435 646
------
Less amount
representing interest 90
Present value of minimum ------
lease payments $ 556
------
Based on the borrowing rates currently available to the Company for capital
leases with similar terms and average maturities, the fair value of capital
leases approximates the carrying value.
The total charged to rent expense for all noncancellable leases including
amounts for building maintenance, utilities and other operating costs was
$803,000, $903,000 and $527,000, in 1997, 1996 and 1995, respectively.
In June 1994, the Company executed an agreement with a third party to
license certain technology. The Company agreed to pay license and consulting
fees of $1,200,000 payable in four equal annual installments, and royalties for
commercial sale of any product incorporating this technology to the third party
pursuant to the terms of the agreement. As of December 31, 1997, all license and
consulting fees pursuant to that agreement have been paid and charged to
expense.
I. Convertible Subordinated Note Payable
In January 1997, the Company entered into a Restructuring Agreement of the
debt related to the Denmark Acquisition. Pursuant to the Restructuring
Agreement, approximately $23,000,000 of indebtedness owed to Novo Nordisk was
restructured by way of issuance by the Company to Novo Nordisk of a 12%
convertible subordinated promissory note in the principal amount of
approximately $11,700,000, which was due and payable on December 31, 2001, with
interest payable quarterly (provided that up to approximately $3,000,000 would
be forgiven in certain circumstances). Approximately $8,500,000 of the reduction
of such indebtedness was forgiven. The remainder of the reduction represented a
net amount due from Novo Nordisk to the Company related to various service
arrangements between the two companies. The amount included in the balance sheet
at December 31, 1997 and 1996 includes the effect of the Restructuring Agreement
net of the $3,000,000 contingency amount to reflect the most probable result of
the Company's decision to exit the plasma business. In December 1997, the
Company notified the holder of the note of its intent to convert in January
1998, $8,687,000 of debt, which it believes was the entire amount outstanding as
of the date of conversion. On January 6, 1998, the Company converted the note,
pursuant to its terms, into shares of Common Stock at a conversion price of
$10.50 per share, or 827,375 shares. The holder of the note has contested the
conversion of the note, including the forgiveness of the $3,000,000 amount. The
Company believes that such claims are without merit.
J. Segment Information
The Company operates exclusively in the blood purification business, which
the Company considers to be one business segment.
Revenues from significant unaffiliated customers are as follows:
Year Ended December 31: 1997 1996 1995
---- ---- ----
A. - - 36%
B. 86% 83% -
K. Stockholders' Equity (Deficit)
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
25
<PAGE>
at fair value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.
The Company has two stock options plans currently in effect under which
future grants may be issued: the 1994 Stock Option Plan, as amended, and the
1994 Director Option Plan, as amended (collectively, the "Plans"). A total of
2,750,000 shares has been authorized by the Company for grants of options or
shares, of which 639,000 are still available for grant. Stock Options granted
during 1997 and 1996 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:
<TABLE>
<CAPTION>
Number of Options Weighted Average
(In thousands) Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
December 31, 1994 660 $ 3.53
Granted 467 $ 4.50
Exercised (19) $ 2.00
Terminated (158) $ 8.27
------- -------
Outstanding at
December 31, 1995 950 $ 3.25
Granted 1,478 $ 12.87
Exercised (49) $ 3.12
Terminated (6) $ 2.88
-------- -------
Outstanding at
December 31, 1996 2,373 $ 9.24
Granted 1,262 $ 3.02
Exercised (24) $ 2.25
Terminated (1,592) $ 12.06
------- -------
Outstanding at
December 31, 1997 2,019 $ 3.25
</TABLE>
At December 31, 1997, 1996 and 1995, respectively, there were 521,000,
277,000 and 144,000 options exercisable with a weighted average exercise price
of $3.42, $2.88 and $2.47. The following table summarizes the status of the
Company's stock options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------------------
Number
Number Weighted Weighted Exercisable Weighted
Outstanding As Average Average As of Average
Of 12/31/97 Remaining Exercise 12/31/97 Exercise
Range of Exercise Prices (In thousands) Contractual Life Price (In thousands) Price
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.75 - $ 2.06 398 6.1 $ 2.00 216 $ 2.00
$ 2.56 - $ 3.38 981 8.6 $ 2.85 223 $ 3.28
$ 3.50 - $ 5.50 573 9.3 $ 3.52 53 $ 3.73
$ 8.38 - $ 16.25 67 8.1 $13.44 29 $14.14
------ --- ------ ----- -------
2,019 8.3 $ 3.23 521 $ 3.42
</TABLE>
The weighted average fair value at date of grant for options granted during
1997, 1996 and 1995 was $2.04, $8.77 and $2.98 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 1997,
1996 and 1995, respectively: risk-free interest rate of 5.5%, 6.20% and 6.30%;
dividend yields of 0% for all years; volatility factor of the expected market
price of the Company's common stock of 75% for all years; and a weighted average
expected life of the options of 5.5 years.
During 1994 and prior to the Company's initial public offering, options to
purchase 482,000 shares of Common Stock were granted under the Plans at an
exercise price of $2.00 per share. The estimated fair market value on the date
of grant was $4.00 per share. The Company recorded compensation expense of
$309,000, $197,000 and $199,000 in 1997, 1996 and 1995, respectively, related to
these options.
26
<PAGE>
In January 1998, the Company adopted a Stock Option Exchange Program. Upon
employee consent, the program provides for the grant to each employee of a new
stock option in exchange for the cancellation of the old stock option. The new
stock option, granted at fair market value at date of issuance, will become
exercisable for a number of shares of Common Stock equal to the number of shares
covered by the old stock option.
In 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the
"Stock Purchase Plan"). Under the Stock Purchase Plan, an aggregate of 100,000
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 42,183 shares for a total of $47,000 during the year ended December
31, 1997 and 17,793 shares for a total of $165,000 during the year ended
December 31, 1996. At December 31, 1997, 29,163 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 1997, 1996 and 1995
consistent with the provisions of SFAS No. 123, the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below. The application of SFAS No. 123 to this employee stock purchase plan
would not result in a significant difference from reported net income and
earnings per share.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $ (9,884) $(40,598) $(7,450)
Net loss - pro forma $(10,415) $(43,280) $(7,750)
Net loss per share - as reported - basic and diluted $(1.22) $ (5.03) $ (1.20)
Net loss per share - pro forma - basic and diluted $(1.28) $ (5.36) $ (1.25)
</TABLE>
The pro forma effect on net income for 1997, 1996 and 1995 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.
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 is exercisable at any time or
from time to time after April 14, 1995 and before April 14, 1999. The option may
be transferred in whole or in part at any time under specific conditions.
L. Income Taxes
The components of the Company's deferred tax assets and liabilities are as
follows at December 31:
(In thousands) 1997 1996
---- ----
Deferred taxes:
Assets
Net operating loss carryforwards $17,596 $10,505
Loss on disposal of discontinued business - 6,120
Research and development expense
capitalization 3,271 -
Tax credit carryforwards 762 429
Inventory reserves 252 326
Deferred compensation 36 239
Accrued charges not paid 410 193
Other 23 23
Liabilities
Property and equipment (153) (78)
--------- --------
22,197 17,757
Valuation allowance (22,197) (17,757)
-------- --------
Net deferred taxes $ - $ -
======== ========
27
<PAGE>
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 both 1997 and 1996. The effective tax rate was 0% due to a net
operating loss and the non-recognition of any net deferred tax asset. At
December 31, 1997, the Company had federal and state tax net operating loss
carryforwards (NOLs) of approximately $43,000,000 and $42,000,000, respectively,
to offset future regular taxable earnings. The federal and state NOLs expire at
various dates through 2012 and 2002, respectively. Federal and state tax credit
carryforwards of approximately $443,000 and $319,000, respectively, expire at
various dates from 2009 through 2012. Based upon the Internal Revenue Code and
changes in company ownership, utilization of the Company's NOLs may be subject
to an annual limitation.
M. Employees' Savings Plan
The Company has a 401(k) plan for all domestic 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 1997 and 1996, the Company
provided approximately $34,000 and $90,000 of matching contributions. There were
no employer contributions to the plan in 1995.
N. Litigation
The Company is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged
that the Company's manufacture, use and/or sale of the LeukoNet product
infringes upon three patents held by Pall.
On October 14, 1996, in connection with the first action concerning U.S.
Patent No. 5,451,321 (the "'321 Patent"), the Company filed a motion for summary
judgment of noninfringement. Pall filed a cross motion for summary judgment of
infringement at the same time. In October 1997, the Eastern District of New York
granted in part Pall's summary judgment motion relating to the '321 patent. The
Company has agreed to terminate the manufacture, use, sale and offer for sale of
the filter subject to the court's order. The court has not yet ruled on the
validity of Pall's '321 patent claims, which HemaSure has asserted are invalid
and unenforceable. No date has been set for the proceeding to determine the
validity and enforceability of Pall's '321 patent claims.
With respect to the second action concerning U.S. Patent Nos. 4,340,479
(the "'479 patent") and 4,952,572 (the "'572 patent"), the Company has answered
the complaint stating that it does not infringe any claim of the asserted
patents. Further, the Company has counterclaimed for declaratory judgment of
invalidity, noninfringement and unenforceability of the '572 patent, and a
declaratory judgment of noninfringement of the '479 patent, as a result of a
license. Pall has attempted to withdraw the '479 patent from the second action.
The Company believes, based on advice of its patent counsel, that a
properly informed court should conclude that the manufacture, use and/or sale by
the Company or its customers of the LeukoNet product does not infringe any valid
enforceable claim of the three asserted 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 adverse
effect on the Company's financial condition and future business and operations.
On November 1, 1996, the Company filed a complaint in the Supreme Court,
State of New York, County of New York, against P&U. In its complaint, the
Company sought to receive damages arising out of the alleged breach by P&U of an
agreement to sell to the Company P&U's plasma pharmaceutical business located in
Stockholm, Sweden. The complaint sought compensatory, consequential and punitive
damages. In September 1997, the Company reached an out-of-court settlement with
P&U. The terms of settlement included a cash payment to the Company and the
granting of an option to P&U to license, on a non-exclusive basis, certain
intellectual property held by the Company and its subsidiaries relating to
plasma fractionation. The cash payment was recognized as other income in 1997.
28
<PAGE>
Exhibit 21.1
HemaSure Inc.
List of Subsidiaries
Jurisdiction of
Name Incorporation/Organization
HemaPharm Inc. Delaware
HemaSure A/S Denmark
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
HemaSure Inc. on Form S-8 (File Nos. 33-79720, 33-79722, 33-94772, 33-94768,
333-05613 and 333-05615) of our report, dated February 4, 1998, on our audits of
the consolidated financial statements of HemaSure Inc. as of December 31, 1997
and 1996, and for the years ended December 31, 1997, 1996 and 1995, which report
is included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF HEMASURE INC. FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,274
<SECURITIES> 6,882
<RECEIVABLES> 436
<ALLOWANCES> 0
<INVENTORY> 158
<CURRENT-ASSETS> 9,097
<PP&E> 3,249
<DEPRECIATION> 1,771
<TOTAL-ASSETS> 10,607
<CURRENT-LIABILITIES> 3,026
<BONDS> 0
82
0
<COMMON> 0
<OTHER-SE> (1,549)
<TOTAL-LIABILITY-AND-EQUITY> 10,607
<SALES> 2,357
<TOTAL-REVENUES> 2,357
<CGS> 4,158
<TOTAL-COSTS> 4,158
<OTHER-EXPENSES> 9,756
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,401)
<INCOME-PRETAX> (9,884)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,884)
<EPS-PRIMARY> (1.22)
<EPS-DILUTED> 0
</TABLE>
