Registration No. 333-_________
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HemaSure Inc.
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
3841
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(Primary Standard Industrial Classification Code Number)
04-3216862
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(I.R.S. Employer Identification Number)
140 Locke Drive
Marlborough, Massachusetts 01752
(508) 490-9500
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(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
John F. McGuire, III
President and Chief Executive Officer
HemaSure Inc.
140 Locke Drive
Marlborough, Massachusetts 01752
(508) 490-9500
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(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
Luke P. Iovine, III, Esq.
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue
New York, New York 10022-4697
(212) 318-6000
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As soon as practicable after this registration statement becomes effective.
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(Approximate date of commencement of proposed sale to the public)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ X ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<CAPTION>
Calculation of Registration Fee
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price Aggregate Amount of
Registered Registered Per Share(1) Offering Price(1) Registration Fee
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Common Stock 2,551,320 shares $10.6875 per share $27,267,233 $7,198.55
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee based on the average high and low trading prices for the
common stock as reported on the over-the-counter bulletin board on March
24, 2000 pursuant to Rule 457(c).
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
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931200.4
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where such offer or sale is not permitted.
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SUBJECT TO COMPLETION
DATED MARCH ___, 2000
PRELIMINARY PROSPECTUS
2,551,320 Shares
[GRAPHIC OMITTED]
Common Stock
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All of the shares of common stock covered by this prospectus are owned
by the stockholders listed in the section of this prospectus called "Selling
Stockholders." The selling stockholders may sell any or all of their shares from
time to time. See "Plan of Distribution."
We will not receive any of the proceeds of sales by the selling
stockholders. We have agreed to bear all expenses related to this offering,
other than underwriting discounts and commissions and any transfer taxes on the
shares of common stock that the selling stockholders are offering.
Our common stock is listed for trading on the over-the-counter bulletin
board under the symbol "HMSR".
Investing in this common stock involves a high degree of risk.
Investors must be prepared to bear the economic risk of their investment for an
indefinite period of time. For a discussion of certain risks that should be
considered in connection with an investment in this common stock, see "Risk
Factors" beginning on page 4.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is March ___, 2000.
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931200.4
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You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or any sale of the common stock.
Unless the context otherwise indicates, references in this prospectus
to "we," "us," "our" or "HemaSure" refer to HemaSure Inc.
TABLE OF CONTENTS
Page
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Prospectus Summary...................................................1
Risk Factors.........................................................4
Note Regarding Forward-Looking Statements...........................15
Capitalization......................................................16
Use of Proceeds.....................................................16
Dividend Policy.....................................................16
Selected Financial Data.............................................17
Selling Stockholders................................................18
Plan of Distribution................................................19
Description of Capital Stock........................................21
Business............................................................25
Market For Common Equity............................................40
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................41
Management..........................................................47
Executive Compensation..............................................50
Security Ownership of Certain Beneficial Owners and Management......53
Certain Related Transactions........................................54
Private Placement Registration Rights...............................56
Legal Matters.......................................................57
Experts.............................................................57
Where You Can Find More Information.................................57
Index to Consolidated Financial Statements ........................F-1
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PROSPECTUS SUMMARY
This summary highlights some of the information in this prospectus. It
may not contain all of the information that is important to you. It contains
forward looking statements that involve risks and uncertainties. HemaSure's
actual results could differ materially from the results anticipated in these
forward looking statements. You should read the entire prospectus carefully,
including the risk factors and financial statements.
Our Company
We develop and supply innovative blood filtration technologies designed
to help meet today's increasing demand for a safer, more reliable blood supply.
Our blood filtration technologies are designed to reduce virus-carrying white
blood cells (leukocytes) in donated blood to nominal levels (a process known as
"leukoreduction"). We believe that we are well positioned to take advantage of
the anticipated growth in leukoreduction in the blood industry worldwide.
Our Market
Industry sources have estimated that approximately 40 to 45 million
units of blood are collected and transfused by developed countries annually and
that this number reaches 70 to 80 million units worldwide. In addition, some
industry sources estimate that the worldwide leukoreduction industry could
conceivably become an $800 million market in the near future.
Until recently, approximately 20% of donated blood in developed
countries was filtered to remove potentially harmful leukocytes. However, the
developed nations throughout the world are increasingly mandating universal
leukoreduction of their blood supplies. In North America and Europe, many
countries are committed to providing 100% leukoreduced blood components or have
received recommendations to provide 100% leukoreduced blood components. France,
Canada, Japan and the United Kingdom, including Ireland, are among the nations
that have implemented plans for requiring a 100% leukoreduced blood supply.
The United States is also moving toward universal leukoreduction of its
blood supply. Approximately 30% to 35% of donated blood in the United States is
currently filtered to remove leukocytes and we believe that this percentage will
increase. In September 1998, the Food and Drug Administration's ("FDA") Blood
Products Advisory Committee announced a non-binding recommendation that 100% of
the blood supply in the United States be leukoreduced. In addition, the American
Red Cross publicly announced that it is striving to achieve 100% leukoreduction
by the end of 2000.
Recent medical studies have demonstrated the patient benefits of
leukoreduction. Scientific studies have shown that the use of leukoreduced blood
could result in shorter hospital stays, fewer postoperative infections and/or
cost savings per patient of approximately $3,000 to $6,000 per patient for
certain procedures, including thoracic surgery, heart bypass surgery and
gastrointestinal surgery.
HemaSure Position
We have developed a proprietary product, the r\LS System, to provide
high-volume, centralized, pre-storage leukoreduction in blood centers. Our
technology is a simple yet highly functional design that requires few
manipulations which we believe provides for a more efficient process. We
designed the r\LS System to be a low cost filter and developed a manufacturing
process, which we believe enables us to manufacture and market the r\LS System
at a low cost, and which, as a result, allows us to effectively compete in the
marketplace.
We believe that we are well positioned to market and distribute our
product to a key segment of the leukoreduction market by capitalizing on our
strategic alliances. It is estimated that the American Red Cross collected over
6 million units of blood in 1999, which represented approximately 50% of the
blood donated in the United States. We entered into a master purchase agreement
with the American Red Cross that provides for
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the sale of the r\LS System by us to the American Red Cross on certain specified
terms. We also have an agreement with the American Red Cross to jointly develop
additional products and technology for their use, including a number of
filtration products based on our core technology.
In addition, we have an agreement with Gambro Inc., which is a leading
manufacturer and distributor of automated blood component collection systems and
a business unit of Gambro A.B, to act as the exclusive distributor of our r\LS
System worldwide, except for sales to the American Red Cross. The agreement also
provides for the development by us of an OEM filter for use with Gambro Inc.'s
Trima(R) Automated Blood Collection System.
HemaSure Management
Our senior management team is committed to the filtration industry and
possesses, on average, more than 15 years of industry experience. John F.
McGuire, III, our President and Chief Executive Officer, possesses 15 years of
experience in the industry. James B. Murphy, our Senior Vice President, Finance
and Administration, possesses 20 years of financial experience. Peter Sutcliffe,
our Chief Operating Officer, has approximately 20 years of experience in
production and product development. Donald Mareci, our Vice President, Sales and
Marketing, has approximately 20 years of experience in the filtration industry
in sales and marketing.
Corporate Information
We were incorporated in Delaware in December 1993. Our principal
executive offices are located at 140 Locke Drive, Marlborough, Massachusetts
01752, and our telephone number is (508) 490-9500. The address of our website is
"www.HemaSure.com."
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SUMMARY SELECTED FINANCIAL DATA
The following sets forth summary selected financial data for our
business on a historical basis for each of the periods and dates indicated and
on a pro forma basis at December 31, 1999. The following information should be
read in conjunction with our consolidated financial statements and the related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The pro forma data at and for the year ended
December 31, 1999 gives effect to the receipt by us of the net proceeds of
$25,975,153 from the private placement of 3,730,000 shares of our common stock
which was consummated on March 2, 2000 as if it had occurred on January 1, 1999.
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Year Ended December 31,
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1995 1996 1997 1998 1999
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(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ..................................... $ 834 $ 779 $ 2,357 $ 25 $ 805
Costs and expenses:
Cost of products sold..................... 1,073 3,785 4,158 657 2,408
Cost of collaborative research and development 283 41 - - -
Research and development.................. 4,061 6,128 3,577 3,794 2,681
Legal expense related to patents.......... 152 744 506 3,340 1,361
Selling, general and administrative....... 3,729 7,325 4,458 4,201 3,728
Restructuring charge...................... - - 1,215 - -
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Total costs and expenses.................. 9,298 18,023 13,914 11,992 10,178
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Loss from operations.......................... (8,464) (17,244) (11,557) (11,967) (9,373)
Other (expense) income........................ 1,014 1,394 1,673 (203) (1,292)
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Net loss from continuing operations........... (7,450) (15,850) (9,884) (12,170) (10,665)
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Discontinued operations:
Loss from operations of discontinued business - (9,550) - - -
Loss on disposal of discontinued business. - (15,198) - - -
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Net loss...................................... $ (7,450) $ (40,598) $ (9,884) $ (12,170) $ (10,665)
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Net loss per share of common stock-basic and
diluted (1):
Net loss from continuing operations (2)... $ (1.20) $ (1.96) $ (1.22) $ (1.35) $ (0.77)
Loss from operations of discontinued business - (1.18) - - -
Loss on disposal of discontinued business. - (1.88) - - -
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Net loss (2).............................. $ (1.20) $ (5.03) $ (1.22) $ (1.35) $ (0.77)
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Weighted average number of shares of common 6,205 8,069 8,127 9,025 13,766
stock outstanding-basic and diluted (2).......
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At December 31, 1999
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Actual Pro Forma
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(In thousands)
Balance Sheet Data:
Cash and marketable securities.............$ 5,243 31,218
Working capital............................ (327) 25,648
Total assets............................... 9,090 35,065
Notes payable long term ................... 43 43
Stockholders' equity....................... 1,227 27,202
(1) See Note B to our financial statements, included elsewhere in this
prospectus, for an explanation of the determination of the number of shares used
in computing pro forma net loss per share.
(2) On a pro forma basis, the net loss per share of common stock (basic and
diluted) from continuing operations is $(0.61), the net loss per share of
common stock (basic and diluted) is $(0.61) and the weighted average number of
shares of common stock outstanding-basic and diluted is 17,496,000.
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RISK FACTORS
You should carefully consider the following risks before making an
investment decision. The risks described below are intended to highlight risks
that are specific to us and are not the only ones that we face. Additional risks
and uncertainties, such as those which generally apply to our industry, also may
impair our business operations. You should also refer to the other information
set forth in this prospectus, including the discussions set forth in "Note
Regarding Forward-Looking Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as our
consolidated financial statements and the related notes.
We Have Incurred Substantial Historical Operating Losses and Anticipate Future
Operating Losses
We incurred substantial losses in each year since our inception in
1993, amounting to more than $85 million in cumulative losses as of December 31,
1999 over that period. We incurred net losses of $12,170,000 and $10,665,000 in
the years ended December 31, 1998 and 1999, respectively. Currently, our only
source of revenues is from the sales of our r\LS System. All of our other
planned blood-related products are in the research and development stage. All of
the products that we are currently developing will require pre-clinical and
clinical testing prior to submission of any regulatory application for
commercial use. Our ability to achieve a profitable level of operations will
depend on the commercial acceptance of our r\LS System, for which we began
accepting orders in the first quarter 1999. We cannot assure you that we will
achieve profitability, or if we achieve profitability, that we will be able to
sustain it.
Our Results of Operations May Fluctuate
Our results of operations may fluctuate on an annual and quarterly
basis due to, among other factors: variations in revenue from product sales;
variations in our marketing, distribution and manufacturing costs; timing of
regulatory approvals; timing of new product introductions by us and our
competitors; product obsolescence; timing of our capacity and manufacturing
expansion; supplier performance; pricing discounts; and timing of the
acquisition and integration of complementary businesses, assets, products and
technologies.
Because of the foregoing factors, past financial results should not be
relied upon as an indication of future performance. We believe that
period-to-period comparisons of our financial results to date are not
necessarily meaningful and expect that our results of operations may fluctuate
from period to period in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Overview."
Our Short-Term Success Depends on the Commercial Acceptance of Our r\LS System
Our r\LS System received 510(k) clearance from the FDA in June 1999.
Prior to that time, we did not recognize any meaningful revenue from sales of
the r\LS System. We do not expect to realize significant revenues from our other
products in development at least until 2001. Accordingly, our short-term success
will depend on the commercial acceptance of our r\LS System. To the extent that
the r\LS System does not gain commercial acceptance, our business, financial
condition and results of operations will be materially and adversely affected.
If the Market for Leukoreduced Blood Does Not Develop as Anticipated, We Could
Be Materially and Adversely Affected
The growth of our business and the success of our r\LS System are
dependent on the continued growth of the market for leukoreduced blood. Based on
industry sources, we estimate that approximately 30% of the blood supply of
developed countries is currently leukoreduced. We anticipate that over the next
two to five years, this percentage will increase to near 100%. This projection
is based on the commitment of the international community, and the non-binding
recommendations by the FDA's Blood Products Advisory Committee and the American
Association of Blood Banks, for universal leukoreduction. Factors that could
931200.4
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result in the market for leukoreduced blood not developing as anticipated
include a reluctance by healthcare payors to pay for leukoreduced blood if they
perceive that the benefits do not outweigh the costs and the development of
other technological processes providing comparable benefits at a reduced cost.
Additional factors may include capacity constraints at blood centers, studies
which may argue against the advantages of leukoreduction or the inability to
meet demand for leukoreduced blood. If the market for leukoreduced blood does
not develop as anticipated, we could be materially and adversely affected.
The Leukoreduced Blood Filtration Market is Extremely Competitive and Two of Our
Competitors Are Large, Well-Established Companies with Substantial Market Share
The leukoreduced blood filtration market is characterized by the
presence of significant competitors. Pall Corporation ("Pall") is the market
leader with approximately 50% to 60% market share. In addition, Baxter
International Inc. ("Baxter") has approximately 25% market share. We also face
competition from several other companies operating in this market. Many of our
competitors in the field of leukocyte reduction have substantially greater
resources, manufacturing and marketing capabilities, research and production
staffs and productions facilities. Some of our competitors have greater
experience in pre-clinical testing, human clinical trials and other regulatory
approval procedures, and have access to greater capital and other resources.
Moreover, many of our competitors may have management personnel with more
experience and may have other advantages in conducting certain businesses and
providing certain services. Furthermore, many of our competitors have
long-standing relationships with the national and regional blood centers to
which we market our products. Our ability to compete successfully will depend,
in part, on our ability to develop proprietary products, develop and maintain
products which are technologically superior to and/or of lower cost than those
currently on the market, attract and retain scientific personnel, obtain patent
or other proprietary protection for our products and technologies, obtain
required regulatory approvals and manufacture, assemble and successfully market
all of the products that we develop. See "Business -- Competition." For a
description of litigation to which we are and have been a party with Pall, see
"Business -- Legal Proceedings."
We Are Dependent on Our Strategic Relationships with the American Red Cross and
Gambro Inc.
We are dependent on our strategic relationships with the American Red
Cross and Gambro Inc. If any of our agreements with these parties are terminated
for any reason, our business, financial condition and results of operations
could be materially and adversely affected. See "Business -- Strategic
Relationships."
In addition, the amount and timing of resources which the American Red
Cross and Gambro Inc. devote to activities on our behalf is not within our
control. To the extent that the American Red Cross or Gambro Inc. does not
devote resources on our behalf, or does not do so on a timely basis, in
connection with the development, marketing, distribution or sale of our
products, we could be materially and adversely affected.
We May Fail to Support Our Anticipated Growth in Operations and May Experience
the Risks of Manufacturing Scale-Up Due to Our Limited Manufacturing Experience
To succeed in the implementation of our business strategy, we must
implement effective planning and operating processes. In addition, to manage
anticipated growth, we must continue to expand and upgrade core technologies,
continue to implement and improve our operational, financial and management
information systems, and hire, train and retain additional qualified personnel.
We have limited experience with the manufacture of our products on a commercial
scale. Our systems and procedures may not be adequate to support our operations,
and our management may not be able to achieve the rapid execution necessary to
exploit the market for our products and services. We cannot assure you that we
will not experience manufacturing and control problems as we begin to scale-up
our manufacturing operations or that we will be able to scale-up manufacturing
in a timely manner or at a commercially reasonable cost to enable production in
sufficient quantities. If we experience any of these problems, our business,
financial condition and results of operations may be materially and adversely
affected.
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We May Not Be Able to Obtain Additional Financing to Fund Our Operations When
Needed
We believe that our current available cash balances and cash generated
from our operating activities should be adequate to fund our expected level of
operations beyond the first quarter 2001. If our plans or assumptions change, if
our assumptions prove to be inaccurate or if we experience unanticipated costs
or competitive pressures, we may seek to raise additional capital by pursuing
strategic partnerships, public or private equity and/or debt financing. If we
fail to obtain any required financing on terms favorable to us, we may be unable
to continue to commercialize and market the r\LS System or complete the
development of our proposed products and/or market such products successfully,
or to continue our then current operations, if at all. Our cash requirements may
vary materially from those now planned because of factors such as the commercial
acceptance of the r\LS System, the successful development and commercial
acceptance of additional products, patent and litigation developments and the
introduction of competitive products. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." If we require additional funds in the future and cannot obtain
adequate funds on acceptable terms when needed, we could be materially and
adversely affected.
We May Be Unable to Adequately Protect Our Proprietary Rights
Our success depends significantly on our ability to protect our
proprietary rights in our products and technologies. If we are not adequately
protected, our competitors could use the intellectual property that we have
developed to enhance their products and services, which could harm our business.
We also cannot assure you that others will not independently develop
substantially equivalent proprietary technology or use their resources to design
comparable products that do not infringe our existing patents.
We rely on patent protection, as well as a combination of trade
secrets, unpatented know-how, continuing technological invention and the pursuit
of licensing opportunities to protect our proprietary rights and to develop and
maintain our competitive position, but these legal means afford only limited
protection. Furthermore, we cannot assure you that any of the patents owned by
or licensed to us will afford protection against competitors or that any pending
patent applications now or hereafter filed by or licensed to us will result in
patents being issued. We also cannot assure you that our nondisclosure
agreements with our employees and consultants will provide meaningful protection
for our trade secrets or other proprietary information. See "Business --
Licenses, Patents and Proprietary Information" and "Business -- Legal
Proceedings."
We May Be Sued by Third Parties for Infringement of Their Proprietary Rights
The products we develop are based on proprietary technologies for which
we have filed patent applications. However, competitors, including those with
substantially greater resources than us may in the future challenge the validity
of the patents owned by or licensed to us. We may not be aware of pending or
unissued patents that relate to our products or technology. Furthermore, we may
need to acquire licenses to or contest the validity of some issued third-party
patents in the field of blood filtration. Significant funds may be required to
contest such patents or to defend any claims, with or without merit, that we
infringed a third-party patent, and any such claim could adversely affect sales
of the challenged product until the claim is resolved. Moreover, any such claims
could be time-consuming and expensive to litigate or settle and could divert
management attention from administering our core business. See "Business --
Licenses, Patents and Proprietary Information" and "Business -- Legal
Proceedings."
We May Not Prevail in Pending or Potential Lawsuits
We are currently a defendant in a lawsuit brought by Pall regarding our
LeukoNet System relating to patent infringement. We are also currently a
defendant with Sepracor Inc. ("Sepracor"), Gambro A.B., Gambro, Inc. and Gambro
BCT (formerly COBE BCT, Inc.), a division of Gambro Inc., in a lawsuit brought
by Pall with respect to claims that our r\LS System infringes one of Pall's
patents. We cannot assure you that we will prevail in these pending litigations.
See "Business-- Legal Proceedings."
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We and Gambro, Inc., doing business as Gambro BCT ("Gambro"), filed a
complaint for declaratory relief against Pall in the United States District
Court of Colorado. We and Gambro seek declaratory relief that Pall's U.S. Patent
No. 4,925,572 (the "'572 Patent"), Pall's U.S. Patent No. 5,451,321 (the "'321
Patent") and Pall's U.S. Patent Nos. 5,229,012 (the "'012 Patent"), 5,344,561
(the "'561 Patent"), 5,501,795 (the "'795 Patent") and 5,863,436 (the "'436
Patent") are invalid and not infringed by our r\LS System and methods of using
the r\LS System. Pall submitted counterclaims alleging that our r\LS System
infringed its '572, '321, '012, '561, '795, and '436 patents and that we and
Gambro tortiously interfered and unfairly competed with Pall's business. Pall
has also counterclaimed against Gambro A.B. in this lawsuit. If determined
adversely to our interests, this proceeding could materially and adversely
affect our business, financial condition and results of operations. We cannot
assure you that we will prevail in this pending litigation or that we will not
be subject to the possibility of significant damages and an injunction against
the sale of the r\LS System if we do not prevail in this litigation. See
"Business -- Legal Proceedings."
We have engaged patent counsel to investigate the pending litigations.
We believe, based upon our review of these matters, that a properly informed
court should conclude that the manufacture, use and/or sale by us or our
customers of the LeukoNet System and the r\LS System do not infringe any valid
enforceable claims of the Pall patents. However, we cannot assure you that we
will prevail in the pending litigations, and an adverse outcome in a patent
infringement action would have a material and adverse effect on our financial
condition and future business and operations, including the possibility of
significant damages in the litigations and an injunction against the sale of the
r\LS System if we do not prevail in the litigations.
In January 1997, we entered into a Restructuring Agreement of the debt
related to our acquisition of Novo Nordisk A/S's plasma products unit. In
January 1998, we elected to convert all indebtedness under the approximately
$11,700,000 promissory note which was issued to Novo Nordisk A/S in connection
with the Restructuring Agreement into common stock at a conversion price of
$10.50 per share, or 827,375 shares. We also elected to treat as forgiven
$3,000,000 in principal amount of the note, pursuant to the terms of the note.
Novo Nordisk A/S has contested the conversion of the note, including the
forgiveness of the $3,000,000 amount. This dispute, with or without merit, could
be time-consuming and expensive to litigate or settle if brought into a court of
law, and could divert management attention from administering our core business.
If Novo Nordisk A/S succeeds on its dispute and we are deemed to have wrongfully
converted the original note, then the 827,375 shares of common stock issued to
Novo Nordisk A/S may no longer be outstanding, and we may be obligated to repay
certain indebtedness under the original note. See "Certain Related Transactions
- -- Novo Nordisk A/S."
The medical technology business generally entails significant
litigation risk, including the risk of litigation relating to patents and
product liability. We cannot assure you that additional lawsuits will not be
filed against us.
Our Future Success Depends, in Part, on Successful Development and
Commercialization of Our Development-Stage Blood-Related Products
All of our planned blood-related products other than the r\LS System
are in the research and development stage. All of our products that we are
currently developing will require pre-clinical and clinical testing which may be
costly and lengthy prior to submission of any regulatory application for
commercial use. We cannot assure you that we will receive regulatory approvals
to commence the sale of these blood-related products. These products are in
various stages of development, and the period necessary to achieve regulatory
approval and market acceptance of any individual product is uncertain and
typically lengthy. Our failure to develop and gain commercial acceptance of
these products could have a material and adverse effect on our financial
condition and future business and operations. We cannot assure you that our
product development efforts will be successfully completed, that required
regulatory approvals will be obtained, that products under development can be
manufactured at acceptable cost and with the appropriate quality or that any
approved products can be successfully introduced or will achieve and sustain
market acceptance.
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We May Not Be Able to Obtain Timely Regulatory Approvals, If at All
The research, development, manufacturing and marketing of our products
are subject to extensive regulation in the United States by numerous regulatory
authorities including the FDA under the Federal Food, Drug, and Cosmetic Act
(the "FDC Act"), the Federal Trade Commission (the "FTC") under the Federal
Trade Commission Act (the "FTC Act") and by comparable regulatory authorities in
foreign countries. These regulatory authorities and other federal, state and
local entities will regulate, among other things, the pre-clinical and clinical
testing, safety, effectiveness, approval, clearance, manufacturing, labeling,
packaging, export, storage, recordkeeping, adverse event reporting, and
promotion and advertising of our products. FDA approval or clearance of our
products, typically including a review of the manufacturing processes and
facilities used to produce such products, is required before the products may be
marketed in the United States. Further, if cleared or approved, the FDA may
impose significant conditions, including limitations on labeling and advertising
claims and post-market testing, tracking or surveillance requirements. In
addition, for products exported from the United States to any foreign country or
territory, applicable FDA export requirements must be met. We are also subject
to numerous and varying foreign regulatory requirements and standards governing
the design and conduct of clinical trials and the manufacturing and marketing of
our products. Such requirements and standards include ISO 9001 which
specifically addresses requirements for the manufacture, design, development,
installation and service of products and EN46001 which addresses the
requirements to market medical devices in the European Union. These
international regulatory requirements and standards may vary widely from country
to country. The time required to obtain foreign approvals often differs from
that required to obtain FDA approval. Also, approval by the FDA does not ensure
approval by regulatory authorities in other countries.
Failure to meet regulatory standards or to obtain marketing clearances
or approvals could have a material and adverse effect on our business, financial
condition, results of operations and ability to market our products. See
"Business -- Government Regulation" for a full description of the regulatory
issues and explanation of the terms used below.
Need for FDA Approval or Clearance to Market Our Products in the United
States
Obtaining required approvals from the FDA is costly, time-consuming and
subject to unanticipated delays. In addition, government regulation
substantially increases the cost of developing, manufacturing and selling our
products. We cannot assure you that we can comply with FDA standards or that the
FDA will approve any of our products for marketing or, if they are approved,
that they will be approved on a timely basis. Failure to meet regulatory
standards or to obtain marketing clearances or approvals could have a material
and adverse effect on our business, financial condition, results of operations
and ability to market our products.
We believe that our In-Line RBC Filtersets (a system which integrates
the filter and receiving bag with the collection bag) currently in development
will be subject to regulation as a "drug" by the FDA. (In Europe, our In-Line
RBC Filtersets will be subject to regulation as a "device.") New drug products
require an approved New Drug Application ("NDA") before they may be marketed in
the United States. Development of a new drug product is an expensive multi-step
process that can take many years. This process typically includes pre-clinical
in vitro and/or animal testing that must be conducted in accordance with good
laboratory practices, and clinical trials in humans under an Investigative New
Drug application ("IND"), which must be allowed to become effective by the FDA
before human trials may begin. The FDA may place a clinical trial on hold or
terminate it if, among other reasons, it concludes that clinical subjects are
being exposed to an unacceptable health risk. Marketing of the product will
require the submission and approval of an NDA including the pre-clinical and
clinical data, information on manufacturing and controls, and any additional
data requested by the FDA. We cannot assure you that we can conduct our
pre-clinical studies and clinical studies in accordance with FDA standards and
regulations, or that a submitted IND will result in clinical trials. We also
cannot assure you that the FDA will approve our NDA in a timely fashion, if at
all.
931200.4
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We believe that our other products under development will be classified
as "devices" by the FDA. In order to be legally marketed, medical devices that
are subject to FDA pre-market regulation are either subject to clearance by
pre-market notification under section 510(k) of the FDC Act or are subject to
approval through the pre-market application ("PMA") process. We believe that our
medical devices currently under development will be subject to the 510(k)
process, which requires that the FDA find that a device is substantially
equivalent to a legally marketed device before the device may be commercially
distributed. The FDA may require clinical data or other additional information
before making a substantial equivalence determination. We cannot assure you that
the FDA will find our devices substantially equivalent in a timely manner, if at
all.
Should the FDA find any of our devices not substantially equivalent
("NSE"), and we fail to obtain a risk-based classification placing our NSE
device into Class I or Class II, we will have to obtain PMA approval for our
device. Like obtaining NDA approval, the PMA approval process can be costly and
time-consuming. The FDA typically requires, among other things, extensive
pre-clinical and clinical data and information on manufacturing and controls to
support approval. Clinical data is normally gathered under an Investigation
Device Exemption ("IDE"), which must be approved by the FDA before trials may
commence. Trials under IDE typically proceed in three phases and are subject to
extensive regulation. We cannot assure you that we can conduct any pre-clinical
or clinical medical studies that may be required to clear or approve our
products in accordance with FDA standards and regulations, or that a submitted
IDE will be approved by the FDA. We also cannot assure you that the FDA will
approve a PMA of ours in a timely fashion, if at all.
Product Modifications May Require Clearance or Approval
Changes to approved drug products that affect safety, effectiveness or
changes in manufacturing of drug products having a substantial potential to
adversely affect product safety or effectiveness require approved supplemental
applications. Such supplemental applications may require the submission of
clinical and/or manufacturing comparability data and must be approved before the
product may be marketed as modified. Changes to devices cleared for marketing
under section 510(k) that could significantly affect safety and effectiveness
will require clearance of a new 510(k). Changes to approved PMA products that
affect safety and effectiveness require the submission of a supplemental PMA. We
would be prohibited from marketing the modified drug or device until we received
FDA clearance or approval. There is no guarantee that the FDA would timely, if
at all, clear or approve any modified NDA, 510(k) or PMA product. Failure to
obtain timely clearance or approval for changes to marketed products could have
a material and adverse effect on our business, financial condition and results
of operations.
The r\LS System Post-Market Surveillance
Our r\LS System was cleared for marketing in 1999 in the United States
under section 510(k) with a post-market surveillance protocol to look for
filter-related transfusion reactions which was agreed to between the FDA and us.
We have found no filter-related transfusion reactions and believe we have
satisfied the FDA's post-market surveillance requirements. We submitted a report
to that effect in early March 2000. We anticipate but cannot guarantee that the
FDA will find our report satisfactory. The post-market surveillance study does
not currently affect our ability to market and sell the r\LS System.
Required Compliance with Current Good Manufacturing Practice
Requirements
Our marketed products will be subject to current good manufacturing
practice regulations established by the FDA for drugs and the quality system
regulation for medical devices. We cannot assure you that we or our suppliers or
contractors will be able to attain or maintain compliance with these standards.
In addition, any changes to manufacturing facilities or methods may require FDA
clearance or approval.
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Reporting Requirements
FDA law and regulations require that medical device reports ("MDRs") be
submitted to the FDA to report device-related deaths, serious injuries and
product malfunctions that could result in death or serious injury were they to
recur. Certain adverse drug experiences are also required to be reported to the
agency. These reports can trigger various FDA regulatory actions such as
inspections, recalls and patient/physician notifications. Because such reports
are publicly available, they can also become the basis for private lawsuits,
including class actions. Failure to submit reports to the FDA constitutes a
violation of the law enforceable under the FDC Act. Depending on their
significance, MDRs could have a material and adverse effect on our business,
financial condition, results of operations and ability to market our products.
Labeling and Advertising Restrictions
The nature of marketing claims that we will be permitted to make in the
labeling and advertising of our products will be limited to those specified in
an FDA clearance or approval. Claims exceeding those that are cleared or
approved will constitute violations of the FDC Act and may result in FDA
enforcement action. Advertisements of our products will also be subject to
regulation by the FTC under the FTC Act. The FTC Act prohibits unfair methods of
competition and unfair or deceptive acts in or affecting commerce. Violations of
the FTC Act, such as failure to have substantiation for product claims, would
subject us to a variety of enforcement actions, including compulsory process,
cease and desist orders and injunctions. FTC enforcement can result in orders
requiring, among other things, limits on advertising, corrective advertising,
consumer redress and recission of contracts. Violations of FTC enforcement
orders can result in substantial fines or other penalties.
Violations of the FDC Act
Violations of the FDC Act or regulatory requirements at any time during
the product development process, approval process or after approval may result
in agency enforcement actions, including voluntary or mandatory recall, license
suspension or revocation, seizure of products, fines, injunctions and/or civil
or criminal penalties. Any such agency action could have a material and adverse
effect on our business, financial condition and results of operations.
Future Changes in Government Regulation
We cannot predict the nature of any future laws, regulations,
interpretations or applications. We also cannot predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on our business in the future. Any such requirements could delay or
prevent regulatory approval or clearance of products under development. Any such
requirements could have a material and adverse effect on our business, financial
condition, results of operations and ability to market our products.
We May Not Be Able to Successfully Compete with Technological Advances by Our
Competitors
The field in which we compete is characterized by extensive research
efforts and rapid technological progress. As a result, we expect to encounter
significant competition in the sale of our proposed products. Our r\LS System
and our products under development, if commercialized, will compete with other
products currently on the market as well as with future products developed by
other medical device companies, biotechnology and pharmaceutical companies,
hospital supply companies, national and regional blood centers, certain
governmental organizations and agencies and academic institutions. We cannot
assure you that we will be able to compete effectively with the technology of
our competitors or that developments by others will not render our products or
technologies obsolete or noncompetitive. See "Business -- Competition."
931200.4
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Our Potential Customers Are Limited in Number
The customers for our potential products are a limited number of
national and regional blood centers, which collect, store and distribute blood
and blood products. In the United States, the American Red Cross collects and
distributes approximately 50% of the nation's supply of blood products. Other
major blood centers include the New York Blood Center, Blood Centers of America,
America's Blood Centers and United Blood Services, each of which distributes 6%
to 12% of the nation's supply of blood and blood products. In Europe, various
national blood transfusion services or Red Cross organizations collect, store
and distribute virtually all of their respective nation's blood and blood
products supply. The number of our customers also may be limited to the extent
any exclusive relationships are entered into between our potential customers and
our competitors. We cannot assure you that we will be successful in marketing
our products to these potential customers.
To date, we have primarily targeted blood donor centers rather than
hospitals as our focus market because we believe that pre-storage leukoreduction
at blood donor centers will prove to be more beneficial than bedside filtration.
We believe that pre-storage leukoreduction is more cost-effective and provides
more patient medical benefits than bedside filtration. However, if bedside
filtration proves to be more beneficial than pre-storage leukoreduction at
blood donor centers, then our failure to capture a significant share of the
hospital market could materially harm our business. In light of the fact that
our available customers are limited in number, any potential customers are
critical to our business and success.
We Could Be Subject to Product Liability
The testing, marketing and sale of our products will entail an inherent
risk of product liability. We cannot assure you that product liability claims
will not be asserted against us. We currently maintain product liability
insurance coverage which we believe is appropriate with respect to our products
and our industry, but we cannot assure you that we will be able to obtain
additional product liability insurance on acceptable terms or that current
insurance or insurance subsequently obtained will provide adequate coverage
against any and all potential claims, if needed. Also, the limitations of
liability contained in agreements to which we are a party may not be enforceable
and may not otherwise protect us from liability for damages. The successful
assertion of one or more large claims against us that exceeds available
insurance coverage, or changes in our insurance policies, such as premium
increases or the imposition of large deductibles or co-insurance requirements,
could materially and adversely affect our business.
A Limited Number of Persons Indirectly Control Our Company and May Exercise
Their Control in a Manner Adverse to Your Interests
As of March 24, 2000, Sepracor, Gambro Inc. and the directors and
officers of our company, in the aggregate, own approximately 53% of our
outstanding voting stock. See "Business -- Legal Proceedings" and "Certain
Related Transactions." By virtue of this stock ownership, they have the power to
direct our affairs and will be able to determine the outcome of all matters
required to be submitted to shareholders for approval, including the election of
a majority of our directors, any merger, consolidation or sale of all or
substantially all of our assets, and amendment of our certificate of
incorporation. Because a limited number of persons control us, transactions
could be difficult or impossible to complete without the support of those
persons. It is possible that these persons will exercise control over us in a
manner adverse to your interests. See "Security Ownership of Certain Beneficial
Owners and Management."
Pursuant to the terms of its investment in our company in May 1999,
Gambro Inc. is entitled to two seats on our board of directors for as long as
Gambro Inc. and its permitted transferees beneficially own at least 20% of our
common stock. Under the terms of its investment, Gambro Inc. has agreed that it
and its permitted transferees will vote all the shares of our common stock
beneficially owned by them for each slate of director nominees proposed by our
board of directors for election by stockholders so long as we have not been
determined to be in material breach of our agreements with Gambro Inc. Further,
we have granted Gambro Inc. certain anti-dilution rights which will allow it
and its permitted transferees to maintain their level of beneficial
931200.4
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<PAGE>
ownership of our common stock in the event we determine to make any private or
public offering of our common stock or securities convertible into our common
stock. See "Certain Related Transactions -- Gambro Inc."
Our Operational Capabilities Are Limited to a Single Facility
We have only one facility, located in Marlborough, Massachusetts. A
significant portion of our development, administrative and manufacturing
operations take place at this facility. Any catastrophe, such as fire, flood or
hurricane, that renders the facility substantially unusable for an extended
period of time, would have a material and adverse effect on our business,
financial condition and results of operations. We are currently negotiating with
some of our existing vendors to provide contract services in connection with our
production capacity expansion strategy. However, we cannot assure you that we
will be able to successfully enter into binding arrangements with such vendors.
We Depend on a Limited Number of Manufacturers and Suppliers
We rely on a limited number of manufacturers and suppliers for certain
components of the r\LS System other than the filters and on a single contract
manufacturer for the filters. Currently, these manufacturers and suppliers,
other than Filtertek Inc. ("Filtertek") and Command Medical Products Inc.
("Command"), as described below, are not contractually bound to provide us with
products or materials. We have not experienced difficulty to date in acquiring
components. However, we cannot assure you that manufacturing or supply
interruptions will not occur in the future or that we will not have to obtain
substitute products or materials. Because there are multiple sources available
to us for our components, and based upon our ongoing relationship with our
suppliers, we do not believe that the loss of any of our current supply channels
would result in a material and adverse effect on our business or our results of
operations. However, any significant interruption of the manufacture of products
or supply of materials could have a material and adverse effect on our business.
Further, we cannot assure you these third parties that supply us will continue
to do so.
We depend on Filtertek for the manufacture and supply of filters used
in our r\LS System pursuant to our contract with Filtertek. We depend on
Filtertek to (i) allocate sufficient capacity to our manufacturing needs, (ii)
produce acceptable quality at agreed pricing and (iii) deliver on a timely
basis. If Filtertek is unable to satisfy these requirements, our business,
financial condition and operating results could be materially and adversely
affected. Under our supply agreement with Filtertek, we are obligated to provide
to Filtertek, on a quarterly basis, forecasts for anticipated purchases for the
upcoming 12-month period. The requirements of the contract could result in
shortages or excess product and adversely harm our business. Any failure in
performance by this manufacturer for any reason could have a material and
adverse effect on our business. Production and pricing by Filtertek is subject
to the risk of price fluctuations and periodic shortages of components. We have
no supply agreements with component suppliers and, accordingly, we are dependent
on the future ability of Filtertek to purchase components. Failure or delay by
suppliers in supplying necessary components could adversely affect our ability
to deliver products on a timely and competitive basis in the future.
We depend on Command for the manufacture and supply of dry bags used in
our r\LS System and the assembly of our r\LS System filters pursuant to our
contract with Command. We depend on Command to (i) allocate sufficient capacity
to our manufacturing needs, (ii) produce acceptable quality at agreed pricing
and (iii) deliver on a timely basis. If Command is unable to satisfy these
requirements, our business, financial condition and operating results could be
materially and adversely affected. Under our supply and assembly agreement with
Command, we are obligated to provide to Command 90 days before each year of the
supply and assembly agreement forecasts for anticipated purchases of the dry
bags and assembly requirements for the upcoming 12-month period. The
requirements of the contract could result in shortages or excess product and
adversely harm our business. Any failure in performance by this manufacturer for
any reason could have a material and adverse effect on our business. Production
and pricing by Command is subject to the risk of price fluctuations in respect
of raw materials, overhead and labor. We have no supply agreements with
component suppliers and, accordingly, we are dependent on the future ability of
Command to purchase components for the
931200.4
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dry bags. Failure or delay by suppliers in supplying necessary components for
the dry bags could adversely affect our ability to deliver products on a timely
and competitive basis in the future.
We May Be Adversely Affected by Changes in the Healthcare Industry
In the United States, a fundamental change is occurring in the
healthcare system. Competition to gain patients on the basis of price, quality
and service is intensifying among healthcare providers who are under pressure to
decrease the costs of healthcare delivery. This trend is expected to continue.
In addition, there has been significant consolidation among healthcare providers
as providers seek to enhance efficiencies, and this consolidation is expected to
continue. As a result of these trends, in recent years, many of our competitors'
overall price increases have been below the increases in the consumer price
index, and these industry trends may inhibit our ability to increase prices in
the future. Further, we could be adversely affected by customer attrition as a
result of consolidation among healthcare providers.
Risks Related to Foreign Operations and Export Sales Could Harm Our Business
International operations are subject to certain additional risks
inherent in conducting business outside the United States. Such risks include
changes in currency exchange rates, price and currency exchange controls, import
restrictions, nationalization, expropriation and other governmental action. For
sales and manufacturing outside the United States, we will also be subject to
foreign regulatory requirements governing human clinical trials, manufacturing
and marketing approval for drugs or biologics and medical devices. These
regulatory requirements may vary widely from country to country. We cannot
predict the incidence of such events or the level of burdensomeness of such
regulatory requirements which could materially and adversely impact our sales
and manufacturing outside the United States and our business, financial
condition and results of operations generally.
We Depend on Our Key Personnel
We are highly dependent upon the expertise and services of the
principal members of our management and scientific staff, in particular, John F.
McGuire, III, our President, Chief Executive Officer and one of our directors,
James B. Murphy, our Senior Vice President, Finance and Administration, and
Peter C. Sutcliffe, our Vice President and Chief Operating Officer. Our business
could be materially and adversely affected if the services of Messrs. McGuire,
Murphy and Sutcliffe cease to be available. In addition, the loss of the
services of any of our other senior management and scientific personnel also
could have a material and adverse effect on us. See "Executive Compensation --
Employment and Retention Agreements."
Our success also depends, in large part, upon our ability to continue
to attract and retain highly-skilled scientific, managerial and marketing
personnel. Competition for such personnel is intense. Competitors and others
have in the past, and may in the future, attempt to recruit our employees. We
cannot assure you that we will be successful in attracting and retaining our
personnel.
Stocks Traded on the OTC Bulletin Board are Subject to Market Risks in Addition
to Those Market Risks Applicable to Exchange-Traded and Nasdaq Stock Market
Traded Stocks
Our shares of common stock are traded on the OTC Bulletin Board, an
electronic, screen-based trading system operated by the National Association of
Securities Dealers, Inc. Securities traded on the OTC Bulletin Board are, for
the most part, thinly traded and generally are not subject to the level of
regulation imposed on securities listed or traded on the NASDAQ system or on a
national securities exchange. As a result, an investor may find it difficult to
dispose of, or to obtain accurate quotations as to the price of, our common
stock.
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Our Stock Price Could Be Volatile
The price of our common stock has been and may in the future continue
to be extremely volatile, with the sale price fluctuating from a low of 1 13/32
to a high of 7 3/8 in 1999. Factors such as the announcements of technological
innovations or new products by us or our competitors, governmental regulation,
healthcare legislation, developments in patent or other proprietary rights of
ours or our competitors, including litigation, fluctuations in our operating
results and market conditions for healthcare stocks in general could have a
significant impact on the future price of our common stock. In addition, the
stock market has from time to time experienced extreme price and volume
fluctuations which may be unrelated to the operating performance of particular
companies.
Sales of a Number of Shares Eligible for Public Sale Could Cause Our Stock Price
to Decline
Certain holders of our securities, including Sepracor, Gambro Inc. and
Novo Nordisk A/S, are entitled to registration rights with respect to an
aggregate of 12,526,064 shares of common stock, including 2,367,000 shares of
common stock underlying the warrants issued to Sepracor. See "Certain Related
Transactions -- Sepracor" and "Certain Related Transactions -- Novo Nordisk
A/S." Sales of substantial amounts of these shares in the public market or the
prospect of sales of these shares could adversely affect the market price of our
common stock. See "Description of Capital Stock -- Registration Rights."
You Might Suffer Dilution in the Value of Your Shares
Persons purchasing shares pursuant to this prospectus might incur
immediate and substantial dilution in net tangible book value per share. To the
extent outstanding options to purchase common stock are exercised, there will be
further dilution. See "Dilution."
We Do Not Expect to Pay Any Dividends
We have not declared or paid cash dividends since our inception. We
currently intend to retain all of our earnings to finance future growth and
therefore, do not expect to declare or pay cash dividends in the foreseeable
future.
Our Certificate of Incorporation and Bylaws and Delaware Law Contain Provisions
That Could Discourage a Takeover
Provisions of our certificate of incorporation and bylaws and Delaware
law may discourage, delay or prevent a merger or acquisition that a stockholder
may consider favorable. These provisions include or may include authorizing our
board of directors to issue preferred stock and limiting the persons who may
call special meetings of stockholders.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), 15 U.S.C.A. Section 77z-2 and 78u-5 (Supp. 1996), Congress
created a safe harbor to protect companies from securities law liability in
connection with forward-looking statements. We intend to qualify both our
written and oral forward- looking statements for protection under the Reform Act
and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act to include,
generally, expressed expectations of future events and the assumptions on which
the expressed expectations are based. All forward- looking statements are
inherently uncertain as they are based on various expectations and assumptions
concerning future events and they are subject to numerous known and unknown
risks and uncertainties which could cause actual events or results to differ
materially from those projected. Due to those uncertainties and risks, you
should not place undue reliance on our forward-looking statements in this
prospectus. We undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
"Forward-looking statements" are contained throughout this prospectus.
The words "estimate," "project," "intend," "expect," "anticipate," "believe" and
similar expressions are intended to identify forward- looking statements.
These are several important factors which could cause forward-looking
statements made in this prospectus to be inaccurate. These factors could
adversely affect our operations and financial results and include, but are not
limited to, the following: the factors described in this prospectus under the
heading "Risk Factors"; risks relating to our liquidity and capital
requirements; risks relating to adverse resolution of lawsuits pending against
us; risks relating to manufacturing scale-up; and risks relating to
identification of growth opportunities.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of
forward-looking statements.
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CAPITALIZATION
The following table sets forth our historical capitalization as of
December 31, 1999 and as of December 31, 1999 pro forma, as adjusted to give
effect to the receipt by us of the net proceeds of $25,975,153 from the private
placement of 3,730,000 shares of our common stock which was consummated on March
2, 2000. This information should be read in conjunction with our consolidated
financial statements and notes relating to such statements and financial data
appearing elsewhere in this prospectus.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources," "Description of
Capital Stock" and the more detailed financial statements and notes appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------
Actual Pro Forma
----------- ----------
(In thousands)
<S> <C> <C>
Current portion of long-term obligations:............................................... $ 30 $ 30
Long-term obligations, less current portion:............................................ 43 43
Stockholders' equity:
Common stock, $.01 par value, 35,000,000 shares authorized.......................... 158 195
Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued or
outstanding on an actual basis; none issued and outstanding on an as adjusted basis.
Additional paid-in capital.......................................................... 86,241 112,179
Accumulated deficit................................................................. (85,172) (85,172)
----------- ----------
Total stockholders' equity.......................................................... $ 1,227 $ 27,202
----------- ----------
Total capitalization................................................................ $ 1,300 $ 27,275
=========== ==========
</TABLE>
USE OF PROCEEDS
We will not receive any proceeds from the sales of common stock by the
selling stockholders pursuant to this prospectus.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock. We
currently intend to reinvest our earnings, if any, for use in the operation of
our business and do not anticipate paying any cash dividends in the foreseeable
future.
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with the financial statements and the notes to such statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The selected statement of operations data
for the years ended December 31, 1997, 1998 and 1999, and the balance sheet data
at December 31, 1998 and 1999, are derived from our financial statements
included elsewhere in this prospectus which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The balance sheet data at
December 31, 1995, 1996 and 1997 and the statement of operations data for the
years ended December 31, 1995 and 1996 are derived from our audited financial
statements not included in this prospectus. The pro forma data at and for the
year ended December 31, 1999 gives effect to the receipt by us of the net
proceeds of $25,975,153 from the private placement of 3,730,000 shares of our
common stock which was consummated on March 2, 2000 as if it had occurred on
January 1, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ 834 $ 779 $ 2,357 $ 25 $ 805
Costs and expenses:
Cost of products sold........................ 1,073 3,785 4,158 657 2,408
Cost of collaborative research and development 283 41 - - -
Research and development..................... 4,061 6,128 3,577 3,794 2,681
Legal expense related to patents............. 152 744 506 3,340 1,361
Selling, general and administrative.......... 3,729 7,325 4,458 4,201 3,728
Restructuring charge......................... - - 1,215 - -
----------- ------------ ----------- ----------- ----------
Total costs and expenses..................... 9,298 18,023 13,914 11,992 10,178
----------- ------------ ----------- ----------- ----------
Loss from operations............................. (8,464) (17,244) (11,557) (11,967) (9,373)
Other (expense) income........................... 1,014 1,394 1,673 (203) (1,292)
----------- ------------ ----------- ----------- ----------
Net loss from continuing operations.............. (7,450) (15,850) (9,884) (12,170) (10,665)
----------- ------------ ----------- ----------- ----------
Discontinued operations:
Loss from operations of discontinued business - (9,550) - - -
Loss on disposal of discontinued business.... - (15,198) - - -
----------- ------------ ----------- ----------- ----------
Net loss......................................... $ (7,450) $ (40,598) $ (9,884) $ (12,170) $ (10,665)
=========== ============ =========== =========== ==========
Net loss per share of common stock-basic and
diluted(1):
Net loss from continuing operations (2)...... $ (1.20) $ (1.96) $ (1.22) $ (1.35) $ (0.77)
Loss from operations of discontinued business - (1.18) - - -
Loss on disposal of discontinued business.... - (1.88) - - -
----------- ------------ ----------- ----------- ----------
Net loss (2)................................. $ (1.20) $ (5.03) $ (1.22) $ (1.35) $ (0.77)
=========== ============ =========== =========== ==========
Weighted average number of shares of common stock
outstanding-basic and diluted (2)................ 6,205 8,069 8,127 9,025 13,766
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
Actual Pro Forma
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and marketable securities.............. $ 47,841 $ 16,724 $ 8,156 $ 1,827 $ 5,243 $ 31,218
Working capital ............................ 46,905 14,844 6,071 37 (327) 25,648
Total assets................................ 50,212 20,560 10,607 5,655 9,090 35,065
Capital lease obligations long-term......... 286 525 289 68 - -
Notes payable long-term..................... - - 72 5,073 43 43
Convertible subordinated note payable long-term - 8,687 8,687 - - -
Stockholders' equity (deficit).............. 48,002 7,929 (1,467) (2,832) 1,227 27,202
</TABLE>
(1) See Note B to our financial statements, included elsewhere in this
prospectus, for an explanation of the determination of the number of shares used
in computing net loss per share.
(2) On a pro forma basis, the net loss per share of common stock (basic and
diluted) from continuing operations is $(0.61), the net loss per share of
common stock (basic and diluted) is $(0.61) and the weighted average number of
shares of common stock outstanding-basic and diluted is 17,496,000.
931200.4
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth information with respect to the number
of shares of common stock held by each selling stockholder as of the date of
this prospectus and the shares being offered by the selling stockholders. The
table indicates the nature of any position, office or other material
relationship that the selling stockholder has had within the past three years
with HemaSure or any of its affiliates. This prospectus relates to the offer and
sale by the selling stockholders of up to 2,551,320 shares of common stock. The
selling stockholders may offer all or part of the shares of common stock covered
by this prospectus. Information with respect to shares owned beneficially after
this offering assumes the sale of all of the shares offered and no other
purchases or sales of shares of common stock. The shares of common stock offered
at any time or from time to time by this prospectus may be offered from time to
time by the selling stockholders named below.
<TABLE>
<CAPTION>
Number of
Shares of Total
Common Number Number of Number of Percentage
Stock, not of Shares Shares of Percentage Shares to be Number of to be
including Represented Common Beneficially Offered for Shares to Beneficially
Warrants, by Warrants Stock Owned the Account be Owned Owned
Beneficially Beneficially Beneficially before this of the Selling after this after this
Name Owned Owned Owned + Offering Stockholder Offering Offering
---- ----------- ------------ ------------ ----------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Janus Investment Fund, on behalf
of its series Janus Global Life
Sciences Fund
100 Fillmore Street, Suite 200
Denver, CO 80206-4928 900,000 0 900,000 4.55% 900,000 0 *
DCF Partners L.P.
1 Newbrook Circle
Chestnut Hill, MA 02467 60,000 0 60,000 * 60,000 0 *
The DCF Life Sciences Fund Limited
73 Front Street
Hamilton HM12 Bermuda 40,000 0 40,000 * 40,000 0 *
ACI Capital America Fund, LP
65 East 55th Street, 18th Floor
New York, New York 10022 133,300 0 133,300 * 133,300 0 *
ACI Capital Strategic Fund, LP
65 East 55th Street, 18th Floor
New York, New York 10022 28,020 0 28,020 * 28,020 0 *
Pequot Scout Fund, L.P.
500 Nyala Farm Road
Westport, CT 06880 150,000 0 150,000 * 150,000 0 *
SMALLCAP World Fund, Inc.
DTC/NY Window
55 Water Street
New York, NY 10041 882,000 0 882,000 4.46% 882,000 0 *
American Variable Insurance Series
Global Small Capitalization Fund
333 South Hope Street
Los Angeles, CA 90071 18,000 0 18,000 * 18,000 0 *
Essex Performance Fund, Limited
Partnership
125 High Street, 29th Floor
Boston, MA 02110 133,333 0 133,333 * 133,333 0 *
Essex Global Life Sciences
Fund is a separate series of
Essex Specialty Pooled Funds, LP
125 High Street, 29th Floor
Boston, MA 02110 106,667 0 106,667 * 106,667 0 *
DFS Integrity Partners, L.P.
75 State Street, Suite 2530
Boston, MA 02109 100,000 0 100,000 * 100,000 0 *
- ----------------------
* Less than 1%.
+ The information contained in this table reflects "beneficial" ownership of
common stock within the meaning of Rule 13d-3 under the Exchange Act.
Beneficial ownership information reflected in the table includes shares
issuable upon the exercise of outstanding warrants issued by HemaSure.
</TABLE>
931200.4
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<PAGE>
PLAN OF DISTRIBUTION
The shares of common stock covered by this prospectus are owned by the
selling stockholders. As used in the rest of this section of the prospectus, the
term "selling stockholders" includes the named selling stockholders and any of
their pledgees, donees, transferees or other successors in interest selling
shares received from a named selling stockholder after the date of this
prospectus. The selling stockholders may offer and sell, from time to time, some
or all of the shares of common stock registered hereby. We have registered the
shares for sale by the selling stockholders so that the shares will be freely
tradeable by them. Registration of the shares does not mean, however, that the
shares necessarily will be offered or sold. We will not receive any proceeds
from any offering or sale by the selling stockholders of the shares. We have
advised the selling stockholders that Regulation M under the Exchange Act may
apply to the activities of the selling stockholders or broker-dealers in
connection therewith. We will pay all costs, expenses and fees in connection
with the registration of the shares. The selling stockholders will pay all
brokerage commissions and similar selling expenses, if any, attributable to the
sale of the shares.
The selling stockholders will act independently of us in making decisions
with respect to the timing, manner and size of each sale. The shares may be sold
by or for the account of the selling stockholders from time to time in
transactions on the OTC Bulletin Board or otherwise. These sales may be at fixed
prices or prices that may be changed, at market prices prevailing at the time of
sale, at prices related to these prevailing market prices or at negotiated
prices. The shares may be sold by means of one or more of the following methods:
-- in a block trade in which a broker-dealer will attempt to sell a
block of shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
-- purchases by a broker-dealer as principal and resale by that
broker-dealer for its account pursuant to this prospectus;
-- on markets where our common stock is traded or in an exchange
distribution in accordance with the rules of the exchange;
-- through broker-dealers, that may act as agents or principals;
-- directly to one or more purchasers;
-- through agents;
-- in connection with the loan or pledge of shares to a broker-dealer,
and the sale of the shares so loaned or the sale of the shares so
pledged upon a default;
-- in connection with put or call option transactions, in hedge
transactions, and in settlement of other transactions in
standardized or over-the-counter options;
-- through short sales of the shares by the selling stockholders or
counterparties to those transactions, in privately negotiated
transactions; or
-- in any combination of the above. In addition, any of the shares
that qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 promulgated under the Securities Act
rather than pursuant to this prospectus.
In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. The
broker-dealer transactions may include:
931200.4
19
<PAGE>
-- purchases of the shares by a broker-dealer as principal and resales
of the shares by the broker-dealer for its account pursuant to this
prospectus;
-- ordinary brokerage transactions; or
-- transactions in which the broker-dealer solicits purchasers.
If a material arrangement with any broker-dealer or other agent is
entered into for the sale of any shares of common stock through a block trade,
special offering, exchange distribution, secondary distribution, or a purchase
by a broker or dealer, a prospectus supplement will be filed, if necessary,
pursuant to Rule 424(b) under the Securities Act disclosing the material terms
and conditions of these arrangements.
The selling stockholders and any broker-dealers or agents participating
in the distribution of the shares may be deemed to be "underwriters" within the
meaning of the Securities Act, and any profit on the sale of the shares of
common stock by the selling stockholders and any commissions received by a
broker-dealer or agents, acting in this capacity, may be deemed to be
underwriting commissions under the Securities Act. We have agreed to indemnify
the selling stockholders, each underwriter who participates in an offering of
the shares of common stock, each person, if any, who controls any of such
parties within the meaning of the Securities Act and the Exchange Act, and each
of their respective directors, officers, employees and agents against certain
liabilities, including liabilities arising under the Securities Act. The selling
stockholders may agree to indemnify any broker-dealer or agent that participates
in transactions involving sales of the shares of common stock against certain
liabilities, including liabilities arising under the Securities Act.
The selling stockholders are not restricted as to the price or prices
at which they may sell their shares of common stock. Sales of such shares may
have an adverse effect on the market price of the common stock. Moreover, the
selling stockholders are not restricted as to the number of shares that may be
sold at any time, and it is possible that a significant number of shares could
be sold at the same time, which may have an adverse effect on the market price
of the common stock.
931200.4
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following information describes our common stock and preferred
stock and anti-takeover and indemnification provisions of our certificate of
incorporation and our bylaws. This description is only a summary. You should
also refer to our certificate of incorporation and bylaws, copies of which have
been filed with the Commission as exhibits to the registration statement of
which this prospectus is a part.
Our authorized capital stock consists of 35,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share.
Common Stock
As of March 24, 2000, there were 19,795,667 shares of common stock
outstanding that were held of record by approximately 125 stockholders.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably any dividends that may be declared from time to time
by our board of directors out of funds legally available therefor. In the event
of a liquidation or dissolution of HemaSure, whether voluntary or involuntary,
the holders of common stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior rights of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions available to the common stock. All outstanding shares of
common stock are fully paid and non-assessable.
Preferred Stock
Our board of directors has the authority, without further stockholder
authorization, but subject to any limitations prescribed by law, from time to
time to issue up to an aggregate of 1,000,000 shares of preferred stock in one
or more series. Our board shall determine the rights and preferences, including
voting rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. Although we have no present
plans to issue any shares of our preferred stock, the issuance of shares of our
preferred stock, or the issuance of rights to purchase such shares, may have the
effect of delaying, deferring or preventing a change in control of our company
or an unsolicited acquisition proposal.
Registration Rights
Sepracor is entitled to certain rights with respect to the registration
under the Securities Act of a total of 6,700,334 shares of common stock,
including shares of common stock issuable upon exercise of outstanding warrants.
These rights provide that Sepracor may require us to register shares subject to
certain conditions and limitations. In connection with our March 2000 private
placement financing, Sepracor agreed to waive its registration rights in
connection with this offering. See "Certain Related Transactions -- Sepracor."
In connection with a private placement financing with Gambro Inc. which
was completed in May 1999, we entered into a stock subscription agreement with
Gambro Inc. which provides for certain rights with respect to the registration
under the Securities Act of a total of 4,998,355 shares of common stock. These
rights provide that Gambro Inc. may require us to register shares subject to
certain conditions and limitations. In connection with our March 2000 private
placement financing, Gambro Inc. agreed to waive its registration rights in
connection with this offering. See "Certain Related Transactions -- Gambro Inc."
931200.4
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<PAGE>
Novo Nordisk A/S is entitled to certain rights with respect to the
registration under the Securities Act of a total of 827,375 shares of common
stock. These rights provide that Novo Nordisk A/S may require us to register
shares subject to certain conditions and limitations, including in connection
with this offering. See "Certain Related Transactions -- Novo Nordisk A/S."
Anti-Takeover Effects of Certain Provisions of Delaware Law and our Certificate
of Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware
General Corporation Law. With limited exceptions, Section 203 prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
interested stockholder attained such status with the approval of our board of
directors, unless the interested stockholder owned at least 85% of the voting
stock at the time the transaction commenced or unless the business combination
is approved in a prescribed manner. A "business combination" includes mergers,
asset sales or other transactions resulting in a financial benefit to the
interested stockholder. Subject to exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock. This statute could
prohibit or delay a merger or other takeover or change in control attempt with
respect to us and, accordingly, may discourage attempts to acquire us.
In addition, our certificate of incorporation and bylaws contain
provisions which may be deemed to have an anti-takeover effect. These
provisions, which are summarized in the following paragraphs, may delay, defer
or prevent a tender offer or takeover attempt that a stockholder might consider
to be in its best interest, including those attempts that might result in a
premium over the market price for the shares held by stockholders.
Board of Directors Vacancies
Our bylaws authorize a majority of the directors to fill vacant
directorships or increase the size of our board of directors. This may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of our board of directors by filling the vacancies created by such removal with
its own nominees.
Stockholder Action; Special Meeting of Stockholders
Our bylaws provide that stockholders may take action by written
consent, but only with respect to actions required to or permitted to be taken
at any annual or special meetings of stockholders. Our bylaws further provide
that special meetings of our stockholders may be called only by the President or
our board of directors.
Authorized But Unissued Shares
Our authorized but unissued shares of common stock and preferred stock
are available for future issuance without stockholder approval, subject to the
limitations imposed by our certificate of incorporation. These additional shares
may be used for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued and unreserved common
stock and preferred stock could render more difficult or discourage an attempt
to obtain control of us by means of a proxy contest, tender offer, merger or
otherwise.
Delaware law provides that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage.
931200.4
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<PAGE>
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that, except to the extent
prohibited by Delaware law, our directors shall not be personally liable to us
or our stockholders for monetary damages for any breach of their fiduciary duty
as directors. Under Delaware law, the directors have a fiduciary duty to us
which is not eliminated by this provision of our certificate of incorporation
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available. In addition, each
director will continue to be subject to liability under Delaware law for breach
of their duty of loyalty to us for acts or omissions which are found by a court
of competent jurisdiction to be not in good faith or which involve intentional
misconduct, or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by Delaware law. This
provision also does not affect the directors' responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
Section 145 of the Delaware General Corporation Law allows a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers, provided that the indemnification does not eliminate or limit the
liability of a director for the following:
o any breach of the director's duty of loyalty to us or our stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock purchases or
redemptions; and
o any transaction from which the director derived an improper personal
benefit.
Delaware law further provides that the permitted indemnification shall
not be deemed exclusive of any other rights to which the directors and officers
may be entitled under our bylaws, any agreement, a vote of stockholders or
otherwise. Our certificate of incorporation eliminates the personal liability of
directors to the fullest extent permitted by Delaware law. In addition, our
certificate of incorporation provides that we may fully indemnify any person who
was or is a party, or is threatened to be made a party to, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was one of our directors or officers or is or was serving at our request as a
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses, including
attorney's fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
We have also entered into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
bylaws. We believe that these provisions and agreements are necessary to attract
and retain qualified directors and executive officers. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions, regardless of whether
Delaware law would permit indemnification. We have applied for liability
insurance for our officers and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the certificate of incorporation. We are not aware
of any threatened litigation or proceeding that may result in a claim for such
indemnification.
931200.4
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<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
931200.4
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<PAGE>
BUSINESS
HemaSure
Overview
We were incorporated as a Delaware corporation in December 1993. Our
principal executive offices are located at 140 Locke Drive, Marlborough,
Massachusetts 01752. The shares of our common stock trade on the OTC Bulletin
Board under the symbol "HMSR".
We develop and supply innovative blood filtration technologies designed
to help meet today's increasing demand for a safer, more reliable blood supply.
Our blood filtration technologies are designed to reduce virus-carrying white
blood cells (leukocytes) in donated blood to nominal levels (a process known as
"leukoreduction").
While approximately 30% to 35% of donated blood in the United States is
currently leukoreduced, we believe this percentage will increase. In September
1998, the FDA's Blood Products Advisory Committee announced a non-binding
recommendation that 100% of the blood supply in the United States be
leukoreduced. In addition, the American Red Cross, which collected over 6
million units of blood in 1999 representing approximately 50% of the blood
donated in the United States, publicly announced that it is striving to achieve
100% leukoreduction by the end of 2000. Moreover, many other countries in the
past several years have mandated the leukoreduction of their blood supply.
We believe that with the r\LS System, we are able to offer a more
effective product than those offered in the market today based on low cost, ease
of use and improved operational fit. According to industry sources, the
leukoreduction industry represents a market potential of approximately $800
million. We believe our proprietary technology, marketing and distribution
arrangements will help us to capitalize on the anticipated growth in this
industry.
Our current focus is to increase the sales of our r\LS System both in
the United States and internationally. We commenced commercialization of the
r\LS System in early 1999. The demand for the r\LS System has exceeded our
original expectations and, as a result, we have initiated a production expansion
plan. See "-- Strategic Relationships."
Our Market
Blood Collection
Industry sources have estimated that approximately 40 to 45 million
units of blood are collected and transfused by developed countries annually and
that this number reaches 70 to 80 million units worldwide. Collection is
typically done by affiliated blood collection centers (for example, the American
Red Cross), consortiums of independent blood collection centers (for example,
Blood Centers of America), independent blood collection centers (for example,
New York Blood Center) or government affiliated blood centers in some foreign
countries.
Blood is collected either manually or with the use of automated blood
collection equipment. If collected manually, the donated blood is tested and
separated into components. If collected through the use of automated blood
collection equipment, the desired component is extracted and the remaining
components are returned to the donor. Whole blood is composed of platelets,
which assist in clotting; plasma, which is the fluid part of blood that contains
proteins that fight infections, aid in clotting and retain blood volume; red
blood cells, which help carry oxygen throughout the body; and leukocytes, or
white blood cells, which are used by the body's immune system to help fight
infections.
931200.4
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<PAGE>
Individuals suffering physical trauma or anemia, undergoing complex
surgical procedures or hemodialysis or undergoing treatment for cancer are among
the diverse group of patients who require blood transfusions in the course of
their medical care. Health risks, such as transfusion complications and
infections, may arise from contaminated blood and blood products, although
infection risks are lower today than in the recent past as a result of improved
donor education and selection and implementation of screening procedures to
identify certain virus contaminated blood units prior to transfusion. Moreover,
these health risks can increase in patients who receive frequent transfusions,
such as those suffering from kidney and liver disorders, and patients who are
immune-suppressed, such as those undergoing treatment for cancer.
The number of units of whole blood, blood components or plasma a
patient receives in a blood transfusion varies significantly. A patient
undergoing routine surgery may typically receive three or four units, while a
cancer patient undergoing platelet transfusion may receive in excess of 100
units over time. The risk of infection to a patient increases as the number of
units transfused increases.
Transfusion Risks
Health risks from transfusions, including complications and infections,
arise from the presence of leukocytes, viruses and other pathogens in blood,
cellular blood components and plasma. In addition, autologous blood recovery and
reinfusion result in an increased risk of contamination of a patient's blood. We
believe that the demand for filtered blood for transfusions will continue to
increase over the next several years due to the growing recognition in the
medical field of the benefits of leukocyte reduction.
Leukocytes. Leukocytes may cause adverse reactions in patients
receiving blood transfusions, such as fever, chills, immune system suppression
or development of immunological responses that could cause the affected patient
to reject subsequent blood transfusions. In addition, leukocytes may harbor
infectious viruses and other agents, including cytomegalovirus, new variant CJD
and human T-cell lymphocyte virus I (HTLV-I).
Pathogens. Viruses such as HIV, hepatitis B and hepatitis C may be
contained inside or outside of the leukocytes and may be transmitted during
transfusions. Other viruses may develop or become prevalent over time. Of the
currently known viruses, there has been significant public focus on hepatitis
and HIV.
Recent Trend Toward Leukoreduction
Historically, approximately 20% of donated blood in developed countries
was filtered to remove leukocytes. Due primarily to cost, generally only those
patients with diseases that may cause immune system complications, such as HIV,
or those with severely compromised immune systems, such as patients undergoing
chemotherapy, received leukoreduced blood and because of the relatively low
number, these were done at the patients hospital beside.
However, the developed nations throughout the world are increasingly
mandating universal leukoreduction of their blood supplies. In North America and
Europe, numerous countries are committed to providing 100% leukoreduced blood
components or have received recommendations to provide 100% leukoreduced blood
components.
France committed to 100% leukocyte reduction in April 1998, both on
clinical grounds and as a precautionary tool ensuring the safety of its blood
supply. Ireland announced its plans to move to 100% leukocyte reduction in April
1998. The United Kingdom has also made the decision to require leukocyte
reduction for all blood units and blood products derived from whole blood.
Following a directive issued by the Canadian Government, the Canadian Blood
Services and Hema-Quebec in Canada have announced plans to adopt leukocyte
reduction of all blood and blood products. In July 1999, Japan announced it
planned to begin full leukoreduction of its blood supply. We believe that
additional countries will recommend leukoreduction as more people seek to
protect themselves from the dangerous transmission of disease through
transfusion. Scientific studies have shown that the use of leukoreduced blood
could result in shorter hospital stays, fewer postoperative
931200.4
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<PAGE>
infections and/or cost savings per patient of approximately $3,000 to $6,000 per
patient for certain procedures, including thoracic surgery, heart bypass surgery
and gastrointestinal surgery.
The United States is also moving toward universal leukoreduction of its
blood supply. Approximately 30% to 35% of donated blood in the United States is
currently filtered to remove leukocytes and this percentage is expected to
increase. In September 1998, the FDA's Blood Products Advisory Committee
announced a non-binding recommendation that the United States adopt 100%
leukoreduction of its donated blood supply. The committee said that, "The
benefit-to-risk ratio associated with leukoreduction is sufficiently significant
to justify the universal leukoreduction of all non-leukocyte cellular
transfusion blood components." Pre-storage filtration (filtration done at the
blood collection center prior to storage for shipment to the hospital) was
recognized by the FDA's Blood Products Advisory Committee as the preferred
method of leukoreduction.
Pre-storage leukoreduction is typically done using two different
processes. One such process requires a filter that is an integral part of the
blood collection set ("in-line"). The second process requires a filter to be
sterile docked to the blood collection set after the blood is collected.
Scientific use of each process is dependent upon a particular blood center's
manufacturing flow-process.
Recent medical studies have demonstrated the patient benefits of
leukoreduction. For example, a study of open heart surgery patients published in
the Annals of Thoracic Surgery found that filtering leukocytes reduced the risks
associated with this type of surgery and improved patient outcomes. It also
determined that leukoreduction in the approximately 300,000 patients who undergo
heart bypass surgeries could result in a 20% decrease in hospital stays and
savings of approximately $3,000 to $6,000 in costs per patient. Another major
study published in the American Journal of Surgery found that gastrointestinal
surgery patients had fewer postoperative infections and shorter hospital stays
after they received leukocyte-filtered red cells. Hospital stays averaged 12
days for patients who received leukocyte-reduced transfusions compared to 18
days for those who received non-leukoreduced blood, at a savings of
approximately $6,000 per patient.
Our Solution
Our blood filtration technologies initially were developed from core
technologies transferred to us from Sepracor at our inception in 1993 relating
to the development, manufacture and use and sale of blood, blood products and
blood components and membrane filter design technologies. Since that time, we
have developed technologies designed to make the process of filtering blood easy
and cost effective. We are utilizing our technologies as the basis for
developing products and methodologies to address the needs of the leukoreduction
market.
Based primarily on our discussions with the American Red Cross, we
believe that a dockable filter used in conjunction with a manual collection
process is the optimal method of high-volume, pre-storage leukoreduction in the
United States. Our current product, the r\LS System, was developed to provide
high- volume, centralized, pre-storage leukoreduction in blood centers in batch
processes. We believe that our r\LS System is well positioned to take advantage
of the anticipated growth in leukoreduction, particularly in the United States.
Currently, we do not have an in-line blood cell filtration system
available for sale, which we understand from Gambro Inc., our distribution
partner, is used predominantly in Europe. However, we are in discussions with
manufacturers of blood bag systems to develop and commercialize in-line
leukocyte reduction systems for red blood cells. We are evaluating different
product design options and discussing potential agreements with respect to
supply and manufacturing arrangements. We believe that the core filter
technology used in the r\LS System could be used in an in-line system.
931200.4
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<PAGE>
Technological Benefits
We believe that the r\LS System provides significant value to
leukoreduction market participants. By implementing a more functional design
that incorporates such features as self priming, draining and a unique air
removal system, which allows the blood center technician to essentially hang the
blood unit and "walk away," we believe that we have been able to incorporate
features considered desirable in leukoreduction products. In addition, our r\LS
System does not require the time-consuming "stripping" operation that is
required with other filters. The r\LS System is predicated on a simple design
that requires fewer manipulations which we believe provides for a more efficient
process.
Low Cost Supplier
We designed the r\LS System to be a low cost filter and developed a
manufacturing process, which we believe enables us to manufacture and market the
r\LS System at a low cost, and which, as a result, allows us to effectively
compete in the marketplace. In the product development and commercialization
process, we have worked very closely with key component suppliers to ensure high
quality, low cost parts and to ensure that the suppliers will be able to meet
the demand for product. The manufacturing process has been designed to permit
multiple site assembly capacity. We believe that our pre-storage filters will
capture increased market share as the relative benefits of pre-storage
filtration become more pronounced in the next few years.
Focus on Blood Center Customers
Unlike Pall and Baxter, our major competitors, our products are
marketed solely to blood donor centers rather than to hospitals. The top four
blood center organizations account for approximately 70% of the supply of blood
and blood products in the United States. We believe that this approach will
enable us to keep sales costs low and provide value-added services to these
customers.
Strategic Relationships
Strategic Partnership with American Red Cross
In August 1998, we completed an amended and restated Master Strategic
Alliance Agreement with the American Red Cross BioMedical Services, which
provides for, among other things, the development and enhancement of a number of
filtration products, based on our core technology including red blood cell
leukoreduction, leukocyte recovery, platelet filtration, whole blood filtration
and tumor cell filtration. The agreement has a term of five years, unless
previously terminated, and can be renewed or extended. We cannot assure you,
however, that such products will ultimately be developed or that any definitive
development arrangements with respect to such products will result from the
strategic alliance with the American Red Cross BioMedical Services.
Pursuant to the strategic alliance agreement, we entered into a master
purchase agreement with the American Red Cross that provides for the sale of the
r\LS System by us to the American Red Cross on specified terms. The master
purchase agreement provides for a thirty-eight month term expiring on August 31,
2002, subject to, among other things, earlier termination by the American Red
Cross in the event (i) of the availability on the market of certain new products
that provide substantial safety and efficiency improvements over the r\LS
System, (ii) the American Red Cross deems that it has no further requirement for
leukoreduction filters generally, or (iii) the American Red Cross changes its
policies toward leukoreduction. We currently are not aware of the availability
of any such products, any such changes in requirements for leukoreduction
filters or any such changes in policies toward leukoreduction. Under the master
purchase agreement, the American Red Cross is required to purchase specified
minimum annual quantities of the r\LS System, subject to certain terms and
conditions. The term of the master purchase agreement may be extended by one
year in certain circumstances if the American Red Cross fails to meet its
minimum purchase obligation in the third year of the agreement.
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If our agreements with the American Red Cross are terminated, or not
implemented, for any reason, our business, financial condition and results of
operations could be materially and adversely affected.
Global Distribution Capabilities through Partnership with Gambro Inc.
In 1998, we completed a distribution and development agreement, which
was amended in May 1999, with Gambro Inc. to act as our exclusive distributor of
our r\LS System worldwide, except for sales to the American Red Cross.
Furthermore, this agreement provides that Gambro Inc. may (upon mutual agreement
by us and Gambro Inc.) distribute additional future products developed by us
that filter blood and its components. Gambro Inc. is a leading manufacturer and
distributor of automated blood component collection systems which markets and
sells blood component apheresis equipment to the blood center market. The
agreement with Gambro Inc. contemplates the development by us of an OEM filter
for use with Gambro Inc.'s Trima(R) Automated Blood Collection System. The
distribution agreement provides for a five year term that expires in June 2004,
subject to automatic three year renewals unless the agreement is previously
terminated.
We believe that Gambro Inc. will be an effective marketing partner for
us with respect to our r\LS System because their sales force currently targets
customers who we had identified as potential customers of our r\LS System. Our
agreement also gives us access to Gambro Inc.'s extensive international
distribution network, which includes sales offices in more than 100 locations
worldwide. This agreement provides for the cooperation by Gambro Inc. with us
with respect to certain patent defense costs related to current and potential
future products. The product development agreement contemplates the supply by us
of filtration devices that may be used in connection with Gambro Inc.'s Trima(R)
Automated Blood Collection System.
Under the distribution agreement, Gambro Inc. is required to meet
certain minimum purchase requirements and is required to purchase from us all of
its requirements for certain blood filtration products, in each case at agreed
upon prices. The distribution agreement also provides for Gambro Inc. to
cooperate with us in the pending litigation against Pall which was initiated by
us and by Gambro BCT in April 1999. Gambro Inc. must also cooperate with us in
any patent infringement proceeding arising subsequent to the time the
distribution agreement was entered into and pay certain expenses incident to any
such proceeding other than damages against us. See " -- Legal Proceedings."
We are dependent on Gambro Inc. for sales, marketing and distribution
of our products. If Gambro Inc. does not successfully market and sell our
products or the distribution agreement is terminated for any reason, our
business, financial condition and results of operations could be materially and
adversely affected.
Production Capacity Expansion Initiative
In December 1999, we engaged the international engineering consulting
firm, PA Consulting Group, to assist us in our production capacity expansion
initiative. With this initiative, we began in March 2000 and expect to increase
manufacturing capacity in increments to several times our current level over the
next two years. The capacity expansion effort will include process flow review,
capital equipment design, qualification, implementation, validation and vendor
supply chain management.
In December 1999, we entered into an agreement with Filtertek that
provides for Filtertek to act as our exclusive manufacturer and supplier of the
filters used in our r\LS System, subject to certain terms and conditions. The
agreement has a term of five years, subject to an automatic one-year extension
in the event we fail to purchase a specified number of products by the fifth
year. Thereafter, the agreement will be subject to automatic one-year renewals
unless the agreement is previously terminated.
Under the agreement, we are required to purchase a minimum number of,
and are required to purchase from Filtertek all of our requirements for, the
filters used in our r\LS System, in each case at agreed upon prices. Pursuant to
the agreement, pricing is fixed for the first three years, subject to certain
raw material price
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increases or decreases. Under our supply agreement with Filtertek, we are
obligated to provide to Filtertek, on a quarterly basis, forecasts for
anticipated purchases for the upcoming 12-month period.
Under the agreement, Filtertek is required to make capital investment
in their production equipment at certain levels and by certain times. If
Filtertek is unable to meet such requirements, we have the right to terminate
Filtertek's rights to exclusivity under the agreement, subject to certain terms
and conditions. We depend on Filtertek to (i) allocate sufficient capacity to
our manufacturing needs, (ii) produce acceptable quality at agreed pricing, and
(iii) deliver on a timely basis. Any failure in performance by Filtertek for any
reason could have a material and adverse effect on our business. We have no
supply agreements with component suppliers and, accordingly, we are dependent on
the future ability of Filtertek to purchase components. Failure or delay by
suppliers in supplying necessary components could adversely affect our ability
to deliver products on a timely and competitive basis in the future.
In January 2000, we entered into an agreement with Command that
provides for Command, on a non-exclusive basis, to (i) act as our manufacturer
and supplier of dry bags used in our r\LS System and (ii) assemble the filters
used in our r\LS System, subject to certain terms and conditions. The agreement
has a term of three years, subject to an automatic one-year extension in the
event we fail to purchase a specified number of products by the third year and,
also, upon the mutual agreement by us and Command. Thereafter, the agreement
will be subject to automatic one-year renewals unless the agreement is
previously terminated.
Under the Command agreement, we are required to purchase a minimum
number of dry bags used in our r\LS System and assembly requirements of the
filters used in our r\LS System, in each case at agreed upon prices. Pursuant to
the agreement, pricing is fixed for the first three years, subject to the risk
of price fluctuations in respect of raw materials, overhead and labor. Under our
supply and assembly agreement with Command, we are obligated to provide to
Command 90 days before each year of the supply and assembly agreement forecasts
for anticipated purchases of the dry bags and assembly requirements for the
upcoming 12- month period.
We depend on Command to (i) allocate sufficient capacity to our
manufacturing needs, (ii) produce acceptable quality at agreed pricing, and
(iii) deliver on a timely basis. Any failure in performance by Command for any
reason could have a material and adverse effect on our business. We have no
supply agreements with component suppliers and, accordingly, we are dependent on
the future ability of Command to purchase components for the dry bags. Failure
or delay by suppliers in supplying necessary components for the dry bags could
adversely affect our ability to deliver products on a timely and competitive
basis in the future.
Current Product and Products Under Development
We are working to develop a range of related leukocyte filtration
products that utilize our core technology, including an in-line pre-storage
filter (the In-Line RBC Filtersets) and whole blood pre-storage. We are also
exploring the possibility of utilizing our core filtration technology to develop
non-leukocyte reduction filtration applications.
Red Blood Cell Systems
r\LS System. Our r\LS System has been designed for leukocyte filtration
by blood centers and hospital blood banks immediately prior to blood storage, a
process which we believe results in improved quality leukocyte reduced blood. We
believe that the demand for filtered blood for transfusions will continue to
increase over the next several years and that, while a significant amount of
leukocyte filtration currently takes place at the patient bedside, as the demand
for filtered blood increases, leukocyte removal will all be done through
centralized filtration performed at blood centers.
The r\LS System is based on a proprietary filter medium comprised of
multiple fibrous components. Leukocytes are removed by a combination of
entrapment and adhesion. With a proprietary automatic internal
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prime and drain design, the filter device reduces operator intervention and
facilitates high volume, centralized processing in a blood center environment.
We are focusing our marketing efforts exclusively on blood centers and hospital
blood banks for pre-storage leukocyte reduction.
We filed an application for 510(k) pre-market notification clearance
with respect to our r\LS System with the FDA in May 1998. We commenced
commercialization of the r\LS System in foreign countries in early 1999. We
received 510(k) pre-market notification clearance from the FDA in May 1999 for
our r\LS System which was classified as a Class II medical device. However, we
cannot assure you that the r\LS System will achieve market acceptance.
While we believe that the performance and ease-of-use of the r\LS
System will compare favorably with other blood filtration devices, we cannot
assure you that the performance or price of the r\LS System will be sufficient
to achieve significant sales, particularly in view of the dominant position in
the market held by Pall.
See "--Competition."
In-Line RBC Filtersets. We are in discussions with manufacturers of
blood bag systems to develop and commercialize in-line leukocyte reduction
systems for red blood cells. In these systems, the filter and receiving bags are
integrated with the collection bag and therefore require no sterile docking.
Currently, we are evaluating different product design options, and are
discussing potential agreements covering supply and manufacturing arrangements.
Whole Blood Filters
We are pursuing technology which we believe will enable the development
of whole blood filtration systems aimed at meeting the needs of two distinct
market segments: (i) traditional manual collection users of whole blood
filtration sets who prefer to continue to operate within their existing blood
collection and processing infrastructure, and (ii) integrating filtration
technology with blood collection equipment to do real-time, simultaneous
collection/leukocyte reduction and, optionally, subsequent component separation.
These different approaches will require different technical solutions. We
believe that we are well positioned to apply our core proprietary know-how to
providing such solutions independently, or in collaboration with selected
partners.
Automated Blood Collection Solutions
Gambro Inc. markets and sells automated blood component apheresis
equipment to the blood center market. The agreement with Gambro Inc.
contemplates the development of a red blood cell leukoreduction filter for use
with Gambro Inc.'s Trima(R)Automated Blood Collection System.
OEM Filters
Other potential partners have asked us to provide them with price
quotes for a basic filtration device to use in their own applications. We are
pursuing these requests and expect that any such filter would use our core
filtration technology.
Technologies
Our current and our planned products are based on our proprietary
technologies that we have acquired or developed in the areas of affinity
separations, membrane technology and device design and fabrication.
Affinity Separations
We have proprietary affinity separations technology that utilizes
ligand, which are molecules that bind to complementary biomolecules, in
connection with our various filtration products. We have identified a family of
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carbohydrate-based ligand that recognize and bind to the cell surface receptors
on leukocytes. We have filed patent applications covering the use of these
carbohydrate-based ligand for removing leukocytes.
Membrane Technology
We believe that, as a result of the research and development work
performed at Sepracor over an eight- year period and transferred to us on
January 1, 1994, we have expertise in the field of separations technology using
both composite matrices and flat- and hollow-fiber membranes. Successful
separation of a substance from its source depends on matching the properties of
that substance, such as size, molecular weight and surface characteristics, to
appropriate separations media. The ability to select and modify the composition
and physical structure of the media is a key to successful separations
technology. We can utilize a variety of media compositions, custom made
structures and surface modifications, including the attachment of selective
ligand, to separate a diverse variety of substances. Our separations
technologies can be used to separate substances including particulates, such as
cells and debris, macromolecules, such as enzymes, and low molecular weight
substances, such as salts, nutrients and anti-viral chemicals. See "Certain
Related Transactions -- Sepracor."
Device Design and Fabrication
We believe that the benefits of high performance separations media can
only be realized in a well- designed device where access to and placement of the
media, hydrodynamics and selection of biocompatible materials have been
optimized. We have expertise in module design, including theoretical
calculations of mass transfer, hydrodynamic modeling, prototyping, testing and
manufacturing engineering.
Drawing from this expertise, we are integrating our proprietary
technologies in device design and media development with blood flow control
systems, tubing, collection containers and other assembly components, in devices
which are designed to achieve efficiency in increasing the safety of donated
blood and improving certain blood transfusion and collection procedures. We
consider our device design and fabrication capabilities to be proprietary and
intend to file patent applications where appropriate.
We have undertaken preliminary studies on the use of our proprietary
media in other applications such as the removal of tumor cells from peripheral
stem cell preparations and in whole blood leukoreduction.
Research and Development Expenses
Research and development expenses were $2,681,000 in the year ended
December 31, 1999 and $3,794,000 for the year ended December 31, 1998. Amounts
expended in the year ended December 31, 1999 were lower than that expended in
the comparable period in 1998, primarily because the majority of research and
development expenditures relating to the r\LS System were made in the 1998
period.
Competition
We expect to encounter significant competition in the sale of our
proposed products. Our proposed products, if commercialized, will compete with
other products currently on the market as well as with future products developed
by other medical device companies, biotechnology and pharmaceutical companies,
hospital supply companies, national and regional blood centers, certain
governmental organizations and agencies and academic institutions. Many of our
competitors in the field of leukocyte reduction have substantially greater
resources, manufacturing and marketing capabilities, research and production
staffs and production facilities than ours. Moreover, some of our competitors
are significantly larger than ours, have greater experience in pre-clinical
testing, human clinical trials and other regulatory approval procedures. In
addition, many of our competitors have access to greater capital and other
resources, may have management personnel with more experience than ours and may
have other advantages over us in conducting certain businesses and providing
certain services. Our ability to compete successfully will depend, in part, on
our ability to develop and maintain products which are technically superior to
and/or of lower cost than those currently on the market; develop
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proprietary products; attract and retain scientific personnel; obtain patent or
other proprietary protection for our products and technologies; obtain required
regulatory approvals; and manufacture, assemble and successfully market any
products we develop. In addition, many of our competitors have long-standing
relationships with the national and regional blood centers to which we will
market our products. We cannot assure you that we will be able to compete
effectively against such companies.
Presently, there are approximately seven to nine competitors in the
leukoreduction filter market. The market leader is Pall with approximately 50%
to 60% market share. Pall offers products to all product/market segments, with
an emphasis in the bedside leukoreduction market. Baxter, which has
approximately 25% market share, also plays a significant role in all
product/market segments. The remaining 15% of the market is shared by the other
five to seven competitors. We believe that the competitive landscape for the
leukoreduction market will level off as the market moves toward 100%
leukoreduction and market participants with smaller market shares realize
greater market penetration. Some of these competitors have long-standing and, in
certain cases, exclusive, relationships, including long-term supply contracts,
with the blood centers that are our target customers. We expect that the
principal competitive factors in the area of leukocyte removal will be removal
efficiency, cost and ease of use.
We are pursuing areas of product development in a rapidly growing field
in which there is a potential for technological innovation in relatively short
periods of time. Our competitors may succeed in developing technologies or
products that are more effective than ours. Technological change or developments
by others may result in our technology or proposed products becoming obsolete or
noncompetitive.
Licenses, Patents and Proprietary Information
We have a Technology Transfer and License Agreement with Sepracor under
which Sepracor transferred to us all rights to the technology developed by
Sepracor for the development, manufacture, use and sale of medical devices for
the separation and purification of blood and blood components, including
technology relating to (i) optimization of flat membranes, hollow fiber
membranes and fibrous supports; (ii) specific affinity and immunoaffinity
ligand; (iii) linking chemistries; (iv) surface modification including
hydrophilic polymers and coatings; (v) device designs and engineering; (vi)
fabrication and manufacturing including encapsulation and assembly techniques;
and (vii) organic chemical synthesis.
We believe that protection of the proprietary nature of our products
and technology is critical to our business. Accordingly, we have adopted and
will maintain a vigorous program to secure and maintain such protection. Our
practice is to file patent applications with respect to technology, inventions
and improvements that are important to our business. We also rely on trade
secrets, unpatented know-how, continuing technological invention and the pursuit
of licensing opportunities to develop and maintain our competitive position. We
cannot assure you that others will not independently develop substantially
equivalent proprietary technology or that we can meaningfully protect our
proprietary position.
To date, we own or have filed 31 patent applications in the United
States relating to blood filtration and pathogen inactivation technologies.
Corresponding foreign patent applications have been filed with respect to
certain of these United States patent applications. Where appropriate, we intend
to file, or cause to be filed on our behalf, additional patent applications
relating to future discoveries and improvements, including, among other things,
the use of certain ligands for affinity separations. To date, 18 patents have
been issued to us (which expire at various dates from 2011 through 2017).
Our success depends, in part, on our ability to obtain patents, to
protect trade secrets, to operate without infringing upon the proprietary rights
of others and to prevent others from infringing on our proprietary rights. See
"-- Legal Proceedings." Proprietary rights relating to our planned products will
be protected from unauthorized use by third parties only to the extent that they
are covered by valid and enforceable patents or are maintained in confidence as
trade secrets. We cannot assure you that any patents owned by or licensed to us
will afford protection against competitors or that any pending patent
applications now or hereafter filed by or licensed
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to us will result in patents being issued. Competitors, including those with
substantially greater resources than ours, may seek to challenge the validity of
the patents owned by or licensed to us or may use their resources to design
comparable products that do not infringe these patents. See "-- Legal
Proceedings."
There are many issued third-party patents in the field of blood
filtration, including patents held by our competitors. We may need to acquire
licenses to, or contest the validity of, some of such patents. It is likely that
significant funds would be required to defend any claim that we infringe a
third-party patent, and any such claim could adversely affect sales of the
challenged product until the claim is resolved. We cannot assure you that any
license required under any such patent would be made available on acceptable
terms or that we would prevail in any litigation involving such patent. See "--
Legal Proceedings."
Much of the know-how of importance to our technology and many of our
processes are dependent upon the unpatentable knowledge, experience and skills
of our key scientific and technical personnel. To protect our rights and to
maintain the confidentiality of trade secrets and proprietary information, we
require all of our employees, consultants and commercial partners and members of
our Scientific/Medical Advisory Board to agree to keep our proprietary
information confidential. These agreements generally prohibit the disclosure of
confidential information to anyone outside HemaSure and require disclosure and
assignment to us of ideas, developments, discoveries and inventions. We cannot
assure you, however, that these agreements will provide meaningful protection
for our proprietary information in the event of unauthorized use or disclosure
of such information.
Government Regulation
The research, development, manufacturing and marketing of our products
are subject to extensive regulation in the United States by numerous regulatory
authorities including the FDA under the FDC Act, the FTC under the FTC Act and
by comparable regulatory authorities in foreign countries. These regulatory
authorities and other federal, state and local entities will regulate, among
other things, the pre-clinical and clinical testing, safety, effectiveness,
approval, clearance, manufacturing, labeling, packaging, export, storage,
recordkeeping, adverse event reporting, and promotion and advertising of our
products. FDA approval or clearance of our products, typically including a
review of the manufacturing processes and facilities used to produce such
products, is required before the products may be marketed in the United States.
Further, if cleared or approved, there may be significant conditions imposed,
including limitations on labeling and advertising claims and post-market
testing, tracking or surveillance requirements. In addition, for products
exported from the United States to any foreign country or territory, applicable
FDA export requirements must be met. Failure to meet regulatory standards or to
obtain required marketing permissions could have a material and adverse effect
on our business, financial condition, results of operations and ability to
market our products.
We believe that our In-line RBC Filtersets will be regulated as new
drugs by the FDA. Development of a new drug product for human use under
applicable laws and regulations is a multi-step process. First, in vitro and/or
animal testing must be conducted in accordance with good laboratory practices to
establish the potential safety and effectiveness of the experimental product for
a given disease. If a product is found to be reasonably safe and potentially
effective in pre-clinical trials, the next step in the process is human clinical
trials. An IND containing, among other things, the pre-clinical data, chemistry,
manufacturing, and control information, and an investigative plan, must be
submitted to the FDA and allowed to become effective by the agency before such
trials may begin. There can be no assurance that submission of an IND will
result in the ability to commence clinical trials. In addition, the FDA may
place a clinical trial on hold or terminate it if, among other reasons, it
concludes that clinical subjects are being exposed to an unacceptable health
risk.
Clinical trials under IND, or for medical devices under IDE, typically
involve three phases, although those phases can overlap. Phase I is conducted to
evaluate the safety and pharmacokinetics of the experimental product in humans,
and if possible, to gain early indications of effectiveness. Phase I studies may
also evaluate various routes, dosages and schedules of product administration.
If acceptable product safety is demonstrated, Phase II studies are initiated. In
Phase II, clinical trials are conducted in groups of patients afflicted with a
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specific disease or condition for which the product is intended for use in order
to further test safety, begin evaluating effectiveness, optimize dosage amounts,
and determine dose schedules and routes of administration. If Phase II studies
yield satisfactory results and no hold is placed on further studies by the FDA,
Phase III studies are commenced. Phase III studies are usually randomized,
double blind studies testing for product safety and effectiveness in an expanded
patient population in order to evaluate the overall risk/benefit relationship of
the product and to provide an adequate basis for product labeling. These studies
also may compare the safety and effectiveness of the product with currently
available products. It is not possible to estimate the time in which Phase I, II
and III studies will be completed with respect to a given product, if at all.
The time period may last as long as several years.
Following completion of clinical investigations, the pre-clinical and
clinical data that has been accumulated, together with chemistry, manufacturing,
and controls specifications and information, are submitted to the FDA in an NDA.
There can be no assurance that a product will be approved in a timely manner, if
at all. The approval process can be very lengthy and depends upon, among other
things, the time it takes to review the submitted data, the FDA's comments on
the application, and the time required for us to provide satisfactory answers or
additional clinical data if requested.
If an NDA is approved, continued compliance with strict FDA current
good manufacturing practices requirements, enforced by periodic inspections, as
well as any special requirements imposed as a part of the NDA approval will be
required to continue marketing the approved product. Changes to approved drug
products that affect safety or effectiveness require approved supplemental
applications, as do changes in manufacturing that have a substantial potential
to adversely affect product safety or effectiveness. Such supplemental
applications may require the submission of clinical and/or manufacturing
comparability data and must be approved before the product may be marketed as
modified. Manufacturers, packers and distributors are also subject to adverse
drug event reporting requirements, which depending on their significance can
result in, among other things, agency inspection, recalls, and patient/physician
notifications, and enforcement actions. Because adverse drug experience reports
are publicly available, they can also become the basis for private lawsuits,
including class actions. Depending on their significance, such reports could
have a material and adverse effect on our business, financial condition, results
of operations and ability to market our products.
We believe that our other products currently under development will,
like our r\LS System, be regulated as medical devices by the FDA. Before a new
device may be introduced into commercial distribution, the manufacturer must
generally obtain marketing clearance through a 510(k) pre-market notification or
approval through a pre-market approval application.
In the United States, medical devices for human use are classified into
three classes (Class I, Class II and Class III) on the basis of the controls
deemed reasonably necessary to assure their safety and effectiveness. Class I
devices are subject to general controls, unless exempt (for example, labeling,
pre-market notification under section 510(k) and quality system requirements).
Class II devices are devices for which general controls are insufficient to
provide a reasonable assurance of safety and effectiveness and for which there
is sufficient information to establish special controls (for example,
performance standards, FDA guidance documents or post-market surveillance) to
provide such assurance. Class III devices are those devices that are
life-supporting, life-sustaining or of substantial importance in preventing
impairment of human life and for which general and special controls are
insufficient to provide a reasonable assurance of safety and effectiveness, or
new devices for which a manufacturer cannot demonstrate substantial equivalence
to an already legally marketed device.
In order to demonstrate substantial equivalence, a manufacturer must
submit a pre-market notification ("510(k)") under section 510(k) of the FDC Act.
The FDA will clear a device if the manufacturer can demonstrate that the device
is "substantially equivalent" to an already legally marketed device. The FDA may
or may not require clinical data in support of a 510(k), and the FDA may require
additional data beyond that in the original submission to support a substantial
equivalence determination. There can be no assurance that the FDA will find a
device substantially equivalent. If the FDA finds that a device is not
substantially equivalent, the manufacturer may ask the FDA to make a risk-based
classification to place the device in Class I or Class II.
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However, if a timely request for risk-based classification is not made, or if
the FDA determines that a Class III designation is appropriate, an approved PMA
will be required before the device may be marketed.
The PMA approval process is lengthy, expensive and typically requires,
among other things, extensive data from pre-clinical testing and a
well-controlled clinical trial or trials that demonstrate a reasonable assurance
of safety and effectiveness. Clinical data for devices generally must be
obtained pursuant to Investigation Device Exemptions, which must be approved by
the FDA before a clinical trial may commence. Like an IND, an IDE contains,
among other things, the pre-clinical data, chemistry, manufacturing and control
information and an investigative plan, generally proceeding in three phases.
There is no guarantee that the agency will approve the IDE, and an IDE approval
process could result in significant delay. In addition, the FDA may place an IDE
on hold or terminate it if, among other reasons, it concludes that clinical
subjects are being exposed to an unacceptable health risk. There is no assurance
that review of a PMA will result in a timely PMA approval, if at all. Further,
if approved, there may be significant PMA conditions of approval, including
limitations on labeling and advertising claims and the imposition of post-market
testing, tracking or surveillance requirements.
Changes to devices cleared for marketing under section 510(k) that
could significantly affect safety and effectiveness will require clearance of a
new 510(k). Changes to approved PMA products that affect safety and
effectiveness require the submission of a supplemental PMA. We would be
prohibited from marketing the modified device until we received FDA clearance or
approval, and there is no guarantee that the FDA would timely or at all clear or
approve the modified 510(k) or PMA device. Failure to obtain timely or any
approval for changes to marketed devices could have a material and adverse
effect on our business, financial condition and results of operations.
Our r\LS System was cleared for marketing in 1999 in the United States
under section 510(k) with a post-market surveillance protocol to look for
filter-related transfusion reactions which was agreed to between the FDA and us.
We have found no filter-related transfusion reactions and believe we have
satisfied the FDA's post-market surveillance requirements. We submitted a report
to that effect in early March 2000. We anticipate but cannot guarantee that the
FDA will find our report satisfactory. The post-market surveillance study does
not currently affect our ability to market and sell the r\LS System.
The regulations relating to MDRs require that reports be submitted to
the FDA to report device-related deaths, serious injuries and malfunctions that
could result in death or serious injury were they to recur. MDRs can result in
agency action such as inspections, recalls and patient/physician notifications,
and are often the basis for agency enforcement actions. Because MDRs are
publicly available, they can also become the basis for private lawsuits,
including class actions. Failure to file MDRs constitutes a violation of the law
enforceable under the FDC Act. Depending on their significance, MDRs could have
a material and adverse effect on our business, financial condition, results of
operations and ability to market our products.
Our marketed products will be subject to current good manufacturing
practice regulations for drugs and the quality system regulation for medical
devices. We cannot assure you that we or our suppliers or contractors will be
able to attain or maintain compliance with these standards. In addition, any
changes to manufacturing facilities or methods may require FDA clearance or
approval.
The nature of marketing claims that we will be permitted to make in the
labeling and advertising of our products will be limited to those specified in
an FDA clearance or approval. Claims exceeding those that are cleared or
approved will constitute violations of the FDC Act. Advertisements of our
products will also be subject to regulation by the FTC under the FTC Act. The
FTC Act prohibits unfair methods of competition and unfair or deceptive acts in
or affecting commerce. Violations of the FTC Act, such as failure to have
substantiation for product claims, would subject us to a variety of enforcement
actions, including compulsory process, cease and desist orders and injunctions.
FTC enforcement can result in orders requiring, among other things, limits on
advertising, corrective advertising, consumer redress and recission of
contracts. Violations of FTC enforcement orders can result in substantial fines
or other penalties.
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Violations of the FDC Act or regulatory requirements at any time during
the product development process, approval process or after approval may result
in FDA enforcement actions, including voluntary or mandatory recall, license
suspension or revocation, seizure of products, fines, injunctions and/or civil
or criminal penalties. Any such agency action could have a material and adverse
effect on our business, financial condition and results of operations.
We are also subject to numerous and varying foreign regulatory
requirements governing the design and conduct of clinical trials and the
manufacturing and marketing of our products. The approval procedure varies among
countries. The time required to obtain foreign approvals often differs from that
required to obtain FDA approval. Moreover, approval by the FDA does not ensure
approval by regulatory authorities in other countries.
We cannot predict the nature of any future laws, regulations,
interpretations or applications. We also cannot predict what effect additional
governmental regulations or administrative orders, when and if promulgated,
would have on our business in the future. Any such requirements could delay or
prevent regulatory approval or clearance of products under development. Any such
requirements could have a material and adverse effect on our business, financial
condition, results of operations and ability to market our products.
Manufacturing and Facilities
Currently, we occupy approximately 30,000 square feet of leased office,
laboratory and manufacturing space in a facility in Marlborough, Massachusetts
(which lease expires in February 2004, and provides for two five-year renewal
options thereafter). In June 2000, we plan to occupy an additional 15,000 square
feet in connection with our expansion plans. We believe that these facilities
are adequate and suitable for our needs through 2000. See " -- Strategic
Relationships." The facility is designed to conform to current good
manufacturing practice regulations and other applicable government standards.
In January 1998, we received ISO 9001 Registration and CE mark EN46001
Certification, which was awarded by Bureau Veritas Quality International. The
ISO 9000 and EN46000 Series of international standards was developed by the
International Organization for Standardization to promote homogeneous quality
processes through the global trade community. ISO 9001 specifically addresses
requirements for the manufacture, design, development, installation and service
of products and CE EN46001 addresses the requirements to market medical devices
in the European Union.
For manufacturing outside the United States, we will also be subject to
foreign regulatory requirements governing human clinical trials, manufacturing
and marketing approval for drugs or biologics and medical devices. The
regulatory requirements may vary widely from country to country. See "--
Government Regulation."
Source and Availability of Raw Materials
We acquire each of the main components of our products from separate
single suppliers. However, given that there are multiple sources available to us
for each such component, and based upon our ongoing relationship with each such
supplier, we do not believe that the loss of any of our current supply channels
would result in a material and adverse effect on our business or our results of
operations.
Employees
As of March 24, 2000, we employed a total of 106 persons, of whom 23
were in research and development, 65 were in manufacturing and support and 18
were in sales and administration.
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Legal Proceedings
We are a defendant in a lawsuit brought by Pall regarding our LeukoNet
System, which is no longer made or sold by us. In a complaint filed in November
1996, Pall alleged that our manufacture, use and/or sale of the LeukoNet System
infringed upon two patents held by Pall. Pall dropped its allegations concerning
infringement of one of the patents and alleges only that our LeukoNet System
infringed the '572 Patent.
With respect to the allegations concerning the '572 Patent, we answered
the complaint stating that the LeukoNet System does not infringe any claim of
the asserted patents. Further, we counterclaimed for declaratory judgment of
invalidity, noninfringement and unenforceability of the '572 Patent. Pall
amended its complaint to add Lydall, Inc., whose subsidiary supplied the filter
media for the LeukoNet System, as a co- defendant. We filed for summary judgment
of non-infringement, and Pall cross-filed for summary judgement of infringement
at the same time. Lydall, Inc. supported our motion for summary judgment of
non-infringement, and filed a motion for summary judgment that the asserted
claims of the '572 patent are invalid as a matter of law. Discovery has been
completed in the action. The court has not acted on the summary judgment
motions.
On April 5, 1999, we and Gambro filed a complaint for declaratory
relief against Pall in the United States District Court of Colorado. We and
Gambro seek declaratory relief that the '572 Patent, the '321 Patent, the '012
Patent, the '561 Patent, the '795 Patent and the '436 Patent are invalid and not
infringed by our r\LS System and methods of using the r\LS System. Pall moved to
dismiss or transfer to the Eastern District of New York or, in the alternative,
to stay this action. We and Gambro opposed Pall's motion. On July 16, 1999, the
United States District Court of Colorado denied Pall's motion to transfer or, in
the alternative, to stay the action, and the action is proceeding. On September
30, 1999, the Court denied Pall's motion to dismiss the action and the case is
proceeding. On October 20, 1999, Pall submitted a counterclaim alleging that our
r\LS System infringes its '572 patent and that we and Gambro BCT tortiously
interfered and unfairly competed with Pall's business. On March 22, 2000, Pall
filed its second amended answer and counterclaims alleging infringement of all
the patents-in-suit. Pall also added counterclaims against Gambro A.B.
On April 23, 1999, Pall filed a complaint against us and Gambro BCT in
the Eastern District of New York alleging that our r\LS System infringes Pall's
'572 Patent and that we and Gambro BCT tortiously interfered and unfairly
competed with Pall's business. On May 19, 1999, Pall amended its complaint and
added Gambro Inc., Gambro A.B. and Sepracor as defendants. We and Gambro have
moved to dismiss, transfer or stay the action and Pall has opposed the motion.
There has been no decision on the motion.
A prior lawsuit brought by Pall in February 1996 has concluded. In June
1999, the United States Court of Appeals for the Federal Circuit determined that
the LeukoNet System did not infringe claim 39 of the '321 Patent and Pall has
not appealed that decision.
We have engaged patent counsel to investigate the pending litigations.
We believe, based upon our review of these matters, that a properly informed
court should conclude that the manufacture, use and/or sale by us or our
customers of the LeukoNet System and the r\LS System do not infringe any valid
enforceable claims of the Pall patents. However, we cannot assure you that we
will prevail in the pending litigations, and an adverse outcome in a patent
infringement action would have a material and adverse effect on our financial
condition and future business and operations, including the possibility of
significant damages in the litigations and an injunction against the sale of the
r\LS System if we do not prevail in the litigations.
In January 1997, we entered into a Restructuring Agreement of the debt
related to our acquisition of Novo Nordisk A/S's plasma products unit. In
January 1998, we elected to convert all indebtedness under the approximately
$11,700,000 promissory note which was issued to Novo Nordisk A/S in connection
with the Restructuring Agreement into common stock at a conversion price of
$10.50 per share, or 827,375 shares. We also elected to treat as forgiven
$3,000,000 in principal amount of the note, pursuant to the terms of the note.
Novo Nordisk A/S has contested the conversion of the note, including the
forgiveness of the $3,000,000 amount. This dispute, with or without merit, could
be time-consuming and expensive to litigate or settle if brought into a
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court of law, and could divert management attention from administering our core
business. If Novo Nordisk A/S succeeds on its dispute and we are deemed to have
wrongfully converted the original note, then the 827,375 shares of common stock
issued to Novo Nordisk A/S may no longer be outstanding and we may be obligated
to repay certain indebtedness under the original note. See "Certain Related
Transactions -- Novo Nordisk A/S."
Former Leukoreduction Filter Product
In June 1995, we received clearance from the FDA for the LeukoNet
System. Fiscal 1996 was the first full year of commercial sale of our LeukoNet
System. In January 1998, we initiated a voluntary recall of the LeukoNet System
because of potential concerns related to transfusion reactions resulting in
bilateral eye redness that were believed to be associated with the product. In
February 1998, we decided to discontinue manufacturing the LeukoNet System and
focus on the completion of development and market introduction of our next
generation red cell filtration product, the r\LS System, because we believe
that, unlike the LeukoNet System, our r\LS System could be manufactured and sold
at a cost that would generate profits for us.
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MARKET FOR COMMON EQUITY
Market Information
Our common stock has been included for quotation on the OTC Bulletin
Board under the symbol HMSR since January 14, 1998. From October 28, 1997 until
January 13, 1998, our common stock was included for quotation on The Nasdaq
SmallCap Market under the symbol HMSRC. From April 7, 1994 to October 28, 1997,
our common stock was included for quotation on the Nasdaq National Market under
the symbol HMSR. Prior to April 7, 1994, our common stock was not publicly
traded. The following table sets forth, for the periods indicated, the range of
high and low bid information per share of the common stock as included for
quotation on the Nasdaq National Market, The Nasdaq SmallCap Market or the OTC
Bulletin Board, as the case may be.
1999 High Low
---- ---- ---
First Quarter 2 1/2 1 13/32
Second Quarter 4 7/8 2 1/8
Third Quarter 7 3/8 3 7/8
Fourth Quarter 6 1/2 4 1/2
1998 High Low
---- ---- ---
First Quarter 2 3/16 3/8
Second Quarter 2 1/16 7/16
Third Quarter 2 15/32 1 3/16
Fourth Quarter 2 15/16 7/8
Holders
On March 24, 2000, our common stock was held by approximately 125
stockholders of record. On March 28, 2000, the last reported sale price of our
common stock on the OTC Bulletin Board was $11.
Dividend Information
We have never paid cash dividends on our common stock. We currently
intend to reinvest our earnings, if any, for use in the business and do not
expect to pay cash dividends in the foreseeable future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and
related notes. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to, those discussed in "Risk Factors" and elsewhere in
this memorandum. See "Note Regarding Forward-Looking Statements." Because of the
foregoing factors, past financial results should not be relied upon as an
indication of future performance. We believe that period-to-period comparisons
of our financial results to date are not necessarily meaningful and expect that
our results of operations may fluctuate from period to period in the future.
Overview
HemaSure was established in December 1993 as a wholly-owned subsidiary
of Sepracor. Effective as of January 1, 1994, in exchange for 3,000,000 shares
of our common stock, $.01 par value, Sepracor transferred to us its technology
relating to the manufacture, use and sale of medical devices for the separation
and purification of blood, blood products and blood components and its membrane
filter design technologies.
We develop and supply innovative blood filtration technologies designed
to help meet today's increasing demand for a safer, more reliable blood supply.
Our blood filtration technologies are designed to reduce virus- carrying white
blood cells (leukocytes) in donated blood to nominal levels (a process known as
"leukoreduction").
In June 1995, we received clearance from the FDA for the LeukoNet
System, a medical device designed for the removal of contaminating leukocytes
from donated blood. Fiscal 1996 was the first full year of commercial sale of
our LeukoNet System. In February 1998, we determined to discontinue
manufacturing the LeukoNet System and focus on the completion of development and
market introduction of our next generation red cell filtration product, the r\LS
System.
In May 1999, we received 510(k) clearance from the FDA to market our
r\LS System in the United States. We initiated sales of the r\LS System in the
United States in the third quarter 1999.
All of our other planned blood-related products are in the research and
development stage, and certain of these products may require pre-clinical and
clinical testing prior to submission of any regulatory application for
commercial use. Our success will depend on the commercial acceptance of the r\LS
System and development and commercial acceptance of our other blood-related
products.
Results of Continuing Operations
Revenues were $805,000 in 1999, $25,000 in 1998 and $2,357,000 in 1997.
All revenues in 1999, 1998 and 1997 were from the sale of our leukoreduction
systems. In 1999, we initiated sales of our next generation red blood cell
leukoreduction system, the r\LS System. In February 1998, we decided to
discontinue the manufacture and sale of our former leukoreduction filter, the
LeukoNet System, which accounts for the increase in revenues in 1999 from those
in 1998 and for the decrease in 1998 from those in 1997 when all revenues were
attributed to the LeukoNet System. In 1999, one customer represented 66% of
total revenues and another customer represented 33% of total revenues. In 1998
one customer represented 53% of total revenues and another customer represented
10% of total revenues. In 1997, one customer represented 86% of total revenues.
The cost of products sold was $2,408,000 in 1999, $657,000 in 1998 and
$4,158,000 in 1997. Cost of products sold exceeded product sales in all periods
due to the high costs associated with low volume production and to the start-up
costs of new product introduction. Cost of products sold in 1997 includes a
charge of approximately
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$800,000 related to our determination to discontinue manufacturing the LeukoNet
System and to focus exclusively on our next generation red cell filter.
Research and development expenses were $2,681,000 in 1999, $3,794,000
in 1998 and $3,577,000 in 1997. The decrease in 1999 from 1998 is primarily
attributable to costs associated with the development of our next generation red
cell filtration system, the r\LS System, for which a majority of the effort was
expended in the 1998 period. The increase in 1998 over amounts expended in 1997
is attributable to costs associated with development of our r\LS System.
Legal expense related to patents were $1,361,000 in 1999, $3,340,000 in
1998 and $506,000 in 1997. In 1998, we incurred significant expenses in
connection with expert witness and discovery related activities associated with
our outstanding patent litigation with Pall. The decrease in 1999 from those
expended in 1998 is due to a reduction in these costs as well as from
cooperation with Gambro BCT in connection with such costs consistent with our
distribution and development agreement with Gambro. See " -- Litigation."
Selling, general and administrative expenses were $3,728,000 in 1999,
$4,201,000 in 1998 and $4,458,000 in 1997. The decrease in the amount expended
in 1999 from 1998 is primarily due to a lower level of general corporate
expenses. The decrease in the amount expended in 1998 from 1997 is primarily due
to a lower level of sales and marketing expense associated with the lower
revenues in 1998 compared to 1997. Sales and marketing costs may increase in
future periods from current levels as we continue our efforts to market and
launch sales of our blood filtration products.
In April 1997, we determined to focus management resources on our core
business of blood filtration technologies. In connection therewith, we incurred
a one-time restructuring charge of $1,215,000 in 1997 for severance and related
charges in connection with executive management departures. At December 31,
1998, all amounts related to this charge were paid.
Interest income in 1999, 1998 and 1997 primarily represents interest
earned on available cash and marketable securities balances during those
periods.
The increase in interest expense in 1999 compared to 1998 is primarily
related to amounts outstanding on our line of credit which was outstanding for
all of 1999 and only for approximately three months in 1998. The decrease in
interest expense in 1998 compared to 1997 is primarily related to a convertible
subordinated note payable which was outstanding for all of 1997 and converted to
common stock in 1998 and lower average capital lease obligation balances.
In September 1997, we reached an out-of-court settlement with Pharmacia
& Upjohn Inc. arising out of the alleged breach by Pharmacia & Upjohn Inc. of an
agreement to sell to us Pharmacia & Upjohn Inc.'s plasma pharmaceutical business
located in Stockholm, Sweden. The terms of settlement included a cash payment to
us and the granting of an option to Pharmacia & Upjohn Inc. to license, on a
non-exclusive basis, certain intellectual property held by us and our
subsidiaries relating to plasma fractionation. The cash payment was recognized
as other income in 1997 and represents the majority of the amount in other
income for that year.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses depends on the intended use of the derivative and its resulting
designation.
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The statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. We do not expect such adoption to have a material impact on
our financial statements.
In December 1999, the Securities and Exchange Commission (the
"Commission") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements," which is effective no later than the
quarter ending June 30, 2000. SAB 101 clarifies the Commission's views related
to revenue recognition and disclosure. We will adopt SAB 101 effective in the
second quarter of 2000 and are presently determining the effect it will have on
our financial statements, but management does not believe the effect will be
material.
Litigation
We are a defendant in a lawsuit brought by Pall regarding our LeukoNet
System, which is no longer made or sold by the Company. In a complaint filed in
November 1996, Pall alleged that the manufacture, use and/or sale of the
LeukoNet System infringed upon two patents held by Pall. Pall dropped its
allegations concerning infringement of one of the patents and alleges only that
the LeukoNet System infringed Pall's U.S. Patent No. 4,952,572 (the "'572
Patent").
With respect to the allegations concerning the '572 Patent, we answered
the complaint stating that the LeukoNet System does not infringe any claim of
the asserted patents. Further, we counterclaimed for declaratory judgment of
invalidity, noninfringement and unenforceability of the '572 Patent. Pall
amended its complaint to add Lydall, Inc., whose subsidiary supplied the filter
media for the LeukoNet System, as a co-defendant. We filed for summary judgment
of non-infringement, and Pall cross-filed for summary judgement of infringement
at the same time. Lydall, Inc. supported our motion for summary judgment of
non-infringement, and filed a motion for summary judgment that the asserted
claims of the '572 patent are invalid as a matter of law. Discovery has been
completed in the action. The court has not acted on the summary judgment
motions.
We and Gambro BCT filed a complaint for declaratory relief against Pall
in the United States District Court of Colorado. We and Gambro BCT seek
declaratory relief that the '572 Patent, Pall's U.S. Patent No. 5,451,321 (the
"'321 Patent") and Pall's U.S. Patent No.'s 5,229,012, 5,344,561, 5,501,795 and
5,863,436 are invalid and not infringed by our r\LS System and methods of using
the r\LS System. Pall moved to dismiss or transfer to the Eastern District of
New York or, in the alternative, to stay this action. We and Gambro BCT opposed
Pall's motion. On July 16, 1999, the United States District Court of Colorado
denied Pall's motion to transfer or, in the alternative, to stay the action, and
the action is proceeding. On September 30, 1999, the Court denied Pall's motion
to dismiss the action and the case is proceeding. On October 20, 1999, Pall
submitted a counterclaim alleging that our r\LS System infringes its '572 patent
and that we and Gambro BCT tortiously interfered and unfairly competed with
Pall's business. Pall has also asserted that the r\LS System infringes one or
more of the other patents that are the subject of the lawsuit.
On April 23, 1999, Pall filed a complaint against us and Gambro BCT in
the Eastern District of New York alleging that our r\LS System infringes Pall's
'572 Patent and that we and Gambro BCT tortiously interfered and unfairly
competed with Pall's business. On May 19, 1999, Pall amended its complaint and
added Gambro Inc., Gambro A.B. and Sepracor as defendants. We and Gambro BCT
have moved to dismiss, transfer or stay the action and Pall has opposed the
motion. There has been no decision on the motion.
A prior lawsuit brought by Pall in February 1996 has concluded. In June
1999, the United States Court of Appeals for the Federal Circuit determined that
the LeukoNet System did not infringe claim 39 of the '321 Patent and Pall has
not appealed that decision.
We have engaged patent counsel to investigate the pending litigations.
We believe, based upon our review of these matters, that a properly informed
court should conclude that the manufacture, use and/or sale by us or our
customers of the LeukoNet System and the r\LS System do not infringe any valid
enforceable claims of the Pall patents. However, we cannot assure you that we
will prevail in the pending litigations, and an adverse
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outcome in a patent infringement action would have a material and adverse effect
on our financial condition and future business and operations, including the
possibility of significant damages in the litigations and an injunction against
the sale of the r\LS System if we do not prevail in the litigations.
On November 1, 1996, we filed a complaint in the Supreme Court, State
of New York, County of New York, against Pharmacia & Upjohn Inc. In our
complaint, we sought damages arising out of the alleged breach by Pharmacia &
Upjohn Inc. of an agreement to sell to us Pharmacia & Upjohn Inc.'s plasma
pharmaceutical business located in Stockholm, Sweden. In September 1997, we
reached an out-of-court settlement with Pharmacia & Upjohn Inc. The terms of
settlement included a cash payment to us and the granting of an option to
Pharmacia & Upjohn Inc. to license, on a non-exclusive basis, certain
intellectual property held us and our subsidiaries relating to plasma
fractionation. The cash payment was recognized as other income in 1997.
Liquidity and Capital Resources
The net increase in cash and cash equivalents in 1999 was $3,416,000.
This net increase is attributable to net cash provided by financing activities
of $14,472,000 offset in part by net cash used in operating activities of
$10,539,000 and net cash used in investing activities of $517,000.
Net cash provided by financing activities relates to net proceeds from
issuance of common stock of $14,724,000 offset in part by repayments of capital
lease obligations of $225,000. Net cash used in operating activities is
primarily attributable to the net loss of $10,665,000, a reduction in accounts
payable of $343,000 and increases in accounts receivable of $443,000 and
inventories of $600,000, offset in part by non-cash charges to operating
activities of $1,024,000 related to warrant financing costs and depreciation and
amortization of $475,000. Net cash used in investing activities relates to
additions to property and equipment of $517,000.
In March 2000, we completed a $28,000,000 private placement in which
institutional investors purchased 3,730,000 shares of our common stock at a
purchase price of $7.50 per share. We have agreed to register, prior to June 2,
2000, such shares for resale. We intend to use the proceeds of the financing for
working capital, capital equipment and general corporate purposes.
We believe, based on our current operating plan, that our existing cash
balances together with the financing provided in March 2000 will be sufficient
to fund our operations beyond the first quarter 2001. If our plans or
assumptions change, if our assumptions prove to be inaccurate or if we
experience unanticipated costs or competitive pressures, we may seek to raise
additional capital by pursuing strategic partnerships, public or private equity
and/or debt financing. If we fail to generate such cash flow or obtain any such
financing on terms favorable to us or if other unforeseen circumstances occur,
we may be unable to continue to commercialize and market the r\LS System or
complete the development of our proposed products and/or market such products
successfully, or to continue our current operations as presently conducted, if
at all, beyond the first quarter 2001. Our 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 our products, patent developments and
the introduction of competitive products.
On May 3, 1999, we completed a private placement financing with Gambro
Inc. The stock subscription agreement, which we entered into with Gambro Inc. in
connection with this financing, provided for an initial investment of $9,000,000
in exchange for 4,500,000 shares of our common stock. The stock subscription
agreement also provided Gambro Inc. with an option to purchase additional shares
of our common stock for up to an aggregate purchase price of $3,000,000 at any
time between August 3, 1999 and May 3, 2000 with the price per share of common
stock to be based upon the market price of our common stock. In October 1999,
Gambro Inc. exercised this option in full. In connection with the exercise of
this option, Gambro Inc. purchased 498,355 shares at a price of $6.02 per share.
The price and number of shares reflects the average price of HemaSure stock in
the 30 days prior to the exercise date of October 5, 1999.
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In March 1999, Sepracor purchased an additional 1,333,334 shares in a
private placement of our common stock for $1.50 per share and received warrants
to purchase an additional 667,000 shares at a price of $1.50 per share. The
financing agreement contains certain registration rights and warrant exercise
provisions.
In September 1998, we completed a $5 million revolving line of credit
arrangement with a commercial bank. As of December 31, 1999, the entire $5
million was outstanding under the line. The revolving line of credit, which
expires in August 2000, is being used to help finance our working capital
requirements and for general corporate purposes. Amounts borrowed under the line
bear interest at the bank's prime lending rate plus 1/2% payable quarterly in
arrears. The weighted-average borrowing rate for the period ended December 31,
1999 was 8.67%. We recorded interest expense related to borrowings under the
line of $434,000 and $93,000 for the periods ended December 31, 1999 and 1998,
respectively. The credit agreement contains customary covenants and provisions.
The bank has a first lien on all of our assets including our intellectual
property.
Sepracor, our largest shareholder, has guaranteed to repay amounts
borrowed under the line of credit. In exchange for the guarantee, we granted to
Sepracor warrants to purchase up to 1,700,000 shares of our common stock at a
price of $0.69 per share. The warrants will expire in the year 2003 and have
certain registration rights associated with them. We have placed a value of
$1,938,000 on the 1,700,000 warrants as of the date of the final agreement and
are amortizing this deferred financing charge on a monthly basis over the term
of the line of credit. We amortized $1,024,000 and $189,000 of this deferred
finance charge and recorded it as interest expense in the Consolidated
Statements of Operations for the periods ended December 31, 1999 and 1998,
respectively.
In April 1997, we determined to focus management resources on our core
business of blood filtration technologies. In connection therewith, we incurred
a one-time restructuring charge of $1,215,000 in 1997 for severance and related
charges in connection with executive management departures. At December 31,
1998, all amounts related to this charge were paid.
In March 1997, we exercised our right, under the lease arrangement of
our Marlborough, Massachusetts facility, to have a portion of our leasehold
improvements financed and received $140,000 in connection with this arrangement.
This amount will be repaid in 60 equal monthly installments at a rate of 12% per
annum. As of December 31, 1999, there was a balance of $73,000 remaining to be
paid on this note.
In January 1997, we entered into a Restructuring Agreement with respect
to the indebtedness incurred by us in connection with our acquisition of the
plasma pharmaceutical business unit of Novo Nordisk. Pursuant to the
Restructuring Agreement, approximately $23,000,000 of indebtedness owed to Novo
Nordisk was restructured by way of issuance by us to Novo Nordisk of a 12%
convertible subordinated promissory note in the principal amount of
approximately $11,700,000, which was due and payable on December 31, 2001, with
interest payable quarterly (provided that up to approximately $3,000,000 would
be forgiven in certain circumstances). Approximately $8,500,000 of the reduction
of such indebtedness was forgiven; such forgiveness is reflected in the 1996
Statement of Operations as a reduction of the loss on disposal of the
discontinued plasma business. The remainder of the reduction represented a net
amount due from Novo Nordisk to us related to various service arrangements
between the two companies. The amount included in the balance sheet at December
31, 1997 and 1996 includes the effect of the Restructuring Agreement net of the
$3,000,000 contingency amount to reflect the most probable result of our
decision to exit the plasma business. All amounts outstanding under such note
were convertible by either party, commencing January 1998, into shares of common
stock at a conversion price equal to $10.50 per share. In December 1997, our
Danish subsidiary was placed in bankruptcy and we notified the holder of the
note of our intent to convert in January 1998, $8,687,000 of debt, which we
believe was the entire amount outstanding as of the date of conversion. On
January 6, 1998, we converted the note, pursuant to its terms, into shares of
common stock at a conversion price of $10.50 per share, or 827,375 shares. The
holder of the note has contested the conversion of the note, including the
forgiveness of the $3,000,000 amount. We believe that such claims are without
merit.
In 1994, in collaboration with Sepracor and certain of its other
subsidiaries, we executed an equipment leasing arrangement that provided for a
total of $2,000,000 to Sepracor and certain of its other subsidiaries for
purposes of
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financing capital equipment. Under certain circumstances, Sepracor is the
guarantor of any amounts outstanding under this financing arrangement. In
October 1996, we executed a replacement leasing arrangement for our benefit only
with the same leasing company providing $1,100,000 of equipment lease financing.
This arrangement terminated in March 1997. All amounts outstanding under the
1994 leasing facility are being repaid under the original terms of that leasing
arrangement. There was $71,000 outstanding under all leasing arrangements as of
December 31, 1999.
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MANAGEMENT
Executive Officers and Directors
Set forth below is the name, age, position and a brief account of the
business experience of each of our executive officers and directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Timothy J. Barberich 51 Chairman of the Board
John F. McGuire, III 53 President, Chief Executive Officer and Director
James B. Murphy 43 Senior Vice President, Finance and Administration
Peter C. Sutcliffe 50 Vice President and Chief Operating Officer
David S. Barlow 43 Director
Frank Corbin 53 Director
Justin E. Doheny 48 Director
Edward C. Wood 55 Director
</TABLE>
Timothy J. Barberich has served as Chairman of our board of directors
since April 1997, as one of our directors since our inception in 1993 and was
Chairman of our board of directors from 1993 until March 1996. Mr. Barberich was
a founder of Sepracor and has served as President, Chief Executive Officer and a
director of Sepracor since 1984 and as Chairman of the board of directors of
Sepracor since December 1999. As of March 24, 2000, Sepracor owned approximately
22% of our issued and outstanding common stock. Mr. Barberich also serves as
Chairman of the board of directors of BioSepra Inc., a publicly traded
subsidiary of Sepracor which is engaged in the manufacture of instrumentation
and media for the pharmaceutical industry.
John F. McGuire, III has served as our Chief Executive Officer,
President and as one of our directors since April 1997. Prior to that time, Mr.
McGuire served as Vice President and General Manager of Johnson & Johnson's
Ortho Diagnostic Systems Blood Bank Business Unit since January 1996. From March
1995 to January 1996, Mr. McGuire held the position of Vice President, Sales &
Marketing, North America for Johnson & Johnson. From August 1990 to March 1995,
Mr. McGuire served as Managing Director of Ortho Diagnostic Systems in the
United Kingdom and Belgium for Johnson & Johnson. From September 1988 to August
1990, Mr. McGuire held the position of Marketing Director for the AIDS and
Hepatitis Business Unit of Johnson & Johnson. From 1977 to 1988, Mr. McGuire
held various management positions at E. I. du Pont de Nemours and Company, the
last of which was National Sales Manager, AIDS & Hepatitis Business. Mr. McGuire
is a member of the board of trustees of the National Blood Foundation Trust
Fund.
James B. Murphy has served as our Senior Vice President, Finance and
Administration since February 1996. From April 1994 to January 1996, he served
as our Vice President and Corporate Controller. Prior to that, from 1990 to
April 1994, he served as Corporate Controller of Sepracor. Previously, Mr.
Murphy held the positions of Senior Corporate Accountant at BBN Inc. and Senior
Accountant at Arthur Andersen LLP.
Peter C. Sutcliffe has served as our Chief Operating Officer since
April 1998. From May 1996 to April 1998, Mr. Sutcliffe served as our Vice
President of Manufacturing Operations. From May 1982 to May 1996, Mr. Sutcliffe
held the position of Vice President, Manufacturing for Corning Costar
Incorporated. From 1976 to 1982, he was a plant manufacturing manager at
Millipore Corporation.
931200.4
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<PAGE>
David S. Barlow has served as one of our directors since January 1994.
Mr. Barlow was Executive Vice President and President, Pharmaceuticals Division
of Sepracor from October 1995 to September 1999. From July 1993 to October 1995,
Mr. Barlow held the position of Senior Vice President and General Manager of the
Pharmaceuticals Division of Sepracor. From 1991 to 1993, he was President of the
Business Group, a management consulting firm. Previously, he was Vice President,
Worldwide Marketing and Business Development of Armour Pharmaceutical Company, a
subsidiary of Rhone-Poulenc Rorer, from 1988 to 1991. Prior to that time, he was
associated with Pfizer Inc. and Ares-Serono, Inc. in various business planning
and marketing positions. Mr. Barlow is a member of the board of directors of
Enzon Inc.
Frank Corbin has been one of our directors since June 1999. Mr. Corbin
has been Vice President of Research and Development of Gambro BCT since July
1997. Prior to that, Mr. Corbin served as Director of Research and Development
for Gambro BCT from January 1991 to July 1997.
Justin E. Doheny has been one of our directors since April 1998. Mr.
Doheny has been Executive Vice President and Chief Operating Officer of Saint
Peter's University Hospital, New Brunswick, New Jersey, since August 1997. From
June 1996 to October 1996, Mr. Doheny served as Senior Vice President of Saint
Barnabas Health Care System in Livingston, New Jersey. From December 1985 to
June 1996, Mr. Doheny was President of Wayne General Hospital, which is located
in Wayne, New Jersey.
Edward C. Wood has been one of our directors since June 1999. Mr. Wood
has been President of Gambro BCT since 1991. Prior to that, Mr. Wood held
various positions in manufacturing, research and development and marketing with
Gambro BCT. He served on the board of Aastrom Biosciences, Inc. from August 1994
to February 1999.
In November 1999, Rolf S. Stutz, who served as one of our directors
since January 1994, passed away. To date, the board has not filled Mr. Stutz's
vacancy.
Donald Mareci, who is not one of our executive officers, serves as our
Vice President, Sales and Marketing, and has approximately 20 years of
experience in the filtration industry in sales and marketing.
Board and Committee Meetings
We have a standing audit committee of our board of directors, which
provides the opportunity for direct contact between our independent accountants
and our board. Our audit committee has responsibility for recommending the
appointment of our independent accountants, reviewing the scope and results of
audits and reviewing our internal accounting control policies and procedures.
Our audit committee met two times in 1999. From January 1999 to July 1999, the
members of our audit committee were Messrs. Doheny and Stutz. From July 1999 to
November 1999, the members of our audit committee were Messrs. Doheny, Stutz and
Corbin. Since November 1999, the members of our audit committee have been
Messrs. Doheny and Corbin.
We also have a standing compensation committee of our board of
directors, which provides recommendations to our board of directors regarding
our compensation programs. Our compensation committee is responsible for
establishing and modifying the compensation of all of our corporate officers,
adopting and amending all stock option and other employee benefit plans, and
determining the engagement of, terms of any employment agreements and
arrangements with, and termination of, all of our corporate officers. Our
compensation committee met once in 1999. From January 1999 to July 1999, the
members of our compensation committee were Messrs. Doheny and Stutz. Since July
1999, the members of our compensation committee have been Messrs. Barberich,
Doheny and Wood.
We do not have a nominating committee or a committee serving a similar
function. Nominations are made by and through our board of directors.
931200.4
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<PAGE>
Our board of directors held four meetings during 1999. Each director
attended at least 75% of the total number of board meetings (including consents
in lieu of meetings) which took place during the period of his directorship.
Compensation for Directors
Directors who are neither officers nor employees of ours or of any of
our subsidiaries receive $1,000 for each board meeting they attend and are
entitled to participate in our 1994 Director Stock Option Plan, except that Mr.
Barberich and Mr. Barlow do not receive compensation for attendance at board
meetings. Directors who are officers or employees of ours do not receive any
additional compensation for their services as directors. On January 5, 1994,
options to purchase an aggregate of 75,000 shares of common stock at an exercise
price of $2.00 per share were granted under our 1994 Director Stock Option Plan
to the following directors: Mr. Barberich, 45,000 shares, and Mr. Barlow, Mr.
Stutz, and two former board members (Messrs. Tullis and Kimbell), 7,500 shares
each. On May 17, 1995, options to purchase 1,500 shares of common stock at an
exercise price of $5.50 per share were granted under our 1994 Director Stock
Option Plan to the following directors: Mr. Barberich, Mr. Barlow, Mr. Stutz and
two former board members (Messrs. Tullis and Kimbell). On February 15, 1996,
options to purchase 18,750 shares of common stock at an exercise price of
$12.375 per share were granted under our 1994 Stock Option Plan to Mr.
Barberich. On May 16, 1996, options to purchase an aggregate of 39,000 shares of
common stock at an exercise price of $16.25 per share were granted under our
1994 Director Stock Option Plan to the following directors: Mr. Barberich, Mr.
Barlow, Mr. Kimbell, and Mr. Stutz, 9,750 shares each. On May 16, 1997, options
to purchase an aggregate of 12,000 shares of common stock at an exercise price
of $1.75 per share were granted under our 1994 Director Stock Option Plan to the
following directors: Mr. Barberich, Mr. Barlow, Mr. Kimbell and Mr. Stutz, 3,000
shares each. On January 22, 1998, options to purchase an aggregate of 162,000
shares of common stock, at an exercise price of $0.625, were granted under our
1994 Stock Option Plan to the following directors: Mr. Barberich, 75,000 shares,
and Messrs. Barlow and Stutz, 43,500 shares each. On May 26, 1998, options to
purchase an aggregate of 16,500 shares of common stock at an exercise price of
$1.50 per share were granted under our 1994 Director Stock Option Plan to the
following directors: Mr. Barberich, Mr. Barlow and Mr. Stutz, 3,000 shares each,
and Mr. Doheny, 7,500 shares. On June 10, 1999, options to purchase an aggregate
of 27,000 shares of common stock at an exercise price of $4.875 per share were
granted under our 1994 Director Stock Option Plan to the following directors:
Mr. Barberich, Mr. Barlow, Mr. Doheny and Mr. Stutz, 3,000 shares each, and Mr.
Corbin and Mr. Wood, 7,500 shares each.
931200.4
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to the
annual and long-term compensation for the last three fiscal years of our
President and Chief Executive Officer and our other executive officers whose
total annual salary and bonus for 1999 exceeded $100,000 (collectively, the
"Named Executive Officers").
<TABLE>
<CAPTION>
Summary Compensation Table
Long--Term
Compensation
Annual Compensation Awards
------------------- ------------
All
Other Annual Securities Other
Compensation Underlying Compensation
Name and Principal Position Year Salary ($) Bonus($) ($)(1) Options/SARS ($)
- --------------------------- ---- ---------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John F. McGuire, III..................... 1999 $282,000 $20,000 $ 95,632(2) 100,000 $1,008(3)
President and Chief Executive Officer
1998 216,172 -- -- 200,000 300
1997 140,302 75,000 -- 600,000 195
James B. Murphy.......................... 1999 $166,600 $10,000 $-- 50,000 $608
Senior Vice President Finance and
Administration
1998 140,063 -- -- 160,000 63
1997 119,387 -- -- 60,000 222
Peter C. Sutcliffe....................... 1999 $176,400 $10,000 $-- 50,000 $701
Vice President and Chief Operating
Officer
1998 160,125 -- -- 200,000 125
1997 143,005 -- -- -- 112
</TABLE>
- -------------
(1) Other annual compensation in the form of perquisites and other personal
benefits, securities or property has been omitted if such compensation
constituted the lesser of $50,000 or 10% of the total annual salary and
bonus for the Named Executive Officer.
(2) Represents relocation expenses.
(3) Represents the taxable portion of group life insurance.
Option Grant Table
The following table sets forth certain information regarding options
granted during the year ended December 31, 1999 by us to the Named Executive
Officers.
931200.4
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<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
-----------------
Percent of Market
Total Price of
Number of Options/ Securities
Securities SARS Exercise Underlying Potential Realizable Value
Underlying Granted to or Options/ at Assumed Annual Rates of
Options/SARS Employees In Base SARS Stock Price Appreciation
Granted Fiscal Price On Grant Expiration For Option Term(2)
------------------
Name (#)(1) Year ($/sh) Date Date 5%($) 10%($)
---- ------- ---- ------ ---- ---- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
John F. McGuire, III........ 100,000 34.1297 $5.625 $5.625 9-1-09 $353,753 $896,480
James B. Murphy............. 50,000 17.0648 $5.625 $5.625 9-1-09 $176,876 $448,240
Peter C. Sutcliffe.......... 50,000 17.0648 $5.625 $5.625 9-1-09 $176,876 $448,240
</TABLE>
- ---------------
(1) Options vest in up to five equal annual installments beginning on the
first anniversary of the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for options
if exercised and sold at the end of the option term. These gains are
based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date options are granted. Actual gains, if
any, on stock option exercises will depend on the future performance of
our common stock on the date on which the options are sold.
Year-End Option Table
The following table sets forth certain information regarding options
held as of December 31, 1999 by the Named Executive Officers. No Named Executive
Officer exercised stock options in 1999.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values
Number of Value of Unexercised
Unexercised In-the-Money
Options/SARS at Options/SARS at
Fiscal Year-End (#) Fiscal Year-End ($)(1)
------------------- ----------------------
Shares
Acquired
on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
John F. McGuire, III................ -- -- 200,000/700,000 $987,600/2,962,800
James B. Murphy..................... -- -- 50,000/220,000 $234,400/789,460
Peter C. Sutcliffe.................. -- -- 45,000/205,000 $209,710/715,390
- ---------------
(1) Value is based on the closing sales price of our common stock on December 31, 1999, which was $5.5625, the last trading day
of our 1999 fiscal year, less the applicable option exercise price.
</TABLE>
931200.4
51
<PAGE>
Employment and Retention Agreements
We entered into an employment agreement, as of April 1, 1997 (the
"McGuire Employment Agreement"), with John F. McGuire, III which provides that
Mr. McGuire serve as our President and Chief Executive Officer. The McGuire
Employment Agreement provided for a first year salary of $175,000 and an annual
bonus of $75,000 to be earned upon the achievement of certain goals as
determined by our board of directors, and for adjustments thereto in subsequent
years, as determined by our board of directors or our Compensation Committee.
Upon execution of the McGuire Employment Agreement, Mr. McGuire received an
option to purchase 600,000 shares of common stock at an exercise price of
$2.5630 per share (which was repriced in January 1998 to $0.6250 per share),
equal to the "low" bid price for our common stock as quoted on the Nasdaq
National Market System for the week of April 4, 1997. The options vest in four
equal annual installments commencing in 1998. Pursuant to the McGuire Employment
Agreement, an additional 200,000 incentive stock options were issued to Mr.
McGuire in January 1998 at an exercise price of $0.6250 per share. No options
were issued to Mr. McGuire in 1999 under the McGuire Employment Agreement.
Finally, pursuant to the terms of the McGuire Employment Agreement, if Mr.
McGuire is terminated other than for cause, he will receive one year's salary
plus the bonus payable for the prior year, to be paid monthly over the course of
the 12 months following such termination, or until he secures employment in an
equivalent role.
On December 15, 1998, we entered into senior management retention
agreements (the "Retention Agreements"), with each of John F. McGuire, III,
James B. Murphy and Peter C. Sutcliffe (each individually a "Key Employee"), to
reinforce and encourage their continued attention and dedication to their
duties. Pursuant to the Retention Agreements, in the event a change of control
occurs (as defined in the agreements) and the Key Employee (i) is terminated by
us after the change of control, (ii) remains employed by us for 12 months after
the change of control, or (iii) terminates his employment with us for good
cause, then the Key Employee is eligible for (i) payment of his full base salary
plus all amounts entitled under any compensation plan through the termination
date, (ii) severance payments, payable in 24 equal monthly installments equal to
200% (except for Mr. McGuire who shall receive 300%) of the higher of his annual
base salary immediately prior to the date of termination or his base salary in
effect immediately prior to the change of control, and (iii) life, disability,
dental, accident and group health insurance benefits for a period of 36 months
after such termination. The Retention Agreements are automatically renewed each
year unless written notice of termination is delivered by October 30th of any
given year.
Compensation Committee Interlocks and Insider Participation
The current members of our compensation committee are Messrs.
Barberich, Doheny and Wood. None of Messrs. Barberich, Doheny and Wood were at
any time during 1999, or formerly, an officer or employee of ours or any of our
subsidiaries, nor has any member of the Compensation Committee had any
relationship with us requiring disclosure under Item 404 of Regulation S-K under
the Securities Exchange Act of 1934.
None of our executive officers has served in 1999 as a director or
member of the compensation committee (or other committee serving an equivalent
function) of any other entity, one of whose executive officers served as a
director of or member of our compensation committee.
931200.4
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 24, 2000 by each person (or
group of affiliated persons) who we know beneficially owns 5% or more of our
outstanding common stock, each of our directors, our executive officers listed
in the Summary Compensation Table, and all of our directors and executive
officers as a group.
Percentage of ownership is calculated as required by Commission Rule
13d-3(d)(1). Except as indicated below, to our knowledge, the persons named in
the table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them. The address for those
individuals for which an address is not otherwise indicated is 140 Locke Drive,
Marlborough, Massachusetts 01752.
<TABLE>
<CAPTION>
Number of Shares of Percentage of Shares
Common Stock of Common Stock
Beneficial Owner Beneficially Owned Beneficially Owned
- ------------------------------------- ---------------------- ---------------------
<S> <C> <C>
Sepracor Inc.
111 Locke Avenue
Marlborough, MA 01752 6,700,334(1) 30.2%(1)
Gambro Inc.
10811 West Collins Ave
Lakewood, CO 80215-4498 6,177,035 31.2%
Timothy J. Barberich(3) 142,250(3) *(3)
David S. Barlow(4) 48,000(4) *(4)
Frank Corbin(5) 0 *
Justin E. Doheny(6) 2,200(6) *(6)
John F. McGuire, III(7) 430,000(7) 2.1%(7)
Edward C. Wood(5) 0 *
James B. Murphy(8) 80,090(8) *(8)
Peter C. Sutcliffe(9) 76,525(9) *(9)
All directors and executive officers as a 779,065(10) 3.8%(10)
group (8 persons)(10)
</TABLE>
- --------------
* Represents holdings of less than one percent.
(1) Includes 2,367,000 shares of common stock which Sepracor has the right
to acquire within 60 days after March 24, 2000 upon exercise of
outstanding warrants.
(2) On January 16, 1998, we converted all indebtedness under a convertible
subordinated promissory note issued to Novo Nordisk A/S, pursuant to
the terms thereof, into shares of common stock at a conversion price of
$10.50 per share. Novo Nordisk A/S has contested the conversion of the
note, including the forgiveness of $3 million of indebtedness pursuant
to the terms thereof.
(3) Mr. Barberich is the President and Chief Executive Officer of Sepracor.
Includes 113,250 shares of common stock which Mr. Barberich has the
right to acquire within 60 days after March 24, 2000 upon exercise of
outstanding stock options.
(4) Includes 45,000 shares of common stock which Mr. Barlow has the right
to acquire within 60 days after March 24, 2000 upon exercise of
outstanding stock options.
(5) Messrs. Wood and Corbin are the President and the Vice President of
Research and Development of Gambro BCT, respectively.
(6) Includes 1,500 shares of common stock which Mr. Doheny has the right to
acquire within 60 days after March 24, 2000 upon exercise of
outstanding stock options.
(7) Includes 400,000 shares of common stock which Mr. McGuire has the right
to acquire within 60 days after March 24, 2000 upon exercise of
outstanding stock options.
(8) Includes 80,000 shares of common stock which Mr. Murphy has the right
to acquire within 60 days after March 24, 2000 upon exercise of
outstanding stock options.
(9) Includes 70,000 shares of common stock which Mr. Sutcliffe has the
right to acquire within 60 days after March 24, 2000 upon exercise of
outstanding stock options.
(10) Includes an aggregate of 709,750 shares of common stock which executive
officers and directors have the right to acquire within 60 days after
March 24, 2000 upon exercise of outstanding stock options.
931200.4
53
<PAGE>
CERTAIN RELATED TRANSACTIONS
Sepracor
HemaSure was organized in December 1993 as a subsidiary of Sepracor.
Effective January 1, 1994, Sepracor transferred its blood filtration and
membrane filter design business to us in exchange for 3,000,000 shares of our
common stock. As of March 24, 2000, Sepracor owned approximately 22% of our
issued and outstanding common stock (30.2% on a fully diluted basis). Mr.
Barberich, one of our directors, is President and Chief Executive Officer of
Sepracor. Until September 1999, Mr. Barlow, one of our directors, was Executive
Vice President and President, Pharmaceuticals Division of Sepracor.
In September 1998, we completed a $5 million revolving line of credit
arrangement with a commercial bank. Sepracor, our largest stockholder, has
guaranteed to repay amounts borrowed under the line of credit. In exchange for
the guarantee, we granted to Sepracor warrants to purchase up to 1,700,000
shares of our common stock at a price of $0.69 per share. The warrants will
expire in the year 2003 and have certain registration rights associated with
them. We placed a value of $1,938,000 on the 1,700,000 warrants and are
amortizing this deferred financing charge on a monthly basis over the term of
the line of credit. For the period ended December 31, 1998, we amortized
$189,000 of this deferred finance charge and recorded it as interest expense in
our statement of operations.
On March 23, 1999, we completed a private placement financing with
Sepracor in which we received $2,000,000 in exchange for 1,333,334 shares of our
common stock and warrants to purchase an additional 667,000 shares of common
stock at $1.50 per share. The warrants will expire in the year 2004 and have
certain registration rights associated with them. We may require Sepracor to
exercise these warrants at any time after we complete an equity financing for at
least $3,000,000 with a third party and the market price of our common stock is
greater than $3.00 per share for 15 consecutive trading days.
Sepracor is entitled to certain rights with respect to the registration
under the Securities Act of a total of 6,700,334 shares of common stock,
including shares of common stock issuable upon exercise of outstanding warrants.
These rights provide that Sepracor may require us to register shares subject to
certain conditions and limitations. Sepracor has agreed to waive these rights in
connection with the registration statement to be filed by us in connection with
this offering.
Any future arrangements and transactions between us and Sepracor will
continue to be on terms which we determine are fair and reasonable to us.
Gambro Inc.
On May 3, 1999, we completed a private placement financing with Gambro
Inc. The stock subscription agreement, which we entered into with Gambro Inc. in
connection with this financing, provides for an initial investment of $9,000,000
in exchange for 4,500,000 shares of our common stock. The stock subscription
agreement also provides Gambro Inc. with an option to purchase additional shares
of our common stock for up to an aggregate purchase price of $3,000,000 at any
time between August 3, 1999 and May 3, 2000 with the price per share of common
stock to be based upon the market price of our common stock. In October 1999,
Gambro Inc. exercised this option in full. In connection with the exercise of
this option, Gambro Inc. purchased 498,355 shares at a price of $6.02 per share.
The price and number of shares reflects the average price of our stock in the 30
days prior to the exercise date of October 5, 1999. The stockholders' agreement,
which we entered into with Gambro Inc. in connection with this financing,
provides that Gambro Inc. will have representation on our board of directors of
up to two directors and our representative committees and contains, among other
things, various registration rights and anti-dilution and standstill provisions.
Subject to certain terms and conditions, the anti-dilution provisions prohibit
us from selling or issuing our common stock or securities convertible into our
common stock in any offering to a third party without offering Gambro Inc. the
opportunity to purchase at the same price and terms that number of securities
necessary for Gambro Inc. to maintain its beneficial ownership of
931200.4
54
<PAGE>
our outstanding common stock. Furthermore, in an offering or in certain other
limited situations, we must provide Gambro Inc. with notice of our intention to
sell as well as a right to negotiate with us first for the purchase of our
securities. Gambro Inc. agrees to certain restrictions on its ability to sell
our common stock owned by it and its permitted transferees. Gambro Inc. also
agrees to refrain from acquiring beneficial ownership of additional equity or
debt securities of our company, engaging in certain proxy solicitation
activities, seeking to control our management, policies or affairs and taking
certain actions relating to business combinations and similar transactions
without prior approval of our board of directors. Gambro Inc. has purchased
1,178,680 shares of common stock in this offering. Gambro Inc. has agreed to
waive its registration rights in connection with the registration statement to
be filed by us in connection with this offering.
Messrs. Corbin and Wood, two of our directors, are Vice President of
Research and Development and President, respectively, of Gambro BCT.
In 1998, we completed a distribution and development agreement, which
was amended in May 1999, with Gambro Inc. to act as our exclusive distributor of
our r\LS System worldwide, except for sales to the American Red Cross.
Furthermore, this agreement provides that Gambro Inc. may (upon mutual agreement
by us and Gambro Inc.) distribute additional future products developed by us
that filter blood and its components. Gambro Inc. markets and sells blood
component apheresis equipment to the blood center market. The agreement with
Gambro Inc. contemplates the development by us of an OEM filter for use with
Gambro Inc.'s Trima(R) Automated Blood Collection System. The distribution
agreement provides for a five year term that expires in June 2004, subject to
automatic three year renewals unless the agreement is previously terminated.
Novo Nordisk A/S
Under the terms of the May 1996 agreement relating to our acquisition
of the plasma product unit of Novo Nordisk A/S, the purchase price to be paid
for the plasma product unit was to be comprised of three portions: (i)
$1,800,000 was to be payable in 1998 in cash or our common stock or the common
stock of one of our subsidiaries, at our option; (ii) approximately $13,000,000
was to be payable from time to time upon the sale of acquired inventory (valued
at approximately $13,000,000), but in any event no later than 1998, provided
that up to approximately $3,000,000 of such portion could be forgiven in certain
circumstances; and (iii) approximately $8,000,000 was to be payable in 1998 in
cash or our common stock or the common stock of one of our subsidiaries, at our
option, provided that all of this portion would be forgiven in certain
circumstances.
In January 1997, we and Novo Nordisk A/S entered into the Restructuring
Agreement relating to our acquisition of the plasma product unit of Novo Nordisk
A/S. Pursuant to the Restructuring Agreement, approximately $23,000,000 of
indebtedness owed to Novo Nordisk A/S was restructured by way of issuance by us
to Novo Nordisk A/S of a 12% convertible subordinated promissory note in the
principal amount of approximately $11,700,000, due and payable on December 31,
2001, with interest payable quarterly (provided that up to approximately
$3,000,000 would be forgiven in certain circumstances). Approximately $8,500,000
of the reduction of such indebtedness was forgiven. The remainder of the
reduction represented a net amount due from Novo Nordisk A/S to us related to
various service arrangements between the two companies.
On January 6, 1998, we elected to convert all indebtedness under the
note, pursuant to the terms thereof, into shares of our common stock at a
conversion price equal to $10.50 per share, or 827,375 shares. Pursuant to a
registration rights agreement, Novo Nordisk A/S has certain registration rights
with respect to any shares of our common stock acquired by Novo Nordisk A/S upon
conversion of the note. As a result, Novo Nordisk A/S has the right to have up
to 827,375 shares included in the registration statement which will be filed in
connection with the resale of the shares offered in this offering. Novo Nordisk
A/S has contested the conversion of the note, including the forgiveness of the
$3,000,000 amount. We believe such assertions are without merit. However, if
Novo Nordisk A/S succeeds on its dispute and we are deemed to have wrongfully
converted the original note, then the 827,375 shares of common stock issued to
Novo Nordisk A/S may no longer be outstanding and we may be obligated to repay
certain indebtedness under the original note.
931200.4
55
<PAGE>
PRIVATE PLACEMENT REGISTRATION RIGHTS
In connection with the private placement and pursuant to the purchase
agreement in connection with the private placements, we have agreed to use our
best efforts to cause a registration statement to be filed and declared
effective by the Commission within 90 days after March 2, 2000, to register the
resale of 2,551,320 shares of common stock issued to investors in the private
placement, which such shares are included in this prospectus. We have further
agreed to cause such registration statement to remain effective until all shares
covered by the registration statement have been sold or such time as all shares
sold in that private placement can be sold without registration under the
Securities Act, pursuant to Rule 144(k) thereunder; provided that we will have
the option of suspending the effectiveness of the registration statement,
without becoming obligated to pay the damages described below, up to two times
in any 12 month period (not to exceed more than 30 days at one time) upon the
occurrence of certain events, including among other things, if our board of
directors determines that compliance with the disclosure obligations necessary
to maintain the effectiveness of the registration statement at such time could
reasonably be expected to have an adverse effect on us or a pending corporate
transaction.
If we fail to fulfill any of the latter two above referenced provisions
(each a "Registration Default"), we will pay to each purchaser of shares sold in
the private placement damages of 2% of the purchase price paid by such purchaser
with respect to its shares which were registered in the registration statement
and were not previously sold for each 30 day period during which a Registration
Default exists (and pro rated for each lesser portion thereof); provided,
however, that the aggregate amount of damages such purchaser will be entitled
under that provision of the Stock Purchase Agreement for any and all
Registration Defaults is limited to 5% of the purchase price paid by such
purchaser for such shares.
If requested by selling stockholders and agreed upon by us, which
agreement will not be unreasonably withheld, we will use our best efforts to
register or otherwise qualify shares for resale in states requested by the
selling stockholders, provided that we may do so without incurring unreasonable
effort or expense.
931200.4
56
<PAGE>
LEGAL MATTERS
Paul, Hastings, Janofsky & Walker LLP will give its opinion as to the
validity of the shares of common stock offered hereby.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each
of the three years in the period ended December 31, 1999, have been so included
in reliance of the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any reports,
statement or other information we have filed with the Commission at the
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549, and at regional offices of the Commission in New York, New York, and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. Our public filings
are also available to the public from document retrieval services and at the Web
site maintained by the Commission at http://www.sec.gov.
931200.4
57
<PAGE>
HemaSure Inc.
<TABLE>
<CAPTION>
Index to Financial Statements Page
-----------------------------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets at December 31, 1999 and 1998.................................................. F-3
Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997..................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1999, 1998 and 1997....................................................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997..................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
931200.4
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of HemaSure Inc.:
In our opinion, the accompanying consolidated balance sheets
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the financial
position of HemaSure Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 4, 2000
except for Note Q for
which the date is
March 2, 2000
931200.4
F-2
<PAGE>
HemaSure Inc.
Consolidated Balance Sheets
December 31,
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents (Note B) $ 5,243 $ 1,827
Accounts receivable (Note D) 443 -
Inventories (Note E) 806 206
Deferred financing costs (Note H) 725 1,024
Prepaid expenses and other current assets 276 326
--------- ---------
Total current assets 7,493 3,383
Property and equipment, net (Note F) 1,547 1,505
Deferred financing costs long-term (Note H) - 725
Other assets 50 42
---------- ----------
Total assets $ 9,090 $ 5,655
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,199 $ 1,542
Accrued expenses (Note G) 1,520 1,549
Current portion of notes payable (Note H) 5,030 27
Current portion of capital lease obligations (Note G) 71 228
---------
Total current liabilities 7,820 3,346
Capital lease obligations (Note G) - 68
Notes payable (Note H) 43 5,073
Total liabilities 7,863 8,487
------- -------
Commitments and contingencies (Notes G, H and I) Stockholders' equity (deficit)
(Notes K and L):
Preferred stock, $0.01 par value, 1,000 shares authorized, none issued
and outstanding in 1999 and 1998
Common stock, $0.01 par value, authorized shares 35,000
in 1999, issued and outstanding
15,823 in 1999 and 9,088 in 1998 158 91
Additional paid-in capital 86,241 71,584
Accumulated deficit (85,172) (74,507)
-------- ---------
Total stockholders' equity (deficit) 1,227 (2,832)
----- ---------
Total liabilities and stockholders' equity (deficit) $ 9,090 $ 5,655
======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
931200.4
F-3
<PAGE>
HemaSure Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
(In thousands, except per share amounts) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue $ 805 $ 25 $ 2,357
Costs and expenses:
Cost of products sold 2,408 657 4,158
Research and development 2,681 3,794 3,577
Legal expense related to patents 1,361 3,340 506
Selling, general and administrative 3,728 4,201 4,458
Restructuring charge - - 1,215
------------- ------------- ---------
Total costs and expenses 10,178 11,992 13,914
--------- --------- --------
Loss from operations (9,373) (11,967) (11,557)
Other income (expense):
Interest income 201 169 577
Interest expense (1,493) (372) (1,401)
Other income - - 2,497
------------ ------------- --------
Net loss $(10,665) $(12,170) $ (9,884)
========= ========= =========
Net loss per share - basic and diluted: $ (0.77) $ (1.35) $ (1.22)
========== ========== ==========
Weighted average number of shares of common stock
outstanding - basic and diluted 13,766 9,025 8,127
</TABLE>
The accompanying notes are an integral part of the financial statements.
931200.4
F-4
<PAGE>
HemaSure Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Year ended
December 31, 1999, 1998
and 1997 (In thousands)
<TABLE>
<CAPTION>
Total
Additional Stockholders'
Common Stock Paid-in Unearned Accumulated Equity
Shares Amount Capital Compensation Other Deficit (Deficit)
-------- ------ --------- ------------ ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 8,098 $81 $60,702 $(398) $(3) $(52,453) $7,929
Issuance of common stock to
employees under stock plans 66 1 176 177
Unearned compensation amortization 309 309
Other 2 2
Net loss (9,884) (9,884)
--------- ------- -------- --------- ------------- -----------
Balance at December 31, 1997 8,164 82 60,878 (89) (1) (62,337) (1,467)
Issuance of common stock to
employees under stock plans 97 1 89 90
Issuance of common stock for debt 827 8 8,679 8,687
Issuance of warrants 1,938 1,938
Unearned compensation amortization 89 89
Other 1 1
Net loss (12,170) (12,170)
--------- ------- -------- --------- ------------- -----------
Balance at December 31, 1998 9,088 91 71,584 - - (74,507) (2,832)
Issuance of common stock to
employees under stock plans 404 4 813 817
Issuance of common stock
in private placements, net of
issuance costs of $93 6,331 63 13,844 13,907
Net loss (10,665) (10,665)
--------- ------- -------- --------- ------------- -----------
Balance at December 31, 1999 15,823 $ 158 $ 86,241 $ - $ - $ (85,172) $ 1,227
====== ========== ========== ============ =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
931200.4
F-5
<PAGE>
HemaSure Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(10,665) $ (12,170) $ (9,884)
Adjustments to reconcile net loss to net
cash used in operating activities:
Financing costs related to warrants 1,024 189 -
Impairment of assets - - 475
Depreciation and amortization 475 479 859
Accretion of marketable securities discount - 20 4
Loss on disposal of equipment - 5 -
Changes in operating assets and liabilities:
Net assets of discontinued business - - 500
Accounts receivable (443) 436 (153)
Inventories (600) (48) 218
Prepaid expenses and other current assets 50 21 33
Accounts payable (343) 666 (736)
Accrued expenses (29) (297) 273
Other assets (8) (10) 20
----------- ---------- ---------
Net cash used in operating activities (10,539) (10,709) (8,391)
-------- -------- -------
Cash flows from investing activities:
Purchases of marketable securities - (20,255) (99,752)
Maturities of marketable securities - 27,117 104,235
Unrealized holding loss of available for sale marketable securities - 1 2
Additions to property and equipment (517) (422) (220)
----- ----- -----
Net cash provided by (used in) investing activities (517) 6,441 4,265
----- ----- -----
Cash flows from financing activities:
Net proceeds from issuance of common stock 14,724 90 177
Borrowing from notes payable arrangements - 5,000 140
Repayment of notes payable (27) (9) (31)
Repayments of capital lease obligations (225) (260) (241)
------- ------ ------
Net cash provided by financing activities 14,472 4,821 45
------ ----- -------
Net (decrease) increase in cash and cash equivalents 3,416 553 (4,081)
Cash and cash equivalents at beginning of period 1,827 1,274 5,355
------- ------- -------
Cash and cash equivalents at end of period $5,243 $1,827 $1,274
====== ====== ======
Supplemental schedule of cash flow information:
Cash paid during the year for interest $ 453 $503 $1,072
Noncash investing and financing activities:
Acquisition of fixed assets financed by capital leases $ - $ - $ 38
Common stock issued for convertible subordinated note $ - $8,687 $ -
Value of warrants issued for guaranteed line of credit $ - $1,938 $ -
</TABLE>
The accompanying notes are an integral part of the financial statements.
931200.4
F-6
<PAGE>
HemaSure Inc.
Notes to Consolidated Financial Statements
A. THE COMPANY:
Nature of the Business
HemaSure Inc. (the "Company") is utilizing its proprietary filtration
technologies to develop products to increase the safety of donated blood and to
improve certain blood transfusion procedures. The Company's currently-marketed
blood filtration product ("r/LS System") is designed for use by blood centers
and hospital blood banks worldwide. From the Company's inception through the
first quarter of fiscal 1996, HemaSure had sold non-blood related filter
products primarily to Sepracor Inc. ("Sepracor"), a related party, for use in
chemical processing applications. Subsequently and throughout 1997, the
Company's revenue was derived from the commercial sales of its LeukoNet System,
a medical device designed for the removal of contaminating leukocytes from
donated blood. In February 1998, the Company determined to discontinue
manufacturing the LeukoNet System and focus on the completion of development and
market introduction of its next-generation red cell filtration product. In May
1999, the Company received 510(k) clearance from the U.S. Food and Drug
Administration ("FDA") to market its r/LS System in the United States. The
Company initiated sales of the r/LS System in the United States in the third
quarter 1999.
The Company is subject to risks common to companies in the medical
technology industry, including, but not limited to, development by the Company
or its competitors of new technological innovations, dependence on key
personnel, protection of proprietary technology, and compliance with regulations
of the FDA and similar foreign regulatory authorities and agencies.
Since its inception, the Company has suffered recurring losses from
operations and, as of December 31, 1999, had an accumulated deficit of $85.2
million. Other than the Company's r\LS System, all of its planned blood-related
products are in the research and development stage, and certain of these
products that the Company is currently developing may require pre-clinical and
clinical testing prior to submission of any regulatory application for
commercial use. The Company's success will depend on the commercial acceptance
of its r\LS System and the development and commercial acceptance of its other
planned blood-related products. The Company believes that the funds currently
available, including the funds raised in March 2000 (Note Q) will be sufficient
to fund operations through at least the next twelve months.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all demand deposits, money market instruments and
repurchase agreements to be cash and cash equivalents. Cash equivalents of
$4,743,000 and $2,138,000 and at December 31, 1999 and 1998, respectively,
consist of repurchase agreements with a commercial bank. The carrying amount
approximates fair value because of the short maturity of those instruments.
Marketable Securities
Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase. The Company held no
marketable securities at December 31, 1999 and 1998.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and equipment are stated at cost. Costs of major additions and
betterments are capitalized; maintenance and repairs, which do not improve or
extend the life of the respective assets, are charged to operations. On
disposal, the related cost and accumulated depreciation or amortization is
removed from the
931200.4
F-7
<PAGE>
accounts and any resulting gain or loss is included in the results of
operations. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. All laboratory, manufacturing and office
equipment have estimated useful lives of three to 10 years.
Revenue Recognition
Revenues from product sales are recognized when goods are shipped.
Research and Development
Research and development costs are expensed in the year incurred.
Net Loss Per Share
The Company follows Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"), which established standards for
computing and presenting earnings per share ("EPS"). Net loss per common share
is based on the weighted average number of shares of common stock outstanding
during each period. Potential common stock has not been included because the
effect would be antidilutive. The potential common stock of the Company consist
of common stock warrants (see Notes C and H), stock options (see Note L) and a
convertible subordinated note payable (see Note I). The Company had 4,757,000,
4,214,000 and 2,846,000 potential common stock shares as of December 31, 1999,
1998, and 1997, respectively. The convertible subordinated note was converted
into 827,375 shares of common stock of the Company in January 1998.
Income Taxes
Deferred income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities reflect the estimated future tax
consequences attributable to tax benefit carryforwards and to "temporary
differences" between amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws. A valuation reserve is
established if it is more likely than not that all or a portion of the deferred
tax asset will not be realized.
Net operating losses of the Company incurred while operating as a
division of Sepracor are not available for carryforward because the Company's
results for those periods were included in the tax returns of Sepracor.
Additionally, based upon the Internal Revenue Code and changes in company
ownership, utilization of the Company's net operating loss may be subject to an
annual limitation.
Comprehensive Income
For all periods presented, net income and comprehensive income are the
same due to the realization of all previously unrealized gains and losses in the
statement of operations.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
"derivatives"), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect such adoption to have
a material impact on its financial statements.
In December 1999, the Commission issued Staff Accounting Bulletin No.
101 ("SAB 101"), "Revenue Recognition in Financial Statements," which is
effective no later than the quarter ending June 30, 2000. SAB 101 clarifies the
Commission's views related to revenue recognition and disclosure. The Company
will adopt
931200.4
F-8
<PAGE>
SAB 101 in the second quarter of 2000 and is presently determining the effect
it will have on the Company's financial statements, although management does
not believe the effect will be material.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1999 and 1998
and the reported amounts of revenues and expenses during the years ended
December 31, 1999, 1998 and 1997. Actual results could differ from those
estimates.
C. AGREEMENTS WITH SEPRACOR:
The Company was formerly a wholly-owned subsidiary of Sepracor. As of
January 31, 2000, Sepracor owned 27% of the common stock, $.01 par value, of the
Company (the"Common Stock").
Under a Technology Transfer and License Agreement, Sepracor transferred
to the Company all technology owned or controlled by Sepracor, including trade
secrets, patents and patent applications, that relates to and is used in
researching, developing or manufacturing products in the Company Field as
defined in the agreement. Further, Sepracor granted an exclusive license to the
Company for any improvements to the transferred technology, which were
developed, or otherwise acquired, by Sepracor during the period beginning on the
date of the Technology Transfer and License Agreement and terminating on the
earlier of January 1, 1998 or the acquisition of Sepracor or the Company (the
"Effective Period"). The Company granted to Sepracor an exclusive license to the
transferred technology for the development, manufacture, use or sale of any
products within the field of chiral synthesis, chiral separations and the
development, manufacture, use or sale of chiral drugs and chiral drug
intermediates, as well as a non-exclusive license to the transferred technology
for the development, manufacture, use or sale of any products outside of the
Company Field. All licenses were royalty-free. Sepracor also granted the Company
a right of first refusal to any product, which Sepracor proposed to sell, or
license a third party to sell during the Effective Period, for use within the
Company Field.
In addition, beginning in April 1998, Sepracor was entitled to certain
rights with respect to the registration under the Securities Act of 1933, as
amended, of a total of 3,000,000 shares of common stock related to the
technology transfer and establishment of the Company in 1993. These rights
provide that Sepracor may require the Company, on two occasions, to register
shares having an aggregate offering price of at least $5,000,000, subject to
certain conditions and limitations.
In September 1998, the Company obtained a $5 million revolving line of
credit arrangement with a commercial bank. Sepracor has guaranteed repayment of
amounts borrowed under the line of credit. In exchange for the guarantee, the
Company granted to Sepracor warrants to purchase up to 1,700,000 shares of the
Company's common stock at a price of $0.69 per share. The warrants will expire
in the year 2003 and have certain registration rights associated with them. (See
Note H)
In March 1999, the Company completed a private placement financing with
Sepracor in which the Company received $2,000,000 in exchange for 1,333,334
shares of the Company's common stock and warrants to purchase an additional
667,000 shares of common stock at $1.50 per share. The warrants will expire in
the year 2004 and have certain registration rights associated with them. In
certain circumstances, the Company is entitled to require Sepracor to exercise
these warrants.
D. ACCOUNTS RECEIVABLE:
The Company's 1999 and 1998 trade receivables primarily represent
amounts due for product sales. The allowance for doubtful accounts was $5,000
and $7,000 at December 31, 1999 and 1998, respectively.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.
931200.4
F-9
<PAGE>
E. INVENTORIES:
Inventories consist of the following at December 31:
(In thousands) 1999 1998
---- ----
Raw materials $ 393 $ 206
Work in Progress 401 -
Finished goods 12 -
-------- ----------
$ 806 $ 206
======== ==========
F. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Laboratory and manufacturing equipment $ 1,479 $ 874
Leased laboratory and manufacturing equipment 505 505
Office equipment 858 759
Leasehold improvements 772 766
-------
3,614 2,904
Accumulated depreciation and amortization (2,324) (1,849)
-------
1,290 1,055
Construction in progress 257 450
--------
$ 1,547 $ 1,505
======== ========
</TABLE>
Depreciation and amortization expense was $475,000, $391,000 and
$548,000, in 1999, 1998 and 1997, respectively. In conjunction with its
determination to discontinue manufacture of the LeukoNet System in February
1998, a provision for impairment of $475,000 for manufacturing and related
assets was recorded for the period ended December 31, 1997.
Accumulated amortization of assets under lease was $106,000 and
$395,000 as of December 31, 1999 and 1998, respectively.
931200.4
F-10
<PAGE>
G. ACCRUED EXPENSES AND COMMITMENTS AND CONTINGENCIES:
Accrued expenses consist of the following at December 31:
(In thousands) 1999 1998
---- ----
Compensation $ 189 $ 43
Professional fees 155 104
Interest on notes payable 41 26
Customer refunds 175 175
Services 678 750
Miscellaneous 282 451
====== =======
$1,520 $1,549
====== ======
Lease Obligations
The Company leased certain laboratory, research and office space from
Sepracor through 1995. In 1995, the Company executed a lease for these facility
requirements, which commenced in February 1996 and extends through February
2004. The lease provides for two five-year renewal options. Under the terms of
the lease, the Company is required to pay its allocated share of taxes and
operating costs in addition to the base annual rent.
In 1994, the Company, in collaboration with Sepracor and certain of its
other subsidiaries, executed an equipment leasing arrangement that provided for
a total of $2,000,000 to these companies for purposes of financing capital
equipment. In October 1996, the Company executed a separate follow-on equipment
leasing arrangement that provided $1,100,000 of equipment financing through
March 31, 1997. The Company has leased various laboratory, manufacturing and
computer equipment under noncancelable capital leases. Terms of arrangements
with the leasing company contain bargain purchase provisions at the expiration
of the lease term, which range from 36 months to 42 months. In some instances,
the Company is required to make a deposit of 20% of the original equipment cost,
which earns interest at an annual rate of 4%. As of December 31, 1999 the
Company had $68,000 on deposit at the leasing company under this leasing
arrangement. Under certain circumstances, Sepracor is the guarantor of debt
incurred to acquire equipment under the leasing facilities. The interest rate
charged on the Company's capital leases ranges from 14% to 21%.
931200.4
F-11
<PAGE>
Future minimum payments under all noncancelable leases in effect at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(In thousands) Operating Capital
Year Leases Leases
- ---- ------ ------
<S> <C> <C>
2000 $ 236 $ 74
2001 236 -
2002 236 -
2003 236 -
2004 20 -
------- ---------
Total minimum lease payments $ 964 74
------ --------
Less amount representing interest 3
Present value of minimum lease payments $ 71
=======
</TABLE>
Based on the borrowing rates currently available to the Company for capital
leases with similar terms and average maturities, the fair value of capital
leases approximates the carrying value.
The total charged to rent expense for all noncancelable leases
including amounts for building maintenance, utilities and other operating costs
was $660,000, $833,000, and $803,000, in 1999, 1998, and 1997, respectively.
In December 1999, the Company entered into an exclusive five-year
manufacturing and supply agreement with a major supplier of a component to the
Company's product. The agreement contains minimum purchase requirements in
future years, which if not met could require the Company to purchase certain
production equipment of the supplier as defined in the agreement. The supplier,
under certain conditions, will acquire such equipment during fiscal years 2000
and 2001. The agreement also contains provisions under which the agreement could
become non-exclusive under certain conditions as defined in the agreement and
for extensions of the term of the agreement.
H. NOTES PAYABLE
Notes payable consist of the following at December 31:
(In thousands) 1999 1998
---- ----
Leasehold improvements financing $ 73 $ 100
Revolving line of credit 5,000 5,000
----- -----
5,073 5,100
Less current portion 5,030 27
----- -------
$ 43 $ 5,073
======= =======
In March 1997, the Company exercised its right, under the lease, to
have a portion of its leasehold improvements financed and received $140,000 in
connection with this arrangement. This amount will be repaid in 60 equal monthly
installments with an interest rate of 12% per annum.
In September 1998, the Company completed a $5 million revolving line of
credit arrangement with a commercial bank. As of December 31, 1999, the entire
$5 million was outstanding under the line. The revolving line of credit, which
expires in August 2000, is being used to help finance the Company's working
capital requirements and for general corporate purposes. Amounts borrowed under
the line bear interest at the bank's prime lending rate plus 1/2% payable
monthly in arrears. The weighted average borrowing rate for the period ended
December 31, 1999 was 8.67%. For the period ended December 31, 1999, the Company
recorded interest expense related to borrowings under the line of $434,000. The
credit agreement contains customary covenants and provisions. The bank has a
first lien on all assets of the Company including its intellectual property.
931200.4
F-12
<PAGE>
Sepracor, the Company's largest shareholder, has guaranteed to repay
amounts borrowed under the line of credit. In exchange for the guarantee, the
Company granted to Sepracor warrants to purchase up to 1,700,000 shares of the
Company's common stock at a price of $0.69 per share. The warrants will expire
in the year 2003 and have certain registration rights associated with them.
HemaSure has placed a value of $1,938,000 on the 1,700,000 warrants as of the
date of the final agreement and is amortizing this deferred financing charge on
a monthly basis over the term of the line of credit. For the periods ended
December 31, 1999 and 1998 the Company amortized $1,024,000 and $189,000,
respectively, of this deferred finance charge and recorded it as interest
expense in the Statement of Operations.
I. CONVERTIBLE SUBORDINATED NOTE PAYABLE
In May 1996, the Company acquired the plasma product unit of Novo
Nordisk A/S, a Denmark corporation ("Novo Nordisk"), through its Danish
subsidiary, HemaSure A/S (the "Denmark Acquisition"). The purchase price for the
transaction was comprised of a combination of promissory notes, convertible
subordinated notes (which would convert to common stock of the Company or a
subsidiary of the Company) and additional consideration payable in 1998 in cash
or stock, at the option of the Company, which would not be paid in certain
events. On February 20, 1997, the Company's board of directors voted to
discontinue the development and operation of the Danish Plasma Business,
retroactive to December 31, 1996.
In January 1997, the Company entered into a Restructuring Agreement of
the debt related to the Denmark Acquisition. Pursuant to the Restructuring
Agreement, approximately $23,000,000 of indebtedness owed to Novo Nordisk was
restructured by way of issuance by the Company to Novo Nordisk of a 12%
convertible subordinated promissory note in the principal amount of
approximately $11,700,000, which was due and payable on December 31, 2001, with
interest payable quarterly (provided that up to approximately $3,000,000 would
be forgiven in certain circumstances). Approximately $8,500,000 of the reduction
of such indebtedness was forgiven. The remainder of the reduction represented a
net amount due from Novo Nordisk to the Company related to various service
arrangements between the two companies. The amount included in the balance sheet
at December 31, 1997 included the effect of the Restructuring Agreement net of
the $3,000,000 contingency amount to reflect the most probable result of the
Company's decision to exit the plasma business. In December 1997, the Company
notified the holder of the note of its intent to convert in January 1998
$8,687,000 of debt, which it believes was the entire amount outstanding as of
the date of conversion. On January 6, 1998, the Company converted the note,
pursuant to its terms, into shares of common stock at a conversion price of
$10.50 per share, or 827,375 shares. The holder of the note has contested the
conversion of the note, including the forgiveness of the $3,000,000 amount. The
Company believes that such assertions are without merit.
J. SEGMENT INFORMATION
The Company operates exclusively in the blood filtration business,
which the Company considers to be one business segment.
Revenue from significant unaffiliated customers are as follows:
Year Ended December 31: 1999 1998 1997
---- ---- ----
Customer A. 66% 53% 86%
Customer B. 33% - -
Customer C. - 10% -
K. STOCKHOLDERS' EQUITY (DEFICIT)
In March 1999, the Company completed a private placement financing with
Sepracor in which the Company received $2,000,000 in exchange for 1,333,334
shares of the Company's common stock and warrants to purchase an additional
667,000 shares of common stock at $1.50 per share. The warrants will expire in
the year 2004 and have certain registration rights associated with them. In
certain circumstances, the Company is entitled to require Sepracor to exercise
these warrants.
931200.4
F-13
<PAGE>
On May 3, 1999, the Company completed a private placement financing
with Gambro Inc ("Gambro"). The stock subscription agreement, which the Company
entered into with Gambro Inc. in connection with this financing, provided for an
initial investment of $9,000,000 in exchange for 4,500,000 shares of the Company
common stock. The stock subscription agreement also provided Gambro Inc. with an
option to purchase additional shares of the Company's common stock for up to an
aggregate purchase price of $3,000,000 at any time between August 3, 1999 and
May 3, 2000 with the price per share of common stock to be based upon the market
price of the Company's common stock. In October 1999, Gambro Inc. exercised this
option in full. In connection with the exercise of this option, Gambro Inc.
purchased 498,355 shares at a price of $6.02 per share. The price and number of
shares reflected the average price of the Company's stock in the 30 days prior
to the exercise date of October 5, 1999.
L. STOCK OPTION PLANS
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
The Company has two stock options plans currently in effect under which
future grants may be issued: the 1994 Stock Option Plan, as amended, and the
1994 Director Option Plan, as amended (collectively, the "Plans"). A total of
3,000,000 shares have been authorized by the Company for grants of options or
shares, of which 155,000 are still available for grant. Stock options granted
during 1999 and 1998 generally have a maximum term of ten years and vest ratably
over a period of two to five years.
931200.4
F-14
<PAGE>
A summary of the Company's stock option activity for the years ended
December 31 follows:
<TABLE>
<CAPTION>
Number of Options Weighted Average
(In thousands) Exercise Price
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1996 2,373 $ 9.24
Granted 1,262 $ 3.02
Exercised (24) $ 2.25
Terminated (1,592) $12.06
-------
Outstanding at December 31, 1997 2,019 $ 3.25
Granted 2,029 $ 0.72
Exercised - -
Terminated (1,534) $ 3.06
-------
Outstanding at December 31, 1998 2,514 $ 1.31
Granted 302 $ 5.27
Exercised (363) $ 2.02
Terminated (63) $ 0.94
----
Outstanding at December 31, 1999 2,390 $ 1.72
===== =======
</TABLE>
The following table summarizes the status of the Company's stock options at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Number
Number Average Average Exercisable Weighted
Outstanding As Remaining Exercise As of Average
Of 12/31/99 Contractual Price 12/31/99 Exercise
Range of Exercise Prices (In thousands) Life (In thousands) Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .63 - $ .94 1,581 8.1 $ .64 408 $ .65
$ 1.25 - $ 1.75 294 8.5 $ 1.28 65 $ 1.34
$ 2.00 - $ 3.50 183 4.9 $ 2.54 138 $ 2.25
$ 3.88 - $ 5.94 284 9.6 $ 5.51 5 $ 5.50
$ 12.38 - $ 16.25 48 6.3 $14.74 40 $ 15.17
------ --- ----- --- -------
2,390 8.0 $ 1.72 656 $ 1.98
</TABLE>
The weighted average grant date fair value for options granted during
1999, 1998 and 1997 was $3.57, $0.49 and $2.04 per option, respectively. The
fair value of these options at date of grant was estimated using the Black-
Scholes model with the following weighted average assumptions for 1999, 1998 and
1997: risk-free interest rate of 5.5%; dividend yields of 0%; volatility factor
of the market price of the Company's common stock of 75%; and a weighted average
expected life of the options of 5.5 years.
During 1994 and prior to the Company's initial public offering, options
to purchase 482,000 shares of common stock were granted under the Plans at an
exercise price of $2.00 per share. The estimated fair market value on the date
of grant was $4.00 per share. The Company recorded compensation expense of
$89,000 and $309,000 in 1998 and 1997, respectively, related to these options.
In January 1998, the Company adopted a one time stock option exchange
program. Upon employee consent, the program provides for the grant to each
employee of a new stock option in exchange for the cancellation of the old stock
option. The new stock option, granted at fair market value at date of issuance,
will become exercisable for a number of shares of common stock equal to the
number of shares covered by the old stock option.
931200.4
F-15
<PAGE>
In 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the
"Stock Purchase Plan"). Under the Stock Purchase Plan, an aggregate of 500,000
shares of common stock may be purchased by employees at 85% of market value on
the first or last day of each six -month offering period, whichever is lower,
through accumulation of payroll deductions ranging from 1% to 10% of
compensation as defined, subject to certain limitations. Options were exercised
to purchase 41,071 shares for a total of $117,000 during the year ended December
31, 1999 and 96,695 shares for a total of $88,000 during the year ended December
31, 1998. At December 31, 1999, 291,397 shares of common stock were reserved for
future issuance under the plan.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 1999, 1998
and 1997 consistent with the provisions of SFAS No. 123, the Company's net loss
and net loss per share would have been reduced to the pro forma amounts
indicated below. The application of SFAS No. 123 to the employee stock purchase
plan would not result in a significant difference from reported net income and
earnings per share.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $(10,665) $ (12,170) $ (9,884)
Net loss - pro forma $(11,274) $ (12,610) $(10,415)
Net loss per share - as reported - basic and diluted $ (0.77) $ (1.35) $ (1.22)
Net loss per share - pro forma - basic and diluted $ (0.82) $ (1.40) $ (1.28)
</TABLE>
The pro forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro forma effect on net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995 or anticipated future option activity.
In connection with the initial public offering, the Company granted to
the underwriter an option to purchase 217,500 shares of common stock at an
exercise price equal to 150% of the initial public offering price or $10.50 and
subject to adjustment in certain circumstances. The option was exercisable at
any time or from time to time after April 14, 1995 and before April 14, 1999.
The option was not exercised.
931200.4
F-16
<PAGE>
M. INCOME TAXES
The components of the Company's deferred tax assets and liabilities are
as follows at December 31:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
---- ----
Deferred taxes:
<S> <C> <C>
Net operating loss carryforwards $31,315 $21,463
Research and development expense capitalization 4,392 3,892
Tax credit carryforwards 1,235 999
Inventory reserves 20 43
Deferred compensation 285 284
Accrued charges not paid 512 466
Other 7 21
Property and equipment 1 (16)
-----------
37,767 27,152
Valuation allowance (37,767) (27,152)
-------- --------
Net deferred taxes $ - $ -
=========== ===========
</TABLE>
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets.
The Company's statutory and effective tax rates were 34% and 0%,
respectively, for 1999, 1998 and 1997. The effective tax rate was 0% due to a
net operating loss and the non-recognition of any net deferred tax asset. At
December 31, 1999, the Company had federal and state tax net operating loss
carryforwards ("NOLs") of approximately $73,000,000 and $67,000,000,
respectively, to offset future regular taxable earnings. The federal and state
NOLs begin to expire in 2009 and 2000. Approximately $4,000,000 of state NOLs
expired in 1999. The Company has research and development tax credits of
approximately $690,000 and $520,000, respectively, which both begin to expire in
2009. The Company has a state investment tax credit carryforward of
approximately $20,000, which begins to expire in 2000.
N. AGREEMENTS
In July 1999, the Company entered into a master purchase agreement with
the American Red Cross that provides for the sale of the r\LS System by the
Company to the American Red Cross on specified terms. The master purchase
agreement provides for a thirty-eight month term expiring on August 31, 2002,
subject to, among other things, earlier termination by the American Red Cross in
certain circumstances. Under the master purchase agreement, the American Red
Cross is required to purchase specified minimum annual quantities of the r\LS
System, subject to certain terms and conditions. The term of the master purchase
agreement may be extended by one year in certain circumstances if the American
Red Cross fails to meet its minimum purchase obligation in the third year of the
agreement.
In August 1998, the Company completed an amended and restated Master
Strategic Alliance Agreement with the American Red Cross BioMedical Services,
which provides for, among other things, the development and enhancement of a
number of filtration products, based on the Company's core technology. The
agreement has a term of five years, unless previously terminated, and can be
renewed or extended. In connection with this agreement, the American Red Cross
is eligible to receive warrants to purchase common stock of the Company up to a
maximum of 400,000 shares based on certain milestones and at a price of $1.51
per share, as determined at the date of this agreement.
In 1998, the Company completed a distribution and development
agreement, which was amended in May 1999, with Gambro Inc. to act as the
Company's exclusive distributor of the Company's r\LS System worldwide, except
for sales to the American Red Cross. Under the amended distribution and
development agreement, Gambro Inc. is required to purchase specified minimum
annual quantities of the r\LS System, subject to certain terms and conditions.
Furthermore, this agreement provides that Gambro Inc. may, upon mutual agreement
by the Company and Gambro Inc., distribute additional future products developed
by us that filter blood and its
931200.4
F-17
<PAGE>
components. The distribution agreement provides for a five-year term that
expires in June 2004, subject to automatic three-year renewals unless the
agreement is previously terminated.
O. EMPLOYEES' SAVINGS PLAN
The Company has a 401(k) plan for all employees. Under the provisions
of the plan, employees may voluntarily contribute up to 15% of their
compensation subject to statutory limitations. In addition, the Company can make
a matching contribution at its discretion. In 1999, 1998 and 1997, the Company
provided matching contributions of approximately $40,000, $0, and $34,000,
respectively.
P. LITIGATION
The Company is a defendant in a lawsuit brought by Pall Corporation
("Pall") regarding the LeukoNet System, which is no longer made or sold by the
Company. In a complaint filed in November 1996, Pall alleged that the
manufacture, use and/or sale of the LeukoNet System infringed upon two patents
held by Pall. Pall dropped its allegations concerning infringement of one of the
patents and alleges only that the LeukoNet System infringed Pall's U.S. Patent
No. 4,952,572 (the "'572 Patent").
With respect to the allegations concerning the '572 Patent, the Company
answered the complaint stating that the LeukoNet System does not infringe any
claim of the asserted patents. Further, the Company counterclaimed for
declaratory judgment of invalidity, noninfringement and unenforceability of the
'572 Patent. Pall amended its complaint to add Lydall, Inc., whose subsidiary
supplied the filter media for the LeukoNet System, as a co-defendant. The
Company filed for summary judgment of non-infringement, and Pall cross-filed for
summary judgement of infringement at the same time. Lydall, Inc. supported the
Company's motion for summary judgment of non- infringement, and filed a motion
for summary judgment that the asserted claims of the '572 patent are invalid as
a matter of law. Discovery has been completed in the action. The court has not
acted on the summary judgment motions.
The Company and Gambro BCT filed a complaint for declaratory relief
against Pall in the United States District Court of Colorado. The Company and
Gambro BCT seek declaratory relief that the '572 Patent, Pall's U.S. Patent No.
5,451,321 ("'321 Patent") and Pall's U.S. Patent Nos. 5,229,012, 5,344,561,
5,501,795 and 5,863,436 are invalid and not infringed by the Company's r\LS
System and methods of using the r\LS System. Pall moved to dismiss or transfer
to the Eastern District of New York or, in the alternative, to stay this action.
The Company and Gambro BCT opposed Pall's motion. On July 16, 1999, the United
States District Court of Colorado denied Pall's motion to transfer or, in the
alternative, to stay the action, and the action is proceeding. On September 30,
1999, the Court denied Pall's motion to dismiss the action and the case is
proceeding. Pall submitted a counterclaim alleging that the r\LS System
infringes the'572 patent and that the Company and Gambro BCT tortiously
interfered and unfairly competed with Pall's business. Pall has also asserted
that the r\LS System infringes one or more of the other patents that are the
subject of the lawsuit.
On April 23, 1999, Pall filed a complaint against the Company and
Gambro BCT in the Eastern District of New York alleging that the r\LS System
infringes the '572 Patent and that the Company and Gambro BCT tortiously
interfered and unfairly competed with Pall's business. On May 19, 1999, Pall
amended its complaint and added Gambro Inc., Gambro A.B., a Swedish company, of
which Gambro Inc. is a business unit, and Sepracor as defendants. The Company
and Gambro BCT have moved to dismiss, transfer or stay the action and Pall has
opposed the motion. There has been no decision on the motion.
The Company has engaged patent counsel to investigate the pending
litigations. The Company believes, based upon its review of these matters, that
a properly informed court should conclude that the manufacture, use and/or sale
by the Company or its customers of the LeukoNet System and the r\LS System do
not infringe any valid enforceable claims of the Pall patents. However, there
can be no assurance that the Company will prevail in the pending litigations,
and an adverse outcome in a patent infringement action would have a material and
adverse effect on the Company's financial condition and future business and
operations, including the possibility of significant damages in the litigations
and an injunction against the sale of the r\LS System if the Company does not
prevail in the litigations.
931200.4
F-18
<PAGE>
A prior lawsuit brought by Pall in February 1996 has concluded. In June
1999, the United States Court of Appeals for the Federal Circuit determined that
the LeukoNet System did not infringe claim 39 of the '321 Patent and Pall has
not appealed that decision.
Q. SUBSEQUENT EVENT
In March 2000, the Company completed a $28,000,000 private placement in
which institutional investors purchased 3,730,000 shares of its common stock at
a purchase price of $7.50 per share. The Company has agreed to register, prior
to June 2, 2000, 2,551,320 of such shares for resale. The Company intends to use
the proceeds of the private placement for working capital, capital equipment and
general corporate purposes.
The Company entered into an agreement with Command effective January
31, 2000 that provides for Command, on a non-exclusive basis, to (i) act as its
manufacturer and supplier of dry bags used in its r\LS System and (ii) assemble
the filters used in its r\LS System, subject to certain terms and conditions.
The agreement has a term of three years, subject to an automatic one-year
extension in the event the Company fails to purchase a specified number of
products by the third year and, also, upon the mutual agreement by the Company
and Command. Thereafter, the agreement will be subject to automatic one-year
renewals unless the agreement is previously terminated.
Under the agreement, the Company is required to purchase a minimum
number of dry bags used in its r\LS System and assembly requirements of the
filters used in its r\LS System, in each case at agreed upon prices. Pursuant to
the agreement, pricing is fixed for the first three years, subject to the risk
of price fluctuations in respect of raw materials, overhead and labor. Under the
Company's supply and assembly agreement with Command, the Company is obligated
to provide to Command 90 days before each year of the supply and assembly
agreement forecasts for anticipated purchases of the dry bags and assembly
requirements for the upcoming 12-month period.
931200.4
F-19
<PAGE>
- ---------------------------------------- ------------------------------------
We have not authorized any dealer,
salesperson or other person to give you
written information other than this
prospectus or to make representation as
to matters not stated in this
prospectus. You must not rely on
unauthorized information. This
prospectus is not an offer to sell
these securities or our solicitation of
your offer to buy the securities in any
jurisdiction where that would not be
permitted or legal. Neither the
delivery of this prospectus nor any
sales made hereunder after the date of
this prospectus shall create an
implication that the information __________________
contained herein or the affairs of
HemaSure Inc. have not changed since
the date hereof.
TABLE OF CONTENTS
Page 2,551,320 SHARES
----
PROSPECTUS SUMMARY................................1 HEMASURE INC.
RISK FACTORS......................................4
NOTE REGARDING FORWARD-LOOKING
STATEMENTS.......................................15
CAPITALIZATION...................................16
USE OF PROCEEDS..................................16 PROSPECTUS
DIVIDEND POLICY..................................16
SELECTED FINANCIAL DATA..........................17
SELLING STOCKHOLDERS.............................18
PLAN OF DISTRIBUTION.............................19
DESCRIPTION OF CAPITAL STOCK.....................21 ___________, 2000
BUSINESS.........................................25
MARKET FOR COMMON EQUITY.........................40
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................41
MANAGEMENT.......................................47
EXECUTIVE COMPENSATION...........................50
SECURITY OWNERSHIP OF CERTAIN __________________
BENEFICIAL OWNERS AND MANAGEMENT.................53
CERTAIN RELATED TRANSACTIONS.....................54
PRIVATE PLACEMENT REGISTRATION
RIGHTS...........................................56
LEGAL MATTERS....................................57
EXPERTS..........................................57
WHERE YOU CAN FIND MORE
INFORMATION......................................57
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS......................................F-1
- --------------------------------------------------- --------------------------
931200.4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses payable by the registrant in connection with the issuance
and distribution of the securities being registered (other than underwriting
discounts and commissions) are estimated as set forth below:
SEC Registration Fee.............................................$ 7,199
Accounting Fees and Expenses.....................................$ 20,000
Legal Fees and Expenses..........................................$316,000
Miscellaneous................................................... $ 7,800
TOTAL............................................................$350,999
========
Item 14. Indemnification of Directors and Officers
Our certificate of incorporation provides that, except to the extent
prohibited by Delaware law, our directors shall not be personally liable to us
or our stockholders for monetary damages for any breach of their fiduciary duty
as directors. Under Delaware law, the directors have a fiduciary duty to us
which is not eliminated by this provision of our certificate of incorporation
and, in appropriate circumstances, equitable remedies such as injunctive or
other forms of non-monetary relief will remain available. In addition, each
director will continue to be subject to liability under Delaware law for breach
of their duty of loyalty to us for acts or omissions which are found by a court
of competent jurisdiction to be not in good faith or which involve intentional
misconduct, or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by Delaware law. This
provision also does not affect the directors' responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
Section 145 of the Delaware General Corporation Law allows a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers, provided that the indemnification does not eliminate or limit the
liability of a director for the following:
o any breach of the director's duty of loyalty to us or our stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o unlawful payments of dividends or unlawful stock purchases or
redemptions; and
o any transaction from which the director derived an improper personal
benefit.
Delaware law further provides that the permitted indemnification shall
not be deemed exclusive of any other rights to which the directors and officers
may be entitled under our bylaws, any agreement, a vote of stockholders or
otherwise. Our certificate of incorporation eliminates the personal liability of
directors to the fullest extent permitted by Delaware law. In addition, our
certificate of incorporation provides that we may fully indemnify any person who
was or is a party, or is threatened to be made a party to, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is or
was one of our directors or officers or is or was serving at our request as a
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses, including
attorney's fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding.
We have also entered into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
bylaws. We believe that these provisions and agreements are necessary to attract
931200.4
II-1
<PAGE>
and retain qualified directors and executive officers. Our bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions, regardless of whether
Delaware law would permit indemnification. We have applied for liability
insurance for our officers and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the certificate of incorporation. We are not aware
of any threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
The following securities have been sold by HemaSure in the last three
fiscal years.
1. Warrants to purchase up to 1,700,000 shares of common stock valued
by HemaSure at approximately $1.9 million granted to Sepracor Inc. on September
15, 1998 in connection with Sepracor Inc.'s guarantee of HemaSure's $5 million
revolving line of credit arrangement with a commercial bank.
2. Private placement consummated on March 23, 1999 of (i) 1,333,334
shares of common stock and (ii) warrants to purchase 667,000 shares of common
stock for $2 million to Sepracor Inc.
3. Private placement consummated on May 3, 1999 of 4,500,000 hares of
common stock for $9 million to Gambro Inc.
4. Gambro Inc. exercised its option in connection with the May 1999
private placement and purchased 498,355 shares of common stock for $3 million on
October 19, 1999.
5. Private placement consummated on March 2, 2000 of 3,730,000 shares
of common stock for approximately $27.9 million.
Each of the foregoing sales of securities were effected in transactions
not involving a public offering of securities in reliance on Regulation D and
Section 4(2) of the Securities Act. Each purchaser, in each case, represented
that it was an institutional accredited investor as defined in Rule 501(a) of
Regulation D and that the securities were acquired for investment only and not
with a view toward distribution.
Item 16. Exhibits and Financial Statement Schedules
(a) The following documents are filed as exhibits to this registration
statement:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1(6) Heads of Agreement, dated as of January 31, 1996,
between the Company and Novo Nordisk A/S.
3.1(1) Certificate of Incorporation of the Company.
3.2(1) By-Laws of the Company.
4.1(1) Specimen Certificate for shares of Common Stock, $.01
par value, of the Company.
4.2(9) Registration Rights Agreement, dated January 23, 1997, by and among the
Company and Novo Nordisk A/S.
4.3(10) Registration Rights Agreement, dated as of September 15, 1998, between the
Company and Sepracor.
4.4(11) Warrant Agreement, dated as of September 15, 1998,
between the Company and Sepracor.
4.5(11) Warrant Certificate, dated as of September 15, 1998,
between the Company and Sepracor.
</TABLE>
931200.4
II-2
<PAGE>
<TABLE>
<S> <C>
4.6(13) Registration Rights Agreement, dated as of March 23, 1999, between the
Company and Sepracor.
4.7(13) Warrant Agreement, dated as of March 23, 1999, between the Company and
Sepracor.
4.8(13) Warrant Certificate, dated as of March 23, 1999, between the Company and
Sepracor.
4.9(14) Stock Subscription Agreement, dated as of May 3, 1999, between the Company
and COBE.
4.10(14) Stockholder's Agreement, dated as of May 3, 1999, between the Company and
COBE.
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP.
10.1(9) 1994 Stock Option Plan, as amended.
10.2(9) 1994 Director Option Plan.
10.3(1) Form of Technology Transfer and License Agreement between the Company and
Sepracor Inc.
10.4(6) Lease Agreement for 140 Locke Drive, Marlborough, MA,
dated as of November 1995, between the Company and
First Marlboro Development Trust.
10.5(4) Employment Agreement between the Company and Dr. Hans
Heiniger, dated January 10, 1994.
10.6(7) Asset Purchase Agreement dated as of May 2, 1996
between the Company, HemaPharm Inc., HemaSure A/S and
Novo Nordisk A/S.
10.7(8) Restructuring Agreement, dated January 23, 1997,
between the Company, HemaPharm Inc., HemaSure A/S and
Novo Nordisk A/S.
10.8(9) Convertible Subordinated Note Due December 31, 2001 in
the amount of U.S. $11,721,989, issued by the Company
to Novo Nordisk A/S, dated January 23, 1997.
10.9(9) Amendment to the Company's 1994 Director Option Plan, dated June 25,
1996.
10.10(9) Amendment to the Company's 1994 Director Option Plan, effective as of May 16,
1996.
10.11(9) Amendment to the Company's 1994 Stock Option Plan, dated June 25, 1996.
10.12(9) Amendment to the Company's 1994 Stock Option Plan, effective as of May 16,
1996.
10.13(9) Sublease Agreement, between the Company and Novo
Nordisk A/S, dated May 2, 1996, for the Premises
(Denmark), as amended.
10.14(9) Sublease Agreement between the Company and Novo
Nordisk A/S, dated May 2, 1996, for the Warehouse
(Denmark), as amended.
10.15(12) Employment Agreement between the Company and John F. McGuire, dated April
1, 1997.
10.16(12) Settlement Agreement, dated September 1997, by and among the Company,
HemaSure AB, HemaPharm Inc., Pharmacia & Upjohn Inc. and Pharmacia &
Upjohn AB.
10.17(10) 1995 Employee Stock Purchase Plan, as amended.
</TABLE>
931200.4
II-3
<PAGE>
<TABLE>
<S> <C>
10.18(11) Revolving Credit and Security Agreement, dated as of September 15, 1998,
between the Company and Fleet National Bank.
10.19(11) Intellectual Property Security Agreement, dated as of September 15, 1998,
between the Company and Fleet National Bank.
10.20(11) Promissory Note, dated as of September 15, 1998, made by the Company in
favor of Fleet National Bank.
10.21(11) Amended and Restated Master Strategic Alliance Agreement between the
Company and the American Red Cross.
10.22(14) Senior Management Retention Agreement, dated as of December 7, 1998, between
the Company and John F. McGuire.
10.23(14) Senior Management Retention Agreement, dated as of December 15, 1998,
between the Company and James B. Murphy.
10.24(14) Senior Management Retention Agreement, dated as of December 22, 1998,
between the Company and Peter C. Sutcliffe.
10.25(13) Securities Purchase Agreement, dated as of March 23, 1999, between the
Company and Sepracor.
10.26(14 Amended and Restated Exclusive Distribution Agreement,
dated as of May 3, 1999, between the Company and COBE.
10.27(15) Master Purchase Agreement, dated as of July 1, 1999, between the Company and
The American National Red Cross.
10.28(16) Manufacturing and Supply Agreement, dated as of December 22, 1999, between
the Company and Filtertek Inc.
10.29(16) Supply and Assembly Agreement, dated as of January 31, 2000, between the
Company and Command Medical Products Inc.
10.30(16) Placement Agency Agreement, dated February 3, 2000, between the Company
and Warburg Dillon Read LLC.
10.31(16) Form of Purchase Agreement, dated March 2, 2000.
10.32(16) Schedule of purchasers which purchased shares of common stock pursuant to the
Form of Purchase Agreement set forth in 10.31.
21.1(12) Subsidiaries of the Company.
23.1 Consent of Paul, Hastings, Janofsky & Walker LLP. (included in exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
</TABLE>
<TABLE>
<S> <C>
(1) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-75930).
(2) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
(3) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
(4) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-95540).
</TABLE>
931200.4
II-4
<PAGE>
<TABLE>
<S> <C>
(5) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994.
(6) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
(8) Incorporated by reference to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 27, 1997.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
(13) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
+ Confidential treatment requested as to certain portions.
</TABLE>
(b) The financial statements to this registration statement on
Form S-1 are included and listed in the prospectus. See "Index to Consolidated
Financial Statements" in the prospectus on page F-1.
Information required by financial statement schedules is not
applicable or the required information is included in the financial statements
or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933, as
amended.
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value
of securities offered would not exceed that which
was registered) and any deviation from the low or
high end of the estimated maximum offering range
may be reflected in the
931200.4
II-5
<PAGE>
form of prospectus filed with the Commission
pursuant to Rule 424(b) of the Securities Act,
if, in the aggregate, the changes in
volume and price represent not more
than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective
registration statement.
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) For purposes of determining any liability under the
Securities Act, each such post- effective amendment
shall be deemed to be a new registration statement
relating to the securities offered therein, and the
offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
this offering.
931200.4
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of New York,
State of New York, on March 31, 2000.
HEMASURE INC.
By: /s/ John F. McGuire, III
------------------------
Name: John F. McGuire, III
Title: Chief Executive Officer and President
(Principal Executive Officer)
POWER OF ATTORNEY
Each person signing below also hereby appoints John F. McGuire, III and
James B. Murphy, and each of them singly, with full power of substitution, his
lawful attorney-in-fact, with full power to execute and file any amendments to
the registration statement, and generally to do all such things, as such
attorney-in-fact may deem appropriate to comply with the provisions of the
Securities Act of 1933 and all requirements of the Securities and Exchange
Commission.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s /John F. McGuire, III Chief Executive Officer, President March 31, 2000
- -------------------------------
John F. McGuire, III and Director (Principal Executive Officer)
/s/ James B. Murphy Senior Vice President, Finance and March 31, 2000
- -------------------------------
James B. Murphy Administration (Principal Financial Officer
and Principal Accounting Officer)
/s/ Timothy J. Barberich Director March 30, 2000
- -------------------------------
Timothy J. Barberich
/s/ David S. Barlow Director March 31, 2000
- -------------------------------
David S. Barlow
/s/ Frank Corbin Director March 31, 2000
- -------------------------------
Frank Corbin
/s/ Justin E. Doheny Director March 30, 2000
- -------------------------------
Justin E. Doheny
/s/ Edward C. Wood Director March 31, 2000
- -------------------------------
Edward C. Wood
</TABLE>
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this registration statement
on Form S-1:
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2.1(6) Heads of Agreement, dated as of January 31, 1996,
between the Company and Novo Nordisk A/S.
3.1(1) Certificate of Incorporation of the Company.
3.2(1) By-Laws of the Company.
4.1(1) Specimen Certificate for shares of Common Stock, $.01
par value, of the Company.
4.2(9) Registration Rights Agreement, dated January 23, 1997, by and among the
Company and Novo Nordisk A/S.
4.3(10) Registration Rights Agreement, dated as of September 15, 1998, between the
Company and Sepracor.
4.4(11) Warrant Agreement, dated as of September 15, 1998,
between the Company and Sepracor.
4.5(11) Warrant Certificate, dated as of September 15, 1998,
between the Company and Sepracor.
4.6(13) Registration Rights Agreement, dated as of March 23, 1999, between the
Company and Sepracor.
4.7(13) Warrant Agreement, dated as of March 23, 1999, between the Company and
Sepracor.
4.8(13) Warrant Certificate, dated as of March 23, 1999, between the Company and
Sepracor.
4.9(14) Stock Subscription Agreement, dated as of May 3, 1999, between the Company
and COBE.
4.10(14) Stockholder's Agreement, dated as of May 3, 1999, between the Company and
COBE.
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP.
10.1(9) 1994 Stock Option Plan, as amended.
10.2(9) 1994 Director Option Plan.
10.3(1) Form of Technology Transfer and License Agreement between the Company and
Sepracor Inc.
10.4(6) Lease Agreement for 140 Locke Drive, Marlborough, MA,
dated as of November 1995, between the Company and
First Marlboro Development Trust.
10.5(4) Employment Agreement between the Company and Dr. Hans
Heiniger, dated January 10, 1994.
10.6(7) Asset Purchase Agreement dated as of May 2, 1996
between the Company, HemaPharm Inc., HemaSure A/S and
Novo Nordisk A/S.
10.7(8) Restructuring Agreement, dated January 23, 1997,
between the Company, HemaPharm Inc., HemaSure A/S and
Novo Nordisk A/S.
</TABLE>
931200.4
II-8
<PAGE>
<TABLE>
<S> <C>
10.8(9) Convertible Subordinated Note Due December 31, 2001 in
the amount of U.S. $11,721,989, issued by the Company
to Novo Nordisk A/S, dated January 23, 1997.
10.9(9) Amendment to the Company's 1994 Director Option Plan, dated June 25, 1996.
10.10(9) Amendment to the Company's 1994 Director Option Plan, effective as of May 16,
1996.
10.11(9) Amendment to the Company's 1994 Stock Option Plan, dated June 25, 1996.
10.12(9) Amendment to the Company's 1994 Stock Option Plan, effective as of May 16,
1996.
10.13(9) Sublease Agreement, between the Company and Novo
Nordisk A/S, dated May 2, 1996, for the Premises
(Denmark), as amended.
10.14(9) Sublease Agreement between the Company and Novo
Nordisk A/S, dated May 2, 1996, for the Warehouse
(Denmark), as amended.
10.15(12) Employment Agreement between the Company and John F. McGuire, dated April
1, 1997.
10.16(12) Settlement Agreement, dated September 1997, by and among the Company,
HemaSure AB, HemaPharm Inc., Pharmacia & Upjohn Inc. and Pharmacia &
Upjohn AB.
10.17(10) 1995 Employee Stock Purchase Plan, as amended.
10.18(11) Revolving Credit and Security Agreement, dated as of September 15, 1998,
between the Company and Fleet National Bank.
10.19(11) Intellectual Property Security Agreement, dated as of September 15, 1998,
between the Company and Fleet National Bank.
10.20(11) Promissory Note, dated as of September 15, 1998, made by the Company in
favor of Fleet National Bank.
10.21(11) Amended and Restated Master Strategic Alliance Agreement between the
Company and the American Red Cross.
10.22(14) Senior Management Retention Agreement, dated as of December 7, 1998, between
the Company and John F. McGuire.
10.23(14) Senior Management Retention Agreement, dated as of December 15, 1998,
between the Company and James B. Murphy.
10.24(14) Senior Management Retention Agreement, dated as of December 22, 1998,
between the Company and Peter C. Sutcliffe.
10.25(13) Securities Purchase Agreement, dated as of March 23, 1999, between the
Company and Sepracor.
10.26(14 Amended and Restated Exclusive Distribution Agreement,
dated as of May 3, 1999, between the Company and COBE.
10.27(15) Master Purchase Agreement, dated as of July 1, 1999, between the Company and
The American National Red Cross.
10.28(16) Manufacturing and Supply Agreement, dated as of December 22, 1999, between
the Company and Filtertek Inc.
</TABLE>
931200.4
II-9
<PAGE>
<TABLE>
<S> <C>
10.29(16) Supply and Assembly Agreement, dated as of January 31, 2000, between the
Company and Command Medical Products Inc.
10.30(16) Placement Agency Agreement, dated February 3, 2000, between the Company
and Warburg Dillon Read LLC.
10.31(16) Form of Purchase Agreement, dated March 2, 2000.
10.32(16) Schedule of purchasers which purchased shares of common stock pursuant to the
Form of Purchase Agreement set forth in 10.31.
21.1(12) Subsidiaries of the Company.
23.1 Consent of Paul, Hastings, Janofsky & Walker LLP. (included in exhibit 5.1).
23.2 Consent of PricewaterhouseCoopers LLP.
27.3 Financial Data Schedule.
</TABLE>
<TABLE>
<S> <C>
(1) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-75930).
(2) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994.
(3) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995.
(4) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as
amended (File No. 33-95540).
(5) Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1994.
(6) Incorporated herein by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
(8) Incorporated by reference to the Company's Current Report on Form 8-K filed with the
Securities and Exchange Commission on February 27, 1997.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
(12) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
(13) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
(14) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
</TABLE>
931200.4
II-10
<PAGE>
<TABLE>
<S> <C>
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999.
(16) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
+ Confidential treatment requested as to certain portions.
</TABLE>
931200.4
II-11
<PAGE>
[Letterhead of Paul, Hastings, Janofsky & Walker LLP]
March 30, 2000
HemaSure Inc.
140 Locke Drive
Marlborough, Massachusetts 01752
Ladies and Gentlemen:
We are furnishing this opinion of counsel to HemaSure Inc., a
Delaware corporation (the "Company"), for filing as Exhibit 5.1 to the
Registration Statement on Form S-1 (the "Registration Statement") to be filed by
the Company on or about March 31, 2000 with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, relating to the re-sale
by the several selling stockholders named in the Registration Statement (the
"Selling Stockholders") of up to 2,551,320 shares of common stock, par value
$.01 per share (the "Shares"), owned by such Selling Stockholders.
In our capacity as counsel for the Company in connection with the
matters referred to above, we have examined the Certificate of Incorporation and
Bylaws of the Company, and the originals or copies certified or otherwise
identified, of records of corporate action of the Company as furnished to us by
the Company, certificates of public officials and of representatives of the
Company, statutes and other instruments and documents, as a basis for the
opinion hereinafter expressed.
Based upon our examination as aforesaid, we are of the opinion
that the Shares are duly authorized, validly issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion of counsel as
Exhibit 5.1 to the Registration Statement.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
Paul, Hastings, Janofsky & Walker LLP
NY/272046.1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 4, 2000, except for Note Q for which the date is
March 2, 2000, relating to the financial statements of HemaSure Inc., which
appears in such Registration Statement. We also consent to the references
to us under the headings "Experts" and "Selected Financial Data" in such
Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 31, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Exhibit 27.1
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEMASURE INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000919745
<NAME> Battle Fowler LLP
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,243
<SECURITIES> 0
<RECEIVABLES> 443
<ALLOWANCES> 5
<INVENTORY> 806
<CURRENT-ASSETS> 7,493
<PP&E> 3,871
<DEPRECIATION> 2,324
<TOTAL-ASSETS> 9,090
<CURRENT-LIABILITIES> 7,820
<BONDS> 0
<COMMON> 158
0
0
<OTHER-SE> 1,069
<TOTAL-LIABILITY-AND-EQUITY> 9,090
<SALES> 805
<TOTAL-REVENUES> 805
<CGS> 2,408
<TOTAL-COSTS> 2,408
<OTHER-EXPENSES> 7,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,493)
<INCOME-PRETAX> (10,665)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,665)
<EPS-BASIC> (0.77)
<EPS-DILUTED> 0
</TABLE>
