SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): February, 2000
HemaSure Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-23776 04-3216862
- ------------------------- ----------------- -------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
140 Locke Drive, Marlborough, Massachusetts 01752
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(508) 485-6850
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
922448.1
<PAGE>
Item 5. Other Events.
This Current Report on Form 8-K contains the Registrant's consolidated financial
statements for the year ended December 31, 1999 which appear on pages F-2 to F-
19. See accompanying Index to the Consolidated Financial Statements on page
F-1.
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
27.1 Financial Data Schedule
99.1 Audited consolidated financial statements and the notes thereto for the
year ended December 31, 1999.
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
922448.1
2
<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 hereunto duly authorized.
HEMASURE INC.
(Registrant)
Date: February __, 2000 By:/s/ John F. McGuire, III
----------------------------------------------
Name: John F. McGuire, III
Title: President and Chief Executive Officer
922448.1
3
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEMASURE INC. FOR THE TWELVE MONTHS ENDED DECEMBER 31,
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
<EPS-DILUTED> 0
</TABLE>
Exhibit 99.1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HemaSure Inc.
- -------------
<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>
F-1
922448.1
<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.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
which raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 4, 2000
924956.1
F-2
<PAGE>
HemaSure Inc.
Consolidated Balance Sheets
December 31,
(In thousands, except par value amounts)
<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets:
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) (Note 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
15,583 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.
924956.1
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.
924956.1
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.
924956.1
F-5
<PAGE>
HemaSure Inc.
Consolidated Statements of Cash Flows
Year ended December 31,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
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.
924956.1
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 accumulated deficits. These conditions raise substantial doubt
about its ability to continue as a going concern. The ultimate success of the
Company is dependent upon its ability to raise capital through strategic
partnerships, public or private equity and/or debt financing and the market
acceptance of new products. However, the Company's capital requirements may
change depending upon numerous factors, including compliance with regulatory
requirements, the time necessary to commercialize the Company's new product and
the demand for the Company's product. No assurance can be given that the Company
will be able to obtain additional financing on terms acceptable to the Company,
if at all, or that the Company will successfully effect the new product
introduction into the market. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In view of the Company's current financial condition, the Company plans
to manage aggressively its working capital and expenses while working to raise
capital. The Company will also pursue product sales opportunities, as well as
strategic or other business relationships.
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
924956.1
F-7
<PAGE>
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 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
924956.1
F-8
<PAGE>
beginning after June 15, 2000. The Company does not expect such adoption to have
a material impact on its financial statements.
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.
924956.1
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.
924956.1
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%.
924956.1
F-11
<PAGE>
Future minimum payments under all noncancelable leases in effect at
December 31, 1999 are as follows:
(In Thousands) Operating Capital
Year Leases Leases
- ---- ------ ------
2000 236 71
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
=======
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.
924956.1
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.
924956.1
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.
924956.1
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
- -------------------------------------------------------------------------------------------------------
Number Weighted Number
Outstanding As Average Weighted Exercisable Weighted
Range of Exercise Of 12/31/99 Remaining Average As of Average
Prices (In thousands) Contractual Exercise 12/31/99 Exercise
Life Price (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 $3.27, $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.
924956.1
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.
924956.1
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
---- ----
<S> <C> <C>
Deferred taxes:
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 credit of approximately $690,000
and $520,000, respectively, which both begin to expire in 2009. The Company has
a state investment tax credits 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 components.
924956.1
F-18
<PAGE>
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 the 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, the 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 PCT 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 the 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.
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.
924956.1
F-18
