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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: March 31, 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
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(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 7,023,026
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Class Outstanding at May 14, 1996
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BioSepra Inc.
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets as of
March 31, 1996 and December 31, 1995 3
Consolidated Condensed Statements of Operations for the
Three Month Periods Ended March 31, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows for the
Three Month Periods Ended March 31, 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 9
PART II - OTHER INFORMATION 13
SIGNATURES 15
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Biosepra Inc.
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<CAPTION>
(In thousands) March 31, December 31,
ASSETS 1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,576 $ 2,079
Cash in escrow 1,572 1,614
Accounts receivable 3,855 3,495
Inventories (Note 2) 3,089 3,120
Other current assets 314 25
------- -------
Total current assets 14,406 10,333
Property and equipment, net (Note 3) 2,169 2,139
Goodwill, net 9,733 9,892
Other assets 1,374 1,460
------- -------
Total assets $27,682 $23,824
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,086 $ 966
Related parties payable (Note 4) 918 812
Accrued expenses 1,830 1,758
Accrued expenses relating to
acquisition payable 1,572 1,614
Accrued restructuring (Note 9) 95 171
Deferred revenue (Note 8) 4,534 3,500
Notes payable, current portion of long-term debt
and capital lease obligations 2,949 2,781
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Total current liabilities 12,984 11,602
Convertible subordinated note payable to related
party (Note 4) 3,500 --
Long-term debt and capital lease obligations 1,189 1,308
Long-term debt payable to related party (Note 4) 287 --
------- -------
Total liabilities 17,960 12,910
Stockholders' equity:
Common stock 70 70
Additional paid-in capital 35,090 35,085
Unearned compensation (630) (685)
Accumulated deficit (24,991) (23,798)
Cumulative translation adjustment 183 242
------- -------
Total stockholders' equity 9,722 10,914
------- -------
Total liabilities and stockholders' equity $27,682 $23,824
======= =======
</TABLE>
The accompanying notes are an integral part
of the financial statements.
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BioSepra Inc.
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three-month periods
ended March 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Revenue:
Product sales $ 2,806 $ 2,815
Related party research and development -- 42
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Total revenue 2,806 2,857
Costs and expenses:
Cost of products sold 1,183 2,512
Research and development 596 914
Selling, general and administrative 2,162 2,590
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Total costs and expenses 3,941 6,016
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Loss from operations (1,135) (3,159)
Other income (expenses), net (58) (2)
------- -------
Net loss $(1,193) $(3,161)
======= =======
Net loss per share $ (0.17) $ (0.45)
Weighted average number of common and
common equivalent shares outstanding 7,022 7,000
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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BioSepra Inc.
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Three-month periods
ended March 31,
---------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,193) $(3,161)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 517 628
Provision for doubtful accounts 107 42
Loss on disposition of long-term assets 10 --
Changes in operating assets and liabilities:
Accounts receivable (514) 398
Inventories (18) (61)
Prepaid and other current assets (289) 71
Accounts payable 139 (583)
Related parties payable 82 (32)
Accrued expenses 100 (398)
Accrued expenses relating to acquisition (3) --
Accrued restructuring (126) --
Deferred revenue 1,034 2,721
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Net cash used in operating activities (154) (375)
Cash flows from investing activities:
Additions to property and equipment (331) (212)
Proceeds from sales of equipment 69 --
Increase in notes receivable from employees (10) --
Increase in other assets (8) (45)
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Net cash used in investing activities (280) (257)
Cash flows from financing activities:
Proceeds from loans by parent company 3,810 --
Proceeds from issuance of common stock 5 --
Borrowings(repayments) under line of credit agreements 199 748
Long-term borrowings -- 146
Repayment of long-term borrowings (104) (74)
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Net cash provided by financing activities 3,910 820
Effect of exchange rate changes on cash
and cash equivalents 21 8
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Net increase in cash and cash equivalents 3,497 196
Cash and cash equivalents at beginning of period 2,079 7,983
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Cash and cash equivalents at end of period $ 5,576 $ 8,179
======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
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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 March 31, 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>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 906 $ 998
Work in progress 427 240
Finished goods 1,756 1,882
------ ------
$3,089 $3,120
====== ======
</TABLE>
3. Property and Equipment
<TABLE>
Property and equipment consists of the following:
<CAPTION>
March 31, December 31,
1996 1995
---- ----
<S> <C> <C>
Property and equipment $5,709 $4,452
Less accumulated depreciation
and amortization (3,600) (2,348)
------ ------
2,109 2,104
Construction in progress 60 35
------ ------
$2,169 $2,139
====== ======
</TABLE>
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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 agreed to loan $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 bear interest at prime plus 3/4%
and are repayable in March 2000. The loans, including any interest
thereon, are convertible into the shares of the Company's common stock,
at the option of Sepracor, at any time prior to payment. As of March 31,
1996, there has been $3,500,000 borrowed against the first loan.
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 intents to use the funds for leasehold improvements to the
Company's facilities. As of March 31, 1996, there has been $310,000
borrowed against the promissory note.
5. Net Loss Per Share
The net loss per common share is computed based upon the weighted average
number of common shares outstanding. 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 three months ended March 31,1996 and
1995 were $80,000 and $89,000, respectively.
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.
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 Sepracor's and BioSepra'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 for May 1996.
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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
Sepracor and BioSepra 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. Sepracor and BioSepra
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. 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. 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.
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 54 employees as part of the cost
reduction program consisting of research and development, administrative,
production and marketing/sales personnel. BioSepra has paid $1,101,000 of
the costs relating to the employee reduction as of March 31, 1996 and
expects the majority of the remaining severance and medical payments to be
completed in early 1996. 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.
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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's products enable
biopharmaceutical companies to reduce the time and cost required to develop and
manufacture biopharmaceuticals. The Company offers a line of chromatographic
products (media, hardware, software and instruments). The media products are
based on both its recently developed HyperD media and established technologies.
In March 1994, BioSepra completed an initial public offering of 3,000,000 shares
of its common stock, yielding net proceeds of approximately $17,924,000. Since
the closing of this offering, Sepracor has owned approximately 57% of the
outstanding Common Stock of the Company.
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[Trademark] 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 May 7, 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 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 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 terminated 54 employees as
part of the cost reduction program consisting of research and development,
administrative, production and marketing/sales personnel. BioSepra has paid
$1,101,000 of the costs relating to this employee reduction as of March 31,
1996, and expects the remaining severance and medical payments to be completed
in early 1996. There can be no assurances that this program will not result in
loss of customers, temporary sales or production disruptions that could have a
material adverse effect on BioSepra's operations.
Three months ended March 31, 1996 and 1995
Revenues decreased to $2,806,000 for the three months ended March 31, 1996 from
$2,857,000 for the same period in 1995. 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 $1,652,000 for the quarter ended March 31, 1995. The increase in product
sales from continuing operations' were due primarily to increases in sales of
the Company's chromatography media and workstation product lines.
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Cost of products sold as a percentage of product sales was 42% for the three
months ended March 31, 1996 compared to 89% for the same period in 1995 as a
result of favorable product mix, and to a lesser extent, 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.
Research and development expenses decreased to $596,000 for the first quarter of
1996 from $914,000 for the first quarter of 1995. This decrease is primarily the
result of the cost-reduction program implemented in June 1995. Research and
development expenses related to discontinued production-scale systems in the
first quarter of 1995 were $114,000.
Selling, general and administrative expenses decreased to $2,162,000 for the
three months ended March 31, 1996 from $2,590,000 for the three months ended
March 31, 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 in the
first quarter of 1995 were $279,000.
Other expenses, net, increased to $58,000 for the three months ended March 31,
1996 as compared to $2,000 for the comparable period in 1995. This increase is
attributable to lower interest income earned as a result of lower cash
balances available for investments.
The Company had a net loss of $1,193,000 for the three months ended March 31,
1996 compared to $3,161,000 for the three months ended March 31, 1995. The
decreased loss for the comparable three-month periods is attributable to 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.
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 Sepracor's and BioSepra'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").
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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 for May 1996.
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 Sepracor and BioSepra 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. Sepracor
and BioSepra 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 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.
LIQUIDITY AND CAPITAL RESOURCES
In March 1996, Sepracor agreed to loan $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 bear interest at prime plus 3/4% and are repayable in
March 2000. The loans, including any interest thereon, are convertible into
the shares of the Company's Common Stock, at the option of Sepracor, at any time
prior to payment. As of March 31, 1996, there has been $3,500,000 borrowed
against the first loan.
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 intends to use the
funds for leasehold improvements to the Company's facilities. As of March 31,
1996 there has been $310,000 borrowed against the promissory note.
Cash and cash equivalents totaled $5,576,000 at March 31, 1996, with an
additional $1,572,000 held in escrow as collateral for the final installment of
cash in April 1996 related to the Biopass acquisition. The net increase in cash
and cash equivalents for the three months ended March 31, 1996 was $3,497,000.
This increase was attributable primarily to the borrowings from Sepracor of
$3,500,000 in convertible subordinated debt and $310,000 in notes payable as
described above, offset in part by net cash used in operating activities of
$154,000. The net cash used in operating activities was comprised of the net
loss of $1,193,000 and the increase of accounts receivable and other assets of
$514,000 and $289,000, respectively, and a decrease of $126,000 in accrued
restructuring. This was offset by increases in accounts payable and accrued
expenses of $221,000 and $100,000 respectively. Also offsetting the net cash
used in operating activities were non-cash adjustments of $517,000 for
depreciation and amortization and $107,000 for the provision for doubtful
accounts. Net cash used in investing activities was $280,000 which included the
increase in property and equipment of $331,000, offset by proceeds from the
sales of equipment of $69,000. Net cash provided by financing activities was
$3,910,000, which included $3,810,000 of new borrowings from Sepracor of
$3,500,000 in convertible subordinated debt and $310,000 in notes payable as
described above. At March 31, 1996, there was $4,110,000 outstanding under
available credit facilities from four commercial banks totaling $3,993,000.
11
<PAGE> 12
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 in 1996, 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 consists of forward-looking statements.
Important factors that could cause actual results to differ materially from the
forward-looking statements are 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 early 1997. The
Company also has access to additional financing to be provided by Sepracor, as
discussed above, in the amount of $2,000,000. 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 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.
12
<PAGE> 13
PART II.
OTHER INFORMATION
Item 1. Legal proceedings
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.
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 Sepracor's and BioSepra'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 for May 1996.
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
Sepracor and BioSepra 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. Sepracor and BioSepra
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.
13
<PAGE> 14
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 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 2-6. None
14
<PAGE> 15
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: May 14, 1996 /s/ Jean-Marie Vogel
-----------------------------------
Jean-Marie Vogel
President, Chief Executive
Officer and Director
(Principal Executive and Financial Officer)
Date: May 14, 1996 /s/ Peter M. Castellanos
-----------------------------------
Peter M. Castellanos
Director, Finance and Administration
(Chief Accounting Officer)
15
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