FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
.............................................................................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ...................... to ......................
Commission file number 0-23776
...............................................................................
HemaSure Inc.
...............................................................................
(Exact name of registrant as specified in its charter)
Delaware 04-3216862
.............................................. .......................
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization ) Identification No.)
140 Locke Drive, Marlborough, Massachusetts 01752
...............................................................................
(Address of principal executive offices)
(Zip Code)
(508) 490-9500
...............................................................................
(Registrant's telephone number, including area code)
Not Applicable
...............................................................................
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 15,804,269
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Class Outstanding at November 5, 1999
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HemaSure Inc.
INDEX
Page
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PART I Financial Information
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Item 1. Financial Statements........................................................................1
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998..................1
Consolidated Statements of Operations for the Three and Nine Month Periods Ended
September 30, 1999 and 1998...............................................................2
Consolidated Statements of Cash Flows for the Nine Month Periods Ended
September 30, 1999 and 1998...............................................................3
Notes to Consolidated Financial Statements..................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................11
PART II Other Information
Item 1. Legal Proceedings..........................................................................12
Item 2. Changes in Securities and Use of Proceeds..................................................13
Item 3. Defaults Upon Senior Securities............................................................13
Item 4. Submission of Matters to a Vote of Security Holders........................................13
Item 5. Other Information..........................................................................13
Item 6. Exhibits and Reports on Form 8-K...........................................................13
Signatures.........................................................................................S-1
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Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
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HemaSure Inc.
Consolidated Balance Sheets
<S> <C> <C>
(In thousands) September 30, December 31,
1999 1998
----------------- ----------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $5,339 $1,827
Accounts receivable 124 --
Inventories 278 206
Deferred financing costs 981 1,024
Prepaid expenses 160 326
-------- --------
Total current assets 6,882 3,383
Property and equipment, net 1,339 1,505
Deferred financing costs long-term -- 725
Other assets 50 42
-------- --------
Total assets $8,271 $5,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $610 $1,542
Accrued expenses 1,661 1,549
Note payable -- current portion 30 27
Capital lease obligations-current portion 92 228
-------- --------
Total current liabilities 2,393 3,346
Capital lease obligations -- 68
Note payable 5,049 5,073
Total liabilities 7,442 8,487
-------- --------
Stockholders' equity (deficit):
Common stock 152 91
Additional paid-in capital 83,118 71,584
Accumulated deficit (82,441) (74,507)
-------- --------
Total stockholders' equity (deficit) 829 (2,832)
-------- --------
Total liabilities and stockholders' equity (deficit) $8,271 $5,655
======== ========
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The accompanying notes are an integral part of the financial statements.
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HemaSure Inc.
Consolidated Statements of Operations
For The Three and Nine Month Periods Ended
September 30, 1999 and 1998
(Unaudited)
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<CAPTION>
(In thousands, except per share Three-month periods Nine-month periods
amounts ended September 30, ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
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Revenues $119 $-- $132 $25
Costs and expenses:
Costs of products sold 649 -- 1,432 657
Research & development 532 855 1,582 2,866
Legal expense related to patents 123 857 1,315 2,313
Selling, general and administrative 1,051 955 2,756 3,218
------- ------- ------- -------
Total costs and expenses 2,355 2,667 7,085 9,054
------- ------- ------- -------
Loss from operations (2,236) (2,667) (6,953) (9,029)
Interest income 73 13 132 133
Interest expense (380) (28) (1,113) (78)
------- ------- ------- -------
Net loss $(2543) $(2,682) $(7,934) $(8,974)
======= ======= ======= =======
Net loss per share -- basic and $(0.17) $(0.30) $(0.61) $(1.00)
diluted ======= ====== ======= =======
Weighted average number of shares 15,145 9,043 13,087 9,014
of common stock outstanding --
basic and diluted
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The accompanying notes are an integral part of the financial statements.
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HemaSure Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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<CAPTION>
(In thousands) Nine-month periods
ended September 30,
------------------------------------------
1999 1998
------------------------------------------
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Cash flows from operating activities:
Net loss $(7,934) $(8,974)
Adjustments to reconcile net loss to net cash used in operating
activities
Financing costs related to warrants 768 --
Depreciation and amortization 359 396
Accretion of marketable securities discount -- 20
Loss on disposal of equipment -- 5
Changes in operating assets and liabilities:
Accounts receivable (124) 436
Inventories (72) (151)
Prepaid expenses 166 (37)
Accounts payable and accrued expenses (820) (96)
------- -------
Net cash used in operating activities (7,657) (8,401)
------- -------
Cash flows from investing activities:
Purchase of available-for-sale marketable securities -- (20,255)
Maturities of available-for-sale marketable securities -- 27,118
Additions to property and equipment (193) (338)
Increase in other assets (8) --
------- -------
Net cash (used in) provided from investing activities (201) 6,525
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 11,595 43
Borrowing from notes payable arrangements -- 3,000
Repayments of notes payable (21) (18)
Repayments of capital lease obligations (204) (184)
------- -------
Net cash provided from financing activities 11,370 2,841
------- -------
Net increase in cash and cash equivalents 3,512 965
Cash and cash equivalents at beginning of period 1,827 1,274
------- -------
Cash and cash equivalents at end of period $5,339 $2,239
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
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HemaSure Inc.
Notes To Consolidated Financial Statements
1. Basis of Presentation
The accompanying financial statements are unaudited and have been
prepared on a basis substantially consistent with the audited financial
statements.
Certain information and footnote disclosures normally included in the
Company's annual statements have been condensed or omitted. The
condensed interim financial statements, in the opinion of management,
reflect all adjustments (including normal recurring accruals) necessary
for a fair statement of the results for the interim periods ended
September 30, 1999 and 1998.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal
year. These interim financial statements should be read in conjunction
with the audited financial statements for the year ended December 31,
1998, which are contained in the Company's Form 10K (File No. 0-23776),
filed with the Securities and Exchange Commission on March 31, 1999.
2. Inventories
Inventories consist of the following:
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September 30, 1999 December 31, 1998
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Raw Materials $211 $206
Work in progress 44 --
Finished goods 23 --
------ ------
$278 $206
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3. Property and Equipment
Property and equipment consists of the following:
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September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Property and equipment $2,927 $2,904
Less accumulated depreciation and amortization (2,208) (1,849)
------ ------
719 1,055
Construction in progress 620 450
------ ------
$1,339 $1,505
------ ------
</TABLE>
4. Stockholders' Equity (Deficit)
In March 1999, the Company completed a private placement financing with
Sepracor in which the Company received $2,000,000 in exchange for
1,333,334 shares of common stock of the Company and warrants to
purchase an additional 667,000 shares of common stock at $1.50 per
share. The warrants expire in the year
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2004 and have certain registration rights associated with them. In
certain circumstances, HemaSure may require Sepracor to exercise these
warrants.
On May 3, 1999, the Company completed a private placement financing
with COBE Laboratories, Inc. ("COBE"). The financing agreement provides
for an initial investment of $9,000,000 in exchange for 4,500,000
shares of the Company's common stock. The agreement also provides COBE
with an option to purchase an additional $3,000,000 of common stock of
the Company at any time between August 3, 1999 and May 3, 2000. In
October 1999, COBE exercised this option and purchased 498,355 shares
at a price of $6.02 per share. The price and number of shares reflects
the average price of Hemasure stock for the 30 days prior to the
exercise date of October 5, 1999. The financing agreement provides that
COBE will have representation on the Company's Board of Directors and
its representative committees and contains among other things various
registration rights and anti-dilution and standstill provisions
customary in such agreements.
In connection with the financing, the Company completed an Amended and
Restated Exclusive Distribution Agreement with COBE. The amended
distribution agreement expands the territory in which COBE will
distribute the Company's products to make it worldwide, excluding sales
to the American Red Cross. In addition, the agreement provides for
joint efforts related to the defense of HemaSure's products against
intellectual property claims made by third parties. As in the original
agreement, there is a provision for the development of additional
products to be incorporated by COBE into its automated blood component
equipment.
In January 1997, the Company entered into a Restructuring Agreement of
the debt related to its acquisition of Novo Nordisk's plasma products
unit. The amount included in the balance sheet at December 31, 1997
includes the effect of the Restructuring Agreement. On January 6, 1998,
$8,687,000 of debt, which is net of a $3,000,000 contingency amount to
reflect the most probable result of the Company's decision to exit the
plasma business, was converted into Common Stock at a conversion price
of $10.50 per share, or 827,375 shares, pursuant to the terms of the
note. The holder of the note has contested the conversion of the note,
including the forgiveness of the $3,000,000 amount.
5. Net loss per share
The net loss per share is based on the weighted average number of
common stock outstanding during the period. Potential common stock is
not included in the per share calculation where the effect of its
inclusion would be antidilutive. Potential common stock of the Company
consists of common stock warrants and stock options. The Company had
5,061,128 and 4,582,028 shares of potential common stock at September
30, 1999 and 1998, respectively.
6. Litigation
The Company is a defendant in a lawsuit brought by Pall Corporation
("Pall") on its LeukoNet Prestorage Leukoreduction Filter, which is no
longer made or sold by the Company. In a complaint filed November 1996,
Pall alleged that the Company's manufacture, use and/or sale of the
LeukoNet product infringes upon two patents held by Pall. Pall dropped
its allegations concerning infringment of one of the patents and
alleges only that the Company's LeukoNet filter infringed U.S. Patent
No. 4,952,572 ("the '572 Patent").
With respect to the allegations concerning the '572 patent, the Company
has answered the complaint stating that it does not infringe any claim
of the asserted patent. Further, the Company has counterclaimed for
declaratory judgment of invalidity, noninfringement and
unenforceability of the '572 patent. Pall has amended its Complaint to
add Lydall, Inc. whose subsidiary supplied filter media for the
LeukoNet product, as a co-defendant. The Company has filed for summary
judgment of noninfringement, and Pall has cross-filed for summary
judgment of infringement at the same time. Lydall supported the
Company's motion for
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summary judgment of noninfringement, and has filed a motion for summary
judgment that the asserted claims of the '572 patent are invalid as a
matter of law. The Company supported Lydall's motion for summary
judgment that the asserted claims of the '572 patent are invalid.
Discovery has been completed in the action.
On April 5, 1999, the Company and COBE BCT, Inc. ("COBE BCT") filed a
complaint for declaratory relief against Pall in the U.S. District
Court of Colorado. The Company and COBE BCT seek declaratory relief
that Pall's U.S. Patent No's. 4,925,572, 5,229,012, 5,344,561,
5,451,321, 5,501,795 and 5,863,436 are invalid and not infringed by the
Company's r\LS filter and methods of using the r\LS filter. Pall moved
to dismiss or transfer to the Eastern District of New York or, in the
alternative, to stay this action. The Company and COBE BCT opposed
Pall's motion. On July 16, 1999, the U.S. District Court of Colorado
denied Pall's motion to transfer or, in the alternative, to stay the
action, and the action is proceeding. On September 30, 1999, the Court
denied Pall's motion to dismiss the action and the case is proceeding.
On April 23, 1999 Pall filed a complaint against the Company and COBE
BCT, Inc. in the Eastern District of New York alleging that HemaSure's
r\LS filter infringes Pall's '572 patent, tortuously interfered and
unfairly competed with Pall's business. On May 19, 1999, Pall amended
its Complaint and added COBE Laboratories, Inc., Gambro A.B., and
Sepracor Inc. as defendants. The Company and COBE BCT have moved to
dismiss, transfer or stay the action and Pall has opposed the motion.
A prior lawsuit brought by Pall Corporation in February 1996 has
concluded. In June 1999, the U.S. Court of Appeals for the Federal
Circuit determined that the LeukoNet product did not infringe claim 39
of Pall Corporation's U.S. Patent No. 5,451,321 and Pall has not
appealed that decision.
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 and
the r\LS filter do not infringe any valid enforceable claims of the
Pall patents. However, there can be no assurance that the Company will
prevail in the pending litigations, and an adverse outcome in a patent
infringement action would have a material adverse effect on the
Company's financial condition and future business and operations.
7. Subsequent event
In October 1999, COBE Laboratories, Inc. exercised its option to
purchase an additional $3,000,000 of the Company's common stock as part
of its May 1999 private placement of $9,000,000. In connection with the
exercise of its option, COBE purchased 498,355 shares at a price of
$6.02 per share. The price and number of shares reflects the average
price of HemaSure stock in the 30 days prior to the exercise date of
October 5, 1999.
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Results of Operations
Overview
HemaSure was established in December 1993 as a wholly owned subsidiary of
Sepracor Inc. ("Sepracor"). 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 products are
designed for use in blood centers and hospital blood banks worldwide.
In June 1995 the Company received 510(K) premarket notification clearance from
the United States Food and Drug Administration for its first generation
leukoreduction system, the LeukoNet Pre-Storage Leukoreduction System ("LeukoNet
System") and began commercialization of this product 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 its next-generation red cell filtration product, the r\LS
System. In May 1998, the Company filed a 510(K) premarket notification
application for the r\LS System. The Company began accepting orders for the r\LS
outside of the U.S. in the first quarter 1999. In May 1999, the Company received
510(K) premarket notification clearance from the United States Food and Drug
Administration for its r\LS System. All of the Company's other 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.
The Company is subject to risks common to small 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, access to sources of capital, protection of proprietary technology
and compliance with FDA regulations.
Three and nine months ended September 30, 1999 and 1998
The Company recorded revenues of $119,000 for the quarter ended September 30,
1999 compared to no revenues in the same period in 1998. Revenues were $132,000
for the first nine months of 1999 compared to $25,000 for the first nine months
of 1998. Revenues for all periods presented represent sales of the Company's
leukocyte filtration products.
Total cost of products sold exceeded total product sales in all periods due to
the high costs associated with low-volume production.
Research and development expenses were $532,000 in the second quarter of 1999
compared to $855,000 in the second quarter of 1998, and were $1,582,000 in the
nine months ended September 30, 1999 compared to $2,866,000 in the nine months
ended September 30, 1998. The decrease in both the three and nine month periods
is primarily attributable to costs associated with the development of the
Company's next generation red cell filtration system, the r\LS system, for which
a majority of the effort was expended in the 1998 periods. Research and
development costs could increase in the future as the Company continues to
address the need for additional filtration products for its customers.
Legal expenses related to patents were $123,000 in the second quarter of 1999
compared to $857,000 in the second quarter of 1998, and were $1,315,000 in the
nine months ended September 30, 1999 compared to $2,313,000 in the nine months
ended September 30, 1998. The expenses in both the three and nine month periods
are related to costs associated with defending the Company's patent position in
its outstanding litigation with Pall Corporation. The
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Company anticipates such costs in 1999 to continue to decline from the 1998
levels as litigation activities related to its former product are expected to
diminish.
Selling, general and administrative expenses were $1,051,000 in the three months
ended September 30, 1999 compared to $955,000 in the three months ended
September 30, 1998, and were $2,756,000 in the first nine months of 1999
compared to $3,218,000 in the first nine months of 1998. The decrease in the
nine month period is primarily attributable to lower general corporate spending
in an effort to streamline costs during a period in which the Company was not
generating revenues. Sales and marketing and administrative costs may increase
in future periods from current levels as the Company continues its efforts to
expand sales of its blood filtration products.
Interest income for the three month period ended September 30, 1999 increased
compared to the three months ended September 30, 1998 due to higher average cash
and marketable securities balances available for investment. Interest expense
for the three and nine month periods ended September 30, 1999 increased compared
to the same periods in 1998 related to a note payable and the amortization of
deferred financing costs which were initiated in September 1998 offset, in part,
by a lower average capital lease obligation balance.
Liquidity and Capital Resources
The net increase in cash and cash equivalents for the nine months ended was
$3,512,000. This increase is attributable primarily to net cash provided from
financing activities of $11,370,000 offset in part by net cash used in operating
activities of $7,657,000 and net cash used in investing activities of $201,000.
Net cash provided from financing activities relates primarily to proceeds from
the issuance of common stock of $11,000,000. Net cash used in operating
activities is primarily attributable to the net loss of $7,934,000, an increase
in accounts receivable of $124,000 and a decrease in accounts payable and
accrued expense balances of $820,000, offset in part by financing costs related
to warrants of $768,000 and depreciation and amortization of $359,000. Net cash
used in investing activities relates primarily to the addition of property and
equipment of $193,000.
In January 1997, the Company entered into a Restructuring Agreement of the debt
related to its acquisition of Novo Nordisk's plasma products unit. The amount
included in the balance sheet at December 31, 1997 includes the effect of the
Restructuring Agreement. On January 6, 1998, $8,687,000 of debt, which is net of
a $3,000,000 contingency amount to reflect the most probable result of the
Company's decision to exit the plasma business, was converted into Common Stock
at a conversion price of $10.50 per share, or 827,375 shares, pursuant to the
terms of the note. The holder of the note has contested the conversion of the
note, including the forgiveness of the $3,000,000 amount.
In March 1999, the Company completed a private placement financing with Sepracor
in which the Company received $2,000,000 in exchange for 1,333,334 shares of
common stock of the Company and warrants to purchase an additional 667,000
shares of common stock at $1.50 per share. The warrants will expire in the year
2004 and have certain registration rights associated with them. In certain
circumstances, HemaSure may require Sepracor to exercise these warrants.
On May 3, 1999, the Company completed a private placement financing with COBE.
The financing agreement provides for an initial investment of $9,000,000 in
exchange for 4,500,000 shares of the Company's common stock. The agreement also
provided COBE with an option to purchase an additional $3,000,000 of common
stock of the Company at any time between August 3, 1999 and May 3, 2000. In
October 1999, COBE exercised this option. In connection with the exercise of
this option, COBE purchased 498,355 shares at a price of $6.02 per share. The
price and number of shares reflects the average price of HemaSure stock in the
30 days prior to the exercise date of October 5, 1999. The financing agreement
provides that COBE will have representation on the Company's Board of Directors
and its representative committees and contains, among other things, various
registration rights and anti-dilution and standstill provisions customary in
such agreements.
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The Company believes, based on its current operating plan, that its current
available cash balances will be sufficient to fund its operations through the
first quarter of the year 2000. The Company expects to continue to evaluate the
need for additional capital over the remainder of 1999 in order to expand the
manufacturing capacity for the r\LS system and fund related working capital and
general corporate financing requirements. Possible sources of such additional
capital could include strategic partnerships, public or private equity and/or
debt financing. 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 to commercialize the r\LS system 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, beyond the first quarter
2000. 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.
Readiness for Year 2000
The "Year 2000" issue results from the use in computer hardware and software of
two digits rather than four digits to define the applicable year. When computer
systems must process dates both before and after January 1, 2000, two-digit year
"fields" may create processing ambiguities that can cause errors and system
failures. The results of these errors may range from minor undetected errors to
complete shutdown of an affected system. These errors or failures may have
limited effects, or the effects may be widespread, depending on the computer
chip, system or software, and its location and function. The effects of the Year
2000 problem are exacerbated because of the interdependence of computer and
telecommunications systems in the United States and throughout the world.
Because of this interdependence, the failure of one system may lead to the
failure of many other systems even though the other systems are themselves "Year
2000 compliant." The Company has reviewed the Year 2000 issue as it may affect
the Company's business activity.
The Company is a developer and supplier of medical devices for the blood
transfusion industry. Currently, the Company has only one product available for
sale. The Company is reliant on a small number of vendors to supply the critical
components for making this product, but has identified alternative suppliers as
a contingency plan. Only final assembly of this product is done at the Company's
Marlborough, MA facility. The Company sells primarily to blood centers and
hospital blood banks and through an international distributor, and therefore
there are a limited number of customers. For internal systems, the Company uses
standardized software from large well-established software providers on PCs for
inventory management, financial systems and general communications purposes.
The Company has implemented a Year 2000 plan (the "Plan") which is designed to
cover all of the Company's activities, which will be modified as circumstances
change. Under the Plan, the Company is using a five-phase methodology for
addressing the issue. The phases are Awareness, Assessment, Correction,
Validation and Implementation. A heightened emphasis on completion will continue
through the fourth quarter. Awareness consists of defining the Year 2000 problem
and gaining executive level support and sponsorship. A Year 2000 program team
has been established and an overall strategy created. During Assessment, all
internal systems, products and supply chain partners have been inventoried and
prioritized for renovation. The Company believes it has completed a majority of
the Awareness and Assessment phases, however, ongoing work will be required in
these areas as the Company completes its assessment of existing supply chain
partners and enters into new supply chain relationships in the ordinary course
of business. Renovation consists of converting, replacing, upgrading or
eliminating systems that have Year 2000 problems. Validation involves ensuring
that hardware and software fixes will work properly in 1999 and beyond and can
occur both before and after implementation. Validation will continue through
1999 to allow for thorough testing before the Year 2000. Implementation is the
installation of hardware and software components in a live environment.
The Company has completed the installation of an upgraded manufacturing system,
which is Year 2000 compliant. Validation of this system is ongoing. Installation
of its Year 2000 compliant internal communications system has
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also been completed. The Company is in the process of upgrading its financial
reporting system with its current provider to be Year 2000 compliant. The
Company continues to assess all of its internal systems for operational
effectiveness and efficiency beyond Year 2000 concerns.
The impact of Year 2000 issues on the Company will depend not only on corrective
actions that the Company takes but also on the way in which Year 2000 issues are
addressed by governmental agencies, business and other third parties that
provide services or data to, or receive services or data from the Company, or
whose financial condition or operational capability is important to the Company.
To reduce this exposure, the Company has an ongoing process of identifying and
contacting mission-critical third party vendors and other significant third
parties to determine their Year 2000 plans and target dates. To date, the
Company is not aware of any critical vendors or customers who either are not
addressing the Year 2000 issue or have indicated that there will be a problem.
Risks associated with any such third parties located outside the United States
may be higher insofar as it is generally believed that non-United States
businesses may not be addressing their Year 2000 issues on as timely a basis as
United States businesses. Notwithstanding the Company's efforts, there can be no
assurance that the Company, mission-critical third party vendors or other
significant third parties will adequately address their Year 2000 issues.
The Company is developing contingency plans for implementation in event that the
Company, mission-critical third party vendors or other significant third parties
fail to adequately address Year 2000 issues. Such plans principally involve
identifying alternative vendors or internal remediation. There can be no
assurance that any such plans will fully mitigate any such failures or problems.
Furthermore, there may be certain mission-critical third parties, such as
utilities, telecommunication companies, or material vendors where alternative
arrangements or sources are limited or unavailable.
Although it is difficult to estimate the total costs of implementing the Plan
through June 1999 and beyond, the Company's preliminary estimate is that such
costs will total approximately $100,000. However, although management believes
its estimates are reasonable, there can be no assurance, for the reasons stated
in the next paragraph, that the actual costs of implementing the Plan would not
differ materially from the estimated costs. The Company has incurred
approximately $75,000 through September 30, 1999 on this project, which does not
include the costs to re-deploy existing staff.
The Company does not believe that the redeployment of existing staff will have a
material adverse effect on its business, results of operations or financial
position. Incremental expenses related to the Year 2000 project are not expected
to materially impact operating results in any one period. The extent and
magnitude of the Year 2000 problem as it will affect the Company, both before
and for some period after January 1, 2000, are difficult to predict or quantify
for a number of reasons. Among the most important are lack of control over
systems that are used by third parties who are critical to the Company's
operation, dependence on third party software vendors to deliver Year 2000
upgrades in a timely manner, complexity of testing inter-connected networks and
applications that depend on third party networks and the uncertainty surrounding
how others will deal with liability issues raised by Year 2000 related failures.
There can be no assurance, for example, that systems used by third parties will
be adequately remediated so that they are Year 2000 ready by January 1, 2000, or
by some earlier date, so as not to create a material disruption to the company's
business. Moreover, the estimated costs of implementing the Plan do not take
into account the costs, if any, that might be incurred as a result of Year 2000
related failures that occur despite the Company's implementation of the Plan.
Although the Company is not aware of any material operational issues associated
with preparing its internal systems for the Year 2000, or material issues with
respect to the adequacy of mission-critical third party systems, there can be no
assurance that the Company will not experience material unanticipated negative
consequences and/or material costs caused by undetected errors or defects in
such systems or by the Company's failure to adequately prepare for the results
of such errors or defects, including costs of related litigation, if any. The
impact of such consequences could have a material adverse effect on the
Company's business, financial condition or results of operations. A more
complete discussion of risks and uncertainties involving the Company's business
is contained in the Company's
10
<PAGE>
Annual Report in Form 10-K for the fiscal year ended December 31, 1998 under the
heading "Factors That May Affect Future Results of Operations."
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."
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.
Not Applicable
11
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a defendant in a lawsuit brought by Pall Corporation ("Pall") on
its LeukoNet Prestorage Leukoreduction Filter, which is no longer made or sold
by the Company. In a complaint filed November 1996, Pall alleged that the
Company's manufacture, use and/or sale of the LeukoNet product infringes upon
two patents held by Pall. Pall dropped its allegations concerning infringment of
one of the patents and alleges only that the Company's LeukoNet filter infringed
U.S. Patent No. 4,952,572 ("the '572 Patent").
With respect to the allegations concerning the '572 patent, the Company has
answered the complaint stating that it does not infringe any claim of the
asserted patent. Further, the Company has counterclaimed for declaratory
judgment of invalidity, noninfringement and unenforceability of the '572 patent.
Pall has amended its Complaint to add Lydall, Inc. whose subsidiary supplied
filter media for the LeukoNet product, as a co-defendant. The Company has filed
for summary judgment of noninfringement, and Pall has cross-filed for summary
judgment of infringement at the same time. Lydall supported the Company's motion
for summary judgment of noninfringement, and has filed a motion for summary
judgment that the asserted claims of the '572 patent are invalid as a matter of
law. The Company supported Lydall's motion for summary judgment that the
asserted claims of the '572 patent are invalid. Discovery has been completed in
the action.
On April 5, 1999, the Company and COBE BCT, Inc. ("COBE BCT") filed a complaint
for declaratory relief against Pall in the U.S. District Court of Colorado. The
Company and COBE BCT seek declaratory relief that Pall's U.S. Patent No's.
4,925,572, 5,229,012, 5,344,561, 5,451,321, 5,501,795 and 5,863,436 are invalid
and not infringed by the Company's r\LS filter and methods of using the r\LS
filter. Pall moved to dismiss or transfer to the Eastern District of New York
or, in the alternative, to stay this action. The Company and COBE BCT opposed
Pall's motion. On July 16, 1999, the U.S. District Court of Colorado denied
Pall's motion to transfer or, in the alternative, to stay the action, and the
action is proceeding. On September 30, 1999, the Court denied Pall's motion to
dismiss the action and the case is proceeding.
On April 23, 1999 Pall filed a complaint against the Company and COBE BCT, Inc.
in the Eastern District of New York alleging that HemaSure's r\LS filter
infringes Pall's '572 patent, tortuously interfered and unfairly competed with
Pall's business. On May 19, 1999, Pall amended its Complaint and added COBE
Laboratories, Inc., Gambro A.B., and Sepracor Inc. as defendants. The Company
and COBE BCT have moved to dismiss, transfer or stay the action and Pall has
opposed the motion.
A prior lawsuit brought by Pall Corporation in February 1996 has concluded. In
June 1999, the U.S. Court of Appeals for the Federal Circuit determined that the
LeukoNet product did not infringe claim 39 of Pall Corporation's U.S. Patent No.
5,451,321 and Pall has not appealed that decision.
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 and the r\LS filter do not
infringe any valid enforceable claims of the Pall patents. However, there can be
no assurance that the Company will prevail in the pending litigations, and an
adverse outcome in a patent infringement action would have a material adverse
effect on the Company's financial condition and future business and operations.
12
<PAGE>
Item 2. Changes in Securities and Use of Proceeds.
On March 23, 1999, the Company completed a private placement financing with
Sepracor in which the Company received $2,000,000 in exchange for 1,333,334
shares of common stock of the Company and warrants to purchase an additional
667,000 shares of common stock at $1.50 per share. The warrants will expire in
the year 2004 and have certain registration rights associated with them. In
certain circumstances, HemaSure may require Sepracor to exercise these warrants.
On May 3, 1999, the Company completed a private placement financing with COBE.
The financing agreement provided for an initial investment of $9,000,000 in
exchange for 4,500,000 shares of the Company's common stock. The agreement also
provided COBE with an option to purchase, subject to certain conditions, an
additional $3,000,000 of common stock of the Company at any time between August
3, 1999 and May 3, 2000. In October 1999, COBE exercised this option. In
connection with the exercise of this option, COBE purchased 498,355 shares at a
price of $6.02 per share. The price and number of shares reflects the average
price of HemaSure stock in the 30 days prior to the exercise date of October 5,
1999.
In each case set forth in this Item 2, the securities were issued pursuant to
exemptions from the registration requirements of the Securities Act of 1933, as
amended, under Section 4(2).
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K
Exhibit Index
(a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q.
Exhibit No. Description
- ----------- -----------
2.1(2) Heads of Agreement, dated as of January 31, 1996, between the Company
and Novo Nordisk A/S.
3.1(1) Certificate of Incorporation of the Company.
3.2(1) By-Laws of the Company.
4.1(1) Specimen Certificate for shares of Common Stock, $.01 par value, of the
Company.
4.2(3) Registration Rights Agreement, dated January 23, 1997, by and among the
Company and Novo Nordisk A/S.
4.3(4) Registration Rights Agreement, dated as of September 15, 1998, between
the Company and Sepracor.
4.4(4) Warrant Agreement, dated as of September 15, 1998, between the Company
and Sepracor.
4.5(4) Warrant Certificate, dated as of September 15, 1998, between the
Company and Sepracor.
4.6(4) Registration Rights Agreement, dated as of March 23, 1999, between the
Company and Sepracor.
4.7(5) Warrant Agreement, dated as of March 23, 1999, between the Company and
Sepracor.
4.8(5) Warrant Certificate, dated as of March 23, 1999, between the Company
and Sepracor.
4.9(6) Stock Subscription Agreement, dated as of May 3, 1999, between the
Company and COBE.
4.10(6) Stockholder's Agreement, dated as of May 3, 1999, between the Company
and COBE.
10.1(5) Securities Purchase Agreement, dated as of March 23, 1999, between the
Company and Sepracor.
10.2(6) Amended and Restated Exclusive Distribution Agreement, dated as of May
3, 1999, between the Company and COBE.
10.3(6) Senior Management Retention Agreement, dated as of December 7, 1998,
between the Company and John F. McGuire.
13
<PAGE>
10.4(6) Senior Management Retention Agreement, dated as of December 15, 1998,
between the Company and James B. Murphy.
10.5(6) Senior Management Retention Agreement, dated as of December 22, 1998,
between the Company and Peter C. Sutcliffe.
10.6(7) Master Purchase Agreement, dated as of July 1, 1999, between the
Company and The American National Red Cross.
27.1 Financial Data Schedule.
1 Incorporated herein by reference to the Company's Registration
Statement on Form S-1, as amended (File No. 33-75930).
2 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
3 Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
4 Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
5 Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
6 Incorporated herein by reference to the Company's Quarterly Report of
Form 10-Q for the quarter ended March 31, 1999.
7 Incorporated herein by reference to the Company's Quarterly Report of
Form 10-Q for the quarter ended June 30, 1999.
(b) Reports on Form 8-K -- None
14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
HemaSure Inc.
Date: November 15, 1999 /s/ John F. McGuire
------------------------------------------------
John F. McGuire
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 /s/ James B. Murphy
------------------------------------------------
James B. Murphy
Senior Vice President, Finance
and Administration
(Principal Financial Officer)
S-1
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1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
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