<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1996
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Transition report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the transition period from to
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Commission File Number 0-23678
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BIOSEPRA INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 04-3216867
------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Organization or Incorporation)
111 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS 01752
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(Address of Principal Executive Offices) (Zip Code)
(508) 481-6802
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(Registrant's Telephone Number, Including Area Code)
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
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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 8,408,426
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Class Outstanding at November 11, 1996
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BioSepra Inc.
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of
September 30, 1996 and December 31, 1995 3
Consolidated Condensed Statements of Operations for the
Three and Nine Month Periods Ended September 30, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows for the
Periods Ended September 30, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION 14
SIGNATURES 16
2
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BioSepra Inc.
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<CAPTION>
(In thousands)
September 30, December 31,
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,643 $ 2,079
Cash in escrow -- 1,614
Marketable securities 360 --
Accounts receivable 2,774 3,495
Inventories (Note 2) 2,943 3,120
Prepaid and other current assets 432 25
-------- --------
Total current assets 11,152 10,333
Property and equipment, net (Note 3) 2,194 2,139
Goodwill, net 9,414 9,892
Other assets 1,166 1,460
-------- --------
Total assets $ 23,926 $ 23,824
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,020 $ 966
Related parties payable (Note 4) 295 812
Accrued expenses 1,797 1,758
Accrued expenses relating to acquisition -- 1,614
Accrued restructuring (Note 9) 15 171
Deferred revenue (Note 8) 4,066 3,500
Notes payable, current portion of long-term debt
and capital lease obligations 418 2,781
-------- --------
Total current liabilities 7,611 11,602
Long-term debt and capital lease obligations 1,002 1,308
Long-term debt payable to related party (Note 4) 266 --
-------- --------
Total liabilities 8,879 12,910
Stockholders' equity:
Common stock 84 70
Additional paid-in capital 40,655 35,085
Unearned compensation (519) (685)
Accumulated deficit (25,302) (23,798)
Equity adjustments 129 242
-------- --------
Total stockholders' equity 15,047 10,914
-------- --------
Total liabilities and stockholders' equity $ 23,926 $ 23,824
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
BioSepra Inc.
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
(In thousands, except per share data)
Three - month periods Nine - month periods
ended September 30, ended September 30,
--------------------- ---------------------
1996 1995 1996 1995
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenue:
Product sales $3,603 $ 2,525 $10,085 $ 9,009
License fees -- -- 600 --
Related party research and development -- 12 -- 98
------ ------- ------- --------
Total revenue 3,603 2,537 10,685 9,107
Costs and expenses:
Cost of products sold 1,733 1,714 4,701 6,690
Research and development 510 526 1,753 2,305
Restructuring and impairment costs (Note 9) -- -- -- 4,144
Selling, general and administrative 1,801 2,050 5,670 7,429
------ ------- ------- --------
Total costs and expenses 4,044 4,290 12,124 20,568
------ ------- ------- --------
Income (loss) from operations (441) (1,753) (1,439) (11,461)
Other income (expenses), net 77 (222) (65) (247)
------ ------- ------- --------
Net income (loss) $ (364) $(1,975) $(1,504) $(11,708)
====== ======= ======= ========
Net income (loss) per share (Note 5) $(0.04) $ (0.28) $ (0.20) $ (1.67)
Weighted average number of common
and common equivalent shares outstanding 8,400 7,002 7,637 7,001
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
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BioSepra Inc.
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
(In thousands)
Nine - month periods
ended September 30,
--------------------
1996 1995
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,504) $(11,708)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,507 1,734
Provision for doubtful accounts 256 222
Restructuring and impairment costs -- 2,548
Loss on disposition of long-term assets 10 --
Changes in operating assets and liabilities:
Accounts receivable 379 690
Inventories 81 1,350
Prepaid and other current assets (409) (547)
Accounts payable 91 (1,274)
Related parties payable (584) 541
Accrued expenses 94 (218)
Accrued expenses relating to acquisition (11) --
Accrued restructuring (204) 826
Deferred revenue 569 2,776
------- --------
Net cash provided by (used in) operating activities 275 (3,060)
Cash flows from investing activities:
Additions to property and equipment (696) (444)
Proceeds from sales of equipment 99 27
Increase in marketable securities (360) --
Increase in other assets (25) (290)
------- --------
Net cash used in investing activities (982) (707)
Cash flows from financing activities:
Proceeds from issuance of common stock to parent 5,548 --
Proceeds from issuance of common stock to minority stockholders 36 8
Net borrowings(repayments) under line of credit (2,300) (2,078)
Long-term borrowings 350 1,498
Repayment of long-term borrowings (367) (243)
------- --------
Net cash provided by (used in) financing activities 3,267 (815)
Effect of exchange rate changes on cash and cash equivalents 4 30
------- --------
Net increase (decrease) in cash and cash equivalents 2,564 (4,552)
Cash and cash equivalents at beginning of period 2,079 7,983
------- --------
Cash and cash equivalents at end of period $ 4,643 $ 3,431
======= ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
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BioSepra Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements are unaudited and have
been prepared on a basis substantially consistent with the Company's
annual audited financial statements. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Certain information and footnote disclosures normally included in the
Company's annual statements have been condensed or omitted. The
consolidated financial statements, in the opinion of management, reflect
all adjustments (including normal recurring accruals) necessary for a fair
statement of the results for the periods ended September 30, 1996 and
1995.
The results of operations for the periods are not necessarily indicative
of the results of operations to be expected for the fiscal year. These
consolidated financial statements should be read in conjunction with the
audited financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
2. Inventories
<TABLE>
Inventories consist of the following:
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Raw materials $ 847 $ 998
Work in progress 400 240
Finished goods 1,696 1,882
------ ------
$2,943 $3,120
====== ======
</TABLE>
3. Property and Equipment
<TABLE>
Property and equipment consists of the following:
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Property and equipment $ 6,001 $ 4,452
Less accumulated depreciation
and amortization (3,847) (2,348)
------- -------
2,154 2,104
Construction in progress 40 35
------- -------
$ 2,194 $ 2,139
======= =======
</TABLE>
6
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4. Related party transactions
The payable to related party represents amounts due for certain services
and facilities provided by Sepracor Inc. ("Sepracor"), the Company's
majority stockholder.
In March 1996, Sepracor loaned $3,500,000 to the Company and agreed to
loan up to an additional $2,000,000 to the Company until March 1997 (the
"loans"). The loans bore interest at prime plus 3/4%, were repayable in
March 2000 and were convertible at the option of Sepracor into shares of
the Company's common stock. On June 10, 1996, Sepracor loaned the
additional $2,000,000 to the Company. On June 10, 1996, at the request of
Sepracor, the outstanding principal amount of $5,500,000 plus accrued
interest of $47,639 was converted into 1,369,788 shares of the Company's
common stock. After the conversion Sepracor owns approximately 64% of the
outstanding common stock of the Company.
In January 1996, the Company signed a promissory note for $350,000, or
such sum as shall have been advanced by Sepracor. This amount is payable
over 60 monthly installments and does not bear interest. The Company used
the funds for leasehold improvements to the Company's facilities. As of
September 30, 1996, there has been $350,000 borrowed against the
promissory note.
5. Net Income (loss) Per Share
The net income (loss) per common share is computed based upon the weighted
average number of common shares outstanding and common equivalent shares.
Common equivalent shares are not included in the per share calculations
where the effect of their inclusion would be antidilutive.
6. Statements of Cash Flows
Cash payments for interest for the nine months ended September 30,1996 and
1995 were $154,000 and $226,000, respectively. During the nine months
ended September 30, 1995 the Company acquired equipment under a
capitalized lease agreement in the amount of $347,000.
7. Litigation
BioSepra and Sepracor are defendants in three lawsuits brought by
PerSeptive Biosystems, Inc. ("PerSeptive"), a competitor of BioSepra, in
the United States District Court for the District of Massachusetts. In
actions commenced in October 1993 and January 1995, PerSeptive has alleged
that BioSepra's and Sepracor's manufacture and sale of HyperD[TradeMark]
chromatography media infringe four of PerSeptive's United States patents.
PerSeptive is seeking unspecified monetary damages as well as injunctive
relief. In a separate action, PerSeptive has alleged that certain
statements made by BioSepra and Sepracor with respect to the performance
of HyperD media, performance of PerSeptive's POROS[Registered Trademark]
media, and the internal structures of POROS and HyperD media, including
statements made in BioSepra's Prospectus dated March 24, 1994,
constitute false advertising. PerSeptive also asserts that an additional
perfusion chromatography patent has been allowed but has not yet been
issued, and that another patent related to perfusion chromatography has
been issued. BioSepra and Sepracor do not know what is claimed in either
patent.
The Company has received an opinion of its patent counsel, Pennie &
Edmonds, to the effect that a properly informed court should conclude the
manufacture, use and/or sale by BioSepra or its customers of the present
HyperD products do not infringe any valid claims of the three U.S. patents
held by PerSeptive relating to "perfusion chromatography." Allegations
have also been made that another U.S. patent which relates to the
chemistry of certain coatings applied during the manufacture of HyperD
(the "coatings patent"), is infringed by the manufacture, sale or use of
HyperD. BioSepra and Sepracor have asserted a counterclaim charging
PerSeptive with unfair competition.
7
<PAGE> 8
On January 9, 1996, the United States District Court for the District of
Massachusetts in part granted BioSepra's and Sepracor's request for
summary judgment with respect to three of PerSeptive's patents concerning
"Perfusion Chromatography" (the "January 9 Order"). The Court ruled that
persons in addition to those named in the "perfusion" patents were
inventors of the alleged inventions claimed in those patents. This ruling
may ultimately dispose of PerSeptive's claims concerning the "perfusion"
patents, depending on the Court's resolution of PerSeptive's effort to
correct the patents and the outcome on appeal by PerSeptive of the January
9 Order or appeal by any party of any ruling regarding correction of
inventorship.
In its January 9 Order, the Court ruled that PerSeptive's claims related
to the three "perfusion" patents would be dismissed on January 19, 1996,
if PerSeptive had not requested correction of inventorship by that date.
The Court postponed this deadline pending its ruling on PerSeptive's
request for certification of an immediate appeal of the January 9 Order to
the United States Court of Appeals for the Federal Circuit. On March 12,
1996, the Court denied PerSeptive's motion for immediate appeal and
scheduled a hearing on deceptive intent on the part of PerSeptive, if
PerSeptive moved to correct inventorship (the "March 12 Order"). The Court
required PerSeptive to make any motion to correct by March 31, 1996. In
response, PerSeptive requested that the Court vacate its January 9 and
March 12 Orders, or in the alternative, correct the patents in such a way
that the presently unnamed inventors obtained no rights to license the
patents. The Court denied PerSeptive's motion to vacate and scheduled a
hearing on PerSeptive's motion to correct the patents which were completed
in August 1996.
The District Court has not rendered a decision based on the August
hearing. According to the January 9 and March 12 Orders, PerSeptive could
correct inventorship if it bears the burden of proving that its initial
designation of inventors was done without deceptive intent. PerSeptive has
asserted that no motion to correct need be filed, and that BioSepra and
Sepracor bear the burden of proving deceptive intent. PerSeptive also
asserts that the unnamed inventors should not be added to the patents or
given any right to license the patents, and that as a matter of law they
did not err in not naming the two unnamed inventors, and did not name
inventors with deceptive intent. BioSepra and Sepracor contend that if
PerSeptive is able to correct inventorship, the presently unnamed
inventors would have independent rights to license the "perfusion" patents
unless the Court ruled that the unnamed inventors are not entitled to such
rights. If inventorship could not be corrected, the "perfusion" patents
would be held invalid, subject to appeal by PerSeptive. A decision by the
District Court to correct inventorship, or preventing the unnamed
inventors from licensing the "perfusion" patents, would be subject to
appeal by any party. PerSeptive could appeal any decision invalidating the
patents for willful misdesignation of inventors.
There can be no assurance that BioSepra and Sepracor will prevail in the
pending litigation, and an adverse outcome in any of the patent
infringement actions on any of the chromatography patents would have a
materially adverse effect on the Company's future business and operations.
The Company is required to repay to Beckman Instruments, Inc. ("Beckman")
all or part of certain payments if the Company terminates Beckman's right
to use and sell HyperD media because a court finds HyperD media infringes
any third party patents.
Substantial funds have been and continue to be expended in connection with
the defense of the litigation. Sepracor has agreed to control the defense
of the litigation, and Sepracor and BioSepra share equally in expenses,
net of insurance payments. In addition, in the event of any settlement or
judgment adverse to BioSepra, Sepracor has agreed to indemnify BioSepra
from and against any damages that BioSepra is required to pay with respect
to its manufacture, use or sale of HyperD media products occurring prior
to March 24, 1994.
8
<PAGE> 9
8. Agreements
On March 14, 1995, BioSepra and Beckman entered into a joint distribution
and development agreement. The agreement allows Beckman to market on a
worldwide (except Japan) exclusive basis for a period of three years
certain HyperD chromatographic columns and provides for the development
(in accordance with certain milestones) and manufacture by BioSepra of
chromatographic systems for Beckman.
Under the agreement, Beckman made a one-time payment to BioSepra of
$3,000,000 and is obligated to make future payments to BioSepra of up to
$2,000,000 based on the accomplishment by BioSepra of such milestones for
the development of chromatographic systems. As of September 30, 1996,
BioSepra had received the one time payment of $3,000,000 and $1,900,000
for the completion of certain milestones in the development of such
systems. In the second quarter of 1996, the Company recognized $600,000 of
licensing revenue under the agreement. The Company may be required to
return to Beckman all or part of such payments made by Beckman under the
agreement if BioSepra fails to meet such milestones. In July, 1996,
BioSepra and Beckman modified the distribution arrangement to include
Japan.
9. Restructuring and Impairment:
On June 5, 1995, BioSepra announced a major cost-reduction program that
involved the consolidation of its facilities and a significant reduction
in the number of employees. The purpose of the program was to enable
BioSepra to focus on the process development and process segments of the
biopharmaceutical market. In connection with this program, on July 20,
1995, BioSepra completed the sale of Biopass, one of its French
subsidiaries. As part of the cost-reduction program, BioSepra recorded
restructuring and impairment charges totaling $4,144,000 in the second
quarter of 1995. Of this amount $1,180,000 represents severance and
benefits related to the reduction in workforce in the U.S. and France, and
$2,964,000 relates to impairment of intangibles and loss on sale of
Biopass. BioSepra has terminated 55 employees as part of the cost
reduction program consisting of research and development, administrative,
production and marketing/sales personnel. BioSepra has paid $1,165,000 of
the costs relating to this reduction as of September 30, 1996 and expects
the remaining severance and benefits payments to be completed by the end
of this year. There can no assurance that this program will not result in
a loss of customers or temporary sales or production disruptions that
could have a materially adverse effect on BioSepra's operations.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
BioSepra Inc. ("BioSepra") develops, manufactures and sells chromatographic
media and instruments for use by biopharmaceutical companies in the purification
and production of biopharmaceuticals. BioSepra offers a line of chromatographic
products (media, hardware, software and instruments) that enable
biopharmaceutical companies to reduce the time and cost required to develop and
manufacture biopharmaceuticals. The media products are based on both its
recently developed HyperD[TradeMark] media and established technologies.
In March 1995, BioSepra and Beckman Instruments, Inc. ("Beckman") entered into a
joint distribution and development agreement. The agreement allows Beckman to
market on a worldwide (except Japan) exclusive basis for a period of three years
certain HyperD chromatographic columns and provides for the development (in
accordance with certain milestones) and manufacture by BioSepra of
chromatographic systems for Beckman. Under the agreement, Beckman made a
one-time payment to BioSepra of $3,000,000 and agreed to make future payments to
BioSepra of up to $2,000,000 based on the accomplishment by BioSepra of such
milestones for the development of chromatographic systems. As of November 8,
1996, BioSepra had received the one time payment of $3,000,000 and $1,900,000
for the completion of certain milestones in the development of such systems. The
Company may be required to return to Beckman all or part of such payments made
by Beckman under the agreement if BioSepra fails to meet such milestones or if
BioSepra terminates Beckman's right to use and sell licensed products, including
HyperD media, because a court finds that any such licensed products infringe any
third party patents. In July 1996, BioSepra and Beckman modified the
distribution arrangement to include Japan.
In June 1995, BioSepra announced a major cost-reduction program that involved
the consolidation of its facilities and a significant reduction in the number of
employees. The purpose of the program was to enable BioSepra to focus on the
process development and process segments of the biopharmaceutical market. In
connection with this program in July 1995, BioSepra completed the sale of
Biopass S.A. ("Biopass"), one of its French subsidiaries. Under the terms of the
sale of Biopass, BioSepra received a renewable royalty free technology license.
As part of the cost-reduction program, BioSepra recorded restructuring and
impairment charges totaling $4,144,000 in the second quarter of 1995. Of this
amount $1,180,000 represents severance and benefits related to the reduction in
workforce in the U.S. and France, and $2,964,000 relates to impairment of assets
and intangibles to net realizable value. BioSepra has completed its reduction in
workforce related to this cost-reduction program resulting in the termination of
55 employees consisting of research and development, administrative, production
and marketing/sales personnel. BioSepra has paid $1,165,000 of the costs
relating to this reduction as of September 30, 1996 and expects the remaining
severance and benefits payments to be completed by the end of this year. There
can be no assurances that this program will not result in a loss of customers,
temporary sales or production disruptions that could have a material adverse
effect on BioSepra's operations.
Three and nine months ended September 30, 1996 and 1995
Revenues increased to $3,603,000 for the three months ended September 30, 1996
from $2,537,000 for the same period in 1995. Revenues for the nine months ended
September 30, 1996 increased to $10,685,000 compared to $9,107,000 for the same
period in 1995. Revenues for the nine months ended September 30, 1996 include
$600,000 of licensing revenue recognized as part of the Beckman distribution
agreement, as discussed above. Excluding sales of production-scale systems, a
product line that was discontinued as part of the cost-reduction program
implemented in June 1995, product revenues from continuing operations were
$1,998,000 and $6,442,000 for the three and nine months ended September 30,
1995, respectively. The increase in revenues from continuing operations, for the
three and nine month periods, are primarily attributable to increased media
product sales and new product sales to Beckman for HyperD media and
chromatographic systems as part of the joint distribution and development
agreement, as described above. The Company believes that sales of BioSepra's
HyperD media products, which were introduced in 1993, have been adversely
affected by, and may continue to be adversely affected by, the pending patent
litigation with PerSeptive BioSystems, Inc. ("PerSeptive") -- see "Legal
Proceedings". BioSepra's future success will depend, in part, on its ability to
generate increased sales of its HyperD media products and ProSys Workstation.
10
<PAGE> 11
Cost of products sold as a percentage of product sales was 48% for the three
months ended September 30, 1996 compared to 68% for the same period in 1995. For
the nine months ended September 30, 1996 and 1995 the cost of products sold as a
percentage of product sales was 47% and 74%, respectively. The improved product
margins are due to favorable product mix, including the discontinuation of the
lower product margin production-scale systems. Also contributing to the lower
product costs were the reduced overall manufacturing costs as a result of the
cost-reduction program implemented in June 1995. Management expects fluctuations
in cost of products sold as a percentage of product sales as product mix changes
occur period to period and new products are introduced.
Research and development expenses decreased to $510,000 in the third quarter of
1996 from $526,000 in the third quarter of 1995. For the first nine months of
1996, research and development expenses decreased to $1,753,000 from $2,305,000
for the comparable period in 1995. These decreases are primarily the result of
the cost-reduction program implemented in June 1995. Research and development
expenses related to discontinued production-scale systems were $19,000 and
$227,000 for the three and nine months ended September 30, 1995, respectively.
Selling, general and administrative expenses decreased to $1,801,000 in the
three months ended September 30, 1996 from $2,050,000 in the three months ended
September 30, 1995. For the first nine months of 1996, selling, general and
administrative expenses decreased to $5,670,000 from $7,429,000 in the
comparable period of 1995. The primary reason for the decrease in expenditures
is related to the cost-reduction program implemented in June 1995. Selling,
general and administrative expenses related to discontinued production-scale
systems were $601,000 for the nine months ended September 30, 1995.
Other income, net was $77,000 for the three months ended September 30, 1996 as
compared to other expense, net of $222,000 for the comparable period in 1995.
For the first nine months of 1996 other expense, net was $65,000 as compared to
other expense, net of $247,000 for the first nine months of 1995. These changes
are attributable to decreased interest expense paid and favorable foreign
currency translation gains.
The Company had a net loss of $364,000 for the three months ended September 30,
1996 compared to a net loss of $1,975,000 for the three months ended September
30, 1995. For the nine months ended September 30, 1996 the Company had a net
loss of $1,504,000 compared to a net loss of $11,708,000 for the comparable
period in 1995. Excluding the $4,144,000 charge for restructuring and
impairment, the Company's net loss would have been $7,564,000 for the nine
months ended September 30, 1995. The decreased losses for the comparable three
and nine month periods are primarily attributable to increased sales, higher
overall product gross margin, and reduced expenses in research, development,
sales, marketing and administration associated with the cost-reduction program
implemented in June 1995.
Litigation
BioSepra and Sepracor are defendants in three lawsuits brought by PerSeptive
Biosystems, Inc. ("PerSeptive"), a competitor of BioSepra, in the United States
District Court for the District of Massachusetts. In actions commenced in
October 1993 and January 1995, PerSeptive has alleged that BioSepra's and
Sepracor's manufacture and sale of HyperD chromatography media infringe four of
PerSeptive's United States patents. PerSeptive is seeking unspecified monetary
damages as well as injunctive relief. In a separate action, PerSeptive has
alleged that certain statements made by BioSepra and Sepracor with respect to
the performance of HyperD media, performance of PerSeptive's POROS[Registered
Trademark] media, and the internal structures of POROS and HyperD media,
including statements made in BioSepra's Prospectus dated March 24, 1994,
constitute false advertising. PerSeptive also asserts that an additional
perfusion chromatography patent has been allowed but has not yet been issued,
and that another patent related to perfusion chromatography has been issued.
BioSepra and Sepracor do not know what is claimed in either patent.
11
<PAGE> 12
The Company has received an opinion of its patent counsel, Pennie & Edmonds, to
the effect that a properly informed court should conclude the manufacture, use
and/or sale by BioSepra or its customers of the present HyperD products do not
infringe any valid claims of the three U.S. patents held by PerSeptive relating
to "perfusion chromatography." Allegations have also been made that another U.S.
patent which relates to the chemistry of certain coatings applied during the
manufacture of HyperD (the "coatings patent"), is infringed by the manufacture,
sale or use of HyperD. BioSepra and Sepracor have asserted a counterclaim
charging PerSeptive with unfair competition.
On January 9, 1996, the United States District Court for the District of
Massachusetts in part granted BioSepra's and Sepracor's request for summary
judgment with respect to three of PerSeptive's patents concerning "Perfusion
Chromatography" (the "January 9 Order"). The Court ruled that persons in
addition to those named in the "perfusion" patents were inventors of the alleged
inventions claimed in those patents. This ruling may ultimately dispose of
PerSeptive's claims concerning the "perfusion" patents, depending on the Court's
resolution of PerSeptive's effort to correct the patents and the outcome on
appeal by PerSeptive of the January 9 Order or appeal by any party of any ruling
regarding correction of inventorship.
In its January 9 Order, the Court ruled that PerSeptive's claims related to the
three "perfusion" patents would be dismissed on January 19, 1996, if PerSeptive
had not requested correction of inventorship by that date. The Court postponed
this deadline pending its ruling on PerSeptive's request for certification of an
immediate appeal of the January 9 Order to the United States Court of Appeals
for the Federal Circuit. On March 12, 1996, the Court denied PerSeptive's motion
for immediate appeal and scheduled a hearing on deceptive intent on the part of
PerSeptive, if PerSeptive moved to correct inventorship (the "March 12 Order").
The Court required PerSeptive to make any motion to correct by March 31, 1996.
In response, PerSeptive requested that the Court vacate its January 9 and March
12 Orders, or in the alternative, correct the patents in such a way that the
presently unnamed inventors obtained no rights to license the patents. The Court
denied PerSeptive's motion to vacate and scheduled a hearing on PerSeptive's
motion to correct the patents which were completed in August 1996.
The District Court has not rendered a decision based on the August hearing.
According to the January 9 and March 12 Orders, PerSeptive could correct
inventorship if it bears the burden of proving that its initial designation of
inventors was done without deceptive intent. PerSeptive has asserted that no
motion to correct need be filed, and that BioSepra and Sepracor bear the burden
of proving deceptive intent. PerSeptive also asserts that the unnamed inventors
should not be added to the patents or given any right to license the patents,
and that as a matter of law they did not err in not naming the two unnamed
inventors, and did not name inventors with deceptive intent. BioSepra and
Sepracor contend that if PerSeptive is able to correct inventorship, the
presently unnamed inventors would have independent rights to license the
"perfusion" patents unless the Court ruled that the unnamed inventors are not
entitled to such rights. If inventorship could not be corrected, the "perfusion"
patents would be held invalid, subject to appeal by PerSeptive. A decision by
the District Court to correct inventorship, or preventing the unnamed inventors
from licensing the "perfusion" patents, would be subject to appeal by any party.
PerSeptive could appeal any decision invalidating the patents for willful
misdesignation of inventors.
There can be no assurance that BioSepra and Sepracor will prevail in the pending
litigation, and an adverse outcome in any of the patent infringement actions on
any of the chromatography patents would have a materially adverse effect on the
Company's future business and operations. The Company is required to repay to
Beckman Instruments, Inc. ("Beckman") all or part of certain payments if the
Company terminates Beckman's right to use and sell HyperD media because a court
finds HyperD media infringes any third party patents.
Substantial funds have been and continue to be expended in connection with the
defense of the litigation. Sepracor has agreed to control the defense of the
litigation, and Sepracor and BioSepra share equally in expenses, net of
insurance payments. In addition, in the event of any settlement or judgment
adverse to BioSepra, Sepracor has agreed to indemnify BioSepra from and against
any damages that BioSepra is required to pay with respect to its manufacture,
use or sale of HyperD media products occurring prior to March 24, 1994.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
In March 1996, Sepracor loaned $3,500,000 to the Company and agreed to loan up
to an additional $2,000,000 to the Company until March 1997 (the "loans"). The
loans bore interest at prime plus 3/4%, were repayable in March 2000 and were
convertible at the option of Sepracor into shares of the Company's common stock.
On June 10, 1996, Sepracor loaned the additional $2,000,000 to the Company. On
June 10, 1996, at the request of Sepracor, the outstanding principal amount of
$5,500,000 plus accrued interest of $47,639 was converted into 1,369,788 shares
of the Company's common stock. After the conversion, Sepracor owns approximately
64% of the outstanding common stock of the Company.
In January 1996, the Company signed a promissory note for $350,000, or such sum
as shall have been advanced by Sepracor. This amount is payable over 60 monthly
installments and does not bear interest. The Company used the funds for
leasehold improvements to the Company's facilities. As of September 30, 1996,
there has been $350,000 borrowed against the promissory note.
Cash and cash equivalents totaled $4,643,000 at September 30, 1996. The net
increase in cash and cash equivalents for the nine months ended September 30,
1996 was $2,564,000. This increase was attributable primarily to the issuance of
common stock to Sepracor of $5,548,000 and $350,000 in notes payable as
described above, offset in part by the net repayments of $2,667,000 in
borrowings. The net cash provided by operating activities was comprised of the
net loss of $1,504,000 and the increase in other assets of $409,000 and the
decreases of $460,000, $204,000 and $493,000 in working capital, accrued
restructuring and payables, respectively. This was offset by increases in
deferred revenue and accrued expenses of $569,000 and $83,000, respectively.
Also offsetting the net cash used in operating activities were non-cash
adjustments of $1,507,000 for depreciation and amortization and $256,000 for the
provision for doubtful accounts. Net cash used in investing activities was
$982,000 which included the increase in property and equipment of $696,000,
offset by proceeds from the sales of equipment of $99,000. Net cash used in
investing activities also included the increase in marketable securities and
other assets of $360,000 and $25,000, respectively. At September 30, 1996, there
was $1,357,000 outstanding under available credit facilities from four
commercial banks totaling $3,732,000. These borrowings are currently guaranteed
by Sepracor while a portion are also collateralized by certain accounts
receivable balances.
FUTURE OPERATING RESULTS
Certain of the information contained in this Quarterly Report on Form 10-Q,
including information with respect to the ability of BioSepra to obtain
additional financing within the next twelve months, the success of BioSepra's
HyperD media and the ProSys workstation, and information with respect to the
Company's other plans and strategy for its business consist of forward-looking
statements. Important factors that could cause actual results to differ
materially from the forward-looking statements include the outcome of the
Company's pending patent infringement litigation with PerSeptive, the successful
commercialization of the Company's product lines and such other factors
described in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995. In addition, based upon the Company's current operating plan,
the Company believes that its current cash balance is sufficient to fund the
Company's operations into 1998. The Company's cash requirements may vary
materially from those now planned because of factors such as the timing of
significant product orders, commercial acceptance of new products, patent
developments, the introduction of competitive products, the outcome of pending
litigation and acquisitions. Accordingly, the Company may be required to raise
additional financing within the next twelve months, and there can be no
assurance that such financing will be available on favorable terms, if at all.
Because of the foregoing factors, the Company believes that period-to-period
comparisons of its financial results are not necessarily meaningful and it
expects that its results of operations may continue to fluctuate from period to
period in the future.
13
<PAGE> 14
PART II.
OTHER INFORMATION
Item 1. Legal proceedings
BioSepra and Sepracor are defendants in three lawsuits brought by
PerSeptive, a competitor of BioSepra, in the United States District
Court for the District of Massachusetts. In actions commenced in
October 1993 and January 1995, PerSeptive has alleged that BioSepra's
and Sepracor's manufacture and sale of HyperD[TradeMark] chromatography
media infringe four of PerSeptive's United States patents. PerSeptive
is seeking unspecified monetary damages as well as injunctive relief.
In a separate action, PerSeptive has alleged that certain statements
made by BioSepra and Sepracor with respect to the performance of HyperD
media, performance of PerSeptive's POROS[Registered Trademark] media,
and the internal structures of POROS and HyperD media, including
statements made in BioSepra's Prospectus dated March 24, 1994,
constitute false advertising. PerSeptive also asserts that an
additional perfusion chromatography patent has been allowed but has not
yet been issued, and that another patent related to perfusion
chromatography has been issued. BioSepra and Sepracor do not know what
is claimed in either patent.
The Company has received an opinion of its patent counsel, Pennie &
Edmonds, to the effect that a properly informed court should conclude
the manufacture, use and/or sale by BioSepra or its customers of the
present HyperD products do not infringe any valid claims of the three
U.S. patents held by PerSeptive relating to "perfusion chromatography."
Allegations have also been made that another U.S. patent which relates
to the chemistry of certain coatings applied during the manufacture of
HyperD (the "coatings patent"), is infringed by the manufacture, sale
or use of HyperD. BioSepra and Sepracor have asserted a counterclaim
charging PerSeptive with unfair competition.
On January 9, 1996, the United States District Court for the District
of Massachusetts in part granted BioSepra's and Sepracor's request for
summary judgment with respect to three of PerSeptive's patents
concerning "Perfusion Chromatography" (the "January 9 Order"). The
Court ruled that persons in addition to those named in the "perfusion"
patents were inventors of the alleged inventions claimed in those
patents. This ruling may ultimately dispose of PerSeptive's claims
concerning the "perfusion" patents, depending on the Court's resolution
of PerSeptive's effort to correct the patents and the outcome on appeal
by PerSeptive of the January 9 Order or appeal by any party of any
ruling regarding correction of inventorship.
In its January 9 Order, the Court ruled that PerSeptive's claims
related to the three "perfusion" patents would be dismissed on January
19, 1996, if PerSeptive had not requested correction of inventorship by
that date. The Court postponed this deadline pending its ruling on
PerSeptive's request for certification of an immediate appeal of the
January 9 Order to the United States Court of Appeals for the Federal
Circuit. On March 12, 1996, the Court denied PerSeptive's motion for
immediate appeal and scheduled a hearing on deceptive intent on the
part of PerSeptive, if PerSeptive moved to correct inventorship (the
"March 12 Order"). The Court required PerSeptive to make any motion to
correct by March 31, 1996. In response, PerSeptive requested that the
Court vacate its January 9 and March 12 Orders, or in the alternative,
correct the patents in such a way that the presently unnamed inventors
obtained no rights to license the patents. The Court denied
PerSeptive's motion to vacate and scheduled a hearing on PerSeptive's
motion to correct the patents which were completed in August 1996.
14
<PAGE> 15
The District Court has not rendered a decision based on the August
hearing. According to the January 9 and March 12 Orders, PerSeptive
could correct inventorship if it bears the burden of proving that
its initial designation of inventors was done without deceptive
intent. PerSeptive has asserted that no motion to correct need be
filed, and that BioSepra and Sepracor bear the burden of proving
deceptive intent. PerSeptive also asserts that the unnamed
inventors should not be added to the patents or given any right to
license the patents, and that as a matter of law they did not err
in not naming the two unnamed inventors, and did not name inventors
with deceptive intent. BioSepra and Sepracor contend that if
PerSeptive is able to correct inventorship, the presently unnamed
inventors would have independent rights to license the "perfusion"
patents unless the Court ruled that the unnamed inventors are not
entitled to such rights. If inventorship could not be corrected,
the "perfusion" patents would be held invalid, subject to appeal by
PerSeptive. A decision by the District Court to correct
inventorship, or preventing the unnamed inventors from licensing
the "perfusion" patents, would be subject to appeal by any party.
PerSeptive could appeal any decision invalidating the patents for
willful misdesignation of inventors.
There can be no assurance that BioSepra and Sepracor will prevail
in the pending litigation, and an adverse outcome in any of the
patent infringement actions on any of the chromatography patents
would have a materially adverse effect on the Company's future
business and operations. The Company is required to repay to
Beckman Instruments, Inc. ("Beckman") all or part of certain
payments if the Company terminates Beckman's right to use and sell
HyperD media because a court finds HyperD media infringes
any third party patents.
Substantial funds have been and continue to be expended in
connection with the defense of the litigation. Sepracor has agreed
to control the defense of the litigation, and Sepracor and BioSepra
share equally in expenses, net of insurance payments. In addition,
in the event of any settlement or judgment adverse to BioSepra,
Sepracor has agreed to indemnify BioSepra from and against any
damages that BioSepra is required to pay with respect to its
manufacture, use or sale of HyperD media products occurring prior
to March 24, 1994.
Items 2-5. None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
27.1 Financial Data Schedule
15
<PAGE> 16
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.
BIOSEPRA INC.
Date: November 11, 1996 /s/ Jean-Marie Vogel
------------------------------------------
Jean-Marie Vogel
President, Chief Executive
Officer and Director
(Principal Executive and Financial Officer)
Date: November 11, 1996 /s/ Peter M. Castellanos
------------------------------------------
Peter M. Castellanos
Director, Finance and Administration
(Chief Accounting Officer)
16
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