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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
..........................................
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ................. to ...................
Commission file number 0-23776
................................................
HemaSure Inc.
..................................................................
(Exact name of registrant as specified in its charter)
Delaware 04-3216862
................................. ...............................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 Locke Drive, Marlborough, Massachusetts 01752
..................................................................
(Address of principal executive offices)
(Zip Code)
(508) 490-9500
..................................................................
(Registrant's telephone number, including area code)
Not Applicable
..................................................................
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 19,706,003
-------------------------------------- -------------------
Class Outstanding at November 11, 2000
<PAGE>
INDEX
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Page
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PART I Financial Information
Item 1. Financial Statements..................................................1
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999.................................................1
Consolidated Statements of Operations for the Three and
Nine Month Periods Ended September 30, 2000 and 1999..................2
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 2000 and 1999.............................3
Notes to Consolidated Financial Statements............................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................6
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........9
PART II Other Information
Item 1. Legal Proceedings....................................................10
Item 2. Changes in Securities and Use of Proceeds............................11
Item 3. Defaults Upon Senior Securities......................................11
Item 4. Submission of Matters to a Vote of Security Holders..................11
Item 5. Other Information....................................................11
Item 6. Exhibits and Reports on Form 8-K.....................................11
Signatures...................................................................S-1
<PAGE>
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
HemaSure Inc.
Consolidated Balance Sheets
(Unaudited)
(In thousands) September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,771 $5,243
Marketable securities 10,895 -
Accounts receivable, net of allowance for doubtful 6 443
accounts of 0 in 2000 and 7,000 in 1999
Inventories 3,571 806
Deferred financing costs - 725
Prepaid expenses 139 276
------ -------
Total current assets 16,382 7,493
Property and equipment, net 2,338 1,547
Other assets 50 50
------ -------
Total assets $18,770 $9,090
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,006 $1,199
Accrued expenses 784 1,470
Warranty reserve 648 -
Accrued legal expenses 379 50
Notes payable - current portion 33 5,030
Capital lease obligations - current portion - 71
------ ------
Total current liabilities 2,850 7,820
Note payable 18 43
------ ------
Total liabilities 2,868 7,863
------ ------
Stockholders' equity:
Common stock 197 158
Additional paid-in capital 112,251 86,241
Accumulated deficit (96,546) (85,172)
------ ------
Total stockholders' equity 15,902 1,227
------ ------
Total liabilities and stockholders' equity $18,770 $9,090
======= ======
</TABLE>
The accompanying notes are an integral part of the
financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
HemaSure Inc.
Consolidated Statements of Operations
For The Three- and Nine-Month Periods Ended
September 30, 2000 and 1999
(Unaudited)
(In thousands, except per share Three-month periods Nine-month periods
amounts) ended September 30, ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $288 $119 $2,747 $132
Costs and expenses:
Cost of products sold 2,353 649 5,754 1,432
Research & development 1,521 532 4,325 1,582
Legal expense related to patents 294 123 703 1,315
Selling, general and administrative 855 1,051 3,084 2,756
----- ------ ------ ------
Total costs and expenses 5,023 2,355 13,866 7,085
----- ------ ------ ------
Loss from operations (4,735) (2,236) (11,119) (6,953)
Interest income 307 73 767 132
Interest expense
(298) (380) (1,052) (1,113)
Other income 17 - 30 -
----- ------ ------ ------
Net loss $(4,709) $(2,543) $(11,374) $(7,934)
======= ======= ======= ======
Net loss per share-- basic and diluted $(0.24) $(0.17) $(0.60) $(0.61)
======= ======= ======= ======
Weighted average number of shares of
common stock outstanding-- 19,704 15,145 18,802 13,087
basic and diluted
</TABLE>
The accompanying notes are an integral part of the
financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
HemaSure Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine-month periods
(In thousands) ended September 30,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(11,374) $(7,934)
Adjustments to reconcile net loss to net cash used in operating
activities
Financing costs related to warrants 725 768
Depreciation and amortization 472 359
Amortization of marketable securities discount (112) -
Provision for inventories 570 45
Changes in operating assets and liabilities:
Accounts receivable 437 (124)
Inventories (3,335) (117)
Prepaid expenses 137 166
Accounts payable and accrued expenses 98 (820)
------ ------
Net cash used in operating activities (12,382) (7,657)
------ ------
Cash flows from investing activities:
Purchase of available-for-sale marketable securities (26,783) -
Sale of available-for-sale marketable securities 16,000 -
Additions to property and equipment (1,263) (193)
Increase in other assets - (8)
------ ------
Net cash used in investing activities (12,046) (201)
------ ------
Cash flows from financing activities:
Proceeds from issuance of common stock 26,049 11,595
Repayments of notes payable (5,022) (21)
Repayments of capital lease obligations (71) (204)
------- -------
Net cash provided from financing activities 20,956 11,370
------- -------
Net increase(decrease) in cash and cash equivalents (3,472) 3,512
Cash and cash equivalents at beginning of period 5,243 1,827
------ ------
Cash and cash equivalents at end of period $1,771 $5,339
====== ======
</TABLE>
The accompanying notes are an integral part of the
financial statements.
3
<PAGE>
HemaSure Inc.
Notes To Consolidated Financial Statements
1. Basis of Presentation
The accompanying financial statements are unaudited and have been
prepared on a basis substantially consistent with the audited financial
statements.
Certain information and footnote disclosures normally included in the
Company's annual statements have been Condensed or omitted. The
condensed interim financial statements, in the opinion of management,
reflect all adjustments (including normal recurring accruals) necessary
for a fair statement of the results for the interim periods ended
September 30, 2000 and 1999.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal
year. These interim financial statements should be read in conjunction
with the audited financial statements for the year ended December 31,
1999, which are contained in the Company's Form 10K (File No. 0-23776),
filed with the Securities and Exchange Commission on March 30, 2000. 2.
Inventories
2. Inventories consist of the following:
(in thousands)
September 30, 2000 December 31, 1999
------------------ -----------------
Raw Materials $2,733 $393
Work in progress 686 401
Finished goods 152 12
------ ------
$3,571 $806
------ ------
3. Property and Equipment
Property and equipment consists of the following:
(in thousands)
September 30, 2000 December 31, 1999
------------------ -----------------
Property and equipment $4,181 $3,614
Less accumulated depreciation and
amortization (2,796) (2,324)
------ ------
1,385 1,290
Construction in progress 953 257
------ ------
$2,338 $1,547
------ ------
4
<PAGE>
4. Equity Financing
In March 2000, the Company completed a private placement financing yielding
gross proceeds of $27,975,000 in which institutional investors purchased
financing 3,730,000 shares of its common stock at a purchase price of $7.50 per
share. The Company has registered 2,551,320 of such shares for resale. The
Company intends to use the net proceeds of such financing, which originally
aggregated $25,803,000, for working capital, capital equipment and general
corporate purposes.
5. Net loss per share
The net loss per share is based on the weighted average number of common stock
outstanding during the period. Potential common stock is not included in the per
share calculation where the effect of its inclusion would be antidilutive.
Potential common stock of the Company consists of common stock warrants and
stock options. The Company had 4,989,804 and 5,061,128 shares of potential
common stock at September 30, 2000 and 1999, respectively.
6. Litigation
The Company is a defendant in a lawsuit brought by Pall Corporation ("Pall")
regarding the Company's LeukoNet System, which is no longer made or sold by the
Company. In a complaint filed in November 1996, Pall alleged that the
manufacture, use and/or sale of the LeukoNet System infringed upon two patents
held by Pall. Pall dropped its allegations concerning infringement of one of the
patents and alleges only that the LeukoNet System infringed Pall's U.S. Patent
No. 4,952,572 (the "'572 Patent").
With respect to the allegations concerning the '572 Patent, the Company answered
the complaint stating that the LeukoNet System does not infringe any claim of
the asserted patents. Further, the Company counterclaimed for declaratory
judgment of invalidity, noninfringement and unenforceability of the '572 Patent.
Pall amended its complaint to add Lydall, Inc., whose subsidiary supplied the
filter media for the LeukoNet System, as a co-defendant. The Company filed for
summary judgment of non-infringement, and Pall cross-filed for summary judgement
of infringement at the same time. Lydall, Inc. supported the Company's motion
for summary judgment of non-infringement, and filed a motion for summary
judgment that the asserted claims of the '572 patent are invalid as a matter of
law. Discovery has been completed in the action. The Court held a hearing on the
summary judgment motions on April 18, 2000. No decision has been made on the
motions.
The Company and Gambro BCT, Inc. filed a complaint for declaratory relief
against Pall in the United States District Court of Colorado. The Company and
Gambro BCT seek declaratory relief that the '572 Patent, Pall's U.S. Patent No.
5,451,321 (the "'321 Patent") and Pall's U.S. Patent No.'s 5,229,012, 5,344,561,
5,501,795 and 5,863,436 are invalid and not infringed by the Company's r\LS
System and methods of using the r\LS System. Pall moved to dismiss or transfer
to the Eastern District of New York or, in the alternative, to stay this action.
The Company and Gambro BCT opposed Pall's motion. On July 16, 1999, the United
States District Court of Colorado denied Pall's motion to transfer or, in the
alternative, to stay the action, 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 the
Company's r\LS System infringes its patents that are the subject of the lawsuit
and that the Company and Gambro BCT tortiously interfered and unfairly competed
with Pall's business. The Company and Gambro BCT replied to Pall's counterclaim
and denied Pall's allegations of tortious interference, unfair competition and
patent infringement. Discovery is proceeding.
On July 13, 2000, Pall filed a Complaint in the United States District Court for
the District of Colorado against the Company, Gambro BCT, Inc. and Gambro AB
alleging that the Company's r\LS system infringes Pall's U.S. Patent No.
6,086,770 (the "`770 Patent"). On August 11, 2000, this action was consolidated
with the earlier declaratory relief action in the United States District Court
for the District of Colorado. The Company, Gambro BCT, Inc. and Gambro AB
answered the complaint, denied the allegations of infringement and submitted a
counterclaim alleging that Pall's `770 patent is invalid, not infringed and
unenforceable. In September 2000, Pall
5
<PAGE>
answered the counterclaim and denied the allegations of noninfringement,
invalidity and unenforceability. Discovery is proceeding.
On April 23, 1999, Pall filed a complaint against the Company and Gambro BCT in
the Eastern District of New York alleging that the Company's r\LS System
infringes Pall's '572 Patent and that the Company and Gambro BCT tortiously
interfered and unfairly competed with Pall's business. On May 19, 1999, Pall
amended its complaint and added Gambro Inc., Gambro A.B. and Sepracor as
defendants. The Company and Gambro BCT have moved to dismiss, transfer or stay
the action and Pall has opposed the motion. On April 18, 2000, Pall moved,
without opposition from the defendants, to dismiss the action and the Court
granted Pall's motion.
A prior lawsuit brought by Pall in February 1996 has concluded. In June 1999,
the United States Court of Appeals for the Federal Circuit determined that the
LeukoNet System did not infringe claim 39 of the '321 Patent and Pall has not
appealed that decision.
The Company has engaged patent counsel to investigate the pending litigations.
The Company believes, based upon its review of these matters, that a properly
informed court should conclude that the manufacture, use and/or sale by the
Company or its customers of the LeukoNet System and the r\LS System do not
infringe any valid enforceable claim of the Pall patents. However, there can be
no assurance that the Company will prevail in the pending litigations, and an
adverse outcome in a patent infringement action would have a material and
adverse effect on the Company's financial condition and future business and
operations, including the possibility of significant damages in the litigations
and an injunction against the sale of the r\LS System if the Company does not
prevail in the litigations.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Results of Operations
Overview
The Company was established in December 1993 as a wholly owned subsidiary of
Sepracor. Effective as of January 1, 1994, in exchange for 3,000,000 shares of
common stock, Sepracor transferred to the Company its technology relating to the
manufacture, use and sale of medical devices for the separation and purification
of blood, blood products and blood components and its membrane filter design
technologies.
The Company develops and supplies innovative blood filtration technologies
designed to help meet today's increasing demand for a safer, more reliable blood
supply. The Company's blood filtration technologies are designed to reduce
virus-carrying white blood cells (leukocytes) in donated blood to nominal levels
(a process known as "leukoreduction").
In June 1995, the Company received clearance from the United States Food and
Drug Administration (the "FDA") for the LeukoNet System, a medical device
designed for the removal of contaminating leukocytes from donated blood. Fiscal
1996 was the first full year of commercial sale of its LeukoNet System. In
February 1998, the Company determined to discontinue manufacturing the LeukoNet
System and focus on the completion of development and market introduction of its
next generation red cell filtration product, the r\LS System.
In May 1999, the Company received 510(k) clearance from the FDA to market its
r\LS System in the United States. The Company initiated sales of the r\LS System
in the United States in the third quarter of 1999.
In April 2000, the Company was notified that the American Red Cross, the
Company's largest customer, was suspending the use of the r\LS System pending
the outcome of an investigation of a small number of non-critical adverse
reactions in patients who have received a transfusion of blood filtered with the
r\LS System. In September
6
<PAGE>
2000, the Company was notified that the American Red Cross terminated its supply
contract for the r\LS System after the completion of investigations into the
reactions identified in April. The extended period of time taken to prove
product improvements that resolve the reactions was the basis for the
termination. See "-Liquidity and Capital Resources" below.
The Company is subject to risks common to small companies in the medical
technology industry, including, but not limited to, development by the Company
or its competitors of new technological innovations, commercial acceptance of
its products, dependence on key personnel, access to sources of capital,
protection of proprietary technology and compliance with FDA regulations.
Three and nine months ended September 30, 2000 and 1999
The Company recorded revenues of $288,000 for the quarter ended September 30,
2000 compared to $119,000 in the same period in 1999. Revenues were $2,747,000
for the first nine months of 2000 compared to $132,000 for the first nine months
of 1999. Revenues for all periods presented represent sales of the Company's
leukocyte filtration products. Due to the American Red Cross decision to
terminate its supply contract with the Company, all sales for the three-month
period ended September 30, 2000 were to one significant customer. The
significant increase in revenues for the three and nine-month periods ended
September 30, 2000 is due to the increase in sales of the r/LS System, for which
the Company received 510(k) clearance in May 1999 from the FDA to market its
r/LS System in the United States.
Total cost of products sold exceeded total product sales in all periods due to
the high costs associated with new product manufacturing start up and low volume
production. Included in cost of products sold for the three and nine-month
periods of fiscal 2000 are charges of approximately $1,240,000 for product
warranty and inventory write-down primarily in connection with the American Red
Cross decision to terminate its supply contract with the Company in September
2000.
Research and development expenses were $1,521,000 in the third quarter of 2000
compared to $532,000 in the third quarter of 1999, and were $4,325,000 in the
nine months ended September 30, 2000 compared to $1,582,000 in the nine months
ended September 30, 1999. The increase in the three-month period is primarily
attributable to costs associated with the transfusion reactions reported by the
American Red Cross in connection with the Company's r\LS System, including
studies to investigate the reactions and the development of product process
improvements. The increase in the nine-month period is primarily attributable to
costs associated with the development of a large scale production process in
order to support the then expected increase in demand for the Company's r\LS
System and the costs associated with the transfusion reactions reported by the
American Red Cross.
Legal expenses related to patents were $294,000 in the third quarter of 2000
compared to $123,000 in the third quarter of 1999, and were $703,000 in the nine
months ended September 30, 2000 compared to $1,315,000 in the nine months ended
September 30, 1999. The expenses in both the three and nine-month periods are
primarily related to costs associated with defending the Company's patent
position in its outstanding litigation with Pall Corporation. The decrease in
the nine-month period in 2000 from those expended in 1999 is due to a reduction
in these costs as well as from cooperation with Gambro BCT in connection with
such costs consistent with the Company's distribution and development agreement
with Gambro. There can be no assurance that such costs will remain at the same
level in future periods. A substantial increase in such costs could have a
material and adverse effect on the Company's financial condition and future
business and operations.
Selling, general and administrative expenses were $855,000 in the three months
ended September 30, 2000 compared to $1,051,000 in the three months ended
September 30, 1999, and were $3,084,000 in the first nine months of 2000
compared to $2,756,000 in the first nine months of 1999. The decrease in the
three-month period of fiscal 2000 from fiscal 1999 is primarily attributable to
lower sales and marketing costs associated with American Red Cross decision to
terminate its supply contract with the Company and a decrease in general
corporate costs in efforts to control spending during low level sales periods.
The increase in the comparative nine
7
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month periods is primarily attributable to higher administrative, personnel,
travel and related costs as well as general professional services in connection
with the Company's expected increasing level of sales of its r\LS System.
Interest income for the three and nine month periods ended September 30, 2000
increased compared to the three and nine-month periods ended September 30, 1999
due to higher average cash and marketable securities balances available for
investment. Interest expense for the three and nine-month periods ended
September 30, 2000 decreased compared to the three and nine-month periods ended
September 30, 1999 due to the completion of the amortization of deferred
financing charges in September 2000 and a lower average capital lease obligation
balance offset, in part, by higher interest related to a note payable.
New Accounting Standards
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 has not had a material impact on the Company's financial
position or results of operations.
In June 2000, the commission issued SAB 101B which delayed the implementation of
SAB 101 until no later than the quarter ended December 31, 2000. The Company
does not expect the application of SAB 101 to have a significant impact on its
financial position or results of operations.
Liquidity and Capital Resources
The net decrease in cash and cash equivalents for the nine months ended
September 30, 2000 was $3,472,000. This decrease is attributable primarily to
net cash used in operating activities of $12,382,000 and net cash used in
investing activities of $12,046,000 offset in part by net cash provided from
financing activities of $20,956,000.
Net cash provided from financing activities relates primarily to the net
proceeds from the issuance of common stock of $26,049,000 in the period, the
majority of which is due to the Company's March 2000 private placement
financing, offset in part by a $5,000,000 repayment of the Company's commercial
line of credit. Net cash used in operating activities is primarily attributable
to the net loss of $11,374,000 and an increase in inventory of $3,335,000. This
was offset in part by an increase in accounts payable and accrued expense
balances of $98,000; a decrease in accounts receivable of $437,000 and prepaid
expenses of $137,000; non-cash operating charges for financing costs related to
warrants of $725,000, depreciation and amortization of $472,000 and provision
for inventories of $570,000. Net cash used in investing activities resulted
principally from the net purchase of available-for-sale marketable securities of
$10,783,000 and the acquisition of property and equipment of $1,263,000 in the
period.
In March 2000, the Company completed a private placement financing yielding
gross proceeds of $27,975,000 in which institutional investors purchased
3,730,000 shares of its common stock at a purchase price of $7.50 per share. The
Company has registered 2,551,320 of such shares for resale. The Company intends
to use the net proceeds of such financing, which originally aggregated
$25,803,000 for working capital, capital equipment and general corporate
purposes.
In April 2000, the Company was notified that the American Red Cross, the
Company's largest customer, was suspending use of the Company's r\LS System
pending the outcome of an investigation of a small number of non-critical
adverse reactions in patients who had received a transfusion of blood filtered
with the r\LS. An extensive epidemiological study was conducted by the American
Red Cross based on the original data. The results of the study did not exonerate
the filter, nor did it point to a specific feature of the filter that caused the
reactions. In
8
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addition, the Company commissioned an epidemiology study at a major U.S. medical
center to further investigate these reactions. This study revealed that the
types of reactions reported to the Company by the American Red Cross occurred in
patients transfused with blood filtered with other manufacturers' filters as
well as blood filtered with the r\LS filter and, indeed, in blood that was not
filtered at all. The study also revealed that the reactions occurred in from 1
to 12 per 10,000 transfusions, but were at the upper end of this scale with the
r\LS filter. The reactions were not permanent and were treatable using standard
practices. In September 2000, the Company was notified that the American Red
Cross terminated its supply contract for the r\LS System after the completion of
these studies. The extended period of time taken to prove product improvements
that resolve the reactions was the basis for the termination.
Due to the termination of the supply contract by the American Red Cross in
September, there are approximately 160,000 r/LS units that are either held in
quarantine at the American Red Cross or in the Company's inventory as of
September 30, 2000. The Company may need to repair, replace or give the American
Red Cross credit for units in its inventory and repair or discard the r\LS units
in the Company's inventory. The Company has incurred product warranty and
inventory charges in cost of goods sold for the three and nine-month periods
ended September 30, 2000 after taking into account anticipated resolution of the
product in question and expected future uses, if any, for the product. The
Company is not yet able to determine the extent of any financial settlement it
may incur, if any, in connection with the terms of its supply contracts with
manufacturers of components of the r/LS System due to the American Red Cross
decision to terminate its supply contract with the Company. The Company will
continue to assess this situation over the balance of fiscal year 2000.
The termination of the supply agreement by the American Red Cross has negatively
impacted our revenue and ability to generate revenue. We believe that based on
our current operating plan our existing cash and marketable securities balances
will be sufficient to fund our operations only into the second quarter of
2001. The Company's cash requirements may vary materially from those now planned
because of factors related to product improvements efforts, results of product
testing, the approval process at the FDA and similar foreign agencies,
commercial acceptance of our products, patent developments and the introduction
of competitive products. In the future, we may be forced to seek to raise
additional capital by pursuing strategic partnerships, public or private equity
and/or debt financing in order to complete the proposed product improvements and
related testing with respect to the r/LS System. We can give no assurance that
we will be able to obtain these types of financing on terms favorable to us, if
at all. If we fail to generate cash flow or obtain such financing or if other
unforeseen circumstances occur, we may be unable to continue the Company's
current operations as presently conducted, if at all, beyond the second quarter
of 2001. Our Board of Directors has commenced a review of our future strategic
direction in light of our current operations and future business prospects.
Although currently no definitive plans have been approved by the Board of
Directors, they will continue to examine all strategic options in order to
prepare for future contingencies.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.
Not Applicable.
9
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a defendant in a lawsuit brought by Pall Corporation ("Pall")
regarding the Company's LeukoNet System, which is no longer made or sold by the
Company. In a complaint filed in November 1996, Pall alleged that the
manufacture, use and/or sale of the LeukoNet System infringed upon two patents
held by Pall. Pall dropped its allegations concerning infringement of one of the
patents and alleges only that the LeukoNet System infringed Pall's U.S. Patent
No. 4,952,572 (the "'572 Patent").
With respect to the allegations concerning the '572 Patent, the Company answered
the complaint stating that the LeukoNet System does not infringe any claim of
the asserted patents. Further, the Company counterclaimed for declaratory
judgment of invalidity, noninfringement and unenforceability of the '572 Patent.
Pall amended its complaint to add Lydall, Inc., whose subsidiary supplied the
filter media for the LeukoNet System, as a co-defendant. The Company filed for
summary judgment of non-infringement, and Pall cross-filed for summary judgement
of infringement at the same time. Lydall, Inc. supported the Company's motion
for summary judgment of non-infringement, and filed a motion for summary
judgment that the asserted claims of the '572 patent are invalid as a matter of
law. Discovery has been completed in the action. The Court held a hearing on the
summary judgment motions on April 18, 2000. No decision has been made on the
motions.
The Company and Gambro BCT, Inc. filed a complaint for declaratory relief
against Pall in the United States District Court of Colorado. The Company and
Gambro BCT seek declaratory relief that the '572 Patent, Pall's U.S. Patent No.
5,451,321 (the "'321 Patent") and Pall's U.S. Patent No.'s 5,229,012, 5,344,561,
5,501,795 and 5,863,436 are invalid and not infringed by the Company's r\LS
System and methods of using the r\LS System. Pall moved to dismiss or transfer
to the Eastern District of New York or, in the alternative, to stay this action.
The Company and Gambro BCT opposed Pall's motion. On July 16, 1999, the United
States District Court of Colorado denied Pall's motion to transfer or, in the
alternative, to stay the action, 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 the
Company's r\LS System infringes its patents that are the subject of the lawsuit
and that the Company and Gambro BCT tortiously interfered and unfairly competed
with Pall's business. The Company and Gambro BCT replied to Pall's counterclaim
and denied Pall's allegations of tortious interference, unfair competition and
patent infringement. Discovery is proceeding.
On July 13, 2000, Pall filed a Complaint in the United States District Court for
the District of Colorado against the Company, Gambro BCT, Inc. and Gambro AB
alleging that the Company's r\LS system infringes Pall's U.S. Patent No.
6,086,770 (the "`770 Patent"). On August 11, 2000, this action was consolidated
with the earlier declaratory relief action in the United States District Court
for the District of Colorado. The Company, Gambro BCT, Inc. and Gambro AB
answered the complaint, denied the allegations of infringement and submitted a
counterclaim alleging that Pall's `770 patent is invalid, not infringed and
unenforceable. In September 2000, Pall answered the counterclaim and denied the
allegations of noninfringement, invalidity and unenforceability. Discovery is
proceeding.
On April 23, 1999, Pall filed a complaint against the Company and Gambro BCT in
the Eastern District of New York alleging that the Company's r\LS System
infringes Pall's '572 Patent and that the Company and Gambro BCT tortiously
interfered and unfairly competed with Pall's business. On May 19, 1999, Pall
amended its complaint and added Gambro Inc., Gambro A.B. and Sepracor as
defendants. The Company and Gambro BCT have moved to dismiss, transfer or stay
the action and Pall has opposed the motion. On April 18, 2000, Pall moved,
without opposition from the defendants, to dismiss the action and the Court
granted Pall's motion.
A prior lawsuit brought by Pall in February 1996 has concluded. In June 1999,
the United States Court of Appeals for the Federal Circuit determined that the
LeukoNet System did not infringe claim 39 of the '321 Patent and Pall has not
appealed that decision.
10
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The Company has engaged patent counsel to investigate the pending litigations.
The Company believes, based upon its review of these matters, that a properly
informed court should conclude that the manufacture, use and/or sale by the
Company or its customers of the LeukoNet System and the r\LS System do not
infringe any valid enforceable claim of the Pall patents. However, there can be
no assurance that the Company will prevail in the pending litigations, and an
adverse outcome in a patent infringement action would have a material and
adverse effect on the Company's financial condition and future business and
operations, including the possibility of significant damages in the litigations
and an injunction against the sale of the r\LS System if the Company does not
prevail in the litigations.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
EXHIBIT INDEX
a) The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
Exhibit No. Description
----------- -----------
2.1(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.
11
<PAGE>
4.5(11) Warrant Certificate, dated as of September 15, 1998,
between the Company and Sepracor.
4.6(13) Registration Rights Agreement, dated as of March 23,
1999, between the Company and Sepracor.
4.7(13) Warrant Agreement, dated as of March 23, 1999,
between the Company and Sepracor.
4.8(13) Warrant Certificate, dated as of March 23, 1999,
between the Company and Sepracor.
4.9(14) Stock Subscription Agreement, dated as of May 3,
1999, between the Company and COBE.
4.10(14) Stockholder's Agreement, dated as of May 3, 1999,
between the Company and COBE.
10.1(9) 1994 Stock Option Plan, as amended.
10.2(9) 1994 Director Option Plan.
10.3(1) Form of Technology Transfer and License Agreement
between the Company and Sepracor Inc.
10.4(6) Lease Agreement for 140 Locke Drive, Marlborough, MA,
dated as of November 1995, between the Company and
First Marlboro Development Trust.
10.5(4) Employment Agreement between the Company and Dr. Hans
Heiniger, dated January 10, 1994.
10.6(7) Asset Purchase Agreement dated as of May 2, 1996
between the Company, HemaPharm Inc., HemaSure A/S and
Novo Nordisk A/S.
10.7(8) Restructuring Agreement, dated January 23, 1997,
between the Company, HemaPharm Inc., HemaSure A/S and
Novo Nordisk A/S.
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.
12
<PAGE>
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.
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.
10.33(17) Indemnification Agreement, dated as of July 13, 2000
between the Company and Ahlstrom Technical
Specialties LLC
21.1(12) Subsidiaries of the Company.
27.1 Financial Data Schedule.
---------------------
13
<PAGE>
(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.
(15) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.
(16) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
(17) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the year ended June 30, 2000.
(b) Reports on Form 8-K.
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HemaSure Inc.
/s/ John F. McGuire
-----------------------------------------
Date: November 14, 2000
John F. McGuire
President and Chief Executive Officer
(Principal Executive Officer)
/s/ James B. Murphy
-----------------------------------------
Date: November 14, 2000
James B. Murphy
Senior Vice President, Finance
and Administration
(Principal Financial Officer)
S-1
