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 June 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 15,107,914
- -------------------------------------- -------------------
Class Outstanding at August 6, 1999
860102.1
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HemaSure Inc.
INDEX
Page
PART I Financial Information
Item 1. Financial Statements. ................................................1
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.1
Consolidated Statements of Operations for the Three
and Six Month Periods Ended June 30, 1999 and 1998 ...................2
Consolidated Statements of Cash Flows for the six month
Periods Ended June 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...........10
PART II Other Information
Item 1. Legal Proceedings....................................................11
Item 2. Changes in Securities and use of Proceeds............................11
Item 3. Defaults Upon Senior Securities......................................12
Item 4. Submission of Matters to a Vote of Security Holders..................12
Item 5. Other Information....................................................12
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.
HemaSure Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands) June 30, December 31,
1999 1998
------- ------------
ASSETS
Current assets:
Cash and cash equivalents $7,398 $1,827
Accounts receivable 6 -
Inventories 255 206
Deferred financing costs 1,024 1,024
Prepaid expenses 358 326
------ ------
Total current assets 9,041 3,383
Property and equipment, net 1,388 1,505
Deferred financing costs long-term 213 725
Other assets 50 42
------ ------
Total assets $10,692 $5,655
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $934 $1,542
Accrued expenses 1,704 1,549
Note payable - current portion 61 27
Capital lease obligations-current portion 185 228
----- ------
Total current liabilities 2,884 3,346
Capital lease obligations 7 68
Note payable 5,050 5,073
----- -----
Total liabilities 7,941 8,487
----- -----
Stockholders' equity (deficit):
Common stock 149 91
Additional paid-in capital 82,500 71,584
Accumulated deficit (79,898) (74,507)
-------- --------
Total stockholders' equity (deficit) 2,751 (2,832)
Total liabilities and stockholders' equity (deficit) $10,692 $5,655
======= ======
The accompanying notes are an integral part of the financial statements.
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<TABLE>
<CAPTION>
HemaSure Inc.
Consolidated Statements of Operations
For The Three and Six Month Periods Ended
June 30, 1999 and 1998
(Unaudited)
(In thousands, except
per share amounts)
Three-month periods Six-month periods
ended June 30, ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $9 $- $13 $25
Costs and expenses:
Cost of products sold 448 - 783 657
Research & development 526 1,249 1,050 2,011
Legal expense related to patents 352 394 1,192 1,456
Selling, general and administrative 856 1,252 1,705 2,263
--- ----- ----- -----
Total costs and expenses 2,182 2,895 4,730 6,387
----- ----- ----- -----
Loss from operations (2,173) (2,895) (4,717) (6,362)
Interest income 48 46 59 120
Interest expense (348) (14) (733) (50)
----- ---- ----- ----
Net (loss) $(2,473) $(2,863) $(5,391) $(6,292)
======== ======== ======== ========
Net (loss) per share - basic and diluted $(0.17) $(0.32) $(0.45) $(0.70)
======= ======= ======= =======
Weighted average number of shares of common 14,830 9,008 12,041 9,000
stock outstanding - basic and diluted
The accompanying notes are an integral part of the financial statements.
</TABLE>
2
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<TABLE>
<CAPTION>
HemaSure Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands) Six-month periods
ended June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,391) $(6,292)
Adjustments to reconcile net loss to net cash
used in operating activities
Financing costs related to warrants 512 -
Depreciation and amortization 228 284
Accretion of marketable securities discount - 20
Loss on disposal of equipment - 5
Changes in operating assets and liabilities:
Accounts receivable (6) 436
Inventories (49) (125)
Prepaid expenses (32) (15)
Accounts payable and accrued expenses (453) (419)
------- -------
Net cash used in operating activities (5,191) (6,106)
======= =======
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 (111) (167)
(Increase) in other assets (8)
------ -------
Net cash (used in) provided from investing activities (119) 6,696
------ -------
Cash flows from financing activities:
Proceeds from issuance of common stock 10,974 42
Repayments of notes payable 11 (18)
Repayments of capital lease obligations (104) (106)
------ -------
Net cash provided from (used in) financing activities 10,881 (82)
------ -------
Net increase in cash and cash equivalents 5,571 508
Cash and cash equivalents at beginning of period 1,827 1,274
------ ------
Cash and cash equivalents at end of period $7,398 $1,782
====== ======
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
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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 June
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:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Raw Materials $255 $206
Work in progress - -
Finished goods - -
----- ----
$255 $206
----- ----
3. Property and Equipment
Property and equipment consists of the following:
June 30, 1999 December 31, 1998
------------- -----------------
Property and equipment $2,937 $2,904
Less accumulated depreciation and amortization $(2,077) $(1,849)
-------- --------
$860 $1,055
Construction in progress $528 $450
---- ----
$1,388 $1,505
------ ------
</TABLE>
4. Stockholders' Equity
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 2004 and have certain registration rights
associated with them. In certain circumstances, HemaSure may
require Sepracor to exercise these warrants.
4
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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. Should COBE
exercise its option, the number of shares to be issued will be based
upon the average closing price of the Company's common stock for the
thirty-day period prior to the exercise. 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. Common Share equivalents are not
included in the per share calculation where the effect of their
inclusion would be antidilutive. Common Share equivalents of the Company
consist of common stock warrants and stock options. The Company had
5,050,028 and 2,480,903 Common Share equivalents at June 30, 1999 and
1998, respectively.
6. Litigation
The Company is a defendant in two lawsuits brought by Pall Corporation
("Pall") on its LeukoNet Prestorage Leukoreduction Filter, which is no
longer made or sold by the Company. 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 non-infringement. 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 and held that the LeukoNet product infringes a
single claim from the '321 patent. The Company terminated the
manufacture, use, sale and offer for sale of the filter subject to the
court's order. The Company appealed the October 1997 decision to the
Court of Appeals for the Federal Circuit. In June 1999, the U.S. Court
of Appeals determined that the LeukoNet product did not infringe claim
39 of Pall Corporation's '321 patent.
With respect to the second action concerning U.S. Patent Nos. 4,952,572
(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,
non-infringement and unenforceability
5
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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
non-infringement, and Pall has cross-filed for summary judgement of
infringement at the same time. Lydall supported the Company's motion for
summary judgment of non-infringement, 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,
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.
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.
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.
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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 state, 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 six months ended June 30, 1999 and 1998
The Company recorded revenues of $9,000 for the quarter ended June 30, 1999
compared to no revenues in the same period in 1998. Revenues were $13,000 for
the first six months of 1999 compared to $25,000 for the first six 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 $526,000 in the second quarter of 1999
compared to $1,249,000 in the second quarter of 1998, and were $1,050,000 in the
six months ended June 30, 1999 compared to $2,011,000 in the six months ended
June 30, 1998. The decrease in both the three and six 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 period.
Legal expenses related to patents were $352,000 in the second quarter of 1999
compared to $394,000 in the second quarter of 1998, and were $1,192,000 in the
six months ended June 30, 1999 compared to $1,456,000 in the six months ended
June 30, 1998. The expenses in both the three and six month periods are related
to costs associated with defending the Company's patent position in its
outstanding litigation with Pall Corporation. The Company anticipates such costs
in 1999 to continue to decline from the 1998 levels as litigation activities
related to our former product are expected to diminish.
Selling, general and administrative expenses were $856,000 in the three months
ended June 30, 1999 compared to $1,252,000 in the three months ended June 30,
1998, and were $1,705,000 in the first six months of 1999 compared to $2,263,000
in the first six months of 1998. The decrease in the three and six month periods
is primarily
7
860102.1
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attributable to lower sales and marketing costs associated with the Company's
decision in 1998 to discontinue making and selling the LeukoNet filter. Sales
and marketing 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 six month period ended June 30,1999 decreased compared
to the six months ended June 30, 1998 due to lower average cash and marketable
securities balances available for investment. Interest expense for the three and
six month periods ended June 30, 1999 increased compared to the same periods in
1998 related to a note payable and the amortization of deferred financing costs
which were not in existence in 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 three months ended was
$5,571,000. This increase is attributable primarily to net cash provided from
financing activities of $10,881,000 offset in part by net cash used in operating
activities of $5,191,000 and net cash used in investing activities of $119,000.
Net cash provided from financing activities relates primarily to proceeds from
the issuance of common stock of $2,000,000 in March 1999 and $9,000,000 in May
1999. Net cash used in operating activities is primarily attributable to the net
loss of $5,391,000 and a decrease in accounts payable and accrued expense
balances of $453,000, offset in part by financing costs related to warrants of
$512,000 and depreciation and amortization of $228,000. Net cash used in
investing activities relates primarily to the addition of property and equipment
of $111,000.
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
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. Should
COBE exercise its option, the number of shares to be issued will be based on the
average closing price of the Company's common stock for the thirty-day period
prior to the exercise. 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.
The Company believes, based on its current operating plan, that its current
available cash balances together with the private placement financing completed
in May 1999 with COBE will be sufficient to fund its operations through the
first quarter of the year 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.
8
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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 outside of the United States and is awaiting approval for sale in the
United States. 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 third 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 also
been completed. The Company's financial reporting system is already 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
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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 less than $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 $50,000 through June 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 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 Disclosure About Market Risk.
Not applicable
10
860102.1
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a defendant in two lawsuits brought by Pall on its LeukoNet
Prestorage Leukoreduction Filter, which is no longer made or sold by the
Company. 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 the '321
Patent, the Company filed a motion for summary judgment of non-infringement.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 and held that the LeukoNet product infringes a single claim from
the '321 patent. The Company terminated the manufacture, use, sale and offer for
sale of the filter subject to the court's order. The Company appealed the
October 1997 decision to the Court of Appeals for the Federal Circuit. In June
1999, the U.S. Court of Appeals determined that the LeukoNet product did not
infringe claim 39 of Pall Corporation's '321 patent.
With respect to the second action 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, non-infringement 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 non-infringement, and Pall has cross-filed for summary
judgment of infringement at the same time. Lydall supported the Company's
motion for summary judgment of non-infringement, 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. filed a complaint for
declaratory relief against Pall in the U.S. District Court of Colorado. The
Company and COBE BCT, Inc. seek declaratory relief that Pall's U.S. Patent No's.
4925,572, 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, 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.
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.
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.
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
11
860102.1
<PAGE>
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. The number of shares to be issued will be based on the
average closing price of the Company's common stock for the thirty-day period
prior to the exercise.
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. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on June 10, 1999, the
following proposals were adopted by the vote specified below.
Proposal For Withheld
Election of Directors
Timothy J. Barberich 9,042,296 10,700
John F. McGuire, III 9,042,296 10,700
Rolf S. Stutz 9,042,296 10,700
David S. Barlow 9,042,296 10,700
Justin E. Doheny 9,042,296 10,700
Edward C. Wood 9,042,296 10,700
Frank Corbin 9,042,296 10,700
<TABLE>
<CAPTION>
For Against Abstain Broker Nonvotes (1)
--- ------- ------- -------------------
<S> <C> <C> <C> <C>
Amendments to the Company's 1995
Employee Stock Purchase Plan 5,485,721 42,050 16,946 3,508,279
Amendments to the Company's 1994
Stock Option Plan
5,437,263 94,934 12,520 3,508,279
Amendment to the Company's
Certificate of Incorporation 9,014,026 28,650 10,320
</TABLE>
(1) Votes counted for purposes of determining whether a quorum is present for
the meeting but indicates that the broker or other holder was not authorized by
the beneficial owner to cast a vote on certain proposals but was authorized to
cast (and did cast) a vote on at least one other proposal.
Item 5. None
12
860102.1
<PAGE>
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.
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
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.
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 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.
(b) Reports on Form 8-K - None
</TABLE>
13
860102.1
<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: August 16, 1999 /s/ John F. McGuire
----------------------------------------------
John F. McGuire
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 16, 1999 /s/ James B. Murphy
--------------------------------------------
James B. Murphy
Senior Vice President Finance
and Administration
(Principal Financial Officer)
S-1
860102.1
Exhibit 10.6
MASTER PURCHASE CONTRACT
This MASTER PURCHASE CONTRACT (the "Contract"), dated as of July 1,
1999, is by and between HemaSure Inc., a Delaware corporation (the "Vendor"),
and The American National Red Cross, a not-for-profit corporation chartered by
an act of Congress (the "Purchaser").
RECITALS
WHEREAS the Vendor is the developer and manufacturer of the HemaSure
r\LS Prestorage Leukoreduction Filtration System (the "Filtration System") for
the reduction of leukocytes in red blood cells; and
WHEREAS the Purchaser desires to purchase Filtration Systems for use in
its blood collection and filtration programs at various facilities of American
Red Cross Blood Services (each, a "Red Cross Center") located throughout the
United States.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and for other good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Term. The term of this Contract is three (3) years and two (2)
months, beginning July 1, 1999 and ending August 31, 2002, unless extended or
earlier terminated pursuant to Sections 2.2 or 12 below. The Contract consists
of a fourteen (14) month period (July 1, 1999 - August 31, 2000) and two (2)
consecutive twelve (12) month periods beginning on September 1, 2000 (each of
such three separate periods is herein referred to as a "year" of the Contract
Term, including the fourteen (14) month period).
2. Purchase and Sale Obligations.
2.1 Pricing Levels. The Vendor agrees to sell Filtration Systems
to the Purchaser, and the Purchaser agrees to purchase such Filtration Systems
from the Vendor, at the confidential quantity and price levels set forth on
Schedule I hereto and incorporated herein.
2.2 Minimum Purchase Requirement. In the first year of the
Contract Term, the Purchaser shall purchase from the Vendor and the Vendor must
provide not fewer than
850681.5
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<PAGE>
400,000 Filtration Systems. In the second year of the Contract Term, the
Purchaser shall purchase from the Vendor and the Vendor must provide not
fewer than 700,000 Filtration Systems. In the third year of the Contract Term,
the Purchaser shall purchase from the Vendor and the Vendor must provide not
fewer than 1,000,000 Filtration Systems. In the event that the Purchaser fails
to meet the minimum purchase requirement in any Contract Term year, the
remaining number of Filtration Systems necessary to meet such minimum purchase
requirement will be added on to the minimum purchase requirement of the
subsequent Contract Term year. In the event that the Purchaser fails to meet the
minimum purchase requirement in the third year of the Contract Term, the term of
this Contract shall be extended for one year during which time the Purchaser
must purchase the remaining number of Filtration Systems as are necessary to
meet the minimum purchase requirement of the previous year.
2.3 Surcharge. In the event that the Purchaser fails to satisfy
the minimum purchase requirements set forth in Section 2.2 of the Contract for
any year of the Contract Term, the Purchaser must pay to the Vendor a surcharge
of $1.50 per Filtration System purchased. For example, if 350,000 Filtration
Systems were purchased for Contract Year 1, there would be an aggregate
surcharge of $525,000 (350,000 x $1.50). In that situation, the Purchaser is
then required to purchase a minimum of 750,000 Filtration Systems in Contract
Year 2 to avoid the application of a surcharge for that year. The same method of
surcharge calculation shall apply to any subsequent Contract years as well. The
surcharges set forth in this section 2.3 shall not apply if Vendor is unable to
provide such Filtration Systems or to force majeure events as set forth in
Section 16.1.
2.4 Purchase Volume Credits.1 If, (i) as a direct result of the
Purchaser's efforts either the Australian Red Cross or the Japanese Red Cross
place orders for the purchase of Filtration Systems from the Vendor and (ii) on
or prior to June 30, 2000 the Japanese Red Cross or the Australian Red Cross, as
the case may be, executes and delivers to the Vendor a definitive, firm
commitment agreement to purchase Filtration Systems from the Vendor, and shall
in fact purchase such Filtration Systems, then, the volume of such purchases,
when and as made and paid for, will be added to the volume of the Purchaser's
purchases for the purpose of computing price level volumes for the Purchaser
hereunder.
2.5 Purchaser Affiliates. The price levels available to the
Purchaser under this Contract will be made available to domestic affiliates of
the Purchaser pursuant to written purchase contracts with the Vendor containing
terms satisfactory to the Vendor. The Purchaser will provide the Vendor with a
list of such domestic affiliates of the Purchaser on a semi-annual basis,
together with documentation reasonably satisfactory to the Vendor evidencing
such domestic affiliate status.
- --------
1 To be discussed.
850681.5
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<PAGE>
2.6 Price Level Adjustments. If as a result of any technological
development or manufacturing process improvements in respect of manufacturing
technologies, filtration media or other significant aspects of the manufacturer
or production of the Filtration System the Vendor achieves and realizes a
substantial reduction in the Vendor's current estimated volume cost of
production and manufacture of such Filtration Systems as of the date hereof, the
Vendor will discuss with the Purchaser, and effect, a fair and reasonable
downward adjustment in the price level set forth in Section 2.1 above; provided,
however, the Vendor shall only be required to effect such a downward price
adjustment under the circumstances detailed in the previous sentence and not in
respect of any production or manufacturing cost or expense savings associated
with increased volume production, economies of scale, or otherwise.
3. Purchase Orders.
3.1 Form of Purchase Orders. Purchase orders for Filtration
Systems shall be submitted to the Vendor in writing, via facsimile, or via
telephone with a confirmation in writing, and shall specify the desired quantity
of Filtration Systems, delivery date and delivery location. The Vendor shall
designate persons within its customer services department who will be
responsible for receiving telephone orders from the Purchaser's representatives.
Telephone orders must be placed between 8:30 a.m. and 5:30 p.m. Eastern Time.
The Vendor may institute a new procedure for placing orders, including a system
through which purchase orders are electronically generated; provided, however,
that such new ordering procedure does not result in additional costs to the
Purchaser.
3.2 Authorized Purchasing Representatives. Unless the Purchaser
notifies the Vendor in writing, purchase orders shall be placed separately with
the Vendor for each Red Cross Center by the Purchasing Office located at the
Blood Services Area Office in Dedham, MA, Charlotte, NC, Detroit, MI, St. Louis,
MO or Phoenix, AZ. Each Area Office shall provide to the Vendor a list of
personnel who are authorized to place purchase orders with the Vendor. The
Vendor shall accept purchase orders only from such authorized personnel.
4. Payment.
4.1 Accepted Goods. Payment is due for all goods accepted as set
forth in Section 5.3 below.
4.2 Time of Payment. Separate invoices will be sent by the Vendor
to each Blood Services Area Office that placed an order with the Vendor. Payment
is due to the Vendor within thirty (30) days of the date of the invoice, such
invoices to be dated and mailed no earlier than the day of product shipment to
the Red Cross Center. The Vendor shall assess service and/or interest charges of
up to 1% per month on any past due amounts.
850681.5
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<PAGE>
5. Delivery.
5.1 Freight Charge. All shipments will be FOB Marlborough, MA, in
accordance with instructions received from the Purchaser.
5.2 Packaging. The Vendor shall package and mark the Filtration
Systems for shipment in accordance with industry standards for safe shipment by
common carrier. Packaging shall comply with applicable Interstate Commerce
Commission regulations appropriate to the mode of transportation. The exterior
of each shipping container shall be marked with the following information: (i)
description, (ii) quantity, (iii) purchase order number, (iv) the Vendor's name,
(v) weight of container. A document containing the following information shall
accompany each shipment: (i) name and address of consignee, (ii) name and
address of shipper, (iii) purchase order number, (iv) Red Cross Center bill of
lading number (if any), and (v) a description of the material shipped which
includes item number, lot number, quantity, number of boxes, and package number.
5.3 Acceptance of Goods. Before accepting a shipment of goods
ordered, the Purchaser shall have the right to inspect and test such goods at
its own cost. Inspection and acceptance of shipments will be conducted by the
Red Cross Center that placed the purchase order and must be completed within 14
calendar days of delivery. Goods may be rejected only if they do not materially
conform to the specifications of the order or the terms of this Contract. In the
event that a shipment is so rejected, (i) the Purchaser shall deliver written
notice to the Vendor informing the Vendor of the reasons for the rejection and
the quantity of rejected goods and (ii) the Vendor shall as soon as is
practicable inform the Purchaser of the Vendor's return instructions, which
instructions the Purchaser shall comply with. The Vendor will bear the cost of
any necessary inspection of goods sent as replacement for the nonconforming
shipment. Any rejected goods may be returned to the Vendor at the Vendor's
expense.
6. Periodic Reports and Notices by the Vendor.
6.1 Product Purchase Reports. The Vendor shall provide the
Purchaser with a Product Purchase Report, every calendar quarter during the Term
of this Contract, which shall set forth the following information with respect
to Filtration Systems purchased by the Purchaser in the previous quarter: (i)
item description, (ii) stock number, (iii) unit of measure, (iv) total number of
units purchased per Red Cross Center, (v) price per unit, and (vi) amount
billed. Product purchase reports should also contain a summary of the
year-to-date purchases by the Purchaser, broken down by Red Cross Centers which
purchased Filtration Systems.
6.2 Quality Control/Inspection Report. The Vendor shall provide
the Purchaser with a Quality Control Report, on a quarterly basis, which shall
detail any problems with the Filtration Systems reported by the Red Cross
Centers. The quality control report shall contain the following information: (i)
the Red Cross Center which reported the problem, (ii)
850681.5
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<PAGE>
the date on which the Red Cross Center experienced a problem, (iii) the Red
Cross Center's product lot number, (iv) the nature of the problem reported, (v)
the diagnosis of the problem and the solution, and (vi) the dates the
problematic product was shipped and received.
6.3 Defective Product Reports and Notice. The Vendor shall provide
the Purchaser with a Defective Product Report, on a quarterly basis, which shall
detail any deficiencies or defects in Filtration Systems already delivered to
the Purchaser. In addition, the Vendor must notify the relevant Red Cross Center
of any defects in Filtration Systems delivered to such Center within one
business day of the Vendor's discovery of such defect.
7. Representations and Warranties of the Vendor
7.1 Generally. The Vendor warrants and represents that: (i) the
rights conveyed in this Contract do not and shall not infringe upon or violate
any right of any third party; (ii) the Vendor possesses full power and authority
to enter into this Contract and convey the rights herein granted to the
Purchaser without the consent of any third party; (iii) the Vendor is duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it was organized; (iv) this Contract, when executed and
delivered by the Vendor, will be the legal, valid and binding obligation of it,
enforceable against it in accordance with its terms; and (v) the execution,
delivery and performance of this Contract does not and will not conflict with,
or constitute a breach or default under, the Vendor's charter documents or any
material agreement, contract, commitment, or instrument to which the Vendor is a
party or require the consent, approval or authorization of any governmental or
regulatory authority.
7.2 Patent/Trade Secret Protection. The Vendor, at its own
expense, will defend any suit which may be brought against the Purchaser for the
infringement of United States patent(s), trademark(s), copyright(s), trade
secret(s) or other proprietary right by goods, equipment, software, materials or
information prepared, developed or supplied in connection with performance of
this Contract and in such suit, the Vendor will pay all costs and satisfy any
final judgement or award for such infringement. The Vendor's foregoing
obligations are subject to the conditions that the Vendor is notified of the
suit within a reasonable time after the Purchaser becomes aware of it and the
Vendor has the full right and opportunity to conduct the defense of any such
action. If the use of such goods, equipment, software, materials or information
by the Purchaser is prevented by permanent injunction, or the Vendor's inability
to procure the right for the Purchaser to continue using the goods, equipment,
software, material or information at a reasonable cost, the Vendor agrees to
accept return of the infringing goods, equipment, software, materials or
information and refund the total amount the Purchaser has paid the Vendor under
this Contract.
7.3 Compliance with Applicable Laws. The Vendor warrants and
represents that any goods furnished under this Contract will be manufactured in
material compliance with the minimum conditions required under the Fair Labor
Standards Act of
850681.5
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<PAGE>
1936, as amended, and any applicable rules or regulations of the Food
and Drug Administration ("FDA") and all other applicable local state and
federal laws, rules or regulations.
7.4 Product Warranty. The Vendor warrants and represents that the
goods delivered hereunder shall be free from defects in materials and
workmanship, when given normal, proper and intended usage, and that product
performance will meet or exceed applicable FDA requirements and other mutually
agreed standards. Except with respect to latent or hidden defects, the
representations and warranties of the Vendor shall not survive any acceptance or
payment by the Purchaser for such Products. EXCEPT AS EXPRESSLY SET FORTH
HEREIN, NEITHER THE VENDOR NOR ANY OF ITS REPRESENTATIVES HAS MADE OR MAKES ANY
EXPRESS OR IMPLIED WARRANTIES TO PURCHASER CONCERNING THE GOODS DELIVERED
HEREUNDER.
8. Representations and Warranties of the Purchaser. The Purchaser
warrants and represents that: (i) the Purchaser possesses full power and
authority to enter into this Contract without the consent of any third party;
(ii) the Purchaser is duly organized, validly existing and in good standing
under the laws of the United States; (iii) this Contract, when executed and
delivered by the Purchaser, will be the legal, valid and binding obligation of
it, enforceable against it in accordance with its terms; and (iv) the execution,
delivery and performance of this Contract does not and will not conflict with,
or constitute a breach or default under, the Purchaser's charter documents or
any material agreement, contract, commitment, or instrument to which the
Purchaser is a party or require the consent, approval or authorization of any
governmental or regulatory authority.
9. Defective Products. If at any time during any Term of this Contract,
defects are discovered by the Purchaser in any Filtration Systems sold by the
Vendor to the Purchaser under this Contract, the Vendor shall, within thirty
days of the return of the defective Filtration System, at its option and its
sole cost, either repair or replace the product or issue a credit to the
Purchaser for such defective product. In no event shall the Vendor have any
other liability or obligation to the Purchaser for defective products beyond
those expressly set forth in this Section 9.
10. Material Changes to Product. The Vendor must obtain the Purchaser's
prior written consent, which consent may not be unreasonably withheld, to any
material changes in the design or manufacture of the Filtration Systems. The
Vendor must provide 60 days' prior written notice of any such material changes.
If such changes are not reasonably acceptable to the Purchaser, the Vendor must,
if not so prohibited by applicable law, rule or regulation, continue to provide
the original product at no additional charge, or this will be cause for
termination of this Contract by the Purchaser without any penalty. The Vendor
must give the Purchaser reasonable prior notice of any scheduled material change
in the manufacture of equipment, package insert changes, supplies or disposables
which would affect the operating procedures with respect to the Filtration
Systems or the quality of the Filtration Systems. The
850681.5
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<PAGE>
notification by the Vendor must include the nature of the change and the
expected impact on performance.
11. Cooperation Between the Vendor and the Purchaser.
11.1 Product Support. Each Red Cross Center placing an order for
Filtration Systems with the Vendor will receive Prestorage Leukoreduction
Filtration Stands free of charge, based on the following formula: one stand for
every 12,500 filter units per year (34 cases/month). The Vendor will provide the
Red Cross Centers with standard operating procedures and training materials
necessary in the operation of the Filtration Systems. In the first year of this
Contract, the Vendor will reasonably cooperate with and assist two Red Cross
Centers designated by the Purchaser to convert such Centers to 100%
leukoreduction. Such cooperation will include assistance in developing marketing
materials as well as assistance in maintaining optimal operational conditions at
the Centers.
11.2 Contract Update Meetings. Representative of the Vendor and
the Purchaser shall meet at their mutual discretion and convenience to discuss
issues pertaining to this Contract.
11.3 Access to Documents and Vendor's Facilities. The Vendor
agrees to permit the Purchaser reasonable access to all records, data and
facilities of the Vendor related to purchases under and performance of this
Contract during the term of this Contract and for a period of two (2) years
following the expiration or termination of this Contract. The Vendor further
agrees that the Purchaser may (i) conduct, from time to time as it reasonably
determines (but not more than twice in any twelve month period), quality audits
of the Vendor's facility to determine the Vendor's material compliance with Part
820 of the Code of Federal Regulations 21 (Quality System Regulations) and (ii)
conduct a review and audit of the Vendor's computer and accounting systems to
determine material compliance with reasonable "Year 2000" compliance standards
to be mutually agreeable to the Vendor and the Purchaser. The Vendor covenants
and agrees with the Purchaser to use commercially reasonable efforts to remedy
any material deficiencies discovered by the Purchaser during the foregoing
audits, and any failure by the Purchaser to do so shall constitute a Termination
for Breach pursuant to Section 12.1 below (subject to the cure periods set forth
therein); provided, however, that with respect to clause (ii) of the preceding
sentence, the Vendor shall not be deemed to have breached this Agreement unless
the discovered non-compliance (and subsequent failure to cure) has a material
adverse effect on the operations of the Purchaser or on the ability of the
Vendor to fulfill its obligations under this Agreement.
All records, files, reports, manuals, studies, photographs,
negatives, source code (including hard copies of all programs), calibration and
performance records, development and validation records, change control
documents, security and access records and records management documents, and all
other documents relating to performance under this Contract, including all
documents relating to all third-party software used herein, will be
850681.5
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<PAGE>
made available to the Purchaser or to persons and or entities to which the
Purchaser is required by law, regulation or otherwise to grant access to such
documents, immediately upon request at any time during performance under
this Contract and for a period of five (5) years after final payment for all
deliverables and services provided by the Vendor. If a longer retention time is
required by law or regulatory agency, the Purchaser will notify the Vendor prior
to the end of the Contract.
It is further agreed that the Vendor will provide immediate access
to the Purchaser or its representatives and the FDA to all documents relating to
the performance of the deliverables and services under this Contract. The Vendor
will allow prompt access during normal business hours to the Purchaser, and
immediate access to the FDA, to all such documents and to its facilities where
work is performed under this Contract or support is provided in connection with
the deliverables or services provided under this Contract at any time (with
reasonable advance notice in the case of the Purchaser's access) for purposes of
FDA inspections or other requests for access by the FDA.
11.4 Adequate Supply. At least thirty (30) days before the end of
each calendar quarter, the Purchaser will prepare and furnish to the Vendor an
annual forecast, by month, for the following four calendar quarters, specifying
the proposed quantity of r\L S Filtration Systems which will be purchased for
delivery during each month of that year. The Vendor hereby guarantees that it
will be able to provide, at a minimum, the quantities of Filtration Systems
reflected in the minimum purchase requirements for each of the Contract years
(Section 2.2). The Vendor shall undertake reasonable efforts to ensure that all
the Purchaser's additional quantity needs for Filtration Systems are met by the
Vendor.
11.5 Customer, Technical Service and Training. The Vendor shall
designate one employee who shall have primary responsibility for servicing this
Contract and the Vendor shall make this employee reasonably available during
normal business hours to discuss Contract issues with the Purchaser. The Vendor
shall maintain a Technical Services Department for the purpose of providing
on-site training, as well as technical follow-up support with regard to the
Purchaser's use of Filtration Systems. The Vendor shall provide for a two-day,
on-site, hands-on training program at each participating American Red Cross
Regional Center. American Red Cross Centers and their personnel may direct
technical questions to the Vendor using a toll-free number, to be provided by
the Vendor, or such American Red Cross Center may contact the Vendor's Technical
Services trainers directly via telephone or pager. The Vendor's Technical
Services Trainers shall also be available to the Purchaser to provide seminars
on an area basis or to attend any regional meetings where their presence and
input will be of value to the American Red Cross.
12. Termination.
12.1 For Breach. The Purchaser may terminate this Agreement,
without any liability except to pay for accepted filters, on thirty (30) days
prior written notice if the Vendor
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is in material breach of this Agreement and has not cured such breach within
thirty (30) days of written notice of such breach. The Vendor may terminate this
Agreement on thirty (30) days prior written notice, if the Purchaser is in
material breach of this Agreement and has not cured such breach within thirty
(30) days of written notice of such breach.
12.2 FDA. In the event that the FDA revokes approval of the
Filtration System, the Purchaser or the Vendor, effective immediately, may
terminate this Contract without any liability except to pay for accepted
filters.
12.3 Technological Change. If (i) as a result of a technological
change, new products become available which provide substantial improvements in
the safety of blood services or the efficiency of blood collection, through
automated collection or filtration strategies or viral inactivation systems or
other methods currently unknown and (ii) it can be shown by mutually agreed upon
independent experts in the blood collection field that any such new product
described in the preceding clause provides a substantial and meaningful clinical
benefit or substantial and material economic advantage compared to the
Filtration System, then the Purchaser, upon delivery to the Vendor of the
results of such independent experts' analysis and thirty (30) days prior written
notice, may terminate this Contract without any liability except to pay for
accepted filters.
12.4 For Change in Circumstances. The Purchaser may terminate this
Contract with ninety (90) days prior written notice at any time prior to the
completion of the Contract if the Purchaser has no further requirement for the
use of leukoreduction filters generally. In the event of such termination, the
Vendor agrees to cease immediately all work for the Purchaser and the liability
of the Purchaser shall be limited to payment for filters already delivered.
12.5 For Change in Policy or Mandate. The Purchaser may terminate
this Contract by thirty (30) days prior written notice at any time prior to
completion of the Contract if (i) there has occurred any material change in the
policies or mandates of the American National Red Cross that make such
termination necessary or desirable and (ii) the Purchaser has purchased from the
Vendor, and has paid for, not fewer than 2.1 million Filtration Systems
hereunder. In the event of such a termination, the Purchaser promptly shall pay
to the Vendor all amounts due and payable hereunder through the effective date
of such termination, plus an amount equal to all costs and expenses incurred by
the Vendor and, directly or indirectly, associated with the manufacture and/or
sale of the Filtration Systems to the Purchaser hereunder, including, but not
limited to, costs and expenses in respect of facilities, equipment, materials,
labor and otherwise.
13. Indemnification.
13.1 By The Vendor. The Vendor agrees to indemnify and hold
harmless the Purchaser and its governors, directors, officers, employees,
volunteers and agents against any
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liability, claim, cost or expense (including reasonable attorneys' fees) with
respect to bodily injury, death, and property damage arising from the
willful misconduct or negligent activity of the Vendor, its directors, officers,
employees or agents during its performance of its responsibilities under this
Contract, including but not limited to any claim against the Purchaser for
infringement of patent rights owned or held by competitors of the Vendor. The
Vendor further agrees to indemnify the Purchaser, its governors, directors,
officers, employees, volunteers and agents from and against any loss, damages,
costs, or expenses ("liability") in connection with any claim arising from any
defect in the Filtration Systems, or in the provision of any services pursuant
to this Contract, or by reason of the nature of the materials contained in said
Filtration Systems or provision of service, except to the extent that the final
order of a court of competent jurisdiction has determined that a proportion of
such liability thereof was caused either by an alteration in, tampering with, or
non-intended usage of the Filtration Systems by the Purchaser or by the willful
misconduct or negligent activity of the Purchaser, its directors, officers or
employees, in which case, the Purchaser shall be responsible solely for its
proportionate share of the liability.
13.2 Defense Obligations. In the event that the Vendor or the
Purchaser is, or both are, the subject of a third party claim, action, or
proceeding alleging injury or damages as a result of any manufacturing defect in
the Filtration System or in the provision of services pursuant to this Contract,
or for infringement of a patent held by a competitor of the Vendor, each party
shall provide the other with prompt notice thereof. The Vendor shall defend or
provide for the defense of such claim, action or proceeding at its sole costs
and expense. The Purchaser shall execute such documents and instruments deemed
necessary by the Vendor or its counsel and not in conflict or derogation of the
Purchaser rights under this Agreement. The Purchaser shall take such other
reasonable action the Vendor may request to assist the Vendor in its efforts on
such matters, including the provision of reasonable testimony or trial
assistance. The Purchaser shall not interfere with or take any steps to settle
such action. The Vendor shall reimburse the Purchaser for its documented and
reasonable out-of-pocket expenses in connection with providing any assistance
under this Section.
14. Insurance. The Vendor shall maintain the following insurance
coverages in full force and effect for the Term of this Contract.
(i) 1) Commercial General Liability Insurance in an amount of
at least $10,000,000 (Ten Million Dollars) naming the Purchaser an
additional insured party; 2) an auto liability policy with at least
$1,000,000 (One Million Dollars) in coverage; and 3) Workers'
Compensation coverage covering each party's own employees with
statutory limits for each jurisdiction where the work required
under this Contract is performed (including monopolistic states if
any work is to be performed in one or more of them) and an
employers' liability policy with at least the following limits,
$250,000 per accident, $500,000 per disease, and $250,000 disease
(each employee).
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<PAGE>
(ii) The Vendor further agrees to maintain not less than
$10,000,000 (Ten Million Dollars) of products liability coverage
naming the Purchaser as an additional insured party with respect to
any product sold to the Purchaser. Said products liability coverage
shall include coverage for claims made against the policy for
injury occurring as a result of a flaw or problem with the design
or manufacture of the Filtration Systems.
(iii) The Vendor agrees to maintain full replacement value "All
Risk" property insurance on all property and equipment of the
Vendor used under this Contract, and said property insurance shall
insure at all times all Filtration Systems being manufactured and
the Vendor agrees to waive any right of subrogation for loss or
damage to any of the Vendor's property at, on, or in the Red Cross
Center's or the Vendor's facilities. The Vendor agrees to obtain,
if required in such property insurance, a waiver of subrogation in
favor of the Purchaser. Said property insurance shall include
Business Interruption and Extra Expense coverage for such losses
arising from loss or damage to aforementioned Vendor property
without expectation of contribution from any such insurance the
Purchaser may maintain.
(iv) The Vendor shall, at its sole expense, keep in force
policies of insurance in the amounts as specified, and as required
by statute, with carriers reasonably satisfactory to the Purchaser;
and said insurance will be written as primary policy coverage and
not contributing with, or in excess of any insurance which the
Purchaser shall carry. Certificates of insurance evidencing all of
the above coverages and conditions (types and amounts) shall be
produced upon written request and remain in full force and effect
during the term of this Contract. The Vendor shall supply evidence
of its property insurance on an ACORD "Evidence of Property
Insurance" form 27. The Vendor's certificate(s) of insurance shall
provide for not less than thirty (30) days written notice of
cancellation, non-renewal or reduction in terms and conditions
below that required herein to the other party.
15. Dispute Resolution.
15.1 Initial Conferences. It is the intention of the parties
hereto to settle amicably all differences or disputes arising from this Contract
by conference and negotiation. The parties hereto will first attempt to resolve
any working level disputes through a Contract Management Advisory Committee
which shall be composed of an equal number of representatives of the Purchaser
and the Vendor. In the event that any problem or dispute is not so resolved,
either party may, upon written notice to the other, request that the matter be
referred to senior management officers within each respective organization with
the express authority to resolve the problem or issue. Such representatives
shall meet or confer at least once in good faith to negotiate a resolution. If
the representatives are unable to resolve the
850681.5
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<PAGE>
problem or dispute within 21 calendar days, any party may take the matter to the
Dispute Resolution Procedure set forth below. No Party may institute litigation
until such procedure has been completed unless, and to the extent that, doing so
is necessary to avoid irreparable harm.
15.2 Dispute Resolution Procedure. If any problem or dispute
arising out of, or related to, this Contract is not resolved by the parties
hereto in the manner described above, at the request of either of the parties,
the matter shall be submitted to mediation, or to such other form of dispute
resolution acceptable to both of the parties hereto. The mediation shall be
conducted in accordance with the Center for Public Resources Model Procedure for
Mediation of Business Disputes.
16. General Provisions.
16.1 Force Majeure. In the event that any party is prevented from
performing, or is unable to perform, any of its obligations under this Contract
due to any act of God, fire, casualty, flood, war, strike, lock out, failure of
public utilities, injunction or any act, exercise, assertion or requirement of
governmental authority, epidemic, destruction of production facilities,
insurrection, inability to procure materials, labor, equipment, transportation
or energy sufficient to meet manufacturing needs, or any other cause beyond the
reasonable control of the party invoking this provision, and if such party shall
have used its best efforts to avoid such occurrence and minimize its duration
and has given prompt written notice to the other party, then the affected
party's performance shall be excused and the time for performance shall be
extended for the period of delay or inability to perform due to such occurrence.
16.2 Confidentiality. Except as otherwise required by law, rule or
regulation, the terms of this Agreement shall be held in confidence by the
parties hereto. No party shall originate any publicity, news release or other
public announcement relating to this Agreement or the existence of an
arrangement between the parties without the prior written approval of the other
party, except as otherwise may be required by law, rule or regulation.
Each party may designate any or all of its information, data,
written and/or verbal communications developed, accessed, provided, or
referenced during the performance of this Contract as Confidential.
The Purchaser and the Vendor acknowledge and agree that if during
the term of this Contract such information is designated confidential and is
disclosed by one party to the other, such Confidential Information shall not be
used for any purpose other than those necessary to directly further the purposes
of this Contract, and each party shall hold all such confidential information in
the strictest confidence and shall not voluntarily sell, transfer, publish,
disclose, display or otherwise make available to any third persons such
confidential information or any portion thereof without the express written
consent of the other party. The
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<PAGE>
Vendor and the Purchaser shall protect the confidences of the confidential
information and prevent its unauthorized dissemination and each use commercially
reasonable efforts to protect the confidentiality of all such information
consistent with the manner in which they protect their most confidential
business information.
In the event either Party receives a subpoena or other validly
issued administrative or judicial process requesting Confidential Information of
the other party, it shall provide prompt notice to the other of such receipt so
that such party may seek a protective order or other appropriate remedy to
obtain confidential treatment of such Confidential Information and (i) cooperate
with such other party with respect to taking legally available steps to resist
or narrow such request or demand and (ii) if disclosure of such information is
legally required, exercise its commercially reasonable efforts to obtain an
order or other reliable assurance that confidential treatment will be accorded
to such Confidential Information.
For the purposes of this Contract, Confidential Information shall
include all information designated in writing as Confidential by the Parties.
The prices and terms and conditions set forth in this Contract are deemed
Confidential Information.
16.3 Public Statements. The Vendor shall not use or reference the
name or emblem of The American National Red Cross, including issuing any press
releases or otherwise making any public statement with respect to this Contract
(unless such press release or statement is required by applicable law,
regulation or the requirements of any listing agreement with any applicable
stock exchange), without the prior written consent of the Purchaser, which
consent will not be unreasonably delayed or withheld.
16.4 No Agency. Nothing contained in this Agreement shall be
deemed to constitute any party as the agent or representative of any other
party.
16.5 Survival of Obligations. All obligations of any party which,
by their nature, require performance after the expiration or termination of this
Agreement, shall survive the expiration or termination of this Agreement.
16.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, in a venue in
the Commonwealth of Virginia, without regard to its conflicts of law rules or
principals.
16.7 Entire Agreement. This Agreement constitutes the entire
agreement between the parties as to the purchase of r\LS Prestorage
Leukoreduction Filtration Systems and supersedes all prior and contemporaneous
agreements and understandings, whether oral or written, relating to the subject
matter hereof. No waiver, consent, modification or change of terms of this
Contract shall bind any party unless in writing signed by both the Vendor and
the
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<PAGE>
Purchaser, and then such waiver, consent, modification or change shall be
effective only in the specific instance and for the specific purpose given.
16.8 Headings. Captions and headings contained in this Agreement
have been included for ease of reference and convenience and shall not be
considered in interpreting or construing this Agreement.
16.9 Assignments. Neither party may assign this Contract without
the consent of the other party hereto. This Agreement will be binding upon and
inure to the benefit of the parties hereto and their respective permitted
successors and assigns.
16.10 Tax Exempt Status of American Red Cross. Notwithstanding any
other provision in this Agreement, the Parties acknowledge that the Purchaser
shall not be required to engage in any activity that compromises the charitable
tax exempt status of, or presents a reasonable likelihood of the imposition of
intermediate sanctions under Section 4958 of the Internal Revenue Code of 1986,
as amended, on the American Red Cross. The Purchaser is a not-for-profit
charitable institution exempt from the payment of sales and use taxes. The
Vendor is responsible for requesting and obtaining all tax exemption numbers as
required, and the Purchaser shall reasonably cooperate with, and assist the
Vendor, in obtaining such tax exemption numbers.
-14-
860681.5
<PAGE>
IN WITNESS WHEREOF, the parties hereto, acting through their duly authorized
officers, have executed this Master Purchase Contract as of the date first set
forth above.
HEMASURE INC. THE AMERICAN NATIONAL RED CROSS
By: /s/ John F. McGuire By: /s/ Philip C. Yenrick
------------------------ --------------------------
Name: John F. McGuire Name: Philip C. Yenrick
Title: President and Chief Title: Contracting Officer
Executive Officer
850681.5
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEMASURE INC. FOR THE SIX MONTHS ENDED JUNE 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,398
<SECURITIES> 0
<RECEIVABLES> 6
<ALLOWANCES> 0
<INVENTORY> 255
<CURRENT-ASSETS> 9,041
<PP&E> 3,465
<DEPRECIATION> 2,077
<TOTAL-ASSETS> 10,692
<CURRENT-LIABILITIES> 2,884
<BONDS> 0
<COMMON> 149
0
0
<OTHER-SE> 2,602
<TOTAL-LIABILITY-AND-EQUITY> 10,692
<SALES> 13
<TOTAL-REVENUES> 13
<CGS> 783
<TOTAL-COSTS> 783
<OTHER-EXPENSES> 3,947
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (733)
<INCOME-PRETAX> (5,391)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,391)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,391)
<EPS-BASIC> (0.45)
<EPS-DILUTED> 0
</TABLE>
