-----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, CNyR6qg90jLuznj0GinNnr5PT0Ne8GhrYpG71SKh8sTL0vjNUi0D95Ndfr4hBG3D t9BmA0CfPSOVXkxVufDmLw== 0000950135-97-001493.txt : 19970401 0000950135-97-001493.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950135-97-001493 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOSEPRA INC CENTRAL INDEX KEY: 0000919015 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 043216867 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23678 FILM NUMBER: 97568873 BUSINESS ADDRESS: STREET 1: 111 LOCKE DR CITY: MALBOROUGH STATE: MA ZIP: 01752 BUSINESS PHONE: 5084816802 10-K405 1 BIOSEPRA INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Year Ended December 31, 1996 Commission File No. 0-23678 - ------------------------------------ --------------------------- BioSepra Inc. ------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 04-3216867 --------------------------- ------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 111 Locke Drive, Marlborough, Massachusetts 01752 ------------------------------------------------- -------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (508) 481-6802 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- Common Stock, $.01 par value 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 the Form 10-K. [X] The aggregate market value of voting Common Stock held by non-affiliates of the registrant was $29,455,776, based on the last reported sale price of the Common Stock on the Nasdaq consolidated transaction reporting system on March 14, 1997. Number of shares outstanding of the registrant's class of Common Stock as of March 14, 1997: 8,415,936 Documents incorporated by reference: 1996 Annual Report to Stockholders - Part II Proxy Statement for the 1997 Annual Meeting of Stockholders - Part III 2 PART I Item 1. BUSINESS BioSepra Inc. ("BioSepra" or the "Company") develops, manufactures and sells chromatographic media and systems for use by pharmaceutical companies in the purification and production of biopharmaceuticals. BioSepra's products enable pharmaceutical companies to reduce the time and cost required to develop and manufacture biopharmaceuticals. The Company's media products are currently used by pharmaceutical companies in the production of several commercial bio- pharmaceuticals, including interferons, insulin, human growth hormone, special enzymes and vaccines. BioSepra was incorporated in December 1993 as a wholly-owned subsidiary of Sepracor Inc., a Delaware corporation ("Sepracor"). Effective as of January 1, 1994, Sepracor transferred to BioSepra its chromatography business, including all of the outstanding shares of BioSepra S.A., formerly called IBF S.A. In March 1994, BioSepra completed an initial public offering of its common stock resulting in net proceeds to BioSepra of approximately $17.9 million. Sepracor owns approximately 64% of the outstanding common stock of BioSepra. The Company's principal offices are located at 111 Locke Drive, Marlborough, Massachusetts 01752 and its telephone number is (508) 481-6802. Unless the context indicates otherwise, the "Company" and "BioSepra" include BioSepra Inc. and its subsidiaries, including BioSepra S.A. INDUSTRY OVERVIEW Purification is a critical process in almost every stage in the development and commercialization of a biopharmaceutical, from research through production for clinical trials to commercial production. At both the laboratory and commercial stages, a biopharmaceutical is typically produced by genetically-engineered cells that are grown in a fermentation broth containing cell culture media. The target biopharmaceutical molecules in the fermentation broth must be purified from the host cells, contaminants and cell culture media. This purification process is complex because the host cells produce extremely small quantities of the target biomolecules relative to the volume of the fermentation broth and because the contaminants produced in the broth are often similar in size and structure to the target biomolecules. For example, each liter of fermentation broth might yield only a few milligrams of purified recombinant protein. Several critical purification steps are therefore required to extract and purify the final product, which must be at least 99.9% pure. It is estimated that biopharmaceutical purification accounts for about one-half of overall commercial production costs. Chromatography is the principal method used for biopharmaceutical purification. In chromatographic processes, the solution containing both the desired product and unwanted contaminants and impurities is flowed through columns that are packed with chromatographic particles ("media"). As the solution flows through 1 3 the columns, the target biomolecules are absorbed by the media. The productivity of a chromatographic media depends on the protein binding capacity of the media, the speed at which biomolecules are able to reach the binding sites and the ability of the media to achieve the desired product purity (resolution). In designing the purification process for any biopharmaceutical, a process engineer or biochemist must typically evaluate a large number of different chromatographic steps to determine the specific chemistries, column sizes, media and process sequences that are able to yield the required process characteristics and product purity on the most cost-effective basis. The design process has historically involved a large number of time-consuming trial and error experiments in which the engineer is required to set up, perform and evaluate different process steps. Because a typical process purification step can take hours to run, the trial and error method of process development can be both inefficient and costly. Moreover, a process that operates effectively at laboratory-scale may prove to be less than optimal when scaled-up for commercial production. The Company believes that the markets for both improved chromatographic media and process development systems are growing as pharmaceutical companies develop and commercialize biopharmaceuticals at an accelerating pace. As of December 31, 1996, over 25 recombinant biopharmaceuticals had been approved by the United States Food and Drug Administration ("FDA") for commercial sale. United States biotechnology companies currently have over 200 therapeutics in human clinical development. It is estimated that over 1,500 biopharmaceuticals are in various stages of development. In particular, BioSepra is targeting the purification of monoclonal antibodies. The Company believes that there are more monoclonal antibody-based drugs currently in Phase II and Phase III clinical trials than any other class of biopharmaceuticals. A vast majority of these therapeutics are being developed for patients with the most serious and poorly managed human diseases; e.g., cancer, AIDS, other immune-system disorders such as multiple sclerosis and rheumatoid arthritis, and heart disease. The first therapeutic monoclonal antibody was approved for sale by the FDA at the end of 1996, and more therapeutic monoclonal antibodies are expected to be approved in 1997. Therapeutic monoclonal antibodies are used in very high doses as compared with most other biopharmaceuticals. Hormones, vaccines, growth factors and immune-system modulators, for example, all act as catalysts that stimulate a biological response. They therefore need only be present in the body in relatively small doses. Antibodies, on the other hand, act directly on disease-causing agents, binding to them and removing them from circulation. They are most effective when available in larger quantities and for extended periods of time. Separation and purification can account for anywhere from 30 to 80 percent of the cost of making monoclonal antibody-based drugs. Therefore, the Company 2 4 believes that purification of monoclonal antibody may represent a large opportunity for use of the Company's proprietary media, although there can be no assurance that companies producing monoclonal antibody-based drugs will use the Company's media in such production. PRODUCTS BioSepra has developed chromatographic media products and systems to enable biopharmaceutical companies to increase the productivity of their purification processes. The Company offers a line of chromatographic products (media, software, hardware and systems). The media products are based on both its recently developed HyperD media and established technologies. In late 1994, the Company introduced its ProSys Workstation and software. Pursuant to a strategic market alliance with Beckman Instruments, Inc. ("Beckman"), in 1996 BioSepra has introduced additional hardware and software products for the research market. HyperD Media In March 1993, the Company introduced its advanced HyperDiffusion Chromatography media, called HyperD media, which the Company believes can increase the productivity of many purification applications. The productivity of chromatographic media depends on both the capacity of the media to bind target biomolecules and the speed at which biomolecules can reach the binding sites. Conventional chromatography media, such as soft gels, have high binding capacity for target proteins, but are typically operated at relatively slow flow rates because the high pressures resulting from the attempt to increase flow rates would compress the soft media gels and impede or stop flow. While more rigid porous materials have been developed to overcome the compressibility of soft gels and thus facilitate higher flow rates, these rigid porous materials have typically been unable to bind as much protein as traditional gels. BioSepra's HyperD media combines the high protein binding capacity of soft gels with the higher flow advantages of rigid porous materials. The soft gel provides a high number of protein binding sites, while the rigid porous materials (or shell) enables the media to resist compression even as solution is flowing at high speeds. The media is therefore able to achieve rapid flow rates while maintaining a high level of protein binding capacity. The Company believes that HyperD media can, in many applications, significantly increase productivity. HyperD media is currently being used by several major pharmaceutical companies in production of biopharmaceuticals. HyperD media is produced in various particle sizes and with various hydrogel chemistries as required by specific applications. Chromatography chemistries currently offered by the Company include Q, S, CM and DEAE Ion Exchange, Protein 3 5 A, Basilen Blue, Heparin, Lysine and certain customized ligands. FDA Drug Master Files have been submitted on the Company's HyperD media products to assist the Company's customers in obtaining regulatory approval of production processes using HyperD media. The Company believes that the unique structure of BioSepra's HyperD chromatography media can enable companies to produce monoclonal antibody-based drugs faster and at higher purity and yield than they could using other products currently on the market. In 1996, BioSepra introduced a CM HyperD specifically designed for the purification of IgGs -- the largest class of monoclonal antibodies. The increased benefits of CM HyperD are due to targeted performance characteristics which will differentiate it from competitive protein purification products. BioSepra currently intends to reinforce the HyperD product line with the development of products specifically designed for the purification of various classes of monoclonal antibodies. There can be no assurance that such companies using HyperD media for the production of monoclonal antibody based drugs will be successful in producing such drugs or that additional companies will use HyperD media for such purpose in the future. In March 1995, the Company entered into a strategic marketing alliance with Beckman appointing Beckman as its exclusive distributor worldwide (except in Japan) of certain HyperD media in several sizes of prepacked columns for use in the research and method development markets. In 1996, the Company extended the agreement to include Japan and the non-exclusive distribution of additional media for use in the research and method development market. The Company believes that sales of its HyperD media products, which were introduced in 1993, have been adversely affected by, and may continue to be adversely affected by, pending patent litigation with PerSeptive Biosystems, Inc. ("PerSeptive"). See "Item 3. Legal Proceedings." Established Media Products The Company offers a line of established chromatographic media products, most of which were introduced in the 1980s. These products, which were developed for use primarily in the blood fractionation industry, currently account for a significant but declining percentage of the Company's sales. The Company plans to continue to sell these media products for use in existing commercial scale processes that use these products, as well as new applications that do not require the high bioprocessing performance of HyperD. The Company's established media products offer different capabilities for purifying specific target molecules based on molecular charge, molecular size, degree of hydrophobicity and binding affinity. The Company's products include the following: 4 6 Ultrogel(TM) Gel Filtration Media. These products are used in the separation of macromolecules such as immunoglobulins, interleukins and enzymes. Spherosil, Trisacryl(TM) and Spherodex(TM) Ion Exchange Media. These products are used in the purification of albumin from blood plasma and the fractionation of serum proteins; purification of growth factors, antibodies, glycoproteins, enzymes, and other cell products from cell culture and fermentations; separation of nucleotides and oligonucleotide mixtures including sugars, polynucleotides, amino acids and peptides. HA Ultrogel Adsorption Media. These are used for separation of human serum proteins, glycoproteins, nucleic acids and immunoglobulins. Protein A, Basilen Blue and Heparin Affinity Media. These products use ligands such as those used for the purification of growth factors, coagulation factors, fibronectin from fibroblasts or mammalian plasma, lipoproteins, and DNA and RNA polymerases. ProSys and BioSys Workstations In late 1994, the Company introduced its ProSys Workstation, a computer-controlled HPLC instrument that provides both computer-aided bioprocess engineering capabilities and automation of process experiments. The ProSys Workstation is controlled by the Company's ProSys RPD(TM) Software, which is designed to enable customers to optimize process parameters based on a small number of experiments and simulate the performance of alternative designs in a commercial environment to determine resulting process characteristics, equipment requirements and operating and capital costs. Traditionally, process development has required the laborious investigation of a large number of experimental parameters requiring long periods of time to test the performance of alternative purification processes. In addition, it is difficult to test whether a process designed for laboratory-scale purification will operate optimally at commercial-scale. The Company's ProSys Workstation is designed to be used early in the product development cycle to create effective production methods and guide process design engineers toward an optimal process for all levels of production. Using the ProSys Workstation, a customer is able to: - -- Automatically Perform Experiments. By enabling the customer to rapidly set-up and complete multiple experiments, the ProSys Workstation can decrease the time required to evaluate alternative chromatographic methods. - -- Determine Optimal Purification Methods. A typical production process involves several purification steps using different chromatographic 5 7 methods. The ProSys Workstation helps the user to determine the optimal methods for each purification step based on data generated from a relatively small number of chromatographic experiments. - -- Simulate Commercial-Scale Production. The ProSys RPD Software introduced in 1996 enables the user to simulate the operation of different process designs based on both operational and economic parameters. Through this simulation process, the user can simulate the performance of individual steps of a process in a commercial environment and determine the resulting operating costs, capital costs and process characteristics. - -- Clinical-Scale Production. The ProSys Workstation is capable of producing up to 250 grams of purified biopharmaceutical per day. Major hardware components, including the pumping modules, for the ProSys Workstation are purchased from a major supplier of HPLC equipment. In 1995, the Company entered into a long-term supply contract with such supplier. While the Company believes that alternative sources of supply for these components could be developed, the integration of the new components could require system design changes which could interrupt the Company's production and delivery of systems to customers. Accordingly, the Company's operating results could be materially and adversely affected if the Company were to incur an extended interruption in its current source of supply. As part of the strategic alliance established in March 1995 with Beckman, the Company developed the BioSys Workstation which is being marketed by Beckman in the research segment of the protein purification market. The BioSys Workstation is similar to the ProSys Workstation. But while the ProSys Workstation focuses on the needs of the process development market, the BioSys Workstation targets the research and method development market which is earlier in the drug development paradigm. Using the BioSys Workstation, a customer is able to automatically perform experiments and determine improved purification methods. The first BioSys Workstation production unit was delivered to Beckman in the first quarter of 1996 and Beckman started market introduction in the second quarter of 1996. Other Products The Company sells several chemical products used in biopharmaceutical research. The Company offers its proprietary UpScale(TM) Process columns designed for larger scale applications with volume capacities ranging from one to 130 liters of media. 6 8 The Company expects that sales of its historical line of chromatography bioprocessing products will not increase in 1997 and that the future success of its business will depend on market acceptance of the Company's more recent products, such as HyperD, the ProSys Workstation and the BioSys Workstation, in the faster growing Markets of the biopharmaceutical industry such as monoclonal antibodies. Additional growth may result from new products currently under development which tailor BioSepra's core chemistry and solid phase technology to the genomics markets and to some segments of the medical industry; however, there can be no assurance that such additional growth will occur or that such products will be developed or be commercially viable. COMPETITION The Company encounters intense competition in the sale of its current and future products. The Company's principal competitors are Pharmacia Biotech ("Pharmacia"), Bio-Rad, and PerSeptive. These competitors as well as other companies selling or developing products for the bioseparations market, have financial, marketing and other resources greater than those of the Company. In addition, certain competitors have had long-term relationships with many of the Company's existing and potential customers. Sales of chromatographic media products typically involve long lead times and customers generally evaluate several different media products before committing to a volume purchase. Also, customers typically are reluctant to change the media used in a production process previously approved by the FDA because such a change would require extensive validation and in certain cases would require additional FDA approval. For these reasons, the Company's success will depend in large part on its ability to sell its products to customers at the early stages of their product development cycles. There can be no assurance that the Company will be able to compete effectively against its existing or future competitors or that developments by others will not render BioSepra's product or technologies obsolete or noncompetitive. MARKETING AND SALES In 1996, the Company marketed its products to the biopharmaceutical industrial market through direct sales efforts in the United States and some parts of Europe and through distributors in other countries. The Company markets and sells its products through field sales representatives and distributors, supported by application specialists, product managers, and technical support/application development personnel in the Company's research and development department. Pursuant to the Company's agreement with Beckman, Beckman distributes worldwide certain HyperD media products and the BioSys Workstation. In 1994, 1995 and 1996, 58%, 60% and 47%, respectively, of the Company's sales were outside the United States. In 1994, 1995 and 1996, media and biochemicals accounted for 52%, 51% and 69%, respectively, of the Company's revenues. In 1996, 7 9 sales to two major biopharmaceutical companies accounted for approximately 25% and 13% of the Company's revenues, respectively. The loss of either or both of these customers could have a material adverse effect on the results of operations of the Company. RESEARCH AND DEVELOPMENT BioSepra's research and development group consists of 12 persons. The Company's research and development efforts are primarily dedicated to the development of chromatographic products to speed up and optimize process design and development and reduce production time and cost for biopharmaceutical drug development and manufacture with a specific focus on monoclonal antibodies and the genomics and gene therapy markets. During 1994, 1995 and 1996, the Company spent $3,383,000, $2,761,000 and $2,399,000, respectively, on research and development. GOVERNMENT REGULATION FDA and comparable foreign regulations pertain not only to health care products, but also to the processes and production facilities used to produce such products. Among the conditions for FDA approval of a biopharmaceutical is the requirement that the manufacturer's quality control and manufacturing processes conform to current Good Manufacturing Practices ("GMP"). BioSepra's customers are required to obtain the approval of the FDA and similar health authorities in foreign countries to test clinically and sell commercially pharmaceuticals for human use. Although the Company's products do not require FDA approval for sale, the FDA and comparable foreign authorities typically review the manufacturing procedures and inspect the facilities and equipment of the Company's customers for compliance with applicable rules and regulations. The Company's customers will often review and inspect the Company's manufacturing facilities prior to ordering products for use in an FDA-approved production process. The Company believes that its production and documentation procedures are consistent with GMP. Also, the Company files with the FDA Drug Master Files that facilitate the use by pharmaceutical companies of the Company's media for both clinical trial production and commercial production. In the production of a biopharmaceutical, any material change by a manufacturer of process or equipment traditionally necessitates additional FDA review and approval. Manufacturers are therefore typically reluctant to change production methods for existing products. For this reason, BioSepra is likely to encounter difficulties in selling its media products to customers which have already applied for or obtained FDA licenses for production processes that specify a different supplier's product. 8 10 New guidelines issued in 1996 by the FDA give biopharmaceutical companies greater flexibility to make changes in the production processes for certain classes of drugs, including monoclonal antibody-based drugs, and to continue optimization of their production processes subsequent to drug approval. In the past, a drug manufacturing process was "locked in" during clinical trials, prior to product approval. Companies were reluctant to make any process changes because the FDA would have required new clinical studies. Now, companies affected by these new guidelines need only demonstrate a product's biological equivalence to adopt process changes without new clinical trials. PATENTS AND PROPRIETARY RIGHTS BioSepra holds several patents and patent applications, including a United States composition of matter patent (and comparable foreign patent applications) on HyperD media. The Company's additional patents relate primarily to the composition of its other media products and certain biopharmaceutical production processes. There can be no assurance that any of the Company's issued patents will afford the Company any significant protection, that any pending patent applications will result in the issuance of patents or that competitors will not successfully challenge the Company's patents or circumvent the Company's patent position. The invalidation of key patents owned by BioSepra or the failure of patents to issue on pending applications could result in increased competition. The Company also relies on unpatented trade secrets and licensed technology. The Company has a royalty-free license to use certain of the simulation software be used in its ProSys Workstation. The patent positions of companies in the biopharmaceutical industry are highly uncertain, involve complex legal and factual questions and recently have been the subject of much litigation. A significant number of patents have been applied for by and issued to other companies in BioSepra's industry, and other companies may have filed applications for, may have been issued patents or may obtain additional patents and proprietary rights relating to products competitive with those of the Company. In addition, the Company's products may give rise to claims that they infringe on the products or proprietary rights of others. See "Item 3. Legal Proceedings." No assurance can be given that any license required under any such patents or rights would be made available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays in product market introductions while it attempts to design around such patents, or could find that the development, manufacture or sale of products requiring such licenses could be precluded. Litigation may be necessary to defend against or assert claims of infringement, to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to determine the scope and validity of the proprietary rights of others, and could result in substantial costs to and diversion of effort by, and may have a material adverse impact on, the Company. 9 11 EMPLOYEES As of March 1, 1997, the Company employed 59 persons, of whom 12 were primarily engaged in research and development activities, 17 in manufacturing, and the remainder in marketing, sales, administration and accounting. Of the 59 persons, 24 are located in the United States and 35 are in Europe. The Company's employees in the United States are not covered by a collective bargaining-agreement. In Europe, its employees are covered by the provisions of two agreements setting forth national guidelines and standards for labor relations in the chemical and metal industry. The Company considers its relations with its employees to be good. RELATIONSHIP WITH SEPRACOR Sepracor, which owns approximately 64% of the outstanding capital stock of the Company, is engaged in the business of using chiral chemistry to develop single- isomer forms of existing, widely-sold pharmaceuticals and to supply major pharmaceutical companies with bulk quantities of chiral intermediates. Under applicable provisions of the Delaware General Corporation Law, Sepracor will have the ability, acting alone, to approve any action requiring approval of the holders of a majority of the outstanding shares of Common Stock. Technology Transfer and License Agreement. The Company and Sepracor entered into a Technology Transfer and License Agreement (the "Technology Transfer Agreement") pursuant to which Sepracor transferred to the Company all technology owned or controlled by Sepracor, including trade secrets, patents and patent applications, that relates to and is used in researching, developing or manufacturing products in the "Company Field." The Company Field means generally the separation of biological molecules. Further, Sepracor has granted an exclusive license to the Company for any improvements to the transferred technology useful in the Company Field which are developed, or otherwise acquired, by Sepracor during the period beginning on the date of the Technology Transfer Agreement and terminating on the earlier of January 1, 1998 or the acquisition of Sepracor or the Company (the "Effective Period"). The Company has granted to Sepracor an exclusive license to the transferred technology for the development, manufacture, use or sale of any products within the field of chiral synthesis, chiral separations and the development, manufacture, use or sale of chiral drugs and chiral drug intermediates (the "Sepracor Field"), as well as a non-exclusive license to the transferred technology for the development, manufacture, use or sale of any products outside the Company Field. All licenses are royalty-free. Sepracor has also granted the Company a right of first refusal to any product which Sepracor proposes to sell, or license a third party to sell, during the Effective Period, for use within the Company Field. 10 12 Cross-License Agreement. The Company has entered into a Cross License Agreement (the "Cross License Agreement"), dated as of January 1, 1994 with HemaSure Inc. ("HemaSure"), a subsidiary of Sepracor. Under the terms of the Cross License Agreement, HemaSure and the Company have each granted to the other a perpetual, royalty-free and non-exclusive right and license to technology and improvements owned or controlled by the licensing party for use in the HemaSure Field or Company Field as the case may be. The HemaSure Field comprises the development, manufacture, use or sale of medical devices for the purification of blood, blood products or blood components and membrane filter design. The Cross License Agreement will terminate on the earlier of January 1, 1998 or the acquisition of all or substantially all of the business or assets, by merger, sale of assets or otherwise, of either the Company or HemaSure. Corporate Services Agreement. The Company and Sepracor entered into a one-year Corporate Services Agreement which provides for a monthly fee to be paid by the Company for basic services, such as accounting, human resources support services, data processing and laboratory support services provided by Sepracor. This fee was determined by estimating Sepracor's cost of the Company's expected usage of such basic services. The Company may purchase additional services from Sepracor for a fixed rate based on the number of hours spent by each Sepracor employee providing such services. For items with identifiable costs such as insurance coverage, Sepracor charges the Company based upon costs directly attributable to the Company. Management believes that the charges under the Corporate Services Agreement are reasonable and that the terms of the Corporate Services Agreement are at least as favorable to the Company as the terms that could be obtained from an unaffiliated third party. This Agreement had an initial term of one year and has been extended by the Company for [three] additional one-year terms. Sepracor retains the right to decline to provide any services which cause an unreasonable burden to Sepracor. The Agreement permits the Company to terminate at any time following 60 days' notice to Sepracor, and automatically terminates six months after Sepracor's ownership percentage of the Company decreases to less than 50% of the Company's issued and outstanding shares. The aggregate payments made by the Company to Sepracor for basic services under this Agreement were $197,000 in 1995, 208,000 in 1996 and are expected to be approximately $208,000 in 1997. Sublease Agreements. Sepracor has entered into a Sublease Agreement with the Company under which Sepracor subleases a portion of its facilities in Marlborough, Massachusetts to the Company. The amount payable to Sepracor under the Sublease Agreement is equal to Sepracor's rental costs under its lease allocable to the portion of the premises subleased to the Company plus a pro rata allocation of the estimated facility maintenance, utilities and other operating costs. The rental payment made by the Company under this Agreement was approximately $77,000 in 1995 and $72,000 in 1996, exclusive of operating costs and is estimated to be approximately $75,000 in 1997. 11 13 Registration Rights. Sepracor has certain registration rights with respect to its shares in the Company as provided in the Technology Transfer Agreement. Loan Agreement. On March 29, 1996, the Company issued a Convertible Subordinated Note due March 2000 (the "Note") to Sepracor providing for the borrowing by BioSepra from Sepracor of up to $5,500,000 (the "Loans") at an interest rate of 7%. The Loans, including any accrued interest thereon, were convertible into shares of the Company's Common Stock, $.01 par value ("Common Stock"), at the option of Sepracor at any time prior to repayment. Since March 29, 1996, an aggregate of $5,500,000 was borrowed under the Note. On June 10, 1996, Sepracor converted the outstanding principal, plus accrued interest, of the Loans into an aggregate of 1,369,788 shares of the Company's Common Stock. As a result of the conversion of the Note, Sepracor's ownership of the Company's outstanding Common Stock increased from approximately 58% to approximately 64%. Promissory Note. In January 1996, the Company entered into a Promissory Note for $350,000, or so much of such sum as shall have been advanced by Sepracor. This amount is payable to Sepracor over sixty monthly installments and does not bear interest. All future arrangements and transactions between the Company and Sepracor will continue to be on terms which the Company determines are fair and reasonable to the Company. Item 2. PROPERTIES BioSepra's facilities are located in Marlborough, Massachusetts and Villeneuve-la-Garenne, France. In Massachusetts, the Company subleases approximately 13,000 square feet of office, laboratory and assembly space from Sepracor. In Villeneuve-la-Garenne, France, the Company leases approximately 28,500 square feet of office, laboratory and manufacturing space. Of the total, approximately 20,440 square feet are used for manufacturing operations, and the balance is used for research and development and administration. The lease charges at the Massachusetts facility are equal to a pro rata portion of Sepracor's costs, including maintenance, utilities and other operating costs based upon square footage occupied. At its facility in Villeneuve-la-Garenne, France, the Company produces its chromatographic media. The plant is currently operating at approximately one-half of full capacity, and, therefore, the Company has the capability to expand production as product sales increase. ProSys and BioSys Workstations are designed and assembled in the Company's Marlborough, Massachusetts facility. The Marlborough facility is currently operating at 60% capacity and, therefore, the Company has the capability to expand production to the extent product sales increase in the future. 12 14 Item 3. LEGAL PROCEEDINGS BioSepra and Sepracor are defendants in three lawsuits brought by PerSeptive Biosystems, Inc. ("PerSeptive"), a competitor of BioSepra, in the United States District Court for the District of Massachusetts. In actions commenced in October 1993 and January 1995, PerSeptive has alleged that BioSepra's and Sepracor's manufacture and sale of HyperD(TM) chromatography media infringe four of PerSeptive's United States patents. PerSeptive is seeking unspecified monetary damages as well as injunctive relief. In a separate action, PerSeptive has alleged that certain statements made by BioSepra and Sepracor with respect to the performance of HyperD media, performance of PerSeptive's POROS(R) media, and the internal structures of POROS and HyperD media, including statements made in BioSepra's Prospectus dated March 24, 1994, constitute false advertising. PerSeptive also asserts that an additional perfusion chromatography patent has been allowed, and that another patent related to perfusion chromatography has been issued. The new perfusion chromatography patent contains claims similar to the other patents BioSepra and Sepracor are alleged to have infringed. The Company has received an opinion of its patent counsel, Pennie & Edmonds, to the effect that a properly informed court should conclude the manufacture, use and/or sale by BioSepra or its customers of the present HyperD products do not infringe any valid claims of the three U.S. patents held by PerSeptive relating to "perfusion chromatography." PerSeptive has not formally claimed that the present HyperD products infringe the fourth perfusion patent. Allegations have also been made that another U.S. patent which relates to the chemistry of certain coatings applied during the manufacture of HyperD (the "coatings patent"), is infringed by the manufacture, sale or use of HyperD. BioSepra and Sepracor have asserted a counterclaim charging PerSeptive with unfair competition. On January 9, 1996, the United States District Court for the District of Massachusetts in part granted BioSepra's and Sepracor's request for summary judgment with respect to three of PerSeptive's patents concerning "Perfusion Chromatography" (the "January 9 Order"). The Court ruled that persons in addition to those named in the "perfusion" patents were inventors of the alleged inventions claimed in those patents. This ruling may ultimately dispose of PerSeptive's claims concerning the "perfusion" patents, depending on the Court's resolution of PerSeptive's effort to correct the patents and the outcome on appeal by PerSeptive of the January 9 Order or appeal by any party of any ruling regarding correction of inventorship. In its January 9 Order, the Court ruled that PerSeptive's claims related to the three "perfusion" patents would be dismissed on January 19, 1996, if PerSeptive had not requested correction of inventorship by that date. The Court postponed this deadline pending its ruling on PerSeptive's request for certification of an immediate appeal of the January 9 Order to the United States Court of Appeals for the Federal Circuit. On March 12, 1996, the Court denied PerSeptive's motion for immediate 13 15 appeal and scheduled a hearing on deceptive intent on the part of PerSeptive, if PerSeptive moved to correct inventorship (the "March 12 Order"). The Court required PerSeptive to make any motion to correct by March 31, 1996. In response, PerSeptive requested that the Court vacate its January 9 and March 12 Orders, or in the alternative, correct the patents in such a way that the presently unnamed inventors obtained no rights to license the patents. The Court denied PerSeptive's motion to vacate and scheduled a hearing on PerSeptive's motion to correct the patents which was completed in August 1996. The District Court has not rendered a decision based on the August hearing. According to the January 9 and March 12 Orders, PerSeptive could correct inventorship if it bears the burden of proving that its initial designation of inventors was done without deceptive intent. PerSeptive has asserted that no motion to correct need be filed, and that BioSepra and Sepracor bear the burden of proving deceptive intent. PerSeptive also asserts that the unnamed inventors should not be added to the patents or given any right to license the patents, and that as a matter of law they did not err in not naming the two unnamed inventors, and did not name inventors with deceptive intent. BioSepra and Sepracor contend that if PerSeptive is able to correct inventorship, the presently unnamed inventors would have independent rights to license the "perfusion" patents unless the Court ruled that the unnamed inventors are not entitled to such rights. If inventorship could not be corrected, the "perfusion" patents would be held invalid, subject to appeal by PerSeptive. A decision by the District Court to correct inventorship, or preventing the unnamed inventors from licensing the "perfusion" patents, would be subject to appeal by any party. PerSeptive could appeal any decision invalidating the patents for willful misdesignation of inventors. There can be no assurance that BioSepra will prevail in the pending litigation, and an adverse outcome in any of the patent infringement actions on any of the chromatography patents would have a materially adverse effect on the Company's future business and operations. The Company would be required to repay to Beckman part of certain payments if the Company terminates Beckman's right to use and sell HyperD media because a court finds HyperD media infringes any third party patents. Substantial funds have been and continue to be expended in connection with the defense of the litigation. Sepracor has agreed to control the defense of the litigation, and Sepracor and BioSepra share equally in expenses, net of insurance payments. In addition, in the event of any settlement or judgment adverse to BioSepra, Sepracor has agreed to indemnify BioSepra from and against any damages that BioSepra is required to pay with respect to its manufacture, use or sale of HyperD media products occurring prior to March 24, 1994. 14 16 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 solicitation of proxies or otherwise, during the last quarter of the year ended December 31, 1996. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the names, ages and positions of the executive officers of the Company.
Name Age Position ---- --- -------- Jean-Marie Vogel 46 President, Chief Executive Officer and Director James A. Prendergast 56 Executive Vice President Egisto Boschetti, Ph.D. 51 Senior Vice President and Chief Scientific Officer Therese Bourdy 46 Vice President of Media Operations Gary G. Gaudet 49 Vice President, Sales and Marketing
- -------------------- Mr. Vogel has served as President, Chief Executive Officer and a director of the Company since September 1994. From January 1994 to August 1994, Mr. Vogel has served as Executive Vice President and Chief Operating Officer of the Company. From 1992 to 1993, Mr. Vogel served as President of the European Operation of Cuno, Inc., a supplier of filtration processes, equipment and devices used in the production of biological drugs and food products. From 1977 to 1992, Mr. Vogel served in various capacities with Millipore Corporation ("Millipore"), a manufacturer of membrane filtration-based products, in its international operations with experience in Asia, Latin America, the former Soviet Union, the Middle East and Australia. Most recently, Mr. Vogel served as Vice President and General Manager of Millipore's Asian Operations. Mr. Vogel is a French citizen. Mr. Prendergast has served as Executive Vice President of the Company since January 1997. From 1991 to 1997 he served as Vice President, World-Wide Sales, Marketing and Service Operations for CEM Corp., a manufacturer of microwave instrumentation in the chemical, food and pharmaceutical markets. From 1971 to 1991, Mr. Prendergast served in a number of positions at Millipore/Waters, a manufacturer of membrane liquid chromatography products, including service as 15 17 President of its Intertech Division and as President of Millipore/Waters Canada, a subsidiary of Millipore/Waters. Dr. Boschetti has served as Senior Vice President and Chief Scientific Officer of the Company since January 1997 and served as Vice President and Chief Scientific Officer from January 1994 to January 1997. From June 1991 to January 1994, Dr. Boschetti served as Vice President of Research and Development and Technical Operations -- Sepracor Europe. From 1986 until 1991, Dr. Boschetti was Vice President of R&D and Technical Director of IBF. Dr. Boschetti has been associated with IBF and its predecessor, Pointet-Girard S.A. for 20 years. Dr. Boschetti has published over 130 articles in international scientific journals and is a member of the editorial board of Preparative Chromatography. Dr. Boschetti is Vice Chairman of the Biotechnology Commission of the French Ministry of Research and is a French citizen. Ms. Bourdy has served as Vice President of Media Operations of the Company since January 1997 and served as General Manager and Director of Operations, BioSepra S.A. from August 1995 to January 1997. From 1992 to 1995, Ms. Bourdy served as Quality Assurance, Operations and Marketing manager for Cuno, Inc., a supplier of filtration processes, equipment and devices used in the production of biological drugs and food products. From 1991 to 1992, Ms. Bourdy was an independent consultant. From 1983 to 1991, Ms. Bourdy served in various operational positions with National Fractionation Center France, a bioprocessing company focusing on blood products. From 1974 to 1983, Ms. Bourdy served in various capacities with Millipore, a manufacturer of membrane filtration-based products, in its pharmaceutical, agrofood and water treatment divisions. Mr. Gaudet has served as Vice President, Sales and Marketing of the Company since June 1995. From January 1995 to May 1995, Mr. Gaudet served as a Business Manager, Process Chromatography of the Company. From March 1994 to January 1995, Mr. Gaudet served as National Marketing Manager for Buss Process Technologies, a supplier of process equipment and plants to the fine chemical, polymer, food and pharmaceutical industries in North America. From April 1992 to March 1994, Mr. Gaudet served as Corporate Sales Manager for CompUSA, a retail supplier of computer products. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock of BioSepra Inc. has been traded on the Nasdaq National Market under the symbol BSEP since March 25, 1994. On March 26, 1997, the last reported sale price of the Company's Common Stock on the Nasdaq Stock Market was $3.375. Prior to March 25, 1994, the Company's Common Stock was not publicly traded. The following table sets forth 16 18 for the periods indicated the high and low sales prices per share of the Common Stock as reported by the Nasdaq National Market for the last two fiscal years.
1995 ---- High Low ---- --- First Quarter .................................. $4 7/8 $3 1/4 (January 1 through March 31, 1995) Second Quarter ................................. $4 5/8 $2 3/4 (ended June 30, 1995) Third Quarter .................................. $6 7/8 $3 3/4 (ended September 30, 1995) Fourth Quarter ................................. $5 3/4 $3 (ended December 31, 1995)
1996 ---- First Quarter .................................. $6 $3 3/8 (January 1 through March 31, 1996) Second Quarter ................................. $5 11/16 $3 5/8 (April 1 though June 30, 1996) Third Quarter .................................. $4 1/8 $2 1/2 (July 1 through September 30, 1996) Fourth Quarter ................................. $3 5/8 $2 9/16 (October 1 through December 31, 1996)
On March 14, 1997, the Company had approximately 41 stockholders of record. The Company believes that the number of record holders is not representative of the number of beneficial holders because many shares are held by depositaries, brokers or other nominees. The Company has never paid dividends on its Common Stock. The Company currently intends to reinvest its earnings, if any, for use in the business and does not expect to pay cash dividends in the foreseeable future. Item 6. SELECTED FINANCIAL DATA Incorporated by reference from the Company's 1996 Annual Report to Stockholders under the heading "Selected Financial Data." 17 19 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the Company's 1996 Annual Report to Stockholders under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements filed as part of this Annual Report on Form 10-K are listed under Item 14 below and are incorporated by reference from the Company's 1996 Annual Report to Stockholders. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On January 26, 1996, the Company, upon the recommendation of its Audit Committee and the approval of its Board of Directors, determined that it would dismiss Coopers & Lybrand L.L.P. as its principal accountant and retain Arthur Andersen LLP as its principal accountant, effective upon completion of the audit by Coopers & Lybrand L.L.P. of the Company's financial statements for the fiscal year ended December 31, 1995 (the "1995 Audit"). The determination to dismiss Coopers & Lybrand L.L.P. was made because Coopers & Lybrand L.L.P. agreed to serve as independent accountants for PerSeptive Biosystems, Inc., a competitor of the Company. The Company had no disagreement with Arthur Andersen L.L.P. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure in connection with the audits of the Company's financial statements for the fiscal year ended December 31, 1996. The Company had no disagreement with Coopers & Lybrand L.L.P. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure in connection with the audits of the Company's financial statements for the fiscal years ended December 31, 1995 and December 31, 1994. Coopers & Lybrand L.L.P.'s reports on the Company's financial statements for the fiscal years ended December 31, 1995 and December 31, 1994 did not contain any adverse opinion or a disclaimer of an opinion nor were they qualified as to uncertainty, audit scope, or accounting principles. 18 20 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 1997 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", 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 of the Registrant." 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 or are incorporated by reference from the Company's 1996 Annual Report to Stockholders.
Page ---- 1. The following financial statements (and related notes) of the Company are incorporated by reference from the Company's 1996 Annual Report to Stockholders. Report of Arthur Andersen, LLP, Independent Public Accountants on Financial Statements F-11* Consolidated Balance Sheets at December 31, 1996 and 1995 F-12* Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994. F-13* Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994. F-14* Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994. F-15* Notes to Consolidated Financial Statements. F-16*
19 21 *Refers to page number of 1996 Annual Report to Stockholders 2. The Report of Coopers & Lybrand L.L.P., Independent Accountants, is filed as part of this Annual Report on Form 10-K. 3. The Schedule listed below and the Reports of Independent Accountants on financial statement schedules are filed as part of this Annual Report on 10-K. Reports of Independent Public Accountants on Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 4. 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. 5. 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) No Current Reports on Form 8-K were filed by the Company during the last quarter of the period covered by this report. The following trademarks are mentioned in this Annual Report on Form 10-K: HyperD, ProSys, Rational Process Design, RPD, Trisacryl, Spherodex, Ultrogel and UpScale are trademarks of the Company. Perfusion Chromatography and POROS are trademarks of PerSeptive Biosystems, Inc. 20 22 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of BioSepra Inc.: We have audited the accompanying consolidated balance sheet of BioSepra Inc. as of December 31, 1995 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1995. 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 generally accepted auditing standards. 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 consolidated financial position of BioSepra Inc. as of December 31, 1995, and the consolidated results of its operations and cash flows for each of the two years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand LLP Boston, Massachusetts February 27, 1996, except as to information contained in the fourth paragraph of Note H and the seventh paragraph of Note C for which the date is March 29, 1996. 21 23 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Shareholders of BioSepra Inc. and subsidiaries: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements of BioSepra Inc. and subsidiaries and have issued our report thereon dated January 29, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statement taken as a whole. The schedule listed in Item 14(a)2 herein is the responsibility of the Company's managements and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein, in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Boston, Massachusetts January 29, 1997 22 24 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Shareholders of BioSepra Inc.: Our report on the consolidated financial statements of BioSepra Inc. as of December 31, 1995 and for each of the two years in the period then ended has been included in this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statements schedule listed in Item 14(a) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information required to be included therein. /s/ Coopers & Lybrand LLP Boston, Massachusetts February 27, 1996, except as to information contained in the fourth paragraph of Note H and the seventh paragraph of Note C, for which the date is March 29, 1996 23 25 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS (2) PERIOD ----------- --------- -------- ------------ -------------- ------ Year ended December 31, 1996 Allowance for doubtful accounts $92,000 $142,000 $ (1,000) $233,000 Year ended December 31, 1995 Allowance for doubtful accounts $61,000 $269,000 $(214,000) $(24,000) $ 92,000 Year ended December 31, 1994 Allowance for doubtful accounts $ 6,000 $ 61,000 $ (6,000) $ 61,000
(1) These amounts relate to changes in the translation rate of the Company's international subsidiary. (2) Collections and bad debt write-offs. 24 26 SIGNATURES Pursuant to the requirements of the 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 on the 28th day of March, 1997. BIOSEPRA INC. By: /s/ Jean-Marie Vogel --------------------------- Jean-Marie Vogel, President and Chief Executive Officer 25 27 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/ Jean-Marie Vogel - ----------------------------------- President, Chief Executive ) Jean-Marie Vogel Officer and Director ) (Principal Executive ) and Financial Officer) ) ) /s/ Peter Castellanos ) - ----------------------------------- Director of Finance ) Peter Castellanos (Principal Accounting ) Officer) ) ) /s/ Timothy J. Barberich ) - ----------------------------------- Director ) Timothy J. Barberich ) March 28, 1997 ) ) /s/ William M. Cousins, Jr. ) - ----------------------------------- Director ) William M. Cousins, Jr. ) ) ) /s/ Alexander M. Klibanov, Ph.D. ) - ----------------------------------- Director ) Alexander M. Klibanov, Ph.D. ) ) ) - ----------------------------------- Director ) Paul A. Looney ) ) ) - ----------------------------------- Director ) William E. Rich, Ph.D. ) ) ) /s/ Riccardo Pigliucci ) - ----------------------------------- Director ) Riccardo Pigliucci ) ) ) /s/ David P. Southwell ) - ----------------------------------- Director ) David P. Southwell )
26 28
Exhibit Index ------------- The following exhibits are filed as part of this Annual Report on Form 10-K. Exhibit No. Description - ----------- ----------- 3.1* -- Certificate of Incorporation, as amended, of the Company. 3.2* -- By-Laws of the Company. 4* -- Specimen Certificate for shares of Common Stock, $.01 par value, of the Company. (1) 10.1* -- 1994 Stock Option Plan. (1) 10.2* -- 1994 Director Option Plan. 10.3* -- Form of Technology Transfer and License Agreement dated as of January 1, 1994 between the Company and Sepracor Inc. 10.4* -- Form of Corporate Services Agreement dated as of January 1, 1994 between the Company and Sepracor Inc. 10.5* -- Form of Cross License Agreement dated as of January 1, 1994, between the Company and HemaSure Inc. 10.6* -- Service Contract dated June 28, 1991 between IBF and Rhne-Poulenc Rorer Principes Actifs (translated from French). 10.7* -- Contract for Supply of Spherosil Media dated May 22, 1991 between IBF and Pasteur Mrieux Srums et Vaccins (translated from French). 10.8* -- Agreement for the Purchase and Supply of Silica Media dated June 27, 1991 between IBF and Societe Franaise des Produits pour Catalyse, S.A.
27 29
(translated from French). 10.9** -- Sale of Shares Contract by and among the stockholders of Biopass, S.A. listed therein and BioSepra S.A. (includes original document in French, together with English language translation). 10.10***+ -- Distribution Agreement dated March 14, 1995 between the Company and Beckman Instruments, Inc. 10.11 -- Amended and Restated Revolving Credit and Security Agreement by and between Fleet National Bank and the Company dated as of December 31, 1996. 10.12*** -- Intellectual Property Security Agreement by and between Fleet Bank of Massachusetts, N.A. and the Company dated December 28, 1994. 10.13*** -- Sub-Sublease dated December 12, 1995 by and between Sepracor Inc. and the Company. 10.14*** -- Sublease dated January 1, 1996 by and between Sepracor Inc. and the Company. 10.15*** -- Promissory Note dated January 1, 1996 made in favor of Sepracor Inc. by the Company. 10.16 -- Confirmation of and Amendment to Intellectual Property Security Agreement by and between Fleet National Bank and the Company dated as of December 31, 1996. 11 -- Statement regarding computation of earnings per share. 13 -- 1996 Annual Report to Stockholders (which shall be deemed filed only with respect to those portions specifically incorporated by reference herein). 21 -- Subsidiaries of the Company.
28 30
23.1 -- Consent of Coopers & Lybrand L.L.P. 23.2 -- Consent of Arthur Andersen LLP 27 -- Financial Data Schedule
- -------------------- (1) Management contract or compensatory plan or arrangement filed as an exhibit to this Form pursuant to Items 14(a) and 14(c) of Form 10-K. * Incorporated herein by reference to the Company's Registration Statement on Form S-1, as amended (File No. 33-75212). ** Incorporated herein by reference to the Company's 8-K filed on September 30, 1994. *** Incorporated herein by reference to the Company's 10-K for the year ended December 31, 1994. + Confidential treatment requested as to certain portions. 29 EX-10.11 2 AMENDED REVOLVING CREDIT AND SECURITY AGREEMENT 1 EXHIBIT 10.11 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT BETWEEN FLEET NATIONAL BANK AND BIOSEPRA INC. ------------------------------------------------ Dated as of December 31, 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS Title ----- Section Page - ------- ---- SECTION 1. ---------- DEFINITIONS ----------- 1.1. Definitions........................................................ 1 ----------- 1.2. Accounting Terms................................................... 9 ---------------- SECTION 2. ---------- DESCRIPTION OF CREDIT --------------------- 2.1. The Revolving Loans................................................ 10 ------------------- 2.2. Commitment Fee..................................................... 10 -------------- 2.3. Reduction of Revolving Commitment Amount........................... 11 ---------------------------------------- 2.4. The Note........................................................... 11 -------- 2.5. Capital Requirements............................................... 11 -------------------- 2.6. Payments and Prepayments of the Revolving Loans.................... 11 ----------------------------------------------- 2.7. Method of Payment.................................................. 12 ----------------- 2.8. Overdue Payments................................................... 12 ---------------- 2.9. Holidays........................................................... 12 -------- 2.10. Interest........................................................... 12 -------- 2.11. Certain LIBOR Provisions........................................... 13 ------------------------ 2.12. Conditions for Basing Interest on the Libor Rate................... 15 ------------------------------------------------ 2.13. Indemnification for Funding and Other Losses....................... 15 -------------------------------------------- 2.14. Change in Applicable Laws, Regulations, etc........................ 16 ------------------------------------------- 2.15. Taxes.............................................................. 16 ----- 2.16. Foreign Exchange Facility.......................................... 16 ------------------------- SECTION 3. ---------- CONDITIONS OF LOANS ------------------- 3.1. Conditions Precedent to Initial Revolving Loan..................... 17 ---------------------------------------------- 3.2. Conditions Precedent to all Revolving Loans........................ 18 ------------------------------------------- 3.3. Conditions Precedent to each Transaction under Foreign Exchange --------------------------------------------------------------- Facility -------- SECTION 4. ---------- 3 Section Page - ------- ---- REPRESENTATIONS AND WARRANTIES ------------------------------ 4.1. Organization and Qualification...................................... 19 ------------------------------ 4.2. Corporate Authority................................................. 19 ------------------- 4.3. Valid Obligations................................................... 20 ----------------- 4.4. Consents or Approvals............................................... 20 --------------------- 4.5. Title to Properties; Absence of Encumbrances........................ 20 -------------------------------------------- 4.6. Financial Statements................................................ 20 -------------------- 4.7. Changes............................................................. 20 ------- 4.8. Defaults............................................................ 21 -------- 4.9. Taxes............................................................... 21 ----- 4.10. Material Agreements................................................. 21 ------------------- 4.11. Material Licenses................................................... 21 ----------------- 4.12. Litigation.......................................................... 21 ---------- 4.13. Use of Proceeds..................................................... 21 --------------- 4.14. Existing Indebtedness............................................... 21 --------------------- 4.15. Existing Investments................................................ 21 -------------------- 4.16. Subsidiaries........................................................ 22 ------------ 4.17. Investment Company Act.............................................. 22 ---------------------- 4.18. Compliance With Erisa............................................... 22 --------------------- 4.19. Fda Compliance, Etc................................................. 22 ------------------- 4.20. Environmental Matters............................................... 22 --------------------- SECTION 5. ---------- AFFIRMATIVE COVENANTS --------------------- 5.1. Financial Statements and other Reporting Requirements............... 24 ----------------------------------------------------- 5.2. Conduct of Business................................................. 25 ------------------- 5.3. Maintenance and Insurance........................................... 25 ------------------------- 5.4. Taxes............................................................... 26 ----- 5.5. Inspection by the Bank.............................................. 26 ---------------------- 5.6. Maintenance of Books and Records.................................... 27 -------------------------------- 5.7. Maintenance of Accounts............................................. 27 ----------------------- 5.8. New Accounts and Investments........................................ 27 ---------------------------- 5.9. Minimum Consolidated Tangible Capital Base.......................... 27 ------------------------------------------ 5.10. Minimum Cash or Equivalents......................................... 27 --------------------------- 5.11. Further Assurances.................................................. 27 ------------------ SECTION 6. ---------- NEGATIVE COVENANTS ------------------ 6.1. Indebtedness........................................................ 27 ------------ ii 4 Section Page - ------- ---- 6.2. Contingent Liabilities.............................................. 28 ---------------------- 6.3. Sale and Leaseback.................................................. 28 ------------------ 6.4. Encumbrances........................................................ 28 ------------ 6.5. Lines of Business................................................... 29 ----------------- 6.6. Merger; Consolidation; Sale or Lease of Assets...................... 29 ---------------------------------------------- 6.7. Additional Stock Issuance........................................... 29 ------------------------- 6.8. Restricted Payments................................................. 29 ------------------- 6.9. Transactions with Affiliates........................................ 30 ---------------------------- 6.10. Investments......................................................... 30 ----------- 6.11. Erisa............................................................... 30 ----- 6.12. Observance of Subordination Provisions, etc......................... 30 ------------------------------------------- SECTION 7. ---------- SECURITY -------- 7.1. Security Interest................................................... 31 ----------------- 7.2. Location of Records and Collateral; Name Change..................... 32 ----------------------------------------------- 7.3. Status of Collateral................................................ 32 -------------------- SECTION 8. ---------- DEFAULTS -------- 8.1. Events of Default................................................... 32 ----------------- 8.2. Remedies............................................................ 34 -------- SECTION 9. ---------- MISCELLANEOUS ------------- 9.1. Notices............................................................. 36 ------- 9.2. Expenses............................................................ 37 -------- 9.3. Set-off............................................................. 37 ------- 9.4. Term of Agreement................................................... 37 ----------------- 9.5. No Waivers.......................................................... 37 ---------- 9.6. Governing Law; Jurisdiction......................................... 37 --------------------------- 9.7. Amendments.......................................................... 38 ---------- 9.8. Binding Effect of Agreement;assignments; Participations............. 38 ------------------------------------------------------- 9.9. Amendment and Termination Of Prior Loan Agreement................... 39 ------------------------------------------------- 9.10. Currency Conversion................................................. 39 ------------------- 9.11. Counterparts........................................................ 39 ------------ 9.12. Partial Invalidity.................................................. 39 ------------------ 9.13. Captions............................................................ 39 -------- iii 5 Section Page - ------- ---- 9.14. Waiver of Jury Trial................................................ 39 -------------------- 9.15. Entire Agreement.................................................... 40 ---------------- EXHIBITS AND SCHEDULES Exhibit A Amended and Restated Promissory Note Exhibit B Compliance Certificate Schedule 4.10 Material Agreements Schedule 4.11 Material Licenses Schedule 4.12 Litigation Schedule 4.15 Investments Schedule 4.16 Subsidiaries Schedule 6.1 Indebtedness Schedule 6.2 Guarantees Schedule 6.4 Encumbrances iv 6 AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT Dated as of December 31, 1996 THIS AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT is made as of December 31, 1996, by and between BIOSEPRA INC., a Delaware corporation having its chief executive office at 111 Locke Drive, Marlborough, Massachusetts 01752, (the "COMPANY") and FLEET NATIONAL BANK (the "BANK"), formerly known as Fleet National Bank of Connecticut, successor by merger to Fleet Bank of Massachusetts, N.A., and having its office at 75 State Street, Boston, Massachusetts 02109. This Agreement amends, restates and supersedes the Revolving Credit and Security Agreement dated as of December 28, 1994 as amended to date (the "PRIOR CREDIT AGREEMENT") by and among the Company, Biosepra S.A., a wholly-owned Subsidiary of the Company ("BSA"), and Fleet Bank of Massachusetts, N.A., pursuant to which the Bank agreed to establish a Revolving Line of Credit and make Revolving Credit Loans (the "PRIOR LOANS") in an aggregate principal amount at any time outstanding not in excess of the Available Aggregate Revolving Commitment (as defined in the Prior Credit Agreement). NOW, THEREFORE, the parties hereby agree as follows: SECTION 1. ---------- DEFINITIONS ----------- 1.1. DEFINITIONS. All capitalized terms used in this Agreement or in the Note or in any certificate, report or other document made or delivered pursuant to this Agreement (unless otherwise defined therein) shall have the meanings assigned to them below: ACCOUNT AND ACCOUNT RECEIVABLE. Include all rights to payment for goods sold or leased or for services rendered, all sums of money or other proceeds due or becoming due thereon, all instruments pertaining thereto, all guaranties and security therefor, and all goods giving rise thereto and the rights pertaining to such goods, including the right of stoppage in transit, and all related insurance. AFFILIATE. As applied to any Person, a spouse or relative of such Person, any member, director or officer of such Person, any corporation, association, firm or other entity of which such Person is a member, director or officer, and any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. AGREEMENT. This Amended and Restated Revolving Credit and Security Agreement, as the same may be supplemented, amended or restated from time to time. 7 ALTERNATIVE CURRENCY. The lawful currency of a foreign country which may be established as an alternate currency by mutual agreement entered into between the Bank and the Company hereafter as confirmed in writing, so long as any such currency is freely transferable, convertible into Dollars and traded on the inter-bank currency deposits market in which the Bank customarily funds foreign currency loans. ALTERNATIVE CURRENCY COMMITMENT. A commitment, to the extent mutually agreed by the Bank and the Company, for (i) the exchange, for future delivery, of an Alternative Currency into Dollars or Dollars into an Alternative Currency or (ii) the purchase, for future delivery, of an Alternative Currency with Dollars or Dollars with an Alternative Currency, in accordance with the Bank's prevailing customs and practices; PROVIDED, that the aggregate Exchange Contract Amount with respect to all such Alternative Currency Commitments shall not exceed the Foreign Exchange Facility Sublimit. ALTERNATIVE CURRENCY EQUIVALENT. The amount in Alternative Currency of Dollars at the quoted spot rate at which the Bank's principal office in the United States offers to exchange such Alternative Currency for Dollars at 11:00 a.m (Boston time) two (2) Business Days prior to the date on which such equivalent is determined. AUTHORIZED OFFICER. The president, chief financial officer or treasurer of the Company. AVAILABLE AGGREGATE REVOLVING COMMITMENT. The excess, if any, of (1) the Revolving Commitment Amount MINUS (2) the excess of (a) the sum of (i) the aggregate principal amounts of revolving loans outstanding under the Sepracor Credit Agreement plus (ii) the sum of the Exchange Contract Amount of the Company and the Exchange Contract Amount of Sepracor (as defined in Sepracor Credit Agreement) MINUS (b) $4,000,000. BANK. See Preamble. BASE ACCOUNTS. Accounts Receivable of the Company as to which the Bank has a perfected first security interest. COMPANY. See Preamble. BUSINESS DAY. Any day other than a Saturday, Sunday or legal holiday on which banks in Boston, Massachusetts are open for the conduct of a substantial part of their commercial banking business. CAPITAL EXPENDITURE. Any payment made directly or indirectly for the purpose of acquiring or constructing fixed assets, real property or equipment which in accordance with GAAP would be added as a debit to the fixed asset account of the Person making such expenditure, including, without limitation, amounts paid or payable under any conditional sale or other title retention agreement or under any lease or other periodic payment arrangement which is of a nature that payment obligations of the lessee or obligor thereunder would be required by GAAP to be capitalized and shown as liabilities on the balance sheet of such lessee or obligor. 2 8 CAPITAL LEASE. Any lease of property (real, personal or mixed) which, in accordance with GAAP, should be capitalized on the lessee's balance sheet or for which the amount of the asset and liability thereunder as if so capitalized should be disclosed in a note to such balance sheet. CASH EQUIVALENT AMOUNT. The sum of the following, without duplication, none of which may be subject to any Encumbrances except for Encumbrances in favor of the Bank or any of its Affiliates: (1) cash held by the Company in the United States and at the Bank, PLUS (2) Qualified Investments of the Company held in the United States, France and Canada, PLUS (3) Net Outstanding Amount of Base Accounts. CODE. The Internal Revenue Code of 1986 and the rules and regulations thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect. COLLATERAL. See Section 7.1. COMPANY. See Preamble. CONFIRMATION OF INTELLECTUAL PROPERTY SECURITY AGREEMENT. The Confirmation of the Intellectual Property Security Agreement dated as of the date hereof between the Company and the Bank. CONSOLIDATED TANGIBLE CAPITAL BASE. At any date as of which the amount thereof shall be determined, the stockholders' equity of the Company and its Subsidiaries on a consolidated basis determined in accordance with GAAP PLUS the outstanding principal amount of any Subordinated Indebtedness MINUS the sum of any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, patents, trade and service marks and names, copyrights and research and development expenses except prepaid expenses, (c) all reserves not already deducted from assets, (d) any write-up in the book value of assets resulting from any revaluation thereof subsequent to the date of the financial statements referred to in Section 4.6 and (e) any and all items included as assets on the consolidated balance sheet of the Company and its Subsidiaries if and to the extent such items consist of the equity in Subsidiaries or other joint venture holdings or similar investments. CONTROLLED GROUP. All trades or businesses (whether or not incorporated) under common control that, together with the Company, are treated as a single employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA. CORPORATE AFFILIATE. As applied to any Person, any corporation, association, firm or other entity directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. CORPORATE SERVICES AGREEMENT. The Corporate Services Agreement dated as of January 1, 1994 between Sepracor and the Company as originally executed and delivered. 3 9 CROSS LICENSE AGREEMENT. The Cross License Agreement dated as of January 1, 1994 between the Company and Hemasure Inc. as originally executed and delivered. DEFAULT. Any event or condition that, with the giving of notice or lapse of time, or both, would constitute an Event of Default. DOLLARS or $. The lawful currency of the United States of America. DOLLAR EQUIVALENT. The amount in Dollars of any Alternative Currency at the quoted spot rate at which the Bank's principal office in the United States offers to exchange Dollars for such Alternative Currency at 11:00 a.m. (Boston time) two (2) Business Days prior to the date on which such equivalent is to be determined. ENCUMBRANCES. See Section 6.4. ENVIRONMENTAL LAWS. Any and all applicable foreign, federal, state and local environmental, health or safety statutes, laws, regulations, rules, ordinances, policies and rules or common law (whether now existing or hereafter enacted or promulgated), of all governmental agencies, bureaus or departments which may now or hereafter have jurisdiction over the Company or any of its Subsidiaries and all applicable judicial and administrative and regulatory decrees, judgments and orders, including common law rulings and determinations, relating to injury to, or the protection of, real or personal property or human health or the environment, including, without limitation, all requirements pertaining to reporting, licensing, permitting, investigation, remediation and removal of emissions, discharges, releases or threatened releases of Hazardous Materials, chemical substances, pollutants or contaminants whether solid, liquid or gaseous in nature, into the environment or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of such Hazardous Materials, chemical substances, pollutants or contaminants. ERISA. The Employee Retirement Income Security Act of 1974 and the rules and regulations thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect. EXCHANGE CONTRACT AMOUNT. At any time, the amount in Dollars or the Dollar Equivalent of an Alternative Currency, as the case may be, which the Bank is obligated to deliver to or exchange with the Company pursuant to Alternative Currency Commitments. EVENT OF DEFAULT. Any event described in Section 8.1. FDA. See Section 4.19. FOREIGN EXCHANGE FACILITY. See Section 2.16. FOREIGN EXCHANGE FACILITY SUBLIMIT. $1,000,000 (including the Dollar Equivalent of an Alternative Currency); PROVIDED that the Foreign Exchange Facility Sublimit shall be (i) proportionately reduced in connection with any reduction of the Revolving Commitment Amount in accordance with Section 2.3 or (ii) terminated in accordance with the termination of the 4 10 Bank's commitment to make further the Revolving Loans under Section 8.2 and, in either case, shall not be subject to reinstatement. GAAP. Generally accepted accounting principles as defined by the United States Financial Accounting Standards Board, as from time to time in effect. GUARANTEES. As applied to the Company and its Subsidiaries, all guarantees, endorsements or other contingent or surety obligations with respect to obligations of others whether or not reflected on the consolidated balance sheet of the Company and its Subsidiaries, including any obligation to furnish funds, directly or indirectly (whether by virtue of partnership arrangements, by agreement to keep-well or otherwise), through the purchase of goods, supplies or services, or by way of stock purchase, capital contribution, advance or loan, or to enter into a contract for any of the foregoing, for the purpose of payment of obligations of any other Person or entity. GUARANTY AGREEMENT (BIOSEPRA). That certain Guaranty Agreement dated as of the date hereof executed by Sepracor guarantying the Obligations of the Company to the Bank. GUARANTY AGREEMENT (VERSICOR). That certain Guaranty Agreement dated as of the date hereof executed by Sepracor guarantying the obligations of Versicor to the Bank. HAZARDOUS MATERIAL. Any substance (i) the presence of which requires or may hereafter require notification, investigation or remediation under any Environmental Law; (ii) which is or becomes defined as a "hazardous waste", "hazardous material" or "hazardous substance" or "controlled industrial waste" or "pollutant" or "contaminant" under any present or future Environmental Law or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and any applicable local statutes and the regulations promulgated thereunder; (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of any foreign country, the United States, any state of the United States, or any political subdivision thereof to the extent any of the foregoing has or had jurisdiction over the Company; or (iv) without limitation, which contains gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated biphenyls ("PCB's"). --- INDEBTEDNESS. As applied to the Company and its Subsidiaries, (i) all obligations for borrowed money or other extensions of credit whether or not secured or unsecured, absolute or contingent, including, without limitation, Capital Leases, unmatured reimbursement obligations with respect to letters of credit or guarantees issued for the account of or on behalf of the Company and its Subsidiaries and all obligations representing the deferred purchase price of property, other than accounts payable arising in the ordinary course of business, (ii) all obligations evidenced by bonds, notes, debentures or other similar instruments, (iii) all obligations secured by any mortgage, pledge, security interest or other lien on property owned or acquired by the Company or any of its Subsidiaries whether or not the obligations secured thereby shall have been assumed, (iv) that portion of all obligations arising under Capital Leases that is required to be capitalized on the consolidated balance sheet of the Company and its Subsidiaries, (v) all Guarantees, and (vi) all obligations that are immediately due and payable 5 11 out of the proceeds of or production from property now or hereafter owned or acquired by the Company or any of its Subsidiaries. INTELLECTUAL PROPERTY. See Section 7.1. INTELLECTUAL PROPERTY SECURITY AGREEMENT. The Intellectual Property Security Agreement dated as of December 28, 1994 between the Company and the Bank whereby the Company has granted to the Bank a security interest in its Intellectual Property, as amended and confirmed on the date hereof by the Confirmation to the Intellectual Property Security Agreement. INVENTORY. Goods, merchandise and other personal property, now owned or hereafter acquired by the Company, which are held for sale or lease or are furnished or to be furnished under a contract of service or are raw materials, work in process or materials used or consumed or to be used or consumed in the Company's business. INVESTMENT. As applied to the Company and its Subsidiaries, the purchase or acquisition of any share of capital stock, partnership interest, evidence of indebtedness or other equity security of any other Person or entity, any loan, advance or extension of credit to, or contribution to the capital of, any other Person or entity, any real estate held for sale or investment, any commodities futures contracts held other than in connection with bona fide hedging transactions, any other investment in any other Person or entity, and the making of any commitment or acquisition of any option to make an Investment. LOAN ACCOUNT. The account on the books of the Bank in which will be recorded Revolving Loans made by the Bank to the Company pursuant to this Agreement, payments made on such Revolving Loans and other appropriate debits and credits as provided by this Agreement. LOAN DOCUMENTS. See Section 8.2. MANAGERIAL EXPENSE. All salaries, costs, fees and other expenses directly or indirectly paid or payable by the Company to any shareholder or to any Affiliate of the Company for management services, except the direct salaries and expenses of executive personnel, the expenses of directors and fees and expenses among and between the Company and its Affiliates in the ordinary course of business and consistent with past practices. MATERIAL LICENSES. See Section 4.11. MONEY MARKETS. See Section 9.10. NET OUTSTANDING AMOUNT OF BASE ACCOUNTS. The net amount of Base Accounts outstanding after (a) eliminating from the aggregate amount of outstanding Base Accounts (i) such Accounts past due under the original terms of sale more than sixty (60) days, (ii) any Base Account owed by any account debtor whose principal place of business or chief executive office is not within the United States or the District of Columbia ("FOREIGN ACCOUNT DEBTORS"), (iii) such Accounts due from Affiliates or Subsidiaries of the Company, (iv) such Accounts for services not yet rendered or goods not yet delivered, and (v) such Accounts representing 6 12 obligations in respect of any joint venture interest owned by the Company and in respect of royalties and license fees payable to the Company by any such joint venture or any joint venture therein, and (b) deducting from the aggregate face amount of the remaining Base Accounts (i) net offsets from accounts owing from account debtors, other than Foreign Account Debtors, which maintain both receivable and payable balances with the Company, (ii) the aggregate amount of outstanding claims asserted by account debtors, other than Foreign Account Debtors, against the Company and (iii) all payments, adjustments, and credits applicable thereto and all amounts due thereon considered by the Bank to be difficult to collect or uncollectible by reason of return, rejection, repossession, loss or damage of or to the merchandise giving rise thereto, a merchandise or other dispute, insolvency of the account debtor or any other reason, all as determined by the Bank in its sole and reasonable discretion, which determination shall be final and binding upon the Company. NOTE. The Amended and Restated Promissory Note of the Company, substantially in the form of EXHIBIT A hereto, evidencing the obligations of the Company to the Bank to repay the Revolving Loans. NOTICE OF BORROWING. See Section 2.1(b). OBLIGATIONS. Any and all obligations of the Company to the Bank of every kind and description (i) hereunder and under the Note, and (ii) under Alternative Currency Commitments and under any and all documents pertaining thereto, direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising, regardless of how they arise or by what agreement or instrument, if any, and including obligations to perform acts and refrain from taking action as well as obligations to pay money. ORIGINAL CURRENCY. See Section 9.10. PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. PERMITTED ENCUMBRANCES. See Section 6.4. PERSON. A corporation, an association, a partnership, a limited liability company or partnership, a joint venture, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. PLAN. At any time, an employee pension or other benefit plan that is subject to Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by the Company or any member of the Controlled Group for employees of the Company or any member of the Controlled Group or (ii) if such Plan is established, maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one employer makes contributions and to which the Company or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five Plan years made contributions. 7 13 PRIME RATE. The rate of interest announced from time to time by the Bank at its office in Boston, Massachusetts as its prime rate. PRIOR CREDIT AGREEMENT. See Preamble. PRIOR LOANS. See Preamble. QUALIFIED INVESTMENTS. As applied to the Company and its Subsidiaries, investments in (i) notes, bonds or other obligations of the United States of America or any agency thereof that as to principal and interest constitute direct obligations of or are guaranteed by the United States of America; (ii) certificates of deposit or other deposit instruments or accounts of banks or trust companies organized under the laws of the United States or any state thereof that have capital and surplus of at least $100,000,000, (iii) commercial paper issued by companies organized under the laws of the United States or any state thereof and that is rated not less than prime-two or A-2 or their equivalents by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or their successors, (iv) mutual or closed end funds that invest solely in investments described in clauses (i) through (iii) of this definition and (v) any repurchase agreement secured by any one or more of the foregoing. RESTRICTED PAYMENTS. (a) Any dividend or other distribution, direct or indirect, on or on account of any shares of any class of stock of any of the Company now or hereafter outstanding and (b) any redemption, purchase or other acquisition, direct or indirect, of any shares of any class of stock of the Company now or hereafter outstanding or of any warrants or rights to purchase any such stock (including without limitation the repurchase of any such stock or warrant or any refund of the purchase price thereof in connection with the exercise by the holder thereof of any right of rescission or similar remedies with respect thereto), (c) any Managerial Expense, and (d) any payment of principal of, premium, if any, or interest on, or otherwise in respect of any Subordinated Indebtedness. REVOLVING COMMITMENT AMOUNT. Three Million Dollars ($3,000,000) or any lesser amount, including zero, resulting from a termination or reduction of such amount in accordance with Section 2.3 or Section 8.2. REVOLVING CREDIT PERIOD. The period beginning on the date hereof and extending through and including the Revolving Credit Termination Date. REVOLVING CREDIT TERMINATION DATE. April 30, 1999 or such earlier date on which the commitment to make Revolving Loans is terminated or the Revolving Commitment Amount is reduced to zero in accordance with the terms of this Agreement. REVOLVING LOANS. See Section 2.1(a). SECOND CURRENCY. See Section 9.10. SEPRACOR. Sepracor Inc., a Delaware corporation and the parent of the Company and Versicor. 8 14 SEPRACOR CREDIT AGREEMENT. That certain Amended and Restated Revolving Credit and Security Agreement dated as of the date hereof among Sepracor, Sepracor Securities Corporation and the Bank. SUBORDINATED INDEBTEDNESS. (a) the existing Indebtedness of the Company which is designated as "Subordinated Indebtedness" in SCHEDULE 6.1 attached hereto, and (b) any other Indebtedness of the Company consented to in writing by the Bank which matures in its entirety later than the Note and by its terms (or by the terms of the instrument under which it is outstanding and to which appropriate reference is made in the instrument evidencing such Subordinated Indebtedness) is made subordinate and junior in right of payment to the Note and to the Company's other obligations to the Bank hereunder by provisions reasonably satisfactory in form and substance to the Bank and its counsel. SUBSIDIARY. Any corporation, association, limited liability company, joint stock company, business trust or other similar organization of which 50% or more of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such entity is held or controlled by the Company or its Subsidiaries; or any other such organization the management of which is directly or indirectly controlled by the Company or a Subsidiary of the Company through the exercise of voting power or otherwise; or any joint venture, whether incorporated or not, in which the Company has, at least, a 50% ownership interest. TECHNOLOGY TRANSFER AGREEMENT. The Technology Transfer and License Agreement dated as of January 1, 1994 between Sepracor and the Company as originally executed and delivered. U.S. SUBSIDIARY. With respect to any Person, each of such Person's Subsidiaries having a principal place of business located in the United States. VERSICOR. Versicor Inc., a Delaware corporation, an Affiliate of the Company and a Subsidiary of Sepracor. VERSICOR CREDIT AGREEMENT. That certain Revolving Credit, Term Loan and Security Agreement dated as of the date hereof between Versicor and the Bank. 1.2. ACCOUNTING TERMS. All terms of an accounting character shall have the meanings assigned thereto by GAAP applied on a basis consistent with the financial statements referred to in Section of this Agreement, modified to the extent, but only to the extent, that such meanings are specifically modified herein. SECTION 2. ---------- DESCRIPTION OF CREDIT --------------------- 2.1. THE REVOLVING LOANS. 9 15 (a) Upon the terms and subject to the conditions of this Agreement, and in reliance upon the representations, warranties and covenants of the Company made herein, the Bank agrees to make loans ("REVOLVING LOANS") to the Company pursuant to Notices of Borrowing as delivered by the Company to the Bank from time to time, from and after the date hereof and during the Revolving Credit Period; PROVIDED, that (1) the aggregate principal amount of Revolving Loans outstanding at any time shall not exceed the lesser of (i) the Revolving Commitment Amount at such time MINUS the Exchange Contract Amount and (ii) the Available Aggregate Revolving Commitment at such time and (2) at the time the Company requests a Revolving Loan and after giving effect to the making thereof there has not occurred and is not continuing any Default or Event of Default. The Company agrees that it shall be an Event of Default if at any time the debit balance of the Loan Account shall exceed the lesser of (i) the Revolving Commitment Amount MINUS the Exchange Contract Amount and (ii) the Available Aggregate Revolving Commitment unless the Company shall, upon demand by the Bank, pay, within two (2) Business Days, cash to the Bank to be credited to the Loan Account in such amount as shall be necessary to eliminate the excess. (b) Prior to 12:00 noon (Boston time) on the Revolving Loan request date, the president, an Authorized Officer shall notify the Bank in writing or by telephone confirmed by (1) telex, (2) telecopy or (3) other facsimile transmission, on the same day as the telephonic request (the "NOTICE OF BORROWING"), of the proposed date of borrowing and the principal amount requested. No Notice of Borrowing shall be revocable by the Company. (c) The Bank shall enter the Revolving Loans as debits in the Loan Account. The Bank shall also record in the Loan Account all payments made by the Company on account of the Revolving Loans, and may also record therein, in accordance with customary accounting practices, other debits and credits, and all interest, fees, charges and expenses chargeable to the Company under this Agreement. The debit balance of the Loan Account shall reflect the amount of the Company's Obligations to the Bank from time to time by reason of the Revolving Loans and other appropriate charges hereunder. Periodically, the Bank shall render a statement of account showing as of its date the debit balance of the Loan Account which, unless within thirty (30) days of such date notice to the contrary is received by the Bank from the Company, absent manifest error, shall be considered correct and accepted by the Company and conclusively binding upon it. (d) Subject to the terms and conditions of this Agreement, the Bank shall make each Revolving Loan on the effective date specified therefor by crediting the amount of such Revolving Loan to the Company's demand deposit account with the Bank. 2.2. COMMITMENT FEE. The Company shall pay to the Bank during the Revolving Credit Period a commitment fee computed at the rate of one quarter of one percent (0.25%) per annum on the average daily amount of the unborrowed portion of the Revolving Commitment Amount during each quarter or portion thereof. Commitment fees shall be payable quarterly in arrears, on the first day of January, April, July and October of each year beginning on April 1, 1997, and on the last day of the Revolving Credit Period. 2.3. REDUCTION OF REVOLVING COMMITMENT AMOUNT. The Company may from time to time by written notice delivered to the Bank by the Company at least five Business Days prior 10 16 to the date of the requested reduction, reduce by integral multiples of Ten Thousand Dollars ($10,000) any unborrowed portion of the Revolving Commitment Amount. No reduction of the Revolving Commitment Amount shall be subject to reinstatement. 2.4. THE NOTE. (a) The Revolving Loans shall be evidenced by the Note which is payable to the order of the Bank and with a final maturity on the Revolving Credit Termination Date. The Note shall be dated on or before the date of the first Revolving Loan and shall have the blanks therein appropriately completed. (b) The Bank shall, and is hereby irrevocably authorized by the Company to, enter on the schedule forming a part of the Note or otherwise in its records appropriate notations evidencing the date and the amount of each Revolving Loan, the interest rate applicable thereto and the date and amount of each payment of principal made by the Company with respect thereto; and in the absence of manifest error, such notations shall constitute conclusive evidence thereof. The Bank is hereby irrevocably authorized by the Company to attach to and make a part of the Note a continuation of any such schedule as and when required. No failure on the part of the Bank to make any notation as provided in this subsection (b) shall in any way affect any Revolving Loan or the rights or obligations of the Bank or the Company with respect thereto. 2.5. CAPITAL REQUIREMENTS. If after the date hereof, the Bank shall have determined that the adoption or implementation of any applicable law, rule or regulation regarding capital requirements for banks or bank holding companies, or any change therein (including, without limitation, any change according to a prescribed schedule of increasing requirements, whether or not known on the date hereof), or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive of such entity regarding capital adequacy (whether or not having the force of law) has the effect of reducing the return on the Bank's capital to a level below that which the Bank could have achieved (taking into consideration the Bank's policies with respect to capital adequacy immediately before such adoption, implementation, change or compliance and assuming that the Bank's capital was fully utilized prior to such adoption, implementation, change or compliance) but for such adoption, implementation, change or compliance as a consequence of its Commitment to make Revolving Loans hereunder by any amount deemed by the Bank to be material, the Company shall pay to the Bank as an additional fee from time to time on demand such amount as the Bank shall have determined to be necessary to compensate it for such reduction. The determination by the Bank of such amount, if done on the basis of any reasonable averaging and attribution methods, shall in the absence of manifest error be conclusive, and at the Company's request, the Bank shall demonstrate the basis of such determination. 2.6. PAYMENTS AND PREPAYMENTS OF THE REVOLVING LOANS. On at least two (2) Banking Days prior written notice to the Bank with respect to Revolving Loans subject to an exercised LIBOR Option and on at least one (1) Banking Day prior written notice to the Bank with respect to all other Revolving Loans, the Company may, at its option, prepay the Note in whole at any 11 17 time or in part from time to time without penalty or premium; PROVIDED, that any prepayment of any LIBOR Portion shall be made together with the applicable LIBOR Premium. Any interest accrued on the amounts so prepaid to the date of such payment must be paid at the time of any such payment. No prepayment of the Revolving Loans shall affect the Revolving Commitment Amount or impair the Company's right to borrow as set forth in Section 2.1. On the Revolving Credit Termination Date, the Company shall repay all outstanding Revolving Loans and the Note, together with all unpaid interest thereon and all fees and other amounts due hereunder with respect to the Revolving Loans. 2.7. METHOD OF PAYMENT. All payments and prepayments of principal and all payments of interest shall be made by the Company to the Bank at 75 State Street, Boston, Massachusetts 02109 in immediately available funds, on or before 11:00 a.m. on the due date thereof, free and clear of, and without any deduction or withholding for, any taxes or other payments. The Bank may, and the Company hereby authorizes the Bank to, debit the amount of any payment not made by such time to the demand deposit account of the Company with the Bank. 2.8. OVERDUE PAYMENTS. (a) Upon the occurrence and during the continuance of an Event of Default, interest on the outstanding principal amount of the Note and (to the extent permitted by law) on accrued but unpaid interest shall thereafter be payable on demand at a rate per annum equal to two percent (2%) above the interest rate otherwise in effect with respect to such Revolving Loans. Upon the cure of an Event of Default and the payment of interest at the default rate through the date of such cure, the interest rate shall revert to that provided for in Section 2.10. (b) If a payment of principal or interest hereunder is not made in full within 10 days of date when due, the Company will pay to the Bank a late fee equal to five percent (5%) of the amount of such payment. Nothing in the preceding sentence shall affect the Bank's right to exercise any of its rights or remedies, including those provided in Section 8.2, if an Event of Default has occurred. 2.9. HOLIDAYS. If any payment required by this Agreement becomes due on a day that is not a Business Day such payment may be made on the next succeeding Business Day, and such extension shall be included in computing interest in connection with such payment. 2.10. INTEREST. The Note shall bear interest on the unpaid principal amount thereof until paid in full at the rate or rates per annum determined (on the basis of the actual number of days elapsed over a 360-day year) and payable as follows: (a) The rate of interest for any portion of the outstanding principal amount of the Revolving Loans which is not then subject to an exercised LIBOR Option under Section 2.11 of this Agreement shall be computed at the Prime Rate. (b) The rate for any LIBOR Portion of the Revolving Loans shall be computed at a rate equal to one and three-quarters percent (1.75%) above the applicable LIBOR Rate. 12 18 (c) Interest on the Note shall be payable monthly in arrears on the first Business Day of each month, commencing on January 1, 1997 and, in addition, interest on any LIBOR Portion of the Revolving Loans in respect of any LIBOR Period shall also be payable on the last day of such LIBOR Period, on the last day of the third month for each LIBOR Portion with a 180-day LIBOR Period and at maturity (whether by acceleration or otherwise). The rate of interest payable on any portion of the outstanding principal balance of any Revolving Loan which is not then subject to a LIBOR Option shall take effect simultaneously with the corresponding change in the Prime Rate. 2.11. CERTAIN LIBOR PROVISIONS. (a) LIBOR OPTION. Subject to the provisions of this Section 2, the Company shall have the right to have the interest on all or any portion of the principal amount of any Revolving Loan, based on a LIBOR Rate. (b) CERTAIN DEFINITIONS. As used herein, the following terms have the following respective meanings: BANKING DAY. (i) When used with respect to the LIBOR Option, a day on which transactions may be effected in deposits of U.S. dollars in the London interbank foreign currency deposits market and on which banks may conduct business in London, England and Boston, Massachusetts and (ii) when used with respect to the other provisions of this Agreement, any day excluding Saturday and Sunday and excluding any other day which shall be in Boston, Massachusetts, a legal holiday or a day on which banking institutions are authorized by law to close. BOARD. The Board of Governors of the Federal Reserve System of the United States. LEGAL REQUIREMENT. Any requirement imposed upon the Bank by any law of the United States of America or the United Kingdom or by any regulation, order, interpretation, ruling or official directive (whether or not having the force of law) of the Board, the Bank of England or any other board, central bank or governmental or administrative agency, institution or authority of the United States of America, the United Kingdom or any political subdivision of either thereof. LIBOR OPTION. The option granted pursuant to this Section 2 to have the interest on all or a portion of the principal amount of the Revolving Loan based on a LIBOR Rate. LIBOR PERIOD. Any period, as provided below in this Section 2.11, of 30, 60, 90 or 180 days, commencing on any Banking Day; PROVIDED, however, that no LIBOR Period with respect to any LIBOR Portion of any Revolving Loan shall extend beyond the maturity date of the Note. If any LIBOR Period so selected would otherwise end on a date which is not a Banking Day, such LIBOR Period shall instead end on the next preceding or succeeding Banking Day as determined by the Bank in accordance with the then current banking practice in London. Each determination by the Bank of any LIBOR Period shall, in the absence of manifest error, be conclusive, and at the Company's request the Bank shall demonstrate the basis for such determination. 13 19 LIBOR PORTION. That portion of the Revolving Loan specified in a LIBOR Request, (i) which is not less than Five Hundred Thousand Dollars ($500,000), (ii) which is an integral multiple of Ten Thousand Dollars ($10,000), (iii) which does not exceed the outstanding balance of the Revolving Loan not already subject to an exercised LIBOR Option, (iv) which, as of the date of the LIBOR Request specifying such LIBOR Portion, has met the conditions for basing interest on the LIBOR Rate in Section 2.12 of this Agreement and (v) the LIBOR Period of which has commenced and not terminated. LIBOR PREMIUM. With respect to the prepayment of any LIBOR Portion of any Revolving Loan, whether voluntary or as a result of acceleration, an amount equal to the product of (i) the excess, if any, of the rate of interest on the principal amount so prepaid over the rate of interest on debt securities issued by the Treasury of the United States of America on a date approximating the date of payment of such principal amount and having a maturity date approximating the last Banking Day of the applicable LIBOR Period, multiplied by (ii) the principal amount so prepaid, multiplied by (iii) a fraction, the numerator of which is the number of days remaining in the related LIBOR Period and the denominator of which is 360. LIBOR RATE. With respect to any LIBOR Portion for the related LIBOR Period, an interest rate per annum (rounded upwards, if necessary,to the next higher 1/8 of 1%) equal to the product of (a) the Base LIBOR Rate (as hereinafter defined) and (b) Statutory Reserves. For purposes of this definition, the term "BASE LIBOR RATE" shall mean the rate (rounded to the nearest 1/8 of 1% or, if there is no nearest 1/8 of 1%, the next higher 1/8 of 1%) at which deposits of U.S. dollars approximately equal in principal amount to the LIBOR Portion and for a maturity equal to the applicable LIBOR Period are offered to the Bank in the London interbank foreign currency deposits market at approximately 11:00 a.m., London time, two (2) Banking Days prior to the commencement of such LIBOR Period, for delivery on the first day of such LIBOR Period. Each determination by the Bank of any LIBOR Rate shall, in the absence of manifest error, be conclusive, and at the Company's request, the Bank shall demonstrate the basis for such determination. LIBOR REQUEST. Notice in writing (or by telephonic communications confirmed by telex, telecopy or other facsimile transmission on the same day as the telephone request) from the Company to the Bank requesting that interest on a LIBOR Portion be based on the LIBOR Rate, specifying: (i) the first day of the LIBOR Period, (ii) the length of the LIBOR Period consistent with the definition of that term and (iii) a dollar amount of the LIBOR Portion consistent with the definition of that term. STATUTORY RESERVES. A fraction, the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including, without limitation, any marginal, special, emergency or supplemental reserves), expressed as a decimal, established by the Board and any other banking authority to which the Bank is subject for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include, without limitation, those imposed under such Regulation D. LIBOR Portions of the Revolving Loans shall be deemed to constitute Eurocurrency Liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exceptions or offsets which may be available from time to time to the 14 20 Bank under such Regulation D. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. TAX. In relation to any LIBOR Portion and the applicable LIBOR Rate, any tax, levy, impost, duty, deduction, withholding or other charges of whatever nature required by any Legal Requirement (i) to be paid by the Bank and/or (ii) to be withheld or deducted from any payment otherwise required hereby to be made by the Company to the Bank, PROVIDED that the term "Tax" shall not include any taxes imposed upon the net income of the Bank by the United States of America or any political subdivision thereof (including state and local governmental authorities). 2.12. CONDITIONS FOR BASING INTEREST ON THE LIBOR RATE. Upon the condition that: (a) The Bank shall have received a LIBOR Request from the Company prior to noon at least two (2) Banking Days prior to the first day of the LIBOR Period requested; (b) There shall have occurred no change in applicable law which would make it unlawful for the Bank to obtain deposits of U.S. dollars in the London interbank foreign currency deposits market; (c) As of the date of the LIBOR Request and the first day of the LIBOR Period, there shall exist no Event of Default, nor any Default, which has not been waived by the Bank; (d) The Bank shall not have determined in good faith that it is unable to determine the LIBOR Rate in respect of the requested LIBOR Period or that it is unable to obtain deposits of U.S. dollars in the London interbank foreign currency deposits market in the applicable amounts and for the requested LIBOR Period; and (e) As of the first date of the LIBOR Period specified in such LIBOR Request, and after having given effect thereto, there shall be no more than an aggregate of four (4) LIBOR Portions outstanding; then interest on the LIBOR Portion requested during the LIBOR Period requested will be at the applicable LIBOR Rate. 2.13. INDEMNIFICATION FOR FUNDING AND OTHER LOSSES. Each LIBOR Request shall be irrevocable and binding on the Company. Without limiting the generality of Section 2.14, the Company shall indemnify the Bank against any loss or expense incurred by the Bank as a result of any failure on the part of the Company to fulfill, on or before the date specified in any LIBOR Request, the applicable conditions set forth in this Agreement, including, without limitation, any loss (including loss of anticipated profits) or expense incurred by reason of the liquidation or redeployment of deposits or other funds acquired by the Bank to fund or maintain the requested LIBOR Portion when interest on such LIBOR Portion, as a result of such failure on the part of the Company, is not based on the applicable LIBOR for the requested LIBOR Period. The Bank shall determine the amount of such loss or expense incurred by it, and absent manifest error such determination shall be conclusive, and at the Company's request the Bank shall demonstrate the basis for such determination. 15 21 2.14. CHANGE IN APPLICABLE LAWS, REGULATIONS, ETC. If any Legal Requirement shall make it unlawful for the Bank to fund through the purchase of U.S. dollar deposits any LIBOR Portion, or otherwise to give effect to its obligations as contemplated hereby, or shall impose on the Bank any costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of the Bank, which includes deposits by reference to which the LIBOR Rate is determined as provided herein or a category of extensions of credit or other assets of the Bank which includes any LIBOR Portion, or shall impose on the Bank any restrictions on the amount of such a category of liabilities or assets which the Bank may hold, (a) the Bank may by notice thereof to the Company terminate the LIBOR Option, (b) any LIBOR Portion subject thereto shall immediately bear interest thereafter at the rate provided for in Section 2.10(a), and (c) the Company shall indemnify the Bank against any loss, penalty or expense incurred by the Bank by reason of the liquidation or redeployment of deposits or other funds acquired by the Bank to fund or maintain such LIBOR Portion, as provided in Section 2.13. 2.15. TAXES. It is the understanding of the Company and the Bank that the Bank shall receive payments of amounts of principal of and interest on the Revolving Loan with respect to the LIBOR Portions from time to time subject to a LIBOR Option free and clear of, and without deduction for, any Taxes. If (a) the Bank shall be subject to any such Tax in respect of any such LIBOR Portion or part thereof or (b) the Company shall be required to withhold or deduct any such Tax from any such amount, and (c) such Tax shall not have existed as of the date of the applicable LIBOR Request, the LIBOR applicable to such LIBOR Portion shall be adjusted by the Bank to reflect all additional costs incurred by the Bank in connection with the payment by the Bank or the withholding by the Company of such Tax and the Company shall provide the Bank with a statement detailing the amount of any such Tax actually paid by the Company. Determination by the Bank of the amount of such costs shall, in the absence of manifest error, be conclusive, and at the Company's request, the Bank shall demonstrate the basis of such determination. If after any such adjustment, any part of any Tax paid by any Bank is subsequently recovered by the Bank, the Bank shall reimburse the Company to the extent of the amount so recovered. A certificate of an officer of the Bank setting forth the amount of such recovery and the basis therefor shall, in the absence of manifest error, be conclusive. 2.16. FOREIGN EXCHANGE FACILITY. During the Revolving Credit Period, the Bank agrees to provide the Company with a foreign exchange facility (the "FOREIGN EXCHANGE FACILITY") pursuant to which the Bank will issue Alternative Currency Commitments from time to time, consistent with the definition thereof. In determining the amount of Dollars or an Alternative Currency purchased or exchanged, the Bank shall use the same method employed in determining the Dollar Equivalent or Alternative Currency Equivalent as set forth in each such definition. All Alternative Currency Commitments of the Company including, without limitation, fees, charges and any currency loss or similar loss, shall be Obligations of the Company hereunder and shall be secured by the security interest granted by the Company to the Bank in the Collateral. The Exchange Contract Amount shall be recalculated hereunder on each date that it shall be necessary to determine the unused portion of the Revolving Commitment Amount. SECTION 3. ---------- 16 22 CONDITIONS OF LOANS ------------------- 3.1. CONDITIONS PRECEDENT TO INITIAL REVOLVING LOAN. The obligation of the Bank to make its initial Revolving Loan and to provide the Foreign Exchange Facility is subject to the condition precedent that the Bank shall have received, in form and substance satisfactory to the Bank and its counsel, the following: (a) this Agreement, duly executed by the Company; (b) the Note, duly executed by the Company; (c) the Confirmation of the Intellectual Property Security Agreement duly executed by the Company in form and substance satisfactory to the Bank and its counsel; (d) the Guaranty Agreement (Biosepra), duly executed by Sepracor; (e) the Sepracor Credit Agreement, the Deposit Pledge Agreement and the Guaranty Agreement (Versicor) duly executed by Sepracor and the Versicor Credit Agreement duly executed by Versicor and the consummation of all transactions contemplated thereby; (f) a certificate of the Secretary or an Assistant Secretary of the Company with respect to resolutions of the Board of Directors authorizing the execution and delivery of this Agreement, the Confirmation of the Intellectual Property Security Agreement and the Note and identifying the officer(s) authorized to execute, deliver and take all other actions required under this Agreement, and providing specimen signatures of such officers; (g) a certificate signed by an Authorized Officer, certifying that the conditions of Section 3.2.(b) have been fulfilled; (h) the certificate of incorporation of the Company and all amendments and supplements thereto, filed in the office of the Secretary of State of the State of Delaware, each certified by said Secretary of State as being a true and correct copy thereof; (i) the Bylaws of the Company and all amendments and supplements thereto, certified by the Secretary or an Assistant Secretary as being a true and correct copy thereof; (j) a certificate of the Secretary of State of the State of Delaware, as to legal existence and good corporate standing of the Company in such state and listing all documents on file in the office of said Secretary of State; (k) UCC-1 Financing Statements, for any new locations of the Company duly executed by the Company and UCC-3 Financing Statements, changing the name of the Bank as set forth in the preamble to this Agreement and any other necessary revisions duly executed by the Company and the Bank, each recorded in the appropriate filing offices; (l) Lien searches against the Company in all appropriate state filing offices and in the United States Patent and Trademark Office and the United States Copyright Office; 17 23 (m) if necessary, UCC-3 Termination Statements and other appropriate lien discharge documentation terminating all liens except those consisting of Permitted Encumbrances. (n) Landlord Waiver as to the real property leased by the Company located at 111 Locke Drive, Marlborough, Massachusetts duly executed by the lessor of such property; (o) an insurance binder demonstrating compliance with Section 5.3; (p) a certificate signed by an Authorized Officer, certifying that there has been no material adverse change in the condition (financial or otherwise), operations, properties, assets, liabilities or earnings of the Company since the date of its most recent financial statement; (q) an opinion addressed to it from Hale & Dorr, counsel to the Company, in form and substance satisfactory to the Bank and its counsel; and (r) such other documents, and completion of such other matters, as counsel for the Bank may deem necessary or appropriate. 3.2. CONDITIONS PRECEDENT TO ALL REVOLVING LOANS. The obligation of the Bank to make each Revolving Loan, including the initial Revolving Loan, or continue or convert the Revolving Loans to loans of another type, is further subject to the following conditions: (a) timely receipt by the Bank of the Notice of Borrowing as provided in Section ; (b) the representations and warranties contained in Section 4 shall be true and accurate in all material respects on and as of the date of such Notice of Borrowing and on the effective date of the making, continuation or conversion of each Revolving Loan as though made at and as of each such date (except to the extent that such representations and warranties expressly relate to an earlier date), and no Default or Event of Default shall have occurred and be continuing, or would result from such Revolving Loan; (c) the resolutions referred to in Sections 3.1.(f) shall remain in full force and effect; and (d) no change shall have occurred in any law or regulation or interpretation thereof that, in the opinion of counsel for the Bank, would make it illegal or against the policy of any governmental agency or authority for the Bank to make Revolving Loans hereunder. The making of each Revolving Loan shall be deemed to be a representation and warranty by the Company on the date of the making, continuation or conversion of such Revolving Loan as to the accuracy of the facts referred to in subsection (b) of this Section 3.2. 3.3. CONDITIONS PRECEDENT TO EACH TRANSACTION UNDER FOREIGN EXCHANGE FACILITY. The obligation of the Bank to deliver Dollars or an Alternative Currency, as the case may be, under the Foreign Exchange Facility is subject to the following conditions: 18 24 (a) the Bank and the Company shall have agreed upon the Alternative Currency for the purchase or exchange; (b) timely receipt by the Bank of written confirmation of each proposed exchange or purchase in form and substance satisfactory to the Bank, duly executed by the Company; (c) No reasonably identifiable disruption of international money markets shall have occurred, and the Bank shall not have determined that it shall be unable, in the exercise of reasonable efforts and through customary means to affect foreign exchange transactions generally or with respect to the Alternative Currency agreed upon in subsection (a) above; (d) the Company shall have given the Bank reasonable notice of the proposed purchase or exchange; (e) no change shall have occurred in any law or regulation or interpretation thereof that, in the opinion of counsel for the Bank, would make it illegal or against the policy of any governmental agency or authority for the Bank to make Revolving Loans hereunder; and (f) such other documents, and completion of such other matters, as the Bank and counsel for the Bank may deem necessary or appropriate. SECTION 4. ---------- REPRESENTATIONS AND WARRANTIES ------------------------------ In order to induce the Bank to enter into this Agreement and to make the Revolving Loans hereunder and to agree to the Foreign Exchange Facility, the Company represents and warrants to the Bank that as of February __, 1997 (notwithstanding that this Agreement is dated as December 31, 1996): 4.1. ORGANIZATION AND QUALIFICATION. Each of the Company and its Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, (b) has all requisite corporate power to own its property and conduct its business as now conducted and as presently contemplated and (c) is duly qualified and in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction where the nature of its properties or business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the financial condition, operations, properties or business. 4.2. CORPORATE AUTHORITY. The execution, delivery and performance of this Agreement and the Note and the transactions contemplated hereby are within the corporate power and authority of the Company and the execution, delivery and performance of the Note are within the corporate power and authority of the Company and have been authorized by all necessary corporate proceedings, and do not and will not (a) require any consent or approval of the stockholders of the Company, (b) contravene any provision of the charter documents or by-laws of the Company or any law, rule or regulation applicable to the Company, (c) 19 25 contravene any provision of, or constitute an event of default or event that, but for the requirement that time elapse or notice be given, or both, would constitute an event of default under, any other agreement, instrument, order or undertaking binding on the Company, or (d) result in or require the imposition of any Encumbrance on any of the properties, assets or rights of the Company. 4.3. VALID OBLIGATIONS. This Agreement and the Note and all of their respective terms and provisions are the legal, valid and binding obligations of the Company, each enforceable in accordance with their respective terms except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, and except as the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. 4.4. CONSENTS OR APPROVALS. The execution, delivery and performance of this Agreement and the Note and the transactions contemplated herein do not require any approval or consent of, or filing or registration with, any governmental or other agency or authority, or any other party. 4.5. TITLE TO PROPERTIES; ABSENCE OF ENCUMBRANCES. Each of the Company and its Subsidiaries has good and marketable title to all of the properties, assets and rights of every name and nature now purported to be owned by it, including, without limitation, such properties, assets and rights as are reflected in the financial statements referred to in Section 4.6 (except such properties, assets or rights as have been disposed of in the ordinary course of business since the date thereof), free from all Encumbrances except Permitted Encumbrances hereto, and, except as so disclosed, free from all defects of title that might materially adversely affect such properties, assets or rights, taken as a whole. 4.6. FINANCIAL STATEMENTS. The Company has furnished the Bank the consolidated and consolidating balance sheets of the Company and its Subsidiaries as of December 31, 1995, and the related consolidated and consolidating statements of income, changes in stockholders' equity and cash flow for the fiscal year then ended, and related footnotes, audited and certified by Coopers & Lybrand. The Company has also furnished the foregoing unaudited financial statements to the Bank for the nine-month period ending September 30, 1996 and financial projections for the 1996 fiscal year prepared by the Company. All such financial statements, except for such projections, were prepared in accordance with GAAP applied on a consistent basis throughout the periods specified and present fairly the financial position of the Company and its Subsidiaries as of such date and the results of the operations of the Company and its Subsidiaries for such period. The projections were prepared in good faith and based on assumptions which were reasonable when made. There are no liabilities, contingent or otherwise, not disclosed in such financial statements that involve a material amount. 4.7. CHANGES. Since the date of the financial statements for the nine-month period ending September 30, 1996 referred to in Section 4.6, there have been no changes in the assets, liabilities, financial condition, business or prospects of the Company or any of its Subsidiaries other than changes in the ordinary course of business, the effect of which has not, in the aggregate, been materially adverse. 20 26 4.8. DEFAULTS. As of the date hereof, no Default or Event of Default exists. 4.9. TAXES. The Company and each Subsidiary has filed all federal, state and other tax returns required to be filed, and all taxes, assessments and other governmental charges due from the Company and each Subsidiary have been fully paid. The Company and each Subsidiary have established on their books reserves adequate for the payment of all federal, state and other tax liabilities. 4.10. MATERIAL AGREEMENTS. SCHEDULE 4.10 hereto accurately and completely lists all material leases, management, stockholder, partnership, joint venture, stock redemption or retirement, employment (including severance), non-competition and related agreements, if any, which are presently in effect in connection with the conduct of business of the Company and its Subsidiaries. 4.11. MATERIAL LICENSES. SCHEDULE 4.11 hereto accurately and completely lists all material licenses and related agreements, if any, which are presently in effect in connection with the conduct of business of the Company and its Subsidiaries (the "MATERIAL LICENSES"), and all such Material Licenses are in full force and effect. 4.12. LITIGATION. Except as set forth in SCHEDULE 4.12 hereto, there is no litigation, arbitration, proceeding or investigation pending, or, to the knowledge of the Company's or any Subsidiary's officers, threatened, against the Company or any Subsidiary that, if adversely determined, could result in a material judgment not fully covered by insurance, could result in a forfeiture of all or any substantial part of the property of the Company or its Subsidiaries, or could otherwise have a material adverse effect on the assets, business or prospects of the Company or any Subsidiary. 4.13. USE OF PROCEEDS. (a) The Company will not, directly or indirectly, use any part of the proceeds of any of the Revolving Loans (i) for the purpose of making any Restricted Payment which is prohibited by Section 6.8 hereof, (ii) for the purpose of purchasing or carrying any margin stock within the meaning of Regulations U and X (12 C.F.R. Part 221 and 224) of the Board, or (iii) for any other purpose which would violate any provision of any other applicable statute, regulation, order or restriction. (b) The proceeds of the Revolving Loans shall be used exclusively for the working capital purposes of the Company, including, without limitation, for the issuance of letters of credit. 4.14. EXISTING INDEBTEDNESS. SCHEDULE 6.1 hereto accurately and completely lists all existing Indebtedness of the Company and its Subsidiaries as of the date hereof. 4.15. EXISTING INVESTMENTS. SCHEDULE 4.15 hereto accurately and completely lists the record owner, location and any relevant account numbers of all depository and operating accounts and marketable securities owned by the Company and its Subsidiaries as of the date hereof. 21 27 4.16. SUBSIDIARIES. As of the date hereof, all the Subsidiaries of the Company are listed in SCHEDULE 4.16 hereto. The Company or a Subsidiary of the Company is the owner, free and clear of all liens and encumbrances, except as expressly provided in such schedule, of all of the issued and outstanding stock of each Subsidiary. All shares of such stock have been validly issued and are fully paid and nonassessable, and no rights to subscribe to any additional shares have been granted, and no options, warrants or similar rights are outstanding. 4.17. INVESTMENT COMPANY ACT. Neither the Company nor any of its Subsidiaries is subject to regulation under the Investment Company Act of 1940, as amended. 4.18. COMPLIANCE WITH ERISA. The Company and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA; and no "prohibited transaction" or "reportable event" (as such terms are defined in ERISA) has occurred with respect to any Plan. 4.19. FDA COMPLIANCE, ETC. Without limiting the scope of Section 4.2, the Company and its Subsidiaries are in compliance in all material respects with all applicable foreign and federal and state laws and regulations, including all material rules, regulations and administrative orders of the United States Food and Drug Administration (the "FDA") and of foreign authorities with jurisdiction over the Company and its Subsidiaries. The Company and its Subsidiaries are in compliance in all material respects with all of the applicable provisions of the Food, Drug and Cosmetic Act, as amended. 4.20. ENVIRONMENTAL MATTERS. (a) The Company and its Subsidiaries have obtained all permits, licenses and other authorizations which are required under all Environmental Laws, except to the extent failure to have any such permit, license or authorization would not have a material adverse effect on the business, financial condition or operations of the Company and its Subsidiaries. The Company and its Subsidiaries are in compliance with the terms and conditions of all such permits, licenses and authorizations, and are also in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in any applicable Environmental Law or in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder, except to the extent failure to comply would not have a material adverse effect on the business, financial condition or operations of the Company and its Subsidiaries. (b) No notice, notification, demand, request for information, citation, summons or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending or threatened by any governmental or other entity with respect to any alleged failure by the Company or any of its Subsidiaries which could materially adversely affect the properties, business, prospects, operating results or condition (financial or otherwise) of the Company, to have any permit, license or authorization required in connection with the conduct of its business or with respect to any Environmental Laws, including, without 22 28 limitation, Environmental Laws relating to the generation, treatment, storage, recycling, transportation, disposal or release of any Hazardous Materials. (c) To the best of the Company's knowledge no oral or written notification of a release of a Hazardous Material which could materially adversely affect the properties, business, prospects, operating results or condition (financial or otherwise) of the Company, has been filed by or on behalf of the Company or any of its Subsidiaries and no property now or previously owned, leased or used by the Company or any of its Subsidiaries is listed or proposed for listing on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or on any similar state list of sites requiring investigation or clean-up. (d) There are no liens or encumbrances arising under or pursuant to any Environmental Laws on any of the real property or properties owned, leased or used by the Company or any of its Subsidiaries and no governmental actions have been taken or are in process which could subject any of such properties to such liens or encumbrances or, as a result of which the Company or any of its Subsidiaries would be required to place any notice or restriction relating to the presence of Hazardous Materials at any property owned by it in any deed to such property. (e) Neither the Company nor any of its Subsidiaries nor, to the best knowledge of the Company, any previous owner, tenant, occupant or user of any property owned, leased or used by the Company or any of its Subsidiaries has (i) engaged in or permitted any operations or activities upon or any use or occupancy of such property, or any portion thereof, for the purpose of or in any way involving the handling, manufacture, treatment, storage, use, generation, release, discharge, refining, dumping or disposal (whether legal or illegal, accidental or intentional) of any Hazardous Materials on, under, in or about such property, except to the extent commonly used in day-to-day operations of such property and in such case only in compliance with all Environmental Laws, or (ii) transported any Hazardous Materials to, from or across such property except to the extent commonly used in day-to-day operations of such property and, in such case, in compliance with, all Environmental Laws, except, in the case of both clause (i) and clause (ii) above, where so doing would not have a material adverse affect on the business, prospects, operating results or condition (financial or otherwise) of the Company; nor to the best knowledge of the Company have any Hazardous Materials migrated from other properties upon, about or beneath such property, nor, to the best knowledge of the Company, are any Hazardous Materials presently constructed, deposited, stored or otherwise located on, under, in or about such property except to the extent commonly used in day-to-day operations of such property and, in such case, in compliance with, all Environmental Laws. SECTION 5. ---------- AFFIRMATIVE COVENANTS --------------------- So long as the Bank has any commitment to lend hereunder or to deliver Dollars or an Alternative Currency, as the case may be, under the Foreign Exchange Facility or any Revolving Loan or other Obligation hereunder remains outstanding, the Company covenants as follows: 23 29 5.1. FINANCIAL STATEMENTS AND OTHER REPORTING REQUIREMENTS. The Company shall furnish to the Bank: (a) as soon as available to the Company and its Subsidiaries, but in any event within 90 days after the end of each of fiscal year, the consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of, and the related consolidated and consolidating statement of income, changes in stockholders' equity and cash flow for, such year, audited and certified by Coopers & Lybrand (or other independent nationally recognized certified public accountants reasonably acceptable to the Bank) in the case of such consolidated statements, and certified by an Authorized Officer in the case of such consolidating statements; and, concurrently with such financial statements, a copy of said certified public accountants' management report and a written statement by such accountants that, in the making of the audit necessary for their report and opinion upon such financial statements they have obtained no knowledge of any Default or Event of Default or, if in the opinion of such accountants any such Default or Event of Default exists, they shall disclose in such written statement the nature and status thereof; (b) as soon as available to the Company, but in any event within 45 days after the end of each fiscal quarter, the consolidated and consolidating balance sheets of the Company and its Subsidiaries as of the end of, and the related consolidated and consolidating statements of income for, the period then ended, certified by an Authorized Officer but subject, however, to normal, recurring year-end adjustments; (c) as soon as available to the Company, but in any event concurrently with the delivery of each financial statement pursuant to subsection 5.1.(a), a copy of each management letter submitted to the Company or any of its Subsidiaries by independent certified public accountants in connection with each annual audit of the books of the Company and its Subsidiaries by such accountants or in connection with any interim audit thereof pertaining to any phase of the business of the Company or any such Subsidiary; (d) concurrently with the delivery of each financial statement pursuant to subsections 5.1.(a) and 5.1.(b) and at any time reasonably requested by the Bank, a completed compliance certificate substantially in the form of EXHIBIT B hereto signed on behalf of the Company by an Authorized Officer; (e) as soon as available to the Company and its Subsidiaries, but in any event within 90 days after the end of each fiscal year, projections for the Company and its consolidated Subsidiaries on a consolidating and consolidated basis for the current fiscal year, including projected balance sheets, income statements, cash flow statements and such other statements as the Bank may reasonably request and in form and substance satisfactory to the Bank, all prepared in good faith and based on assumptions which were reasonable when made; (f) if and when the Company gives or is required to give notice to the PBGC of any "Reportable Event" (as defined in Section 4043 of ERISA) with respect to any Plan that might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that any member of the Controlled Group or the plan administrator of any Plan has given or is required to give notice of any such Reportable Event, a copy of the notice of such Reportable Event given or required to be given to the PBGC; 24 30 (g) immediately upon becoming aware of the existence of any condition or event that constitutes a Default or Event of Default, written notice thereof specifying the nature and duration thereof and the action being or proposed to be taken with respect thereto; (h) promptly upon becoming aware of any litigation or of any investigative proceedings by a governmental agency or authority commenced or threatened against the Company or any of its Subsidiaries of which it has notice, the outcome of which would or might have a materially adverse effect on the assets, business or prospects of the Company or the Company and its Subsidiaries on a consolidated basis, written notice thereof and the action being or proposed to be taken with respect thereto; (i) promptly upon becoming aware of any investigative proceedings by a governmental agency or authority commenced or threatened against the Company or any of its Subsidiaries regarding any potential violation of Environmental Laws or any spill, release, discharge or disposal of any Hazardous Material, written notice thereof and the action being or proposed to be taken with respect thereto; and (j) promptly after the same become available, copies of all proxy statements and annual, quarterly and interim reports (excluding reports in respect of the beneficial ownership of officers, directors and certain other shareholders on Forms 3, 4 and 5 promulgated under the Securities Exchange Act of 1934, as amended) as the Company shall send to shareholders or as the Company may file with the Securities and Exchange Commission or any governmental authority at any time having jurisdiction over the Company; and (k) from time to time, such other financial data and information about the Company or its Subsidiaries, including, without limitation, a current aging of Accounts, as the Bank may reasonably request. 5.2. CONDUCT OF BUSINESS. Each of the Company and its Subsidiaries shall: (a) duly observe and comply in all material respects with all applicable laws and valid requirements of any governmental authorities relative to its corporate existence, rights and franchises, to the conduct of its business and to its property and assets (including, without limitation, the Food, Drug and Cosmetic Act, and all regulations promulgated by the FDA, all Environmental Laws and ERISA), and shall maintain and keep in full force and effect all licenses and permits necessary in any material respect to the proper conduct of its business; (b) maintain its corporate existence; and (c) maintain its business in developing and commercializing process technology and chromatographic media and instrument products and transacting related business. 5.3. MAINTENANCE AND INSURANCE. Each of the Company and its Subsidiaries shall maintain and keep its properties in good repair, working order and condition, and from time to time make all needful improvements thereto so that its business may be properly and advantageously conducted at all times. The Company will maintain or cause to be maintained on all insurable properties now or hereafter owned by the Company insurance against loss or 25 31 damage by fire or other casualty to the extent customary with respect to like properties of companies conducting similar businesses and will maintain or cause to be maintained, products liability, public liability and workmen's compensation insurance insuring the Company to the extent customary with respect to companies conducting similar businesses and, upon request, will furnish to the Bank satisfactory evidence of the same. Each insurance policy pertaining to any of the Collateral shall: (i) name the Bank as an insured pursuant to a so-called "standard mortgagee clause"; (ii) provide that no action of the Company, or any tenant or subtenant shall void such policy as to the Bank; and (iii) provide that the Bank shall be notified of any proposed cancellation of such policy at least thirty (30) days in advance of such proposed cancellation and will have sufficient time to correct any deficiencies justifying such proposed cancellation. All such policies shall be delivered to the Bank upon request. In the event of a casualty loss, the Company may apply the proceeds of any insurance to the restoration or replacement of the property or asset which was the subject of such loss, PROVIDED that (A) the Company shall have demonstrated to the reasonable satisfaction of the Bank that such property or asset will be restored to substantially its previous condition or will be replaced by a substantially identical property or asset, and (B) the Bank shall have received, if requested by it, a favorable opinion from counsel for the Company satisfactory in scope and form to the Bank, as to the Bank's having a prior security interest in and valid first lien on such restored or replaced property or asset. 5.4. TAXES. The Company shall pay or cause to be paid all taxes, assessments or governmental charges on or against it or any of its Subsidiaries or its or their properties on or prior to the time when they become due; PROVIDED that this covenant shall not apply to any tax, assessment or charge that is being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been established and are being maintained in accordance with GAAP. 5.5. INSPECTION BY THE BANK. The Company shall permit the Bank or its designees, at any reasonable time, and upon reasonable notice (or if a Default or Event of Default shall have occurred and is continuing, at any time and without prior notice), to (i) visit and inspect the properties of the Company and its Subsidiaries, (ii) examine and make copies of and take abstracts from the books and records of the Company and its Subsidiaries, (iii) discuss the affairs, finances and accounts of the Company and its Subsidiaries with their appropriate officers, employees and accountants, and (iv) to arrange for verification of Accounts Receivable, under reasonable procedures, directly with account debtors or by other methods; and shall do, make, execute and deliver all such additional and further acts, things, deeds, assurances, and instruments as the Bank may reasonably require more completely to vest in and assure to the Bank its rights hereunder or in any Collateral and to carry into effect the provisions and intent of this Agreement. In handling such information the Bank shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any non-public information thereby received or received pursuant to Section 5 except that disclosure of such information may be made (i) to the subsidiaries or affiliates of the Bank in connection with their present or prospective business relations with the Company and its Subsidiaries, (ii) to prospective transferees or purchasers of an interest in the Revolving Loans if they agree to be bound by the confidentiality obligations of this Section 5.5, (iii) as required by law, regulation, rule or order, subpoena, judicial order or similar order and (iv) as may be required in connection with the examination, audit or similar investigation of the Bank. 26 32 5.6. MAINTENANCE OF BOOKS AND RECORDS. Each of the Company and its Subsidiaries shall keep adequate books and records of account, in which true and complete entries will be made reflecting all of its business and financial transactions, and such entries will be made in accordance with GAAP consistently applied and applicable law. 5.7. MAINTENANCE OF ACCOUNTS. The Company and each of its U.S. Subsidiaries will maintain its principal depository and operating accounts and cash management services with the Bank at all times and shall maintain in such accounts sufficient funds to make all principal and interest payments when due. 5.8. NEW ACCOUNTS AND INVESTMENTS. The Company will notify the Bank in writing of any additions or changes in the ownership, location or relevant account numbers of any depository and operating accounts with a balance equal or greater than $100,000 and marketable securities owned by the Company and its Subsidiaries. 5.9. MINIMUM CONSOLIDATED TANGIBLE CAPITAL BASE. The Company and its Subsidiaries shall maintain at all times a Consolidated Tangible Capital Base of not less than $2,000,000. 5.10. MINIMUM CASH OR EQUIVALENTS. The Company shall maintain at all times a Cash Equivalent Amount of not less than $2,500,000. 5.11. FURTHER ASSURANCES. At any time and from time to time the Company shall, and shall cause each of its Subsidiaries to, execute and deliver such further instruments and take such further action as may reasonably be requested by the Bank to effect the purposes of this Agreement and the Note. SECTION 6. ---------- NEGATIVE COVENANTS ------------------ So long as the Bank has any commitment to lend hereunder or to deliver Dollars or an Alternative Currency, as the case may be, under the Foreign Exchange Facility or any Revolving Loan or other Obligation hereunder remains outstanding, the Company covenants as follows: 6.1. INDEBTEDNESS. Neither the Company nor any of its Subsidiaries shall create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness other than the following: (a) Indebtedness of the Company or any of its Subsidiaries to the Bank or any of its Affiliates, including, without limitation, the Exchange Contract Amount not in excess of the Foreign Exchange Facility Sublimit; (b) Indebtedness existing as of the date hereof and disclosed in SCHEDULE 6.1 hereto and Guarantees disclosed on SCHEDULE 6.2 hereto and any refinancing of such Indebtedness in 27 33 amounts not exceeding the principal amount thereof and on terms which are substantially the same as the terms of the refinanced Indebtedness; (c) Indebtedness of the Company to or from Sepracor and Versicor so long as the Company and Versicor remain Subsidiaries of Sepracor; (d) Indebtedness of the Company to or from its Corporate Affiliates (except Sepracor and Versicor so long as the Company and Versicor remain Subsidiaries of Sepracor) in the aggregate principal amount outstanding at any time not in excess of $10,000,000 and, with respect to each such Corporate Affiliate, not in excess of $5,000,000 principal amount outstanding at any time; (e) Indebtedness secured by Permitted Encumbrances; (f) Indebtedness of BSA to BNP Gennevilliers disclosed on SCHEDULE 6.1 hereto, and the refinancing of such Indebtedness in amounts not exceeding the principal amount thereof and on terms which are substantially the same as the terms of the refinanced Indebtedness; (g) Indebtedness in respect of Capital Leases and purchase money financing for tangible property used in the business of the Company in the aggregate principal amount outstanding at any time not in excess of $5,000,000 LESS with respect to each of Sepracor and Versicor, any indebtedness in respect of Capital Leases and purchase money financing for tangible property used in their businesses; and (h) Indebtedness of BSA to the government of the Republic of France or a French financial institution in the maximum principal amount of 22,725,000 French Francs incurred in connection with the construction of, the purchase of equipment for, and the related expenses for, a new facility located in the Paris/Cerge Pontise/Roissy Charles de Gaulle region of France. 6.2. CONTINGENT LIABILITIES. Neither the Company nor any of its Subsidiaries shall create, incur, assume or remain liable with respect to any Guarantees other than the following: (a) Guarantees in favor of the Bank or any of its Affiliates; and (b) Guarantees disclosed in SCHEDULE 6.2 hereto. 6.3. SALE AND LEASEBACK. Neither the Company nor any of its Subsidiaries shall enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property owned by it in order to lease such property or lease other property that the Company or any such Subsidiary intends to use for substantially the same purpose as the property being sold or transferred. 6.4. ENCUMBRANCES. Neither the Company nor any of its Subsidiaries shall create, incur, assume or suffer to exist any mortgage, pledge, security interest, lien or other charge or encumbrance, including the lien or retained security title of a conditional vendor upon or with respect to any of its property or assets ("ENCUMBRANCES"), or assign or otherwise convey any 28 34 right to receive income, including the sale or discount of accounts receivable with or without recourse, except the following ("PERMITTED ENCUMBRANCES"): (a) Encumbrances in favor of the Bank or any of its Affiliates; (b) Encumbrances existing as of the date hereof and disclosed in SCHEDULE 6.4 hereto and securing any refinancing of Indebtedness provided that such refinancing is permitted pursuant to Section 6.1(b); (c) Encumbrances for purchase money obligations or Capital Leases permitted pursuant to Section 6.1(f); PROVIDED that such Encumbrances shall not attach to property and assets of the Company or any Subsidiary not purchased with the proceeds of such purchase money obligations; (d) liens for taxes, fees, assessments and other governmental charges to the extent that payment of the same may be postponed or is not required in accordance with the provisions of Section 5.4; and (e) landlords' and lessors' liens in respect of rent not in default or liens in respect of pledges or deposits under workmen's compensation, unemployment insurance, social security laws, or similar legislation (other than ERISA) or in connection with appeal and similar bonds incidental to litigation; mechanics', laborers' and materialmen's and similar liens, if the obligations secured by such liens are not then delinquent; liens securing the performance of bids, tenders, contracts (other than for the payment of money); and statutory obligations incidental to the conduct of its business and that do not in the aggregate materially detract from the value of its property or materially impair the use thereof in the operation of its business. 6.5. LINES OF BUSINESS. Neither the Company nor any Subsidiary will engage in any line of business if as a result thereof the business of the Company and its Subsidiaries taken as a whole would be materially different from what it was on the date hereof. 6.6. MERGER; CONSOLIDATION; SALE OR LEASE OF ASSETS. Neither the Company nor any of its Subsidiaries shall, without the prior written consent of the Bank, sell, lease or otherwise dispose of assets or properties, other than sales or leases of inventory in the ordinary course of business; or liquidate, merge or consolidate into or with any other Person or entity, PROVIDED that any Subsidiary of the Company may merge or consolidate into or with (i) the Company if no Default or Event of Default has occurred and is continuing or would result from such merger and if the Company is the surviving company or (ii) any other wholly-owned Subsidiary of the Company. 6.7. ADDITIONAL STOCK ISSUANCE. The Company shall not permit any of its Subsidiaries to issue any additional shares of such Subsidiary's capital stock or other equity securities, any options therefor or any securities convertible thereto other than to the Company; PROVIDED, that such Subsidiaries may issue additional shares of its capital stock if after any such issuance the Company has 50% or more of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such entity or the Company has, at least, a 50% ownership interest. 29 35 6.8. RESTRICTED PAYMENTS. The Company will not directly or indirectly declare, order, pay or make any Restricted Payment or set aside any sum or property therefore if at the time of such proposed action or immediately after giving effect thereto, any condition or event shall exist which constitutes a Default or an Event of Default and unless such Restricted Payment is expressly permitted by this Section 6.8. Subject to the foregoing, the Company may (a) make distributions of shares of its capital stock as stock splits or stock dividends, (b) make payments under the Corporate Services Agreement, and (c) make any other Restricted Payment; PROVIDED, that in the last event the Company shall have received the prior written consent of the Bank to such proposed Restricted Payment. The amount involved in any Restricted Payment declared, ordered, paid, made or set apart in property shall be deemed to be the greater of the fair market value thereof at the time of such distribution or payment (or the date of such transaction, as the case may be), as determined in good faith by the Company, or the net book value thereof on the books of the Company as at such time. 6.9. TRANSACTIONS WITH AFFILIATES. Except for Sepracor's Subsidiaries on the date hereof so long as they remain Subsidiaries of Sepracor, the Company will not, and will not permit any Corporate Affiliate to, directly or indirectly, enter into any lease or other transaction with any shareholder or with any Affiliate of the Company or such shareholder, on terms that are less favorable to the Company or such Subsidiary than those which might be obtained at the time from Persons who are not a shareholder or an Affiliate. Notwithstanding the preceding sentence, the Company may (1) sublease its facilities from Sepracor; (2) enter into and perform the Corporate Services Agreement, the Technology Transfer Agreement and [the Cross License Agreement, (3) enter into an amended and restated cross license agreement replacing the Cross License Agreement if such amended and restated agreement is in form and substance acceptable to the Bank and its counsel] and (4) engage in transactions expressly permitted by Sections 6.1, 6.6, and 6.7. 6.10. INVESTMENTS. Neither the Company nor any of its Subsidiaries shall make or maintain any investments other than (i) existing and additional investments in Subsidiaries on the date hereof so long as they remain Subsidiaries of the Company, (ii) Qualified Investments, (iii) investments consisting of foreign deposit accounts used for ordinary course working capital purposes of the Company or its Subsidiaries; PROVIDED, that the aggregate balance of foreign deposit accounts of Sepracor and its Subsidiaries shall not at any time exceed $1,500,000 and (iv) investments in French Subsidiaries in existence on or prior to December 28, 1994 but only to the extent such investments are required for compliance with French statutory requirements regarding corporate capitalization. 6.11. ERISA. Neither the Company nor any member of the Controlled Group shall permit any Plan maintained by it to (i) engage in any "prohibited transaction" (as defined in Section 4975 of the Code, (ii) incur any "accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or not waived, or (iii) terminate any Plan in a manner that could result in the imposition of a lien or encumbrance on the assets of the Company or any of its Subsidiaries pursuant to Section 4068 of ERISA. 30 36 6.12. OBSERVANCE OF SUBORDINATION PROVISIONS, ETC. The Company will not make, or cause or permit to be made, any payments in respect of any Subordinated Indebtedness in contravention of the subordination and other payment provisions contained in the evidence of such Subordinated Indebtedness or in contravention of any written agreement pertaining thereto, nor will the Company (a) amend, modify or change in any manner any of such subordination or other payment provisions without the prior written consent of the Bank or (b) amend, modify or change in any manner adverse to the interests of the Bank any of the other provisions set forth in the agreements under which such Subordinated Indebtedness is outstanding or contained in the evidence of such Subordinated or other Indebtedness. SECTION 7. ---------- SECURITY -------- 7.1. SECURITY INTEREST. As security for the payment and performance of all Obligations, the Bank shall have and the Company hereby grants to the Bank a continuing security interest in all property of the Company of every kind and description, tangible or intangible, whether now or hereafter existing, whether now owned or hereafter acquired, and wherever located, including but not limited to the following (and together with all property in which the Bank may have a security interest pursuant to any other security agreements, pledge agreements, mortgages and other instruments creating a security interest in favor of the Bank and securing the Obligations, collectively, the "COLLATERAL"): all furniture, and similar property of the Company; all Accounts of the Company; all contract rights of the Company; all other rights of the Company, including, without limitation, amounts due from affiliates, tax refunds, and insurance proceeds; all investment property (as defined in the Massachusetts Uniform Commercial Code); all interest of the Company in goods or services as to which an Account Receivable shall have arisen; all files, records (including, without limitation, computer programs, tapes and related electronic data processing software) and writings of the Company or in which it has an interest in any way relating to the foregoing property; all goods, instruments, documents of title, policies and certificates of insurance, securities, chattel paper, deposits, cash or other property owned by the Company or in which it has an interest which are now or may hereafter be in the possession of the Bank or as to which the Bank may now or hereafter control possession by documents of title or otherwise; all general intangibles of the Company (including, without limitation, all patents, trademarks, trade names, service marks, copyrights and applications for any of the foregoing; all rights to use patents, trademarks, trade names, service marks, and copyrights of any Person and all trade secrets, know how and other intellectual property rights (collectively "INTELLECTUAL PROPERTY"); and any rights of the Company to retrieval from third parties of electronically processed and recorded information pertaining to any of the types of collateral referred to in this Section 7.1); any other property of the Company, real or personal, tangible or intangible, in which the Bank now has or hereafter acquires a security interest or which is now or may hereafter be in the possession of the Bank; any sums at any time credited by or due from the Bank to the Company, including deposits; and proceeds and products of all of the foregoing; PROVIDED THAT the Bank shall not be deemed to have a security interest in any technology license entered into by the Company and any third party other than an Affiliate or Subsidiary of the Company prior to December 28, 1994 if the granting of such security interest by the Company would be a violation of such technology 31 37 license. The provisions of this Section 7.1 applicable to general intangibles consisting of Intellectual Property are supplemented by the provisions of the Intellectual Property Security Agreement and any conflict between the provisions of this Agreement as applicable to such general intangibles and the Intellectual Property Security Agreement shall be resolved in favor of such Intellectual Property Security Agreement. 7.2. LOCATION OF RECORDS AND COLLATERAL; NAME CHANGE. The Company shall give the Bank written notice of each location at which Collateral is or will be kept and of each office of the Company at which the records pertaining to its Accounts Receivable and contract rights are kept. Except as such notice is given, all Collateral is and shall be kept, and all records of the Company pertaining to Accounts and contract rights are and shall be kept at the Company's chief executive offices at 111 Locke Drive, Marlborough, Massachusetts 01752 or at the Bank. The Company shall give the Bank thirty (30) days prior written notice of any change in the name or corporate form of the Company or any change in the name under which the Company's business is transacted. 7.3. STATUS OF COLLATERAL. As of the date hereof, the Company has good and marketable title to all of its properties, assets and rights of every name and nature now purported to be owned by it, including, without limitation, the Collateral, free from all liens, charges and encumbrances whatsoever, except as disclosed on SCHEDULE 6.4 hereof. At the time the Company pledges, sells, assigns or transfers to the Bank any instrument, document of title, security, chattel paper or other property (including Inventory, contract rights and Accounts) or any proceeds or products thereof, or any interest therein, the Company shall be the lawful owner thereof and shall have good right to pledge, sell, assign or transfer the same; none of such property shall have been pledged, sold, assigned or transferred to any Person other than the Bank or in any way encumbered, except as disclosed in SCHEDULE 6.4 of this Agreement; and the Company shall defend the same against the claims and demands of all Persons. SECTION 8. ---------- DEFAULTS -------- 8.1. EVENTS OF DEFAULT. There shall be an Event of Default hereunder if any of the following events occurs: (a) the Company shall fail to pay when due (i) any amount of principal of any Revolving Loans, or (ii) any amount of interest thereon; or (b) the Company shall fail to pay within three (3) days after receipt of notice from the Bank any fees or expenses payable hereunder or under the Note; or (c) the Company shall fail to perform any term, covenant or agreement contained in Sections 5 (except Section 5.3) or or shall fail to perform any term, covenant or agreement contained in the Intellectual Property Security Agreement; or 32 38 (d) the Company shall fail to perform any term, covenant or agreement (other than those referred to above in this Section ) contained in this Agreement and such default shall continue for twenty (20) days; or (e) any representation or warranty of the Company made in this Agreement or in the Note, or by the Company in the Intellectual Property Security Agreement, or by the Company in any other documents or agreements executed in connection with the transactions contemplated by this Agreement or in any certificate delivered hereunder shall prove to have been false in any material respect upon the date when made or deemed to have been made; or (f) the occurrence of an Event of Default under the Sepracor Credit Agreement; or (g) the failure to pay at maturity, or within any applicable period of grace, any obligations of Sepracor or the Company or one of its Subsidiaries in excess of One Hundred Thousand Dollars ($100,000) in the aggregate for borrowed monies or advances, or for the use of real or personal property, or fail to observe or perform any term, covenant or agreement evidencing or securing such obligations, the result of which failure is to permit the holder or holders of such indebtedness to cause such indebtedness to become due prior to its stated maturity upon delivery of required notice, if any; or (h) the Company or Sepracor shall default in any payment due on any Indebtedness in respect of borrowed money, any Capital Lease or the deferred purchase price of property with an outstanding principal amount in excess of One Hundred Thousand Dollars ($100,000) and such default shall continue for more than the period of grace, if any, specified therein and shall not have been waived pursuant thereto; (i) the Company or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of itself or of all or a substantial part of its property, (ii) be generally not paying its debts as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as now or hereafter in effect), (v) take any action or commence any case or proceeding, as debtor, under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, or any other law providing for the relief of debtors, (vi) fail to contest in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Federal Bankruptcy Code or other law, (vii) take any action under the laws of its jurisdiction of incorporation or organization similar to any of the foregoing, or (viii) take any corporate action for the purpose of effecting any of the foregoing; or (j) a proceeding or case shall be commenced, without the application or consent of the Company or any of its Subsidiaries in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (iii) similar relief in respect of it, under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts or any other law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 60 days; or an order for relief shall be 33 39 entered in an involuntary case under the Federal Bankruptcy Code, against the Company or such Subsidiary; or action under the laws of the jurisdiction of incorporation or organization of the Company or any of its Subsidiaries similar to any of the foregoing shall be taken with respect to the Company or such Subsidiary and shall continue unstayed and in effect for any period of 60 days; or (k) a judgment or order for the payment of money shall be entered against the Company or any of its Subsidiaries by any court, or a warrant of attachment or execution or similar process shall be issued or levied against property of the Company or such Subsidiary, that in the aggregate exceeds one hundred thousand dollars ($100,000) in value and such judgment, order, warrant or process shall continue undischarged or unstayed for 30 days; or (l) the Company or any member of the Controlled Group shall fail to pay when due an amount or amounts aggregating in excess of Fifty Thousand Dollars ($50,000) that it shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by the Company, any member of the Controlled Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against the Company and such proceedings shall not have been dismissed within 30 days thereafter; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or (m) if Sepracor shall cease to own directly at least 51% of the issued and outstanding shares of the capital stock of the Company having ordinary voting power to elect a majority of the board of directors of the Company; or (n) a final nonappealable judgment shall be entered against the Company or Sepracor by any court with respect to any patent litigation involving HyperD chromatography media or the Company or Sepracor shall have entered into a settlement in respect of any such litigation, which, in either case would have a material adverse affect on the Company; (o) the termination, expiration or non-renewal of any license or other Material Agreement which termination, expiration or non-renewal has a material adverse effect on the existing business or prospects of the Company; or (p) the Company shall fail to perform with respect to any material term, covenant or agreement of any Alternative Currency Commitment. 8.2. REMEDIES. Upon the occurrence of an Event of Default described in Sections 8.1.(i) and 8.1.(j), immediately and automatically, and upon the occurrence of any other Event of Default, at any time thereafter while such Event of Default is continuing, at the Bank's option and upon the Bank's declaration: 34 40 (a) the Bank's commitment to make any further Revolving Loans hereunder and to deliver Dollars or an Alternative Currency under any Alternative Currency Commitment or under the Foreign Exchange Facility, generally, shall terminate; (b) the unpaid principal amount of the Revolving Loans together with accrued interest and all other Obligations hereunder shall become immediately due and payable, including the unpaid principal amount of any Revolving Loan subject to an exercised LIBOR Option together with accrued interest thereon and the related LIBOR Premium in the same manner as though the Company had exercised its right to prepayment pursuant to Section 2.6 of this Agreement, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived; and (c) the Bank may exercise any and all rights it has under this Agreement, the Note or any other documents or agreements executed in connection herewith, or at law or in equity, and proceed to protect and enforce the Bank's rights by any action at law, in equity or other appropriate proceeding. (d) Upon the occurrence of any Event of Default and at any time thereafter (unless such Event of Default shall theretofore have been remedied), at the Bank's option: (i) the Bank shall thereupon be relieved of all of its obligations to make any Revolving Loans hereunder; (ii) the Bank shall thereupon be relieved of all of its obligations with respect to Alternative Currency Commitments or under the Foreign Exchange Facility, generally; (iii) the unpaid principal amount of the Note together with accrued interest thereon and all other Obligations shall become immediately due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived; and (iv) the Bank may exercise any and all rights it has under this Agreement, the Note, the Intellectual Property Security Agreement or any other documents or agreements executed in connection with the transactions contemplated by this Agreement (the "LOAN DOCUMENTS"), or by law or equity, and proceed to protect and enforce the Bank's rights by any action at law, suit in equity or other appropriate proceeding, whether for specific performance or for an injunction against a violation of any covenant contained herein or in any Loan Document or in aid of the exercise of any power granted hereby or thereby or by law. (e) Without limiting the rights of the Company set forth in this Section 8.2 above, upon the occurrence of any Event of Default and at any time thereafter (such default not having been cured), the Bank shall have the right to take immediate possession of the Collateral, and for that purpose the Bank may, so far as the Company can give authority therefor, enter upon any premises on which the Collateral may be situated and remove the same therefrom. The Company waives demand and notice with respect to and assents to any repossession of the Collateral. The Bank may dispose of the Collateral in any order and in any manner it chooses and may refrain from the sale of any real property, held as the Collateral, until the sale of personal property. Except for the Collateral which is perishable or threatens to decline speedily in value or which is of a type customarily sold on a recognized market, the Bank shall give to the Company at least ten (10) days' prior written notice of the time and place of any public sale of the Collateral or of the time after which any private sale or any other intended disposition is to be made. The residue of any proceeds of collection or sale, after satisfying all Obligations in such order of preference as the Bank may determine and making proper allowance for interest 35 41 on Obligations not then due, shall be credited to any deposit account which the Company may maintain with the Bank, or, if there is no such account, held pending instructions from the Company. The Company shall remain liable for any deficiency. (f) The Bank may at any time in its sole discretion (after an Event of Default has occurred) transfer any securities or other property constituting the Collateral into its own name or that of its nominee and receive the income thereon and hold the same as security for Obligations or apply it on principal or interest due on Obligations. Insofar as the Collateral shall consist of Accounts or instruments, the Bank may, upon the occurrence of an Event of Default, without notice to or demand on the Company, demand and collect such Collateral as the Bank may determine. For the purpose of realizing the Bank's rights therein, the Bank may receive, open and dispose of mail addressed to the Company and endorse notes, checks, drafts, money orders, documents of title or other evidences of payment, shipment or storage or any form of Collateral on behalf of and in the name of the Company. The powers conferred on the Bank by this Section are solely to protect the interest of the Bank and shall not impose any duties on the Bank to exercise any powers. (g) In addition to all other rights and remedies provided hereunder or by law, the Bank shall have in any jurisdiction where enforcement of this Agreement is sought the rights and remedies of a secured party under the Uniform Commercial Code of Massachusetts. SECTION 9. ---------- MISCELLANEOUS ------------- 9.1. NOTICES. Unless otherwise specified herein, all notices hereunder to any party hereto shall be in writing and shall be deemed to have been given when delivered by hand, or three (3) days after being properly deposited in the mails postage prepaid, or when sent by telex, answerback received, or electronic facsimile transmission, or when delivered to the telegraph company or overnight courier, addressed to such party at its address indicated below: If to the Company, at BioSepra Inc. 111 Locke Drive Marlborough, Massachusetts 01752 Attention: Robert F. Scumaci Chief Financial Officer and Treasurer Fax No.: 508-357-7494 If to the Bank, at Fleet National Bank 75 State Street Boston, Massachusetts 02109 Attention: Kimberly A. Martone 36 42 Vice President Fax No.: 617-346-1633 or at any other address specified by such party in writing. 9.2. EXPENSES. The Company will pay on demand all expenses of the Bank in connection with the preparation, waiver or amendment of this Agreement, the Note, or other documents executed in connection therewith, or the administration, default or collection of the Revolving Loans or other Obligations, or collection of amounts due with respect to Alternative Currency Commitments or the Foreign Exchange Facility, or in connection with the Bank's exercise, preservation or enforcement of any of its rights, remedies or options thereunder, including, without limitation, reasonable fees and disbursements of outside legal counsel or accounting, consulting, brokerage or other similar professional fees or expenses, and any fees or expenses associated with any travel or other costs relating to any appraisals or examinations conducted in connection with the Obligations or any Collateral therefor, and the amount of all such expenses shall, until paid, bear interest at the rate applicable to principal hereunder (including any default rate). 9.3. SET-OFF. Regardless of the adequacy of any Collateral or other means of obtaining repayment of the Obligations, any deposits, balances or other sums credited by or due from the head office of the Bank or any of its branch offices to the Company, may, at any time and from time to time after the occurrence of an Event of Default hereunder, without notice to the Company or compliance with any other condition precedent now or hereafter imposed by statute, rule of law, or otherwise (all of which are hereby expressly waived) be set off, appropriated, and applied by the Bank against any and all Obligations of the Company to the Bank or any of its affiliates in such manner as the head office of the Bank or any of its branch offices in their sole discretion may determine, and the Company hereby grants the Bank a continuing security interest in such deposits, balances or other sums for the payment and performance of all such obligations. 9.4. TERM OF AGREEMENT. This Agreement shall continue in force and effect so long as the Bank has any commitment to make Revolving Loans hereunder or any Revolving Loan or any Obligation hereunder shall be outstanding. 9.5. NO WAIVERS. No failure or delay by the Bank in exercising any right, power or privilege hereunder or under the Note or under any other documents or agreements executed in connection herewith shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein and in the Note provided are cumulative and not exclusive of any rights or remedies otherwise provided by agreement or law. 9.6. GOVERNING LAW; JURISDICTION. This Agreement and the Note shall be deemed to be contracts made under seal and shall be construed in accordance with and governed by the laws of Massachusetts (without giving effect to any conflicts of laws provisions contained therein). The Company, to the extent that it may lawfully do so, hereby consents to the jurisdiction of the courts of the Commonwealth of Massachusetts and the United States District Court for the District of Massachusetts, as well as to the jurisdiction of all courts to which an 37 43 appeal may be taken from such courts, for the purpose of any suit, action or other proceeding arising out of any of its obligations hereunder or with respect to the transactions contemplated hereby, and expressly waives any and all objections it may have as to venue in any such courts. The Company further agrees that a summons and complaint commencing an action or proceeding in any of such courts shall be properly served and shall confer personal jurisdiction if served personally or by certified mail to it at its address provided in Section of this Agreement or as otherwise provided under the laws of the Commonwealth of Massachusetts. 9.7. AMENDMENTS. Neither this Agreement nor the Note nor any provision of this Agreement or thereof may be amended, waived, discharged or terminated except by a written instrument signed by the Bank and, in the case of amendments, by the Company. 9.8. BINDING EFFECT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS. (a) This Agreement shall be binding upon and inure to the benefit of the Company and the Bank and their respective successors and assigns; PROVIDED that the Company may not assign or transfer its rights or obligations hereunder. (b) ASSIGNMENTS BY THE BANK. From and after the date hereof, the Bank may at any time assign all, or a proportionate part of all, of its rights, interests and duties with respect to the Revolving Commitment Amount and the Note (1) to any one or more of its Affiliates without the consent or approval of the Company or (2) to one or more banks or other financial institutions with the consent of the Company which consent shall not be unreasonably withheld (each assignee under clauses (1) and (2), an "Assignee"), in each case on such terms, as between the Bank and each of its Assignees, as the Bank may think fit, and such Assignee shall assume such rights, interests and duties pursuant to an instrument executed by such Assignee and the Bank, and for this purpose the Bank may make available to each of its potential Assignees such information relating to the Company, this Agreement and the transactions contemplated hereby as the Bank may think necessary or desirable, which information shall be held by each potential Assignee strictly in confidence. Upon execution and delivery of such an instrument and payment by such Assignee to the Bank of an amount equal to the purchase price agreed between the Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights, interests and duties of a Bank with a Revolving Commitment Amount and Revolving Loan as set forth in such instrument of assumption, and the Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this paragraph (i), the Bank and the Company shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. (c) PARTICIPATIONS BY THE BANK. From and after the date hereof, the Bank shall be at liberty to offer the participations in the Revolving Commitment Amount and the Note to one or more banks or other financial institutions on such terms as the Bank may think fit, and for this purpose the Bank may make available to each of its potential participants such information relating to the Company, this Agreement and the transactions contemplated hereby as the Bank may think necessary or desirable, which information shall be held by each potential participant strictly in confidence; PROVIDED, that the Bank shall not offer any participations to foreign banks or other financial institutions without the prior written consent of the Company; PROVIDED FURTHER, that the Bank shall retain the sole right to consent to amendments to, or waivers of, the 38 44 provisions of this Agreement and the Note and the sole right and responsibility to enforce the obligations of the Company hereunder and under the Note; PROVIDED FURTHER, that the Bank may agree with each of its participants that the Bank will not agree, without the consent of the participant, to any amendment or waiver of any provision of this Agreement which would increase or otherwise change such Revolving Commitment Amount or reduce the principal of or rate of interest on the Revolving Loans subject to such participation, or postpone the date fixed for any payment of principal or of interest on any Revolving Loans. 9.9. AMENDMENT AND TERMINATION OF PRIOR LOAN AGREEMENT. Upon the execution and delivery of this Agreement, (i) Section 1.1 of the Prior Loan Agreement shall be amended to change the "Revolving Credit Termination Date to "December 31, 1996," and (ii) the Prior Loan Agreement shall be terminated and of no further force and effect except for the obligation of the Company to pay any and all of its obligations incurred thereunder or in respect thereof (including the payment of the entire unpaid amount of principal of, if any, and accrued interest on the Prior Loans and the payment in full of all fees and expenses provided for in the Prior Loan Agreement) and except for the continuation of the Bank's security interest in the Collateral as provided herein and in the other Loan Documents which continuing security interest is hereby acknowledged and confirmed. 9.10. CURRENCY CONVERSION. If, for the purpose of obtaining or enforcing judgment in any court or for any other purpose hereunder it is necessary to convert an amount due hereunder in the currency in which it is due (the "ORIGINAL CURRENCY") into another currency (the "SECOND CURRENCY") the rate of exchange applied shall be that at which, in accordance with normal banking procedures, the Bank could purchase, in the United States money market or the United States foreign exchange market (the "MONEY MARKETS"), as the case may be, the Original Currency with the Second Currency on the Business Day on which judgment is given or the amount is due. The Company agrees that its obligations in respect of any amounts due from it to the Bank, in the Original Currency hereunder shall, notwithstanding any judgment expressed or payment made in the Second Currency, be discharged only to the extent that on the Business Day following receipt of any sums so paid or adjudged to be due hereunder in the Second Currency, the Bank may, in accordance with normal banking procedure purchase, in the appropriate Money Market, the Original Currency with the amount of the Second Currency so paid or so adjudged to be due; and if the amount of the Original Currency so purchased is less than the amount originally due in the Original Currency, the Company agrees as a separate obligation, and notwithstanding any such payment or judgment to indemnify the Bank. 9.11. COUNTERPARTS. This Agreement may be signed in any number of counterparts with the same effect as if the signatures hereto and thereto were upon the same instrument. 9.12. PARTIAL INVALIDITY. The invalidity or unenforceability of any one or more phrases, clauses or sections of this Agreement shall not affect the validity or enforceability of the remaining portions of it. 9.13. CAPTIONS. The captions and headings of the various sections and subsections of this Agreement are provided for convenience only and shall not be construed to modify the meaning of such sections or subsections. 39 45 9.14. WAIVER OF JURY TRIAL. THE BANK AND THE COMPANY AGREE THAT NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE BANK AND THE COMPANY, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NEITHER THE BANK NOR THE COMPANY HAS AGREED WITH OR REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. 9.15. ENTIRE AGREEMENT. This Agreement, the Note and the documents and agreements executed in connection herewith constitute the final agreement of the parties hereto and supersede any prior agreement or understanding, written or oral, with respect to the matters contained herein and therein. 40 46 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year first above written. BIOSEPRA INC. By: /s/ Robert F. Scumaci --------------------------------------------- Name: Robert F. Scumaci Title: Chief Financial Officer and Treasurer FLEET NATIONAL BANK By: /s/ Kimberly A. Martone --------------------------------------------- Name: Kimberly A. Martone Title: Vice President 41 47 EXHIBIT A FORM OF BIOSEPRA INC. AMENDED AND RESTATED PROMISSORY NOTE December 31, 1996 $3,000,000 Boston, Massachusetts For value received, the undersigned hereby promises to pay to FLEET NATIONAL BANK (the "BANK"), or order, at the head office of the Bank at 75 State Street, Boston, Massachusetts 02109, the principal amount of THREE MILLION DOLLARS ($3,000,000) or such lesser amount as shall equal the principal amount outstanding hereunder on April 30, 1999 or such earlier date as provided in the Agreement (as defined below) in lawful money of the United States of America and in immediately available funds, and to pay interest on the unpaid principal balance hereof from time to time outstanding, at said office and in like money and funds, for the period commencing on the date hereof until paid in full, at the rates per annum and on the dates provided in the Agreement. Upon the occurrence and during the continuance of an Event of Default, interest on the unpaid principal amount hereof and (to the extent permitted by law) on unpaid interest shall thereafter be payable on demand at a rate per annum equal to two percent (2%) above the interest rate otherwise in effect with respect to such Revolving Loans. Upon the cure of an Event of Default and the payment of interest at the default rate through the date of such cure, the interest rate shall revert to that provided for in the Agreement. If the entire amount of any required principal and/or interest is not paid in full within ten (10) days after the same is due, the undersigned shall pay to the Bank a late fee equal to five percent (5%) of the required payment; PROVIDED, that such late fee shall be reduced to three percent (3%) of any required principal and interest payment that is not paid within fifteen (15) days of the date it is due if this Note is secured by a mortgage on an owner-occupied residence, 1-4 units. Nothing in the preceding sentence shall affect the Bank's rights to exercise any of its rights and remedies provided in the Agreement (as defined below) if an Event of Default (as defined in the Agreement) has occurred. This Note is issued pursuant to, and entitled to the benefits of, and is subject to, the provisions of a certain Amended and Restated Revolving Credit and Security Agreement dated as of December 31, 1996, by and between the undersigned and the Bank (herein, as the same may from time to time be amended or extended, referred to as the "AGREEMENT"), but neither this reference to the Agreement nor any provision thereof shall affect or impair the absolute and unconditional obligation of the undersigned makers of this Note to pay the principal of and interest on this Note as herein provided. As provided in the Agreement, this Note is secured by certain assets of the undersigned. 48 In case an Event of Default (as defined in the Agreement) shall occur, the aggregate unpaid principal of and accrued interest on this Note shall become or may be declared to be due and payable in the manner and with the effect provided in the Agreement. The undersigned may at its option prepay all or any part of the principal of this Note before maturity upon the terms provided in the Agreement, and this Note is subject to mandatory prepayment in certain circumstances, which repayment shall in certain cases require the payment of a premium and in certain cases not require the payment of a premium. The undersigned makers hereby waive presentment, demand, notice of dishonor, protest and all other demands and notices in connection with the delivery, acceptance, performance and enforcement of this Note. This instrument shall have the effect of an instrument executed under seal and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts (without giving effect to any conflicts of laws provisions contained therein). BIOSEPRA INC. By: -------------------------------------------- Name: Robert F. Scumaci Title: Chief Financial Officer and Treasurer 2 49 SCHEDULE I TO PROMISSORY NOTE AMOUNT OF INTEREST AMOUNT NOTATION DATE REVOLVING RATE PAID MADE BY LOAN 3 50 EXHIBIT B COMPLIANCE CERTIFICATE ---------------------- Fleet National Bank 75 State Street Boston, Massachusetts 02109 Attention: Kimberly A. Martone Vice President Ladies and Gentlemen: As required by Section 5.1(c) of the Amended and Restated Revolving Credit and Security Agreement dated as of December 31, 1996 (the "CREDIT AGREEMENT") by and between BioSepra Inc. (the "COMPANY") and Fleet National Bank (the "BANK"), a review of the activities of the Company for the fiscal year and/or fiscal quarter ending ___________, 19___ (the "FISCAL PERIOD") has been made under my supervision to determine whether the Company has performed and/or maintained all of its respective obligations under the Credit Agreement. Based upon such review, I hereby certify to you, as an Authorized Officer of the Company, that the Company has performed and maintained all such obligations under the Credit Agreement, the Note and the Loan Documents for the Fiscal Period and, to the best of my knowledge, no event has occurred that constitutes a Default or an Even of Default as defined in the Credit Agreement. Other capitalized terms used herein without definition have the same meanings as in the Credit Agreement. As required by Section [5.1(a)][5.1(b)] of the Credit Agreement financial statements of the Company (the "FINANCIAL STATEMENTS") for the Fiscal Period and other information required by such sections accompany this certificate. The Financial Statements present fairly the financial position of the Company as of the date thereof and the statements of operation of the Company for the Fiscal Period covered thereby. I further certify to you, as an Authorized Officer of the Company, that the figures set forth below accurately represent amounts required to be calculated under the various provisions or covenants of the Credit Agreement indicated, each as of the last day of the Fiscal Period unless otherwise indicated. Dated: _________ __, 199__ ___________________________________ Title: 51 I. Section 5.9 - Minimum Consolidated Tangible Capital Base -------------------------------------------------------- (1) Stockholders' equity $____________ (2) Subordinated Indebtedness $____________ (3) Goodwill $____________ (4) Intangible items $____________ (5) Reserves not already deducted from assets $____________ (6) Write-ups from revaluations $____________ (7) Equity in Subsidiaries or joint ventures $____________ (8) Actual Consolidated Tangible Capital Base $____________ (1 + 2) - (sum of 3 through 7) Required Minimum Consolidated Tangible Capital Base: $2,000,000 II. Section 5.10 - Minimum Cash or Equivalents ------------------------------------------ A. Qualified Investments held in the U.S. -------------------------------------- (9) Obligations of the United States of America held in the U.S. $____________ (10) Certificates of deposit, other deposit instruments, bank accounts held in the U.S. $____________ (11) Commercial Paper held in the U.S. (see definition of Qualified Investments) $____________ (12) Mutual/closed end funds that invest only in investments set forth in clauses (9) through (11) $____________ (13) Repurchase agreements secured by any one or more of the foregoing held in the U.S. $____________ 2 52 (14) Qualified Investments: $____________ (sum of 9 through 13) B. Net Outstanding Amount of Base Accounts --------------------------------------- (15) Base Accounts $____________ (16) Ineligible as of ________________1 (i) over 60 days from invoice date $____________ (ii) Accounts outside of US $____________ (iii) Accounts due from Affiliates $____________ (iv) Prepayments $____________ (v) Joint venture accounts $____________ (17) Ineligible Accounts $____________ (sum of 16(i through v)) (18) Contra Account offsets $____________ (19) Net Outstanding Amount of Base Accounts $____________ (15 - 17 - 18) C. Cash Equivalent Amount ---------------------- (20) Unencumbered Cash held in the United States $____________ (21) Qualified Investments (from (14)) $____________ (22) Net Outstanding Amount of Base Accounts $____________ (from (19)) (23) Actual Cash Equivalent Amount $____________ (20 + 21 + 22) Required Minimum Cash Equivalent Amount $2,500,000 Dated: _________ __, 199__ __________________________ Title: - --------------- 1 Ineligible calculated monthly 3 EX-10.16 3 INTELLECTUAL PROPERTY SECURITY AGREEMENT 1 EXHIBIT 10.16 CONFIRMATION OF AND AMENDMENT TO INTELLECTUAL PROPERTY SECURITY AGREEMENT THIS AGREEMENT, dated as of the 31st day of December, 1996, by and between BIOSEPRA INC., a Delaware corporation having its principal place of business at 111 Locke Drive, Marlborough, Massachusetts 01752 ("Pledgor"), in favor of FLEET NATIONAL BANK, formerly known as Fleet National Bank of Connecticut, successor by merger to Fleet Bank of Massachusetts, N.A., having an office at 75 State Street, Boston, Massachusetts 02109 (the "Bank"). WHEREAS, the Bank has made certain loans (the "Original Loans") to the Pledgor pursuant to the terms of a Revolving Credit and Security Agreement dated as of December 28, 1994 (the "Original Credit Agreement"); WHEREAS, as collateral security for the Original Loans, the Pledgor entered into an Intellectual Property Security Agreement with the Bank dated as of December 28, 1994 (as amended, the "Security Agreement"), which Security Agreement was filed with the United States Patent and Trademark Office on March 6, 1995 in Reel 7372, Frame 0072 with respect to patents and on May 22, 1995 in Reel 1358, Frame 0758 with respect to trademarks; WHEREAS, the Pledgor has requested that the Bank amend certain provisions of the Original Credit Agreement pursuant to the terms of a certain Amended and Restated Revolving Credit and Security Agreement dated of even date herewith (the Original Credit Agreement as so amended and as may be further amended, restated, increased or modified from time to time is herein collectively referred to as the "Credit Agreement"); WHEREAS, the Pledgor acknowledges that it has been benefitted directly and indirectly by the Original Loans and will continue to be benefitted directly and indirectly by the Loans (as defined in the Credit Agreement) made pursuant to the Credit Agreement; and WHEREAS, the Bank is willing to modify the terms of the Original Credit Agreement and to make the Loans provided for in the Credit Agreement upon the condition, among others, that the Pledgor enter into this Agreement to secure all of the Obligations (as defined in the Credit Agreement) of the Pledgor to the Bank under the Credit Agreement. NOW, THEREFORE, for and in consideration of the premises and the Credit Agreement and the Loans made by the Bank to the Pledgor and other good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, the parties hereto covenant and agree as follows: 1. CONFIRMATION. The Pledgor hereby agrees that the Security Agreement and the grant of the security interest thereunder are hereby expressly ratified, confirmed and, to the extent necessary, amended so that the term "Credit Agreement" shall mean the Amended and Restated Revolving Credit and Security Agreement between the Pledgor and the Bank dated as of December 31, 1996, as the same may be amended, restated, replaced, superseded or modified from time to time. SCHEDULES A, B, C, D, E AND F to the Security Agreement are hereby 2 amended to include the additional items listed on the schedules attached hereto. Except as expressly amended hereby, the Security Agreement shall remain in full force and effect. 2. NO DEFAULT; REPRESENTATIONS AND WARRANTIES, ETC. The Pledgor hereby represents and warrants to the Bank that: (a) the representations and warranties of the Pledgor contained in the Security Agreement are true on and as of the date hereof as if made on such date (except to the extent that such representations and warranties expressly relate to an earlier date; (b) the Pledgor is in compliance in all material respects with all of the terms and provisions set forth in the Security Agreement on their part to be observed or performed thereunder; (c) no Default or Event of Default (as such terms are defined in the Credit Agreement) has occurred or is continuing; (d) the Pledgor has all necessary corporate power and have taken all corporate action necessary to make the Security Agreement, as supplemented and amended hereby, the valid and enforceable obligation it purports to be; and (e) neither the execution nor delivery of this Agreement or the Security Agreement, as supplemented and amended hereby, or the consummation of any transaction contemplated hereby, nor the fulfillment of the terms hereof, has constituted or resulted in or will constitute or result in a breach of the provisions of the charter or by-laws of the Pledgor, or any other agreement to which the Pledgor is a party or by which the Pledgor is bound or any presently existing applicable law, judgment, decree or governmental order, rule or regulation applicable to the Pledgor. 3. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with and governed by the laws of the Commonwealth of Massachusetts (without regard to its conflicts of laws provisions). 4. COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the different parties on different counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one in the same instrument. 5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. - 2 - 3 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. BIOSEPRA INC. By: /s/ Robert F. Scumaci --------------------------------------------- Name: Robert F. Scumaci Title: Chief Financial Officer and Treasurer FLEET NATIONAL BANK By: /s/ Kimberly A. Martone --------------------------------------------- Name: Kimberly A. Martone Title: Vice President - 3 - EX-11 4 STATEMENT RE: EARNINGS PER SHARE 1 EXHIBIT 11 BioSepra Inc. STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Year Ended Year Ended Year Ended (in thousands) December 31, 1996 December 31, 1995 December 31, 1994 ----------------- ----------------- ----------------- Weighted average number of common shares outstanding 7,832 7,004 6,326 Issuance of cheap stock and cheap stock equivalents (1) -- -- 91 ----- ----- ----- Total weighted average number of common shares outstanding 7,832 7,004 6,417 ===== ===== ===== (1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock, convertible preferred stock and warrants issued at prices below the initial public offering price of $7.00 per share ("cheap stock") during the twelve-month period immediately preceding the initial filing date of the Registration Statement, have been included as outstanding for all periods prior to the offering, which impact is anti-dilutive to the net loss in each period.
EX-13 5 EXCERPTS FROM 1996 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, (In thousands, except per share amounts) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Revenues: Revenues from existing product sales $ 13,333 $ 9,658 $ 8,763 $ 7,022 $ 10,086 Revenues from discontinued product sales 90 2,722 2,157 -- -- License fees 900 -- -- -- -- Collaborative research and development -- 107 376 45 134 - --------------------------------------------------------------------------------------------------------- Total revenues 14,323 12,487 11,296 7,067 10,220 - --------------------------------------------------------------------------------------------------------- Costs and expenses: Cost of products sold 6,338 8,344 5,933 4,423 4,735 Research and development 2,399 2,761 3,383 2,726 1,570 Selling, general and administrative 7,573 9,544 9,605 6,469 6,941 Restructuring and impairments -- 4,144 -- -- -- Purchase of in-process research and development -- -- 3,500 -- -- - --------------------------------------------------------------------------------------------------------- Total costs and expenses 16,310 24,793 22,421 13,618 13,246 - --------------------------------------------------------------------------------------------------------- Loss from operations (1,987) (12,306) (11,125) (6,551) (3,026) Other income (expense): Interest income 186 381 443 -- 10 Interest expense (214) (448) (250) (274) (272) Other income (expense) (105) (302) (191) (4) (32) - --------------------------------------------------------------------------------------------------------- Net loss $ (2,120) $(12,675) $(11,123) $ (6,829) $ (3,320) - --------------------------------------------------------------------------------------------------------- Net loss per common or common equivalent share $ (.27) $ (1.81) $ (1.73) -- -- Weighed average number of common and common equivalent shares outstanding 7,832 7,004 6,417 -- -- - --------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Cash and cash equivalents $ 4,142 $ 3,693 $ 7,983 $ 50 $ 40 Working capital 3,648 (1,269) 6,972 1,624 2,864 Total assets 23,169 23,824 35,605 18,341 21,506 Long-term debt and capital leases 1,141 1,308 359 85 136 Shareholders' equity 14,442 10,914 23,010 14,891 16,969
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Overview BioSepra Inc. and subsidiaries (the "Company") develop, manufacture and sell chromatographic media and instruments for use by biopharmaceutical companies in the purification and production of biopharmaceuticals. The Company offers a line of chromatographic products (media, hardware, software and instruments) that enable biopharmaceutical companies to reduce the time and cost required to develop and manufacture biopharmaceuticals. The media products are based on both its recently developed HyperD(TM) media and established technologies. In March 1995, the Company and Beckman Instruments, Inc. ("Beckman") entered into a joint distribution and development agreement. The agreement was extended in July 1996, allowing Beckman to market on a worldwide exclusive basis for a period of three years certain HyperD chromatographic columns and provides for the development (in accordance with certain milestones) and manufacture by the Company of chromatographic systems for Beckman. Under the agreement, Beckman made payments of $1,400,000 and $3,500,000 in 1996 and 1995, respectively. The Company may be required to return to Beckman part of such payments made by Beckman under the agreement if the Company fails to meet such milestones or if the Company terminates Beckman's right to use and sell licensed products, including HyperD media, because a court finds that any such licensed products infringe any third party patents. In June 1995, The Company announced a major cost-reduction program that involved the consolidation of its facilities and a significant reduction in the number of employees. The purpose of the program was to enable the Company to focus on the process development and process segments of the biopharmaceutical market. In connection with this program in July 1995, the Company completed the sale of Biopass S.A. ("Biopass"), one of its French subsidiaries. As part of the cost-reduction program, the Company recorded restructuring and impairment charges totaling $4,144,000 in the second quarter of 1995. Of this amount $1,180,000 represents severance and benefits related to the reduction in workforce in the U.S. and France, and $2,964,000 relates to impairment of assets and intangibles to net realizable value. The Company has completed its reduction in workforce related to this cost-reduction program resulting in the termination of 55 employees consisting of research and development, administrative, production and marketing/sales personnel. The Company has paid $1,165,000 of the costs relating to this employee reduction as of December 31, 1996, and expects the remaining severance and medical payments to be completed in 1997. There can be no assurances that this program will not result in loss of customers or temporary sales or production disruptions that could have a materially adverse effect on the Company's operations. See "Future Operating Results". In July 1995, the Company completed the sale of its subsidiary, Biopass, while the Company retained the chromatography column technology that it assumed when it acquired Biopass in 1994. The results of Biopass' operations through July 19, 1995, have been included in the consolidated results for the year ended December 31, 1995. The revenues, loss from operations and net loss for Biopass for this period are $1,878,000, $1,208,000 and $44,000, respectively. The loss of $2,964,000, on the sale of Biopass, was recorded in restructuring and impairment costs in the income statement for the year ended December 31, 1995. On, March 29, 1996, the Company entered into a $5,500,000 Convertible Subordinated Note (the Note) with Sepracor. Principal and interest were due and payable on March 29, 2000. The Note bore interest per annum at Sepracor's borrowing rate less 1/2%. On June 10, 1996, Sepracor exercised it's option to convert the outstanding principal and interest on the Note into shares of common stock. The Note was converted into one share of common stock for every $4.05 of principal and interest outstanding resulting in 1,369,788 shares of common stock issued to Sepracor. After the conversion, Sepracor owns approximately 64% of the outstanding common stock of the Company. In January 1996, the Company entered into a promissory note for $350,000 with Sepracor. This amount is payable to Sepracor over sixty monthly installments and does not bear interest. The Company used the funds for leasehold improvements to the Company's facilities. As of December 31, 1996, $327,000 was outstanding under the promissory note. 3 The Company's primary operations are located in facilities leased in France and in facilities subleased from Sepracor in the United States for which the Company is charged a portion of Sepracor's rent and operating costs based upon the amount of space it occupies. In addition, Sepracor provides support services, including laboratory support, data processing, accounting and finance, legal and other administrative functions. Sepracor allocates a portion of the costs of these activities to the Company based upon its pro rata usage of such services. Years Ended December 31, 1996, 1995 and 1994 The Company's revenue increased to $14,323,000 in 1996 compared to $12,487,000 in 1995 and $11,296,000 in 1994. The increase in sales from 1995 to 1996 is the result of (i) increased media sales, (ii) new sales generated through the joint distribution and development agreement with Beckman and (iii) licensing revenue recognized as the result of achieving certain milestones related to the Beckman agreement. Included in 1995 revenue was $2,722,000 of sales from certain low margin hardware products which were discontinued in mid-1995. The increase in sales from 1994 to 1995 is the result of increased instrument product sales, primarily related to sales of the ProSys(TM) line of products, which was introduced in the fourth quarter of 1994. These increased sales were offset by a decrease in media sales as a result of changes in order patterns of certain production scale media customers. Costs of products sold decreased to $6,338,000 in 1996 compared to $8,344,000 in 1995 and $5,933,000 in 1994, representing 47% , 67% and 54% of product revenue, respectively. The reduced cost of goods sold as a percentage of product sales in 1996, as compared to both 1995 and 1994 was due primarily to favorable product mix, the discontinuation of certain low margin hardware products and to the transition of manufacturing facilities from external contract to internal assembly. The increased cost of goods sold as a percentage of product sales from 1994 to 1995 is attributable to unfavorable product mix, and to a lesser extent, costs associated with the closing and transition of manufacturing facilities. Management expects fluctuations in gross margin as changes in product mix occur from period to period. Research and development expenses decreased to $2,399,000 in 1996 from $2,761,000 in 1995 and $3,383,000 in 1994. The reduction in expenses from 1995 to 1996 is primarily the result of further commercialization of media and instrument products and to a lesser extent, the cost reduction program announced in June 1995. The reduction in expenses from 1994 to 1995 is primarily the result of reduced development expenses for the Company's ProSys Workstation which was introduced in the fourth quarter of 1994, and to a lesser extent, the cost-reduction program announced in June 1995, as described above. In addition, upon acquisition of Biopass in September 1994, the Company recorded a non-recurring charge of $3,500,000 for the purchase of in-process research and development representing that portion of the purchase price paid for Biopass's ongoing research and development projects that had not yet resulted in commercially viable products. Selling, general and administrative expenses decreased to $7,573,000 in 1996 from $9,544,000 in 1995 and $9,605,000 in 1994. The reduction in expenses from 1995 to 1996 was due primarily to the cost reduction program announced in June 1995 and reduced legal expenses associated with the lawsuits brought against the Company by PerSeptive Biosystems, Inc. ("PerSeptive"), as further described below. The decrease in 1996 was partially offset by the write off in 1996 of certain technologies acquired from BioPass. The reduction in expenses from 1994 to 1995 was due primarily to the cost reduction program announced in June 1995. The decrease in 1995 was partially offset by increased legal expenses incurred in defense of lawsuits brought against the Company by PerSeptive, as further described below, and to a lesser extent increased goodwill amortization related to the purchase of Biopass. The Company also incurred $4,144,000 in restructuring and impairment charges in 1995 as a result of the implementation of its cost-reduction program, as announced in June 1995, as further detailed herein. Interest income decreased to $186,000 in 1996 from $381,000 in 1995 and $443,000 in 1994. The decrease from 1995 to 1996 was due primarily to changes in the level of cash investments throughout the year and to changes in the interest rates earned on such investments. The decrease from 1994 to 1995 was due primarily to the decreased levels of cash investments and changes in the interest rates earned on such investments. Interest expense decreased to $214,000 in 1996 from $448,000 in 1995 and from $250,000 in 1994. The decrease in 1996 from both 1995 and 1994 is primarily attributed to decreasing levels of borrowings and changes in the interest rates charged on such borrowings. Other expense, net, decreased to $105,000 in 1996 from $302,000 in 1995 and $191,000 in 1994. The decrease in 1996 was due primarily to costs incurred to sell BioPass in 1995 and the net effect of foreign currency gains and losses due 4 to changes in the value of the U.S. dollar. Other expense, net, increased in 1995 from 1994 due primarily to costs incurred to sell Biopass. Other On March 3, 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings Per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. This statement is effective for fiscal years ending after December 15, 1997 and early adoption is not permitted. When adopted, the statement will require restatement of prior years' earnings per share. The Company will adopt this statement for its fiscal year ended December 31, 1997. In addition, the Company believes that the adoption of SFAS No. 128 will not have a material effect on its financial statements. Litigation The Company and Sepracor are defendants in three lawsuits brought by PerSeptive Biosystems, Inc., a competitor of the Company, in the United States District Court for the District of Massachusetts. In actions commenced in October 1993 and January 1995, PerSeptive has alleged that the Company's and Sepracor's manufacture and sale of HyperD chromatography media infringe four of PerSeptive's United States patents. PerSeptive is seeking unspecified monetary damages as well as injunctive relief. In a separate action, PerSeptive has alleged that certain statements made by the Company and Sepracor with respect to the performance of HyperD media, performance of PerSeptive's POROS(R) media, and the internal structures of POROS and HyperD media, including statements made in the Company's Prospectus dated March 24, 1994, constitute false advertising. PerSeptive also asserts that an additional perfusion chromatography patent has been allowed, and that another patent related to perfusion chromatography has been issued. The new perfusion chromatography patent contains claims similar to the other patents the Company and Sepracor are alleged to have infringed. The Company has received an opinion of its patent counsel, Pennie & Edmonds, to the effect that a properly informed court should conclude the manufacture, use and/or sale by the Company or its customers of the present HyperD products do not infringe any valid claims of the three United States patents held by PerSeptive relating to "perfusion chromatography." Allegations have also been made that another United States patent which relates to the chemistry of certain coatings applied during the manufacture of HyperD (the "coatings patent"), is infringed by the manufacture, sale or use of HyperD. The Company and Sepracor have asserted a counterclaim charging PerSeptive with unfair competition. On January 9, 1996, the United States District Court for the District of Massachusetts in part granted Sepracor and the Company's request of summary judgment with respect to three of PerSeptive's patents concerning "Perfusion Chromatography" (the "January 9 Order"). The Court ruled that persons in addition to those named in the three "perfusion" patents were inventors of the alleged inventions claimed in those patents. This ruling may ultimately dispose of PerSeptive's claims concerning the "perfusion" patents, depending on the Court's resolution of any effort to correct the patents and the outcome on appeal by PerSeptive of the January 9 Order or appeal by any party of any ruling regarding correction of inventorship. In its January 9 Order, the Court ruled that PerSeptive's claims related to the three "perfusion" patents would be dismissed on January 19, 1996, if PerSeptive had not requested correction of inventorship by that date. The Court postponed this deadline pending its ruling on PerSeptive's request for certification of an immediate appeal of the January 9 Order to the United States Court of Appeals for the Federal Circuit. On March 12, 1996, the Court denied PerSeptive's motion for immediate appeal and scheduled a hearing on deceptive intent on the part of PerSeptive, if PerSeptive moves to correct inventorship, for April 29, 1996 (the "March 12 Order"). The Court required PerSeptive to make any motion to correct by March 31, 1996. In response, PerSeptive requested that the Court vacate its January 9 and March 12 Orders, or in the alternative, correct the patents in such a way that the presently unnamed inventors obtained no rights to license the patents. The Court denied PerSeptive's motion to vacate and scheduled a hearing on PerSeptive's motion to correct the patents which was completed in August 1996. The District Court has not rendered a decision based on the August hearing. According to the January 9 and March 12 Orders, PerSeptive could correct inventorship if it bears the burden of proving that its initial designation of inventors was done without deceptive intent. PerSeptive has asserted that no motion to correct need be filed, and that the Company and Sepracor bear the burden of proving deceptive intent. PerSeptive also asserts that the unnamed inventors should not be added to the patents or given any right to license the patents, and that as a matter of law they did not err in not naming the two unnamed inventors, and did not name inventors with deceptive intent. 5 Sepracor and The Company contend that if PerSeptive is able to correct inventorship, the presently unnamed inventors would have independent rights to license the "perfusion" patents unless the Court ruled that the unnamed inventors are not entitled to such rights. If inventorship could not be corrected, the "perfusion" patents would be held invalid, subject to appeal by PerSeptive. A decision by the district Court to correct inventorship, or preventing the unnamed inventors from licensing the "perfusion" patents, would be subject to appeal by any party. PerSeptive could appeal any decision invalidating the patents for willful misdesignation of inventors. There can be no assurance that the Company and Sepracor will prevail in the pending litigation, and an adverse outcome in any of the patent infringement actions on any of the chromatography patents would have a materially adverse effect on the Company's future business and operations. The Company would be required to repay to Beckman part of certain payments if the Company terminates Beckman's right to use and sell HyperD media because a court finds HyperD media infringes any third party patents. Substantial funds have been and continue to be expended in connection with the defense of the litigation. Sepracor has agreed to control the defense of the litigation, and Sepracor and the Company share equally in expenses, net of insurance payments. In addition, in the event of any settlement or judgment adverse to the Company, Sepracor has agreed to indemnify the Company from and against any damages that the Company is required to pay with respect to its manufacture, use or sale of HyperD media products occurring prior to March 24, 1994. LIQUIDITY AND CAPITAL RESOURCES The Company has funded its operations to date primarily from net proceeds provided from the Company's initial public offering, funds provided by Sepracor and equipment financing leases. As of December 31, 1996, the Company had $4,142,000 of cash and cash equivalents and $3,648,000 of working capital. Cash and cash equivalents of for the year ended December 31, 1996 increased by $2,063,000. In 1996, the Company generated cash from operations of $195,000. The improvement in cash provided by operations is primarily the result of the cost reduction program announced in 1995 and improved working capital management. The Company generated cash from financing activities of $3,190,000. The improvement in cash provided by financing activities is primarily due to converting the $5,500,000 Note payable to Sepracor into 1,369,788 shares of the Company's common stock. The proceeds from the conversion of the Note were offset by repayment of borrowings of $2,776,000. The Company used cash of $1,326,000 in investing activities primarily for the purchase of property and equipment. As of December 31, 1996, there was $1,025,000 outstanding under an available credit facility with a French commercial bank which is currently guaranteed by Sepracor. In addition, Sepracor guarantees certain capital lease obligations of the Company. The outstanding balance of the capital lease obligation guaranteed by Sepracor was $235,000 as of December 31, 1996. On December 31, 1996, the Company, in collaboration with Sepracor and certain of its other subsidiaries, amended its revolving credit agreement under which the Company may borrow up to $3,000,000, subject to limitations defined in the agreement and on borrowings outstanding by other companies. There were no borrowings outstanding under this agreement as of December 31, 1996. Interest is payable monthly in arrears at prime (8.25% at December 31, 1996) or, at the Company's discretion, the LIBOR rate (5.53% at December 31, 1996) plus 1.75%. The Company is required to pay a commitment fee equal to 1/2% per annum on the average unused line. The agreement requires the Company to maintain certain financial ratios and levels of cash balances, net worth and profitability. This facility is available until April 30, 1999 and is collateralized by the personal property of the Company. Sepracor is guarantor of any amounts outstanding under the agreement. Based upon the Company's current operating plan, the Company believes that its current cash balance is sufficient to fund the Company's operations into 1998. The Company's cash requirements may vary materially from those now planned because of factors such as the timing of significant product orders, commercial acceptance of new products, patent developments, the introduction of competitive products and acquisitions. 6 FUTURE OPERATING RESULTS Certain information contained in this Annual Report, including information with respect to the ability of the Company to obtain additional financing within the next twelve months, the success of the Company's HyperD media and the ProSys Workstation and information with respect to the Company's other plans and strategy for its business, including its plans to introduce products for use in producing monoclonal antibody-based drugs, consist of forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include the following: The Company and Sepracor are defendants in three lawsuits brought by PerSeptive, a competitor of the Company, alleging that the Company's and Sepracor's manufacture and sale of HyperD chromatography media infringe four of PerSeptive's United States patents dealing with liquid chromatography. PerSeptive is seeking unspecified monetary damages as well as injunctive relief. In response to certain allegations, the Company and Sepracor have asserted a counterclaim charging PerSeptive with unfair competition. See "Results of Operations" herein. There can be no assurance that the Company or Sepracor will prevail in pending litigation, and an adverse outcome in any of the patent infringement actions on any of the chromatography patents would have a materially adverse effect on the Company's future business and operations. The future success of the Company will depend largely on the success of two product lines: HyperD media, which was introduced in March 1993, and the chromatography workstation product line, which was introduced in late 1994. Sales of HyperD media have been, and are expected to continue to be, affected adversely by the pending litigation with PerSeptive described above. There can be no assurance that the Company's HyperD media or chromatography workstation product line will achieve commercial success, and any failure of such products to achieve such success would have a materially adverse effect on the business and results of operations of the Company. The Company could require additional funds in 1997 if, and to the extent, it fails to achieve its operating plan, which contemplates significant increases in sales of HyperD media and chromatography workstation product lines. At such time, as the Company requires additional financing, there can be no assurance that such financing will be available on favorable terms, if at all. If the Company requires additional financing and such capital is not available on acceptable terms from third parties, Sepracor may, but is not obligated to, guarantee or provide such financing. Sales of chromatographic media products, such as HyperD media, typically involve long lead times, and customers generally evaluate several different media products before committing to a volume purchase. Also, customers are typically reluctant to change media used in the production process for a pharmaceutical previously approved by the Federal Drug Administration ("FDA") because such a change would, in certain cases, require additional FDA approval. For these reasons, the Company's future success will depend in large part on its ability to sell its products to customers at the early stage of their product development cycles. There can be no assurance that the Company will be able to compete effectively against its existing or future competitors. In March 1995, the Company and Beckman Instruments, Inc. ("Beckman") entered into a joint distribution and development agreement, as discussed above. The Company may be required to return to Beckman all or part of payments made by Beckman under the agreement if the Company fails to meet certain milestones or if the Company terminates Beckman's right to use and sell licensed products, including HyperD media, because a court finds that any such licensed products infringe any third-party patents. In June 1995, the Company announced a major cost-reduction program that involved the consolidation of its facilities and a significant reduction in the number of employees, and in July 1995, in connection with this program, the Company completed the sale of Biopass, one of its French subsidiaries. The Company announced that the principal purpose of the program was to enable it to focus on the process development and process segments of the biopharmaceutical market. In connection with this program, the Company recorded restructuring and impairment charges totaling $4,144,000 in the second quarter of 1995. There can be no assurance that this program will not result in loss of customers or temporary sales or production disruptions that could have a materially adverse effect on the Company's operations. Because of the foregoing factors, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and it expects that its results of operations may fluctuate from period to period in the future. 7 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of BioSepra Inc. and subsidiaries: We have audited the accompanying consolidated balance sheet of BioSepra Inc. (a Delaware Corporation) and subsidiaries as of December 31, 1996, and the related consolidated statement of operations, shareholders' equity and cash flows for the year then ended. 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 audit. The consolidated balance sheet of BioSepra Inc. and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the two years in the period then ended were audited by other auditors whose report dated February 27, 1996 (except as to information contained in the fourth paragraph of Note H and the seventh paragraph of Note C for which the date is March 29, 1996), expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides 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 BioSepra Inc. and subsidiaries as of December 31, 1996 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Boston, Massachusetts January 29, 1997 8 BioSepra Inc.
CONSOLIDATED BALANCE SHEETS - --------------------------- DECEMBER 31, (In thousands, except par value amounts) 1996 1995 - -------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents (Note B) $ 4,142 $ 2,079 Cash held in escrow (Note I) -- 1,614 Marketable securities 360 -- Restricted Cash 167 -- Accounts receivable (less allowance for doubtful accounts, $233 in 1996 and $92 in 1995) 3,030 3,495 Inventories (Note D) 3,481 3,120 Prepaid and other current assets 54 25 - -------------------------------------------------------------------------------------------------- Total current assets 11,234 10,333 - -------------------------------------------------------------------------------------------------- Property and equipment, net (Note E) 2,168 2,139 Goodwill, net 9,254 9,892 Other assets 513 1,460 - -------------------------------------------------------------------------------------------------- Total assets $ 23,169 $ 23,824 - -------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable and current portion of long-term debt and capital leases (Notes F and G) $ 497 $ 2,781 Accounts payable 1,365 966 Related parties payable (Note C) 157 812 Accrued expenses 1,555 1,387 Accrued expenses relating to acquisition (Note I) 352 371 Accrued restructuring (Note K) 14 171 Deferred contract revenue (Note L) 3,646 3,500 Acquisition payable (Note I) -- 1,614 - -------------------------------------------------------------------------------------------------- Total current liabilities 7,586 11,602 - -------------------------------------------------------------------------------------------------- Long-term debt and capital leases, net of current portion (Notes F and G) 1,141 1,308 Commitments and contingencies (Notes G and H) - -------------------------------------------------------------------------------------------------- Total liabilities 8,727 12,910 - -------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY (Note O) Preferred stock, $0.01 par value, 1,000 shares authorized; none issued and outstanding -- -- Common stock, $0.01 par value, 12,000 shares authorized; issued and outstanding 8,416 shares in 1996 and 7,021 shares in 1995 84 70 Additional paid-in capital 40,485 35,085 Unearned compensation, net (322) (685) Accumulated deficit (25,918) (23,798) Cumulative translation adjustments 113 242 - -------------------------------------------------------------------------------------------------- Total shareholders' equity 14,442 10,914 - -------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 23,169 $ 23,824 - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 9 BioSepra Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------- FOR THE YEARS ENDED DECEMBER 31,(In thousands, except per share amounts) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ REVENUES (NOTE B): Product sales $13,423 $ 12,380 $ 10,920 License fees 900 -- -- Related party collaborative research and development -- 107 146 Collaborative research and development -- -- 230 - ------------------------------------------------------------------------------------------------------------ Total revenues 14,323 12,487 11,296 - ------------------------------------------------------------------------------------------------------------ COSTS AND EXPENSES: Cost of products sold 6,338 8,344 5,933 Research and development 2,399 2,761 3,383 Selling, general and administrative 7,573 9,544 9,605 Restructuring and impairment costs (Notes J and K) -- 4,144 -- Purchase of in-process research and development (Note I) -- -- 3,500 - ------------------------------------------------------------------------------------------------------------ Total costs and expenses 16,310 24,793 22,421 - ------------------------------------------------------------------------------------------------------------ Loss from operations (1,987) (12,306) (11,125) OTHER INCOME (EXPENSE): Interest income 186 381 443 Interest expense (214) (448) (250) Other income (expense) (105) (302) (191) - ------------------------------------------------------------------------------------------------------------ Net loss $(2,120) $(12,675) $(11,123) - ------------------------------------------------------------------------------------------------------------ Net loss per common and common equivalent share (Note B) $ (.27) $ (1.81) $ (1.73) Weighted average number of common and common equivalent shares outstanding 7,832 7,004 6,417
The accompanying notes are an integral part of the consolidated financial statements. 10 BioSepra Inc. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - -----------------------------------------------
Additional Unearned Accumu- Cumulative Total FOR THE YEARS ENDED DECEMBER 31, Common Stock Paid-in Compen- lated Translation Shareholders' 1996, 1995 AND 1994 (IN THOUSANDS) Shares Amount Capital sation Deficit Adjustment Equity - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 4,000 $40 $ 14,970 -- -- $(119) $ 14,891 - ---------------------------------------------------------------------------------------------------------------------------- Investment by Parent Company -- -- 1,042 -- -- -- 1,042 Issuance of common stock options -- -- 1,131 (1,131) -- -- -- Unearned compensation amortization -- -- -- 223 -- -- 223 Issuance of common stock in initial public offering (net of issuance costs totaling $3,106) 3,000 30 17,894 -- -- -- 17,924 Net loss -- -- -- -- (11,123) -- (11,123) Change in translation adjustment -- -- -- -- -- 53 53 - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 7,000 70 35,037 (908) (11,123) (66) 23,010 - ---------------------------------------------------------------------------------------------------------------------------- Unearned compensation amortization -- -- -- 223 -- -- 223 Issuance of common stock under stock plans 21 -- 48 -- -- -- 48 Net loss -- -- -- -- (12,675) -- (12,675) Change in translation adjustment -- -- -- -- -- 308 308 - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 7,021 70 35,085 (685) (23,798) 242 10,914 - ---------------------------------------------------------------------------------------------------------------------------- Unearned compensation amortization and termination -- -- (202) 363 -- -- 161 Issuance of common stock under stock plans 25 -- 68 -- -- -- 68 Issuance of common stock upon conversion of subordinated convertible note 1,370 14 5,534 -- -- -- 5,548 Net loss -- -- -- -- (2,120) -- (2,120) Change in translation adjustment -- -- -- -- -- (129) (129) - ---------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 8,416 $84 $ 40,485 $ (322) $(25,918) $ 113 $ 14,442 - ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 11
BioSepra Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------- FOR THE YEARS ENDED DECEMBER 31, (In thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net loss $(2,120) $(12,675) $(11,123) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,400 2,037 1,503 Provision for doubtful accounts 142 269 61 Loss on disposition of long-term assets 10 10 45 Restructuring and impairment costs -- 2,629 -- Purchase of in-process research and development -- -- 3,500 Changes in operating assets and liabilities, net of effects of disposed business: Accounts receivable 230 (393) (2,790) Inventories (364) 1,676 (265) Prepaid and other current assets (30) 74 (427) Accounts payable 443 (1,501) 1,501 Related parties payable (654) 567 247 Accrued expenses 208 (352) 906 Accrued expenses relating to acquisition (13) (170) 191 Accrued restructuring (204) 162 -- Deferred contract revenue 147 2,757 (110) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 195 (4,910) (6,761) - --------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of property and equipment (1,018) (404) (948) Proceeds from sales of equipment 147 34 2 Decrease in notes receivable from employees -- -- 100 Increase in marketable securities (360) -- -- Increase in restricted cash (170) -- -- Decrease (Increase) in other assets 75 (66) (303) Cash paid for purchase of Biopass S.A., net of cash acquired -- -- (3,306) Cash purchase price of Biopass S.A. held in escrow 1,614 -- (1,483) Decrease in acquisition payable (1,614) -- -- - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (1.326) (436) (5,938) - --------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from investment by parent company 5,548 -- 1,042 Net proceeds from initial public offering -- -- 17,924 Proceeds from issuance of common stock 68 48 -- Borrowings (repayments) under line of credit agreements (2,299) (1,701) 1,706 Long-term borrowings 350 1,503 73 Repayments on long-term borrowings (477) (381) (137) - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 3,190 (531) 20,608 - --------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 4 (27) 24 - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,063 (5,904) 7,933 Cash and cash equivalents at beginning of year 2,079 7,983 50 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year 4,142 $ 2,079 $ 7,983 - --------------------------------------------------------------------------------------------------------------------- Supplemental schedule of cash flows information: Cash paid for interest $ 231 $ 431 $ 214 Acquisition of equipment under capital lease $ 61 $ 347 $ 90 - ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ A. NATURE OF THE BUSINESS: BioSepra Inc. and subsidiaries (the "Company") was established in December 1993 as a wholly owned subsidiary of Sepracor Inc. ("Sepracor"). Effective as of January 1, 1994, Sepracor transferred to the Company the chromatography business of Sepracor, including all of the outstanding shares of Sepracor S.A. (now BioSepra S.A., a wholly-owned subsidiary of the Company). The Company develops, manufactures and sells chromatographic media and process design instruments for use by pharmaceutical companies in the purification of biopharmaceuticals. Operating losses from inception through the January 1, 1994, effective date of Sepracor's transfer of assets and technology, were recorded as a reduction in the net balance advanced to the Company by Sepracor. As of January 1, 1994, the Company entered into various agreements wherein Sepracor agreed to provide certain services and facilities to the Company in accordance with the terms described in Note C. Sepracor provided the working capital to fund the Company's business until the closing of the initial public offering in March, 1994. The 1994 financial statements include the results of operations and net assets of Biopass S.A. since the date of acquisition, September 1994. The acquisition was accounted for under the purchase method of accounting. The 1995 financial statements include the results of operations of Biopass S.A. through July 19, 1995, when the sale of Biopass S.A. was completed. The Company is subject to risks common to companies in its industry including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel and protection of proprietary technology. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION Consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balance and transactions have been eliminated in consolidation. TRANSLATION OF FOREIGN CURRENCIES The accounts of the Company's international subsidiaries are translated in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation". Accordingly, the assets and liabilities of the Company's international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date. Statement of operations amounts are translated at average exchange rates prevailing during the period. The resulting translation adjustment is recorded in the cumulative translation adjustment account in shareholders' equity. Foreign exchange transaction gains and losses are included in other expense in the accompanying statement of operations. USE OF ESTIMATES The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company applies SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At December 31, 1996 cash equivalents primarily consist of $1,763,000 in a repurchase agreement and $1,612,000 in a money market instrument. At December 31, 1995 cash equivalents primarily consist of $145,000 in a repurchase agreement and $1,736,000 in a money market instruments. The Company's marketable securities are classified as held-to-maturity and are recorded at amortized cost, which approximates fair market value. At December 31, 1996, marketable securities consisted of a bond with original maturity of less than six months. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ RESTRICTED CASH The Company has $167,000 of restricted cash at December 31, 1996 held in an escrow account at a French commercial bank. The restricted cash represents the portion of a contract advance for the purchase of materials to be used in the manufacturing process for a customer's product. The amount due the Company is held as a guarantee for 60 days after the product is shipped to the customer. CONCENTRATION OF CREDIT RISK SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk", requires disclosure of any significant off-balance-sheet and credit risk concentrations. The Company has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with financial institutions. Financial instruments that subject the Company to credit risk consist primarily of trade accounts receivable. Customers with amounts due to the Company that represent greater than 10% of the accounts receivable balance are as follows:
Year Ended December 31: 1996 1995 ------------------------------------------------------- Customer A 26% 11% Customer B 15% -- Customer C -- 16%
Revenue from significant customers are as follows:
Year Ended December 31: 1996 1995 1994 -------------------------------------------------------------- Customer A 25% -- -- Customer B 13% -- 20% Customer C -- 11% --
For financial information by geographic area see Note N. SOFTWARE DEVELOPMENT COSTS In accordance with the provision of SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed", the Company capitalized $199,000 and $518,000 of software costs in 1995 and 1994, respectively. The costs are being amortized over the expected number of units to be shipped. Amortization of $311,000, $165,000 and $19,000 was charged to cost of sales in 1996, 1995 and 1994, respectively. There were no capitalizable software costs in 1996. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Costs of major additions and betterments are capitalized; maintenance and repairs which do not improve or extend the life of the respective assets are charged to operations. On disposal, the related cost and accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in the results of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. All laboratory, manufacturing and office equipment have estimated useful lives of three to ten years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the remaining term of the lease. GOODWILL AND OTHER ASSETS Goodwill is amortized using the straight-line method over 20 years. Accumulated amortization was approximately $3,510,000 and $2,872,000 in 1996 and 1995, respectively. The Company capitalizes all significant costs associated with the successful filing of a patent application as a component of other assets in the accompanying consolidated balance sheet. Patent costs are being amortized over their estimated useful lives, not to exceed 17 years. Accumulated amortization for patent costs was approximately $370,000 and $240,000 in 1996 and 1995, respectively. Purchased technology is recorded at cost, is included in other assets in the accompanying consolidated balance sheet and consisted of Biopass S.A.'s chromatography columns technology and patents. Amortization was provided over the estimated life of three years. Accumulated amortization was approximately $148,000 in 1995. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The Company adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of" in 1995. SFAS 121 requires that long-lived assets be reviewed for impairment by comparing the fair value of the assets with their carrying amount. Any write-downs are to be treated as permanent reductions in the carrying amount of the assets. Accordingly, the Company evaluates the possible impairment of goodwill and other assets at each reporting period based on the discounted projected cash flows of the related asset. In 1996, the Company wrote off the remaining unamortized portion of the technology retained as part of the sale of BioPass of approximately $741,000. REVENUE RECOGNITION Revenues from media and small-scale bioprocess instrument sales are recognized when goods are shipped, and from production-scale systems when installation is complete. Revenues for contracted services and research and development contracts are recorded based on effort incurred or milestones achieved in accordance with the terms of the contract. Deferred contract revenue represents progress payments received from customers pursuant to contract revenues not yet recorded. RESEARCH AND DEVELOPMENT Research and development costs are expensed in the period incurred. NET LOSS PER COMMON SHARE AND COMMON EQUIVALENT SHARE The net loss per common share for the years ended December 31, 1996, 1995 and 1994 are computed based upon the weighted average number of common shares outstanding and gives effect to certain adjustments described below. Common equivalent shares are not included in the per share calculations where the effect of their inclusion would be antidilutive, except that, in accordance with Securities and Exchange Commission requirements, common and common equivalent shares issued during the twelve-month period prior to the Company's initial public offering have been included in the calculation as if they were outstanding from January 1, 1994, to the Company's initial public offering in March, 1994. OTHER On March 3, 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. This statement is effective for fiscal years ending after December 15, 1997 and early adoption is not permitted. When adopted, the statement will require restatement of prior years' earnings per share. The Company will adopt this statement for its fiscal year ended December 31, 1997. In addition, the Company believes that the adoption of SFAS No. 128 will not have a material effect on its financial statements. C. ALLOCATIONS FROM AND AGREEMENTS WITH SEPRACOR AND HEMASURE: Since the Company's inception, all facilities and support services of U.S. operations of the Company, including administrative support, have been provided by Sepracor. For these facilities and services, the Company was charged approximately $513,000, $584,000 and $481,000 for the years ended December 31, 1996, 1995 and 1994, respectively. These charges represent an allocation of the Company's proportionate share of Sepracor's overhead costs using formulas which management believes are reasonable based upon the Company's use of such facilities and services. All other costs of United States operations, including payroll costs, are directly attributable to the Company. Net amounts payable to Sepracor at December 31, 1996 and 1995 were $157,000 and $818,000, respectively. Prior to March 1994, these amounts had been paid by Sepracor for the Company. Under a Corporate Services Agreement, commencing January 1, 1994, the Company receives certain basic support services from Sepracor in exchange for a variable monthly payment, adjusted annually. These basic services include laboratory support as well as assistance with certain administrative services, including recruiting and benefits administration, purchasing, data processing, risk management, corporate communications, patents and legal, accounting, finance and treasury activities. The Company may request additional services, if available, from Sepracor for which it has agreed to pay Sepracor the fully allocated costs of those services. The Service Agreement is renewable for two one-year increments by the Company and is cancelable by the Company with 60 days notice. The fixed monthly payments to Sepracor for basic support services under the Corporate Services Agreement in 1996 were $17,315 for a total allocated cost of approximately $208,000. In 1995, the monthly payments to Sepracor ranged from $15,200 to $17,000, for a 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ total allocated cost of $197,000. In 1994, the fixed monthly payments to Sepracor were $18,300 for a total allocated cost of approximately $220,000. During 1996, the Company provided warehouse, shipping and receiving services to Sepracor. Total payments received from Sepracor amounted to $20,750. Under a Sublease Agreement, the Company leases certain laboratory, research and office space from Sepracor through 2007 in exchange for monthly rent payments which increase at various dates and which approximate the Company's proportionate share of Sepracor's cost of providing the facilities, including building maintenance, utilities and other operating costs (see Note G). Under a Technology Transfer and License Agreement, Sepracor transferred to the Company all technology owned or controlled by Sepracor, including trade secrets, patents and patent applications, that relates to and is used in researching, developing or manufacturing products in the Company Field. The Company Field means generally the separation of biological molecules. Further, Sepracor has granted an exclusive license to the Company for any improvements to the transferred technology which are developed, or otherwise acquired, by Sepracor during the period beginning on the date of the Technology Transfer and License Agreement and terminating on the earlier of January 1, 1998 or the acquisition of Sepracor or the Company (the "Effective Period"). The Company has granted to Sepracor an exclusive license to the transferred technology for the development, manufacture, use or sale of any products within the field of chiral synthesis, chiral separations and the development, manufacture, use or sale of chiral drugs and chiral drug intermediates, as well as a non-exclusive license to the transferred technology for the development, manufacture, use or sale of any products outside of the Company Field. All licenses are royalty-free. Sepracor has also granted the Company a right of first refusal to any product that Sepracor proposes to sell, or license a third party to sell during the Effective Period, for use within the Company Field. In addition, in March 1998, Sepracor is entitled to certain rights with respect to the registration under the Securities Act of a total of 4,000,000 shares of Common Stock. These rights provide that Sepracor may require the Company, on two occasions, to register the shares having an aggregate offering price of at least $5,000,000, subject to certain conditions and limitations. Prior to September 1995, the Company provided management information services and warehouse, shipping and receiving services to Hemasure for a fixed monthly fee of $6,020. Payments received from Hemasure amounted to $48,160 in 1995. In September 1995, the Company transferred its warehouse employees and facility lease to HemaSure. HemaSure provided warehouse, shipping and receiving services to the Company in exchange for a fixed monthly payment of $4,500. Total charges paid to HemaSure amounted to $18,100 in 1995. In March 1996, HemaSure transferred the warehouse employees back to the Company. Total warehouse charges paid to HemaSure amounted to $7,900 in 1996. Net amounts receivable from Hemasure at December 31, 1995 was $6,000. There was no amounts receivable from or due to Hemasure at December 31, 1996. On, March 29, 1996, the Company entered into a $5,500,000 Convertible Subordinated Note (the Note) with Sepracor. Principal and interest were due and payable on March 29, 2000. The Note bore interest per annum at Sepracor's borrowing rate less 1/2%. On June 10, 1996, Sepracor exercised it's option to convert the outstanding principal and interest on the Note into shares of common stock. The Note was converted into one share of common stock for every $4.05 of principal and interest outstanding resulting in 1,369,788 shares of common stock issued to Sepracor. D. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following at December 31, (in thousands)
1996 1995 - ------------------------------------------------------------------------------------------- Raw materials $1,155 $ 998 Work in progress 310 240 Finished goods 2,016 1,882 - ------------------------------------------------------------------------------------------- $3,481 $3,120 - -------------------------------------------------------------------------------------------
16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ E. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, (in thousands) 1996 1995 - -------------------------------------------------------------------------------------------------------- Laboratory and manufacturing equipment $ 2,454 $ 2,556 Office equipment 1,283 1,112 Leasehold improvements 1,137 784 - -------------------------------------------------------------------------------------------------------- 4,874 4,452 Accumulated depreciation and amortization (2,752) (2,348) - -------------------------------------------------------------------------------------------------------- 2,122 2,104 Construction in progress 46 35 - -------------------------------------------------------------------------------------------------------- $ 2,168 $ 2,139 - --------------------------------------------------------------------------------------------------------
Depreciation and amortization expense was $729,000, $789,000 and $492,000 for the years ended December 31, 1996, 1995 and 1994, respectively. F. NOTES PAYABLE AND LONG-TERM DEBT:
Notes Payable and Long-Term Debt consists of the following at December 31, (in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------- 8.77% French Franc Loan payable in quarterly installments through 2000 $1,012 $1,376 Non-interest bearing Related party promissory note payable in monthly installments through 2000 327 -- Obligations under capital leases (See Note G) 279 322 Variable rate, 4.95% - 9.6%, French Franc Line of Credit 13 324 8.05% French Franc Term Loan payable in monthly installments through 1997 7 16 Revolving Credit Agreement -- 2,000 8.75% French Franc Term Loan payable in quarterly installments through 1996 -- 51 - ---------------------------------------------------------------------------------------------- 1,638 4,089 Less current portion 497 2,781 - ---------------------------------------------------------------------------------------------- Total long-term debt 1,141 $1,308 - ----------------------------------------------------------------------------------------------
On December 31, 1996, the Company, in collaboration with Sepracor and certain of its other subsidiaries, amended its revolving credit agreement under which the Company may borrow up to $3,000,000, subject to limitation defined in the agreement and on borrowings outstanding by other companies. Borrowings outstanding under this agreement were none and $2,000,000 for the Company as of December 31, 1996 and 1995, respectively. Interest is payable monthly in arrears at prime (8.25% at December 31, 1996) or, at the Company's discretion, the LIBOR rate (5.53% at December 31, 1996) plus 1.75%. The Company is required to pay a commitment fee equal to 1/2% per annum on the average unused line. The agreement requires the Company to maintain certain financial ratios and levels of cash balances, net worth and profitability. This facility is available until April 30, 1999 and is collateralized by the personal property of the Company. Sepracor is guarantor of any amounts outstanding under the agreement. The Company's French subsidiary has an available credit facility aggregating $385,000 from one French commercial bank, of which $13,000 and $324,000 was outstanding at December 31, 1996 and 1995, respectively. The amount available under this credit facility, which is payable on demand, is guaranteed and cross-collateralized by Sepracor. The interest rate at December 31, 1996 and 1995 was 5.012% and 6.5%, respectively. Minimum annual principal repayments of notes payable and long-term debt, excluding capital leases, in each of the next five fiscal years are as follows: 1997 - $391,000; 1998 - $371,000; 1999 - $371,000; 2000 - $226,000; 2001 - none. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ G. COMMITMENTS:
Future minimum payments under all noncancelable leases in effect at December 31, 1996 are as follows (in thousands): Capital Operating Sub-Lease Year Leases Leases Sepracor Total - ----------------------------------------------------------------------------------------- 1997 $136 $301 $ 72 $ 509 1998 136 149 72 357 1999 56 7 72 135 2000 -- -- 72 72 2001 -- -- 72 72 Thereafter -- -- 288 288 - ---------------------------------------------------------------------------------------- Total minimum lease payments $328 $457 $648 1,433 - ---------------------------------------------------------------------------------------- Less amount representing interest 49 -- -- 49 - ---------------------------------------------------------------------------------------- Present value of minimum lease payments $279 $457 $648 $1,384 - ----------------------------------------------------------------------------------------
Future minimum lease payments under operating and noncancelable capital leases relate to the French subsidiary's office, laboratory and production facilities, equipment and motor vehicles as well as office and computer equipment and a motor vehicle in the U.S. The terms of arrangements with two leasing companies contain bargain purchase provisions at the expiration of the lease terms of 24 months and 42 months. In some instances, the Company is required to make a deposit of 20% of the original equipment cost which earns interest at an annual rate of 4%. Under certain circumstances, Sepracor is the guarantor of debt incurred to acquire equipment under the leasing facilities. The facility lease requires the Company to pay its allocated share of taxes and operating costs in addition to the annual base rent payments. Rental expense under these and other leases amounted to $663,000, $556,000 and $597,000 for the years ended December 31, 1996, 1995 and 1994, respectively. H. LITIGATION: The Company and Sepracor are defendants in three lawsuits brought by PerSeptive Biosystems, Inc., a competitor of the Company, in the United States District Court for the District of Massachusetts. In actions commenced in October 1993 and January 1995, PerSeptive has alleged that the Company's and Sepracor's manufacture and sale of HyperD chromatography media infringe four of PerSeptive's United States patents. PerSeptive is seeking unspecified monetary damages as well as injunctive relief. In a separate action, PerSeptive has alleged that certain statements made by the Company and Sepracor with respect to the performance of HyperD media, performance of PerSeptive's POROS(R) media, and the internal structures of POROS and HyperD media, including statements made in the Company's Prospectus dated March 24, 1994, constitute false advertising. PerSeptive also asserts that an additional perfusion chromatography patent has been allowed, and that another patent related to perfusion chromatography has been issued. The new perfusion chromatography patent contains claims similar to the other patents the Company and Sepracor are alleged to have infringed. The Company has received an opinion of its patent counsel, Pennie & Edmonds, to the effect that a properly informed court should conclude the manufacture, use and/or sale by the Company or its customers of the present HyperD products do not infringe any valid claims of the three United States patents held by PerSeptive relating to "perfusion chromatography." Allegations have also been made that another United States patent which relates to the chemistry of certain coatings applied during the manufacture of HyperD (the "coatings patent"), is infringed by the manufacture, sale or use of HyperD. The Company and Sepracor have asserted a counterclaim charging PerSeptive with unfair competition. On January 9, 1996, the United States District Court for the District of Massachusetts in part granted Sepracor and the Company's request of summary judgment with respect to three of PerSeptive's patents concerning "Perfusion Chromatography" (the "January 9 Order"). The Court ruled that persons in addition to those named in the three "perfusion" patents were inventors of the alleged inventions claimed in those patents. This ruling may ultimately dispose of PerSeptive's claims concerning the "perfusion" patents, depending on the Court's resolution of any effort to correct the patents and the outcome on appeal by PerSeptive of the January 9 Order or appeal by any party of any ruling regarding correction of inventorship. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ In its January 9 Order, the Court ruled that PerSeptive's claims related to the three "perfusion" patents would be dismissed on January 19, 1996, if PerSeptive had not requested correction of inventorship by that date. The Court postponed this deadline pending its ruling on PerSeptive's request for certification of an immediate appeal of the January 9 Order to the United States Court of Appeals for the Federal Circuit. On March 12, 1996, the Court denied PerSeptive's motion for immediate appeal and scheduled a hearing on deceptive intent on the part of PerSeptive, if PerSeptive moves to correct inventorship, for April 29, 1996 (the "March 12 Order"). The Court required PerSeptive to make any motion to correct by March 31, 1996. In response, PerSeptive requested that the Court vacate its January 9 and March 12 Orders, or in the alternative, correct the patents in such a way that the presently unnamed inventors obtained no rights to license the patents. The Court denied PerSeptive's motion to vacate and scheduled a hearing on PerSeptive's motion to correct the patents which was completed in August 1996. The District Court has not rendered a decision based on the August hearing. According to the January 9 and March 12 Orders, PerSeptive could correct inventorship if it bears the burden of proving that its initial designation of inventors was done without deceptive intent. PerSeptive has asserted that no motion to correct need be filed, and that the Company and Sepracor bear the burden of proving deceptive intent. PerSeptive also asserts that the unnamed inventors should not be added to the patents or given any right to license the patents, and that as a matter of law they did not err in not naming the two unnamed inventors, and did not name inventors with deceptive intent. Sepracor and The Company contend that if PerSeptive is able to correct inventorship, the presently unnamed inventors would have independent rights to license the "perfusion" patents unless the Court ruled that the unnamed inventors are not entitled to such rights. If inventorship could not be corrected, the "perfusion" patents would be held invalid, subject to appeal by PerSeptive. A decision by the district Court to correct inventorship, or preventing the unnamed inventors from licensing the "perfusion" patents, would be subject to appeal by any party. PerSeptive could appeal any decision invalidating the patents for willful misdesignation of inventors. There can be no assurance that the Company and Sepracor will prevail in the pending litigation, and an adverse outcome in any of the patent infringement actions on any of the chromatography patents would have a materially adverse effect on the Company's future business and operations. The Company would be required to repay to Beckman part of certain payments if the Company terminates Beckman's right to use and sell HyperD media because a court finds HyperD media infringes any third party patents. Substantial funds have been and continue to be expended in connection with the defense of the litigation. Sepracor has agreed to control the defense of the litigation, and Sepracor and the Company share equally in expenses, net of insurance payments. In addition, in the event of any settlement or judgment adverse to the Company, Sepracor has agreed to indemnify the Company from and against any damages that the Company is required to pay with respect to its manufacture, use or sale of HyperD media products occurring prior to March 24, 1994. I. ACQUISITION OF BIOPASS: In September 1994 the Company completed the acquisition of Biopass S.A. ("Biopass"), a French company that manufactures and distributes downstream production-scale purification and chromatography systems. The purchase price was $5,024,000 ($3,000,000 paid immediately in cash, $1,500,000 to be paid in either cash or the Company's common stock, provided the common stock issued does not exceed 4% of the Company's total outstanding shares or equivalent French Francs, or a combination of the two in April 1996 and $524,000 of acquisition costs). The French Francs totaling 7,917,000 were placed in escrow until the Company paid the final installment of $1,500,000 in April 1996. The acquisition was accounted for under the purchase method of accounting and, accordingly, the net assets and operations of Biopass were included in the Company's financial statements since the date of acquisition. Total assets of $2,802,000 were acquired and approximately $3,747,000 of liabilities were assumed by the Company in the acquisition. The Company recorded a non-recurring charge of $3,500,000 identified as "in-process research and development" representing that portion of the purchase price paid for Biopass' on going research and development projects that had not yet resulted in commercially viable products. The Company continued to invest in the development and commercialization of the purchased research and development until the date of disposition. The remaining excess purchase price of $2,469,000 was recorded as goodwill; the unamortized balance at June 30, 1995 was written off as part of the sale of Biopass (see Note J). 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ If the acquisition had taken place at the beginning of the year ended December 31, 1994, giving effect to adjustments for increased depreciation and amortization, elimination of intercompany transactions and the in-process research and development charge, the pro forma revenues, net loss and net loss per common and common equivalent share would have been $12,208,000, $11,875,000 and $1.85 respectively, for the year ended December 31, 1994. J. DISPOSAL OF BIOPASS: On July 19, 1995, the Company completed the sale of its subsidiary, Biopass, while the Company retained the chromatography column technology that it assumed when it acquired Biopass in 1994 (See Note I). BioSepra S.A. sold its shares in Biopass for a total sale price of $1.3 million which is payable in quarterly installments of $100,000 from September 30, 1995 through June 30, 1996, and $150,000 is payable beginning on September 30, 1996 through December 31, 1997. The full value of the sale price was reserved for pending the buyer's payment and will be recognized as payments are received. In 1995 one payment of $100,000 was received. No payments were received in 1996. This sales contract also provided for a renewable royalty-free technology license. This license allows the buyer to develop, manufacture and sell products that incorporate the technology retained by the Company, however, the Company will be the exclusive seller during the period in which the buyer is required to make installment payments for the purchase of Biopass. The Company had committed to the minimum purchase of $1,000,000 per year, provided minimum net gross margins are met. In January 1996, the commitment to purchase chromatography columns and accessories was terminated by the Company due to inability of the purchaser to meet certain commitments. The results of Biopass' operations through July 19, 1995, have been included in the accompanying consolidated statement of operations for the year ended December 31, 1995. Total revenues, loss from operations and net loss for Biopass for this period are $1,878,000, $1,208,000 and $44,000, respectively. The loss of $2,964,000, on the disposal, was included in restructuring and impairment costs in the accompanying consolidated statement of operations for the year ended December 31, 1995 (see Note K). The net liabilities are excluded from the Company's consolidated balance sheet for 1995. K. RESTRUCTURING AND IMPAIRMENT: In June 1995, the Company announced a major cost-reduction program that involved the consolidation of its facilities and a significant reduction in the number of employees. The purpose of the program was to enable the Company to focus on the process development and process segments of the biopharmaceutical market. In connection with this program in July 1995, the Company completed the sale of Biopass, one of its French subsidiaries. As part of the cost-reduction program, the Company recorded restructuring and impairment charges totaling $4,144,000 in the second quarter of 1995. Of this amount $1,180,000 represents severance and benefits related to the reduction in work force in the U.S. and France, and $2,964,000 represents the write down of assets and intangibles to their net realizable value. The Company has terminated 55 employees as part of the cost reduction program consisting of research and development, administrative, production and marketing/sales personnel. The Company paid $140,000 and $1,025,000 of the costs relating to the employee reduction in the years ended December 31, 1996 and 1995, respectively. The Company expects the remaining severance and medical payments to be completed in 1997. There can be no assurances that this program will not result in loss of customers, temporary sales or production disruptions that could have a material adverse effect on the Company's operations. L. DISTRIBUTION AGREEMENT: In March 1995, the Company and Beckman Instruments, Inc. ("Beckman") entered into a joint distribution and development agreement. The agreement was extended in July 1996, allowing Beckman to market on a worldwide exclusive basis for a period of three years certain HyperD(TM) chromatographic columns and provides for the development (in accordance with certain milestones) and manufacture by the Company of chromatographic systems for Beckman. Under the agreement, Beckman made payments of $1,400,000 and $3,500,000 in 1996 and 1995, respectively. The Company may be required to return to Beckman part of such payments made by Beckman under the agreement if the Company fails to meet such milestones or if the Company terminates Beckman's right to use and sell licensed products, including HyperD media, because a court finds that any such licensed products infringe any third party patents. The Company recognized revenue totaling $900,000 and $400,000 during 1996 and 1995, respectively and has recorded deferred revenue of $3,600,000 and $3,500,000 as of December 31, 1996 and 1995, respectively. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ M. INCOME TAXES: INCOME TAXES The Company accounts for income taxes in accordance with the SFAS No.109, "Accounting for Income Taxes" which requires the recognition of deferred tax assets or deferred tax liabilities for the expected future tax consequences of events that have been included in the Company's consolidated financial statements. Deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of existing assets and liabilities, using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company's statutory and effective tax rates were 34% and 0%, respectively in 1996, 1995 and 1994 due to a net loss in each year and the nonrecognition of any deferred tax asset for its net operating loss carryforwards. At December 31, 1996, the Company had federal and state tax net operating loss carryforwards of approximately $9,372,000 and $8,993,000, which will expire in the year 2011 and the year 2001, respectively. The Company also had a net operating loss carryforward from its operations in France of approximately $14,329,000. Approximately $9,328,000 of this net operating loss carryforward will expire over a three year period between 1998 and 2000, and the remainder may be used indefinitely. At December 31, 1996, the Company had federal and state research and experimentation credit carryforwards of approximately $158,000 and $199,000, respectively, which will expire in the year 2011. Net operating losses of the Company incurred while operating as a division of Sepracor are not available for carryforward because the Company's results for those periods were included in the consolidated tax return of Sepracor. The components of the Company's net deferred tax asset are as follows at December 31 (in thousands):
1996 1995 - -------------------------------------------------------------------------- Assets Foreign NOL carryforwards $ 4,776 $ 5,240 Domestic NOL carryforwards 3,814 4,783 Deferred revenue 1,442 -- Inventory reserve 282 372 Tax credit carryforwards 357 219 General accruals 294 258 Capitalized technology 427 234 Other 339 395 Liabilities Property and equipment (173) (225) - --------------------------------------------------------------------------- Subtotal 11,558 11,276 Valuation allowance (11,558) (11,276) - --------------------------------------------------------------------------- Net deferred tax asset $ -- $ -- - ---------------------------------------------------------------------------
A valuation reserve is established if all or a portion of the deferred tax asset is not likely to be realized. Accordingly, a valuation reserve has been established for the full amount of the deferred tax asset. 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ N. SEGMENT INFORMATION: The Company develops, manufactures and markets processes and products for the separation and purification of biopharmaceutical compounds. The Company operates exclusively in the separations business, which the Company considers to be one business segment. Financial information by geographic area is as follows for the years indicated: For the years ended December 31, (in thousands)
1996 1995 1994 - ---------------------------------------------------------------------------- REVENUES United States Unaffiliated customers $ 8,136 $ 5,054 $ 4,538 Related parties -- 2 9 Transfer to other geographic areas 431 487 347 - ---------------------------------------------------------------------------- 8,567 5,543 4,894 - ---------------------------------------------------------------------------- Europe Unaffiliated customers 6,187 7,324 6,603 Related parties -- 107 146 Transfer to other geographic areas 2,999 1,596 3,209 - ---------------------------------------------------------------------------- 9,186 9,027 9,958 - ---------------------------------------------------------------------------- Eliminations and adjustments (3,430) (2,083) (3,556) - ---------------------------------------------------------------------------- Total revenues $14,323 $ 12,487 $ 11,296 - ---------------------------------------------------------------------------- OPERATING INCOME (LOSS) United States $(3,743) $ (6,291) $ (7,403) Europe 1,753 (6,049) (3,684) Eliminations and adjustments 3 34 (38) - ---------------------------------------------------------------------------- Total operating income (loss) $(1,987) $(12,306) $(11,125) - ---------------------------------------------------------------------------- TOTAL ASSETS United States $19,917 $ 24,455 $33,068 Europe 6,343 6,713 14,209 Eliminations and adjustments (3,091) (7,344) (11,672) - ---------------------------------------------------------------------------- Total assets $23,169 $ 23,824 $ 35,605 - ----------------------------------------------------------------------------
O. SHAREHOLDERS' EQUITY: Common Stock The Company's authorized capital stock consists of 12,000,000 shares of common stock, par value $0.01 per share. At December 31, 1996, 5,369,788 shares of the Company's common stock outstanding are held by Sepracor. The common stock has no preemptive, subscription, redemption or conversion rights. Preferred Stock In January 1994, the shareholder voted to authorize 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. Stock Option Plans The 1994 Stock Option Plan (the "Plan") provides for the grant of both incentive stock options ("ISOs") and nonstatutory stock options ("NSOs") to officers, directors and key employees of the Company. The Plan also provides for the grant of NSOs to consultants of the Company who are also not employees of the Company. In March 1995, the Board of Directors approved an amendment to the Plan increasing the number of shares of common stock which may be granted to 1,000,000. The exercise price for ISOs must be at least equal to the fair market value of the 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 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. Stock option activity related to this plan is summarized as follows: 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------
Weighted Number Exercise Price Average Price (In thousand, except option price) of Shares per Share per Share - ---------------------------------------------------------------------------------------------- Outstanding, December 31, 1994 692 $2.00-7.50 $2.51 Granted 175 $4.00-4.50 $4.22 Exercised (15) $2.00-2.50 $2.14 Canceled (136) $2.00-7.50 $3.62 - ---------------------------------------------------------------------------------------------- Outstanding, December 31, 1995 716 $2.00-7.50 $2.72 Granted 209 $2.75-4.63 $2.99 Exercised (3) $2.00 $2.00 Canceled (45) $2.00-4.63 $3.39 - ---------------------------------------------------------------------------------------------- Outstanding, December 31, 1996 877 $2.00-7.50 $2.75 Options exercisable at December 31, 1996 193 $2.00-7.50 $2.51 Options available for future grant 106 - ----------------------------------------------------------------------------------------------
In 1994, 496,000 NSOs were granted to officers, key employees and consultants prior to the Company's initial public offering. The Company recognized a compensation charge of $133,000 in 1996 and $186,600 in both 1995 and 1994 related to the NSOs. The Director Option Plan (the "Director Plan") 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 150,000 shares of common stock options may be issued under the Director Plan subject to adjustments as provided therein. Except as noted below, the exercise price per share will equal the fair market value of a share of 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. Stock option activity related to this plan is summarized as follows:
Weighted Number Exercise Price Average Price (In thousand, except option price) of Shares per Share per Share - ---------------------------------------------------------------------------------------------- Outstanding, December 31, 1994 90 $2.00 $2.00 Granted 18 $3.38-6.13 $4.90 Exercised -- -- -- Canceled -- -- -- - ---------------------------------------------------------------------------------------------- Outstanding, December 31, 1995 108 $2.00-6.13 $2.48 Granted 14 $5.38 $5.38 Exercised (8) $2.00 $2.00 Canceled (14) $2.00-5.38 $2.48 - ---------------------------------------------------------------------------------------------- Outstanding, December 31, 1996 100 $2.00-6.13 $2.93 Options exercisable at December 31, 1996 34 $2.00 $2.40 Options available for future grant 42 - ----------------------------------------------------------------------------------------------
The weighted average fair value under the Black-Scholes option pricing model of options granted during the years ended December 31, 1996 and 1995 under these plans is $3.08 and $3.84, respectively. As of December 31, 1996 and 1995 the weighted average remaining contractual life of outstanding options under these plan is 8.05 years and 8.55 years, respectively. During 1994 and prior to the Company's initial public offering, options to purchase 90,000 shares of common stock were granted under the Director Plan at an exercise price of $2.00 per share. The estimated fair market value on the date of the grant was $4.00 per share. The Company recorded a compensation charge of $28,000 in 1996 and $36,000 in both 1995 and 1994 related to these options. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ In October 1995, the FASB issued SFAS No. 123, which requires the measurement of the fair value of stock options or warrants to be included in the statement of income or disclosed in the notes to the financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure only alternative under SFAS No. 123 for options granted in 1996 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions are as follows:
December 31, 1996 1995 -------------------------------------------------------------- Risk-free interest rate 5.8% - 6.7% 6.1% - 7.2% Expected dividend yield -- -- Expected lives 10 years 10 years Expected volatility 134% - 152% 103% - 120%
Had compensation cost for these plans and the employee stock purchase plan been determined consistent with SFAS No. 123, the Company's net loss and net loss per share would have been reduced to the following pro forma amounts:
December 31, (in thousands, except per share amounts) 1996 1995 ----------------------------------------------------------------------- Net loss As reported (2,120) (12,675) Pro Forma (2,276) (12,730) Net loss per share As reported $(.27) $(1.81) Pro Forma $(.29) $(1.82)
Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions including 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 input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. In connection with the initial public offering, the Company granted to the Underwriter an option to purchase 300,000 shares of common stock at an excise price equal to 150% of the initial public offering price per share or $10.50 and subject to adjustment in certain circumstances. The option is exercisable at any time or from time to time after March 24, 1995, and before March 24, 1999. The option may be transferred in whole or part at any time under specific conditions. In 1995, the Company adopted the 1995 Employee Stock Purchase Plan ("Purchase Plan"). Under the Purchase Plan, 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, through accumulation of payroll deductions ranging from 1% to 10% of compensation, as defined, subject to certain limitations. During 1996 and 1995, there were 14,494 and 6,010 shares, respectively, issued under the Purchase Plan. At December 31, 1996, 29,496 shares of authorized but unissued common stock were reserved for future issuance under the Purchase Plan. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ P. EMPLOYEES SAVINGS PLAN: The Company adopted a 401(k) savings plan for all domestic employees in 1994. Under the provisions of the plan, employees may voluntarily contribute up to 20% of their compensation subject to statutory limitations. In addition, the Company can make matching contributions at its discretion. In 1996 the Company matched 50% of the first $2,000 contributed by employees up to $1,000 maximum per employee. Employer matching contributions amounted to $14,000 for the year ended December 31, 1996. There were no employer matching contributions to the plan in 1995 or 1994. EX-21 6 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF BIOSEPRA INC. Name of Subsidiary Jurisdiction of Organization - ------------------ ---------------------------- BioSepra S.A. France BioSepra BioMedical Inc. Delaware EX-23.1 7 CONSENT OF COOPERS & LYBRAND L.L.P. 1 Exhibit 23.1 ------------ CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the registration statements of BioSepra, Inc. on Form S-8 (Files Nos. 33-79398, 33-79396, 33-94792, 33-94770, 333-05621) of our reports dated February 27, 1996, except as to the information in the fourth paragraph of Note H and the seventh paragraph of Note C, for which the date is March 29, 1996, on our audits of the consolidated financial statements and the financial statement schedule of BioSepra, Inc. as of December 31, 1995, and for the years ended December 31, 1995, and 1994, which reports are included in the Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Boston, Maccachusetts March 28, 1997 EX-23.2 8 CONSENT OF ARTHUR ANDERSEN LLP 1 ARTHUR ANDERSEN LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-79398, 33-79396, 33-94792, 33-94770 and 333-05621. /s/ Arthur Andersen LLP Boston, Massachusetts March 25, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 4,142,000 360,000 3,030,000 0 3,481,000 11,234,000 2,168,000 0 23,169,000 7,586,000 1,141,000 0 0 84,000 14,358,000 23,169,000 13,423,000 14,323,000 6,338,000 6,338,000 9,972,000 0 214,000 (2,120,000) 0 (2,120,000) 0 0 0 (2,120,000) .27 .27
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