-----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, GZgQAIUKnrDgmHXuihmHz6bRzcFCN/XyTq4dxdEc+Mjbo0RYkAG+HMsAilaN1ZpR OjXWA+lwXdbYWKDXWm+1ew== 0000927016-02-001814.txt : 20020415 0000927016-02-001814.hdr.sgml : 20020415 ACCESSION NUMBER: 0000927016-02-001814 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23678 FILM NUMBER: 02595925 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-K 1 d10k.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2001 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 Incorporation (IRS Employer or Organization) Identification No.) 1050 Hingham St., Rockland, Massachusetts 02370 (Address of Principal Executive Offices) (Zip Code) (781) 681-7900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of voting Common Stock held by non-affiliates of the registrant was $76,630,000 based on the closing price of the shares as reported by the Nasdaq National Market on March 16, 2002. Number of shares outstanding of the registrant's Common Stock as of March 16, 2002 was 12,910,495. Documents incorporated by reference: Proxy Statement for the 2002 Annual Meeting of Stockholders--Part III. ================================================================================ PART I Item 1. BUSINESS We are 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. We believe microsphere technologies, such as our proprietary microsphere platform, are enabling the rapid development of a new, "micro-interventional" market. We expect that micro-interventional devices will expand the capability of catheter-based interventional technologies and permit clinicians to treat medical conditions in a more effective and minimally invasive manner. Embolotherapy is a minimally invasive procedure in which embolic materials, such as 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 initial product, Embosphere(R) Microspheres, is targeted for 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. Our microspheres have a variety of characteristics that we believe make them preferable to other embolic materials currently used in embolotherapy. Specifically, we have designed our products to be easier to use and their delivery to the tumor more targeted and controlled, which we believe will result in better outcomes for the patient. By improving the practice and awareness of embolotherapy and the benefits of our products, we believe that patients who are currently untreated, surgical candidates and patients considering treatment with other embolics may seek treatment with our microsphere technology. We believe that our platform microsphere technology also has several non-embolotherapy applications, such as tissue bulking, repair and regeneration. In this context, we are exploring and/or developing microspheres for use in the treatment of a number of conditions, including stress urinary incontinence and gastroesophageal reflux disease. BioSphere Medical, Inc. was originally incorporated as a Delaware corporation in 1993 under the name BioSepra Inc., as a chromatography media company. During 1999, we strategically refocused our business on the development and commercialization of our proprietary microspheres for medical applications. During 2000, we established two wholly owned subsidiaries to pursue the development of our microsphere technologies in applications outside of, and complementary to, embolotherapy. In May 2000, we established Biosphere Medical Japan, Inc., a Delaware corporation, to develop and commercialize Embosphere Microspheres and HepaSphere SAP(TM) Microspheres in the Far East. In December 2000, we established BSMD Ventures, Inc., also a Delaware corporation, to explore and develop non-embolotherapy applications for our proprietary microspheres. INDUSTRY OVERVIEW Embolotherapy Markets Embolotherapy has been in use for more than 20 years by interventional radiologists to mechanically block the flow of blood to treat certain peripheral tumors and arteriovenous malformations and to control blood loss. Historically, embolotherapy has been used in various brain-based procedures as a means of blocking the blood supply to inoperable tumors or to minimize bleeding within targeted surgical areas. As applications within the brain are considered among the most medically sensitive and complex, we believe the continued use of embolotherapy in these high-risk procedures attests to its overall safety and efficacy. In recent years, interventional radiologists in the United States, Europe and Japan have begun to expand the scope of 2 embolotherapy to include uterine artery embolization and the treatment of certain cancers, including liver cancer. Moreover, a growing number of affected people are taking proactive steps in seeking alternative treatments, particularly as a result of increased general awareness brought about by the proliferation of medical internet sites. We refer to the use of embolotherapy as a method of blocking blood flow to tumors and other malformations as passive embolotherapy. We believe the potential market for passive embolotherapy continues to expand beyond niche neurovascular applications into broader medical opportunities, such as uterine fibroid and liver tumor embolization. In addition, in a process we refer to as active embolotherapy, we are pursuing the development of microspheres as well as other technologies designed to release embedded drugs, live cells, ionizing radiation or genetic material specifically at a targeted site. We believe that delivering a drug directly to the tumor site and then releasing it over time may increase the effectiveness of the drug while decreasing the adverse side effects. Uterine Fibroids Uterine fibroids are non-cancerous tumors growing within or on the wall of the uterus. Their cause is unknown. Most patients with uterine fibroids do not initially have symptoms and remain untreated until the patient experiences abnormal bleeding, increased urinary frequency, pain, swelling or fertility difficulties. Until now, women suffering from uterine fibroids have had few treatment options. These existing treatment options include the following: . Hysterectomy. Hysterectomy is a surgical procedure to remove the uterus. While hysterectomy has a relatively low complication rate, it requires a hospital stay of several days, a recovery period of up to six to eight weeks and results in loss of fertility for women of child-bearing age. Furthermore, hysterectomies have been tied to adverse psychological effects, as well as the onset of early menopause. . Myomectomy. Myomectomy is the surgical removal of the uterine fibroids without removal of the uterus. It is usually performed on women who wish to preserve their fertility. In addition to the invasiveness of the procedure, the most significant disadvantage of myomectomy is a 10 to 30 percent recurrence rate. Even though a myomectomy has been the only procedure available to women with severe symptoms from uterine fibroids that wish to preserve fertility, the recurrence rate and invasiveness have resulted in resistance from both third party payors and patients. Relatively few myomectomies are performed in relation to the number of eligible patients. . Medical Management and "Watchful Waiting." About 95 percent of symptomatic fibroid patients either receive hormone treatment on a temporary basis to relieve symptoms or remain untreated and tolerate the symptoms. Even if the patient receives treatment, once treatment ceases, the uterine fibroids usually regrow. While hormone treatment temporarily reduces symptoms, patients often experience side effects associated with the accompanying hormonal changes. Moreover, women cannot conceive while taking the hormones. Women with less severe symptoms who are, therefore, not candidates for hormone treatment, and those seeking to conceive have few satisfactory options. In these circumstances, physicians usually monitor symptoms and will administer therapy only if the condition worsens. The therapies currently available for treating uterine fibroids may have significant drawbacks including: . temporary or permanent loss of fertility for women of child-bearing age; . lengthy recovery periods; . premature menopause and related symptoms; . high costs, including costs of medications, surgical procedures, and frequent and long hospital stays; 3 . discomfort and side effects from invasive surgical procedures and hormone therapy; and . risk of recurrence of the fibroids. Another method of treating uterine fibroids, more recently adopted by physicians, is uterine artery embolization. Though not approved by the FDA for this specific use, another embolic material commonly used today in uterine artery embolization is polyvinyl alcohol, or PVA. Polyvinyl alcohol has several limitations, including: . Inconvenience and limited effectiveness. Polyvinyl alcohol often clogs in the catheter, interrupting the procedure and necessitating potentially hazardous, costly and time-consuming catheter replacement. In addition, because of its imprecise size and shape, polyvinyl alcohol may not fully occlude the blood vessel, allowing the blood to circumvent the embolic material and continue to feed the tumor. . Limited control. Polyvinyl alcohol often fragments and aggregates, or clumps, in the blood vessel, causing vessel blockages prior to reaching the desired site of blood flow occlusion. In addition to catheter problems, clumping during embolization is clinically problematic. If clumping occurs at non-targeted sites in the vessel after injection into the artery, incomplete embolization can occur. In addition, occlusions can block desired normal blood supply causing undesired necrosis or death of healthy tissue. . Chronic inflammatory response. Polyvinyl alcohol often stimulates an inflammatory response by the body that persists for an extended period of time. Based upon the shortcomings in existing technologies and therapies we discussed above, we believe there are significant opportunities in developing and commercializing alternative embolic treatment products for patients suffering from uterine fibroids. For example, there are approximately 300,000 hysterectomies performed annually in the United States for uterine fibroids. We believe that substantially all of these cases could be effectively treated with our Embosphere Microspheres. Primary Liver Cancer Primary liver cancer originates in the liver, rather than traveling to the liver from another cancer site in the body. Over 70 percent of primary liver cancers are inoperable and are, therefore, treated primarily with chemotherapy or radiation. However, due to the destructive nature of both radiation and chemotherapy, these therapies have traditionally been associated with the following limitations and side effects: . Radiation. While radiation therapy can shrink or eliminate certain individual tumors, its use in treating liver cancer is limited. Since it is difficult to isolate radiation exposure to the liver tumor, radiation therapy often results in damage to the surrounding non-tumorous tissue. . Chemotherapy. Chemotherapy seeks to control cancer by selectively killing the more-rapidly-dividing cancer cells and is widely used for treating cancer elsewhere in the body. The use of systemically delivered chemotherapy agents, however, has shown little benefit in treating liver cancer. Similar to the limitations of radiation therapy, therapeutic doses of chemotherapy to the cancerous tissue have a damaging effect on the normal surrounding tissue. Other treatments currently under investigation to treat inoperable primary liver cancer are radio frequency tumor ablation, which seeks to kill the tumor by means of destructive electrical energy, and embolization. Interventional radiologists are also currently using chemoembolotherapy to treat liver cancer. Chemoembolotherapy refers to the delivery of drugs in a mixture that contains embolic materials to create a higher localized concentration of the drug. We believe there are significant opportunities in developing and commercializing alternative embolic products for use in non-operable liver cancer cases. 4 Non-Embolotherapy Applications Advances in cell biology are resulting in rapid advances in the fields of organ and tissue repair, reconstruction and regeneration, which we generally refer to as tissue engineering. These developments in tissue engineering are targeted at facilitating the body to heal itself through the delivery of molecular signals, cells or supporting structures to the appropriate sites in the body. In certain conditions, including stress urinary incontinence, gastroesophageal reflux disease, urinary reflux in infants and certain skin conditions, the normal anatomic supports are not present in the body. Injecting fillers into the existing structures to bulk them up, referred to as tissue bulking, is designed to recreate the missing anatomic supports, thereby eliminating the condition. Tissue repair and regeneration involves the development of bioartifical cells, tissues and supporting matrixes, which are scaffolds that hold the cells or tissues together. These tissue scaffolds may also be developed from synthetic polymers. Tissue scaffold products have a number of potential applications, including cartilage and bone repair as well as organ supplements or replacements. OUR BUSINESS STRATEGY Utilizing our platform microsphere technology, our strategy is to develop and commercialize innovative embolotherapy products for conditions where minimally invasive treatments do not currently exist. Because our primary focus is on embolotherapy, our strategy, with respect to other business opportunities, is to develop these products through proof of principle and then seek strategic partnerships to complete the commercialization process. Our criterion for product selection is that the product must have the potential to become the global leader in a significant market. The key elements of our strategy are as follows: . Continue to advance our microsphere technology for use in current passive embolotherapy applications. We are focusing the initial implementation of our microsphere technology on addressing large embolotherapy market opportunities. We believe that embolotherapy will represent an attractive alternative to the current treatment options, many of which are invasive surgical procedures or have other significant drawbacks. We received FDA clearance in April 2000 for use of Embosphere Microspheres in the embolization of arteriovenous malformations and hypervascularized tumors in the United States. We intend, pending FDA clearance or approval, to market our products for use in embolization of uterine fibroids. We have recently completed the enrollment of our pivotal Phase II clinical trial to support an application for marketing clearance or approval from the FDA for the use of our Embosphere Microspheres in the specific treatment of uterine fibroids. Our Embosphere Microspheres are also approved in the European Union, Australia and Canada. In Japan, our Hepasphere SAP Microspheres have been used experimentally in over 100 patients for liver cancer embolotherapy. . Develop new embolotherapy platforms, including active microsphere technologies that advance the scope of embolotherapy into new therapeutic applications. We believe that there are opportunities to use microspheres as well as other technologies to advance the scope of embolotherapy into new therapeutic applications. We are currently pursuing opportunities in the area of active embolotherapy, which is the use of embolotherapy to deliver therapeutic agents directly to a target site. Therapeutic agents may include drugs, ionizing radiation, live cells or genetic material. We believe that active embolotherapy could, for example, allow blocking of the blood flow to the tumor site while allowing targeted, more effective delivery of therapeutic agents. We are currently conducting pre-clinical research on our Viasphere(TM) Microspheres, which are being designed as precisely-sized highly hydrophilic microspheres to which living cells, genetic materials or drugs are attached. We are also conducting pre-clinical research on our Radiosphere(TM) Microspheres which are similarly designed to deliver targeted radiation therapy. 5 . Pursue opportunities for microsphere technology in other medical applications with large target markets and commercialize these opportunities primarily through strategic alliances and partnerships. We believe that there are significant opportunities for applying our platform microsphere technology beyond embolotherapy. These opportunities include configuring our microspheres to serve as a bulking agent to treat stress urinary incontinence, gastroesophageal reflux disease and dermal repair, or as a tissue scaffold for tissue or organ regeneration. We believe that our microspheres will be an attractive treatment alternative in each of these markets. We intend to establish strategic alliances or partnerships as the primary vehicle to commercialize products outside the field of embolotherapy based on our microspheres. . Build a broad, value-added ancillary product portfolio to facilitate embolotherapy procedures. We intend to complement our microsphere product line by offering value-added ancillary products used in each procedure, such as specialty catheters, guidewires and other delivery systems. Our ancillary products will be specifically designed for our targeted procedures and will be aimed at facilitating ease of use, enhancing clinical performance during the procedure and providing differentiating benefit to our customers. We believe that this will enable us to leverage our existing distribution channels and satisfy more of our physician customer's needs by providing more complete product solutions for each procedure. . Build a sales infrastructure consistent with the customer base and the geographic distribution of the patient population. We intend to market our products primarily through direct sales efforts in the United States and through a combination of distributors, field representatives and direct marketing support in other parts of the world. In the United States, there are approximately 2,500 to 3,000 interventional radiologists and 200 to 300 interventional neuroradiologists. We believe that we can market effectively to these groups with a relatively small, targeted sales force. We intend to tailor our sales infrastructure to the demographics of the patient population for each of the targeted markets. For example, there are a large number of primary liver cancer patients in Asia due to the prevalence of hepatitis. Accordingly, we will likely choose to focus more of our sales resources in Asia on our Hepasphere SAP Microspheres product than on our Embosphere Microspheres. PRODUCTS Our innovative microsphere technology evolved out of approximately 15 years of research and development of polymer formulations used in the field of biological separations and drug purification. In 1999, we made a strategic decision to focus on microsphere technologies for medical applications. We believe that our microsphere technology is a platform technology which can be configured in several different ways to have applications as a pure embolic material, an embolic material linked to a gene or drug, a bulking agent or a scaffold for tissue engineering. The following table summarizes information about our principal products and products under research and development. 6
PRODUCT / PRODUCT CANDIDATES POTENTIAL MARKETS STATUS TARGET CUSTOMERS - ------------------------ ------------------------- -------------------------- --------------------------- EMBOLOTHERAPY - --------------------------------------------------------------------------------------------------------- Embosphere(R) Hypervascularized tumors, Marketed in United States, Interventional Radiologist; Microspheres arteriovenous Canada, Australia and Interventional malformations European Union Neuroradiologist Uterine fibroids Marketed in Canada, Interventional Radiologist Australia and European Union Pivotal Phase II clinical trial in United States - --------------------------------------------------------------------------------------------------------- EmboGold(TM) Hypervascularized tumors, Marketed in United States, Interventional Radiologist; Microspheres arteriovenous Canada, Australia and Interventional malformations European Union Neuroradiologist Uterine fibroids Marketed in European Interventional Radiologist Union, Canada and Australia Pivotal Phase II clinical trial in United States - --------------------------------------------------------------------------------------------------------- Hepasphere SAP(TM) Liver cancer Investigational use in Interventional Radiologist Microspheres human patients in Japan - --------------------------------------------------------------------------------------------------------- TempRx(TM) Microspheres Trauma, hemorrhage Research Interventional Radiologist - --------------------------------------------------------------------------------------------------------- LiquiDx(TM) Microspheres Abdominal aortic Research Interventional Radiologist aneurysm graft leaks Cerebral aneurysm Research Interventional Neuroradiologist - --------------------------------------------------------------------------------------------------------- Radiosphere(TM) Cancer Research Interventional Radiologist Microspheres - --------------------------------------------------------------------------------------------------------- Viasphere(TM) Cancer Research Interventional Radiologist Microspheres - --------------------------------------------------------------------------------------------------------- TISSUE ENGINEERING - --------------------------------------------------------------------------------------------------------- MatrX(TM) Microspheres Urinary incontinence Pre-clinical Urologist Vesicoureteral reflux Pre-clinical Urologist Facial contour defects Pre-clinical Dermatologist Gastroesophageal reflux Research Gastroenterologist disease - --------------------------------------------------------------------------------------------------------- GenS2(TM) Microspheres Tissue regeneration Research Orthopedic Surgeon Dermatologist - ---------------------------------------------------------------------------------------------------------
7 PASSIVE EMBOLOTHERAPY Embosphere Microspheres Our initial product, Embosphere Microspheres, is intended for use in passive embolotherapy to block the blood supply to hypervascularized tumors and arteriovenous malformations. Embosphere Microspheres have been used in Europe, the United States, Canada and Australia to treat hypervascularized tumors and arteriovenous malformations and to presurgically control blood loss. We believe that if we receive clearance or approval from the FDA specifically for uterine artery embolization, the principal application of the Embosphere Microspheres will be for this indication. Uterine artery embolization is a minimally invasive procedure performed by interventional radiologists. In this procedure, microspheres are injected through a small catheter into the blood vessels feeding the fibroid tumor, preferentially blocking the blood supply to the fibroids, but not to the surrounding healthy tissues. The goal of the uterine artery embolization procedure is to eliminate the flow of blood to the uterine fibroid, thereby alleviating related symptoms, while preserving normal uterine and ovarian function. We believe that embolotherapy is a significantly more attractive alternative in the treatment of uterine fibroids, particularly when compared to the invasiveness of such surgical procedures as hysterectomy or myomectomy, or even when compared to hormone therapy and "watchful waiting." Current therapies can have significant adverse side effects including temporary or permanent loss of fertility, lengthy recovery periods, high costs, discomfort and risk of recurrence of fibroids. Although the effect of uterine artery embolization on continued fertility has not been established, we believe that uterine artery embolization has the potential to preserve the fertility of the patient that would otherwise be lost through hysterectomy or may be compromised by the use of current therapies or technologies, and to reduce or eliminate the risk of recurrence of the uterine fibroid tumor and the complications associated with myomectomy. Most uterine artery embolization procedures can be performed in less than one hour, while the patient is sedated, but awake. The patient generally stays overnight in the hospital to manage any discomfort associated with the procedure and typically returns to everyday activities in three to five days. In contrast, hysterectomy patients undergo general anesthesia, stay in the hospital for four to five days and have a recovery period lasting up to six to eight weeks. Embolotherapy using polyvinyl alcohol has several limitations associated with its imprecise size and shape, including less effective occlusion of the blood supply to the tumor, inflammation and untargeted embolization resulting in the injury of the surrounding normal tissue. Independent studies have indicated that Embosphere Microspheres have a variety of characteristics that may make them preferable to polyvinyl alcohol. These include: . Uniform Spherical Shape/Calibrated Particle Size. We are able to synthesize beads with uniform sizing and a spherical shape. When embolic materials are irregularly shaped or sized, as is the case with polyvinyl alcohol, clinicians find vessel targeting more difficult, and may also experience an increased incidence in unwanted embolization of blood vessels away from the site of the tumor. . Compliant and Resilient Properties. We have developed a soft, elastic microsphere, that has the capability to compress significantly. Consequently, clinicians can deliver these beads through microcatheters. Many clinicians prefer using microcatheters during embolization since such catheters minimize the frequency of artery or vessel spasm during the procedure. Vessel spasm can be of particular concern during uterine artery embolization as it can disrupt the flow of blood. Clinicians rely on blood flow during embolization to direct the microspheres to the vessel targeted for occlusion. . Hydrophilic Properties. As a result of the materials used to manufacture microspheres, our products are hydrophilic, which means that they absorb moisture. This characteristic is important in that it prevents the microspheres from clumping in the catheter and the artery during the procedure. 8 . Non-biodegradability. Our microspheres are composed of a synthetic three-component polymer that is compatible with the human body. This polymer is insoluble and non-biodegradable. We believe, therefore, that our Embosphere Microspheres are an appropriate agent for permanent vessel occlusion. . Cell Adhesion. Our Embosphere Microspheres are cross-linked with a cell adhesion promoter composed of gelatin. This material promotes cell adhesion, resulting in a more rapid, stable and complete occlusion of the vessel. . Charged Surface Property. Our microspheres are positively charged, enabling them to attach to the negatively-charged blood vessel wall. This attachment to the vessel wall minimizes the potential for the microspheres to migrate to non-targeted vessels. Embosphere Microspheres are currently available in six sizes, from 40 to 1,200 microns, based on current customer requirements and targeted applications. They are designed to precisely fit the blood vessels, resulting in targeted and controlled occlusion. They can be used with existing, commercially available catheters and delivery systems. We anticipate that subsequent generations of Embosphere Microspheres, such as our EmboGold(TM) Microspheres, will incorporate new product characteristics. These new product characteristics may include improved cell adhesion properties and an improved ability for the physician to visualize the product using conventional x-ray or magnetic resonance imaging during administration. All of these products may require a new 510(k) approval. In February 2002, we began selling EmboSphere Microspheres in a new enhanced vial package. We received CE Mark approval of our Embosphere Microspheres in the European Union in 1997 and more recently received marketing approval in Australia and Canada. In April 2000, we received marketing clearance from the FDA for our Embosphere Microspheres, through a 510(k) notification for hypervascularized tumors and arteriovenous malformations. The 510(k) clearance for hypervascularized tumors and arteriovenous malformations does not specifically cover treating uterine fibroids. For the treatment of uterine fibroids through embolization, we recently completed enrollment of a clinical trial under an investigation device exemption to support an application for clearance or approval from the FDA for this specific indication. In January 2000, we initiated a Phase I clinical trial of Embosphere Microspheres for uterine artery embolization. Thirty patients were enrolled in the multi-center study at Roxborough Memorial Hospital, Philadelphia, the Miami Cardiac and Vascular Institute, Miami and Georgetown University Medical Center, Washington, D.C., as of June 2000. These patients were followed for a period of one year in accordance with the study plan. In October 2000, we initiated our pivotal Phase II clinical trial of the safety and efficacy of Embosphere Microspheres for uterine artery embolization, in which we studied an expanded patient population of 100 patients at seven clinical sites. These sites included Miami Cardiac and Vascular Institute, Miami; Roxborough Memorial Hospital, Philadelphia; Piedmont Hospital, Atlanta; Georgetown University Medical Center, Washington D.C.; Women's Health Center, Phoenix; Albany Medical Center, Albany; and Beverly Hills Center for Special Surgery, Beverly Hills. We announced full enrollment of the UAE arm of this study in September 2001 and, in January 2002, announced full enrollment of the remaining hysterectomy study arm. EmboGold(TM) Microspheres EmboGold Microspheres, an enhanced version of Embosphere Microspheres, were launched in the US in September 2001 after receiving FDA clearance earlier in the year. In March 2002, we received CE Mark approval in the European Union. This product enhancement added color to the spheres for improved visibility during preparation and injection. EmboGold Microspheres are provided in a special 20cc syringe and packaged in a sterile Tyvek(R) sealed tray. The syringe container was designed to provide added convenience in handling and preparation. Hepasphere SAP(TM) Microspheres Through our wholly owned subsidiary, Biosphere Medical Japan, Inc., we are developing Hepasphere SAP Microspheres for the treatment of primary liver cancer. Our Hepasphere SAP Microspheres are expandable microspheres for injection via catheter into the blood vessels feeding the liver cancer tumor. Once at the tumor 9 site, they are designed to expand by absorbing water from the blood and effectively block the blood supply to the tumor. Targeted liver embolotherapy is intended to starve the liver tumor, without damaging the surrounding tissues or causing any adverse side effects on other parts of the body, such as those associated with chemotherapy and radiation. Over 100 primary liver cancer patients have been treated to date with Hepasphere SAP Microspheres on an investigational basis in Japan. In September 1999, we obtained a worldwide exclusive license to Hepasphere SAP Microspheres from its Japanese inventor. We plan to apply to the Japanese Ministry of Health and Welfare for marketing approval within the next 18 to 24 months. TempRx(TM) Microspheres We believe that a significant opportunity exists for temporary or resorbing embolic materials. Currently, embolic materials are frequently used to temporarily treat internal bleeding from trauma or specific disease and we believe that this could be a suitable application for temporary embolics. We believe that there is also a growing interest to use temporary or dissolving embolics in many current embolization applications, including liver and fibroid embolization. We are currently conducting research on our TempRx Microspheres as temporary embolics. LiquiDx(TM) Microspheres We are in the research stage of developing liquid embolics, or embolics that are in a liquid state when injected and, depending on the application, subsequently convert to a solid gel. Potential applications include treatment of endovascular graft leaks, aneurisms, and large vessel embolization applications including pelvic congestion syndrome and varicocele. ACTIVE EMBOLOTHERAPY We believe that our microspheres which are being designed to deliver drugs, radioactive material or genetic materials may have several advantages over current gene therapy, drug delivery or radiation products, including the direct delivery to tumor. Our microspheres for active embolotherapy will be designed to deliver the drug or gene therapy product directly to the tumor, avoiding the potential side effects associated with high levels of circulating drugs, genes, or radiation after an intravenous infusion through the blood vessel system. Direct delivery should permit the use of higher, potentially more effective, dosage of the product. Radiosphere(TM) Microspheres We believe the first step in marketing embolics that can deliver drugs or agents to treat cancer will be to develop microspheres that are "loaded" with drugs or agents at the treatment center using currently available equipment and techniques. We are developing our microsphere technology platform to be specifically formulated to express a high affinity for certain radioactive compounds. We believe that these spheres, when loaded, can be injected through a catheter to deliver radiation treatment directly to the tumor site. We believe that transvascular targeting of radiation is a potentially superior method to currently existing radiation treatment modalities because it offers a conceptually optimum way of uniformly dosing the tissue that is most actively proliferating while, at the same time, minimizing dosage to non-targeted areas. We also believe this approach will simplify logistical and handling requirements for radioactive materials in a hospital setting such as storage and shelf life. We have completed proof of concept for this technology and we expect to initiate pre-clinical testing in early 2003. Viasphere(TM) Microspheres We are conducting early-stage research on our Viasphere Microspheres, which are being designed as precisely-sized highly hydrophilic microspheres to which genetic materials or drugs are attached. We are developing these microspheres to be injected into the blood vessels feeding the tumor. We expect that once the flow of blood to the tumor has been occluded, Viasphere Microspheres will begin delivering concentrated genes or drugs into the tumor. 10 Other Embolization Products We intend to develop and commercialize other embolization products that include: . delivery systems for embolic materials, such as specialty catheters and guidewires, . procedure-enhancing technologies that are designed to improve the uniformity of microsphere dispersion during injection, reduce radiation exposure and optimize efficiency of procedure time and implanted material, and . additional embolic materials such as innovative coils, embolics that solidify upon injection and resorbable embolics to treat aneurisms and large arteriovenous malformations, as well as for specific tumors based upon their type or location. In November 2001, we announced that we had received FDA clearance to market our EmboCath(TM) Infusion Catheter. The EmboCath Infusion Catheter is a micro-catheter style catheter that is designed to be used to inject embolization material in the pelvic and abdominal region and has properties that we believe optimize the unique design of our hydrophilic and compressible microspheres. NON-EMBOLOTHERAPY TECHNOLOGIES MatrX(TM) Microspheres Our MatrX Microspheres product, currently in pre-clinical development, are highly hydrophilic synthetic microspheres designed to cause tissue bulking as a means to provide anatomic support in disease conditions where this support is missing. MatrX Microspheres preparations will be designed to be easily injectable yet large enough to avoid digestion within the body. We anticipate that the microsphere matrix, once injected, will be rapidly populated by surrounding cells and provide a stable, mechanically resistant tissue bulking structure. Potential applications of MatrX Microspheres preparations for tissue bulking include: . Stress Urinary Incontinence. Approximately four million adults in the United States suffer from stress urinary incontinence, which is the involuntary loss of urine during coughing, laughing, sneezing, jogging, or any other activity which causes a sufficient increase in pressure within the abdomen. Stress urinary incontinence is currently treated in a variety of ways, but the majority of patients are managed with techniques that treat the symptoms, but do not restore urinary continence. Most curative approaches to the treatment of urinary incontinence require significant surgical interventions. Tissue bulking agents are either biologically derived or synthetic and are designed to be injected in or near the bladder neck to increase tissue bulk. While bulking procedures are gaining acceptance, the body typically absorbs biologically-derived bulking agents, requiring retreatment. Other limitations include migration of the synthetic agents to other non-affected parts of the body causing adverse health effects, incompatibility of the synthetic agents with the human body and difficulty in injecting the agents into the walls of the urethra. Accordingly, currently available therapies provide only limited benefit in the treatment of stress urinary incontinence. We are currently developing our MatrX Microspheres tissue-bulking product, which is designed to be injected into the urethral wall to reduce or eliminate the incidence of urinary incontinence. We are conducting pre-clinical research on the application of our MatrX Microspheres tissue-bulking product for stress urinary incontinence. . Vesicoureteral Reflux. Vesicoureteral reflux is a condition in which urine may backflow from the bladder through the ureter and into the kidneys. This condition, which can result in urinary tract infections, pain, fever and discomfort, affects over one percent of children. We are conducting preclinical research on the application of MatrX Microspheres to bulk the area of tissue at the junction of the ureter and bladder to increase backflow resistance. 11 . Gastroesophageal Reflux Disease. Gastroesophageal reflux disease occurs when the stomach contents abnormally flow upward into the esophagus, which can lead to pain and esophageal ulcers. In many cases, gastroesophageal reflux disease is attributable to decreased tone of the lower esophageal muscle tissue or to a congenitally small band of muscle tissue. We are conducting research on how MatrX Microspheres tissue-bulking product, injected directly into the esophageal muscle tissue, improves its function. GenS/2(TM)/ Microspheres Injectable Tissue Scaffold We are researching the use of GenS/2/ Microspheres injectable tissue scaffold products for such applications as cartilage repair and other tissue or organ replacement. Several companies are developing and marketing bioartifical cells, tissues and supporting scaffoldings that hold the cells or tissues together. However, the existing tissue scaffoldings are either difficult to inject into the body, are digested by the body over time or do not adequately merge into the original tissue. In addition, most procedures still require surgery to implant the bioartifical tissues. We believe that our microsphere technology can be formulated into injectable microsphere scaffolds, which we call GenS/2/ Microspheres, which may overcome many of the limitations of tissue scaffolds currently commercially available. We are designing this product to adhere to cells and to be small enough to be injected, yet large enough to avoid digestion after injection. Other Non-Strategic Products In addition to our Embosphere Microspheres products, we sell barium delivery kits and other ancillary products in the European Union. Barium is purchased from Guerbet Medical, Inc. and resold for use in gastrointestinal medical testing. We sell other ancillary devices as medical products for hospital and physician use. While we generated a significant portion of our revenue in 2001 and 2000 from these non-strategic products, we do not expect these products to be a significant component of our future sales. MARKETING AND SALES We currently market our embolotherapy products through direct sales efforts in the United States and Canada and through a combination of direct sales, distributors, field representatives and direct marketing support in the European Union and other parts of the world. We are in the process of expanding our sales and marketing presence in the European Union, the United States and Japan. In January 2002, we entered into an exclusive pan-European distribution agreement with Terumo Europe N.V., a wholly owned subsidiary of Terumo Corporation. Terumo is a world leader in developing, manufacturing and marketing cardiovascular and interventional radiology products, including microcatheters, guidewires and introducer systems that directly complement our embolization products. Terumo Europe will use its large direct sales and marketing team to develop markets and sell our microspheres in the European markets. We plan to attend major medical conventions throughout the world pertaining to our targeted markets and invest in market development, including physician training and patient outreach. We are working closely with major academic centers to serve as centers for excellence for physician training, product evaluation and ongoing research. Many members of our Medical Advisory Board are associated with these major academic centers. RESEARCH AND DEVELOPMENT Our research and development group consists of ten employees and three consultants. In addition, we have several development agreements with outside product development contractors and study agreements with several medical centers. Our research and development group is focusing on developing our product technology in three areas: . continuous improvement of our core technology; . new embolotherapy materials and platforms; 12 . complementary embolotherapy products; and . new initiatives aimed at leveraging our core technology in new market areas. Our core technologies include microsphere technologies, organic and inorganic polymer and surface chemistries for microsphere design and development, non-viral DNA transfection technology, and expertise and know-how in microsphere manufacturing. During the fiscal years ended December 31, 2001, 2000 and 1999, we spent approximately $4.76 million, $2.52 million and $968,000, respectively on our research and development efforts. We expect our research and development expenses to increase in the future as we seek to increase our research and development staff and related facilities, enhance our existing products and develop additional products. COMPETITION Passive Embolotherapy The primary competitive embolotherapy product sold by competitors is polyvinyl alcohol, or PVA, a product introduced into the market more than 20 years ago. We encounter, and expect to continue to encounter, competition in the sale of our current and future passive embolotherapy products. Our principal competitors in the field of passive embolotherapy are Boston Scientific Corporation, Cook Incorporated and Cordis Corporation, a Johnson & Johnson company, as well as companies selling or developing non-embolotherapy solutions for the disease states targeted by us. These competitors have, and our future competitors are likely to have, greater financial, operational, sales and marketing resources and more experience in research and development than we have. We compete primarily on the basis of product performance, ease of use, degree of targeted embolization control, and quality of patient outcome. Our future success will depend in large part on our ability to gain market leadership at the early stage of the development and acceptance of new procedures, and our ability to continue to develop and bring to market differentiated products enhancing embolotherapy. Active Embolotherapy Although we are not aware of any company selling or marketing active embolotherapy products, we expect to encounter competition in the future sale of any active embolotherapy products. We expect that our future competitors in this area may have greater financial, operational, sales and marketing resources and more experience in research and development than we have. In addition, we expect to compete with companies that are developing and marketing other anticancer therapies and gene therapy drugs. These competitors include several large pharmaceutical companies along with numerous smaller biotechnologies. We believe that the principal competitive advantages in the active embolotherapy market will include the ability to deliver a highly concentrated dose of gene or drug to the tumor without negatively affecting other parts of the body, product designs facilitating a minimally invasive outpatient procedure, and a sales and marketing organization which is able to support specialized physician groups. Tissue Bulking and Tissue Engineering In the field of tissue bulking and tissue engineering, we believe that competition will come from companies that are currently developing and marketing tissue bulking, tissue repair and regeneration products. We believe our principal competitors in the field of tissue engineering are companies such as Boston Scientific Corporation, CR Bard, Inc., Johnson & Johnson and Medtronic, Inc. These competitors have, and our future competitors are likely to have, greater financial, operational, sales and marketing resources and more experience in research and development than we have. We believe that the principal competitive advantages in the tissue engineering market will be the ability to obtain durable effects while reducing the invasiveness of the procedure. 13 GOVERNMENT REGULATION FDA Regulation. The FDA, and other federal, state, local, and foreign authorities, regulate our products and manufacturing activities. Pursuant to the Federal Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, the FDA regulates the development, clinical testing, manufacture, packaging, labeling, storage, distribution and promotion of medical devices. Before a new device can be introduced into the market, the manufacturer must generally obtain marketing clearance through a 510(k) notification or approval through a premarket approval application. We generally will be required to obtain 510(k) clearance or premarket approval prior to commercial distribution of future products or additional applications of current products. Our proposed active embolotherapy products will likely be regulated as combination products, meaning they could be subject to regulation similar to drugs as well as devices, which may involve more extensive clinical testing and a more rigorous FDA review process than required for our microspheres and ancillary products, and other proposed products. Classification of Medical Devices. In the United States, medical devices intended for human use are classified into three categories, Class I, II, or III, on the basis of the controls deemed reasonably necessary by the FDA to assure their safety and effectiveness. Class I devices are subject to general controls, for example, labeling, adherence to the FDA's Good Manufacturing Practice regulations and in some instances, premarket notification under Section 510(k). Class II devices are subject to general and special controls, for example, performance standards, postmarket surveillance, patient registries, and FDA guidelines. Class III is the most stringent regulatory category for medical devices. Many Class III devices are subject to premarket approval requirements. Class III devices include, for example, devices which are life-sustaining, or life-supporting, or new devices which have not been found substantially equivalent to legally marketed devices. 510(k) Clearance. The FDA will clear a device under section 510(k) if the submitted information establishes that the proposed device is substantially equivalent to a legally marketed Class I or II medical device, or to a Class III medical device for which the FDA has not yet called for a premarket approval application. Commercial distribution can begin only after the FDA issues an order finding that the device is substantially equivalent to a device that is legally marketed and not subject to a premarket approval requirement. The 510(k) notice may have to be supported by laboratory testing, animal testing and/or clinical testing. The FDA may determine that a proposed device is not substantially equivalent to a legally marketed device, in which case a premarket approval will be required to market the device, unless additional information can be submitted to support a substantial equivalence determination, or the FDA, pursuant to a timely request from a 510(k) submitter, makes a risk-based determination that a not-substantially-equivalent device can be classified into Class I or II. An FDA request for additional data could require that clinical studies of the device's safety and effectiveness be performed. In April 2000, we received 510(k) clearance to market Embosphere Microspheres for embolization of hypervascularized tumors and arteriovenous malformations. Our embolotherapy device is classified into Class III by the FDA, which means that even though we obtained 510(k) clearance to market the device, the FDA could issue a proposed rule and, subsequently, promulgate a regulation requiring premarket approval of the device to allow it to remain on the market or could require premarket approval for new treatment indications for the device. A requirement for premarket approval will likely require us to continue costly clinical trials and there is no guarantee that we can provide the FDA sufficient data for premarket approval in a timely fashion, if at all. Failure to obtain premarket approval would result in removal of our product from the United States market. If human clinical trials of a device are required, and the device presents a "significant risk," the sponsor, usually the manufacturer or the distributor of a device, must obtain FDA approval of an investigational device exemption application prior to commencing human clinical trials. Sponsors of clinical trials are permitted to charge for devices distributed in the course of a study provided such charges do not exceed recovery of the costs of manufacture, research, development and handling, but devices may not be commercialized, e.g., promoted as safe or effective. The study must comply with the FDA's investigational device exemption regulations or other regulations. The sponsor must also obtain approval from one or more institutional review boards. Investigational device exemption trials are subject to extensive regulation, and may be placed on hold or terminated by the FDA if, among other reasons, there is reason to believe the risks do not outweigh the anticipated benefits. The clinical trial process may take years. 14 Premarket Approval. A premarket approval application must be filed and approved before a device can be marketed if a proposed device is not substantially equivalent to a legally marketed device or, as discussed above, if it is a pre-amendments Class III device, i.e., a device in commercial distribution prior to May 28, 1976, for which the FDA has called for premarket approvals. A premarket approval application must be supported by valid scientific evidence, which typically includes extensive data, including pre-clinical and clinical trial data, to demonstrate the safety and effectiveness of the device. Obtaining approval can take several years and approval may be conditioned on, among other things, substantial restrictions on indications for use and the conduct of postmarket surveillance studies. The FDA has not formally decided how it will conduct the premarket review for the use of embolic particles for uterine fibroid embolization. The FDA may decide to require a premarket approval application or, alternatively, may allow commercial clearance via a 510(k) notice together with clinical support that substantiates product safety and efficacy. We have received an investigational device exemption pursuant to which we are conducting clinical studies to investigate the safety and efficacy of the Embosphere Microspheres for uterine artery embolization. We intend to file for marketing clearance under the 510(k) process unless the FDA requires a premarket approval application. Drug Regulations: Drug and device approvals require extensive clinical testing involving multiple phases. The clinical data must demonstrate, from adequate and well-controlled trials, that the drug or device, as the case may be, is safe and effective in order to obtain approval. Clinical trials typically take years to complete. Before initiating such a clinical trial, we must obtain an investigational new drug exemption, or INDA, from FDA. Changes in Approved Devices. Device manufacturers must obtain new FDA 510(k) clearance when there is a major change or modification in the intended use of a legally marketed device or a change or modification, including product enhancements, to a legally marketed device that could significantly affect its safety or effectiveness. Supplements for approved premarket approval devices are required for device changes, including some manufacturing changes that may affect safety or effectiveness. For devices marketed pursuant to 510(k) determinations of substantial equivalence, we must obtain FDA clearance of a new 510(k) notification prior to marketing the modified device; for devices marketed with premarket approval, we must obtain FDA approval of a supplement to the premarket approval prior to marketing the modified device. Good Manufacturing Practices and Reporting. The Federal Food, Drug, and Cosmetic Act requires us to comply with Good Manufacturing Practices or Quality Systems regulations. We must comply with various quality control requirements pertaining to all aspects of our product design and manufacturing process including requirements for packaging, labeling and record keeping, including complaint files. The FDA enforces these requirements through periodic inspections of medical device manufacturing facilities. In addition, the Medical Device Reporting regulation obligates us to inform the FDA whenever information reasonably suggests that one of our devices may have caused or contributed to death or serious injury, or when one of our devices malfunctions, if the device would be likely to cause or contribute to a death or a serious injury in the event the malfunction recurred. Labeling and Advertising. Labeling and promotional activities are also subject to scrutiny by the FDA. Among other things, labeling is violative of the law if it is false or misleading in any respect or it fails to contain adequate directions for use. Moreover, claims that are outside the labeling either approved or cleared by the FDA may violate the Federal Food, Drug, and Cosmetic Act. Our product promotion is also subject to regulation by the Federal Trade Commission under the Federal Trade Commission Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce, as well as unfair or deceptive practices such as the dissemination of any false advertisement pertaining to medical devices. Under the Federal Trade Commission's substantiation doctrine, an advertiser is required to have adequate data for all product claims at the time the claims are first used in advertising or other promotions. 15 Import Requirements. To import a device, the importer must file an entry notice and bond with the U.S. Customs Department pending an FDA decision on the product's admissibility. All devices are subject to FDA examination before release from Customs. Any article that appears to be in violation of the Federal Food, Drug, and Cosmetic Act may be refused admission and a notice of detention and hearing may be issued. A product also can be detained without physical examination if the product has a past history or other information indicates that it may be violative. A device must have received 510(k) clearance or be subject to an approved premarket approval application if required. Export Requirements. Products for export from Europe and from the United States are subject to foreign countries' import requirements and the FDA's or European regulating bodies' exporting requirements. The introduction of our products in foreign markets may subject them to foreign regulatory clearances, which may impose additional product standards, packaging and labeling requirements and import restrictions on devices. Regulatory requirements to market devices vary from country to country. In addition, each country has its own tariff regulations, duties, and tax requirements. In addition to the import requirements of foreign countries, we must also comply with the United States laws governing the export of products regulated by the FDA. Devices that have obtained 510(k) clearance or premarket approval and comply with the law in all other respects may be exported without further FDA authorization. However, foreign countries often require, among other things, an FDA certificate for products for export. To obtain this certificate, the device manufacturer must certify to the FDA that the product has been granted clearance or approval in the United States and that the manufacturing facilities appeared to be in compliance with Good Manufacturing Practices regulations at the time of the last FDA inspection. Under the FDA Export Reform and Enhancement Act of 1996, an unapproved device requiring a premarket approval or a device subject to an investigational device exemption may be exported to any country if the product complies with the laws of that country and has valid marketing authorization in one of the following countries or authorities: Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa, the European Union, or a country in the European Economic Community, or EEC, if the device is marketed in an EEC country or authorized for general marketing in the EEC. The FDA is authorized to add countries to this list in the future. Further, a device may be exported under this provision only if, among other things, it meets the specifications of the foreign purchaser, complies with the laws of the importing country, is labeled for export, is manufactured in substantial compliance with Good Manufacturing Practices regulations or recognized international standards, is not sold in the United States, and meets other conditions. Fines and Penalties for Noncompliance. Failure to comply with applicable FDA regulatory requirements could result in, among other things, premarket clearance or approval withdrawal, injunctions, product withdrawals, voluntary or mandatory patient/physician notifications, recalls, warning letters, product seizures, civil penalties, fines and criminal prosecutions. In addition, the Federal Trade Commission has a variety of processes and remedies available to it for enforcement, both administratively and judicially, including compulsory process, cease and desist orders and injunctions. Federal Trade Commission enforcement can result in orders requiring, among other things, limits on advertising, corrective advertising, consumer redress, rescission of contracts and such other relief as may be deemed necessary. Violation of such orders could result in substantial financial or other penalties. Any such action by the FDA or the Federal Trade Commission could materially adversely affect our ability to successfully market our products. Medical device laws are also in effect in many countries outside of the United States. These range from comprehensive device approval requirements for some or all of our medical device products to simpler requests for product data or certification. The number and scope of these requirements are increasing. Sales of medical devices in the European Union are subject to the European Medical Device Directive. This directive contains requirements for quality system and product performance guidelines to which all manufacturers must comply. These guidelines contain quality system guidelines and preproduction product design verification that closely resemble current FDA guidelines. In 1997, we obtained ISO 9002 international quality systems registration, a 16 certification showing that our procedures and manufacturing facilities comply with standards for quality assurance and manufacturing process control. Our compliance with this registration has been confirmed since 1997 in semi-annual surveillance audits. In January 2002, we obtained certification to EN46001/ISO9001, which along with the manufacturing and quality controls of ISO9002, also adds design control requirements. The EN46001/ISO 9001 certification and the European Medical Device Directive Certification signifies compliance with the requirements, enabling us to affix the CE Mark to our Embosphere Microsphere and our EmboGold Microsphere product. The CE Mark denotes conformity with European standards for safety and allows certified devices to be placed on the market in all European Union countries. Medical devices may not be sold in European Union countries unless they display the CE Mark. Failure to comply with applicable federal, state and foreign medical device laws and regulations would likely have a material adverse effect on our business. In addition, federal, state and foreign regulations regarding the manufacture and sale of medical devices are subject to future changes. We cannot predict what impact, if any, such changes might have on our business, but such change could have a material impact. We are subject to various federal, state, local and foreign laws and regulations relating to the protection of the environment, as well as health and safety. In the course of our business, we are involved in the handling, storage and disposal of certain chemicals. The laws and regulations applicable to our operations include provisions that regulate the discharge of materials into the environment. Usually these environmental laws and regulations impose "strict liability," rendering a person liable without regard to negligence or fault on the part of such person. Such environmental laws and regulations may expose us to liability for the conduct of, or conditions caused by, others, or for acts that were in compliance with all applicable laws at the time the acts were performed. We do not believe that we have been required to expend material amounts in connection with our efforts to comply with environmental requirements or that compliance with such requirements will have a material adverse effect upon our capital expenditures, results of operations or competitive position. Failure to comply with applicable environmental and related laws could have a material adverse effect on our business. In addition, because the requirements imposed by such laws and regulations are frequently changed, we are unable to predict the cost of compliance with such requirements in the future, or the effect of such laws on our capital expenditures, results of operations or competitive position. PROPRIETARY TECHNOLOGY AND PATENT RIGHTS We seek to establish and protect our proprietary technologies and products through a combination of patent, copyright, trademark and trade secrets laws, as well as confidentiality provisions in our contracts. We have implemented a patent strategy designed to maximize our intellectual property rights. We are pursuing patent coverage in the United States and foreign countries to protect the technology, inventions and improvements that we consider critical to the development of our products and business. In January 1998, we entered into an agreement with L'Assistance Publique-Hopitaux De Paris, referred to as AP-HP, pursuant to which AP-HP has granted us the exclusive right to use two jointly-owned patents relating to micospheres. We are required to pay to AP-HP a royalty on the commercial sale of any products, which incorporate technology covered by the patents. We may only sublicense these exclusive rights under the agreement with the prior written consent of AP-HP, which consent cannot be unreasonably withheld. The rights granted under the contract are for an initial period, which ends on September 16, 2009, and are renewable by mutual agreement between the parties. The agreement can be terminated on three months notice by either party if the other party does not perform one or more of its obligations under the agreement and fails to cure its nonperformance during the notice period. These jointly-owned patents will expire in 2014. In addition, as part of the sale of our former core business to Invitrogen, Inc., formerly know as Life Technologies, in May 1999, we entered into a cross-license agreement with Invitrogen. Under that agreement, Invitrogen has granted to us an exclusive, worldwide, perpetual, royalty-free license to its technology and patents relating to our core field of development, including any improvement to that technology made prior to May 2004. 17 Under the agreement, we also granted to Invitrogen an exclusive, worldwide, perpetual, royalty-free license to any improvements to the technology they have licensed to us, which are useful in Invitrogen's fields of development. Either party can terminate the agreement, and all licenses granted thereunder on sixty day's notice in the event of a breach of the agreement by the other party. In 1999, we entered into an agreement with Dr. Shinichi Hori, pursuant to which we have an exclusive royalty-bearing license to Japanese patent rights for our Hepasphere SAP Microsphere product. These patent rights expire in 2012. There are no United States or other international filings corresponding to this patent application. We intend to file patent applications directed to improvement of this inventor's technology. However, present applications may not issue as patents, and these patents, if issued, may not provide us with sufficient protection against competitors. Further, we may be required to obtain additional licenses concerning the Japanese patent application and any licenses, if obtained, may not be on terms that are acceptable to us. We were recently granted a United States patent directed to the treatment of urinary incontinence using microparticles. This patent expires in March 2019. We have filed two patent applications relating to materials and methods for active embolotherapy, gene therapy and the treatment of gastroesophageal reflux disease, urinary incontinence and skin wrinkles. In addition, in July 1999, we entered into an agreement with the Louis Pasteur University in Strasbourg, France and Centre National de la Recherche Scientifique pursuant to which we received exclusive, royalty-bearing worldwide rights to two United States patents relating to active embolotherapy technology. We have filed a patent application relating to our material, formulation process and method of use for our new EmboGold Microspheres. We have filed four United States patent applications and corresponding foreign applications relating to the use of embolotherapy for tissue bulking and the treatment of urinary incontinence, vesicoureteral reflux, dermal augmentation, skin wrinkles and gastroesophageal reflux disease. We have also filed patent applications relating to materials and methods for tissue regeneration. Our success depends to a significant degree upon our ability to develop proprietary products and technologies and to obtain patent coverage for these products and technologies. We intend to continue to file patent applications covering any newly-developed products and technologies. However, as discussed above, there can be no guarantee that any of our pending or future filed applications will be issued as patents. There can be no guarantee that the United States Patent and Trademark Office or some third party will not initiate an interference proceeding involving any of our pending applications or issued patents. Finally, there can be no guarantee that our issued patents or future issued patents, if any, will provide adequate protection from competition, as further discussed below. Patents provide some degree of protection for our proprietary technology. However, the pursuit and assertion of patent rights, particularly in areas like medical device development, involve complex legal and factual determinations and, therefore, are characterized by significant uncertainty. In addition, the laws governing patent issuance and the scope of patent coverage continue to evolve, particularly in life sciences. Moreover, the patent rights we possess or are pursuing generally cover our technologies to varying degrees. As a result, we cannot assure you that patents will issue from any of our patent applications or from applications licensed to us or that any of our issued patents will offer meaningful protection. In addition, our issued patents or patents licensed to us may be successfully challenged, invalidated, circumvented or rendered unenforceable so that our patent rights may not create an effective competitive barrier. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent, as do the laws of the United States. There can be no assurance that any patents issued to us will provide a legal basis for establishing an exclusive market for our products or provide us with any competitive advantages or that the patents of others will not have an adverse effect on our ability to do business or to continue to use our technologies freely. In view of these factors, the value of our intellectual property position is uncertain. 18 We may be subject to third parties filing claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert such claims against us or our licensees or against the licensors of technology licensed to us, or whether those claims will harm our business. If we are forced to defend against such claims, regardless of their merit or whether they are resolved in favor of or against us, our licensees or our licensors, we may face costly litigation and diversion of management's attention and resources. As a result of such disputes, we may have to develop, at a substantial cost non-infringing technology, or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, or at all, which could seriously harm our business or financial condition. We also rely in part on trade secret protection of our intellectual property. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties, employees and consultants. Our employees also sign agreements requiring that they assign to us their interests in inventions and original expressions and any corresponding patents and copyrights arising from their work for us. However, it is possible that these agreements may be breached, invalidated or rendered unenforceable and if so our trade secrets could be disclosed to others, including our competitors, and there may not be an adequate corrective remedy available. Despite the measures we have taken to protect our intellectual property, parties to our agreements may breach the confidentiality provisions in our contracts or infringe or misappropriate our patents, copyrights, trademarks, trade secrets and other proprietary rights. In addition, third parties may independently discover or invent competitive technologies or reverse engineer our trade secrets, or other technology. Therefore, the measures we are taking to protect our proprietary technology may not be adequate. EMPLOYEES As of February 28, 2002, we employed 87 persons. Of these employees, 10 are primarily engaged in research and development activities, 20 are engaged in manufacturing, 38 are engaged in sales and marketing, and the remainder are engaged in finance and administration. Of these 87 persons, 44 are located in the United States, 41 are located in France and 2 are located in Japan. Our employees in the United States are not covered by a collective bargaining agreement. In Europe, our employees are covered by the provisions of an agreement setting forth national guidelines and standards for labor relations within our industry. We consider our relations with our employees to be good. RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS This Annual Report on Form 10-K contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be considered to be forward-looking statements. Although not a complete list of words that might identify forward-looking statements, we use the words "believes," "anticipates," "plans," "expects," "intends," and similar expressions to identify forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated by forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Form 10-K. We expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. RISK RELATING TO OUR FUTURE PROFITABILITY Because we have a history of losses and our future profitability is uncertain, our common stock is a highly speculative investment We have incurred operating losses since our inception and, as of December 31, 2001, had an accumulated deficit of approximately $54.9 million. We expect to spend substantial funds to continue research and product testing, to establish sales, marketing, quality control, regulatory and administrative capabilities and for other general corporate purposes. We expect to continue incurring losses for the next fiscal year as we expand our commercialization efforts. 19 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 Embosphere Microspheres product, our business prospects will be seriously harmed Our Embosphere Microspheres are based on new technologies and therapeutic approaches. In the United States, we only recently began selling our Embosphere Microspheres product for the embolization of hypervascularized tumors and arteriovenous malformations. We will require additional FDA approval before we can market Embosphere Microspheres in the United States for use in the embolization of uterine fibroids. Our success will depend upon the medical community, patients and third party payors accepting our Embosphere Microspheres product as medically useful, 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. 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 limited cases, require a hysterectomy. In addition, Embosphere Microspheres are designed to remain in the body permanently. As a result, there is some limited risk that some or all of the Embosphere Microspheres used in a medical procedure may travel in the blood system beyond the intended site of action and occlude, or block, other blood vessels, resulting in significant adverse health effects on the patient or even death. Moreover, to use our Embosphere 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 Embosphere Microspheres could 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 Embosphere Microspheres in patient therapy. In addition, there is only limited data concerning the long-term health effects on persons resulting from 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 and 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 product, 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 than treatments or products under development. All of our products under development will require significant 20 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, obtain marketing approvals and successfully introduce new products, we may not achieve revenue opportunities We derived more than a majority of our revenue for the years ended December 31, 2001 and 2000 from the sale of Embosphere Microspheres. In addition, although we have not received FDA clearance or approval to market our Embosphere Microspheres for the specific use in the treatment of uterine fibroids, we believe that a majority of our revenue in the United States for the years ended December 31, 2001 and 2000 was derived from the sale of Embosphere Microspheres for use in uterine fibroid embolization. We derived approximately 19% of our revenue for the years ended December 31, 2001, and 49% of our revenue for the year ended December 31, 2000 from the sale of non-strategic products that we do not expect to constitute a significant portion of our revenue on an ongoing basis. Accordingly, we need to seek and obtain marketing approval for the use of Embosphere Microspheres for uterine artery embolization, 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 these efforts, we may not achieve revenue opportunities. 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. The terms of any collaboration may not be favorable to us. We may not be able to provide adequate incentive to our sales force or to establish distribution and marketing collaborations with other companies to promote our products. 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 the strategic redirection of our business is not successful, we may be unable to achieve growth in our business In early 1999, we decided to exit the chromatography business, which had constituted our core business, to focus on the commercialization of microspheres for use in embolotherapy and other medical applications. We have restated our historical financial statements to reflect the discontinuation of our chromatography business. In addition, 73% of 1999 revenue, 49% of 2000 revenue and approximately 19% of revenue in 2001 included in our consolidated financial statements was derived from the sale of products we consider to be non-strategic and which we do not expect to constitute a significant portion of our revenue on an ongoing basis. Our strategic shift from the chromatography business to the commercialization of microspheres may not prove to be successful and, consequently, we may be unable to commercially develop our business and achieve profitability. 21 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 and therapeutics 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 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 Embosphere Microspheres product more rapidly or at less cost than we can. Currently, the primary products with which our Embosphere 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. 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 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 Embosphere 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 revenue for us, and could affect our ability to raise capital and market our products. 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 whom 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. 22 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 clinical trials, 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 January 31, 2002, Sepracor Inc. beneficially owns approximately 25% of our outstanding common stock. In addition, as of January 31, 2002, our executive officers and directors beneficially owned, in the aggregate, approximately 9% of our outstanding common stock, excluding shares owned by Sepracor which some of our directors and executive officers may be deemed to beneficially own, but including shares issuable upon exercise of vested options and warrants. Two of our directors are executive officers of Sepracor. Sepracor and our executive officers and directors will have substantial 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. 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. 23 We are focusing our immediate product commercialization efforts on our Embosphere Microspheres. In April 2000, we obtained clearance from the FDA to market our Embosphere Microspheres in the United States for the embolization of hypervascularized tumors and arteriovenous malformations. However, before we can market Embosphere 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. We do not expect to receive the required clearance or approval for specific labeling for uterine fibroids until at least the last quarter of 2002, if at all. In order to obtain FDA clearance or approval to market our product for this indication, we are conducting clinical trials. We cannot assure you that the data resulting from this study will be considered by the FDA to be sufficient to permit clearance or approval. If we do not receive FDA clearance or approval to market our Embosphere Microspheres in the United States in the treatment of uterine fibroids, our business will be adversely affected. 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 Embosphere Microspheres are limited to those specified in any FDA clearance or approval. For example, because our products are not 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 revenue in the United States for the years ended December 31, 2001 and 2000 was derived from the sale of Embosphere Microspheres for use in uterine fibroid embolization. We may in the future make modifications to our Embosphere 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 to the FDA 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 which would require us to track specific elements of patient experience with our Embosphere 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. If our clinical trials are not completed successfully, we will not be able to develop and commercialize our products Although for planning purposes we forecast the timing of completion of clinical trials, the actual timing can vary dramatically due to factors such as delays, scheduling conflicts with participating clinicians and clinical institutions, the rate of patient accruals and the uncertainties inherent in the clinical trial process. In addition, we 24 may rely on academic institutions or clinical research organizations to supervise or monitor some or all aspects of clinical trials involving our products. Accordingly, we may have less control over the timing and other aspects of these clinical trials than if we conducted them entirely on our own. In addition, we will need FDA approval to initiate some clinical trials, and the trials must be conducted in compliance with FDA regulations. Furthermore, clinical or regulatory issues may occur that will compel us to temporarily or permanently suspend our clinical trials. As a result of these factors, we or third parties may not successfully begin or complete our clinical trials and we may not make regulatory submissions or receive required regulatory approvals to commence or continue our clinical trials in the time periods we have forecasted, if at all. If we or third parties fail to commence or complete, or experience delays in, any of our planned clinical trials, then we are likely to incur additional costs and delays in our product development programs, and we may not be able to successfully develop and commercialize our products. If we incur costs and delays in our programs or if we do not successfully develop and commercialize our products, our stock price could decline. 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. 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 Embosphere Microspheres and other products commercialized by us. For example, our U.S. patent directed to copolymers used to make our present Embosphere 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. 25 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. 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 revenue. 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 26 to commercialize ourselves. Although we are presently negotiating a credit line with a bank, we currently have no committed source of capital in the United States. 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 Embosphere Microspheres, customer cancellations and general economic conditions. We also expect that our operating results will be affected by seasonality, since we expect our revenues to decline substantially 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 August. Due to these fluctuations, our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would probably decline. In addition, a large portion of our expenses, including expenses for facilities, equipment and personnel, are relatively fixed. Accordingly, if our revenue declines or does not grow as much as we anticipate, we might not be able to improve our operating margins. In addition, we plan to significantly increase operating expenses in the next several years. Failure to achieve anticipated levels of revenue 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 Embosphere Microspheres products in one manufacturing facility in France and sub-contract a significant portion 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. We have contingency plans to establish manufacturing in the United States in place but we could encounter delays or difficulties establishing relationships with alternate contract manufacturers or in establishing agreements on terms that are favorable to us. 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, 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 premarket approval 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. 27 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 Embosphere 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 operations are currently conducted primarily through our French subsidiary. Furthermore, we currently derive a significant portion of our revenue from the sale of our Embosphere Microspheres and other products in the European Union. We are increasingly subject to a number of 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. 28 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 2. PROPERTIES We currently lease office and manufacturing facilities in Rockland, Massachusetts, and Roissy, France. Our Rockland, Massachusetts, office includes approximately 13,000 square feet of corporate offices and laboratory space pursuant to a five-year lease expiring in March of 2005. Our Roissy, France facility includes approximately 18,150 square feet of office, laboratory and manufacturing space and is leased through May 2010. At our facility in France, we produce our Embosphere Microspheres and some ancillary disposable devices. Embosphere Microsphere production includes the synthesis of raw materials and third party manufactured intermediary compounds. For certain products currently sold in North America, final product packaging is performed by a contracted third-party within the United States under Good Manufacturing Practices manufacturing standards. We believe that our currently-leased facilities in Rockland, Massachusetts and Roissy, France are suitable to meet our current requirements and that suitable additional or substitute space will be available to us on commercially reasonable terms, if needed in the future. Item 3. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company, through solicitations of proxies or otherwise, during the quarter ended December 31, 2001. 29 EXECUTIVE OFFICERS Our executive officers, their respective ages as of December 31, 2001 and their positions are as follows:
Name Age Position ---- --- -------- John M. Carnuccio.. 48 Chief Executive Officer, President and Director Alain Brunier...... 57 President, Europe Jonathan R. McGrath 47 Vice President, Worldwide Research and Development Robert M. Palladino 47 Vice President and Chief Financial Officer Robert T. Phelps... 45 Vice President, U.S. Sales and Business Development Michael Miley...... 39 Vice President, U.S. Marketing
John M. Carnuccio, age 48, has served as a director of BioSphere since June 1999. From January 1999 until May 1999, Mr. Carnuccio served as Executive Vice President of BioSphere and President of the Medical Products Business of BioSphere. In May 1999, he was appointed President and Chief Executive Officer of BioSphere. From 1979 to January 1999, Mr. Carnuccio served in a number of capacities at Boston Scientific Corporation, a worldwide manufacturer of medical devices for interventional medicine, most recently as Vice President, Market Development, Interventional Gynecology, from April 1998 to January 1999 and as Vice President and General Manager, Microvasive Urology Division from 1992 to April 1998. Alain Brunier, age 57, has served as President, Europe since June 2000. From 1996 to May 2000, Mr. Brunier served as Managing Director, France & North Africa of St. Jude Medical, a manufacturer of pacemakers and other medical devices used by cardiologists. From 1990 to 1996, Mr. Brunier served as Vice President and Chief Executive, Europe, Middle East & Africa of Telectronics, a manufacturer of pacemakers and implantable defibrillators. Prior to 1990, Mr. Brunier has also held senior management positions at SMAD - HEMO France and Baxter-Travenol. Jonathan R. McGrath, age 47, has served as Vice President, Worldwide Research and Development since August 1999. From 1995 to 1998, Mr. McGrath served as Vice President of Research and Development at Urologix, a urological device company. From 1990 to 1995, he served as Vice President of Research and Development at Schneider/Pfizer, a cardiovascular device company. From 1987 to 1990, Mr. McGrath served as the Vice President of Product Development & Operations at Harbor Medical, a surgical device company. From 1980 to 1987, Mr. McGrath held various positions at Boston Scientific Corporation, most recently as the Director of Metals Product Development. Robert M. Palladino, age 47, has served as Chief Financial Officer and Vice President since December 1999. From March 1999 to December 1999, Mr. Palladino served as Vice President and Chief Financial Officer of Coretek, Inc., a fiber optics manufacturer. From 1995 to 1999, he served as Vice President of Finance at C.P. Clare Corporation, a multinational electronics firm. He also served as Assistant Treasurer at the Kendall Company, a health care manufacturer from 1991 to 1995. Robert T. Phelps, age 45, has served as the Vice President, U.S. Sales and Business Development since August 1999. From 1998 to 1999 Mr. Phelps was self-employed as a strategic sales consultant. From 1993 to 1998, Mr. Phelps served as Vice President of Sales, Orthopedic Division at Johnson & Johnson, a pharmaceutical company. From 1990 to 1993, Mr. Phelps served as the Group Controller, Orthopedics Division at Johnson & Johnson. Michael Miley, age 39, has served as Vice President, U.S. Marketing, since August 2001. From January 2001 to July 2001, Mr. Miley served as Senior Director of Worldwide Market Development for BioSphere. From August 2000 to December 2000, Mr. Miley was an independent consultant to BioSphere. From 1988 to 2000, Mr. Miley held various sales and marketing positions with Boston Scientific Corporation, most recently as Director of Marketing, International - Aneurysmal Therapies. 30 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our Common Stock has traded on the Nasdaq National Market from March 1994 through January 13, 1999 and from March 29, 2000 to the present. Our Common Stock traded on the National Association of Securities Dealers, Inc. OTC Bulletin Board from January 14, 1999 to March 28, 2000. As of March 15, 2002, there were approximately 128 stockholders of record of our Common Stock. The following table shows the range of high and low sales prices per share of our Common Stock as reported on the Nasdaq National Market or the OTC Bulleting Board, as the case may be, for the last two fiscal years.
2001 ------------- High Low ------ ------ First Quarter.................... $19.81 $ 9.50 Second Quarter................... $19.00 $11.56 Third Quarter.................... $13.79 $ 6.96 Fourth Quarter................... $11.56 $ 7.00 2000 ------------- High Low ------ ------ First Quarter.................... $50.50 $ 6.00 Second Quarter................... $31.38 $12.25 Third Quarter.................... $18.63 $10.50 Fourth Quarter................... $14.56 $ 9.00
We have not paid any dividends on our Common Stock since our inception and do not intend to pay any dividends in the foreseeable future. 31 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes to those statements and other financial information included elsewhere in this Annual Report on Form 10-K.
2001 2000 1999 1998 1997 Year Ended December 31, -------- ------- ------- ------- ------- (In thousands, except per share amounts) Statement of Operations Data: Revenue: Revenue from product sales........................ $ 8,752 $ 3,961 $ 2,263 $ 155 $ 117 License fees and collaboration revenue............ 250 -- 3 47 35 -------- ------- ------- ------- ------- Total Revenue................................... 9,002 3,961 2,266 202 152 Costs and expenses: Costs of products sold............................ 2,356 1,461 1,404 95 72 Research and development.......................... 4,755 2,517 968 34 34 Selling, general and administrative............... 12,839 7,847 4,003 1,364 1,195 Stock-based compensation to non-employees......... -- 1,261 -- -- -- -------- ------- ------- ------- ------- Total costs and expenses........................ 19,950 13,086 6,375 1,493 1,301 -------- ------- ------- ------- ------- Loss from operations............................... (10,948) (9,125) (4,109) (1,291) (1,149) Other income (expense):............................ Interest income................................... 794 715 234 30 32 Interest expense.................................. (31) (54) (134) (222) (72) Other............................................. (160) 17 15 -- -- -------- ------- ------- ------- ------- Net loss from continuing operations................ $(10,345) $(8,447) $(3,994) $(1,483) $(1,189) Net loss from discontinued operations.............. -- -- (539) (330) (2,615) -------- ------- ------- ------- ------- Net loss........................................... $(10,345) $(8,447) $(4,533) $(1,813) $(3,804) ======== ======= ======= ======= ======= Basic and diluted net loss per common share from continuing operations............................ $ (0.89) $ (0.87) $ (0.47) $ (0.17) $ (0.14) Basic and diluted net loss per common share from discontinued operations.......................... -- -- (0.06) (0.04) (0.31) -------- ------- ------- ------- ------- Basic and diluted net loss per common share........ $ (0.89) $ (0.87) $ (0.53) $ (0.21) $ (0.45) Basic and diluted weighted average number of common shares outstanding............................... 11,642 9,700 8,456 8,437 8,423 -------- ------- ------- ------- ------- 2001 2000 1999 1998 1997 Balance Sheet Data as of December 31, -------- ------- ------- ------- ------- (In thousands) Cash, cash equivalents and marketable securities... $ 23,119 $15,276 $ 5,368 $ 2,235 $ 2,370 Working capital.................................... 22,789 14,136 4,490 2,552 3,835 Total assets....................................... 29,984 19,306 7,496 12,664 12,787 Debt and minority interest acquisition obligation.. 303 575 945 82 164 Stockholders' equity............................... 25,873 15,686 4,588 9,136 10,716 -------- ------- ------- ------- -------
32 Item 7. 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 Consolidated Financial Statements and the related Notes included elsewhere in this report. Except for historical information contained herein, matters discussed in this report constitute forward-looking statements. We use the words "expects," "estimates," "intends," "plans," "should" and similar expressions to identify such forward-looking statements. Actual results could differ materially from those set forth in the forward-looking statements. In light of the substantial risks and uncertainties inherent in all future projections, our inclusion of forward-looking statements in this report should not be regarded as representations by us that our objectives or plans will be achieved. Many factors could cause our actual results, performance or achievements to differ materially from those in the forward-looking statements. Reference is made in particular to the risk factors set forth in the subsection Item 1. Business--"Risk Factors That May Affect Future Operating Results" to this report and the discussions set forth below in this report under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview We are 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 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 initial product, Embosphere Microspheres, is 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. BioSphere Medical, Inc. was originally incorporated in 1993 under the name BioSepra, Inc., as a chromatography media company. 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 November 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 to BioSphere Medical, Inc. As of December 31, 2001, Sepracor Inc., a specialty pharmaceutical company, beneficially owned approximately 25% of our outstanding common stock. In April 2000, we received clearance from the United States FDA for embolization of hypervascularized tumors and arteriovenous malformations, excluding specific marketing approval for the uterine fibroids. In December 2000, we commenced our pivotal Phase II clinical testing, under an investigational device exemption, of the safety and effectiveness of treating uterine fibroids by uterine artery embolization with our Embosphere Microspheres. An investigational device exemption is a regulatory exemption granted by the FDA to medical device manufacturers for the purpose of conducting clinical studies. We intend, pending FDA clearance or approval for this indication, to 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 Embosphere 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 Embosphere Microspheres product in Australia and Canada. 33 Our revenue is primarily generated from product sales of Embosphere Microspheres in the United States, European Union, Australia and Canada. Product revenues also include the sale of barium and other ancillary products manufactured by us or by third parties. Although we have not received FDA clearance or approval to market our Embosphere Microspheres for the specific use in the treatment of uterine fibroids, we believe that a majority of our revenue in the United States for the years ended December 31, 2001 and 2000 was derived from the sale of Embosphere Microspheres for use in uterine fibroid embolization. During 2000, we established two wholly owned subsidiaries to pursue the development of other microsphere technologies. In April 2000, we established Biosphere Medical Japan, Inc., a Delaware corporation, to develop and commercialize Embosphere Microspheres as well as Hepasphere SAP Microspheres in Asia. In December 2000, we established BSMD Ventures, Inc., also a Delaware corporation, to explore and develop non-embolotherapy applications with a specific focus on tissue engineering uses. We have experienced operating losses in each fiscal period since our inception. As of December 31, 2001, we had approximately $23.1 million in cash and short-term marketable securities and an accumulated deficit of approximately $54.9 million. In connection with the execution of our business plan, we expect to experience continued losses for the next fiscal year. The sale of our former chromatography business in 1999 has been presented in the financial statements in accordance with discontinued operations accounting principles. Accordingly, the results of all discontinued operations have been excluded from the continuing operations and presented separately in the accompanying selected financial data. Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our 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. Our significant accounting policies are summarized in Note B to our consolidated financial statements. The significant accounting policies which we believe are the most critical in gaining full understanding and evaluating our reported financial results include the following: Revenue Recognition Revenues from product sales are recognized when requested goods are shipped to customers and collection is considered probable. Management establishes reserves for potential sales returns and evaluates, on a monthly basis, the adequacy of those reserves based upon realized experience. Under our current policy, only those products on a customers' initial order qualify for credit returns. To date, returns have been minimal and immaterial. While such returns have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have in the past. Any significant change in product satisfaction and any resulting credit returns could have a material adverse impact on our operating results for the period or periods in which such returns materialize. Accounts Receivable We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical payment experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Substantially all of our receivables are due from hospitals, distributors, health care clinics, and managed care systems located throughout the United States, Australia, Canada, and Europe. A significant portion of products sold, both foreign and domestic, are ultimately funded through government reimbursement programs. As a consequence, changes in these programs can have an adverse impact on liquidity and profitability of our customer base. 34 Inventories We value our inventory at the lower of the actual cost to purchase or manufacture the inventory. We regularly review inventory quantities in process and on hand and record a provision for production loss and obsolete inventory based primarily on actual loss experience and on our estimated forecast of product demand. Therefore, significant increases in the demand for our products could result in a short-term increase in production loss while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our costs of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we would have over-reported our costs of goods sold in previous periods and would be required to recognize a reduced per unit cost at the time of sale. Therefore, although we make every effort to ensure the accuracy of our production process and forecasts of future product demand, any significant unanticipated changes in production yield or product demand could have a significant impact on the value of our inventory and our reported operating results. Deferred Taxes We use the asset and liability accounting method whereby deferred tax assets and liabilities are recognized based on temporary differences between the financial statements and tax bases of assets and liabilities using current statutory tax rates. A valuation allowance against net deferred tax assets is recorded if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management evaluates, on a quarterly basis, the ability to recover the deferred tax assets and the level of the valuation allowance. Due to the size of our net operating loss carryforward in relation to our history of unprofitable operations we have not recognized any of our net deferred tax assets. We currently provide for income taxes only to the extent that we expect to pay cash taxes (primarily foreign subsidiary and certain state minimum net worth tax) for current income. However, future improvements in operational performance could result in the increased certainty of our ability to apply our deferred tax assets against taxable income which, could in turn, result in a significant impact on the value of our deferred tax assets and our reported operating results. Results of Operations Years Ended December 31, 2001, 2000 and 1999 Total revenue increased to $9.0 million for the year ended December 31, 2001 from $3.96 million for the same period in 2000 and $2.27 million in 1999. The $5.04 million increase from 2000 to 2001, as well as the $1.69 million increase from 1999 to 2000 is primarily due to an increase in sales of Embosphere Microsphere in the United Sates following receipt of FDA 510(k) clearance and commercial introduction in April 2000. North American revenues increased 394% from $1.27 million in 2000 to $6.27 million in 2001. No product sales were recorded in North America during 1999. Included in our 2001 consolidated and North American revenue was $250,000 in collaboration revenue recognized through a supply agreement with a third party. We expect that sales of our Embosphere Microspheres will continue to account for a majority of our revenue in 2002. Costs of products sold for the year ended December 31, 2001 was $2.36 million, compared to $1.46 million in 2000 and $1.40 million in 1999, representing 27%, 37%, and 62% of product revenue, respectively. The $895,000 increase in the cost of product revenues in the year ended December 31, 2001 was due to increased sales volume offset by the effects of a shift in product sales to the Embosphere Microsphere products which have a higher gross profit margin than our other products. Gross margin for the year ended December 31, 2001 was $6.65 million or 73% of product revenues compared with $2.5 million or 63% of product revenues for the same period in 2000 and $862,000 or 38% of product revenues in 1999. The increase in gross margin for each of the years ended December 31, 2001 and 2000 was attributable to the effects of a shift in the majority of sales to the higher margin Embosphere 35 Microsphere products, predominantly in North America. Also contributing to the gross margin improvement during 2001 and 2000 was the effect of improved manufacturing efficiencies and process improvements realized at our French production facility. Research and development expenses increased to $4.76 million in 2001 from $2.52 million in 2000 and $968,000 in 1999. The $2.24 million increase from 2000 to 2001 as well as the $1.55 million increase in research and development expenses from 1999 to 2000 was due primarily to clinical trial and regulatory submission costs incurred relative to seeking regulatory approval for Embosphere Microsphere and EmboGold Microspheres in the United States. The 89% increase from 2000 to 2001 was also due to the final process development and validation costs incurred with respect to the release of our EmboGold Microspheres product line combined with additional salary and staffing expense in the United States. We anticipate future research and development expenses will increase as a result of the advancement of Embosphere Microsphere products through our pivotal Phase II clinical trial for uterine artery embolization of uterine fibroids, which was initiated in October 2000. The Phase II trial was approved by the FDA under an investigational device exemption. Additional expenses are also expected to result from the continued development and enhancement of our current products and product candidates. Selling, general and administrative expenses, net of non-cash, non-employee stock option acceleration charges, increased to $12.84 million for the year ended December 31, 2001 from $7.85 million in 2000 and $4.0 million in 1999. The $4.99 million and $3.84 million increases in selling, general and administrative expenses from 2000 to 2001 and from 1999 to 2000, respectively, were primarily due to the implementation of our product commercialization plan, including salary and other related costs associated with increased personnel, sales and marketing, investor relations and all other expenses associated with developing and introducing a new product platform in both the North American and European territories. Future selling, general and administrative expenses are expected to increase consistent with the growth in our revenue and the embolization industry in general. In connection with stock options previously issued to non-employee advisors, we recognized, 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), $1.26 million in non-employee compensation expense during the year ended December 31, 2000. The non-cash stock-based compensation charge has been presented as a separate line item within the Statement of Operations for the year ended December 31, 2000. The $1.26 million aggregate fair value of the non-employee stock options was derived from the Black-Scholes option-pricing model. Interest income was $794,000 in the year ended December 31, 2001 compared to $715,000 in 2000 and $234,000 in 1999. The growth in interest income in each of the sequential years was due to the continued increase in the average-daily invested cash balances offset, to a limited extent, by reduced rates of return, particularly during fiscal 2001. Increased invested cash primarily resulted from the May 1999 sale of our discontinued chromatography operations resulting in net proceeds of approximately $9.6 million along with the net proceeds of $5.9 million, $11.8 million and $20.4 million from our February 2000, July 2000 and July 2001 equity placements, respectively. Interest expense decreased from $134,000 in 1999 to $54,000 in 2000 and to $31,000 in 2001. This sequential decrease for each of 2001 and 2000 was primarily due to the retirement of our debt in the second quarter of 1999. Interest expense during 2001 primarily resulted from the cost of financing operational cash flow as well as certain capital leases. Interest expense in 2000 resulted primarily from non-cash interest charges generated from the potential obligation to purchase the remaining outstanding minority interest in BMSA. See Note C to the consolidated financial statements. Other income and (expense) increased from $15,000 in 1999 to $17,000 in 2000, then decreased to ($160,000) in 2001. Other income and expense is primarily comprised of the foreign currency exchange gains and losses and to a limited extent, gains on the sale of idle assets. The $177,000 change from 2000 to 2001 was primarily due to foreign currency losses associated with our inter-company trade. 36 We have not recorded any tax benefit resulting from our operating losses as management believes the ability to realize and benefit against future taxable income is uncertain. Net loss from continuing operations increased to $10.35 million for the year ended December 31, 2001 compared to $8.45 million in 2000 and $3.99 million in 1999. The increases are a direct result of the implementation of our strategic plan to develop, introduce and commercialize our EmboSphere Microspheres, EmboGold Microspheres, and other product lines both in the North American and European markets. Liquidity and Capital Resources We have historically funded our operations from product sales, net proceeds provided by 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, the exercise of stock options. As of December 31, 2001, we had $23.12 million of cash, cash equivalents and marketable securities, an increase of $7.84 million from $15.28 million as of December 31, 2000. This increase primarily resulted from the net proceeds of $20.4 million from our public offering of common stock in July 2001 offset, to a limited extent, by cash used to fund operations. As of December 31, 2001, we had $22.79 million in working capital. We expect to finance our 2002 operations through product sales and existing cash balances. For the year ended December 31, 2001, we used $10.77 million in operating cash primarily to fund our sales, marketing, research and product development activities and to finance working capital requirements. Cash used in operations is expected to decrease over the next twelve month period as anticipated increases in product revenues are expected to offset the Company's operational and product development expenditures. Net cash used in investing activities was $14.75 million for the year ended December 31, 2001 and primarily represents our investment of cash in excess of current operational needs in marketable securities. We also used $953,000 in connection with the purchase of the remaining outstanding equity interest in BMSA. From this step-acquisition, our total ownership interest in BMSA increased from 85% to 100%. The remaining cash used in investing activities of approximately $1.25 million was used to purchase property and equipment relating to establishing full manufacturing capabilities at BMSA and to obtain office equipment and furnishings in our corporate headquarters in Rockland, Massachusetts. We anticipate future capital expenditures will increase over the next twelve-month period consistent with our plan to expand our manufacturing, sales and marketing presence in the United States, Europe, the Far East, Australia and Canada. If available on favorable terms, we expect to finance certain future fixed asset acquisitions through leasing arrangements. Net cash provided by financing activities was $20.78 million for the year ended December 31, 2001. On July 3, 2001, we completed an underwritten public offering of 4.0 million shares of our common stock at $11.00 per share. Of the 4.0 million shares of common stock offered, we sold 2.0 million shares and Sepracor sold 2.0 million shares. Our net proceeds were approximately $20.4 million. Proceeds from the public offering will be used for working capital and general corporate purposes, including product commercialization and research and development. On August 6, 2001, Sepracor sold an additional 600,000 shares of our common stock pursuant to the exercise of the underwriter's over-allotment option. As a result of this offering, including the over-allotment, Sepracor's beneficial ownership interest in our outstanding common stock decreased from approximately 55% to approximately 25%. In both February 2000 and in July 2000, we completed private-equity placements resulting in the issuance of an aggregate of 1,868,787 shares of common stock for net proceeds of approximately $17.72 million. The February 2000 private-equity issuance included warrants to purchase a total of 163,468 shares of common stock with an exercise price of $20 per share. Cash provided by financing activities also includes $149,000 and $558,000 received in connection with the sale of common stock through the exercise of options granted under our incentive stock option plans during the years ended December 31, 2001 and 2000, respectively. We believe that our existing cash and other working capital, including the approximate $23.12 million in cash, cash equivalents and marketable securities that we have as of December 31, 2001, will be sufficient to fund our operating and capital requirements, as currently planned, at least through the next twelve-month period. 37 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 commercialization activities. 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, if at all. Borrowing Arrangement In March 2000, BMSA entered into a (Euro)152,450 ($135,000 equivalent as of December 31, 2001) term loan with a French national bank that is payable over five years and accrues interest at 5.4% per annum. The total loan balance outstanding as of December 31, 2001 was approximately (Euro)104,000 or $92,000. As a co-borrower under Sepracor's commercial bank facility, we had availability to borrow up to $2.0 million through a line of credit agreement. As a result of our July 2001 underwritten public offering, Sepracor's ownership of our outstanding common stock was reduced to less than 50%, thereby automatically terminating the co-borrowing arrangement. Because we are no longer a party to the loan agreement, which had no outstanding balance as of December 31, 2001, the bank released Sepracor's guaranty of our obligations to the bank and Sepracor terminated its related security interest in our assets. Commitments As of December 31, 2001, we have entered into two operating leases pursuant to the lease of our facilities in Rockland, Massachusetts and Roissy, France. The Rockland, Massachusetts lease expires in March of 2005 and the Roissy, France operating lease expires in May 2010. During 2001, we entered into several non-cancelable capital lease agreements with various equipment-financing companies, in connection with the acquisition of certain manufacturing and computer equipment. The leases have initial terms of 30 to 60 months with interest rates of 5.4% to 13.4%. All corresponding leased equipment serves as pledged capital with respect to each respective capital lease agreement. Future cash payments, including interest, under contractual obligations in effect as of December 31, 2001, are as follows:
Term Operating Capital Period Loans Leases Leases Total ------ ----- --------- ------- ------ (In thousands) 2002.............................. $ 31 $ 502 $ 76 $ 609 2003.............................. 31 501 76 608 2004.............................. 31 480 76 587 2005.............................. 7 223 69 299 2006.............................. -- 139 47 186 Thereafter........................ -- 475 -- 475 ---- ------ ---- ------ Total contractual cash commitments $100 $2,320 $344 $2,764
38 Related Party Transactions The Company subcontracts a key portion of its final packaging processes to an independent third-party contract manufacturer. If such services were not available at a reasonable cost from our existing contract manufacturer, we would need to obtain new contracts with new providers or incur the expense of internalizing the packaging process. Such a conversion could cause us to incur additional expense in validating the process under FDA Good Manufacturing Practices, delay the availability of finished product and limit commercial sales of our products. Receivable from related party represents the portion of offering expenses that Sepracor has agreed to pay as a result of Sepracor's participation in the July 2001 public offering of 4.0 million shares of our common stock. Total related party receivables are offset by amounts due to Sepracor for certain administrative services provided to us on an arms-length basis by Sepracor as of December 31, 2001. Total administrative fees charged for services rendered in the year ended December 31, 2001 were not material. All receivable from related party balances were received in full in February 2002. Sepracor is entitled to certain rights with respect to the registration under the Securities Act of a total of 1,400,000 shares of our common stock. These rights provide that Sepracor may require us to register shares, subject to certain conditions and limitations. As of December 31, 2001, Sepracor has not exercised these rights. As of December 31, 2001, the Company is not a party to any unconsolidated special purpose entity arrangements. Recent Accounting Pronouncements In 2002, Statement of Financial Accounting Standards or SFAS, No. 142, "Goodwill and Other Intangible Assets" became effective and as a result, we will cease to amortize $1.44 million of goodwill. During 2001, we recorded approximately $177,000 of amortization within selling, general and administrative expense and would have recorded an estimated $200,000 of amortization during 2002. In lieu of periodic amortization, we are required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. We expect to complete our initial review over the next six-month period. We currently do not expect to record an impairment charge upon completion of the initial impairment review. However, there can be no assurance that at the time the review is completed a material impairment charge will not be recorded. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments As of December 31, 2001, we did not participate in any derivative financial instruments or other financial and commodity instruments for which fair value disclosure would be required under Financial Accounting Standards Board Statement of Financial Accounting Standard No. 107 "Disclosures About Fair Value of Financial Instruments." 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 expenses in France are primarily denominated in local currency, and 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 39 our investment in foreign subsidiaries with a functional currency other than our reporting currency 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. A ten-percent depreciation in year-end 2001 and 2000 functional currencies relative to the U.S. dollar would not result in a material reduction of stockholders' equity. Because our foreign currency exchange rate risk is not material, no quantitative tabular disclosure has been provided. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of BioSphere Medical, Inc. and subsidiaries: We have audited the accompanying consolidated balance sheets of BioSphere Medical, Inc. (a Delaware Corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BioSphere Medical, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /S/ ARTHUR ANDERSEN LLP Boston, Massachusetts January 17, 2002. 40 BIOSPHERE MEDICAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share and per share amounts)
December 31, ------------------ 2001 2000 -------- -------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 10,569 $ 15,276 Marketable securities............................................................ 12,550 -- Accounts receivable, net of allowance for doubtful accounts of $105 and $29 as of December 31, 2001 and 2000, respectively....................................... 1,809 1,142 Inventories, net................................................................. 1,111 639 Receivable from related party.................................................... 276 -- Prepaid and other current assets................................................. 282 124 -------- -------- Total current assets........................................................... 26,597 17,181 Property and equipment, net...................................................... 1,570 694 Goodwill, net.................................................................... 1,443 1,144 Other assets..................................................................... 374 287 -------- -------- Total assets................................................................... $ 29,984 $ 19,306 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................. $ 771 $ 924 Accrued compensation............................................................. 1,383 994 Other accrued expenses........................................................... 1,569 1,086 Payable to related party......................................................... -- 14 Current portion of long-term debt and capital lease obligations.................. 85 27 -------- -------- Total current liabilities...................................................... 3,808 3,045 Minority interest acquisition obligation.......................................... -- 478 Long-term debt and capital lease obligations...................................... 303 97 -------- -------- Total liabilities.............................................................. 4,111 3,620 Commitments (Note I) Stockholders' equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized.................... -- -- Common stock, $0.01 par value, 25,000,000 shares authorized; 12,721,000 and 10,595,000 shares issued and outstanding as of December 31, 2001 and 2000, respectively................................................................... 127 106 Additional paid-in capital........................................................ 80,583 60,100 Accumulated deficit............................................................... (54,860) (44,515) Accumulated other comprehensive income (loss)..................................... 23 (5) -------- -------- Total stockholders' equity..................................................... 25,873 15,686 -------- -------- Total liabilities and stockholders' equity..................................... $ 29,984 $ 19,306 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 41 BIOSPHERE MEDICAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
For the Years Ended December 31, ------------------------------- 2001 2000 1999 -------- ------- ------- Revenues: Product sales........................................................ $ 8,752 $ 3,961 $ 2,266 Collaboration revenue................................................ 250 -- -- -------- ------- ------- Total revenue...................................................... 9,002 3,961 2,266 -------- ------- ------- Costs and expenses: Costs of product sales............................................... 2,356 1,461 1,404 Research and development............................................. 4,755 2,517 968 Selling, general and administrative (1).............................. 12,839 7,847 4,003 Stock-based compensation to non-employees............................ -- 1,261 -- -------- ------- ------- Total costs and expenses........................................... 19,950 13,086 6,375 -------- ------- ------- Loss from operations.................................................. (10,948) (9,125) (4,109) Interest income....................................................... 794 715 234 Interest expense...................................................... (31) (54) (134) Other (expense) / income, net......................................... (160) 17 15 -------- ------- ------- Loss from continuing operations....................................... (10,345) (8,447) (3,994) Loss from discontinued operations..................................... -- -- (539) -------- ------- ------- Net loss........................................................... $(10,345) $(8,447) $(4,533) ======== ======= ======= Basic and diluted net loss per common share: Continuing operations................................................ $ (0.89) $ (0.87) $ (0.47) Discontinued operations.............................................. -- -- (0.06) -------- ------- ------- Total.............................................................. $ (0.89) $ (0.87) $ (0.53) ======== ======= ======= Basic and diluted weighted average number of common shares outstanding 11,642 9,700 8,456 ======== ======= =======
(1) Excludes compensation charges relating to the issuance of stock options to non-employees. The accompanying notes are an integral part of these consolidated financial statements. 42 BIOSPHERE MEDICAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) (In thousands)
Common Stock ------------- Accumulated Additional Other Total Paid-in Accumulated Comprehensive Stockholders' Shares Amount Capital Deficit Income (Loss) Equity ------ ------ ---------- ----------- ------------- ------------- Balance at December 31, 1998 8,456 $ 84 $40,587 $(31,535) $ -- $ 9,136 Comprehensive loss: Net loss...................... -- -- -- (4,533) -- (4,533) Translation adjustment........ -- -- -- -- (15) (15) -------- Total comprehensive loss...... -- -- -- -- -- (4,548) ------ ---- ------- -------- ---- -------- Balance at December 31, 1999 8,456 84 40,587 (36,068) (15) 4,588 Comprehensive loss: Net loss...................... -- -- -- (8,447) -- (8,447) Translation adjustment........ -- -- -- -- 10 10 -------- Total comprehensive loss...... (8,437) Issuance of common stock, net (Note L)...................... 1,869 19 17,697 -- -- 17,716 Issuance of common stock under employee benefit and incentive plans......................... 270 3 555 -- -- 558 Stock-based compensation to non-employee.................. -- -- 1,261 -- -- 1,261 ------ ---- ------- -------- ---- -------- Balance at December 31, 2000 10,595 106 60,100 (44,515) (5) 15,686 Comprehensive loss: Net loss...................... -- -- -- (10,345) -- (10,345) Translation adjustment........ -- -- -- -- 28 28 -------- Total comprehensive loss...... (10,317) Issuance of common stock, net (Note L)...................... 2,000 20 20,334 -- -- 20,354 Issuance of common stock under employee benefit and incentive plans......................... 126 1 149 -- -- 150 ------ ---- ------- -------- ---- -------- Balance at December 31, 2001 12,721 $127 $80,583 $(54,860) $ 23 $ 25,873 ------ ---- ------- -------- ---- --------
The accompanying notes are an integral part of these consolidated financial statements. 43 BIOSPHERE MEDICAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
For the Years Ended December 31, ------------------------------- 2001 2000 1999 -------- ------- ------- Cash flows from operating activities: Net loss..................................................................... $(10,345) $(8,447) $(4,533) Less: Net loss from discontinued operations.................................. -- -- (539) -------- ------- ------- Net loss from continuing operations.......................................... (10,345) (8,447) (3,994) -------- ------- ------- Adjustments to reconcile net loss from continuing operations to net cash used in operating activities: Provision for doubtful accounts............................................ 83 37 -- Depreciation and amortization.............................................. 523 279 102 Non-cash interest on minority interest obligation.......................... -- 19 -- Foreign exchange gain...................................................... -- (85) -- Non-cash stock-based compensation for non-employees........................ -- 1,261 -- Changes in operating assets and liabilities: Accounts receivable...................................................... (787) (615) 121 Inventories.............................................................. (527) (250) 5 Prepaid and other current assets......................................... (254) (271) 4 Related party receivable / payable....................................... (289) (54) (362) Accounts payable......................................................... (233) 308 103 Accrued compensation and other expenses.................................. 1,056 801 282 -------- ------- ------- Net cash used in operating activities........................................ (10,773) (7,017) (3,739) -------- ------- ------- Cash flows from investing activities: Purchase of property and equipment........................................... (1,245) (533) (382) Purchase of marketable securities............................................ (12,550) -- -- Cash paid for step acquisitions of Biosphere Medical, S.A.................... (953) (950) -- Increase in other assets..................................................... -- -- (1) Cash acquired through acquisition of 51% of Biosphere Medical, S.A........... -- -- 283 -------- ------- ------- Net cash used in investing activities........................................ (14,748) (1,483) (100) -------- ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock, net.................................. 20,354 17,716 -- Proceeds from stock options exercised........................................ 150 558 -- Net repayments under line of credit agreements............................... -- -- (2,000) Net proceeds (payments) on long-term debt and capital leases................. 271 124 (664) -------- ------- ------- Net cash provided by (used in) financing activities.......................... 20,775 18,398 (2,664) -------- ------- ------- Effect of exchange rate changes on cash and cash equivalents................. 39 10 (7) -------- ------- ------- Net (decrease) increase in cash and cash equivalents.......................... (4,707) 9,908 (6,510) Net cash provided by discontinued operations.................................. -- -- 9,643 Cash and cash equivalents at beginning of year................................ 15,276 5,368 2,235 -------- ------- ------- Cash and cash equivalents at end of year...................................... $ 10,569 $15,276 $ 5,368 -------- ------- ------- Supplemental disclosure of cash flows information: Cash paid for interest....................................................... $ 8 $ 5 $ 134 -------- ------- ------- Supplemental disclosure of non-cash investing activities (note C): Acquisition of Biosphere Medical, SA: Fair value of assets acquired.............................................. $ -- $ -- $ 1,493 Liabilities assumed........................................................ -- -- (1,493) Minority interest acquisition obligation................................... -- 188 771 -------- ------- ------- Goodwill................................................................... $ -- $ 188 $ 771
The accompanying notes are an integral part of these consolidated financial statements. 44 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A - Nature of the Business BioSphere Medical, Inc ("we," "BioSphere" or the "Company") was incorporated in Delaware in December 1993 under the name BioSepra Inc. During 1999, the Company strategically refocused its business on the development and commercialization of its proprietary Embosphere Microspheres for use in treating hypervascularized tumors and malformations. Between February 1999 and October 2001 we acquired all ownership interests in Biosphere Medical S.A. ("BMSA"), a French societe anonyme (See Note C). BMSA holds 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 to BioSphere Medical, Inc. On July 3, 2001, we completed an underwritten public offering of 4.0 million shares of our common stock. Of the 4.0 million shares of our common stock offered, the Company sold 2.0 million shares and Sepracor Inc., a selling stockholder, sold 2.0 million shares. Net proceeds to the Company were approximately $20.4 million. On August 6, 2001, Sepracor sold an additional 600,000 shares of our common stock pursuant to exercise of the underwriter's over-allotment option. As a result of this offering, including the sale of shares associated with the over-allotment option, Sepracor's beneficial ownership interest in our outstanding common stock decreased from approximately 55% to approximately 25% (See Note D and L). During 2000, the Company established two wholly owned subsidiaries to pursue the development of other microsphere applications and technologies. In May 2000, BioSphere Medical Japan, Inc., a Delaware corporation, was established to develop and commercialize Embosphere Microspheres as well as HepaSphere SAP 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 with a specific focus on dermal and other tissue engineering uses. The Company believes that current working capital along with anticipated sales of its EmboSphere Microspheres and other products, will provide liquidity sufficient to allow the Company to meet its expected spending obligations for the foreseeable future 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. Should the Company not realize some or all of its revenue projections, it may be required to secure alternative financing arrangements, pursue additional strategic partners, and/or defer or limit some or all of its research, development and/or clinical projects. B - Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries BMSA, Biosphere Medical Japan, Inc. and BSMD Ventures, Inc. All material intercompany balances and transactions have been eliminated in consolidation. Translation of Foreign Currencies The assets and liabilities of the Company's foreign subsidiaries is translated into U.S. dollars using the exchange rates in effect as of each balance sheet date. Revenue and expense items are translated at average exchange rates prevailing during each reporting period. Resulting translation adjustments are recorded in the cumulative translation adjustment account in stockholders' equity. Aggregate foreign exchange transaction gains and losses are not material and are included in other income in the accompanying statement of operations for all periods presented. 45 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B - Summary of Significant Accounting Policies (Continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the following: (1) the reported amounts of assets and liabilities, (2) the disclosure of contingent assets and liabilities at the date of the financial statements and (3) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Cash, Cash Equivalents and Marketable Securities The Company considers all highly liquid investments with an original maturity of ninety days or less, as of the date of purchase, to be cash equivalents. In accordance with our investment policies, surplus cash is invested in investment grade corporate and government debt and asset backed securities typically with maturity dates of less than 180 days. The Company determines the appropriate classification of marketable securities at each balance sheet date. Marketable securities as of December 31, 2001, classified as held to maturity for which we have the positive intent and ability to hold to maturity, are reported at amortized cost, which approximates fair market value. Concentration of Credit Risk and Off-Balance Sheet Risk The Company has no significant off-balance-sheet risk or concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash, cash equivalents, marketable securities, amounts due from related parties, trade accounts receivable, accounts payable and long-term debt obligations. The estimated fair value of the Company's financial instruments approximate their carrying value. BioSphere Medical places its cash, cash equivalents and marketable securities with high credit quality financial institutions. Concentrations of credit risk with respect to trade accounts receivable are limited due to a large number of customers and their dispersion across many geographic areas. The Company subcontracts a key portion of its final packaging processes to an independent third-party contract manufacturer. If such services were not available at a reasonable cost from the existing contract manufacturer, we would need to obtain new contracts with new providers or incur the expense of internalizing the packaging process. Such a conversion could cause the Company to incur additional expense in validating the process under FDA Good Manufacturing Practices, delay the availability of finished product and limit commercial sales of our products. Property and Equipment Property and equipment are stated at cost. The Company provides for depreciation based upon expected useful lives using the straight-line method over the following estimated useful lives: Office equipment...................... 3-5 years Laboratory and manufacturing equipment 3-5 years Leasehold improvements................ Shorter of lease term or estimated useful life
Maintenance and repairs are charged to expense as incurred. Upon retirement or sale, the cost of disposed assets and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to non-operating income. 46 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B - Summary of Significant Accounting Policies (Continued) Goodwill and Other Assets Goodwill represents the difference between the purchase price and the fair value of the tangible and identifiable intangible net assets acquired in accordance with the purchase method of accounting. Between February 1999 and October 2001, the Company recorded goodwill upon the periodic step-acquisitions of additional interests of BMSA. Goodwill is amortized over the shorter of an estimated ten-year useful life or February 2009, which represents a ten-year amortization period from the date of the original BMSA purchase agreement (See Note C). Accumulated amortization was approximately $351,000 and $174,000 as of December 31, 2001 and December 31, 2000, respectively. Impairment of Long-Lived Assets As of December 31, 2001, 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 December 31, 2001, the Company has determined that no impairment of long-lived assets exists. Revenue Recognition Revenues from product sales are recognized when requested goods are shipped to customers and collectibility is probable. Management establishes reserves for potential sales returns and evaluates, on a monthly basis, the adequacy of those reserves based upon realized experience. To date, returns have been minimal and immaterial. The Company adopted the Security and Exchange Commission's Staff Accounting Bulletin No. 101, Revenue Recognition, in the year ended December 31, 2000, with no material impact to the Company's results of operations. Research and Development Research and development costs are expensed in the period incurred. Income Taxes The Company uses the asset and liability accounting method whereby deferred tax assets and liabilities are recognized based on temporary differences between the financial statements and tax bases of assets and liabilities using current statutory tax rates. A valuation allowance against net deferred tax assets is recorded if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management evaluates, on a quarterly basis, the ability to recover the deferred tax assets and the level of the valuation allowance. At such time as it is more likely than not that deferred tax assets are realizable, the valuation allowance will be appropriately reduced. Comprehensive Income /(Loss) Comprehensive income/(loss) is comprised of net income/(loss) and other comprehensive income/(loss). Other comprehensive income/(loss) includes certain changes in equity that are excluded from net income/(loss). Specifically, the effects of foreign currency translation adjustments which are reflected separately in stockholders' equity, are included in accumulated other comprehensive income/(loss). 47 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) B - Summary of Significant Accounting Policies (Continued) 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 any dilutive effects of common stock equivalent options, warrants and other convertible securities. Total warrants and options potentially convertible into common stock as of December 31, 2001, 2000 and 1999, equaled 4,086,000, 4,147,000 and 3,783,000, respectively. All 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. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations." SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Adoption of this statement did not have a material impact on the Company's operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." With the adoption of SFAS No. 142, goodwill and certain intangible assets with identifiable lives will no longer be subject to amortization over its estimated useful life, but instead goodwill is subject to at least an annual valuation and assessment for impairment by applying a fair-value-based test. Adoption of this statement is not expected to have a material impact on operations other than to exclude an estimated $201,000 in goodwill amortization from selling, general and administrative expenses in each respective year through 2008. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This statement amends FASB Statement No. 19 and is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of this statement to have a material impact on its operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supercedes SFAS Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." This statement requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect the adoption of this statement to have a material impact on its operations. C - Step Acquisition of Biosphere Medical S.A. and Minority Interest Acquisition Obligation On February 25, 1999, the Company acquired 51% of the outstanding capital stock of BMSA. Pursuant to a February 25, 1999 purchase agreement, the Company acquired a this ownership interest by granting to BMSA an exclusive sales and manufacturing license to certain patents and technology primarily relating to the Company's 48 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) C - Step Acquisition of Biosphere Medical S.A. and Minority Interest Acquisition Obligation (Continued) Embosphere Microspheres technology. The Company was also granted an option to purchase the remaining 49% interest in BMSA through December 31, 2004, for an amount equal to the product of the percentage interest to be purchased and the sum of BMSA's rolling average twelve-month sales and worldwide Embosphere Microspheres sales as of the date of exercise (the "Purchase Option"). Moreover, the holder of the remaining 49% interest was also granted an option (the "Put Option") to require the Company to purchase the remaining 49% interest from December 31, 2003 until December 31, 2004 for an amount equal to the greater of an agreed upon price (in French Francs) for each percentage interest to be sold or the amount payable adjusted to a rolling nine-month sales average under the Purchase Option. The Put Option represented a contingent purchase consideration for which the Company accreted the value of the Put Option through October 31, 2001. On April 7, 2000, the Company purchased an additional 34% of BMSA for $950,000. As a result of this step-acquisition, the Company's total ownership interest in BMSA increased to 85%. On November 5, 2001, the Company acquired the remaining 15% interest in BMSA for approximately $953,000. Both subsequent step-acquisition transactions were accounted for under purchase accounting principles whereby the fair value in excess of the net assets purchased is treated as an increase to goodwill. Net goodwill, comprised entirely of the unamortized purchase price paid in excess of the net BMSA assets acquired, equaled $1.4 million and $1.1 million as of December 31, 2001 and December 31, 2000, respectively. D - Related Party Transactions Receivable from related party at December 31, 2001 represents the portion of expenses that Sepracor has agreed to pay as a result of Sepracor's participation in the July 2001 secondary offering of 4.0 million shares of the Company's common stock. Total related party receivables are offset by $83,000 due to Sepracor for certain administrative services provided by Sepracor as of December 31, 2001. Total administration fees, including rent through April 2000, charged by Sepracor for services rendered in the years ended December 31, 2001, 2000 and 1999 were $20,000, $111,000 and $119,000, respectively. Sepracor is also entitled to certain rights with respect to the registration under the Securities Act of a total of 1,400,000 shares of BioSphere's Common Stock. These rights provide that Sepracor may require BioSphere Medical to register shares, subject to certain conditions and limitations. As of December 31, 2001, Sepracor has not exercised such rights. E - Marketable Securities Cash and cash equivalents include $10.2 million and $15.2 million of commercial paper and money market funds as of December 31, 2001 and 2000, respectively. The Company's cash, cash equivalents and marketable securities as of December 31, 2001 are as follows:
December 31, 2001 -------------- (in thousands) Cash and money market funds......................... $ 7,569 Commercial paper.................................... 3,000 Asset-backed government securities.................. 12,550 -------- Total.............................................. 23,119 Less amounts classified as cash and cash equivalents (10,569) -------- Total marketable securities......................... $ 12,550 ========
49 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) E - Marketable Securities (Continued) As the maturity dates on all marketable securities held as of December 31, 2001 were less than 90 days, amortized cost approximates fair market value. No realized gains or losses on held to maturity securities were recognized during the twelve-month period ended December 31, 2001. F - Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following as of:
December 31, -------------- 2001 2000 ------ ---- (In thousands) Raw material.... $ 185 $156 Work in progress 269 78 Finished goods.. 657 405 ------ ---- Total inventory $1,111 $639 ====== ====
G - Property and Equipment Property and equipment consists of the following as of:
December 31, ------------- 2001 2000 ------ ----- (In thousands) Office equipment...................... $ 827 $ 469 Laboratory and manufacturing equipment 1,056 425 Leasehold improvements................ 272 45 ------ ----- Total property and equipment......... 2,155 939 Less: accumulated depreciation........ (585) (245) ------ ----- Net property and equipment........... $1,570 $ 694 ====== =====
Depreciation expense was $341,000, $161,000 and $49,000 for the years ended December 31, 2001, 2000 and 1999, respectively. H - Debt and Other Obligations Debt consists of the following as of:
December 31, ------------- 2001 2000 ---- ---- (In thousands 5.4% French Franc term loan payable to a bank in monthly installments through March 2005, secured by the net assets of BMSA.............................. $ 92 $124 Capital lease obligations (see note I)....................................... 296 -- Less: current portion........................................................ (85) (27) ---- ---- Total long-term debt and capital lease obligations........................... $303 $ 97 ==== ====
As a co-borrower under Sepracor's commercial bank facility, we had availability to borrow up to $2.0 million through a line of credit agreement. As a result of our July 2001 secondary public offering, Sepracor's ownership of our outstanding common stock was reduced to less than 50%, thereby automatically terminating the co-borrowing arrangement. Because we are no longer a party to the loan agreement, which had no outstanding balance as of December 31, 2001, the bank released Sepracor's guaranty of our obligations to the bank and Sepracor terminated its related security interest in our assets. 50 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) I - Commitments The Company leases approximately 13,000 square feet of office and lab space at its Rockland facility under an operating lease expiring in February 2005 for approximately $139,000 per year. BMSA leases approximately 18,150 square feet of manufacturing and office space in Roissy, France through December 2009 for approximately (Euro)157,000 per year (approximately $139,000 as of December 31, 2001). BMSA also has several operating leases covering certain pieces of manufacturing and office equipment through March 2005. During fiscal year 2001, the Company entered into several non-cancelable capital lease agreements in connection with the acquisition of certain manufacturing and computer equipment. The leases have initial terms of 30 to 60 months with interest rates of 5.4% to 13.4%. All corresponding leased equipment serves as pledged capital. Future minimum lease payments under non-cancellable operating leases and capital leases in effect as of December 31, 2001, are as follows:
Period Operating Leases Capital Leases - ------ ---------------- -------------- (In thousands) 2002............................................... $ 502 $ 76 2003............................................... 501 76 2004............................................... 480 76 2005............................................... 223 69 2006............................................... 139 47 Thereafter......................................... 475 -- ------ ---- Total lease commitments............................ $2,320 $344 ====== Less amount representing interest.................. (48) ---- Present value of net minimum capital lease payments $296 ====
Total rental expense for the years ended December 31, 2001, 2000 and 1999 was approximately $464,000, $245,000 and $81,000, respectively. J - Income Taxes As of December 31, 2001, the Company had federal and state net operating loss (NOL) carryforwards of approximately $43.6 million, which will expire through the year 2021. As of December 31, 2001, research and experimentation credit carryforwards approximated $281,000, which will expire through the year 2015. The components of the Company's net deferred tax asset are as follows at:
December 31, ------------------ 2001 2000 -------- -------- (In thousands) Assets Domestic NOL carryforwards $ 14,813 $ 11,470 Tax credit carryforwards.. 281 281 Property and equipment.... 5 (44) Other..................... 755 138 -------- -------- Subtotal................... 15,854 11,845 Valuation allowance....... (15,854) (11,845) -------- -------- Net deferred tax asset..... $ -- $ -- ======== ========
51 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) J - Income Taxes (Continued) The Company has established a full valuation allowance against its deferred tax asset as of December 31, 2001 as it considers the realizable value of any tax benefit against future taxable income to be uncertain. K - Segment Information The Company develops microspheres for use in the treatment of hypervascularized tumors and malformations. The Company operates exclusively in the medical device business, which the Company considers as one business segment. Financial information by geographic area is as follows:
For the years ended December 31, ------------------------------- 2001 2000 1999 -------- ------- ------- (In thousands) Revenue United States................................. Unaffiliated customers...................... $ 6,018 $ 1,266 $ -- Licensing fees.............................. 250 -- -- France and other Europe territories........... Unaffiliated customers - (Primarily French). 2,324 2,183 1,949 Intercompany................................ 3,504 1,405 -- Transfer to other geographic areas.......... 410 512 317 -------- ------- ------- 12,506 5,366 2,266 Intercompany eliminations..................... (3,504) (1,405) -- -------- ------- ------- Total revenue................................. $ 9,002 $ 3,961 $ 2,266 ======== ======= ======= Operating losses United States................................. $(11,561) $(8,976) $(3,965) Europe........................................ 613 (149) (144) -------- ------- ------- Total operating loss.......................... $(10,948) $(9,125) $(4,109) Long-lived assets as of December 31, 2001 2000 -------- ------- United States................................. $ 2,803 $ 2,241 Europe........................................ 904 412 Eliminations.................................. (320) (528) -------- ------- Total long-lived assets....................... $ 3,387 $ 2,125 ======== =======
L - Capital Stock Common Stock The Company's authorized capital stock includes 25,000,000 shares of common stock, par value $0.01 per share. As of December 31, 2001, 3.22 million shares, or approximately 25%, of the Company's common stock outstanding is held by Sepracor. The common stock has no preemptive, subscription, redemption or conversion rights. Preferred Stock The Company's authorized capital stock includes 1,000,000 shares of preferred stock, par value $0.01 per share, with such rights, restrictions and specifications as the Board of Directors may determine. As of December 31, 2001 and 2000, no shares of preferred stock have been issued. 52 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) L - Capital Stock (Continued) Common Stock Financing In February 2000, the Company completed a private equity placement of common stock and warrants for net proceeds of approximately $5.9 million. Investors purchased 653,887 shares of the Company's common stock at a price of $9.00 per share, which included warrants to purchase up to an additional 163,468 shares of common stock. Of the total 653,887 common shares sold, unrelated third-party institutional investors purchased 609,445, or 93%, and 44,442, or 7%, were purchased by executive officers and members of the Company's Board of Directors. The warrants have an exercise price equal to $20.00 per share and expire on February 4, 2005. Using the Black-Scholes option-pricing model, the Company valued the warrants at approximately $929,000 and included such amount as a component of additional paid-in capital. In July 2000, the Company completed an additional private equity placement of common stock for net proceeds of approximately $11.8 million. Investors purchased 1,214,900 shares of common stock at $11.00 per share. Of the total shares sold, Sepracor Inc., which was at the time of the private placement the Company's parent company, purchased 454,545 shares, after which its majority ownership decreased to 55%. On July 3, 2001, the Company completed an underwritten public offering of 4.0 million shares of its common stock at $11.00 per share. Of the 4.0 million shares of common stock offered, the Company sold 2.0 million shares and Sepracor sold 2.0 million shares. Net proceeds to the Company were approximately $20.4 million. On August 6, 2001, Sepracor sold an additional 600,000 shares of our common stock pursuant to exercise of the underwriters' over-allotment option. As a result of this offering, including the sale of shares pursuant to exercise of the over-allotment, Sepracor's beneficial ownership interest in the Company's outstanding common stock decreased from approximately 55% to approximately 25% as of December 31, 2001. M - Stock Plans and Warrants Stock Option Plans The 1994 stock option plan (the "1994 Plan") provides for the grant of both incentive stock options ("ISOs") and non-statutory stock options ("NSOs") to officers, directors, advisors and key employees of the Company. The 1994 Plan also provides for the grant of NSOs to consultants of the Company. The exercise price for ISOs must be at least equal to the fair market value of the Company's common stock on the date of grant and the exercise price of NSOs must be at least equal to 50% of the fair market value of the Company's common stock on the date of grant. Options generally become exercisable in five equal annual installments beginning on the first anniversary of the date of grant. ISOs have a maximum term of ten years from the date of grant. A total of 1.0 million shares were approved for issuance under the 1994 Plan and as of December 31, 2001, approximately 303,000 shares were available for issuance. The Company's 1997 Stock Option Plan, as amended, (the "1997 Plan") provides for the grant of both ISOs and NSOs to officers, directors, advisors and key employees of the Company. The 1997 Plan also provides for the grant of NSOs to consultants of the Company. In September 2000, the Company's Board of Directors approved an amendment to the 1997 Stock Incentive Plan to increase the number of shares of common stock available for issue from 3,125,000 shares to 5,000,000 shares. As of December 31, 2001, approximately 1,582,000 shares under the 1997 plan were available for issuance. Options generally become exercisable in five equal annual installments beginning on the first anniversary of the date of grant. 53 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) M - Stock Plans and Warrants (Continued) The Director Option Plan (the "Director Plan"), as amended, provides for the granting of NSOs to directors of the Company who are not officers or employees of the Company or of any subsidiary of the Company. A total of 300,000 shares of common stock may be issued under the Director Plan subject to adjustments as provided therein. The exercise price per share will equal the fair market value of a share of Company's common stock on the date on which the option is granted. Options granted under the Director Plan will vest in either two or five equal installments beginning on the first anniversary of the date of the grant depending on the nature of the grant. As of December 31, 2001, there were 116,000 options available for issuance under the Director Plan. The following table summarizes all stock option activity under the three stock option plans for the three years ended December 31, 2001:
Options issued under the Plans ----------------------------------- Average Shares Price Per Share ------ --------------- (In thousands, except option price) Outstanding at December 31, 1998 1,582 $ 2.37 Granted........................ 2,549 0.94 Canceled....................... (393) 2.15 ----- ------ Outstanding at December 31, 1999 3,738 $ 1.42 Granted........................ 516 14.88 Exercised...................... (266) 2.09 Canceled....................... (44) 2.79 ----- ------ Outstanding at December 31, 2000 3,944 $ 3.12 Granted........................ 200 12.19 Exercised...................... (122) 1.04 Canceled....................... (139) 16.29 ----- ------ Outstanding at December 31, 2001 3,883 $ 3.18
The following options and their respective average prices per share were outstanding and exercisable at December 31, 2001, 2000 and 1999:
Average Average Price Price Outstanding Per Share Exercisable Per Share ----------- --------- ----------- --------- (In thousands, except option price) December 31, 2001 3,883 $3.18 1,818 $2.85 December 31, 2000 3,944 3.12 1,147 2.11 December 31, 1999 3,738 1.42 1,016 2.39
54 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) M - Stock Plans and Warrants (Continued) Options vest at various rates over periods of up to five years and may be exercised within ten years from the date of grant. The following table summarizes information about total stock options under the three plans, outstanding and exercisable as of December 31, 2001: Options Outstanding Options Exercisable --------------------- -------------------------- Weighted Remaining Average Weighted Range of Number Contractual Exercise Number Average Exercise Prices Outstanding Life (Years) Price Exercisable Exercise Price --------------- ----------- ------------ -------- ----------- -------------- (In thousands except per share amounts) $ 0.81 - 1.25 2,180 7.13 $ 0.84 634 $ 0.84 1.26 - 1.89 351 5.97 1.79 345 1.80 1.90 - 2.85 651 4.25 2.20 567 2.19 2.86 - 4.30 90 4.56 3.37 90 3.37 4.31 - 6.50 40 3.82 5.15 40 5.15 6.51 - 9.75 46 9.78 7.75 -- -- 9.76 - 14.50 332 8.82 11.93 61 11.66 14.51 - 21.75 163 8.75 17.27 67 17.64 21.76 - 27.25 30 8.13 27.25 14 27.25 ----- ------- ----- -------- 3,883 $ 3.18 1,818 $ 2.85 The Company applies the principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its Plans. Accordingly, no compensation expense has been recognized for its employee stock-based compensation plans. Had compensation costs for the Company's stock-based compensation been determined based on the fair value at the grant dates as calculated in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's reported net loss and net basic and diluted loss per common share for the years ended December 31, 2001, 2000 and 1999 would have been adjusted to the pro forma amounts indicated below:
For the years ended December 31, ------------------------------- 2001 2000 1999 -------- ------- ------- (In thousands, except per share amounts) Net Loss As reported.................... $(10,345) $(8,447) $(4,533) Pro forma...................... (12,017) (9,227) (7,612) Basic and diluted loss per share As reported.................... (0.89) (0.87) (0.53) Pro forma...................... (1.03) (0.95) (0.90)
55 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) M - Stock Plans and Warrants (Continued) The average fair value of options granted, $10.05, $12.39, and $0.82 for fiscal years 2001, 2000, and 1999, respectively, was estimated using the Black-Scholes option-pricing model using the following weighted-average assumptions:
2001 2000 1999 --------- --------- --------- Dividend Yield......... None None None Volatility............. 113% 110% 106% Risk-free interest rate 4.0%-5.0% 5.5%-6.2% 4.9%-6.7% Expected life (years).. 5 5 7
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the use of highly subjective assumptions, including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock-based compensation. Employee Stock Purchase Plans Under the 1997 employee stock purchase plan (the "1997 ESPP"), an aggregate of 50,000 shares of common stock may be purchased by employees at 85% of the fair market value on the first or last day of each six month offering period, whichever is lower. An eligible employee may elect to have up to a maximum of 10% deducted through payroll deductions from his or her regular salary. During 2001, 2000 and 1999, there were 0, 0, and 4,876 shares of the Company's common stock, respectively, were issued under the 1997 ESPP. In June 2000, stockholders approved the 2000 employee stock purchase plan (the "2000 ESPP") to replace the Company's 1997 Plan. Under the 2000 ESPP, an aggregate of 50,000 shares of common stock may be purchased by employees at 85% of the fair market value on the first or last day of each six month offering period, whichever is lower. During each offering period, the maximum number of shares which may be purchased by a participating employee is determined on the first day of the offering period and is equal to the number of shares of common stock determined by dividing $12,500 by the last reported sale price of the common stock on the Nasdaq National Market on the first day of the offering. An eligible employee may elect to have up to a maximum of 10% deducted through payroll deductions from his or her regular salary. During 2000, no shares were issued under the 2000 ESPP. During 2001, 3,683 shares of the Company's common stock were issued under the 2000 ESPP. Stock-Based Compensation to Non-Employees In connection with stock options previously issued to non-employees, the Company's Board of Directors authorized the Company to accelerate the vesting of all non-employee advisors' stock options subject to variable accounting principles. Accordingly, $1,261,000 in non-cash compensationexpensewas recorded and presented as a separate line item within the statement of operations for the year ended December 31, 2000. The recorded $1,261,000 aggregate fair value of the non-employee stock options was derived from the Black-Scholes option-pricing model. Stock Warrants In 1997, the Company issued a warrant to purchase 45,000 shares of the Company's common stock at $3.00 per share. The warrant expires on June 5, 2002. As of December 31, 2000, the warrant had vested with respect to 40,000 shares. The remaining 5,000 shares are not exercisable due to the failure of the holder to satisfy certain vesting requirements. 56 BIOSPHERE MEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) N - Employees Savings Plan The Company has a 401(k) savings plan for all domestic employees pursuant to which eligible employees may voluntarily contribute up to 15% of their compensation subject to statutory limitations. In addition, the Company matches in cash 50% of the first $3,000 contributed by employees up to a $1,500 maximum per employee. Employer cash matching contributions amounted to approximately $44,000, $18,000, $11,000 for the years ended December 31, 2001, 2000 and 1999, respectively. O - Discontinued Operations On May 17, 1999, the Company sold substantially all of the assets of its business, for approximately $11.0 million ($9.6 million, net) in cash and the assumption of certain liabilities. Upon the consummation of the sale, BioSepra, Inc. changed its name to BioSphere Medical, Inc. The Company utilized a portion of the proceeds to pay approximately $880,000 of transaction costs, to repay approximately $2.0 million of outstanding bank debt, and to repay approximately $143,000 due to Sepracor. The net assets included in the sale had a net book value of approximately $10.5 million on May 17, 1999, which was included in calculating a net loss on the sale of approximately $70,000. The operations of the business have been presented in accordance with disposal of a segment of a business and discontinued operations accounting principles in the accompanying consolidated financial statements. Accordingly, the operating results of the discontinued business for the year ended December 31, 1999 have been segregated from the continuing operations and reported as a separate line item on the consolidated statements of operations. P - Valuation and Qualifying Accounts The Company monitors the credit worthiness of its trade customers based upon historical payment experience. A rollforward of the allowance for doubtful accounts for the years ended December 31, 2001, 2000 and 1999 is as follows:
Balance, Charged to Balance, Beginning of Costs and End of Period Expenses Deductions Period ------------ ---------- ---------- -------- (In thousands) Year ended December 31, 2001 $ 29 $83 $ (7) $105 Year ended December 31, 2000 $ -- $37 $ (8) $ 29 Year ended December 31, 1999 $106 -- $(106) --
Q - Quarterly Financial Data (Unaudited) The following is a summary of quarterly financial results:
Fourth Third Second First Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands except per share amounts) Net revenue 2001................. $ 2,725 $ 2,017 $ 2,413 $ 1,847 2000................. 1,356 1,016 815 774 ------- ------- ------- ------- Gross profit 2001................. 2,024 1,470 1,824 1,328 2000................. 956 641 411 492 ------- ------- ------- ------- Net loss 2001................. (2,487) (3,075) (2,282) (2,501) 2000................. (2,371) (2,453) (2,147) (1,476) ------- ------- ------- ------- Diluted loss per share 2001................. (0.20) (0.24) (0.22) (0.24) 2000................. (0.23) (0.24) (0.23) (0.17)
57 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During 2001 and 2000, there were no disagreements with our independent accountants on accounting and financial disclosure matters. PART III ITEMS 10-13. The information required for Part III in this Annual Report on Form 10-K is incorporated by reference from the Company's definitive proxy statement for the Company's 2002 Annual Meeting of Stockholders. Such information will be contained in the sections of such proxy statement captioned "Stock Ownership of Certain Beneficial Owners and Management", "Election of Directors", "Board and Committee Meetings", "Compensation for Directors", "Compensation of Executive Officers", "Compliance with Section 16 Reporting Requirements", and "Certain Relationships and Related Transactions". Information regarding executive officers of the Company is also furnished in Part I of this Annual Report on Form 10-K under the heading "Executive Officers." 58 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are included as part of this Annual Report on Form 10-K. 1. The Schedule listed below and the Reports of Independent Accountants on financial statement schedules are filed as part of this Annual Report on Form 10-K. All other schedules are omitted as the information required is inapplicable or the information is presented in the consolidated financial statements or the related notes. 2. The Exhibits listed in the Exhibit Index immediately preceding the Exhibits are filed as a part of this Annual Report on Form 10-K. (b) Current Reports on Form 8-K filed during the last quarter of the fiscal year. On December 7, 2001, the Company filed a report on Form 8-K to report, pursuant to Item 5, that the Company had issued a press release on November 29, 2001 announcing the resignation of Jean-Marie Vogel as a director and as chairman of the Board of Directors and the acquisition of an outstanding minority interest in Biosphere Medical S.A. ----------------- 59 Exhibit Index
Exhibit No. Description - ----------- ----------- 3.1 Certificate of Incorporation, as amended, of the Company. (Incorporated herein by reference to the Company's Registration Statement on Form S-8. (File No. 333-83639)) 3.2 By-Laws of the Company. (Incorporated herein by reference to the Company's Registration Statement on Form S-1, as amended (File No. 33-75212)). 4 Specimen Certificate for shares of Common Stock, $.01 par value, of the Company. (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1999) 10.1(1) 1994 Director Option Plan. (Incorporated herein by reference to the Company's Registration Statement on Form S-1, as amended (File No. 33-75212)) 10.2 Form of Technology Transfer and License Agreement dated as of January 1, 1994 between the Company and Sepracor Inc. (Incorporated herein by reference to the Company's Registration Statement on Form S-1, as amended (File No. 33-75212)) 10.3 Share Purchase Agreement by and between Marie-Paula Leroy-Landercy and the Company dated December 31, 1998. (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1999) 10.4+ Joint Ownership Contract between the Company and L'Assistance Publique Hopitaux de Paris dated January 5, 1998, together with amendment dated February 10, 2000 (translated from French). (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1999) 10.5* Rider No. 2 dated June 20, 2000 to the Joint Ownership Contract between the Company and L'Assistance Publique Hopitaux de Paris dated January 5, 1998. 10.6+* Exclusive License Agreement between Dr. Shin-ichi Hori and the Company dated May 8, 2000. 10.7+ Exclusive License and Know How Agreement No. L99037 by and between Le Centre National de la Recherche Scientifique, L'Universite Louis Pasteur Strasbourg and the Company dated July 15, 1999 (translated from French). (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1999) 10.8 Form of Stock and Warrant Purchase Agreement dated as of February 4, 2000, between the Company (together with schedule of purchasers thereto). (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1999) 10.9 Form of Warrant Agreement dated as of February 4, 2000, between the Company and certain purchasers (together with schedule of purchasers thereto). (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1999) 10.10 Sublease Agreement between Guerbet S.A. and BiosphereMedical, S.A. (translated from French to English). (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1999) 10.11 Lease Agreement dated January 7, 2000 by and between 1050 Hingham Street Realty Trust and the Company. (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1999) 10.12 First Amendment to Lease Agreement dated June 27, 2000 by and between 1050 Hingham Street Realty Trust and the Company. (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 1999) 10.13 Stock Purchase Agreement dated July 28, 2000. (Incorporated herein by reference to the Company's Form 10-Q for the quarter ended June 30, 2000)
60
Exhibit No. Description - ----------- ----------- 10.14 Registration Rights Agreement dated July 28, 2000. (Incorporated herein by reference to the Company's Form 10-Q for the quarter ended June 30, 2000) 10.15 Lease Agreement dated October 19, 2000 by and between Biosphere Medical S.A. and Salamandre S.A (translated from French to English). (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 2000) 10.16+* Exclusive Distribution Agreement dated January 24, 2002 by and between BioSphere Medical S.A. and Terumo Europe NV/SA, as amended on January 28, 2002. 21 Subsidiaries of the Company. (Incorporated herein by reference to the Company's Form 10-K for the year ended December 31, 2000) 23* Consent of Arthur Andersen LLP. 99* Letter to Commission Pursuant to Temporary Note 3T - Confirmation of Arthur Andersen Representations
- -------- (1) Management contract or compensatory plan or arrangement filed as an exhibit to this Form 10-K pursuant to Items 14(a) and 14(c) of Form 10-K. + Confidential treatment requested as to certain portions. * Filed herewith. 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOSPHERE MEDICAL, INC. By: /S/ JOHN M. CARNUCCIO ---------------------------------- John M. Carnuccio President and Chief Executive Officer Date: March 28, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ JOHN M. CARNUCCIO March 28, 2001 - ----------------------------- President, Chief Executive Officer, Director John M. Carnuccio (Principal Executive Officer) /s/ ROBERT M. PALLADINO Chief Financial Officer March 28, 2001 - ----------------------------- (Principal Financial and Robert M. Palladino Accounting Officer) /s/ TIMOTHY J. BARBERICH Director March 28, 2001 - ----------------------------- Timothy J. Barberich /s/ WILLIAM M. COUSINS, JR. Director March 28, 2001 - ----------------------------- William M. Cousins, Jr. - ----------------------------- Director Alexander M. Klibanov, Ph.D. /s/ PAUL A. LOONEY Director March 28, 2001 - ----------------------------- Paul A. Looney /s/ RICCARDO PIGLIUCCI Director March 28, 2001 - ----------------------------- Riccardo Pigliucci /s/ DAVID P. SOUTHWELL Director March 28, 2001 - ----------------------------- David P. Southwell
62 EX-10.5 3 dex105.txt RIDER #2 TO JOINT OWNERSHIP CONTRACT EXHIBIT 10.5 RIDER No. 2 TO CO-OWNERSHIP CONTRACT OF JANUARY 5, 1998 BETWEEN ASSISTANCE PUBLIQUE - HOPITAUX DE PARIS, a public health establishment headquartered at Avenue Victoria 75004 PARIS RP, represented for this contract and by delegation from its General Director by Mrs. Dominique LAURENT, Director of the Medical Polyclinic, hereinafter "AP-HP" AND BIOSPHERE MEDICAL, a corporation headquartered in the Industrial Zone Louvres, Road 2 - 95380 Louvres, represented for this rider by its General Director Mrs. Marie-Paule LEROY-LANDERCY, hereinafter "BIOSHERE" hereinafter "THE PARTIES" RECITALS: - --------- By Co-Ownership Contract signed on January 5, 1998 between AP-HP and BIOSEPRA, hereinafter "INITIAL CONTRACT," the principles of co-ownership on the contractual patents were defined, as well as the rights and obligations of each of the Parties, for the commercial utilization of these patents. BIOSEPRA has decided to transfer its share of the co-ownership to BIOSPHERE. This transfer was executed by notarized instrument of April 13, 1999. By rider No. 1 December 6, 1999, BIOSPHERE is subrogated in the rights of BIOSEPRA. The Parties wish to complete paragraph 12-2 in article 12 of the Initial Contract in order to specify the rights and obligations of the Parties in the event of lawsuit against a third party for infringement. IT WAS THEN AGREED AS FOLLOWS: Article 1 - --------- The following text will be added to paragraph 12.2 of the Initial Contract: As part of the lawsuit filed by one of the Parties alone in the United States, the other Party abandons its rights to refuse to be associated as Plantiff in such lawsuit. If the lawsuit is filed only by BIOSPHERE without express agreement of AP-HP, all costs will be paid by BIOSPHERE. If necessary, the share of expenses attributable to AP-HP will be deducted from the amounts received in damages. Article 2 - --------- All other articles of the Initial Contract not amended by Rider No. 1 and this rider remain unchanged. Issued in _______, on June 20, 2000 (in three copies) ASSISTANCE PUBLIQUE- HOPITAUX DE PARIS General Director of AP-HP and by Delegation Director of Medical Policies [signature] Dominique Laurent BIOSPHERE MEDICAL S.A. General Director [signature] Marie-Paule LEROY-LANDERCY Approved by Financial Auditor [signature] Francois POTIER DE COURCY JUNE 5, 2000 EX-10.6 4 dex106.txt EXCLUSIVE LICENSE AGREEMENT Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Exhibit 10.6 EXCLUSIVE LICENSE AGREEMENT --------------------------- This Exclusive License Agreement ("Agreement"), effective as of May 8th, 2000 ("Effective Date"), is entered into by and between BIOSPHERE MEDICAL, INC., a Delaware corporation having principal offices at BioSphere Medical, Inc., 1050 Hingham Street, Rockland, MA 02370 U.S.A. ("BioSphere"); DR. SHIN-ICHI HORI, an individual having an address at 3-2-4 Motomachi, Hamadera, Sakai-shi, Osaka 592-8343, Japan ("Hori"), and Ms. TOMOKO HORI, an individual having an address at 3-2-4 Motomachi, Hamadera, Sakai-shi, Osaka 592-8343, Japan (together with Hori, "Licensors"). WHEREAS, Licensors are the owners of certain patent rights in and to super absorbing polymer microspheres ("SAP-MS") useful for, among other things; embolotherapy; and WHEREAS, the parties have entered into an agreement under which Licensors granted rights in such technology to BioSphere; and WHEREAS, the parties are desirous of setting forth with more particularity their rights and obligations concerning such patent rights and new developments based thereon. NOW, THEREFORE, BioSphere and Licensors agree as follows: Section 1 Definitions ----------- In this Agreement, unless otherwise provided, the following terms shall have the meanings set forth in this section. 1.1 Affiliate means, with respect to BioSphere, any other entity that --------- directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with BioSphere. For purposes hereof, the term "control" (including, with its correlative meanings, the terms ------- "controlled by" and "under common control with"), with respect to BioSphere, ------------- ------------------------- means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of BioSphere (whether through the ownership of voting securities, by contract or otherwise); provided that in each -------- event in which any entity owns directly or indirectly more than fifty percent (50%) of the securities having ordinary voting power for the election of directors or other governing body of a corporation or more than fifty percent (50%) of the ownership interest of any other entity, such entity shall be deemed to control such corporation or other entity. 1.2 Follow-On Inventions means and includes any inventions relating to -------------------- SAP-MS useful for embolotherapy, conceived or reduced to practice by Hori during the period commencing on January 1, 1992 and continuing during the term of this Agreement. 1.3 Improvement means (a) any new or modified product or method that ----------- performs the same function as a Licensed Product or Licensed Method in a better or more economical way; or (b) any new or modified product or method that performs the same function as a Licensed Product Or Licensed Method and costs less to manufacture than a Licensed Product or costs less to practice than a Licensed Method. 1.4 Know-How means unpublished research and development information, -------- unpatented know-how, trade secrets, and technical data necessary or useful for practicing the Licensed Patents. 1.5 Licensed Method means any method the practice of which, without this --------------- license, would infringe a claim of a Licensed Patent. 1.6 Licensed Patents means (i) Japan patent number JP 6056676 ("JP `676 ---------------- patent") entitled Suspension For Blocking Blood Vessels, any patent application any where in the world that claims or relies on the JP `676 patent for priority, or any patent issuing on any such application, and any reissue, reexamination, or extension of any such patent, and (ii) any patent application filed any where in the world that discloses and claims a Follow-On Invention, any patent application any where in the world relying on any such application for priority, any patent issuing on either of the foregoing and, any reissue, reexamination or extension of any such patent. 1.7 Licensed Products means any product the manufacture, use, sale, ----------------- offer for sale, or import of which, without this license, would infringe a claim of a Licensed Patent. 1.8 "Net Sales" means the invoiced price of Licensed Products sold by --------- BioSphere or its Affiliates (a) after deduction of (i) [**]; (ii) [**]; (iii) [**] (if any); (iv) [**]; (v) [**]; (vi) [**], and (vii) [**]; but (b) [**]. Licensed Products used in testing, clinical trials, or as marketing samples to develop or promote the Licensed Products shall not be included as sold under the definition of Net Sales, provided, however, that such excluded Licensed Products are (a) supplied to the user at no cost; (b) supplied to the user at a cost which is intended to enable BioSphere or its Affiliates to recover its costs for manufacturing such Licensed Products and/or (c) used for developing a formulation or manufacturing process for the Licensed Products. For purposes of this definition, except when BioSphere's Affiliates are the end users of Licensed Products, Licensed Products shall be considered sold when billed out to a customer other than BioSphere's Affiliates. No deductions shall be made for commissions paid to sales persons or agents or for the cost of collections. In the event a Licensed Product is sold in [**], Net Sales, for purposes of determining royalties [**] will be calculated by [**], in which [**] of the Licensed Product [**], and [**] of the [**] in the [**]. If the Licensed Products and the [**] in the [**], then royalties on the [**] will be calculated by the same method, in which [**] the Licensed Product and [**]. However, in no case shall the [**]. 1.9 Valid Claim means an issued claim of an unexpired patent, which ----------- shall not have been withdrawn, canceled or disclaimed, or held invalid or unenforceable by a court of competent jurisdiction in an unappealed or unappealable decision. 2 Section 2 License Grant ------------- 2.1 Grant. Licensors hereby grant to BioSphere an exclusive, worldwide, ----- right and license, with the right to grant sublicenses, under the Licensed Patents, unpatented Follow-On Inventions, Improvements and/or Know-How to make, have made, use, offer to sell, sell, import and otherwise dispose of Licensed Products, and to practice Licensed Methods. 2.2 Reservation of Rights. The license granted in Section 2.1 of this --------------------- Agreement, is subject to a reserved non-exclusive license to Hori to practice the Licensed Patents solely for (a) the conduct of clinical trials in Japan for and on behalf of BioSphere; (b) the treatment of patients by Hori at Rinku Medical Center and Osaka Medical Center, and (c) Hori's research at Osaka University, provided any such research is not sponsored by or disclosed to any third party commercial entities. Section 3 Payments and Royalties ---------------------- 3.1 Initial Fee. BioSphere shall pay to Hori, on behalf of Licensors, as ----------- a license execution fee the sum of [**] dollars ($[**]), receipt of which is hereby acknowledged by Hori, on behalf of Licensors. 3.2 Royalties. BioSphere and/or its Affiliates shall pay to Hori, on --------- behalf of Licensors, (a) a continuing royalty of [**] percent ([**]%) of the Net Sales of Licensed Products covered by a Valid Claim of an issued patent within the Licensed Patents or Improvements in each country in the world in which such Valid Claim exists; (b) a continuing royalty of [**] percent ([**]%) of the Net Sales of Licensed Products under the Know-How, unpatented Improvements or unpatented Follow-On Inventions; and (c) [**] percent ([**]%) of royalties actually received by BioSphere based on the sales of the Licensed Products by its sublicensees. 3.3 Stock Issuance. In further consideration of the rights and options -------------- granted to BioSphere hereunder, and pursuant to the terms and conditions of the Stock Purchase Agreement attached hereto as Exhibit A, BioSphere shall issue to Hori, on the Effective Date, an option to acquire ten thousand (10,000) shares of BioSphere's Common Stock, at a par value of $0.01, through BioSphere's 1997 Stock Option Plan. 3.4 No Multiple Royalties. No multiple royalties shall be payable in the --------------------- event that any of the Licensed Products or the manufacture, use or sale thereof is covered by more then one patent included in Licensed Patents or any combination of Licensed Patents and Know-How and/or Improvements. 3.5 Credits. If BioSphere is required to make royalty payments to a ------- third party to obtain a license or similar right necessary to make, use, offer for sale, sell or import Licensed Products or practice Licensed Methods, BioSphere may deduct [**] percent ([**]%) of such royalty payments due to such third party from royalties thereafter payable to Hori, provided, however, that in no event shall the royalty payments to Hori be reduced by more than [**]. 3 3.6 Royalty Payment Period. BioSphere's obligation to pay royalties to ---------------------- Hori under this Agreement shall commence, on a product by product basis, one year after the Effective Date and end (i) upon the expiration of the last to expire patent within Licensed Patents covering such product, or (ii) ten (10) years after the Effective Date on products covered only by Know-How or unpatented Improvements. 3.7 Disposition of Sublicenses. If this Agreement is terminated for -------------------------- any reason, BioSphere shall immediately assign all of is right, title, and interest to all sublicenses to Licensors, including all right to receive all income from sublicensees. BioSphere shall, prior to execution of each sublicense, make the sublicensee aware of this contingency. 3.8 Notice of Improvements. Licensors shall provide BioSphere with ---------------------- prompt written notice of any improvements. Such notice shall contain a detailed explanation of any such Improvement. 3.9 Currency. Payments hereunder shall be made to Hori in United -------- States of America Dollars or in Japanese Yen. 3.10 Withholding Taxes. The parties acknowledge and agree that there ----------------- may be deducted from any payments or royalties otherwise due and payable hereunder any taxes or other payments required to be paid by Hori under applicable law with respect to such payments or royalties or otherwise relating to the Licensed Products. Section 4 Payment Of Royalties, Accounting For Royalties and Records ---------------------------------------------------------- 4.1 Payment. Royalties payable hereunder shall be paid within [**] ------- days after the end of each calendar quarter, based on the Net Sales of the Licensed Products by BioSphere and its sublicensees and Affiliates during the preceding calendar quarter. 4.2 Accounting Reports. With each quarterly payment, BioSphere shall ------------------ deliver to Hori; a full and accurate accounting that sets forth the following information: (a) total receipts for each Licensed Product sold or otherwise disposed of by BioSphere and/or its Affiliates subject to royalty, by country, and, to the extent used in any royalty calculations during such quarter, the exchange rate set forth in Section 4.3 of this Agreement; (b) Royalties and other payments received by BioSphere in connection with any sublicense of BioSphere's rights under this Agreement, and compensation due to Hori on sales of Licensed Products by sublicensees pursuant to such sublicense; and (c) total royalties and/or compensation payable to Hori. 4.3 Accounting; Foreign Currency. The aggregate amount of the Net ---------------------------- Sales of the Licensed Products used for computing the royalties payable hereunder shall be computed in U.S. 4 Dollars or in Japanese Yen, and all payments of such royalties shall be made in U.S. Dollars or in Japanese Yen. For purposes of determining the amount of royalties due, the amount of the Net Sales of the Licensed Products in any foreign currency shall be computed by converting such amounts into U.S. Dollars or Japanese Yen at the prevailing commercial rate of exchange for purchasing same quoted in The Wall Street Journal, New York edition, on the last business day of the calendar quarter with respect to which such royalty payment is payable hereunder. 4.4 Records. BioSphere shall keep, and shall cause each of its ------- Affiliates and sublicenses to keep, for three (3) years, complete and accurate records of the Net Sales of the Licensed Products sold in sufficient detail to allow the royalties payable by BioSphere to be accurately determined. Hori shall have the right for a period of three (3) years after receiving any report or statement with respect to royalties due and payable hereunder by BioSphere to appoint an independent accounting firm to inspect and audit the relevant records of BioSphere and its Affiliates to verify such report or statement. BioSphere and its Affiliates shall make their records available for inspection and audit by such independent accounting firm, no more than once per year, during regular business hours at such place or places where such records are customarily kept, upon reasonable notice to BioSphere, to the extent reasonably necessary to verify the accuracy of the reports and payments required hereunder. The cost of any such inspection and audit shall be paid by Hori unless such inspection and audit discloses for any calendar quarter examined that there shall have been a discrepancy of greater than ten percent (10%) between the royalties payable hereunder by BioSphere and the royalties actually paid by BioSphere with respect to such calendar quarter, in which case BioSphere shall be responsible for the payment of the entire cost of such inspection and audit. In all cases, BioSphere shall pay to Hori any underpaid royalties promptly and with interest at the prime rate quoted by Citibank, N.A. on the date such payment was due. Section 5 Due Diligence ------------- BioSphere shall use commercially reasonable efforts to develop, manufacture, and sell Licensed Products. For purposes of this Agreement, commercially reasonable efforts means funding studies required to obtain regulatory approval for marketing Licensed Products in Japan in an amount up to [**] dollars ($[**]). 5 Section 6 Patent Prosecution ------------------ 6.1 Filing and Prosecution. BioSphere shall have the right, but not the ---------------------- obligation, to apply for, prosecute and maintain during the term of this Agreement any and all Licensed Patents and patents on Improvements in any countries in which BioSphere desires in its sole discretion to commercialize the Licensed Products. All reasonable costs and expenses of the filing, prosecution and maintenance of the Licensed Patents in such countries (including all governmental filing fees) shall be paid by BioSphere. Licensors shall render reasonable assistance to BioSphere in filing and prosecuting such applications and maintaining the Licensed Patents in such countries whenever requested to do so, at BioSphere's expense. Section 7 Representations And Warranties ------------------------------ 7.1 By BioSphere. BioSphere hereby represents and warrants to Licensors ------------ that BioSphere has full legal right, power and authority to execute, deliver and perform its obligations under this Agreement. 7.2 By Licensors and Hori. Licensors and Hori, jointly and severally, --------------------- hereby warrant and represent to BioSphere that (a) Hori and Licensors have full legal right, power and authority to execute, deliver and perform their respective obligations under this Agreement; (b) the execution, delivery and performance by Hori and Licensors of this Agreement does not contravene or constitute a default under any provision of applicable law or of any agreement, judgment, injunction, order, decree or other instrument binding upon Hori or Licensors; (c) all licenses, consents, authorizations and approvals, if any, required for the execution, delivery and performance by Hori and/or Licensors of this Agreement have been obtained and are in full force and effect and all conditions thereof have been complied with, and no other action by or with respect to, or filing with, any governmental authority or any other person or entity is required in connection with the execution, delivery and performance by Hori and/or Licensors of this Agreement, (d) Licensors are the exclusive owner of all legal and beneficial right, title and interest in and to the Licensed Patents, (e) as of the Effective Date, Licensors are not aware of any patent or other right of any third party that would be infringed or violated by the practice of the Licensed Patents as contemplated by this Agreement, and (f) this Agreement constitutes a valid and binding agreement of Hori and Licensors, enforceable against Hori and Licensors, in accordance with its terms. 7.3 Survival of Representations and Warranties. The representations and ------------------------------------------ warranties contained herein shall survive the execution, delivery and performance of this Agreement by the parties, notwithstanding any investigation at any time on or prior to the date hereof made by or on behalf of any party or parties. 6 Section 8 Third Party Infringement ------------------------ 8.1 Third Party Infringement. ------------------------ 8.1.1 Notice. In the event that either party becomes aware of any ------ substantial infringement of the Licensed Patents, such party shall notify the other party of the substantial infringement in writing and provide a summary of the relevant facts and circumstances known to such party relating to such infringement. Neither party will notify a third party of the substantial infringement of any of the Licensed Patents without first obtaining consent of the other party, which consent shall not be unreasonably withheld or delayed. 8.1.2 BioSphere's Options. During the term of this Agreement, ------------------- BioSphere shall have the right, but shall not be obligated, to prosecute, at its own expense, any infringements of the Licensed Patents, to defend the Licensed Patents and to recover, for its own account, any damages, awards or settlements resulting therefrom. Licensors hereby agree that BioSphere may join Licensors as a party plaintiff(s) in any such suit, without expense to Licensors. BioSphere shall hold harmless and indemnify Licensors from and against any order for costs arising without fault of Licensors that may be made against Licensors by reason of being named a party plaintiff(s) in such proceedings. BioSphere shall have sole control of any such suit and all negotiations for its settlement or compromise, provided that, BioSphere shall not settle or compromise any such suit or enter into any consent order for the settlement or compromise thereof that adversely affects the Licensed Patents without the prior written consent of Licensors, which consent shall not be unreasonably withheld or delayed. The total cost of any infringement action commenced or defended solely by BioSphere shall be borne solely by BioSphere. 8.1.3 Licensors's Options. If, within one (1) year after having been ------------------- notified of any potential infringement subject to the provisions of Sections 8.1.2, BioSphere shall have been unsuccessful in causing the alleged infringer to desist and shall not have brought and shall not be diligently prosecuting an infringement action, or if BioSphere notifies Licensors at any time prior thereto of its intention not to bring suit against any alleged infringer, then, in those events only, Licensors shall have the right, but shall not be obligated, to prosecute, at its own expense, any infringements of the Licensed Patents, to defend the Licensed patents and to recover, for its own account, any damages, awards or settlements resulting therefrom. BioSphere hereby agrees that Licensors may join BioSphere as a party plaintiff in any such suit, without expense to BioSphere. Licensors shall hold harmless and indemnify BioSphere from and against any order for costs arising without fault of BioSphere that may be made against BioSphere by reason of being named a party plaintiff in such proceedings. Licensors shall have sole control of any such suit and all negotiations for its settlement or compromise, provided that Licensors shall not settle or compromise any such suit or enter into any consent order for the settlement or compromise thereof that adversely affects the Licensed Patents or any of the licenses or rights of BioSphere hereunder, without the prior written consent of BioSphere which consent shall not be unreasonably withheld or delayed. The total cost of any infringement action commenced or defended solely by Licensors shall be borne by Licensors. 7 8.2 Infringement Charge Against BioSphere. In the event that any action, ------------------------------------- suit or proceeding is brought against, or written notice of threat thereof is provided to, BioSphere alleging infringement of any patent or unauthorized use or misappropriation of technology arising out of or in connection with BioSphere's practice of Licensed Patents, BioSphere shall defend at its own expense such action, suit or proceeding and, in furtherance of such rights, Licensors hereby agree that BioSphere may join Licensors as a party(ies) in such suit, without expense to Licensors. BioSphere shall hold harmless and indemnify Licensors from and against any order for costs arising without fault of Licensors that may be made against Licensors in such proceedings. Licensors agrees to cooperate with BioSphere, at BioSphere's expense, in connection with BioSphere's response to or defense of such action, suit or proceeding, or notice or threat thereof. 8.3 Cooperation. In the event that a party shall undertake the enforcement ----------- and/or defense of the Licensed Patents by legal or patent office proceedings pursuant to this Agreement, the other party shall, at the request and expense of the party undertaking such enforcement and/or defense, cooperate in all reasonable respects and, to the extent possible, have its employees testify when requested and make available relevant records, papers, information, samples and the like. 8.4 BioSphere's Rights. BioSphere shall have the sole right in accordance ------------------ with the terms and conditions hereof to sublicense any alleged infringer for future use of the Licensed Patents to which it has exclusive rights under Section 2.1 of this Agreement. Section 9 Indemnification --------------- 9.1 Indemnification. BioSphere hereby agrees that it shall be responsible --------------- for, indemnify, hold harmless and defend Licensors and their successors and assigns (collectively, the "Indemnitees"), from and against any and all claims, ----------- demands, losses, liabilities, damages, costs and expenses (including the cost of settlement, reasonable legal and accounting fees and any other expenses for investigating or defending any actions or threatened actions) (collectively, "Losses") suffered or incurred by any Indemnitee arising out of, relating to, resulting from or in connection with (a) a claim brought by a third party of personal injury (including death) or property damage caused by a Licensed Product manufactured by or for BioSphere its Affiliates or sublicensees, (b) the exercise of any of the rights and/or licenses granted herein to BioSphere, its Affiliates, or any sublicensee, and (c) any action, suit or other proceeding, or compromise, settlement or judgment, relating to any of the foregoing matters described in subparagraph (a) hereof with respect to which the Indemnitees are entitled to indemnification hereunder. The foregoing shall not apply to the extent that such Losses are due to the willful misconduct or gross negligence of any of the Indemnitees. 9.2 Notice of Claims. In the event that a claim is made pursuant to ---------------- Section 9.1 above against any Indemnitee, the Indemnitee agrees to promptly notify BioSphere of such claim or action and, in any such case BioSphere shall assume control of the defense of such claim or action; provided, however, that -------- ------- (a) all Indemnitees shall be entitled to participate therein (through a single counsel of their own choosing) at the Indemnitees' sole cost and expense, 8 (b) the Indemnitees shall fully cooperate with BioSphere in all reasonable respects, and (c) BioSphere shall not settle or compromise any such claim or action without the prior written consent of the Indemnitees, unless such settlement or compromise includes a general release of the Indemnitees from any and all liability with respect thereto and does not include an admission of liability on the part of any Indemnitee, and does not impose any restriction on the conduct by such Indemnitee of any of its activities. Section 10 Limitations on Liability 10.1 No Warranties. Except as expressly set forth in Section 7 hereof, ------------- neither party makes any representations or warranties as to any matter whatsoever. EACH PARTY HEREBY DISCLAIMS ANY AND ALL OTHER REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE LICENSED PATENTS, THE KNOW-HOW AND THE LICENSED PRODUCTS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. 10.2 Limitations of Liability. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY ------------------------ BE LIABLE TO THE OTHER PARTY OR ANY OTHER PERSON FOR ANY SPECIAL, CONSEQUENTIAL OR INDIRECT DAMAGES OF ANY KIND WHATSOEVER. 10.3 Force Majeure. No party shall be liable for failure or delay in ------------- performing any of its obligations hereunder if such failure or delay is occasioned by compliance with any governmental regulation, request or order, or by circumstances beyond the reasonable control of the party so failing or delaying, including, without limitation, Acts of God, war, insurrection, fire, flood, accident, labor strikes, work stoppage or slowdown (whether or not such labor event is within the reasonable control of the parties), or inability to obtain raw materials, supplies, power or equipment necessary to enable such party to perform its obligations hereunder. Each party shall (a) promptly notify the other party in writing of any such event of force majeure, the expected duration thereof and its anticipated effect on the ability of such party to perform, its obligations hereunder, and (b) make reasonable efforts to remedy any such event of force majeure. Section 11 Term and Termination 11.1 Term. The term of this Agreement will commence on the Effective Date ---- of this Agreement and remain in full force and effect until either the later of (i) expiration of the term of the last patent of the Licensed Patent covering any Licensed Product, or (ii) ten (10) years. 11.2 Termination By BioSphere. BioSphere may terminate this Agreement in ------------------------ part or in whole at any time upon one hundred eighty (180) days' written notice in advance to Licensors. 11.3 Termination By Default. If either party shall be in default of any ---------------------- obligation hereunder, or shall be adjudged bankrupt, or become insolvent, or make an assignment for the 9 benefit of creditors, or be placed in the hands of a receiver or a trustee in bankruptcy; the other party may terminate this Agreement by giving sixty (60) days' notice by Registered Mail to the other party, specifying the basis for termination. If within sixty (60) days after the receipt of such notice, the party who received notice shall remedy the condition forming the basis for termination, such notice shall cease to be operative, and this Agreement shall continue in full force. Section 12 Export Controls --------------- All obligations to furnish goods, technology, or software under this Agreement may be subject to various laws and regulations governing the export of goods, including U.S. and/or Japanese Export Control Laws and Regulations. BioSphere agrees to comply fully with all applicable laws and regulations before exporting any goods, technology, or software. BioSphere recognizes and agrees that its obligations to comply with such export control laws and regulations survive the termination or expiration of this Agreement. Section 13 Miscellaneous ------------- 13.1 Notices. All notices, reports and/or other communications made in ------- accordance with this Agreement, shall be deemed to be duly made or given (i) when delivered by hand, (ii) three days after being mailed by registered or certified mail (air mail if mailed overseas), return receipt requested, or (iii) when received by the addressee, if sent by facsimile transmission or by Express Mail, Federal Express or other express delivery service (receipt requested), in each case addressed to such party at its address set forth below (or to such other address as such party may hereafter designate as to itself by notice to the other party hereto): In the case of BioSphere: John Carnuccio BioSphere Medical, Inc. 1050 Hingham Street Rockland MA 02370 U.S.A. In the case of Licensors or Hori: Dr. Shin-ichi Hori 3-2-4 Motomachi, Hamadera Sakai-shi, Osaka 592-8343 Japan 13.2 Amendments. This Agreement may not be amended or modified, nor may ---------- any right or remedy of any party be waived, unless the same is in writing and signed by such party or a duly authorized representative of such party. The waiver by any party of the breach of any 10 term or provision hereof by any other party shall not be construed as a waiver of any other subsequent breach. 13.3 No Waiver; Remedies. No failure or delay by any party in exercising ------------------- any of its rights or remedies hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy. The rights and remedies of the parties provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law. 13.4 Assignment. Licensors may not assign or otherwise transfer this ---------- Agreement or any of their rights, duties or obligations hereunder without the prior written consent of BioSphere. 13.5 Expenses. Unless otherwise provided herein, all costs and expenses -------- incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party which shall have incurred the same and the other party shall have no liability relating thereto. 13.6 Entire Agreement. This Agreement and that certain Medical Advisory ---------------- Board Agreement entered into between Hori and BioSphere in September 1999 constitute the entire agreement between the parties and supersedes all prior proposals, communications, representations and agreements, whether oral or written, with respect to the subject matter hereof. 13.7 Severability. Any term or provision of this Agreement which is ------------ invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions hereof in any other jurisdiction. 13.8 Counterparts. This Agreement may be signed in any number of ------------ counterparts, each of which shall be deemed an original, with the same effect as of the signatures thereto and hereto were upon the same instrument. 13.9 Headings. The headings used in this Agreement are for convenience of -------- reference only and shall not affect the meaning or construction of this Agreement. 13.10 Governing Law. This Agreement, including the performance and ------------- enforceability hereof, shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, U.S.A. without reference to choice of law doctrine. Each party hereby submits itself for the sole purpose of this Agreement and any controversy arising hereunder to the jurisdiction of the courts located in the Commonwealth of Massachusetts, and any courts of appeal therefrom, and waives any objection (on the grounds of lack of jurisdiction or forum non conveniens or otherwise) to the exercise of such jurisdiction over it by any such courts. 13.11 Official Language. The official language of this Agreement and any ----------------- communication, notice or proceeding relating thereto shall be English. 11 IN WITNESS WHEREOF, the undersigned are duly authorized to execute this Agreement on behalf of BIOSPHERE, HORI, and LICENSORS as applicable. FOR BIOSPHERE MEDICAL, INC.: FOR LICENSORS: DR SHIN-ICHI-HORI ("BioSphere") ("Hori") By: /s/ Jean-Marie Vogel /s/ Shinichi Hori --------------------------------- --------------------------------- Print Name: Jean-Marie Vogel Print Name: Shinichi Hori ------------------------- ----------------------- Title: Chairman ------------------------------ Tomoko Hori /s/ Tomoko Hori ---------------------------------- Print Name: Tomoko Hori ----------------------- 12 EX-10.16 5 dex1016.txt EXCLUSIVE DISTRIBUTION AGREEMENT Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Exhibit 10.16 - ------------------------------------------------------------------------------- EXCLUSIVE DISTRIBUTION AGREEMENT - ------------------------------------------------------------------------------- This Agreement is dated and effective as of January /24th/ 2002 and made ------------------- between: BIOSPHERE MEDICAL SA, a French societe anonyme having its registered office at Parc des Nations Z.I Paris Nord II, 383, rue de la Belle Etoile 95700 Roissy-en-France, FRANCE, registered with the Registry of Commerce and Companies of BOBIGNY under the number 418.584.033, and represented by Alain Brunier in his capacity as President, Europe-Middle East-Africa (hereinafter referred to as "BIOSPHERE MEDICAL SA") AND - --- TERUMO EUROPE NV/SA, a Belgian societe anonyme having its registered office at 3001 Leuven, Research Park Zone 2 Haasrode, Interleuvenlaan 40, registered with the Registry of Commerce of Leuven under the number 52.311, and represented by Alain Poncet in his capacity as Senior Vice President (hereinafter referred to as "TERUMO EUROPE") (hereinafter collectively referred to as the "Parties" or individually as a "Party") 2 WITNESSETH - ---------- WHEREAS TERUMO EUROPE is an international company manufacturing high medical technology. WHEREAS TERUMO EUROPE has also developed a strong and capable network for the sale and distribution of medical products and devices. WHEREAS BIOSPHERE MEDICAL SA is a company with a high reputation in manufacturing and distribution of high medical technology in EUROPE. WHEREAS BIOSPHERE MEDICAL SA owns and/or controls a series of patents and technical information, including process and know how, and has wide experience and an international reputation in manufacturing and distribution of embolotherapy product range particularly under the trademarks of Embosphere and Embogold; WHEREAS BIOSPHERE MEDICAL SA owns, controls and/or has right, directly or indirectly to the trademarks of Embosphere and Embogold in connection with the above mentioned products (the "Trademarks") and owns, controls and/or has right, directly or indirectly, corporate names, including BIOSPHERE MEDICAL (the "Tradenames"), through fully owned or directly controlled subsidiaries; WHEREAS TERUMO EUROPE and BIOSPHERE MEDICAL SA manufacture and distribute medical products which are complementary. WHEREAS TERUMO EUROPE and BIOSPHERE MEDICAL SA do not manufacture or distribute competitive products. WHEREAS the purpose of TERUMO EUROPE and BIOSPHERE MEDICAL SA is to optimize the terms of marketing and distribution in-house or with trading partners. WHEREAS through a not binding agreement dated November, 12, 2001, BIOSPHERE MEDICAL SA agrees to and TERUMO EUROPE wishes to be exclusive distributor of Products in the Territory specified in article 2 pursuant to the terms of this Agreement. 3 NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS: - ------------------------------------------- Article 1 - Grant of rights --------------- 1.1. BIOSPHERE MEDICAL SA hereby grants to TERUMO EUROPE which hereby accepts the exclusive right to distribute, market and sell the Products in the territories of several countries specified in article 2 (the "Territory"). 1.2. BIOSPHERE MEDICAL SA hereby grants to TERUMO EUROPE the exclusive [**] right to use the Trademarks and the Tradenames with respect to the distribution, marketing and sale of the Products in the Territory. 1.3. TERUMO EUROPE accepts to use the Trademarks and the Tradenames with respect to the distribution, marketing and sale of the Products in the Territory. 1.4. TERUMO EUROPE hereby accepts the terms and conditions of such grant of rights. Article 2 - Products and Territory ---------------------- 2.1. The term of "Products" as used herein shall mean the BIOSPHERE MEDICAL Embolotherapy product range as listed in Schedule 1 attached thereto. 2.2. The term "Territory" as used herein shall mean Germany, UK, Scandinavia, Switzerland, Belgium, Portugal, Ireland, Greece, Czech rep., Poland, Tunisia, Morocco, Algeria, Russia; The Agreement will be extended to: [**] Article 3 - TERUMO EUROPE's responsibilities -------------------------------- 3.1. TERUMO EUROPE shall at its own expenses: (i) Use its best efforts to contribute to the market promotion and distribution determined by BIOSPHERE MEDICAL SA within the Territory. (ii) Maintain or arrange for suitable and satisfactory facilities for the sale and servicing of products within the Territory; (iii) Make available to BIOSPHERE MEDICAL SA every reasonable assistance in connection with the execution of sales and advertising plans and prepare and submit to 4 BIOSPHERE MEDICAL SA sales forecasts and appraisals of market conditions as may be requested by BIOSPHERE MEDICAL SA from time to time (iv) Maintain a high reputation for conducting TERUMO EUROPE's business ethically and in accordance with all laws and regulations applicable thereto; (v) The costs incurred by TERUMO EUROPE in the sale of Products as previously mentioned, including, but not limited to, shipping, billing, invoicing, order processing, transportation insurance, customs duties, sales taxes, VAT and other taxes, but to the exclusion of promotional activities which will be shared by the Parties in the conditions specified in articles 7 and 10. (vi) TERUMO EUROPE shall maintain a system of product traceability. During the term of this Agreement, and for twelve (12) months thereafter, BIOSPHERE MEDICAL SA shall be entitled, at its expense and upon reasonable notice or have examined by an independent auditing firm acceptable to both parties, to verify the existence of such product traceability. (vii) TERUMO EUROPE shall at its own expense, outside of provisions of Article 10.0 of this agreement, obtain all permits, licenses and other approvals necessary for its activities, shall conduct its business in compliance with all laws and regulations applicable in the Territories and shall, when requested, provide BIOSPHERE MEDICAL SA with information regarding TERUMO EUROPE's compliance with such laws and regulations. (viii) TERUMO EUROPE shall not offer Products for sale to customers or dealers within the Territories, except if specifically agreed in writing, when it reasonably assumes that such customers or dealers intend to resell the Products outside any of the Territories. Article 4 - BIOSPHERE MEDICAL's responsibilities ------------------------------------ 4.1 BIOSPHERE MEDICAL SA shall at its own expenses: (i) Use its best efforts to promote the best possible products (ii) Develop the terms of marketing and distribution (iii) BIOSPHERE MEDICAL SA agrees that all relevant information which could affect the use of the product (such as product recalls or procedural issues) to the extent known by Biosphere medical SA will be brought to TERUMO EUROPE's attention. BIOSPHERE MEDICAL S.A will also immediately inform TERUMO EUROPE of any change in the technical specifications of the Product. (iv) BIOSPHERE MEDICAL SA agrees to use all reasonable efforts to notify TERUMO EUROPE of all market opportunities suggested to BIOSPHERE MEDICAL SA in the Territory. 5 (v) BIOSPHERE MEDICAL SA agrees to deal with the registrations and the CEE's marking. (vi) BIOSPHERE MEDICAL SA agrees to inform TERUMO EUROPE in due time of its new product development to enhance the sales activity effectiveness in the Territory. Article 5 - TERUMO EUROPE's warranties -------------------------- 5.1. TERUMO EUROPE warrants that it is and will remain during the term of this Agreement in full compliance with all applicable laws and regulations in the Territory, to the extent such laws and regulations are related to TERUMO EUROPE's performance of or ability to perform its obligations under this Agreement. 5.2 TERUMO EUROPE acknowledges that it has received copies of technical documentation related to each and all Products specifying their conditions of use and application, has read them, understands them, and agrees to comply with them as well as with any modification which is duly notified by BIOSPHERE MEDICAL SA. A modification will be notified in advance at least [**] days before coming into effect Article 6 - BIOSPHERE MEDICAL SA's warranties --------------------------------- 6.1 BIOSPHERE MEDICAL SA represents and warrants that: (i) All Products presently comply, to the best of its knowledge, with all applicable French laws and regulations as applicable in the Territory and governing labeling, packaging and quality of the Products, and that such Products shall comply therewith during the term hereof (ii) There is no obligation of a contractual or other nature to any person, firm, or corporation which at BIOSPHERE MEDICAL's best knowledge is inconsistent or in conflict with this Agreement. Article 7 - Sales Terms and payment ----------------------- 7. 1 The Parties agree the following Transfer pricing Embosphere: 11 1 ml vial (all sizes): [**] Euro 6 12 2 ml vial (all sizes): [**] Euro Embogold: 13 1 ml vial (all sizes): [**] Euro 14 2 ml vial (all sizes): [**] Euro The Parties agree that the transfer pricing of Embogold will be confirmed at launching time of the Products 7.2 The price of the Products is exclusive of VAT. It will be reviewed and discussed at every budgetary year such budgetary year defined as beginning January 1, and ending December 31, of any year. Such discussions shall be initiated at least 3 months prior to the start of the new budgetary year 7.3 TERUMO EUROPE will pay all costs of delivery or importation 7.4 The purchase orders issued by TERUMO EUROPE for Products shall be submitted to BIOSPHERE MEDICAL SA in writing or by fax. No order shall be binding upon BIOSPHERE MEDICAL SA until duly accepted by means of an order confirmation in the same manner or by speedier means of communication within [**] days of BIOSPHERE MEDICAL's receipt of purchase orders by an authorised representative of Biosphere Medical. BIOSPHERE MEDICAL SA shall deliver the Products within [**] to TERUMO EUROPE warehouse in Belgium. In case BIOSPHERE MEDICAL SA cannot deliver the Products in time, they will notify TERUMO EUROPE within [**] working days after receipt of the purchase of TERUMO's purchase order. 7.5 Unless otherwise agreed, the Products will be delivered at the delivery date specified in the purchase order. The Products will be shipped free on board ("FOB") BMSA. 7.6 The Parties agree the following payments terms: (i) [**] initial stock: [**] days (ii) Following orders: [**] days Article 8 - Liability --------- 8.1 The liability of BIOSPHERE MEDICAL SA under this Agreement and under any purchase order of Products accepted by BIOSPHERE MEDICAL SA pursuant to this Agreement shall be limited to that arising from its obligations to supply Products in accordance with the terms and conditions of orders accepted by BIOSPHERE MEDICAL SA, its obligations under this Agreement and its statutory obligations with regard to warranties and product 7 liability. BIOSPHERE MEDICAL SA will be liable for all damages and costs resulting from any recall of the Products manufactured by Biosphere Medical resulting from the nature of product defectiveness. Without limiting the generality of the foregoing, Biosphere in particular warrants that all Products delivered pursuant to this Agreement will be new and in saleable condition, fit for their intended purpose. 8.02 TERUMO EUROPE agrees to hold BIOSPHERE MEDICAL SA harmless from and against any and all claims, losses, obligations, liabilities, costs and expenses (including without limitation legal and other fees): (i) arising from actions or omissions of TERUMO EUROPE, its employees or agents, or (ii) arising out of TERUMO EUROPE's breach of or failure to perform any of its obligations, representations, warranties, covenants and agreements herein, including those contained in the technical sheets, or (iii) arising out of claims of negligence of TERUMO EUROPE, or (iv) arising from Products defects caused by TERUMO EUROPE Article 9 - Intellectual property rights ---------------------------- 9.1 TERUMO EUROPE agrees to use Trademarks and Tradenames currently owned, controlled or used by BIOSPHERE MEDICAL SA and in connection with this Agreement, whether or not registered, only in the manner stipulated by BIOSPHERE MEDICAL SA or in such other manner to which BIOSPHERE MEDICAL SA may specifically consent in writing. BIOSPHERE MEDICAL SA undertakes to provide TERUMO EUROPE with all necessary materials (editing support) to comply with this undertaking 9.2 TERUMO EUROPE shall in no way alter any of the Trademarks or Tradenames appearing on Products or other merchandise supplied to TERUMO EUROPE and shall not use such trademarks or tradenames similar thereto on stationary, advertising, promotional materials or displays or in its company name or in any other fashion whatsoever unless prior written approval of BIOSPHERE MEDICAL SA is obtained, and such use, if approved, shall in no way bestow any rights to such trademarks or tradenames upon TERUMO EUROPE. Additionally, any rights acquired by TERUMO EUROPE in such trademarks or tradenames shall immediately inure to the benefit of, and automatically become transferred to BIOSPHERE MEDICAL SA. In the event of termination of this Agreement, TERUMO EUROPE shall immediately discontinue all use of such trademarks and tradenames except for the distribution of the 8 Products still in stock a the time of termination and not re-purchased by BIOSPHERE MEDICAL SA 9.3 TERUMO EUROPE shall not affix any trademark or tradename to products or other merchandise supplied to TERUMO EUROPE other than those affixed by BIOSPHERE MEDICAL SA or which BIOSPHERE MEDICAL SA may request TERUMO EUROPE to affix, without prior written approval of BIOSPHERE MEDICAL SA. 9.4 The Trademarks and Tradenames are and shall remain the exclusive right and property of BIOSPHERE MEDICAL SA and BIOSPHERE MEDICAL SA agrees that they will not cause, allow or permit any third party to use their labels, Trademarks and/or Tradenames in the Territory. 9.5 TERUMO EUROPE and BIOSPHERE MEDICAL SA shall notify each other of any claim of infringement or any complaint of which it has knowledge based upon used by TERUMO EUROPE of the Trademarks and/or Tradenames or any simulation, counterfeiting or infringement of the Trademarks and Tradenames by third parties. 9.6 TERUMO EUROPE agrees not to remove any identifying marks, warning signs or instructions placed on Products by BIOSPHERE MEDICAL SA. 9.7 BIOSPHERE MEDICAL SA shall be solely responsible for all damages and costs resulting from patent, trademarks and tradenames infringement caused by the Products and shall at its own expense defend any such patent, trademarks and tradenames infringement claims raised in the Territory. BIOSPHERE MEDICAL SA will indemnify TERUMO EUROPE for all costs and expenses which TERUMO EUROPE would incur as a result of such infringement claims. Article 10 - Marketing, advertising and fairs -------------------------------- 10.1 TERUMO EUROPE and BIOSPHERE MEDICAL SA shall actively promote the Products in the Territory by activities consisting of: (i) training, (ii) congresses, (iii) workshops, (iv) media campaigns (v) advertising and more generally, all activities in connection with the promotion of the Products. 9 10.2 The development and execution of the promotional activities is in the first place the responsibility of TERUMO EUROPE. The costs incurred by TERUMO EUROPE shall be submitted to BIOSPHERE MEDICAL SA in writing or by fax. No cost shall be binding upon BIOSPHERE MEDICAL SA until duly accepted in writing in the same manner or by speedier means of communication within eight days of BIOSPHERE MEDICAL's receipt of such costs. The costs incurred by BIOSPHERE MEDICAL SA shall likewise be submitted to TERUMO EUROPE and shall not be binding upon TERUMO EUROPE until duly accepted within 8 days of TERUMO EUROPE's receipt of submission of expense. 10.3 The costs of mutual agreed activities shall be shared [**] by TERUMO EUROPE and BIOSPHERE MEDICAL SA. The Parties will settle the marketing costs sharing on quarterly bases with immediate payment 10.4 The Parties agree the amount for 2002 for TERUMO will be [**] Euro taking into consideration the countries not involved in TERUMO'S territory in 2002. 10.5 The Parties shall inform each other in appropriate time of any contemplated participation in fairs and exhibitions. Article 11 - Insurance --------- 11.1 At its own expense, TERUMO EUROPE shall maintain with reputable insurance companies insurance policies covering the distribution activities which TERUMO EUROPE will conduct under the present Agreement 11.2 TERUMO EUROPE agrees to furnish BIOSPHERE MEDICAL SA, within thirty (30) business days of the execution of this agreement, with satisfactory evidence of such insurance policies prior to the first purchase order and at such other time as BIOSPHERE MEDICAL SA may require for its activity in the Territory Article 12 - Confidentiality --------------- TERUMO EUROPE, BIOSPHERE MEDICAL SA and their employees and agents shall at all times, during the term of this Agreement and thereafter, keep confidential and not disclose to any third party any trade secret and other information of a confidential nature acquired by either part from the other in the course of performance of this Agreement. Article 13 - Non competition --------------- 10 13.1 TERUMO EUROPE hereby undertakes not to sell, directly or indirectly, nor assist, directly or indirectly, in selling products which may be identical, similar and/or competitive by reason of their nature, appearance, use, and/or technical features with the Products. 13.2 Such undertaking shall be valid during the terms of this Agreement. 13.3 In case BIOSPHERE MEDICAL developed products competitive to Terumo Corporation and Terumo Europe, then Biosphere Medical Europe would offer them for sale to Terumo Europe within the Territory. Article 14 - Duration -------- 14.1 Subject to immediate termination as mentioned in Article 15, this Agreement shall be with retroactive effect as of January, 1, 2002, and expire on January, 1, 2006. The parties will re-examine the duration of this Agreement after an initial period of two (2) years using qualitative and quantitative criteria (for example : sales achievement, competitive edge of the Products, products in the pipeline, Distributors' performance etc.). The parties can at that time agree to maintain the initial duration of the Agreement or to extend or reduce its duration. If one of the parties at that time whishes to terminate, based on the outcome of the "re-examination" discussions, the contract prior to the end of its initial term, such party may terminate the agreement unilaterally by observing the notice period stipulated in article 14.2 14.2 If a party decides to terminate the Agreement unilaterally, the terminating party will deliver to the other party a notice of termination by registered mail and observe a notice period of twelve (12) months 14.3 The Parties agree to meet at the latest six (6) months before the date of expiry of the Agreement to discuss the terms and conditions of a renewal of the Agreement. If the Parties do not enter into a formal contract for the renewal of their Agreement but yet continue to operate within the terms of this Agreement, the Agreement will be renewed automatically for a period of two (2) years. Article 15 - Immediate termination --------------------- 15.1 This Agreement is subject to immediate termination by the Parties upon any of the following events: (i) Insolvency, bankruptcy, liquidation, or loss of corporate identity on the part of one of the Parties or the filing by one of the Parties of a petition seeking relief under the laws of insolvency or bankruptcy of any country. 11 (ii) Breach of any obligation under this Agreement by one of the Parties, if not remedied by one of the Parties within [**] days of written receipt notice of breach. (iii) The merger of TERUMO EUROPE with another company or corporation other or any other transaction effecting a substantial change in control or ownership of TERUMO EUROPE, with the exclusion of mergers or transactions whereby the control or ownership of TERUMO EUROPE remains within the TERUMO group of companies 15.2 Without prejudice to the generality of the foregoing, the performance by TERUMO EUROPE of its obligations with regard all payments under Article 7 is of the essence of this Agreement. Conversely, it is agreed that the timely performance by BIOSPHERE MEDICAL SA of its delivery obligations as stipulated under Article 7 is also of the essence of this Agreement. Any breach of or default in the performance of such obligations shall entail the immediate termination of this Agreement. Article 16 - Change of control provisions - ----------------------------------------- 16.1 The present Agreement is directly linked to the present BSMD ownership. It will be cancelled by a majority change in BSMD's shareholder's equity. 16.2 Regarding the cancellation of the Agreement specified in Article 16.1, BIOSPHERE MEDICAL SA agrees to pay to TERUMO EUROPE in compensation for its investments an amount of: [**] Euro if end of 2002 (or pro rata if earlier in the year) [**] Euro if end of 2003 (or pro rata if earlier in the year) [**] Euro if end of 2004 (or pro rata if earlier in the year) Each amount non cumulative to the other Article 17 - Assignment ---------- TERUMO EUROPE shall not assign its rights and obligations under this Agreement to any third party without the prior written consent of BIOSPHERE MEDICAL SA. Article 18 - Governing law and jurisdiction ------------------------------ 18.1 This Agreement shall be governed by and construed in accordance with the laws of France 12 18.2. All provisions of this Agreement are several and any provision which may be prohibited by law shall be ineffective to the extent of such prohibition without invalidating the remaining provisions. Notwithstanding the foregoing, the Parties shall use their best efforts to replace any provision which may become invalid or unenforceable by other adequate provisions reflecting their intents and purposes. Article 19 - Miscellaneous ------------- 19.1. This Agreement constitutes the entire agreement between the Parties and supersedes all previous agreements or understandings between them covering the subject matter hereof and may be amended only in writing. 19.2. Any failure by any Party hereto to exercise at any time any of its rights and/or to enforce any terms or conditions of this Agreement shall not be considered a waiver of such Party's right thereafter to exercise said rights or to enforce each and every term or condition of this Agreement; nor shall any such waiver be implied from the acceptance of any payment. 19.3. Any notice required to be given hereunder shall be notified at the addresses shown on the first page hereof. BIOSPHERE MEDICAL SA TERUMO EUROPE NV/ SA Alain Brunier Alain Poncet - ------------------------- ------------------------- represented by represented by 13 SCHEDULE I LIST OF PRODUCTS TO BE DISTRIBUTED BY TERUMO EUROPE NV/SA --------------------------------------------------------- - Embosphere - Embogold 14 Attachement 1 TERUMO FORECAST 2002 (January 2002 - December 2002) 1 ml 2 ml Total ---- ---- ----- Germany [**] [**] [**] UK [**] [**] [**] Scandinavia [**] [**] [**] Switzerland [**] [**] [**] Belgium [**] [**] [**] Portugal [**] [**] [**] Ireland [**] [**] [**] Greece [**] [**] [**] Czech Rep. [**] [**] [**] Russia/Poland ) Tunisia/Morocco ) [**] [**] [**] Algeria ) TOTAL [**] [**] [**] FIRST AMENDMENT TO EXCLUSIVE DISTRIBUTION AGREEMENT This First Amendment to Exclusive Ditribution Agreement (the "Amendment") is dated and effective as of January 28/th/ 2002 and made between: BIOSPHERE MEDICAL SA, a French societe anonyme having its registered office at Parc des Nations Z.I Paris Nord II, 383, rue de la Belle Etoile 95700 Roissy-en-France, FRANCE, registered with the Registry of Commerce and Companies of BOBIGNY under the number 418.584.033, and represented by Alain Brunier in his capacity as President, Europe-Middle East-Africa (hereinafter referred to as "BIOSPHERE MEDICAL SA") AND - --- TERUMO EUROPE NV/SA, a Belgian societe anonyme having its registered office at 3001 Leuven, Research Park Zone 2 Haasrode, Interleuvenlaan 40, registered with the Registry of Commerce of Leuven under the number 52.311, and represented by Alain Poncet in his capacity as Senior Vice President (hereinafter referred to as "TERUMO EUROPE") (hereinafter collectively referred to as the "Parties" or individually as a "Party") WITNESSETH - ---------- WHEREAS the Parties entered into an Exclusive Distribution Agreement on January ___, 2002 (the "Distribution Agreement"). WHEREAS the Parties desire to amend Article 16 of the Distribution Agreement to clarify the change of control provisions set forth therein. NOW THEREFORE, THE PARTIES AGREE AS FOLLOWS: - ------------------------------------------- 1. Article 16 of the Distribution Agreement is hereby deleted in its entirety and the following new Article 16 is substituted in lieu thereof: "Article 16 - Change of control provisions ----------------------------------------- 16.1 Notwithstanding any other provision of this Agreement, either Party shall have the right to immediately terminate the Agreement in the event of a Change of Control of BioSphere Medical, Inc., a Delaware corporation and the parent corporation of BIOSPHERE MEDICAL SA ("BSMD"), by providing written notice to the other Party within 30 days following such Change of Control. For purposes of this Article 16.1, a Change of Control shall mean (a) the acquisition by a person, party or group of more than 50% of the outstanding voting stock of BSMD, excluding acquisitions from BSMD, (b) the sale of BSMD by means of a reorganization, merger, consolidation, recapitalization or asset sale, unless the owners of the outstanding voting stock of BSMD before such transaction continue to own more than 50% of the outstanding voting stock of the acquiring or succeeding entity in substantially the same proportions, or (c) the approval of a complete liquidation or dissolution of BSMD. 16.2 If the Agreement is terminated by BIOSPHERE MEDICAL SA or its assignee or successor pursuant to Article 16.1, BIOSPHERE MEDICAL SA agrees to pay to TERUMO EUROPE in compensation for its investments an amount of: [**] Euro if end of 2002 (or pro rata if earlier in the year) [**] Euro if end of 2003 (or pro rata if earlier in the year) [**] Euro if end of 2004 (or pro rata if earlier in the year) Each amount non cumulative to the other" 2. Except as specifically amended by this Amendment, all terms and conditions of the Distribution Agreement shall remain unchanged and in full force and effect. BIOSPHERE MEDICAL SA TERUMO EUROPE NV/SA Alain Brunier Alain Poncet - ---------------------- ---------------------------------- represented by represented by 16 EX-23 6 dex23.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation of our report, dated January 17, 2002, included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-79398, 33-79396, 33-94792, 33-94770, 333-28955, 333-28957, 333-58023, 333-58021, 333-83639, 333-41986, 333-38482, and 333-50100. Boston, Massachusetts March 28, 2002 EX-99 7 dex99.txt CONFIRMATION OF ARTHUR ANDERSEN REPRESENTATIONS Exhibit 99 [Company Letterhead] March 28, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Judiciary Plaza Washington, DC 20549 Re: Confirmation of Arthur Andersen Representations Ladies and Gentlemen: This letter confirms that BioSphere Medical, Inc. has received from Arthur Andersen LLP, the independent public accountant engaged by the company to examine the company's financial statements that are included in the Form 10-K to which this letter is filed as an exhibit, a representation letter addressed to the company and stating that: o the audit conducted by Andersen was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards; and o there was appropriate continuity of Andersen personnel working on the audit, availability of national office consultation and availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the audit. Very truly yours, BIOSPHERE MEDICAL, INC. /S/ Robert M. Palladino Robert M. Palladino Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----