-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VB61Ctfm3NnBODoyzh3uEPYN4BAKmIXxevjYQrhfElojiVzbyAUOj1NqwLsmv+Gd HsJea34SwSomx6UNwgTNYA== 0000919015-02-000010.txt : 20020814 0000919015-02-000010.hdr.sgml : 20020814 20020814095409 ACCESSION NUMBER: 0000919015-02-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOSPHERE MEDICAL INC CENTRAL INDEX KEY: 0000919015 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 043216867 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23678 FILM NUMBER: 02731947 BUSINESS ADDRESS: STREET 1: 1050 HINGHAM STREET CITY: ROCKLAND STATE: MA ZIP: 02370 BUSINESS PHONE: 7816817900 MAIL ADDRESS: STREET 1: 1050 HINGHAM STREET CITY: ROCKLAND STATE: MA ZIP: 02370 FORMER COMPANY: FORMER CONFORMED NAME: BIOSEPRA INC DATE OF NAME CHANGE: 19940215 10-Q 1 frm10qq2.txt Q2 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q --------------- (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------- ------- Commission File Number 0-23678 BIOSPHERE MEDICAL, INC. (Exact Name of Registrant as Specified in its Charter) --------------- Delaware 04-3216867 - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (IRS Employer Identification Number) Organization or Incorporation) 1050 Hingham St., Rockland, Massachusetts 02370 (Address of Principal Executive Offices) (Zip Code) (781) 681-7900 (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 ------- ------- The number of shares outstanding of the Registrant's Common Stock as of August 2, 2002: 13,037,997 shares. - -------------------------------------------------------------------------------- BIOSPHERE MEDICAL, INC. INDEX Page Part I - Financial Information ---- Item 1. Consolidated Condensed Financial Statements Consolidated Condensed Balance Sheets as of June 30, 2002 and December 31, 2001 (unaudited).................3 Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 (unaudited)...4 Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (unaudited).............5 Notes to Consolidated Condensed Financial Statements............6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................9 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................................22 Part II - Other Information Item 1. Legal Proceedings................................................23 Item 4. Submission of Matters to a Vote of Security Holders..............23 Item 6. Exhibits and Reports on Form 8-K.................................23 Signatures.......................................................24 - 2 - PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS. BIOSPHERE MEDICAL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands, except per share data / unaudited)
JUNE 30, DECEMBER 31, 2002 2001 ------------ ------------ ASSETS Current assets: Cash and cash equivalents....................... $ 9,469 $ 10,569 Marketable securities........................... 8,040 12,550 Accounts receivable, net of allowance for doubtful accounts of $105 as of June 30, 2002 and December 31, 2001............ 2,398 1,809 Inventories, net................................ 2,167 1,111 Receivable from related party................... -- 276 Prepaid and other current assets................ 353 282 ------------ ------------ Total current assets........................ 22,427 26,597 Property and equipment, net..................... 1,716 1,570 Goodwill, net................................... 1,443 1,443 Other assets.................................... 381 374 ------------ ------------ TOTAL ASSETS..................................... $ 25,967 $ 29,984 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................ $ 822 $ 771 Accrued compensation............................ 1,627 1,383 Other accrued expenses.......................... 1,233 1,569 Current portion of long-term debt and capital lease obligations.................. 104 85 ------------ ------------ Total current liabilities................... 3,786 3,808 Long-term debt and capital lease obligations.................................... 299 303 ------------ ------------ TOTAL LIABILITIES................................ $ 4,085 $ 4,111 ============ ============ Stockholders' equity: Common stock, $0.01 par value, 25,000,000 shares authorized; shares issued and outstanding: 13,038,000 as of June 30, 2002 and 10,595,000 as of December 31, 2001......... 130 127 Additional paid-in capital...................... 80,951 80,583 Accumulated deficit............................. (59,320) (54,860) Cumulative other comprehensive income........... 121 23 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY....................... 21,882 25,873 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $ 25,967 $ 29,984 ============ ============
The accompanying notes are an integral part of these consolidated condensed financial statements. - 3 - BIOSPHERE MEDICAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (In thousands, except per share data / unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------- 2002 2001 2002 2001 --------- --------- --------- --------- REVENUE: Product revenues........................... $ 3,379 $ 2,163 $ 5,982 $ 4,010 Collaboration revenues..................... -- 250 -- 250 --------- --------- --------- --------- TOTAL REVENUES.......................... 3,379 2,413 5,982 4,260 COSTS AND EXPENSES: Cost of product revenues................... 879 589 1,592 1,108 Research and development................... 1,066 1,249 2,113 2,198 Selling and marketing...................... 1,973 2,286 4,428 4,346 General and administrative................. 1,695 673 2,531 1,729 --------- --------- --------- --------- TOTAL COSTS AND EXPENSES................ 5,613 4,797 10,664 9,381 --------- --------- --------- --------- LOSS FROM OPERATIONS.................... (2,234) (2,384) (4,682) (5,121) Interest and other income, net............. 93 102 222 339 --------- --------- --------- --------- NET LOSS................................ $ (2,141) $ (2,282) $ (4,460) $ (4,782) ========= ========= ========= ========= BASIC AND DILUTED NET LOSS PER SHARE......... $ (0.16) $ (0.22) $ (0.35) $ 0.45) ========= ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic and diluted....................... 12,997 10,597 12,897 10,597 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. - 4 - BIOSPHERE MEDICAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands / unaudited)
SIX MONTHS ENDED JUNE 30, --------------------- 2002 2001 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................... $ (4,460) $ (4,782) Adjustments to reconcile net loss to net cash used in operating activities: Provision for doubtful accounts...................... -- 80 Depreciation and amortization........................ 289 216 Non-cash stock-based compensation to non-employees.................................... 38 -- Changes in operating assets and liabilities: Accounts receivable................................ (517) (606) Inventories........................................ (958) (168) Prepaid and other assets........................... (72) (210) Accounts payable................................... (6) 159 Accrued compensation............................... 199 (4) Other accrued expenses............................. (394) 91 Payments from related party........................ 260 24 --------- --------- Net cash used in operating activities.................. (5,621) (5,200) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment..................... (333) (623) Purchase of available for sale marketable securities............................................ (8,040) -- Proceeds from the maturity of held to maturity marketable securities................................. 12,550 -- --------- --------- Net cash provided by (used in) investing activities.... 4,177 (623) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercise of stock options and warrants.......................................... 349 9 Proceeds from issuance of long-term debt and capital leases.................................... 32 -- Principle payments under long-term debt and capital lease obligations......................... (28) -- --------- --------- Net cash provided by financing activities.............. 353 9 --------- --------- Effect of exchange rate changes on cash and cash equivalents....................................... (9) (57) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS................ (1,100) (5,871) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 10,569 15,276 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 9,469 $ 9,405 ========= =========
The accompanying notes are an integral part of these consolidated condensed financial statements. - 5 - BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A) NATURE OF BUSINESS BioSphere Medical, Inc. (the "Company") was incorporated in Delaware in December 1993. During 1999, the Company strategically refocused its business on the development and commercialization of its proprietary Embosphere(R) Microspheres for use in treating hypervascularized tumors and arteriovenous malformations. Between February 1999 and October 2001, the Company acquired all ownership interests in Biosphere Medical S.A. ("BMSA"), a French societe anonyme. BMSA holds the license to the embolotherapy device that is the main focus of the Company's business. In May 1999, the Company sold substantially all of the assets relating to its former core business, chromatography, and changed its name from BioSepra, Inc. to BioSphere Medical, Inc. During 2000, the Company established two wholly owned subsidiaries to pursue the development of other microsphere applications and technologies. In April 2000, BioSphere Medical Japan, Inc., a Delaware corporation, was established to develop and commercialize Embosphere Microspheres, EmboGold(TM) Microspheres ("Microspheres") as well as HepaSphere SAP(TM) Microspheres in Asia. In December 2000, BSMD Ventures, Inc., also a Delaware corporation, was established to explore and develop alternative applications for the Company's Microsphere platform technology. The Company believes that existing working capital, together with anticipated sales proceeds from its Microspheres and other medical device products, will provide liquidity sufficient to allow the Company to meet its expected spending obligations for at least the next twelve-month period, while also allowing the further development and testing of other product candidates and technologies. However, no assurances can be given that such revenues will, in fact, be realized, or that the Company will have sufficient capital to meet its obligations beyond the next twelve-month period. Should the Company not realize some or all of its revenue projections, or otherwise fail to have sufficient capital for its planned operations, it may be required to secure alternative financing arrangements, pursue additional strategic partners and/or defer or limit some or all of its sales, marketing, research, development and/or clinical projects. B) BASIS OF PRESENTATION The accompanying consolidated condensed financial statements are unaudited and have been prepared on a basis substantially consistent with the Company's annual audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The consolidated condensed financial statements include the accounts of the Company, and its three wholly owned subsidiaries, BMSA, Biosphere Medical Japan, Inc. and BSMD Ventures, Inc. All material inter-company balances and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in the Company's annual audited financial statements have been condensed or omitted. The consolidated condensed financial statements, in the opinion of management, reflect all adjustments (including normal recurring accruals) necessary for a fair statement of the results for the three and six months ended June 30, 2002 and 2001. The results of operations for the presented periods are not necessarily indicative of the results of operations to be expected for the entire fiscal year. These consolidated condensed 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, 2001. C) COMPREHENSIVE LOSS Comprehensive loss is comprised of net loss and other comprehensive income. Other comprehensive income includes certain changes in equity that are excluded from net loss. Specifically, the effects of foreign currency translation adjustments and any unrealized gains or losses on available-for-sale marketable securities are separately included in accumulated other comprehensive income within stockholder's equity. For the six months ended June 30, 2002 and 2001, the Company's comprehensive loss was $4,362,000 and $4,839,000, respectively. - 6 - BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) D) NET LOSS PER SHARE Basic net loss per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net loss per share incorporates the dilutive effect of common stock equivalent options, warrants and other convertible securities. Common stock equivalents, as calculated in accordance with the treasury-stock accounting method equaled 2,311,132 and 3,246,673 as of June 30, 2002 and 2001, respectively. Common stock equivalents have been excluded from the calculation of weighted average number of diluted common shares, as their effect would be antidilutive for all periods presented. E) IMPAIRMENT OF LONG-LIVED ASSETS As of June 30, 2002, the Company has evaluated the potential impairment of its long-lived assets with respect to events or changes in circumstances that may indicate that the carrying amount of a recorded asset may not be recoverable. Based on management's assessment as of June 30, 2002, the Company has determined that no impairment of long-lived assets exists. 2. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company considers all highly liquid investments with an original maturity of ninety days or less to be cash equivalents. In accordance with the Company's investment policies, surplus cash is invested in investment grade corporate and government debt and asset backed securities. The Company determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. As of December 31, 2001, all marketable securities were classified as held to maturity as the Company had both the intent and ability to hold all such assets to maturity. As of June 30, 2002, all marketable securities are classified as current and available-for-sale since the Company has the ability to use such securities to satisfy current liabilities. Marketable securities are carried at their fair value with unrealized gains and losses included in accumulated other comprehensive income in the accompanying balance sheet. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, along with realized gains and losses on available-for-sale securities, are included in other income and expense. As of June 30, 2002, the Company's cash, cash equivalents and marketable securities amortized cost approximates fair value and are as follows (in thousands):
JUNE 30, 2002 ----------- Cash and money market funds....... $ 9,469 Corporate debt and asset backed securities................ 1,698 Government securities............. 6,342 ----------- Total.......................... 17,509 Less amounts classified as cash and cash equivalents........ (9,469) ----------- Total marketable securities.... $ 8,040 ===========
3. INVENTORIES Inventories are stated at the lower of cost or market and consist of the following (in thousands) :
JUNE 30, DECEMBER 31, 2002 2001 ----------- ----------- Raw material ..................... $ 220 $ 185 Work in progress ................. 705 269 Finished goods ................... 1,242 657 ----------- ----------- $ 2,167 $ 1,111 =========== ===========
- 7 - BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 4. SEGMENT AND GEOGRAPHIC DATA The Company develops Microspheres for use in the treatment of hypervascularized tumors and arteriovenous malformations. The Company operates exclusively in the medical device business, which the Company considers as one business segment. Operations are primarily conducted in two geographic regions: North America and Europe. Operations by geographic region for the three and six months ended June 30, 2002 and 2001 are as follows (in thousands:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 2002 2001 2002 2001 --------- --------- --------- --------- REVENUES NORTH AMERICA Unaffiliated customers................. $ 2,462 $ 1,449 $ 4,196 $ 2,515 Related parties........................ 84 -- 92 -- Collaboration revenues................. -- 250 -- 250 --------- --------- --------- --------- TOTAL REVENUES - NORTH AMERICA....... $ 2,546 $ 1,699 $ 4,288 $ 2,765 --------- --------- --------- --------- EUROPE Unaffiliated customers - (primarily French).................. 780 607 1,518 1,271 Related parties....................... 977 801 1,898 1,777 Transfer to other geographic areas.... 137 107 268 224 --------- --------- --------- --------- TOTAL REVENUES - EUROPE.............. 1,894 1,515 3,684 3,272 --------- --------- --------- --------- ELIMINATION AND ADJUSTMENTS.............. (1,061) (801) (1,990) (1,777) --------- --------- --------- --------- TOTAL REVENUES....................... $ 3,379 $ 2,413 $ 5,982 $ 4,260 ========= ========= ========= ========= OPERATING INCOME (LOSS) UNITED STATES............................ $ (1,879) $ (2,780) $ (4,166) $ (5,677) EUROPE................................... (262) 498 (294) 895 --------- --------- --------- --------- NET LOSS............................. $ (2,141) $ (2,282) $ (4,460) $ (4,782) ========= ========= ========= =========
5. RELATED PARTY TRANSACTIONS As of December 31, 2001, receivable from related party represented $343,000 in offering expenses that Sepracor, Inc., had agreed to pay as a result of Sepracor's 2.0 million share participation in the July 2001 secondary offering of a total of 4.0 million shares of the Company's common stock. Partially offsetting the total receivable from related party were amounts due to Sepracor for certain health benefits paid by Sepracor on the Company's behalf, along with related health benefit administrative services provided on an arms-length basis through October 2001. As of June 30, 2002, all related party commitments have been settled in full. 6. STOCK-BASED COMPENSATION TO NON-EMPLOYEES In connection with stock options previously issued to non-employee medical board advisors, the Company, in accordance with Emerging Issues Task Force Abstract 96-18 "Accounting for equity instruments that are issued to other than employees for acquiring, or in conjunction with selling, goods or services" ("EITF 96-18"), recognized $38,000 in non-employee compensation expense during the three-month period ended June 30, 2002. The fair value of the non-employee stock options was derived from the Black-Scholes option-pricing model. - 8 - BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued) 7. CREDIT FACILITY In May 2002, the Company entered into a two-year credit facility with a bank under which we may borrow, subject to limitations defined in the agreement, up to $5.0 million for general working capital and corporate purposes. There were no borrowings outstanding under this agreement as of June 30, 2002. Interest on each advance shall bear interest at a per annum rate that the Company may select equal to either (i) a variable rate as determined by the bank or (ii) a rate equal to the LIBOR rate (2.25 % as of June 30, 2002) plus a LIBOR rate spread as determined by certain Company financial conditions in effect at the time of the advance. Our ability to borrow under this credit line is dependent upon maintenance of certain financial ratios and levels of cash and cash equivalents and tangible capital bases. In connection with the credit facility, we have entered into a security agreement pursuant to which we have pledged to the bank all of our U.S. assets, excluding our equity ownership of BMSA, as collateral. 8. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, the Company prospectively adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and as a result, the Company will cease to amortize the $1.44 million in goodwill recorded as of December 31, 2001. During the quarter ended June 30, 2001, the Company recorded approximately $43,000 of amortization expense within our general and administrative expense category and would have recorded an estimated $50,000 of amortization expense during the three month period ended June 30, 2002. In lieu of periodic amortization, the Company was required to perform an initial impairment review of its goodwill in 2002 and an annual impairment review thereafter. Based upon the initial review performed, the Company did not record any impairment charges. On October 20, 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of," however it retains the fundamental provision of that statement related to the recognition and measurement of the impairment of long-lived assets to be held and used. In addition, SFAS No. 144 provides additional guidance on estimating cash flows when performing a recoverability test, requiring that a long-lived asset to be disposed of other than by sale be classified as an asset held for sale until it is disposed of, and establishes more restrictive criteria to classify an asset as held for sale. SFAS No. 144 became effective in the first quarter of 2002. Application of SFAS No. 144 did not have any effect on our consolidated financial position or consolidated results of operations as the Company believes no impairment exists at this time. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes contained elsewhere in this report. OVERVIEW BioSphere Medical, Inc., ("we," or the "Company") is pioneering the use of our proprietary bio-engineered acrylic beads, known as microspheres, for medical applications using embolotherapy techniques and also to develop potential applications in several non-embolotherapy applications. Embolotherapy is a minimally invasive procedure in which embolic materials, such as our Embosphere(R) Microspheres and EmboGold(TM) Microspheres (our "Microspheres"), are delivered through a catheter into the blood vessels to inhibit blood flow to tumors or vascular defects or to control blood loss presurgically. Our Microsphere embolotherapy products, are targeted for the treatment of hypervascularized tumors and arteriovenous malformations. Hypervascularized tumors are tumors that have a large number of blood vessels feeding them and include certain tumors affecting the brain and spinal cord, tumors in the uterus, known as uterine fibroids, and tumors associated with primary liver cancer. By selectively blocking the tumor's blood supply, embolotherapy is designed to cause the tumor to shrink and necrose. Based on preliminary research, we believe that our Microsphere technology platform can also be adapted to deliver drugs, living tissue or genetic material to targeted sites. The Company was originally incorporated in 1993. During 1999, we strategically refocused our business on the development and commercialization of our proprietary Microspheres for medical applications. In February 1999, we acquired a 51% ownership interest in Biosphere Medical S.A., a French societe anonyme, which we refer to as BMSA. Between April 2000 and October 2001, we acquired the remaining ownership interest in BMSA. BMSA retains the license to the embolotherapy device that is the main focus of our business. In May 1999, we sold substantially all of our assets relating to our former core business, chromatography, and changed our name from BioSepra, Inc. to BioSphere Medical, Inc. Sepracor Inc., a specialty pharmaceutical company, beneficially owned approximately 25% of our outstanding capital stock as of June 30, 2002. - 9 - In April 2000, we received clearance from the United States Food and Drug Administration (the "FDA") for embolization of hypervascularized tumors and arteriovenous malformations, excluding specific marketing approval for uterine fibroids. We intend, subject to FDA clearance or approval of our pending specific marketing 510(k) application for UFE, to aggressively promote our Microspheres for the treatment of uterine fibroids. We do not anticipate receiving this clearance or approval before the last fiscal quarter of 2002, if at all. We received CE mark approval of our Microspheres product in the European Union in 1997. CE mark approval is a certification granted by European regulatory bodies, or by some manufacturers with satisfactory quality systems, that substantiates the compliance of products with specific standards of quality and/or safety. This approval is generally required prior to the commercialization of a medical device in the European Union. In January 2000, we received marketing approval of our Microspheres product in Australia and Canada. Our revenues are primarily generated from product sales of our Microspheres in the United States, European Union, Australia and Canada. Product revenues also include the sale of barium and other ancillary device products manufactured by us or by third parties. Although we have not received FDA clearance or approval to specifically market our Microspheres for use in the treatment of uterine fibroids, we believe that a majority of our revenues in the United States for the three and six month periods ended June 30, 2002 and 2001 were derived from the sale of our Microspheres for use in off-label uterine fibroid embolization. We have experienced operating losses in each fiscal period since our inception. As of June 30, 2002, we had approximately $17.51 million in cash, cash equivalents and marketable securities and an accumulated deficit of approximately $59.32 million. In connection with our business plan to pursue those critical programs designed to assist us in developing, expanding and capturing a significant portion of the embolotherapy market, we expect to experience continued quarterly losses through at least the next six-month period. We believe that existing working capital, together with anticipated sales proceeds from our Embosphere Microspheres, EmboGold Microspheres and other medical device product lines, will provide liquidity sufficient to allow us to meet our expected spending obligations for at least the next twelve-month period, while also allowing the further development and testing of other product candidates and technologies. However, no assurances can be given that such revenues will, in fact, be realized, or that we will have sufficient capital to meet our obligations beyond the next twelve-month period. Should we not realize some or all of our revenue projections, or otherwise fail to have sufficient capital for our operations, we may be required to secure alternative financing arrangements, pursue additional strategic partners, and/or defer or limit some or all of our sales, marketing, research, development and/or clinical projects. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure at the date of our financial statements. Areas where judgments are made include revenue recognition, accounts receivable, inventories and deferred taxes. Actual results could differ materially from these estimates. There were no material changes in our judgments or estimates during the first six months of 2002. For a more detailed explanation of the judgments made in these areas, refer to our Annual Report on Form 10-K for the year ended December 31, 2001. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 AND 2001 Total revenues increased to $3.38 million for the three-month period ended June 30, 2002 from $2.41 million for the same period in 2001. The $970,000, or 40%, increase in total revenues in the year-to-year quarters was due primarily to an increase in the sales volume of our Microspheres in the United States. Also contributing to the revenue growth was an increase in the average per unit selling price driven by the September 2001 introduction of the EmboGold Microspheres pre-filled syringe package as well as the May 2002 introduction of the new EmboSphere pre-filled syringe package. Total North American product revenue increased $1.01 million, or 70%, from $1.45 million in the three-month period ended June 30, 2001 to $2.46 million in same period ended June 30, 2002. Included in total revenues in the three-month period ended June 30, 2001 was $250,000 in collaboration revenues earned in connection with a supply agreement that has been terminated. - 10 - Cost of product revenues for the three-month period ended June 30, 2002 was $879,000, compared with $589,000 for the same period in 2001. The $290,000, or 49%, increase in the cost of product revenues was due to a 56% increase in product revenues partially offset by a shift in the product sales mix from the European device products to the higher margin EmboSphere Microspheres and EmboGold Microspheres products, predominantly in North America. Gross margin from our Embosphere Microspheres, EmboGold Microspheres and all other European-distributed device product sales for the three-month period ended June 30, 2002 was $2.50 million, or approximately 74% of product revenues, compared with $1.57 million, or 73% of product revenues, for the same period in 2001. Research and development expenses consist of (i) research to identify and evaluate new and innovative embolotherapy products based on our platform Microsphere technology, (ii) pre-clinical testing and clinical trials of product candidates, and (iii) development related to improving clinical and commercial manufacturing processes. Our research efforts are primarily focused in the following areas: - Continuing to advance our Microsphere technology for use in embolotherapy applications; - Developing next generation embolotherapy technologies, including active Microsphere platforms that advance the scope of embolotherapy into new therapeutic applications; and - Building a broad, ancillary product portfolio to compliment embolotherapy procedures. Our research and development functions typically work on a number of projects concurrently. In addition, except for clinical expenses, a substantial amount of fixed research and development costs such as salary and salary related benefits, facility depreciation, utilities and maintenance are shared among various programs. Accordingly, we have not and do not plan to separately track all specific costs for each of our research and development projects. We estimate that during the three and six months ended June 30, 2002 and 2001, the majority of our research and development expenses were related to clinical trial costs, development and validation of our new EmboSphere products and packaging formats, development and validation of our Embo-Cath catheter and Segway Guidewire, as well as salaries and lab supplies related to our TempRx (TM) and Hepasphere SAP(TM) programs. In the three months ended June 30, 2002, total research and development expenses decreased to $1.07 million, from $1.25 million in the same period in 2001. The $180,000, or 15%, decrease in the three months ended June 30, 2002 was primarily due to the completion of our pivotal Phase II clinical trials aimed at establishing clinical data to support FDA specific labeling clearance or approval to use our Microsphere products in the treatment of uterine fibroids. Total clinical costs were $283,000 and $532,000 for the three-month period ended June 30, 2002 and 2001, respectively. Offsetting the decrease, to a limited extent, was a slight increase in salary and related benefit expenses associated with increased research and development functions in the United States. We anticipate future research and development expenses should remain consistent with current expense levels as other pipeline products progress through their respective development and approval processes. Selling and marketing expenses decreased to $1.97 million for the three months ended June 30, 2002 from $2.29 million for the comparable period in 2001. The $320,000, or 14%, decrease was primarily due to decreased contracted clinician and physician training expenses incurred in conjunction with our initial EmboSphere MicroSphere product launch and physician awareness campaign. Also contributing to the decrease in the year-to-year periods was reductions in salary and related benefit expenses associated with fewer territory managers in our US sales force. Future selling and marketing expenses are expected to increase consistent with the growth in our revenues and the embolization industry in general. General and administrative expenses increased to $1.70 million for the three months ended June 30, 2002 from $673,000 for the comparable period in 2001. The $1.02 million, or 152%, increase was primarily due to executive transition and severance expenses recorded in relation to the resignations of the CEO as well as the European president during the three-month period ended June 30, 2002. Also contributing to the increase was incremental salary and benefit expenses associated with added administrative personnel needed to accommodate growth within our business. Interest and other income, net, in the three-month period ended June 30, 2002 was $93,000, compared to $102,000 in the comparable period in 2001. The $9,000, or 9%, decrease in interest and other income, net, was primarily due to differences in realized investment yields brought about by the significant reductions in interest rates in the fourth quarter of 2001. To date, the Company has not recorded a benefit for income taxes, as we believe the ability to realize such tax benefits remains uncertain. - 11 - SIX MONTHS ENDED JUNE 30, 2002 AND 2001 Total revenues increased to $5.98 million for the six-month period ended June 30, 2002 from $4.26 million for the same period in 2001. The $1.72 million, or 40%, increase in total revenues was primarily due to the 43% increase in product revenues resulting from increases in both sales volume and average selling price of our Microspheres, principally in the United States. Offsetting the total revenue increase was the absence, in 2002, of $250,000 in collaboration revenue recorded in connection with a supply agreement that has been terminated. Cost of product revenues for the six-month period ended June 30, 2002 was $1.59 million, compared with $1.11 million for the same period in 2001. The $480,000, or 43%, increase in the cost of product revenues was due largely to the 49% increase in product revenues, partially offset by a continued shift in the product sales mix to the Embosphere Microspheres and EmboGold Microspheres products, predominantly in North America. Gross margin from our Embosphere Microspheres, EmboGold Microspheres and all other ancillary product sales for the six-month period ended June 30, 2002 was $4.39 million, or approximately 73% of product revenues, compared with $2.90 million, or 72% of product revenues, for the same period in 2001. Research and development expenses decreased to $2.11 million in the six months ended June 30, 2002, from $2.20 million in the same period in 2001. The $90,000, or 4%, decrease in the year-to-year periods was primarily due to reduced costs related to the recent completion of our pivotal Phase II clinical trials to support our FDA specific labeling clearance or approval to use our Microsphere products in the treatment of uterine fibroids. Selling and marketing expenses increased to $4.43 million for the six months ended June 30, 2002 from $4.35 million for the comparable period in 2001. The $80,000, or 2%, increase was primarily due to product launch expenses incurred in connection with our EmboGold, EmboSphere pre-filled syringe and new EmboSphere Vial products as well as increased interventional radiologist marketing and trade show spending in the first quarter of 2002. Offsetting the total increase was a decrease in contracted clinician and physician training expenses. General and administrative expenses increased to $2.53 million for the six months ended June 30, 2002 from $1.73 million for the comparable period in 2001. The $800,000 or 46%, increase was primarily due to executive transition and severance expenses recorded with the resignations of the CEO as well as the European president in the three-month period ended June 30, 2002. Also contributing to the increase was incremental salary and benefit expenses resulting from additional administrative personnel needed to accommodate growth within our business. Offsetting the total general and administrative expense increase was the absence of litigation defense expenses in the six months ended June 30, 2002. Specifically, during the three-month period ended March 31, 2001, we incurred additional legal costs in defense of a legal proceeding, which was settled in May 2001. Additional offsets to the total increase in general and administrative expenses resulted from the elimination of goodwill amortization expenses as required under Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." Interest and other income, net, in the six-month period ended June 30, 2002 was $220,000, compared to $340,000 in the comparable period in 2001. The $120,000, or 35%, decrease in interest and other income, net, was primarily due to differences in realized investment yields resulting from reductions in both invested principal balances and interest rates since the fourth quarter of 2001. Also contributing to the decrease in interest and other income was the effect of foreign currency fluctuations. LIQUIDITY AND CAPITAL RESOURCES We have historically funded our operations from product sales, net proceeds provided from public and private equity offerings, funds provided by the sale of our former chromatography business, funds provided by Sepracor, bank financing, equipment financing leases and, to a lesser extent, exercises of stock options. As of June 30, 2002, we had $17.51 million in cash, cash equivalents and marketable securities as well as $18.64 million in net working capital. In July 2001, we issued 2.0 million shares of common stock in a follow-on public offering resulting in net proceeds to us of approximately $20.35 million. - 12 - For the six months ended June 30, 2002, we used $5.62 million in operating activities primarily to fund our sales, marketing and product research and development activities, as well as to finance working capital requirements particularly in the United States. Notable working capital cash uses included accounts receivable which grew by $517,000, primarily as a result our 30% increase in revenues from the quarter ended March 31, 2002 to the quarter ended June 30, 2002 and inventory which increased $958,000 in response to anticipated revenue growth and new product introductions. Also contributing to our cash use in the six-month period was a $394,000 reduction in accrued expenses primarily related to the cash settlement of clinical trial expenses. Offsetting the total cash used in operations was $260,000 in receipts from Sepracor, Inc. and $199,000 in accrued compensation growth related to expensed but not paid severance charges. Cash used in operations is expected to decrease, as product revenue growth is expected to begin offsetting our working capital needs, product development efforts and operational expenses. Net cash provided by investing activities was $4.18 million for the six months ended June 30, 2002, primarily all of which resulted from the maturity of our held-to-maturity marketable securities. Offsetting the total increase was $8.04 million in new available-for-sale marketable security purchases and $333,000 in property and equipment purchases. Property and equipment purchases during the six-month period ended June 30, 2002, included the acquisition and partial implementation of a new management information system as well as additional scientific, manufacturing and computer equipment needed for our expansion in both the United States and France facilities. Future capital expenditures are anticipated to remain at current levels over the next twelve to eighteen month period consistent with our plan to expand our infrastructure capabilities. If available on favorable terms, we expect to finance certain future fixed asset acquisitions through leasing arrangements. Net cash provided by financing activities was $353,000 for the six months ended June 30, 2002, primarily all of which resulted from the exercise of common stock options and warrants. Additionally, $32,000 was received in relation to the leasing of new research and development equipment. In May 2002, we entered into a two-year credit facility with a bank under which we may borrow, subject to limitations defined in the agreement, up to $5.0 million for general working capital and corporate purposes. There were no borrowings outstanding under this agreement as of June 30, 2002. Interest on each advance shall bear interest at a per annum rate that we may select equal to either (i) a variable rate as determined by the bank or (ii) a rate equal to the LIBOR rate (2.25 % as of June 30, 2002) plus a LIBOR rate spread as determined by certain Company financial conditions in effect at the time of the advance. Our ability to borrow under this credit line is dependent upon maintenance of certain financial ratios and levels of cash and cash equivalents and tangible capital bases. In connection with the credit facility, we have entered into a security agreement pursuant to which we have pledged to the bank all of our U.S. assets, excluding our equity ownership of BMSA as collateral. We believe that our existing cash and other working capital, including the approximate $17.51 million in cash and cash equivalents that we have as of June 30, 2002, will be sufficient to fund our operating and capital requirements, as currently planned, at least through the next twelve-month period. However, our cash requirements may vary materially from those now planned due to changes in anticipated research and development efforts, the scope and results of pre-clinical and clinical testing, changes in the focus and direction of our research and development programs, competitive and technological advances, the timing and results of FDA regulatory review, the market's acceptance of any approved products, and other factors. We expect to incur substantial additional costs, including costs related to ongoing research and development activities, pre-clinical studies, clinical trials, the expansion of our manufacturing, laboratory and administrative functions as well as costs relating to further market development and commercialization efforts. We may also need additional funds for possible strategic acquisitions of synergistic businesses, products and/or technologies. These additional funds may be raised from time to time through additional public or private sales of equity, through borrowings, or through other financings. There are no assurances that we will be able to obtain any additional funding that may be required on acceptable terms. Except as referred to above, we have not had any material changes in our borrowings, our borrowing arrangements, contractual cash commitments and related party transactions since December 31, 2001. For a discussion of our contractual cash commitments and related party transactions, refer to our Annual Report on Form 10-K for the year ended December 31, 2001. RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2002, we prospectively adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" and as a result, we will cease to amortize the $1.44 million in goodwill recorded as of December 31, 2001. During the quarter ended June 30, 2001, we recorded approximately $43,000 of amortization expense within our general and administrative expense category and would have recorded an estimated $50,000 of amortization expense during the three month period ended June 30, 2002. In lieu of periodic amortization, we were required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. Based upon the review performed, we did not record any impairment charges. - 13 - On October 20, 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of," however it retains the fundamental provision of that statement related to the recognition and measurement of the impairment of long-lived assets to be held and used. In addition, SFAS No. 144 provides additional guidance on estimating cash flows when performing a recoverability test, requiring that a long-lived asset to be disposed of other than by sale be classified as an asset held for sale until it is disposed of, and establishes more restrictive criteria to classify an asset as held for sale. SFAS No. 144 became effective in the first quarter of 2002. Application of SFAS No. 144 did not have any effect on our consolidated financial position or consolidated results of operations as we believe no impairment exists at this time. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains, in addition to historical information, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including information with respect to timing and likelihood or regulatory approval of products under development, market acceptance of our products and expected results of operations. These forward-looking statements involve risks and uncertainties and are not guarantees of future performance. The Company's actual results could differ significantly from the results discussed in such forward-looking statements due to a number of important factors, including those set forth below. You should carefully consider each of these risks and uncertainties in evaluating our business, financial condition and results of operations. The forward-looking information provided herein represents the Company's estimates as of the date of this report. Subsequent events and developments may cause these estimates to change. The Company cautions you that while it may elect to update this forward-looking information at some point in the future, it specifically disclaims any obligation to do so. RISK RELATING TO OUR FUTURE PROFITABILITY - ----------------------------------------- BECAUSE WE HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN, OUR COMMON STOCK IS A SPECULATIVE INVESTMENT We have incurred operating losses since our inception and, as of June 30, 2002, had an accumulated deficit of approximately $59.32 million. We expect to spend substantial funds to continue research and product testing, to establish sales, marketing, quality control, regulatory, manufacturing and administrative capabilities and for other general corporate purposes. We expect to continue to incur operating losses for at least the next several fiscal quarters as we expand our commercialization efforts. We may never become profitable. If we do become profitable, we may not remain profitable on a continuing basis. Our failure to become and remain profitable would depress the market price of our common stock and impair our ability to raise capital and expand, diversify or continue our operations. RISKS RELATING TO OUR INDUSTRY, BUSINESS AND STRATEGY - ----------------------------------------------------- IF WE DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE OF OUR MICROSPHERES PRODUCTS, OUR BUSINESS PROSPECTS WILL BE SERIOUSLY HARMED Our Microspheres are based on new technologies and therapeutic approaches. In the United States, we have been selling our Microspheres product for the embolization of hypervascularized tumors and arteriovenous malformations since the first half of 2000. We are required to obtain additional FDA approval before we can market our Microspheres in the United States for specific use in the embolization of uterine fibroids. We do not expect FDA approval for this indication until the last fiscal quarter of 2002, if at all. Our success will depend upon the medical community, patients and third party payors accepting our Microspheres product as medically therapeutic, cost-effective and safe. In particular, our success will depend upon obstetrics and gynecology physicians referring patients to interventional radiologists to receive treatment using our products in lieu of, or in addition to, receiving other forms of treatment that the obstetrics and gynecology physicians can otherwise provide directly. - 14 - Negative publicity associated with any adverse medical effects attributed to embolization treatments generally or our product specifically, may create the market perception that our products are unsafe. For example, patients commonly experience a day or two of post-procedure abdominal pain or cramping. Other infrequently occurring complications may include allergic reactions, rashes, early onset of menopause, infertility and infection that may, in some cases, require a hysterectomy. In addition, our Microspheres are designed to remain in the body permanently. As a result, there is some risk that some or all of the Microspheres used in a medical procedure may travel in the blood system beyond the intended surgical site and occlude, or block, other blood vessels, resulting in the potential for significant adverse health effects on the patient or, in a worst case, even death. Moreover, to use our Microspheres correctly for a particular medical procedure, physicians must select and use the proper size and quantity of Embosphere Microspheres. A physician's selection and use of the wrong size or quantity of our Microspheres could potentially have significant adverse health effects on the patient, including death. It will be necessary for us to spend significant amounts of money and allocate management resources to educate physicians about the selection and use of the proper size and quantity of Microspheres in patient therapy. In addition, there is only limited data concerning the long-term health effects on persons receiving embolotherapy using our Embosphere Microspheres. If we are not able to successfully educate physicians to properly use our product, or if the market determines or concludes that our product is not safe or effective for any reason, we may be exposed to product liability claims, product recalls, fines or other penalties or enforcement actions by regulatory agencies and associated adverse publicity. In addition, we have provided to our customers a satisfaction guarantee that requires us to accept the return of any inventory and credit the entire amount of the original order if a properly trained customer is not satisfied with the performance of our Microspheres. If we experience adverse publicity or are subject to product liability claims, excessive guarantee claims, recalls, fines and the like, we will be unable to achieve widespread market acceptance of our Embosphere Microsphere products and achieve profitability. WE WILL BE REQUIRED TO EXPEND SIGNIFICANT RESOURCES FOR RESEARCH, DEVELOPMENT, TESTING AND REGULATORY APPROVAL OF OUR PRODUCTS UNDER DEVELOPMENT AND THESE PRODUCTS MAY NOT BE DEVELOPED SUCCESSFULLY We are developing and commercializing products for medical applications using embolotherapy techniques and also seeking to develop potential applications in several non-embolotherapy applications. Except for our Embosphere Microspheres, Embo-Cath catheter and Segway guidewire products, most of our product candidates are still in the early stages of research and development. Our products may not provide greater benefits than current treatments or products, or alternative treatments or products under development. All of our products under development will require significant additional research, development, pre-clinical and/or clinical testing, regulatory approval and a commitment of significant additional resources prior to their commercialization. Our potential products may not: - be developed successfully; - be proven safe and effective in clinical trials; - offer therapeutic or other improvements over current treatments and products; - meet applicable regulatory standards or receive regulatory approvals; - be capable of production in commercial quantities at acceptable costs; or - be successfully marketed. IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS WE MAY NOT ACHIEVE REVENUE OPPORTUNITIES We derived more than a majority of our revenues for the six-month periods ended June 30, 2002 and 2001 from the sale of Embosphere Microspheres. In addition, although we have not received FDA clearance or approval to market of our Microspheres for the specific use in the treatment of uterine fibroids, we believe that a majority of our revenues in the United States for the six-month periods ended June 30, 2002 and 2001 was derived from the sale of our Microspheres for use in uterine fibroid embolization. We derived approximately 14% of our revenues for the six-month period ended June 30, 2002, and 22% of our revenues for six-month periods ended June 30, 2001 from the sale of non-strategic products that we do not expect to constitute a significant portion of our revenues on an ongoing basis. Accordingly, we need to develop and introduce new applications for our embolotherapy technology and pursue opportunities for Microsphere technology in other medical applications. If we are not successful in developing new applications and products, we may not achieve revenue opportunities. - 15 - IF WE EXPERIENCE DELAYS, DIFFICULTIES OR UNANTICIPATED COSTS IN ESTABLISHING THE SALES, DISTRIBUTION AND MARKETING CAPABILITIES NECESSARY TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS, WE WILL HAVE DIFFICULTY MAINTAINING AND INCREASING OUR SALES We are currently developing sales, distribution and marketing capabilities in the United States and have only limited sales, distribution and marketing capabilities in the European Union. It is expensive and time-consuming for us to develop a global marketing and sales force. Moreover, we may choose, or find it necessary, to enter into strategic collaborations to sell, market and distribute our products. For example, BMSA has entered into an exclusive, multi-year distribution agreement with Terumo Europe N.V. ('Terumo") pursuant to which Terumo has become the exclusive distributor and marketing partner for our Microspheres products in certain countries of the European Union. We may not be able to provide adequate incentive to our sales force or to establish and maintain favorable distribution and marketing collaborations with other companies to promote our products. In addition, any third party with whom we have established a marketing and distribution relationship may not devote sufficient time to the marketing and sale of our product. Any third-party collaborators and we must also market our products in compliance with federal, state and local laws relating to the providing of incentives and inducements. Violation of these laws can result in substantial penalties. If we are unable to successfully motivate and expand our marketing and sales force and further develop our sales and marketing capabilities, or if our distributors fail to promote our products, we will have difficulty maintaining and increasing our sales. IF WE ARE UNABLE TO OBTAIN ADEQUATE PRODUCT LIABILITY INSURANCE, THEN WE MAY HAVE TO PAY SIGNIFICANT MONETARY DAMAGES IN A SUCCESSFUL PRODUCT LIABILITY CLAIM AGAINST US The development and sale of medical devices entails an inherent risk of product liability. Product liability insurance is generally expensive for medical device companies such as ours. Although we maintain limited product liability insurance coverage for our products, it is possible that we will not be able to obtain further product liability insurance on acceptable terms, if at all. Insurance we subsequently obtain may not provide us with adequate coverage against all potential claims. If we are exposed to product liability claims for which we have insufficient insurance, we may be required to pay significant damages which would prevent or delay our ability to commercialize our products. IF WE ARE NOT ABLE TO COMPETE EFFECTIVELY, WE MAY EXPERIENCE DECREASED DEMAND FOR OUR PRODUCTS, WHICH MAY RESULT IN PRICE REDUCTIONS We have many competitors in the United States and abroad, including medical device, biotechnology and other alternative therapeutic companies, universities and other private and public research institutions. Our success depends upon our ability to develop and maintain a competitive position in the embolotherapy market. Our key medical device competitors are Cordis Corporation, a Johnson & Johnson company, Boston Scientific Corporation and Cook Incorporated. These and many of our other competitors have greater capabilities, experience and financial resources than we do. As a result, they may develop products that compete with our Microspheres product more rapidly or at less cost than we can. Currently, the primary products with which our Microspheres compete for some of our applications are polyvinyl alcohol, polymerizing gels and coils. In addition, our competitors may develop technologies that render our products obsolete or otherwise noncompetitive. We may not be able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our market and continue to commercially develop our business. Moreover, we may not be able to compete effectively, and competitive pressures may result in less demand for our products and impair our ability to become profitable. - 16 - IF WE FAIL TO MAINTAIN, OR IN SOME INSTANCES OBTAIN, AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS BY THIRD-PARTY PAYORS, THERE MAY BE NO COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS The availability and levels of reimbursement by governmental and other third party payors affects the market for any medical device. We may not be able to sell our products profitably if reimbursement is unavailable or limited in scope or amount. Some insurance companies do not fully reimburse for embolization procedures. These third-party payors continually attempt to contain or reduce the costs of healthcare by challenging the prices that companies such as ours charge for medical products. In some foreign countries, particularly the countries of the European Union where our Microspheres product is currently marketed and sold, the pricing of medical devices is subject to governmental control and the prices charged for our products have in some instances been reduced as a result of these controls. Additionally, in both the United States and some foreign jurisdictions, there have been a number of legislative and regulatory proposals to change the healthcare system. Further proposals are likely. These proposals, if adopted, could result in less revenues per procedure for us, and could affect our ability to market our products profitably. IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT, OTHER KEY EMPLOYEES, SCIENTIFIC COLLABORATORS AND ADVISORS, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY The loss of key members of our management team could harm us. We also depend on our scientific collaborators and advisors, all of who have other commitments that may limit their availability to us. Our success is substantially dependent on the ability, experience and performance of these members of our senior management and other key employees, scientific collaborators and advisors. Because of their ability and experience, if we lose one or more of these individuals, we may not be able to successfully implement our business strategy. IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO EXPAND OUR BUSINESS Our future success will depend in large part upon our ability to attract and retain highly skilled scientific, operational, managerial and marketing personnel, particularly as we expand our activities in product development, the regulatory approval process and sales and manufacturing. We face significant competition for these types of persons from other companies, research and academic institutions, government entities and other organizations. Consequently, if we are unable to attract and retain skilled personnel, we will not be able to expand our business. IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER SUCCESSFULLY INTEGRATE THE ACQUIRED BUSINESS INTO OURS We may attempt to acquire businesses, technologies, services or products that we believe are a strategic complement to our business model. We may encounter operating difficulties and expenditures relating to integrating an acquired business, technology, service or product. These acquisitions may also absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may never realize the anticipated benefits of any acquisition. We may also make dilutive issuances of equity securities, incur debt or experience a decrease in the cash available for our operations, or incur contingent liabilities in connection with any future acquisitions. BECAUSE SEPRACOR INC. AND OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A SIGNIFICANT AMOUNT OF OUR COMMON STOCK, THEY MAY BE ABLE TO EXERT CONTROL OVER US As of June 30, 2002, Sepracor Inc. owned approximately 25% of our outstanding common stock. Moreover, two of our directors are executive officers of Sepracor. Sepracor and our executive officers and directors will have significant control over all corporate actions requiring stockholder approval irrespective of how our other stockholders may vote, including: - the election of directors; - the amendment of charter documents; - the approval of mergers and other significant corporate transactions, including a sale of substantially all of our assets; and - the defeat of any non-negotiated takeover attempt that might otherwise benefit the public stockholders. This ownership concentration could cause the market price of our common stock to decline. In addition, conflicts of interest between Sepracor and us may arise, including with respect to competitive business activities and control of our management and our affairs. - 17 - RISKS RELATING TO REGULATORY MATTERS - ------------------------------------ IF WE DO NOT OBTAIN THE REGULATORY APPROVALS REQUIRED TO MARKET AND SELL OUR PRODUCTS, THEN OUR BUSINESS WILL BE UNSUCCESSFUL AND THE MARKET PRICE OF OUR STOCK WILL SUBSTANTIALLY DECLINE We are subject to regulation by government agencies in the United States and abroad with respect to the manufacture, packaging, labeling, advertising, promotion, distribution and sale of our products. For example, our products are subject to approval or clearance by the FDA prior to marketing in the United States for commercial use. Similar regulations exist in most major foreign markets, including the European Union and Asia. The process of obtaining necessary regulatory approvals and clearances will be time-consuming and expensive for us. If we do not receive required regulatory approval or clearance to market our products, we will not be able to develop and commercialize our products and become profitable, and the value of our common stock will substantially decline. We are focusing our immediate product commercialization efforts on our Embosphere Microspheres. In April 2000, we obtained clearance from the FDA to market our Microspheres in the United States for the embolization of hypervascularized tumors and arteriovenous malformations. However, before we can specifically market Microspheres in the United States for use in the embolization of uterine fibroids, we will require either FDA clearance of a premarket notification under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, which we refer to as a 510(k) notification, or the more time consuming and expensive approval of a premarket approval application. Although we have submitted a 510(k) application for the specific labeling for the treatment of uterine fibroids, we do not expect to receive the required clearance or approval until at least the last quarter of 2002, if at all. We cannot assure you that the data resulting from our recently completed clinical study which was used as the basis of our 510(k) application will be considered by the FDA to be sufficient to permit clearance or approval. IF THE FDA OR OTHER REGULATORY AGENCIES PLACE RESTRICTIONS ON, OR IMPOSE ADDITIONAL APPROVAL REQUIREMENTS WITH RESPECT TO, PRODUCTS WE ARE THEN MARKETING, WE MAY INCUR SUBSTANTIAL ADDITIONAL COSTS AND EXPERIENCE DELAYS OR DIFFICULTIES IN CONTINUING TO MARKET AND SELL THESE PRODUCTS Even if the FDA grants us approval or clearance with respect to any of our products, it may place substantial restrictions on the indications for which we may market the product, which could result in lower revenues. The marketing claims we are permitted to make in labeling or advertising regarding our Microspheres are limited to those specified in any FDA clearance or approval. For example, because our products are not currently specifically approved for labeling for use for uterine fibroids, we may not promote them for this use. However, we believe that a majority of our revenues in the United States for the six months ended June 30, 2002 and 2001 was derived from the sale of our Microspheres for use in uterine fibroid embolization. We may in the future make modifications to our Microspheres or their labeling which we determine do not necessitate the filing of a new 510(k) notification. However, if the FDA does not agree with our determination, it will require us to make additional 510(k) filings for the modification, and we may be prohibited from marketing the modified product until we obtain FDA clearance. Similarly, if we obtain premarket approval, we may not be able to make product or labeling changes until we get FDA approval. Further, the FDA has classified our embolotherapy device into Class III, which means that even though we have obtained clearance under Section 510(k) to market the device for certain indications, the FDA could in the future promulgate a regulation requiring premarket approval of the device under Section 515 of the Federal Food, Drug, and Cosmetic Act to allow it to remain on the market. We may experience difficulty in providing the FDA with sufficient data for premarket approval in a timely fashion, if at all. In addition, the FDA may require us to conduct a postmarket surveillance study that would require us to track specific elements of patient experience with our Microspheres product after we have begun marketing it. If such a study revealed previously unknown adverse events or an unexpectedly high rate of adverse events, the FDA could place further restrictions on our marketing of the device, or rescind our clearance or approval. Our products will be subject to continuing FDA requirements relating to quality control, quality assurance, maintenance of records, documentation, manufacturing, labeling and promotion of medical devices. We are also required to submit medical device reports to the FDA to report device-related deaths or serious injuries, as well as malfunctions, the recurrence of which would be likely to cause or contribute to a death or serious injury. These reports are publicly available. - 18 - IF WE FAIL TO COMPLY WITH REGULATORY LAWS AND REGULATIONS, WE WILL BE SUBJECT TO ENFORCEMENT ACTIONS, WHICH WILL AFFECT OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND MAY HARM OUR REPUTATION If we fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions, which could affect our ability to develop, market and sell our products successfully and could harm our reputation and lead to less acceptance of our products by the market. These enforcement actions include: - product seizures; - voluntary or mandatory recalls; - voluntary or mandatory patient or physician notification; - withdrawal of product clearances or approvals; - withdrawal of investigational device exemption approval; - restrictions on, or prohibitions against, marketing our products; - fines; - restrictions on importation of our products; - injunctions; - civil and criminal penalties; and - withdrawal of premarket approval or rescission of premarket notification clearance. RISKS RELATING TO INTELLECTUAL PROPERTY - --------------------------------------- IF WE ARE UNABLE TO OBTAIN PATENT PROTECTION FOR OUR PRODUCTS, THEIR COMPETITIVE VALUE COULD DECLINE We may not obtain meaningful protection for our technology and products with the patents and patent applications that we own or license relating to our Microsphere technology or other ancillary products. In particular, the patent rights we possess or are pursuing generally cover our technologies to varying degrees, and these rights may not prevent others from designing products similar to or otherwise competitive with our Microspheres and other products commercialized by us. For example, our U.S. patent directed to copolymers used to make our present Microspheres expired in June 2001. Two other U.S. patents and their foreign equivalents are also directed to materials and methods for performing embolization. To the extent that our competitors are able to design products competitive with ours without infringing our intellectual property rights, we may experience less market penetration with our products and, consequently, we may have decreased revenues. We do not know whether competitors have similar United States patent applications on file, since United States patent applications filed before November 28, 2000 or for which no foreign patents will be sought are secret until issued, and applications filed after November 28, 2000 are published approximately 18 months after their earliest priority date. Consequently, the United States Patent and Trademark Office could initiate interference proceedings involving our owned or licensed United States patent applications or issued patents. Further, there is a substantial backlog of patent applications at the United States Patent and Trademark Office, and the approval or rejection of patent applications may take several years. We require our employees, consultants and advisors to execute confidentiality agreements. However, we cannot guarantee that these agreements will provide us with adequate protection against improper use or disclosure of confidential information. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Further, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market. - 19 - IF WE BECOME INVOLVED IN EXPENSIVE PATENT LITIGATION OR OTHER PROCEEDINGS TO ENFORCE OUR PATENT RIGHTS, WE COULD INCUR SUBSTANTIAL COSTS AND EXPENSES OR SUBSTANTIAL LIABILITY FOR DAMAGES OR BE REQUIRED TO STOP OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS In order to protect or enforce our patent rights, we may have to initiate legal proceedings against third parties, such as infringement suits or interference proceedings. By initiating legal proceedings to enforce our intellectual property rights, we may also provoke these third parties to assert claims against us and, as a result, our patents could be narrowed, invalidated or rendered unenforceable by a court. Furthermore, we may be sued for infringing on the intellectual property rights of others. We may find it necessary, if threatened, to initiate a lawsuit seeking a declaration from a court regarding the proprietary rights of others. Intellectual property litigation is costly, and, even if we prevail, could divert management attention and resources away from our business. The patent position of companies like ours generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. We may not prevail in any patent-related proceeding. If we do not prevail in any litigation, we could be required to pay damages, stop the infringing activity, or obtain a license. Any required license might not be available to us on acceptable terms, or at all. In addition, some licenses may be nonexclusive, and therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license or are unable to design around a patent, we may be prevented from selling some of our products, which could decrease our revenues. IF ANY OF OUR LICENSES TO USE THIRD-PARTY TECHNOLOGIES IN OUR PRODUCTS ARE TERMINATED, WE MAY BE UNABLE TO DEVELOP, MARKET OR SELL OUR PRODUCTS We are dependent on various license agreements relating to each of our current and proposed products that give us rights under intellectual property rights of third parties. These licenses impose commercialization, sublicensing, royalty, insurance and other obligations on us. Our failure, or any third party's failure, to comply with the terms of any of these licenses could result in us losing our rights to the license, which could result in us being unable to develop, manufacture or sell products which contain the licensed technology. RISKS RELATING TO OUR FINANCIAL RESULTS AND NEED FOR FINANCING - -------------------------------------------------------------- WE WILL CONTINUE TO NEED ADDITIONAL FUNDS, AND IF ADDITIONAL CAPITAL IS NOT AVAILABLE, WE MAY HAVE TO LIMIT, SCALE BACK OR CEASE OUR OPERATIONS We may need to raise additional funds to develop and commercialize our products successfully. If we cannot raise more funds, we could be required to reduce our capital expenditures, scale back our product development, reduce our workforce and license to others products or technologies that we otherwise would seek to commercialize ourselves. In May 2002, we entered into a two-year, $5.0 million secured credit facility (see Note 7 to the Consolidated Condensed Financial Statements). We may seek additional funding through collaborative arrangements, borrowing money or the sale of additional equity securities. We may not receive additional funding on reasonable terms or at all. Any sales of additional shares of our capital stock are likely to dilute our existing stockholders. Further, if we issue additional equity securities, the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. Alternatively, we may borrow money from commercial lenders, possibly at high interest rates, which will increase the risk of your investment in us. IF OPERATING RESULTS FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER, THEN OUR STOCK PRICE MAY DECLINE Our operating results could fluctuate significantly from quarter to quarter. These fluctuations may be due to several factors including the timing and volume of customer orders for our commercial products, customer cancellations and general economic conditions. We also expect that our operating results will be affected by seasonality, since we expect our revenue growth to subside in the third quarter of each year from the first two quarters of each year because we do a significant percentage of our business in the European Union, which typically experiences a slowdown of business during the summer months. Due to these fluctuations, our operating results in some quarters may not meet the expectations of our investors. In that case, our stock price may decline. - 20 - In addition, a large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. Accordingly, if our revenues declines or does not grow as much as we anticipate, we might not be able to improve our operating margins. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period. RISKS RELATING TO THE PRODUCTION AND SUPPLY OF OUR PRODUCTS - ----------------------------------------------------------- IF WE EXPERIENCE MANUFACTURING DELAYS OR INTERRUPTIONS IN PRODUCTION, THEN WE MAY EXPERIENCE CUSTOMER DISSATISFACTION AND OUR REPUTATION COULD SUFFER If we fail to produce enough products at our own manufacturing facility or at a third-party manufacturing facility, we may be unable to deliver products to our customers on a timely basis, which could lead to customer dissatisfaction and could harm our reputation and ability to compete. We currently produce all of our Microspheres products in one manufacturing facility in France and sub-contract a majority of the final packaging process to an independent contract manufacturer. We would likely experience significant delays or cessation in producing our products at either of these facilities if a labor strike, natural disaster, local or regional conflict or other supply disruption were to occur. If we are unable to manufacture our products at our facility in France, or package certain of our products with our contract manufacturer, we may be required to enter into arrangements with one or more alternative contract manufacturing companies. In addition, if we are required to depend on third-party manufacturers, our profit margins may be lower, which will make it more difficult for us to achieve profitability. Also, medical device manufacturers, including us, must adhere to the FDA's current Good Manufacturing Practices regulations, which are enforced by the FDA through its facilities inspection program. The manufacturers may not be able to comply or maintain compliance with Good Manufacturing Practices regulations. If our manufacturers fail to comply, their non-compliance could significantly delay our receipt of new product premarket approvals or result in FDA enforcement action, including an embargo on imported devices. For a premarket approval device, if we change our manufacturing facility or switch to a third-party manufacturer we will be required to submit a premarket approval application supplement before the change is implemented. BECAUSE WE RELY ON A LIMITED NUMBER OF SUPPLIERS, WE MAY EXPERIENCE DIFFICULTY IN MEETING OUR CUSTOMERS' DEMANDS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET We currently purchase key components of our Microspheres from a variety of outside sources. Some of these components may only be available to us through a few sources. We generally do not have long-term agreements with any of our suppliers. Our reliance on our suppliers exposes us to risks, including: - the possibility that one or more of our suppliers could terminate their services at any time without penalty; - the potential inability of our suppliers to obtain required components; - the potential delays and expenses of seeking alternative sources of supply; - reduced control over pricing, quality and timely delivery due to the difficulties in switching to alternative suppliers; and - the possibility that one or more of our suppliers could fail to satisfy any of the FDA's required current Good Manufacturing Practices regulations. Consequently, in the event that our suppliers delay or interrupt the supply of components for any reason, our ability to produce and supply our products could be impaired, which could lead to customer dissatisfaction. RISKS RELATING TO OUR FOREIGN OPERATIONS - ---------------------------------------- IF WE ARE UNABLE TO MEET THE OPERATIONAL, LEGAL AND FINANCIAL CHALLENGES THAT WE WILL ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, WE MAY NOT BE ABLE TO GROW OUR BUSINESS Our worldwide manufacturing and European sales operations are currently conducted primarily through our French subsidiary. Furthermore, we currently derive a portion of our revenues from the sale of our Microspheres and other products in the European Union. We are increasingly subject to a number of - 21 - challenges, which specifically relate to our international business activities. Our international operations may not be successful if we are unable to meet and overcome these challenges, which would limit the growth of our business. These challenges include: - failure of local laws to provide the same degree of protection against infringement of our intellectual property; - protectionist laws and business practices that favor local competitors, which could slow our growth in international markets; - potentially longer sales cycles to sell products, which could slow our revenue growth from international sales; and - potentially longer accounts receivable payment cycles and difficulties in collecting accounts receivable. BECAUSE WE EXCHANGE FOREIGN CURRENCY RECEIVED FROM INTERNATIONAL SALES INTO U.S. DOLLARS AND ARE REQUIRED TO MAKE FOREIGN CURRENCY PAYMENTS, WE MAY INCUR LOSSES DUE TO FLUCTUATIONS IN FOREIGN CURRENCY TRANSLATIONS A significant portion of our business is conducted in the European Union Euro. We recognize foreign currency gains or losses arising from our operations in the period incurred. As a result, currency fluctuations between the U.S. dollar and the currencies in which we do business will cause foreign currency translation gains and losses, which may cause fluctuations in our future operating results. We do not currently engage in foreign exchange hedging transactions to manage our foreign currency exposure. RISK RELATING TO OUR STOCK PRICE - -------------------------------- BECAUSE THE MARKET PRICE OF OUR STOCK IS HIGHLY VOLATILE, INVESTMENTS IN OUR STOCK COULD RAPIDLY LOSE THEIR VALUE AND WE MAY INCUR SIGNIFICANT COSTS FROM CLASS-ACTION LITIGATION The market price of our stock is highly volatile. As a result, investments in our stock could rapidly lose their value. In addition, the stock market often experiences extreme price and volume fluctuations, which affect the market price of many medical device companies and which are often unrelated to the operating performance of these companies. Recently, when the market price of a stock has been as volatile as our stock price has been, holders of that stock have occasionally instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuit is without merit, we could incur substantial costs in defending the lawsuit. The lawsuit could also divert the time and attention of our management. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE COMMODITY INSTRUMENTS As of June 30, 2002, we did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required. PRIMARY MARKET RISK EXPOSURES Our primary market risk exposures are in the area of foreign currency exchange rate risk. We are exposed to currency exchange rate fluctuations related to our operations in France. Operations in France are denominated in the Euro. We have not engaged in formal currency hedging activities to date, but do have a limited natural hedge in that our revenues and expenses in France are primarily denominated in the European community currency (the Euro). We also attempt to minimize exchange rate risk by converting non-U.S. currency to U.S. dollars as often as practicable. We generally view our investment in foreign subsidiaries operating under a functional currency (the Euro) other than our reporting currency (the US Dollar) as long-term. Our investment in foreign subsidiaries is sensitive to fluctuations in foreign currency exchange rates. The effect of a change in foreign exchange rates on our net investment in foreign subsidiaries is reflected in the "Other accumulated comprehensive loss" component of stockholders' equity. Because our foreign currency exchange rate risk is not material, no quantitative tabular disclosure has been provided. - 22 - The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that an increase in prevailing interest rates may cause the principal amount of the investment to decrease. To minimize this risk in the future, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, investment grade asset-backed corporate securities, money market funds and government and non-government debt securities. A hypothetical 100 basis point increase in interest rates would result in an approximate $40,000 decrease in the fair value of our investments as of June 30, 2002. However, due to the conservative nature of our investments, the relatively short duration of their maturities and our ability to convert some or all of our long-term investments to less interest rate sensitive holdings, we believe interest rate risk is mitigated. As of June 30, 2002, approximately 69% of our available-for-sale marketable securities will mature in one year or less. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not currently a party to any material legal proceedings ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's Annual Meeting of Shareholders was held on May 22, 2002. At the Meeting, the following matter was voted upon: To elect the following seven Directors:
VOTES VOTES VOTES FOR AGAINST WITHELD ---------- --------- --------- John M. Carnuccio........... 10,176,896 1,688,720 1,044,879 Timothy J. Barberich........ 11,662,985 202,631 1,044,879 William M. Cousins, Jr...... 11,662,985 202,631 1,044,879 Alexander M Klibanov, Ph.D.. 11,662,985 202,631 1,044,879 Paul A. Looney.............. 11,662,985 202,631 1,044,879 Riccardo Pigliucci.......... 11,662,985 202,631 1,044,879 David P. Southwell.......... 11,662,985 202,631 1,044,879
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) EXHIBITS The exhibits filed as part of the Form 10-Q are listed on the Exhibit Index immediately preceding such exhibits, which Exhibit Index is incorporated herein by reference. b) REPORTS ON FORM 8-K ITEM 5. Other Events. On June 3, 2002, the Company filed a current report on Form 8-K to report that John M. Carnuccio, President and Chief Executive Officer, will resign effective September 1, 2002, to pursue other opportunities. Paul A. Looney, who has served as a director since 1994, has been appointed Chairman of the Board. Robert M. Palladino, Vice President and Chief Financial Officer, was promoted to Executive Vice President. The Form 8-K reported that the Board of Directors had initiated a search for a new Chief Executive Officer. - 23 - 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 authorize BIOSPHERE MEDICAL, INC. Date: August 14, 2002 /s/ Robert M. Palladino ------------------------ Robert M. Palladino Chief Financial Officer and Executive Vice President (DULY AUTHORIZED OFFICER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER) - 24 - INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION ------- -------------------------------------------------------------------- 10.1 Credit Agreement between the Registrant and Brown Brothers Harriman & Co.dated May 17, 2002 10.2 Security Agreement between the Registrant and Brown Brothers Harriman & Co. dated May 17, 2002 10.3 Letter Agreement between the Registrant and John M. Carnuccio dated May 31, 2002 10.4 Amendment No. 1 to Letter Agreement between the Registrant and John M. Carnuccio dated August 9, 2002 99.1 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes - Oxley Act of 2002. - 25 - EX-10.1 3 locagrm.txt CREDIT AGREEMENT EXHIBIT 10.1 CREDIT AGREEMENT ================ This Agreement, dated as of May 17, 2002, is made between BioSphere Medical, Inc., a Delaware corporation, with its chief executive office at 1050 Hingham Street, Rockland, Massachusetts 02370 as borrower (the "Borrower"), and Brown Brothers Harriman & Co., a New York general partnership, with an office at 40 Water Street, Boston, Massachusetts 02109 as lender (the "Lender"). BACKGROUND The Borrower wishes to establish with the Lender a $5,000,000 - two year term credit facility (the "Credit Facility") for working capital and general corporate purposes. The Credit Facility will be available on a revolving basis through multiple draw borrowings. Amounts outstanding under the Credit Facility are to be based at a percentage of Eligible Accounts, as defined below. The Lender is willing to extend such credit to the Borrower upon the terms and conditions hereinafter set forth. DEFINITIONS Certain terms are defined in the text of the Agreement and the meanings assigned to such defined terms are referenced at Section IX below. REPRESENTATIONS, WARRANTIES AND COVENANTS SECTION 1 - THE FINANCING 1.1 Credit Facility - Credit Availability. Subject to the terms and conditions hereof, Borrower may until the earlier to occur of May 17, 2004 ("Maturity") or an Event of Default, as hereinafter defined, borrow, repay and reborrow funds from the Lender, as set forth below; provided however that the aggregate principal amount of all advances outstanding at any one time under the Credit Facility, shall not in the aggregate exceed (a) the Borrowing Base, as defined below, or (b) $5,000,000, whichever is less (the "Credit Availability"); and provided further, however, that notwithstanding anything contained herein to the contrary, in no event shall Borrower have the right to borrow or shall Lender have the obligation to make any advance under the Credit Facility at any time that a condition which, with the giving of notice or the passage of time, or both, would constitute an Event of Default hereunder, shall exist. 1.2 Advances. All advances by the Lender under the Credit Facility shall be funded by the Lender to the Borrower by depositing the amount thereof in an account of the Borrower designated by the Borrower and maintained with the Lender. 1.3 The Note. Advances under the Credit Facility shall be evidenced by a promissory note of the Borrower substantially in the form of Annex A hereto (the "Note") payable to the order of the Lender. The Note shall bear interest as provided below. 1.4 Interest on Advances. (a) Interest Rate. Each advance under the Credit Facility shall bear interest at a per annum rate that the Borrower may select equal to (i) a variable rate (the "Floating Rate") equal to the Base Rate plus the Base Rate Spread (herein a "Floating Rate Advance") or (ii) a rate (the "Eurodollar Rate") equal to the LIBOR Rate plus the LIBOR Rate Spread for Interest Periods of 30, 60, 90 or 180 days (herein a "Eurodollar Rate Advance"). The Floating Rate shall change simultaneously and automatically, without further notice, upon the Lender's determination and designation from time to time of the Base Rate, and shall also change simultaneously and automatically, without further notice, upon each change in the Base Rate Spread. The Eurodollar Rate for an Interest Period shall change simultaneously and automatically during such Interest Period, without further notice, upon each change in the LIBOR Rate Spread and shall also change simultaneously and automatically, without further notice, upon each change in the Libor Rate Reserve Percentage. (b) Interest Period. Each Interest Period shall commence on the date on which such advance is made and shall end on the date as the Borrower may elect as set forth in Paragraph 1.4(a) above; provided, however: (i) any Interest Period that would otherwise end on a day which is not a Banking Day shall be extended to the next Banking Day unless such extension would carry such Interest Period into the next month, in which event such Interest Period shall end on the preceding Banking Day; (ii) any Interest Period that begins on the last Banking Day of a calendar month (or on a date for which there is no numerically corresponding day in the calendar month during which such Interest Period is to end), shall (subject to clause (i) above) end on the last Banking Day of such calendar month; and (iii) any Interest Period that would otherwise extend beyond Maturity shall end at Maturity. (c) Conversion. Provided that no Event of Default shall have occurred and continued beyond the expiration of any applicable grace or cure period, if any, and no condition which, with the passage of time or the giving of notice, or both, would constitute an Event of Default shall exist, the Borrower may convert any outstanding Floating Rate Advance to a Eurodollar Rate Advance in the same aggregate principal amount on any Banking Day and may convert a Eurodollar Rate Advance to a Floating Rate Advance only on the last Banking Day of the then current Interest Period applicable to such Eurodollar Rate Advance. If Borrower desires to convert an advance, it shall give the Lender three (3) Banking Days written notice, specifying the date of such conversion, the amount to be converted and if the conversion is from a Floating Rate Advance to a Eurodollar Rate Advance, the duration of the Interest Period therefor. (d) Extension. Subject to all of the terms and conditions applicable to a request that a new advance be a Eurodollar Rate Advance or a Floating Rate Advance and provided that no Event of Default shall have occurred and continued beyond the expiration of any applicable grace or cure period, if any, and no condition which, with the passage of time or the giving of notice, or both, would constitute an Event of Default shall exist, the Borrower may extend a Eurodollar Rate Advance as of the last day of the applicable Interest Period to a new Eurodollar Rate Advance. If the Borrower fails to notify the Lender of the Interest Period for the extension of a Eurodollar Rate Advance at least three (3) Banking Days prior to the last day of the then current applicable Interest Period then, at Lender's discretion, such outstanding Eurodollar Rate Advance shall become a Floating Rate Advance at the end of the current Interest Period for such outstanding Eurodollar Rate Advance and shall accrue interest in accordance with the provisions regarding Floating Rate Advances described above. (e) Definitions. As used herein, (i) "Banking Day" shall mean: any day which is neither a Saturday or Sunday nor a legal holiday on which commercial banks are authorized or required to close in Massachusetts and, if such day relates to a determination of interest on an advance or a notice by the Borrower with respect to any such borrowing, a day which is also a day on which dealings in dollar deposits are carried out in the London interbank market. (ii) "Base Rate" shall mean: the variable per annum rate of interest so designated from time to time by Lender as its Base Rate. The Base Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer. (iii) "Base Rate Spread" shall mean: (i) 100 basis points at all times that Borrower shall have an aggregate amount of cash or cash equivalents in the Pledged Account (as hereinafter defined), determined by Lender in its sole discretion, of at least one and one half (1 1/2) times the then outstanding principal balance of the Note, but not more than $9,999,999; (ii) 50 basis points at all times that Borrower shall have an aggregate amount of cash or cash equivalents in the Pledged Account, determined by Lender in its sole discretion, of at least $10,000,000, but not more than $12,499,000 and (iii) 0 basis points at all times that Borrower shall have an aggregate amount of cash or cash equivalents in the Pledged Account, determined by Lender in its sole discretion, of at least $12,500,000. (iv) "LIBOR Rate" shall mean: with respect to any Interest Period, the quotient of (i) the per annum interest rate equal to the simple average, rounded upwards, if necessary, to the next 1/32 of 1%, of the rates shown on the display referred to as the "Telerate Page 3750," or any display substituted therefor, of the Dow Jones Telerate Service, or, if fewer than two such rates appear on such display on the day of any determination thereof, the rates shown on the Reuters Screen LIBOR Page, as being the respective rates at which deposits in U.S. Dollars would be offered by the principal London offices of each of the lenders named thereon to major lenders in the London interbank market at approximately 11:00 A.M., London time, two Business Days prior to the Business Day on which such Interest Period begins, in an amount approximately equal to the principal amount of such Eurodollar Rate Advance, for a period of time equal to such Interest Period, and (ii) a number equal to the number one minus the Libor Rate Reserve Percentage. In the event that such rate is not available at such time for any reason, then the "LIBOR Rate" for such Interest Period shall be quotient of (i) the per annum interest rate equal to the simple average, rounded upwards, if necessary, to the next 1/32 of 1%, of the rates at which deposits in U.S. Dollars are offered by the principal London offices of any three major banks in the London interbank market (as selected by the Lender) at approximately 11:00 A.M., London time, two Business Days prior to the Business Day on which such Interest Period begins, in an amount approximately equal to such Eurodollar Rate Advance, for a period of time equal to such Interest Period, and (ii) a number equal to the number one minus the Libor Rate Reserve Percentage. The "Libor Rate Reserve Percentage" applicable to any Interest Period means the maximum effective rate (expressed as a decimal) of the statutory reserve requirements (without duplication, but including, without limitation, basic, supplemental, marginal and emergency reserves) applicable to the Lender during such Interest Period under regulations of the Board of Governors of the Federal Reserve System (or any successor), including without limitation Regulation D or any other regulation dealing with maximum reserve requirements which are applicable to the Lender with respect to its "Eurocurrency Liabilities," as that term may be defined from time to time by the Board of Governors of the Federal Reserve System (or any successor) or which in any other respect relate to the funding of loans bearing interest at a rate calculated with reference to a LIBOR Rate. (v) "LIBOR Rate Spread" shall mean: 350 basis points at all times that Borrower shall have an aggregate amount of cash or cash equivalents in the Pledged Account, determined by Lender in its sole discretion, of at least one and one half (1 1/2) times the then outstanding principal balance of the Note, but not more than $9,999,999; (ii) 325 basis points at all times that Borrower shall have an aggregate amount of cash or cash equivalents in the Pledged Account, determined by Lender in its sole discretion, of at least $10,000,000, but not more than $12,499,000 and (iii) 200 basis points at all times that Borrower shall have an aggregate amount of cash or cash equivalents in the Pledged Account, determined by Lender in its sole discretion, of at least $12,500,000. (vi) "Interest Period" shall mean, with respect to any Eurodollar Rate Advance, the 30, 60, 90 or 180 days period selected by the Borrower pursuant to Section 1.4 or Section 1.5 hereof. 1.5 Requests For Advances. Requests for advances under the Credit Facility may be made to the Lender on any Banking Day in writing or by telephone and confirmed in writing. Each request shall constitute a confirmation to the Lender by the Borrower that all representations and warranties contained in Section III remain materially true and correct as though made at the time of the proposed borrowing (except to the extent such representation and warranty related specifically to an earlier date) and the Lender may, at its option, require a certificate to such effect signed by the chief financial officer or corporate controller of Borrower or by a designee of the chief financial officer or corporate controller. Each request for an advance shall be accompanied by a certificate of the Borrower setting forth the use of such advance and such other matters as the Lender may reasonably require. The Borrower agrees to indemnify and hold the Lender harmless for any action, loss or expense taken or incurred by the Lender in good faith in reliance upon any request for an advance by the Borrower under this Agreement. Each request shall be irrevocable and shall be made before 11:00 a.m. on the day on which such advance is to be made if such advance is to be a Floating Rate Advance, and shall be made before 11:00 a.m. (3) three Banking Days prior to the date such advance is to be made if such advance is to be a Eurodollar Rate Advance. Each request shall specify the aggregate amount of such advance, the date such advance is to be made, the type of borrowing (i.e., whether such advance is to be a Floating Rate Advance or a Eurodollar Rate Advance), and the duration of the first Interest Period therefor. If the Lender does not receive timely notice of a requested Eurodollar Rate Advance, the Borrower shall be deemed to have selected a Floating Rate Advance. Eurodollar Rate Advances may only be requested in multiples of $100,000, no more than three (3) Eurodollar Rate Advances may be outstanding at any one time and no advance may be made, continued or extended as a Eurodollar Rate Advance if an Event of Default shall have occurred and continued beyond the expiration of any applicable grace or cure period, if any or if any condition which, with the giving of notice or the passage of time, or both, would constitute an Event of Default shall exist. If any advance is made, the Lender shall record on the books and records of the Lender an appropriate notation evidencing such advance, each repayment on account of the principal thereof and the amount of interest paid; and the Borrower authorizes the Lender to maintain such records or make such notations and agrees that the amount shown on the books and records as outstanding from time to time of the Lender shall constitute the amount owing to the Lender in connection with the Credit Facility, absent manifest error. 1.6 Payments on the Credit Facility. Interest on all Floating Rate Advances shall be payable monthly beginning on the first Banking Day of each month following the date hereof, and continuing thereafter on the first day of each succeeding month until the principal balance shall be paid in full. Interest on all Eurodollar Rate Advances shall be payable in arrears, on the first Banking Day following the expiration of the applicable Interest Period. Subject to approval of the Lender, amounts outstanding under the Credit Facility may be prepaid in whole or in part prior to the end of an Interest Period, but any such prepayment shall be subject to the indemnification provisions of Section 1.7. Unless payment is accelerated under Section 7.1 prior thereto, each Floating Rate Advance, together with all accrued but unpaid interest thereon, shall be due and payable at Maturity, and each Eurodollar Rate Advance, together with all accrued but unpaid interest thereon, shall be due and payable on the last Banking Day of the Interest Period applicable thereto. All payments of principal and interest shall be paid in immediately available funds to the Lender. 1.7 Indemnification for Losses. The Borrower shall indemnify the Lender against any actual losses, costs or expenses which the Lender may at any time incur as a consequence of (a) the failure of the Borrower to borrow the amount requested on the date specified in a request for an advance, (b) the failure of the Borrower to pay, punctually on the due date thereof any amount payable under the Credit Facility, (c) the accelerated payment of any obligations under the Credit Facility of the Borrower as a result of an Event of Default that continues beyond the expiration of any applicable grace or cure period, if any, or (d) the repayment or prepayment of principal amounts under the Credit Facility on a date other than the last date of an Interest Period. Such losses, costs or expenses shall include but shall not be limited to (x) any costs incurred by Lender in carrying funds which were to have been borrowed or in carrying funds to cover the amount of any overdue principal or overdue interest on amounts under the Credit Facility, (y) any interest payable by Lender to lenders of the funds borrowed by Lender in order to carry the funds referred to in the immediately preceding subclause, and (z) any losses incurred by Lender in liquidating or re-employing funds acquired from third parties to effect or maintain all or any part of the amounts outstanding under the Credit Facility or portion thereof. 1.8 The Borrowing Base. The borrowing base ("Borrowing Base") shall equal 80% of Eligible Accounts. "Eligible Accounts" shall mean Accounts (as such term is defined in the Uniform Commercial Code in force in the Commonwealth of Massachusetts) which are acceptable to Lender in its sole discretion, but which at least are continuously in compliance with all of the following: (a) The Account is an account of Borrower which arose in the ordinary course of the business of Borrower from or in connection with the bona fide sale of goods or rendition of services, performed in accordance with an order or contract, oral or written, wherein all obligations of Borrower regarding the shipment or delivery of such goods to a customer have been satisfied or the services have been performed for a customer; (b) The Account did not arise from or in connection with a sale of goods by Borrower on consignment or with a sale of goods by Borrower that had been consigned to Borrower; (c) The Account is not evidenced by a promissory note or chattel paper; (d) The rights of Borrower in and to the Account and the proceeds thereof are not subject to any assignment, claim, lien, security interest or other encumbrance except in favor of Lender; (e) The financial condition of the customer is acceptable to Lender in its sole discretion; (f) The Account is not disputed nor subject to offset, credit allowance, contra account or adjustment by a customer, except discounts for prompt payment disclosed to Lender; (g) The Account has remained unpaid for not more than ninety (90) days past its invoice date; (h) The Account is not owed by any creditor, employee, supplier or affiliate of Borrower. The term "affiliate" means any person which, directly or indirectly, controls or is controlled by Borrower, or is under common control with Borrower as determined by Lender; (i) [Intentionally Omitted]; and (j) The customer has its principal place of business in the United States of America or, so long as such invoices are designated in U.S. Dollars, in Canada; provided, however, that no Account shall be considered to be an Eligible Account if owed to Borrower by a person or entity at least twenty percent (20%) of whose aggregate accounts receivable to Borrower have been outstanding for more than ninety (90) days past their invoice dates. 1.9 Borrowing Base Reports. Borrower shall deliver to Lender not less frequently than monthly from the date hereof through and including May 1, 2003 and quarterly thereafter, a report of Eligible Accounts as of a specified date ("Borrowing Base Report"), in form reasonably satisfactory to the Lender, signed by the chief financial officer, chief executive officer or corporate controller of Borrower: 1.10 Mandatory Prepayment. If at any time when the aggregate unpaid principal amounts outstanding under the Credit Facility exceed the Borrowing Base the Lender gives notice of a mandatory prepayment, the Borrower shall promptly make a payment on the Note in an amount equal to such excess, and the Lender may, without prior notice to the Borrower, charge accounts of the Borrower with the Lender to effect such payment. 1.11 Interest Calculations. Interest shall be computed on the basis of the actual number of days elapsed over a 360 day year. 1.12 Overdue Principal and Interest. Overdue principal and, to the extent permitted by law, overdue interest on amounts outstanding under the Credit Facility, shall bear interest at a rate which at all times shall be equal to the lower of the Floating Rate plus 4% or the highest rate permitted by applicable law and shall be payable on demand. 1.13 Yield Protection, Etc. (a) Additional Costs. If any present or future applicable law ("Applicable Law"), which expression as used herein includes statutes, rules and regulations thereunder and interpretations thereof by any competent court or by any governmental or other regulatory body or official charged with the administration or the interpretation thereof and requests, directives, instructions and notices at any time or from time to time hereafter made upon or otherwise issued to Lender by any central bank or other fiscal, monetary or other authority (whether or not having the force of law), including without limitation any change according to a prescribed schedule of increasing requirements, whether or not known or in effect as of the date hereof, shall with respect to any amounts outstanding under the Credit Facility, or undertakings of the Lender under this Agreement (i) subject the Lender to any tax, levy, impost, duty, charge, fee, deduction or withholding of any nature with respect to this Agreement or undertakings of the Lender hereunder or the payment to the Lender of any amounts due to it hereunder, or (ii) materially change the basis of taxation of payments to the Lender of the principal of or interest on any amounts payable to the Lender hereunder, or (iii) impose or increase or render applicable any special or supplemental deposit or reserve or similar requirements or assessment against assets held by, or deposits in or for the account of, or any liabilities of, or advances by the Lender in respect of the transactions contemplated herein, or (iv) impose on the Lender any other condition or requirement with respect to this Agreement, the Credit Facility or advances thereunder, and the result of any of the foregoing is (A) to increase the cost to the Lender of making, funding or maintaining all or any part of the Credit Facility or advances thereunder, or (B) to reduce the amount of principal, interest or other amount payable to the Lender hereunder, or (C) to require the Lender to make any payment or to forego any interest or other sum payable hereunder, the amount of which payment or foregone interest or other sum is calculated by reference to the gross amount of any sum receivable or deemed received by the Lender from the Borrower hereunder, then, and in each such case not otherwise provided for hereunder, the Borrower will upon demand promptly following Lender's notice to the Borrower and the Lender pertaining to such matters accompanied by calculations thereof in reasonable detail, pay to the Lender such additional amounts as will be sufficient to compensate it for such additional cost, reduction, payment or foregone interest or other sum; provided that the foregoing provisions of this sentence shall not apply in the case of any additional cost, reduction, payment or foregone interest or other sum resulting from any taxes charged upon or by reference to the overall net income, profits or gains of the Lender. (b) Capital Adequacy. If, after the date hereof, Lender shall have determined that any Applicable Law regarding capital requirements for banks or bank holding companies generally, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any of the foregoing, either imposes a requirement upon Lender to allocate additional capital resources or increases Lender's requirement to allocate capital resources or its undertaking to make, or to its maintenance of, the Credit Facility or advances thereunder, which has or would have the effect of reducing the return on Lender's capital to a level below that which it could have achieved (taking into consideration its then existing policies with respect to capital adequacy and assuming full utilization of its capital) but for such applicability, change, interpretation, administration or compliance, by any amount deemed by Lender to be material, Lender shall promptly after its determination of such occurrence give notice thereof to the Borrower. In such event commencing on the date of such notice (but not earlier than the effective date of any such applicability, change, interpretation, administration or compliance), the fees payable hereunder shall increase by an amount which will, in Lender's reasonable determination, evidenced by calculations in reasonable detail furnished to the Borrower, compensate the Lender for such reduction, its determination of such amount to be conclusive and binding upon the Borrower, absent manifest error. In determining such amount, Lender may use any reasonable methods of averaging, allocating or attributing such reduction among its customers. 1.14 Inability to Quote Eurodollar Rates; Illegality. If the Lender shall for any reason beyond its reasonable control be unable to quote a Eurodollar Rate with respect to a proposed Interest Period or if the Lender shall determine that a change in Applicable Law makes it unlawful to fund advances in the London interbank market, the Lender shall notify the Borrower and all amounts outstanding under the Credit Facility shall at the end of the then current Interest Period be converted to advances bearing interest at the Floating Rate, such rate to be adjusted concurrent with each change in the Base Rate and the Base Rate Spread. 1.15 Commitment Fee. The Borrower shall pay to the Lender, on or prior to the date hereof, a non-refundable loan commitment fee in the amount of $7,500.00. 1.16 Usury. All agreements between Borrower and Lender are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of maturity of the indebtedness evidenced by the Note or otherwise, shall the amount paid or agreed to be paid to Lender for the use or the forbearance of the indebtedness evidenced by the Note exceed the maximum permissible under applicable law. As used herein, the term "applicable law" shall mean the law in effect as of the date hereof provided, however, that in the event there is a change in the law which results in a higher permissible rate of interest, then this Agreement and the Note shall be governed by such new law as of its effective date. In this regard, it is expressly agreed that it is the intent of the Borrower and Lender in the execution, delivery and acceptance of this Agreement and of the Note to contract in strict compliance with the laws of the Commonwealth of Massachusetts from time to time in effect. If, under or from any circumstances whatsoever, fulfillment of any provision hereof or of the Note at the time of performance of such provision shall be due, shall involve transcending the limit of such validity prescribed by applicable law, then the obligation to be fulfilled shall automatically be reduced to the limits of such validity, and if under or from any circumstances whatsoever Lender should ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the principal balance evidenced by the Note and not to the payment of interest. This provision shall control every other provision of all agreements between the Borrower and Lender. SECTION II - SECURITY The Note and all other obligations of the Borrower to the Lender whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising (collectively, the "Obligations") shall be secured by a security interest in all of the Borrower's assets, now existing or hereafter arising, other than as specifically set forth in that certain Security Agreement by and between Borrower and Lender of even date herewith, as the same may be amended and/or restated from time to time (the "Collateral"). SECTION III - REPRESENTATIONS AND WARRANTIES The Borrower makes the following representations and warranties to the Lender: 3.1 Organization and Qualification. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of Delaware. The Borrower is duly qualified or licensed and in good standing as a foreign corporation in each other jurisdiction where the ownership of property or the conduct of its activities requires qualification and the failure to so qualify would have a material adverse effect on Borrower. The Borrower has all necessary power and authority to own its assets and to conduct its activities as now conducted and as presently contemplated. 3.2 Corporate Authority; No Violation of Law or Default, Etc. The execution, delivery and performance by the Borrower of this Agreement, the Note, the Security Agreement and the transactions contemplated thereunder, are within the corporate authority of the Borrower, have been duly authorized by all necessary corporate action and will not contravene any provision of federal, state or municipal law or regulation, the charter or by-laws of the Borrower or create a default or result in the acceleration of indebtedness or the imposition of a lien on assets of the Borrower under any material agreement, bond, note or indenture to which the Borrower is a party or by which it is bound, other than consents of certain parties whose consent has been obtained. 3.3 Governmental Approvals. The execution, delivery and performance of this Agreement, the Note, and the Security Agreement and the transactions contemplated thereby do not require any approval or consent of, or filing with, any federal, state or municipal authority other than filings with the Uniform Commercial Code records in connection with the Security Agreement. 3.4 Valid Obligations. This Agreement, the Note and the Security Agreement, constitute, the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms. 3.5 Financial Statements. The Borrower has furnished to the Lender its quarterly financial statements as of March 31, 2002 audited by Ernst & Young, independent certified public accountants. The quarterly financial statements and the notes thereto were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the period specified and present fairly the financial position of the Borrower as of the date specified and the results of operations and changes in financial position of the Borrower for the fiscal year then ended. 3.6 Changes. Since March 31, 2002 there has been no change in the assets, liabilities, financial condition or business of the Borrower other than changes in the ordinary course of business, the effects of which individually, or taken as a whole, have not been materially adverse to the financial condition or business of the Borrower. 3.7 Title to Properties; Absence of Liens. The Borrower has good and marketable title to all its properties, assets and rights of every nature now owned by it, including all assets reflected on the latest financial statement described above (except for assets disposed of for fair value in the ordinary course of business since the date thereof), free from all security interests, mortgages, capitalized leases, liens, charges and encumbrances whatsoever, except for any of the same existing at the date hereof, all of which are listed in Schedule I hereto. The Borrower enjoys quiet possession under all leases under which it leases, any personal or real property, and all of such leases are valid, subsisting and in full force and effect. 3.8 Absence of Undisclosed Liabilities. Except as disclosed on the latest financial statement described above, in the note thereto, the Borrower has no liabilities of a material nature individually or in the aggregate, whether accrued, absolute, contingent or otherwise except liabilities stated or adequately reserved against in such financial statement or liabilities arising in the ordinary course of business since the date of such balance sheet. 3.9 Litigation. Except as disclosed on Schedule II, there is not now pending against the Borrower, nor is there overtly threatened against the Borrower, any litigation, investigation or any proceeding by or before any tribunal or governmental agency, the outcome of which, individually or in the aggregate, if adversely determined, would have a material adverse effect on the financial condition, business or continued operations of the Borrower. 3.10 Taxes. The Borrower has filed all tax returns which are required to have been filed (whether informational returns or not) and has paid all taxes, if any, as shown on said returns and all assessments to the extent that such taxes have become due. Neither the Internal Revenue Service nor any other taxing authority is now asserting or, to the knowledge of the Borrower, threatening to assert against the Borrower any deficiency or claim for additional taxes or interest thereon or penalties in connection therewith. 3.11 Compliance with Laws; Permits. The Borrower is in full compliance with all laws and regulations which apply to its activities and the conduct of its business, the breach or violation of which, individually or in the aggregate, could have a material adverse effect on the Borrower's operations or financial condition, including, without limitation, all laws and regulations relating to environmental protection, release or disposition of hazardous substances and occupational health and safety. The Borrower holds all material licenses, permits and franchises which are required to permit it to conduct its activities and businesses as presently conducted or contemplated, and all such licenses, permits and franchises are in full force and effect. 3.12 Pension Plans. No event which is a reportable event under Section 4043 of the Employee Retirement Income Security Act of 1974 ("ERISA") has occurred with respect to any pension plan maintained for employees of the Borrower (or for the employees of any person who is under "common control" with the Borrower as that term is defined in Section 4001(a)(14) of ERISA (an "ERISA Affiliate")) and covered by Title IV of ERISA ("Pension Plan"). The market value of the assets of each Pension Plan as of the last valuation date for such Pension Plan equals or exceeds the present value of benefit liabilities as of the latest actuarial valuation date for such Pension Plan, determined in accordance with the actuarial assumptions used by the Pension Benefit Guaranty Corporation ("PBGC") in single-employer plan terminations. All required contributions due to each Pension Plan have been made by the Borrower or an ERISA Affiliate, as the case may be; and, with respect to each Pension Plan, there is no accumulated funding deficiency within the meaning of ERISA and the Borrower and any ERISA Affiliates are in full compliance with Section 412 of the Internal Revenue Code of 1986, as amended. Neither the Borrower nor any ERISA Affiliate has issued a notice of intent to terminate any Pension Plan or received a notice from the PBGC of its intent to initiate proceedings to terminate, or appoint a trustee with respect to, any Pension Plan; and neither the Borrower nor any ERISA Affiliate has incurred any liability to the Pension Benefit Guaranty Corporation or to any Pension Plan in connection with the termination of any Pension Plan. No event or condition has occurred or exists that could result in the imposition of liability under Sections 4063, 4069 or, to the best knowledge of the Borrower, 4201 of ERISA, the imposition of a lien under Section 412 of the Code or Section 302 of ERISA, or the requirement to provide security under Section 401(a)(29) of the Code. 3.13 Regulation U. None of the proceeds of the Credit Facility will be used to purchase or carry margin securities within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. 3.14 Subsidiaries. The Borrower does not own, directly or indirectly, more than 5% of any other corporation, business trust, partnership or other business entity except as set forth in Schedule III hereto. Each of the Borrower's subsidiaries has been duly organized and is validly existing and in good standing in its jurisdiction of organization and is duly qualified and licensed and in good standing as a foreign entity in each other jurisdiction where the ownership of property or the conduct of its activities requires qualification and the failure to so qualify would have a material adverse effect on it. 3.15 No Default. No event has occurred and is continuing which, with notice or lapse of time or both, would constitute an Event of Default hereunder. 3.16 Investment Company. The Borrower is not an "investment company", or a company "controlled" by an "investment company", as such terms are defined in the Investment Company act of 1940, as amended. SECTION IV - CLOSING CONDITIONS The following conditions shall be met prior to the making of any advance under the Credit Facility: all representations and warranties contained in Section III shall be true and accurate on and as of the time of such advance (except to the extent such representation and warranty related specifically to an earlier date), no Event of Default shall have occurred hereunder and no condition which, with the giving of notice or the passage of time, or both, would constitute an Event of Default shall exist, and no change shall have occurred in any Applicable Law which in the opinion of counsel for the Lender would make it illegal for the Lender to make the advances hereunder. In addition, the Lender shall have received: (a) Certificates of the Secretaries of State of Delaware and Massachusetts as to the legal existence and good standing of the Borrower; (b) a certificate of the Secretary of the Borrower as to (i) a copy of charter documents and amendments of the Borrower, (ii) a copy of the by-laws of the Borrower; (iii) a copy of the action taken to authorize this Agreement and the transactions contemplated by the Agreement; and (iv) a list of the incumbent officers of the Borrower; (c) the executed Note; (d) the executed Security Agreement; (e) confirmation that all Collateral consisting of investment property has been delivered to the Lender or is held by the Lender as securities intermediary for the Borrower; (f) a Federal Reserve Form U-1; (g) a current Borrowing Base Report; (h) an opinion, satisfactory in scope, form and substance to the Lender, as to the matters referred to in Section 3.1 through 3.3 and such other matters as the Lender may reasonably request from counsel to the Borrower. All closing documents shall be satisfactory in scope, form and substance to MacAdams & Wieck Incorporated, special counsel to the Lender. SECTION V - AFFIRMATIVE COVENANTS 5.1 Financial Statements and Reports. Borrower will furnish to the Lender the following, all to be in form and substance satisfactory to Lender in its sole discretion: (a) Annual Reports. As soon as practicable and in any event within 90 days after the end of each fiscal year, an annual financial statement of Borrower as at the end of such year, audited and certified without qualification by independent certified public accountants engaged by the Borrower and acceptable to the Lender. (b) Quarterly Reports. As soon as practicable and in any event within 45 days after the end of each fiscal quarter, a quarterly financial statement of Borrower as at the end of such quarter, including a consolidated balance sheet of Borrower, an income statement and cash flow information certified by the chief financial officer or corporate controller of Borrower. (c) Borrowing Base. At the times specified in Section 1.9, the reports specified therein for the period certified by the chief financial officer or corporate controller of Borrower. (d) Projections. As soon as practicable and in any event within thirty (30) days prior to Borrower's fiscal year end, one (1) year of projections, including balance sheets, income statements and assumptions. (e) Additional Information. From time to time such other financial data and information as the Lender may reasonably request. 5.2 Notice of Certain Events. (a) Defaults. The Borrower will, promptly after obtaining knowledge thereof, give written notice to the Lender of any matter which constitutes or which, with the giving of notice or the passage of time, or both, would constitute, an Event of Default under this Agreement, specifying the nature of the same, the period it has existed and what action the Borrower has taken or proposes to take with respect thereto, and any matter which, in the judgment of the chief financial officer of the Borrower, has resulted in or is likely to result in a material adverse change in the financial condition or operations of the Borrower. (b) Judicial and Administrative Proceedings. The Borrower shall promptly notify the Lender of the threat or commencement of any judicial, administrative or other proceeding looking toward the limitation, qualification or revocation of any permit or license required to permit the Borrower to conduct its activities and businesses as presently conducted or contemplated, including licenses and permits relating to environmental protection, release or disposition of hazardous substances and occupational health and safety or alleging any violation by the Borrower of any laws or regulations relating to environmental protection, release or disposition of hazardous substances or occupational health and safety or the demand or request for the obtaining of any additional licenses or permits of such nature. 5.3 Corporate Existence, Etc. The Borrower will take all action necessary to preserve and maintain its corporate existence and will maintain and preserve in full force and effect all material rights, licenses, patents, trademarks, copyrights and franchises and will comply with all applicable laws and regulations in all jurisdictions necessary for the conduct of its activities and business. 5.4 Maintenance of Properties. The Borrower will keep all of the properties which it deems useful or necessary in its activities and business in good working order and condition reasonable wear and tear excepted. 5.5 Taxes. The Borrower shall promptly pay and discharge or make adequate provision for the payment or discharge of any taxes, assessments or governmental charges or levies that may be imposed upon its income or profits or upon any of its property prior to the date on which penalties (excluding interest) attach thereto, and all lawful claims which, if unpaid, might become a lien or charge upon its property; provided, however, that this provision shall not be deemed to require payment of any taxes, assessments, governmental charges, levies or claims, the validity of which is being contested in good faith by appropriate proceedings and for which adequate reserves have been maintained. 5.6 Insurance. The Borrower will maintain insurance with responsible companies, in such amounts and against such risks as is deemed prudent by the Borrower, consistent with prevailing practice in Borrower's field. 5.7 ERISA. The Borrower shall: (a) make all required contributions in a timely manner to each Pension Plan and fund each Pension Plan as required by the provisions of Section 412 of the Internal Revenue Code of 1986, as amended; (b) promptly furnish to the Lender a copy of any notice of a Pension Plan termination or of a reportable event with respect to a Pension Plan sent to the Pension Benefit Guaranty Corporation under Sections 4041(a) or 4043 of ERISA: (c) furnish to the Lender a copy of any request for waiver from the funding standards or extension of the amortization periods required by Section 412 of the Internal Revenue Code no later than the date on which the request is submitted to the Department of Labor or the Internal Revenue Service, as the case may be; (d) promptly furnish the Lender any notice of plan termination by the Pension Benefit Guaranty Corporation received by the Borrower; (e) promptly furnish the Lender any notice of plan disqualification received from the Internal Revenue Service; (f) promptly furnish the Lender any notice received by the Borrower with respect to any potential withdrawal liability with respect to a Pension Plan or any reorganization or proposed termination of a Pension Plan. 5.8 Operating Account; Custodial Accounts; Liquidity Manager. The Borrower shall maintain its primary depository relationship for its main operating account with the Lender, shall maintain all custody accounts for its investment portfolio with the Lender as custodian and, so long as Lender is offering services competitive in the marketplace, shall use Lender as its liquidity manager. 5.9 Further Assurances; Inspection. The Borrower will, at any time and from time to time, execute and deliver such further instruments and take such further action as may be reasonably requested by the Lender in each case to further and more perfectly carry out the purposes of this Agreement. The Borrower will permit officers, employees or representatives of the Lender to visit and inspect any of the properties and examine the books and discuss the affairs, finances and accounts of the Borrower with its officers; all at such reasonable times and upon reasonable notice and as often as the Lender may reasonably request. 5.10 Cash or Cash Equivalents. Borrower shall maintain at all times in its account with Lender entitled BioSphere Medical, Inc., account number 2430064 (the "Pledged Account"), an aggregate amount of cash or cash equivalents of at least one and one-half (1 1/2) times the then outstanding principal balance of the Note. Lender shall determine, in its sole discretion, which financial assets in the Pledged Account are "cash or cash equivalents" and the value of such financial assets. SECTION VI - NEGATIVE COVENANTS During the term of this Agreement, and so long as the Note is outstanding, the Borrower agrees as follows: 6.1 Consolidation, Mergers, Disposition of Assets, Acquisitions, Etc. Without the prior written consent of the Lender (which consent shall not be unreasonably withheld), Borrower shall not become a party to a merger or consolidation with any other person, corporation, business trust, partnership or entity ("Person") unless the Borrower is the survivor of such merger or consolidation (provided that immediately after the effectiveness of such merger or consolidation, no Event of Default shall have occurred and be continuing and no condition which, with the giving of notice or the passage of time, or both, would constitute an Event of Default, shall exist), nor will the Borrower sell, lease or otherwise dispose of any of the Collateral (except as permitted in the Security Agreement) or all or a substantial part of its assets, nor will the Borrower without the prior written consent of Lender (which consent shall not be unreasonably withheld), acquire the stock or substantially all of the assets of any other Person. Notwithstanding any provision of this Section 6.1 to the contrary Lender's consent shall not be required for the Borrower to enter into any transaction, which would otherwise be prohibited by this Section 6.1, including, but not limited to, partnerships, joint ventures, strategic alliances, exclusive licenses and similar arrangements (collectively, "Restricted Transactions"), so long as the aggregate amount of Borrower's monetary obligations (both paid and to be paid) in connection with such Restricted Transactions (giving effect to the Restricted Transaction in question) shall not exceed Two Million ($2,000,000) Dollars during the term of this Agreement and so long as, immediately after the effectiveness of such Restricted Transaction, no Event of Default shall have occurred and be continuing and no condition which, with the giving of notice or the passage of time, or both, would constitute an Event of Default, shall exist. 6.2 Liens. The Borrower shall not permit to exist any lien upon, pledge of or security interest in any of its assets, nor will it acquire any personal property under a capitalized lease, conditional sales agreement or other title retention contract or sell any account, except: (a) liens for taxes, assessments or governmental charges or levies the payment of which is not at the time required or which are being contested in good faith by appropriate proceedings provided adequate reserves are established and provided enforcement of such liens have been stayed; (b) liens of carriers, warehousemen, mechanics and materialmen and other similar inchoate liens incurred in the ordinary course of business for sums not yet due or being contested in good faith by appropriate proceedings; (c) liens incurred or deposits made in the ordinary course of business in connection with workmen's compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, performance and return of money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (d) any attachment or judgment lien, unless such attachment or judgment shall not, within 60 days after the issue or entry thereof, have been released or discharged or execution thereof stayed pending appeal, or shall not have been discharged within 60 days after the expiration of any such stay; (e) liens in favor of the Lender; (f) liens securing permitted indebtedness outstanding on the date of this Agreement as described on Schedule I; (g) liens securing indebtedness incurred solely for the purpose of acquiring any real or personal property, other than inventory; provided no such purchase money security interest shall extend to any property other than the particular property so acquired and provided further that the amount of any such purchase money indebtedness shall not exceed the fair value of such property at the time of acquisition. 6.3 Indebtedness. The Borrower shall not incur, assume, guaranty or have outstanding any indebtedness whatsoever (including without limitation, indebtedness under capitalized and non-capitalized leases), except for: (a) indebtedness under the Note; (b) indebtedness to which the Lender has given its prior written consent; (c) trade payables incurred in the ordinary course of business; (d) indebtedness described on Schedule IV existing as of the date hereof; (e) indebtedness and capitalized lease obligations secured by liens permitted under Section 6.2(g), not to exceed $500,000 in the aggregate outstanding at any one time; - (f) unsecured indebtedness not to exceed $2,000,000 in the aggregate, which amount may include, but not be limited to, letters of credit, foreign exchange contracts and security deposits. SECTION VII - DEFAULTS If any of the following events ("Events of Default") shall occur: (a) the Borrower shall fail to pay any principal or interest on the Note within three (3) days after the due date thereof; (b) any representation or warranty of the Borrower herein, in the Security Agreement, or in any certificate delivered hereunder shall prove to have been false in any material respect as of the time made or furnished; (c) the Borrower shall suffer a receiver or trustee for all or substantially all of its property to be appointed; or institute or suffer to be instituted against it any proceedings under any law relating to bankruptcy, insolvency, arrangement, reorganization or relief of debtors; provided, however, that Borrower may cure an Event of Default resulting from the appointment of a receiver or trustee for Borrower or the institution of any proceedings under any law against Borrower relating to bankruptcy, insolvency, arrangement, reorganization or relief of debtors, commenced by an unrelated third party without the consent or acquiescence of Borrower, if such receiver or trustee shall be discharged or such proceeding shall be terminated, as appropriate, within sixty (60) days of the appointment or filing thereof; (d) the Borrower shall fail to perform any other term, covenant or agreement contained herein, in the Security Agreement or in any other agreement with Lender; provided, however, that: (i) Borrower's failure to perform the covenant contained in Section 5.10 hereof shall not be an Event of Default hereunder unless such failure shall continue for at least two days after Lender sends Borrower written notice of such failure; and (ii) Borrower's failure to perform the covenant contained in Section 6.2 hereof by permitting certain liens to exist upon its assets, shall not be an Event of Default hereunder unless such failure shall continue for at least thirty days after Lender sends Borrower written notice of such failure or unless such lien is a consensual lien or unless such lien covers the Pledged Account or any of the assets held therein or unless the lienor has taken action to enforce such lien or unless Borrower's failure to perform such covenant is not otherwise susceptible to a cure. (e) the Borrower shall fail to pay at maturity, or within any applicable period of grace, any obligation in excess of $100,000 for borrowed monies or advances or any capitalized lease obligations or fail to observe or perform any term, covenant or agreement contained in any agreement, by which it is bound, evidencing or securing borrowed monies or advances, for such period of time as would, or would have permitted (assuming the giving of appropriate notice if required) the holder or holders thereof or of any obligations issued thereunder to accelerate the maturity thereof; (f) substantial loss, theft, damage, destruction or diminution in market value of the Collateral taken as a whole that is not fully covered by insurance; (g) the occurrence of any material adverse change in the condition of Borrower, financial or otherwise. then, and in every such event, the Lender may terminate this Agreement, declare all amounts owing hereunder or under the Note and all other obligations to be, and they shall forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, provided, however, that upon the occurrence of an Event of Default under subsection (c) above all such amounts due under the Note shall automatically become immediately due and payable without demand or any action on the part of Lender. SECTION VIII - SET-OFF Any deposits or other sums at any time credited by or due from the Lender to the Borrower and any securities or other property of the Borrower in the possession of the Lender may at all times be held and treated as collateral security for the payment of the Obligations. Regardless of the adequacy of any Collateral, any deposits or other sums credited by or due from the Lender to the Borrower may be applied to or set off against the Obligations at any time. SECTION IX - DEFINITIONS The following terms shall have the meanings set forth below or the meanings as used or assigned to them in the provisions of this Agreement referred to below: Applicable Law see sec.1.13 Banking Day see sec.1.4 Base Rate see sec.1.4(c) Base Rate Spread see sec.1.4(c) Borrower see Preface Borrowing Base see sec.1.8 Borrowing Base Report see sec.1.9 Collateral see sec.2.1 Credit Availability see sec.1.1 Credit Facility see Background Eligible Accounts see sec.1.8 ERISA see sec.3.12 ERISA Affiliate see sec.3.12 Eurodollar Rate Advance see sec.1.4(a) Events of Default see sec.7.1 Floating Rate see sec.1.4(a) Floating Rate Advance see sec.1.4(a) Interest Period see sec.1.4(c) Lender See Preface LIBOR Rate see sec.1.4(c) LIBOR Rate Spread see sec.1.4(c) Maturity see sec.1.1 Note see sec.1.3 Obligations see sec.2.1 PBGC see sec.3.12 Pension Plan see sec.3.12 Person see sec.6.1 Pledged Account see sec.5.10 Restricted Transactions see sec.6.1 Security Agreement see sec.2.1 Any term of an accounting nature not otherwise defined shall have the meaning usually assigned to it under generally accepted accounting principles applied on a consistent basis. SECTION X - MISCELLANEOUS 10.1 Expenses, Taxes. Whether or not the transactions contemplated in this Agreement are consummated, the Borrower will pay the reasonable out-of-pocket expenses of the Lender (including reasonable fees and disbursements of special counsel, if any, retained by the Lender) in connection with the preparation, administration and enforcement of this Agreement, the Note, the Security Agreement, and the advances made hereunder. The Borrower agrees to indemnify and hold the Lender harmless against any taxes, assessments or charges assessed by any governmental authority, and costs of any litigation or proceedings and any losses, claims, damages or expenses whatsoever, arising by reason of the execution and delivery of this Agreement, the Note, and the Security Agreement, any recordings with respect to the Security Agreement or any use of the proceeds of the Credit Facility, other than losses, claims, damages or expenses resulting solely from Lender's gross negligence or willful misconduct. 10.2 Payment Dates. If the due date for any payment of principal is extended by operation of law, interest shall be payable for such extended time. If any payment required by this Agreement becomes due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day and such extension shall be included in computing interest or fees, as the case may be, in connection with such payment. 10.3 Notices. Except as otherwise provided, all notices hereunder shall be in writing and shall be deemed adequately given if sent as provided in Section 18 of the Security Agreement. 10.4 Changes, Waiver, Etc. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated or any consent thereunder granted orally, but only by a statement in writing. Any waiver or amendment of any provision hereof may be granted or effected, with the consent of the Borrower, by a written instrument signed by the Lender. No failure or delay by the Lender in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies otherwise provided by law. 10.5 Participations. The Borrower understands and agrees that Lender may grant to other banks or financial institutions participations in the loans made hereunder, the Note and this Agreement provided that in the event of such a participation, such Lender shall at all times act as lead participant. All costs of any such participation shall be borne by Lender, and Borrower may continue to deal with Lender as if Lender were the sole lender hereunder. 10.6 Binding Effect of Agreement. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lender and their respective successors and assigns, provided, however, that the Borrower may not assign or transfer the rights hereunder without the prior written consent of the Lender. 10.7 WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTE, THE SECURITY AGREEMENT OR ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY, INCLUDING, WITHOUT LIMITATION, ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS OR ACTIONS OF THE LENDER RELATING TO THE ADMINISTRATION OF THE CREDIT FACILITY OR ENFORCEMENT OF THIS AGREEMENT, THE NOTE OR THE SECURITY AGREEMENT, AND AGREE THAT NO PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. 10.8 Massachusetts Law. This Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Massachusetts. 10.9 Counterparts. This Agreement may be signed in counterparts with the same effect as if the signatures hereto and thereto were upon the same instrument. 10.10 Confidentiality. In handling any confidential or proprietary information received pursuant to this Agreement or the transactions contemplated hereby, Lender, and all employees and agents of Lender, including, but not limited to, accountants, shall exercise the same degree of care that they exercise with respect to Lender's own confidential or proprietary information. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed, under seal, by their respective officers, as of the date first set forth above. BioSphere Medical, Inc. By: /s/ Robert M. Palladino ---------------------------------------------- Vice President / CFO Brown Brothers Harriman & Co. By: /s/ Joseph E. Hall ---------------------------------------------- Senior Vice President Schedule I Security Interests, Mortgages, Liens, Capitalized Leases and Encumbrances Financing Statements on File on Date Hereof Filing Secured File Collateral Office Party No. Date Description - ------ ----- --- ---- ----------- Delaware Waters 20268742 1/3/02 Specified Secretary Financial Equipment of State Services Capitalized Leases - ------------------ o BioSphere Medical, Inc. ("the company") Leases (10) IBM Thinkpads and (1) 340 Microdrive Thinkpad through Heller Financial Group. As of March 31, 2002, the company had $19,244.37 outstanding on a five year lease agreement that began in April 2001. o The company also leases (1) Dell Firewall Server through Dell Equipment Leasing. As of March 31, 2002, the company had $933 outstanding on a three year lease agreement. o The company has leased (1) High Performance Liquid Chromaotography Machine for Research and Development purposes through Waters Financial. As of March 31, 2002 the company has $20,707 outstanding on a three year lease. Schedule II Litigation, Investigations and Proceedings None. Schedule III Subsidiaries Company Jurisdiction Percentage Owned - ------- ------------ ---------------- BioSphere Medical, S.A. France 100% BioSphere Medical Japan, Inc. Delaware 100% BSMD Ventures, Inc. Delaware 100% Schedule IV Existing Indebtedness None other than capitalized leases described on Schedule I. ANNEX A PROMISSORY NOTE $5,000,000 May 17, 2002 Boston, Massachusetts For value received the undersigned, promises to pay to the order of Brown Brothers Harriman & Co., a New York general partnership (the "Lender"), on or before May 17, 2004 the principal sum of $5,000,000 or, if less, the aggregate unpaid principal amount of all advances made by the Lender under the Credit Agreement referred to below, and outstanding at maturity, together with interest thereon or on such portion thereof as may be from time to time outstanding, at such rate or rates, and payable at such times and manner, as are provided in the said Credit Agreement. Payments of principal and interest shall be made to Lender at its offices at 40 Water Street, Boston, Massachusetts 02109-3661. This Note is issued under the Credit Agreement dated as of May 17, 2002, between the undersigned, as borrower and the Lender, as lender, and is subject to the terms and conditions of the Credit Agreement. Upon the occurrence of certain events, as specified in the Credit Agreement, the principal of this Note may be declared due and payable in the manner and with the effect provided in the Credit Agreement. The undersigned hereby agrees to pay on demand all costs and expenses (including, without limitation, reasonable attorneys' fees and disbursements) paid or incurred by the holder in enforcing this Note on default or in connection with any bankruptcy, reorganization, receivership or other insolvency proceeding involving the undersigned. THE UNDERSIGNED HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ENFORCEMENT OF THIS NOTE AND AGREES THAT IT WILL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. This Note shall take effect as a sealed instrument and be governed by the laws of the Commonwealth of Massachusetts. BioSphere Medical, Inc. By: /s/ Robert M. Palladino ---------------------------------------------- EX-10.2 4 secagrm.txt SECURITY AGREEMENT EXHIBIT 10.2 SECURITY AGREEMENT THIS SECURITY AGREEMENT is made as of the 17th day of May, 2002, by and between BioSphere Medical, Inc., a Delaware corporation ("Debtor"); and Brown Brothers Harriman & Co., a New York general partnership ("Secured Party"). WITNESSETH: WHEREAS, Debtor has executed and delivered to Secured Party a Credit Agreement of even date herewith (as the same may be amended, extended or restated from time to time, the "Loan Agreement"); and WHEREAS, pursuant to the Loan Agreement, Debtor has executed and delivered to Secured Party a Promissory Note of even date herewith in the original principal amount of up to $5,000,000 (as the same may be amended, extended, renewed or restated from time to time, the "Note"); and WHEREAS, Debtor has agreed to enter into this Security Agreement in order to induce Secured Party, inter alia, to make the loans to be evidenced by the Note; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. The Security Interests. --------- ---------------------- (a) In order (i) to secure the due and punctual payment of the Note; (ii) to secure the due and punctual payment and performance of all obligations of Debtor contained herein; (iii) to secure the due and punctual payment and performance of all indebtedness, obligations and liabilities of Debtor contained in the Loan Agreement and in all other agreements executed or delivered by Debtor in connection with or as contemplated by the Loan Agreement; and (iv) to secure the due and punctual payment and performance of all other indebtedness, liabilities and obligations of Debtor to Secured Party of every kind and description, whether direct, indirect or contingent, whether now existing or hereafter arising or incurred, whether due or to become due, whether otherwise secured or unsecured and howsoever evidenced, incurred or arising, including, without limitation, all indebtedness, liabilities and obligations evidenced or arising pursuant to any promissory note, loan agreement, equipment lease, conditional sales agreement, consignment agreement, guaranty, overdraft, bankers' acceptance, forward contract, foreign exchange contract, letter of credit reimbursement agreement or any other agreement or instrument which may at any time be executed or issued for Debtor's account or to which Debtor is now or hereafter may become a party (all of the foregoing are hereinafter collectively called the "Obligations"), Debtor hereby grants to Secured Party a continuing security interest in the following described fixtures and personal property, whether now existing or hereafter arising (hereinafter collectively called the "Collateral"): All fixtures and all tangible and intangible personal property of Debtor of every kind and description and wherever located, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest, including, without limitation: (1) all equipment (as such term is defined in the Uniform Commercial Code [the "UCC"]), machinery and fixtures, including, without limitation, all processing and manufacturing equipment, machine tools, data processing and computer equipment, furniture, tools, dies, molds, motor vehicles, rolling stock, trailers, airplanes, vessels and other equipment of every kind and description, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (2) all inventory (as such term is defined in the UCC), including without limitation, all merchandise, raw materials, work in process, parts, components, dies, molds, finished goods, supplies and all goods returned to or repossessed by Debtor, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (3) all accounts (as such term is defined in the UCC), accounts receivable, other receivables, evidences of indebtedness, notes, drafts, acceptances, contract rights, leases, chattel paper and electronic chattel paper (as such terms are defined in the UCC), commercial tort claims (as such term is defined in the UCC), and general intangibles (as such term is defined in the UCC), including, without limitation, all collateral and security therefor and all supporting obligations (as such term is defined in the UCC) of every kind and description (including, without limitation, all guarantees, letters of credit, letter-of-credit rights (as such term is defined in the UCC), liens and security interests in favor of Debtor), and all goodwill, going concern value, patents, applications for patents, trademarks, trade names, service marks, registrations of trademarks and servicemarks, customer lists, advertising materials, operating manuals, copyrights, blueprints, designs, engineering drawings and contracts, proprietary information, product lines, distribution agreements, dealer contracts, supplier contracts, tax refund claims, licenses, research and development, and all rights to the payment of money, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; (4) all instruments (as such term is defined in the UCC), documents of title, policies and certificates of insurance, securities (as such term is defined in the UCC), securities entitlements (as such term is defined in the UCC), investment property (as such term is defined in the UCC), partnership interests, membership interests in limited liability companies, bank deposits, deposit accounts (as such term is defined in the UCC), checking accounts, certificates of deposit and cash, in each case whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest, including, without limitation, all right, title and interest of Debtor in and to its account with Secured Party entitled BioSphere Medical, Inc., Account Number 2430064, and all money, investment property and financial assets now or hereafter held in such account; (5) all accessions, additions and improvements to, all substitutions for and all proceeds and products of, all of the foregoing, including proceeds of insurance, whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest; and (6) all books, records, documents, computer tapes and discs relating to all of the foregoing, whether now owned or hereafter acquired by Debtor, or in which Debtor may now have or hereafter acquire an interest. Notwithstanding any provision of this Agreement to the contrary, Collateral shall not include: (i) Debtor's ownership interest in its subsidiaries, now or hereafter existing, including the subsidiaries listed on Schedule III of the Loan Agreement; (ii) the property that is described in the financing statement listed in Exhibit B hereto; (iii) certain equipment hereafter acquired by Debtor if such equipment is covered by a lien that secures purchase money indebtedness incurred by Debtor solely for the purpose of acquiring such equipment and so long as the amount of such indebtedness does not exceed the fair value of such equipment at the time of acquisition; and (iv) the leased equipment described in Schedule I attached hereto and made a part hereof. (b) All of Debtor's accounts, accounts receivable, contract rights, chattel paper, general intangibles and rights to the payment of money, and all collateral and security therefor and related supporting obligations, and all proceeds thereof, are sometimes hereinafter collectively called the "Customer Receivables". All of Debtor's equipment, fixtures and inventory are sometimes hereinafter collectively called the "Tangible Collateral". (c) The security interests granted pursuant to this Section 1 (the "Security Interests") are granted as security only and shall not subject Secured Party to, or transfer to Secured Party, or in any way affect or modify, any obligation or liability of Debtor under any of the Collateral or any transaction which gave rise thereto. (d) If Debtor shall at any time acquire a commercial tort claim, as defined in Article 9 of the UCC, Debtor shall promptly notify Secured Party in writing of the brief details thereof and shall grant to Secured Party in writing a security interest therein and in the proceeds thereof, all on the terms of this Security Agreement, and in writing in form and substance reasonably satisfactory to Secured Party. (e) For avoidance of doubt it is expressly understood and agreed that (i) the Collateral is intended to consist of all assets of Debtor other than Debtor's ownership interest in its subsidiaries, now or hereafter existing, including the subsidiaries listed on Schedule III to the Loan Agreement, the property that is described in the financing statement listed in Exhibit B hereto, certain equipment hereafter acquired by Debtor if such equipment is covered by a lien that secures purchase money indebtedness incurred by Debtor solely for the purpose of acquiring such equipment and so long as the amount of such indebtedness does not exceed the fair value of such equipment at the time of acquisition, and the leased equipment described in Schedule I attached hereto and made a part hereof; and (ii) to the extent the UCC is revised subsequent to the date hereof such that the definition of any of the foregoing terms included in the description of Collateral is changed, the parties agree that any property which is included in such changed definitions which would not otherwise be included in the foregoing grant on the date hereof be included in such grant immediately upon the effective date of such revision, it being the intention of the parties hereto that the description of Collateral set forth herein be construed to include the broadest possible range of property and assets and all tangible and intangible personal property and fixtures of Debtor of every kind and description other than as specifically excluded herein. Section 2. Delivery of Pledged Securities and Chattel Paper. --------- ------------------------------------------------- (a) All securities of Debtor, whether now owned or hereafter acquired by Debtor, shall be promptly delivered to Secured Party by Debtor pursuant hereto (which securities, together with all other securities, securities entitlements, and shares of stock which may hereafter be delivered to Secured Party pursuant to the terms hereof, are hereinafter called the "Pledged Securities"), shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignments in blank, with signatures appropriately guaranteed, and accompanied in each case by any required transfer tax stamps, all in form and substance satisfactory to Secured Party. Exhibit A attached hereto and made a part hereof sets forth a complete description of all Pledged Securities owned by Debtor on the date hereof. Debtor shall from time to time promptly and in accordance with the foregoing provisions deliver to Secured Party any and all Pledged Securities which may hereafter be acquired by Debtor. (b) Secured Party may at any time or from time to time, in its sole discretion, require Debtor to cause any chattel paper included in the Customer Receivables to be delivered to Secured Party or any agent or representative designated by it, or to cause a legend referring to the Security Interests to be placed on such chattel paper and upon any ledgers or other records concerning the Customer Receivables. Section 3. Filing; Further Assurances. --------- -------------------------- Debtor will, at its expense, execute, deliver, file and record (in such manner and form as Secured Party may reasonably require), or permit Secured Party to file and record, any financing statements, any carbon, photographic or other reproduction of a financing statement or this Security Agreement (which the parties hereto agree shall be sufficient as a financing statement hereunder), any specific assignments or other paper that may be reasonably necessary or desirable, or that Secured Party may reasonably request, in order to create, confirm, preserve, perfect or validate any Security Interest or to enable Secured Party to exercise and enforce its rights and remedies hereunder or under applicable law with respect to any of the Collateral. Debtor hereby authorizes Secured Party, at any time and from time to time, without the Debtor's further signature or authorization, to file financing statements, continuation statements and amendments thereto that describe or indicate the Collateral including, without limitation, an indication that the Collateral consists of "all assets" of the Debtor or words of similar effect and which contain any other information required by Part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether Debtor is an organization, the type of organization and any organization identification number issued to Debtor. Debtor agrees to furnish any such information to Secured Party promptly upon request. Section 4. Debtor's Representations and Warranties. --------- --------------------------------------- Debtor hereby represents and warrants to Secured Party as follows: (a) Except as described in Exhibit B attached hereto and made a part hereof and liens permitted by the Loan Agreement, Debtor is, or to the extent that certain of the Collateral is to be acquired after the date hereof, will be, the owner of the Collateral free from any adverse lien, security interest or encumbrance. (b) Except for such financing statements as may be described in Exhibit B attached hereto and made a part hereof, no financing statement covering the Collateral is on file in any public office, other than the financing statements filed pursuant to this Security Agreement. (c) All additional information, representations and warranties contained in Exhibit C attached hereto and made a part hereof, and any Schedules attached to said Exhibit C, are true, accurate and complete on the date hereof. (d) There are no restrictions upon the voting rights or the transfer of all or any of the Pledged Securities (other than may appear on the face of the certificate thereof) and Debtor has the right to vote, pledge, grant a security interest in, and otherwise transfer the Pledged Securities free of any encumbrances (other than applicable restrictions imposed by Federal or state securities laws or regulations). Debtor is not affiliated with the issuers of any securities constituting Collateral through officers, directors or otherwise and Debtor does not hold, directly or indirectly, more than 10% of the securities of any issuer of securities constituting Collateral. (e) Exhibit D attached hereto constitutes an accurate and complete list of all patents, trademarks, tradenames, patent applications, servicemarks and registrations of the foregoing owned by or held by Debtor. Section 5. Debtor's Covenants. --------- ------------------ Debtor hereby covenants and agrees with Secured Party that Debtor will: (a) Defend the Collateral against all claims and demands of all persons at any time claiming any interest therein (other than the parties holding liens permitted by the Loan Agreement to secure indebtedness permitted by the Loan Agreement). (b) Provide Secured Party, at least fifteen (15) business days prior to occurrence, with written notice of (i) any change in Debtor's chief executive office or the office where Debtor maintains its books and records pertaining to the Customer Receivables, (ii) the movement or location of Collateral to or at any address other than as set forth in said Exhibit C, and (iii) any event or occurrence which would render any material warranty or information contained in Exhibit C or D hereto inaccurate or incomplete. (c) Promptly notify Secured Party of any event causing a substantial loss or diminution in the value of all or any material part of the Collateral and the amount or an estimate of the amount of such loss or diminution. (d) Except as otherwise permitted by the Loan Agreement and Section 27 hereof, not sell or offer to sell or otherwise assign, transfer or dispose of the Collateral or any interest therein, without Secured Party's prior written consent; provided, however, that Debtor may sell inventory, if any, in the ordinary course of its business, may enter into licenses of its intellectual property in the ordinary course of its business, and may sell equipment having an aggregate value not to exceed $200,000 in any calendar year. (e) Except as otherwise permitted by the Loan Agreement, keep the Collateral free from any adverse lien, security interest or encumbrance and in good order and repair, reasonable wear and tear excepted, and not waste or destroy the Collateral or any part thereof. (f) Not use the Collateral in violation of applicable law or of any policy of insurance applicable thereto. (g) Not change its corporate name, identity, structure or state of organization or formation without at least thirty (30) days prior written notice to Secured Party. (h) At Secured Party's request, execute, acknowledge and deliver such further documents and instruments as Secured Party may from time to time reasonably request or require to confirm Secured Party's Security Interests in and to any patent, trademark or service mark, and any registrations or applications for same. (i) Promptly pay any and all taxes, assessments and governmental charges upon the Collateral prior to the date penalties are attached thereto, except to the extent that such taxes, assessments and charges shall be contested in good faith by Debtor, adequate reserves have been set aside therefor, and payment of such contested taxes made prior to the institution of any enforcement proceeding which could adversely affect the Security Interests or the Collateral. (j) Have and maintain insurance at all times with respect to the Tangible Collateral against risks of fire (including so-called extended coverage) and theft, and such other risks as Secured Party may reasonably require in writing, containing such terms, in such form, in such amounts, for such periods, and written by such companies as may be reasonably satisfactory to Secured Party, such insurance to name Secured Party as "additional insured" and "mortgagee" thereunder and to be payable to Secured Party and Debtor as their respective interests may appear pursuant to Loss Payable Endorsements in form acceptable to Secured Party. All policies of insurance shall provide for thirty (30) days' prior written notice to Secured Party of cancellation or material amendment of the policies, and Debtor shall furnish Secured Party with certificates or other evidence satisfactory to Secured Party of compliance with the foregoing insurance provisions. Debtor shall notify Secured Party of any material change in the insurance maintained with respect to the Tangible Collateral and shall furnish Secured Party satisfactory evidence of any such change. Without limiting any other remedies available to Secured Party, in the event Debtor shall default in the performance of its obligations under this paragraph (j), Secured Party, at its option, may effect such insurance coverage with an insurer acceptable to Secured Party and add the premium(s) paid therefor to the Obligations secured hereby, and the amount of such premium(s) shall be payable by Debtor on demand with interest thereon at the highest rate payable under the agreements evidencing the Obligations. (k) Take such steps as the Secured Party may reasonably request for Secured Party (i) to obtain an acknowledgement, in form and substance satisfactory to Secured Party, of any bailee having possession of any of the Collateral that the bailee holds such Collateral for Secured Party, (ii) to obtain "control" of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper (as such terms are defined in Article 9 of the UCC) with any agreements establishing control to be in form and substance reasonably satisfactory to Secured Party, and (iii) otherwise to insure the continued perfection and priority of Secured Party's security interest in the Collateral and of the preservation of its rights therein. Section 6. Records Relating to Collateral. --------- ------------------------------ Debtor will keep its records concerning the Collateral, including the Customer Receivables and all chattel paper included in the Customer Receivables, at its offices at 1050 Hingham Street, Rockland, Massachusetts, or at such other place or places of business as Secured Party may approve in writing. Debtor will hold and preserve such records and chattel paper and will permit Secured Party's representatives at any time during normal business hours to examine and inspect the Collateral and to make abstracts from such records and chattel paper, and will furnish to Secured Party such information and reports regarding the Collateral as Secured Party may from time to time reasonably request. Section 7. Collections with Respect to Customer Receivables. --------- ------------------------------------------------ Debtor will, at its expense: (i) endeavor to collect or cause to be collected from customers indebted on Customer Receivables, as and when due, any and all amounts, including interest, owing under or on account of each Customer Receivable; and (ii) take or cause to be taken such appropriate action to repossess goods, the sale or rental of which gave rise to any Customer Receivable, and to enforce any rights or liens under Customer Receivables, in the name of Debtor or Secured Party, as Secured Party may deem proper; provided, however, that (a) Debtor will at all times use its best judgment to protect the interests of Secured Party, and (b) Debtor shall not be required under this Section 7 to take any action which would be contrary to any applicable law, court order or standard practice in Debtor's industry. Debtor shall, at Secured Party's request following the occurrence of an Event of Default that continues beyond the expiration of any applicable grace or cure period, if any, notify Debtor's account debtors of the Security Interests in the Customer Receivables and Secured Party may itself at any such time following the occurrence of an Event of Default that continues beyond the expiration of any applicable grace or cure period, if any, so notify account debtors. Secured Party shall have full power at any time after such notice to collect, compromise, endorse, sell or otherwise deal with any or all outstanding Customer Receivables or the proceeds thereof in the name of either Secured Party or Debtor, as Secured Party shall reasonably determine. In the event that, after notice to any account debtors to pay Secured Party, Debtor receives any payment on a Customer Receivable, all such payments shall be held by Debtor in trust for Secured Party and promptly turned over to Secured Party. Section 8. Record Ownership of Pledged Securities. --------- -------------------------------------- Upon the occurrence of an Event of Default that continues beyond the expiration of any applicable grace or cure period, if any, Secured Party may cause any or all of the Pledged Securities to be transferred of record into Secured Party's name. Debtor will promptly give to Secured Party copies of any notices or other communications received by Debtor with respect to Pledged Securities registered in the name of Debtor and Secured Party will promptly give to Debtor copies of any notices and communications received by Secured Party with respect to Pledged Securities registered in the name of Secured Party. Section 9. Right to Receive Distributions on Pledged Securities. --------- ---------------------------------------------------- Unless an Event of Default shall have occurred that continues beyond the expiration of any applicable grace or cure period, if any, Debtor shall be entitled, from time to time, to collect and receive for its own use all dividends, interest and other payments and distributions made upon or with respect to the Pledged Securities, except (i) stock dividends, (ii) dividends payable in securities or other property, and non-cash dividends, (iii)dividends or distributions on dissolution, or on partial or total liquidation, or in connection with a reduction of capital, capital surplus or paid-in surplus, and (iv) other securities issued with respect to or in lieu of the Pledged Securities (whether upon conversion of the convertible securities included therein or through stock split, spin-off, split-off, reclassification, merger, consolidation, sale of assets, combination of shares or otherwise). Secured Party shall have the right to receive and retain all dividends, interest and other payments and distributions made upon or with respect to the Pledged Securities, except those which Debtor is specifically authorized to receive as provided above, and Debtor shall take all such action as may be necessary or appropriate to give effect to such right. From time to time upon receiving a written request from Debtor accompanied by a certificate signed by its principal financial officer or designee stating that no Event of Default has occurred and is continuing, Secured Party shall deliver to Debtor suitable assignments and orders for the payment to Debtor or upon its order of all dividends, interest and other payments and distributions to which Debtor is entitled as set forth herein, upon or with respect to any Pledged Securities which are registered in Secured Party's name. Section 10. Right to Vote Pledged Securities. ---------- -------------------------------- Unless an Event of Default shall have occurred that continues beyond the expiration of any applicable grace or cure period, if any, Debtor shall have the right, from time to time, to vote and to give consents, ratifications and waivers with respect to the Pledged Securities and to exercise conversion rights with respect to the convertible securities included therein, and Secured Party shall, upon receiving a written request from Debtor accompanied by a certificate signed by its principal financial officer stating that no Event of Default has occurred and is continuing, deliver to Debtor or as specified in such request such proxies, powers of attorney, consents, ratifications and waivers as Secured Party shall approve in respect of any Pledged Securities which are registered in Secured Party's name, and make such arrangements with respect to the conversion of convertible securities as shall be specified in Debtor's request and be in form and substance reasonably satisfactory to Secured Party. If an Event of Default shall have occurred that continues beyond the expiration of any applicable grace or cure period, if any, and provided Secured Party elects to exercise the rights hereinafter set forth by notice to Debtor of such election, Secured Party shall have the right to the extent permitted by law, and Debtor shall take all such action as may be necessary or appropriate to give effect to such right, to vote and to give consents, ratifications and waivers and take any other action with respect to all the Pledged Securities with the same force and effect as if Secured Party were the absolute and sole owner thereof. The curing of any such Event of Default where no grace or cure period has been granted herein or the curing of any such Event of Default after the expiration of any applicable grace or cure period, if any, shall not divest Secured Party of its rights under Sections 8, 9, 10 and 11 hereof unless and until Secured Party in writing reinstates the rights of Debtor which existed prior to the occurrence of the Event of Default. Section 11. General Authority. ---------- ----------------- Debtor hereby irrevocably appoints Secured Party Debtor's true and lawful attorney, with full power of substitution, in the name of Debtor, Secured Party or otherwise, for the sole use and benefit of Secured Party, but at Debtor's expense, to the extent permitted by law to exercise, at any time and from time to time after any Event of Default has occurred that continues beyond the expiration of any applicable grace or cure period, if any, all or any of the following powers with respect to all or any of the Collateral (which power shall be in addition and supplemental to any powers, rights and remedies of Secured Party described herein or otherwise available to Secured Party under applicable law): (i) to demand, sue for, collect, receive and give acquittance for any and all moneys due or to become due upon or by virtue thereof, (ii) to receive, take, endorse, assign and deliver any and all checks, notes, drafts, documents and other negotiable and non-negotiable instruments and chattel paper taken or received by Secured Party in connection therewith, (iii)to settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto, (iv) to sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof or any related goods securing the Customer Receivables, as fully and effectually as if Secured Party were the absolute owner thereof, (v) to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto, and (vi) to discharge any taxes, liens, security interests or other encumbrances at any time placed thereon. The power conferred on Secured Party under this Section 11 is solely to protect, realize upon and enforce Secured Party's Security Interests and rights and remedies in respect to the Collateral and shall not impose any duty upon Secured Party to exercise such power. Section 12. Events of Default. ---------- ----------------- Debtor shall be in default under this Security Agreement upon the occurrence of any "Event of Default" as defined in the Loan Agreement, or in any agreement now or hereafter securing the Note, or in any agreement now or hereafter evidencing or securing any of the Obligations, and the continuance of such Event of Default beyond the expiration of any applicable grace or cure period, if any (each such event is herein referred to as an "Event of Default"). Section 13. Remedies Upon Event of Default. ---------- ------------------------------ (a) If any Event of Default shall have occurred and shall have continued beyond the expiration of any applicable grace or cure period, if any, Secured Party may exercise all the rights and remedies of a secured party under the UCC (whether or not the UCC is in effect in the jurisdiction where such rights and remedies are exercised) and, in addition, Secured Party may, without being required to give any notice, except as herein provided or as may be required by mandatory provisions of law, (i) apply the cash, if any, then held by it as Collateral in the manner specified in Section 15 hereof, and (ii) if there shall be no such cash or if such cash shall be insufficient to pay all the Obligations in full, sell the Collateral, or any part thereof, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery, and at such price as Secured Party may deem satisfactory. (b) Secured Party may require Debtor to assemble all or any part of the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient. Any holder of an Obligation may be the purchaser of any or all of the Collateral so sold at any public sale (and, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, at any private sale) and thereafter hold the same absolutely, free from any right or claim of whatsoever kind. Upon any such sale Secured Party shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold. Each purchaser at any such sale shall hold the Collateral so sold absolutely, free from any claim or right of whatsoever kind, including any equity or right of redemption of Debtor. (c) Unless the Collateral to be sold is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party shall give Debtor at least twenty (20) days' prior written notice of its intention to make any such public or private sale or sale at a broker's board or on a securities exchange. Such notice, in case of a public sale, shall state the time and place fixed for such sale, and in case of sale at a broker's board or on a securities exchange, shall state the board or exchange at which such sale is to be made and the day on which the Collateral, or the portion thereof so being sold, will first be offered for sale at such board or exchange. Such notice, in case of a private sale or disposition, shall state the time after which any private sale or other intended disposition is to be made. (d) Any such public sale shall be held at such time or times within ordinary business hours and at public or private place or places as Secured Party may fix in the notice of such sale. At any public or private sale, the Collateral may be sold in one lot as an entirety or in separate parcels, as Secured Party may determine. Secured Party shall not be obligated to make such sale pursuant to any such notice. Secured Party may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale,. and such sale may be made at any time or place to which the same may be adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by Secured Party until the selling price is paid by the purchaser thereof, but Secured Party shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. (e) Debtor acknowledges that Secured Party may be unable to effect a public sale of Pledged Securities by reason of prohibitions contained in applicable state and federal securities laws, and agrees that Secured Party is authorized, at any such sale, if it deems it advisable so to do, to restrict the prospective bidders or purchasers of any of the Pledged Securities to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or sale of any of such Pledged Securities. Debtor agrees that any private sale of Pledged Securities may be at prices and on terms less favorable than if sold at public sales, and Debtor agrees that such private sales shall not by reason thereof be deemed to have been made in a commercially unreasonable manner. Secured Party shall have no obligation to delay any sale of Pledged Securities for the period of time necessary to permit the issuer of such Pledged Securities to register such securities for public sale under applicable securities laws, even if such issuer would agree to do so. (f) Secured Party, instead of exercising the power of sale herein conferred upon it, may proceed by a suit or suits at law or in equity to foreclose the Security Interests and sell the Collateral, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. (g) All rights and remedies contained herein shall be separate and cumulative and in addition to all other rights and remedies available to a secured party under applicable law, and the exercise of one shall not in any way limit or prejudice the exercise of any other such rights or remedies. Section 14. Right of Secured Party to Use and Operate Tangible Collateral, Etc. ---------- -------------------------------------------------------------- Upon the occurrence of an Event of Default that shall continue beyond the expiration of any applicable grace or cure period, if any, to the extent permitted by law, Secured Party shall have the right and power to take possession of all or any part of the Tangible Collateral, and to exclude Debtor and all persons claiming under Debtor wholly or partly therefrom, and thereafter to hold, store, and/or use, operate, manage and control the same. Upon any such taking of possession, Secured Party may, from time to time, at Debtor's expense, make all such repairs, replacements, alterations, additions and improvements to and of the Tangible Collateral as Secured Party may reasonably deem proper. In such case, Secured Party shall have the right to manage and control the Tangible Collateral and to carry on the business and to exercise all rights and powers of Debtor in respect thereto as Secured Party shall deem best, including the right to enter into any and all such agreements with respect to the leasing and/or operation of the Tangible Collateral or any part thereof as Secured Party may deem fit; and Secured Party shall be entitled to collect and receive all rents, issues, profits, fees, revenues and other income of the same and every part thereof. Such rents, issues, profits, fees, revenues and other income shall be applied to pay the expenses of holding and operating the Tangible Collateral and of conducting the business thereof, and of all maintenance, repairs, replacements, alterations, additions and improvements, and to make all payments which Secured Party may be required or may elect to make, if any, for taxes, assessments, insurance and other charges upon the Tangible Collateral or any part thereof, and all other payments which Secured Party may be required or authorized to make under any provision of this Security Agreement (including legal costs and attorney's fees). The remainder of such rents, issues, profits, fees, revenues and other income shall be applied to the payment of the Obligations in such order or priority as Secured Party shall determine (subject to the provisions of Section 15 hereof) and, unless otherwise provided by law or by a court of competent jurisdiction, any surplus shall be paid over to Debtor. Section 15. Application of Collateral and Proceeds. ---------- -------------------------------------- The proceeds of any sale of, or other realization upon, all or any part of the Collateral shall be applied in the following order of priorities: (a) first, to pay the actual and reasonable expenses of such sale or other realization, including reasonable commission to Secured Party's agent, and all expenses, liabilities and advances incurred or made by Secured Party in connection therewith, and any other unreimbursed expenses for which Secured Party is to be reimbursed pursuant to Section 16 hereof; (b) second, to the payment of the Obligations in such order and manner as Secured Party, in its sole discretion, shall determine; and (c) finally, unless applicable law otherwise provides, to pay to Debtor, or its successors or assigns, or as a court of competent jurisdiction may direct, any surplus then remaining from such proceeds. Section 16. Expenses; Secured Party's Lien. ---------- ------------------------------ Debtor will forthwith upon demand pay to Secured Party: (a) the amount of any taxes which Secured Party may at any time be required to pay by reason of the Security Interests (including any applicable transfer taxes and taxes payable in connection with the filing of financing statements to perfect the Security Interests) or to free any of the Collateral from any lien thereon, and (b) the amount of any and all actual and reasonable out-of-pocket expenses, including reasonable attorneys' fees and the reasonable fees and disbursements of any agents not regularly in its employ, which Secured Party may incur in connection with (i) the preparation and administration of this Security Agreement, (ii) the collection, sale or other disposition of any of the Collateral, (iii) the exercise by Secured Party of any of the powers, rights or remedies conferred upon it hereunder, or (iv) any Event of Default hereunder. Section 17. Termination of Security Interests; Release of Collateral. ---------- -------------------------------------------------------- Upon the repayment and performance in full of all the Obligations, the expiration of all obligations of Secured Party to extend credit or provide financial accommodations to Debtor under the Loan Agreement, and the termination of the Loan Agreement, the Security Interests shall terminate and all rights to the Collateral shall revert to Debtor. Upon any such termination of the Security Interests or release of Collateral, Secured Party will, at Debtor's expense to the extent permitted by law, execute and deliver to Debtor such documents as Debtor shall reasonably request to evidence the termination of the Security Interests or the release of such Collateral, as the case may be. Section 18. Notices. ---------- ------- All notices, communications and demands hereunder shall be in writing and sent by certified or registered mail, return receipt requested, or by overnight delivery service, with all charges prepaid, to the applicable party or parties at the addresses set forth below, or by facsimile transmission (including, without limitation, computer generated facsimile), promptly confirmed in writing sent by first class mail, to the FAX numbers and addresses set forth below: (i) If to Debtor, to it at: Mr. Robert M. Palladino BioSphere Medical, Inc. 1050 Hingham Street Rockland, Massachusetts 02370 Fax No. (781) 681-5093 with a copy to: Attorney Meryl J. Epstein Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02111 Fax No. (617) 542-2241 (ii) If to Secured Party, to it at: Brown Brothers Harriman & Co. 40 Water Street Boston, Massachusetts 02109-3661 Attn: Peter D. Costa Fax No. (617) 772-1138 with a copy to: Attorney Janet S. Fogarty MacAdams & Wieck Incorporated 101 Dyer Street, Suite 400 Providence, Rhode Island 02903 Fax No. (401) 454-8755 or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties complying as to delivery with the terms of this Section. All such notices and correspondence shall be deemed given upon the earliest to occur of (i) actual receipt, (ii) if sent by certified or registered mail, three (3) business days after being postmarked, (iii) if sent by overnight delivery service, when received or when delivery is refused, or (iv) if sent by facsimile, when receipt of such transmission is acknowledged. Section 19. Waivers; Non-Exclusive Remedies. ---------- ------------------------------- (a) Except as otherwise specifically provided herein, Debtor hereby waives demand, notice, protest, notice of acceptance of this Security Agreement, notice of loans made, credit extended, collateral received or delivered or other action taken in reliance hereon (and all other demands and notice of any description). With respect to both the Obligations and the Collateral, Debtor hereby assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as Secured Party may deem advisable. (b) Except as otherwise provided by applicable law, Secured Party shall not have any duty as to the collection or protection of the Collateral or any income thereon, nor as to the preservation of rights against prior parties, nor as to the preservation of any rights pertaining thereto beyond the safe custody of any Collateral in its possession. Except as otherwise provided by applicable law, Secured Party may exercise its rights with respect to the Collateral without resorting or regard to other collateral or sources of reimbursement for liability. Except as otherwise provided by applicable law, Secured Party shall not be required to marshal any present or future security for (including, but not limited to, this Security Agreement and the Collateral subject to the Security Interest created hereby), or guaranties of, the Obligations or any of them, or to resort to such security or guarantees in any particular order; and all of its rights hereunder and in respect of such security and guarantees shall be cumulative and in addition to all other rights, however existing or arising. To the extent that it lawfully may do so, Debtor hereby agrees that it will not invoke any law relating to the marshalling of collateral which might cause delay in or impede the enforcement of Secured Party's rights under this Security Agreement or under any other instrument evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or guaranteed, and to the extent that it lawfully may do so, Debtor hereby irrevocably waives the benefits of all such laws. (c) No failure on the part of Secured Party to exercise, and no delay in exercising, and no course of dealing with respect to, any right, power or remedy under this Security Agreement shall operate as a waiver thereof; nor shall any single or partial exercise by Secured Party of any right, power or remedy under this Security Agreement preclude any other right, power or remedy. The remedies in this Security Agreement are cumulative and are not exclusive of any other remedies provided by law, including any rights of setoff in favor of Secured Party. (d) Debtor, to the extent it may lawfully do so, hereby consents to the jurisdiction of the courts of the Commonwealth of Massachusetts and the Federal District Courts sitting in the Commonwealth of Massachusetts for the purpose of any suit or proceeding brought in connection with or with respect to this Security Agreement. Section 20. Waiver of Jury Trial. ---------- -------------------- EACH OF DEBTOR AND SECURED PARTY HEREBY EXPRESSLY WAIVES TRIAL BY JURY IN ANY ACTION BROUGHT ON OR WITH RESPECT TO THIS SECURITY AGREEMENT. Section 21. Changes in Writing. ---------- ------------------ Neither this Security Agreement nor any provision hereof may be changed, waived, discharged or terminated orally but only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. Section 22. Massachusetts Law; Meaning of Terms. ---------- ----------------------------------- This Security Agreement shall be construed in accordance with and governed by the laws of the Commonwealth of Massachusetts applicable to contracts made and performed in said commonwealth, except to the extent that remedies provided by the laws of any state other than Massachusetts are governed by the laws of such state. Unless otherwise defined herein, or unless the context otherwise requires, all terms used herein which are defined in the UCC as in effect in the Commonwealth of Massachusetts have the meanings therein stated. Section 23. Separability. ---------- ------------ If any provision hereof is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of Secured Party. Section 24. Successors and Assigns. ---------- ---------------------- This Security Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, any subsequent holders of the Note or any of the Obligations, each of whom shall, without further act, become a party hereto by becoming a holder of the Note or such Obligations. Section 25. Headings. ---------- -------- The headings in this Security Agreement are for the purposes of reference only and shall not limit or otherwise affect the meaning hereof. Section 26. Counterparts. ---------- ------------ This Security Agreement may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same agreement. Section 27. Permitted Transfer of Cash or Cash Equivalents. ---------- ---------------------------------------------- Notwithstanding any provision of this Agreement to the contrary, Debtor may at its election direct the disposition of funds from the Pledged Account (as defined in the Loan Agreement) and may originate instructions or entitlement orders with respect to the Pledged Account so long as: (a) Debtor is at all times in compliance with Sections 5.8 and 5.10 of the Loan Agreement (both prior to and after giving effect to any such directions, instructions or entitlement orders); and (b) no Event of Default has occurred hereunder and continued beyond the expiration of any applicable grace or cure period, if any, or would result from the taking of any such action permitted hereunderno condition which, with the giving of notice or the passage of time, or both, would constitute an Event of Default hereunder exists or would result from the taking of any such action permitted hereunder. IN WITNESS WHEREOF, this Security Agreement has been executed by the parties hereto all as of the day and year first above written. BIOSPHERE MEDICAL, INC. By: /s/ Robert M. Palladino ---------------------------------------- Title: Vice President / CFO -------------------------------- BROWN BROTHERS HARRIMAN & Co. By: /s/ Joseph E. Hall ---------------------------------------- Title: Senior Vice President -------------------------------- EXHIBIT A Pledged Securities Existing on Date Hereof Debtor owns no securities, security entitlements or shares of stock as of the date hereof. EXHIBIT B Financing Statements on File on Date Hereof Filing Secured File Collateral Office Party No. Date Description - -------------------------------------------------------------------------------- Delaware Waters 20268742 1/3/02 Specified Secretary Financial Equipment of State Services EXHIBIT C Additional Representations and Warranties 1. Debtor's exact name is: BioSphere Medical, Inc. 2. Debtor's Federal Tax Identification Number is: #04-3216867. 3. Debtor's organization number assigned to Debtor by the Secretary of State of its state of formation is #NONE. 4. Debtor uses in its business and owns the following trade names: None. 5. Debtor's chief executive office is: 1050 Hingham Street, Rockland, Massachusetts 02370 6. Debtor's principal place of business is: 1050 Hingham Street, Rockland, Massachusetts 02370 7. Debtor has other places of business located at: 1050 Hingham Street, Rockland, Massachusetts 02370 8. Debtor owns or has an interest in personal property located elsewhere at: None. 9. Debtor owns property consisting of fixtures at the following locations: Address Record Owner of Real Estate 1050 Hingham Street Rockland, Massachusetts 02370 True and complete legal descriptions of such real estate are attached hereto as Schedules - ---------------. EXHIBIT D Patents, Trademarks, Tradenames, Etc. SCHEDULE I Leased Equipment o (10) IBM Thinkpads and (1) 340 Microdrive Thinkpad leased by Debtor through Heller Financial Group pursuant to a five year lease that began in April 2001. o (1) Dell Firewall Server leased by Debtor through Dell Equipment Leasing pursuant to a three year lease that began in May 1, 2002. o (1) High Performance Liquid Chromatography Machine leased by Debtor through Waters Financial pursuant to a three year lease that began in January 2002. EX-10.3 5 jmcresign.txt LETTER AGREEMENT JMC EXHIBIT 10.3 May 31, 2002 Via Facsimile Transmission Mr. John M. Carnuccio 22 Winsor Street Duxbury, MA 02332 Dear John: During our discussions, you have notified me that you are resigning from your positions as Chief Executive Officer and member of the Board of Directors of BioSphere Medical, Inc. (the "Company") effective September 1, 2002. Also effective September 1, 2002, you are resigning all positions you hold with any company that is a subsidiary of, or affiliated with, the Company. Although you are resigning, the Company is prepared to provide you with the severance benefits described in paragraph 2 below if you sign and return this letter agreement to me by May 31, 2002. By signing and returning this letter agreement, you will be entering into a binding agreement with the Company and will be agreeing to the terms and conditions set forth in the numbered paragraphs below, including the release of claims set forth in paragraph 3. Therefore, you are advised to consult with your attorney before signing this letter agreement. Once you sign this letter agreement, it will become a binding agreement between you and the Company. If you choose not to sign and return this letter agreement to me by May 31, 2002, you shall not receive any severance benefits from the Company and your employment will terminate on that date. You will, however, receive payment for all accrued wages and for any unused vacation time accrued through the Separation Date (as defined below). Also, regardless of signing this letter, you may elect to continue receiving group medical insurance pursuant to the federal "COBRA" law, 29 U.S.C. ss. 1161 et seq. All premium costs shall be paid by you on a monthly basis for as long as, and to the extent that, you remain eligible for COBRA continuation. You should consult the COBRA materials to be provided by the Company for details regarding these benefits. All other benefits, including life insurance and long term disability, will cease upon your Separation Date. Further, pursuant to the BioSphere Medical, Inc. (f/k/a BioSepra Inc.) 1997 Stock Incentive Plan and your Incentive Stock Option Agreement, you will have up to thirty-six (36) months after the Separation Date to exercise any vested stock options you may have as of the Separation Date (as provided for by the plan and related agreement). All unvested stock options will be cancelled on the Separation Date. The following numbered paragraphs set forth the terms and conditions which will apply if you sign and return this letter agreement: 1. SEPARATION DATE AND TRANSITION PERIOD - The effective date of your separation from the Company, resignation from the Board of Directors, and resignation from all positions you hold with any and all subsidiaries and affiliates of the Company is September 1, 2002 (the "Separation Date"). The period of May 31, 2002 to September 1, 2002, shall be your Transition Period. During the Transition Period, you will perform any and all services on behalf of the Company at my direction. All business-related communications with Company employees will be at my direction or through Robert Palladino. Your duties during the Transition Period will be performed from your home except as I may otherwise reasonably request or as we may mutually agree. On or before September 15, 2002, the Company shall pay you for four weeks of accrued and unused vacation in full satisfaction of any and all accrued and unused vacation you may have as of September 1, 2002. 2. SEVERANCE BENEFITS - In return for your execution of this letter agreement, including the release of claims in section 3 below, the Company agrees to pay you Three Hundred Ten Thousand Nine Hundred Sixty-Three Dollars and Four Cents ($310,963.04), less all applicable state and federal taxes (the "Severance Pay"). This Severance Pay equals your current annual salary and a bonus amount of $80,604.00. This Severance Pay will be paid in equal installments for a period of twenty-six (26) pay periods following the Separation Date in accordance with the Company's regular payroll practices. In addition, during the period of time that the Company is paying the Severance Pay (the "Severance Pay Period"), or until you become eligible for other coverage, whichever comes first, you shall be considered to have elected to continue receiving group medical insurance pursuant to the federal "COBRA" law, 29 U.S.C.ss.1161 et seq. During the Severance Pay Period, the Company shall continue to pay the -- --- share of the premium of such coverage that is paid by the Company for active and similarly-situated employees who receive the same type of coverage. The remaining balance of any premium costs, and all premium costs after the Severance Pay Period, shall be paid by you on a monthly basis for as long as, and to the extent that, you remain eligible for COBRA continuation. You should consult the COBRA materials to be provided by the Company for details regarding these benefits. 3. RELEASE - In consideration of the payment of the Severance Pay and benefits described above, which you acknowledge you would not otherwise be entitled to receive, you hereby fully, forever, irrevocably and unconditionally release, remise and discharge the Company, its officers, directors, stockholders, corporate affiliates, subsidiaries, parent companies, agents and employees (each in their individual and corporate capacities) (hereinafter, the "Released Parties") from any and all claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, sums of money, costs, accounts, reckonings, covenants, contracts, agreements, promises, doings, omissions, damages, executions, obligations, liabilities, and expenses (including attorneys' fees and costs), of every kind and nature which you ever had or now have against the Released Parties arising out of your employment with and/or separation from the Company, including, but not limited to, all employment discrimination claims under Title VII of the Civil Rights Act of 1964, 42 U.S.C.ss.2000e et seq., the Americans With Disabilities Act of 1990, 42 U.S.C.,ss.12101 et seq., the Family and Medical Leave Act, 29 U.S.C.ss.2601 et seq., the Rehabilitation Act of 1973, 29 U.S.C.ss.701 et seq., and the Massachusetts Fair Employment Practices Act., M.G.L. c.151B,ss.1 et seq., all as amended; all claims arising out of the Fair Credit Reporting Act, 15 U.S.C.ss.1681 et seq., the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. ss.1001 et seq., the Massachusetts Civil Rights Act, M.G.L. c.12ss.ss.11H and 11I, the Massachusetts Equal Rights Act, M.G.L. c.93,ss.102 and M.G.L. c.214,ss.1C, the Massachusetts Labor and Industries Act, M.G.L. c.149,ss.1 et seq., and the Massachusetts Privacy Act, M.G.L. c. 214,ss.1B, all as amended; all common law claims including, but not limited to, actions in tort, defamation and breach of contract (including any and all claims pursuant to your offer letter dated January 18, 1999); all claims to any non-vested ownership interest in the Company, contractual or otherwise, including but not limited to claims to stock or stock options; and any claim or damage arising out of your employment with or separation from the Company (including any claim for retaliation) under any common law theory or any federal, state or local statute or ordinance not expressly referenced above; provided, however, that nothing in this Agreement prevents you from filing, cooperating with, or participating in any proceeding before the EEOC or a state Fair Employment Practices Agency (except that you acknowledge that you may not be able to recover any monetary benefits in connection with any such claim, charge or proceeding); and provided further that nothing in this letter agreement shall affect your right to enforce the provisions of this letter agreement, nor shall it affect your right to claim contribution, indemnification or insurance coverage from the Company that you would have had if you had not entered into this letter agreement. In consideration of the undertakings, transactions and consideration recited in this letter agreement, the Company hereby unconditionally and irrevocably remises, releases and forever discharges you, your heirs and administrators, or any of them, of and from any and all suits, claims, demands, interest, costs (including attorney fees and costs actually incurred), expenses, actions and causes of action, rights, liabilities, obligations, promises, agreements, controversies, losses and debts, or any nature whatsoever, which the Company now has, or at any time heretofore ever had, or could have had, whether known or unknown, suspected or unsuspected, arising out of your employment with the Company; provided, however, nothing in this letter agreement shall affect the Company's right to enforce the provisions of this letter agreement. 4. NON-DISCLOSURE AND NON-COMPETITION- You acknowledge your obligation to keep confidential all non-public information concerning the Company which you acquired during the course of your employment with the Company, as stated more fully in the Confidentiality Agreement you executed which remains in full force and effect. You further agree: (a) You shall not disclose to others, or use for your own benefit or the benefit of others, any confidential, proprietary or secret information owned, possessed or used by the Company, (collectively, the "Proprietary Information"). By way of illustration, but not limitation, Proprietary Information includes inventions, improvements, modifications, discoveries, methods, trade secrets, processes, data, know-how, marketing plans, forecasts, unpublished financial statements, budgets, licenses, prices, costs and employee, customer and supplier lists. (b) Unless otherwise approved by the Board of Directors, in writing, for a period of twelve (12) months from the Separation Date, you shall not directly or indirectly engage (whether for compensation or without compensation) in any business activity, either as an individual proprietor, partner, stockholder, officer, employee, director, consultant or in any other capacity whatsoever (otherwise than as the holder of not more than 2% of the shares of outstanding stock of a publicly held corporation), which competes with any business conducted by the Company or any of its subsidiaries at any time during the period of your relationship with the Company, or any business planned by the Company or any of its subsidiaries at the time of the Separation Date in the field of embolotherapy. You further agree that you shall not, at any time during the twelve (12) months following the Separation Date, recruit or otherwise solicit or induce any employee or consultant of the Company or any of its subsidiaries to terminate such person's employment with, or otherwise terminate such person's relationship with the Company or any of its subsidiaries, successors or assigns. (c) The restrictions set forth in this Section 4 are considered by the parties to be reasonable for the purposes of protecting the business of the Company. However, if any such restriction is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 5. RETURN OF COMPANY PROPERTY - You confirm that you have returned to the Company all Proprietary Information (and copies thereof), keys, files, records (and copies thereof), equipment (including, but not limited to, computer hardware, software and printers, wireless handheld devices, cellular phones, pagers, etc.), Company identification, Company vehicles and any other Company-owned property in your possession or control and have left intact all electronic Company documents, including but not limited to those which you developed or help develop during your employment. You further confirm that you will cancel all accounts for your benefit, if any, in the Company's name, including but not limited to, credit cards, telephone charge cards, cellular phone and/or pager accounts and computer accounts by May 31, 2002. 6. BUSINESS EXPENSES AND COMPENSATION - You acknowledge that you have not submitted all your claims for reimbursement of business expenses incurred in conjunction with the performance of your employment as of the date of this letter agreement and the Company acknowledges that you may not have been paid for all your claims for reimbursement already submitted. You agree to promptly submit claims for all appropriate business expenses for which you have not yet submitted claims and the Company agrees to pay such appropriate expenses and previously submitted but unpaid expenses in accordance with past practice for reimbursement of expenses. You further acknowledge that you have received payment in full for all services rendered in conjunction with your employment by the Company and that no other compensation is owed to you. 7. NON-DISPARAGEMENT - You understand and agree that as a condition for payment to you of the consideration herein described, you shall not make any false, disparaging or derogatory statements to any media outlet, industry group, financial institution or analyst, or current or former employee, consultant, client or customer of the Company regarding the Company or any of its directors, officers, employees, agents or representatives or about the Company's business affairs and financial condition. The Company agrees that it will instruct individuals with knowledge of this letter agreement not to make any false, disparaging or derogatory statements to any media outlet, industry group, financial institution or analyst, or current or former employee, consultant, client or customer about you. 8. AMENDMENT - This letter agreement shall be binding upon the parties and may not be modified in any manner, except by an instrument in writing of concurrent or subsequent date signed by duly authorized representatives of the parties hereto. This letter agreement is binding upon and shall inure to the benefit of the parties and their respective agents, assigns, heirs, executors, successors and administrators. 9. WAIVER OF RIGHTS - No delay or omission by the Company in exercising any right under this letter agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. 10. VALIDITY - Should any provision of this letter agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby and said illegal or invalid part, term or provision shall be deemed not to be a part of this letter agreement. 11. CONFIDENTIALITY - You understand and agree that as a condition for payment to you of the severance benefits herein described, the terms and contents of this letter agreement, and the contents of the negotiations and discussions resulting in this letter agreement, shall be maintained as confidential by you and your agents and representatives and shall not be disclosed except to the extent required by federal or state law or as otherwise agreed to in writing by the Company. The Company may file this document or disclose the contents hereof with the Securities and Exchange Commission or any regulatory or governmental agency or entity, to the extent required by law or regulation or as otherwise agreed to by you. 12. Nature of Agreement - The parties understand and agree that this letter agreement is a severance agreement and does not constitute an admission of liability or wrongdoing on the part of either party. 13. ACKNOWLEDGMENTS - You acknowledge that you have been given a reasonable amount of time to consider this letter agreement, and that the Company advised you to consult with an attorney of your own choosing prior to signing this letter agreement. 14. VOLUNTARY ASSENT - You affirm that no other promises or agreements of any kind have been made to or with you by any person or entity whatsoever to cause you to sign this letter agreement, and that you fully understand the meaning and intent of this letter agreement. You state and represent that you have had an opportunity to fully discuss and review the terms of this letter agreement with an attorney. You further state and represent that you have carefully read this letter agreement, understand the contents herein, freely and voluntarily assent to all of the terms and conditions hereof, and sign your name of your own free act. 15. APPLICABLE LAW - This letter agreement shall be interpreted and construed by the laws of the Commonwealth of Massachusetts, without regard to conflict of laws provisions. Each party hereby irrevocably submits to and acknowledges and recognizes the jurisdiction of the courts of the Commonwealth of Massachusetts, or if appropriate, a federal court located in Massachusetts (which courts, for purposes of this letter agreement, are the only courts of competent jurisdiction), over any suit, action or other proceeding arising out of, under or in connection with this letter agreement or the subject matter hereof. 16. ENTIRE AGREEMENT - This letter agreement contains and constitutes the entire understanding and agreement between the parties hereto with respect to your severance benefits and the settlement of claims against the Company and cancels all previous oral and written negotiations, agreements, commitments, writings in connection therewith. Nothing in this paragraph, however, shall modify, cancel or supersede your obligations set forth in paragraph 4 herein. If you have any questions about the matters covered in this letter, please call me. Very truly yours, BIOSPHERE MEDICAL, INC. By: /s/ Paul Looney --------------- Paul Looney Board Member I hereby agree to the terms and conditions set forth above. I hereby resign my position with the Company, my seat on the Board of Directors, and all positions I hold with any subsidiary or affiliate of the Company effective September 1, 2002. I have been given sufficient time to consider this letter agreement, I have reviewed it with my counsel and I have chosen to execute this on the date below. /s/ John M. Carnuccio Date: May 31, 2002 - --------------------- John M. Carnuccio To be returned by May 31, 2002 EX-10.4 6 jmcamend.txt AMENDMENT TO LETTER AGREEMENT EXHIBIT 10.4 AMENDMENT NO. 1 TO LETTER AGREEMENT AGREEMENT made as of the 9th day of August, 2002, by and between BioSphere Medical, Inc. (the "Company") and John M. Carnuccio (the "Executive"). WHEREAS, the Executive and the Company entered into a letter agreement dated May 31, 2002 (the "Letter Agreement") pursuant to which the Executive confirmed his intention to resign from the Company effective September 1, 2002, and further provided for an amicable separation of the Executive from the Company and established the terms of the Executive's separation; and WHEREAS, the parties desire to amend certain of the terms of the Letter Agreement to provide that the Executive shall resign, effective as of the date hereof, from all positions that he currently holds with the Company, and the Company desires to accept such resignation; and WHEREAS, the Executive desires to remain an employee of the Company until the Separation Date (as such term is defined in the Letter Agreement), and the Company desires to continue to employ the Executive until the Separation Date. NOW, THEREFORE, in consideration of the promises and conditions set forth herein, the sufficiency of which is hereby acknowledged, the Company and the Executive agree as follows: 1. RESIGNATION. Effective as of the date hereof, the Executive hereby resigns from the positions of President, Chief Executive Officer and member of the Board of Directors of the Company, as well as from all other positions that the Executive holds with the Company and any and all subsidiaries and affiliates of the Company, provided that the Executive shall continue to remain an employee of the Company through the Separation Date. As of the date hereof, the Executive has executed a resignation letter in the form attached hereto as Exhibit A. 2. CONTINUATION OF LETTER AGREEMENT. Except as expressly provided herein, the terms of the Letter Agreement shall remain if full force and effect. 3. COUNTERPARTS. This Agreement may be executed in two (2) signature counterparts, each of which shall constitute an original, but all of which taken together shall constitute but one and the same instrument. IN WITNESS WHEREOF, all parties have set their hand and seal to this Agreement as of the date written above. COMPANY: BIOSPHERE MEDICAL, INC. By: /s/ Paul Looney ----------------------- Name: Paul Looney Title: Board Member EXECUTIVE: /s/ John M. Carnuccio ----------------------- John M. Carnuccio [Form of Resignation Letter] August [___], 2002 Mr. Paul Looney Chairman of the Board of Directors BioSphere Medical, Inc. 1050 Hingham Street Rockland, MA 02370 Dear Mr. Looney: I hereby resign from my positions as President, Chief Executive Officer and as a member of the Board of Directors of BioSphere Medical, Inc. (the "Company") and from all other positions that I hold of the Company and its subsidiaries and/or affiliates. Notwithstanding this resignation, I understand that I will remain an employee of the Company until September 1, 2002, and that the letter agreement dated May 31, 2002 relating to the terms of my severance will remain in full force and effect. Very truly yours, John M. Carnuccio EX-99.1 7 certify.txt CEO & CFO CERTIFICATION EXHIBIT 99.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002 ================================================================================ In connection with the Quarterly Report on Form 10-Q of BioSohere Medical, Inc. (the "Company") for the period ended June 30, 2002, as filed with the Securities and Exchange Commission on the date herof (the "Report"), the undersigned, Paul A. Looney, Chief Executive Officer of the Company, and Robert M. Palladino, Chief Financial Officer of the Company, each herby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. BIOSPHERE MEDICAL, INC. Date: August 14, 2002 /s/ Paul A. Looney ------------------------ Paul A. Looney Chief Executive Officer Date: August 14, 2002 /s/ Robert M. Palladino ------------------------ Robert M. Palladino Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----