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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 0-23678
BIOSPHERE MEDICAL, INC.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 04-3216867
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Organization or Incorporation)
1050 Hingham St., Rockland, Massachusetts 02370
(Address of Principal Executive Offices) (Zip Code)
(781) 681-7900
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(Registrant's Telephone Number, Including Area Code)
Indicate by an (X) whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by an (X) whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
YES NO X
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The number of shares outstanding of the Registrant's Common Stock as of
May 1, 2003: 13,328,941 shares.
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BioSphere Medical, Inc.
INDEX
Page
Part I - Financial Information
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets
as of March 31, 2003 and December 31, 2002
(unaudited)...............................................3
Consolidated Condensed Statements of
Operations for the Three Months Ended
March 31, 2003 and 2002 (unaudited).......................4
Consolidated Condensed Statements of
Cash Flows for the Three Months Ended
March 31, 2003 and 2002 (unaudited).......................5
Notes to Consolidated Condensed
Financial Statements......................................6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................................10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .......................................22
Item 4. Controls and Procedures..................................22
Part II - Other Information
Item 1. Legal Proceedings........................................23
Item 6. Exhibits and Reports on Form 8-K.........................23
Signatures...............................................24
Certifications...........................................25
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
BIOSPHERE MEDICAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data / unaudited)
MARCH 31, DECEMBER 31,
2003 2002
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ASSETS
Current assets:
Cash and cash equivalents....................... $ 1,291 $ 4,112
Marketable securities........................... 11,121 10,626
Accounts receivable, net of allowance for
doubtful accounts of $163 and $117 as of
March 31, 2003 and December 31, 2002,
respectively................................... 2,183 2,059
Inventories, net................................ 3,416 3,179
Prepaid and other current assets................ 470 431
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Total current assets........................ 18,481 20,407
Property and equipment, net..................... 1,576 1,692
Goodwill, net................................... 1,443 1,443
Other assets.................................... 388 386
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TOTAL ASSETS..................................... $ 21,888 $ 23,928
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 949 $ 858
Accrued compensation............................ 1,316 1,477
Other accrued expenses.......................... 1,171 941
Current portion of long-term debt
and capital lease obligations.................. 127 123
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Total current liabilities................... 3,563 3,399
Long-term debt and capital lease
obligations.................................... 247 270
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TOTAL LIABILITIES................................ $ 3,810 $ 3,669
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Stockholders' equity:
Common stock, $0.01 par value, 25,000,000
shares authorized; shares issued and
outstanding: 13,226,000 as of March 31, 2003
and December 31, 2002.......................... 132 132
Additional paid-in capital...................... 81,208 81,169
Accumulated deficit............................. (63,417) (61,241)
Cumulative other comprehensive income........... 155 199
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TOTAL STOCKHOLDERS' EQUITY....................... 18,078 20,259
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $ 21,888 $ 23,928
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The accompanying notes are an integral part of these consolidated
condensed financial statements.
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BIOSPHERE MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data / unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
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PRODUCT REVENUES................................. $ 3,050 $ 2,604
COSTS AND EXPENSES:
Cost of product revenues....................... 1,027 713
Research and development....................... 706 1,047
Sales.......................................... 1,424 1,420
Marketing...................................... 1,289 1,036
General and administrative..................... 906 837
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TOTAL COSTS AND EXPENSES.................... 5,352 5,053
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LOSS FROM OPERATIONS........................ (2,302) (2,449)
Interest and other income, net................. 126 130
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NET LOSS.................................... $ (2,176) $ (2,319)
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BASIC AND DILUTED NET LOSS PER SHARE............. $ (0.16) $ (0.18)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic and diluted........................... 13,226 12,793
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The accompanying notes are an integral part of these consolidated
condensed financial statements.
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BIOSPHERE MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands / unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------
2003 2002
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Cash flows from operating activities:
Net loss............................................... $ (2,176) $ (2,319)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for doubtful accounts...................... 45 --
Depreciation and amortization........................ 176 133
Non-cash stock-based compensation to non-employees... 39 --
Realized gains on available for
sale marketable securities.......................... (18) --
Changes in operating assets and liabilities:
Accounts receivable................................ (143) (179)
Inventories........................................ (254) (535)
Prepaid and other current assets................... (37) 63
Related party receivable........................... -- 260
Accounts payable................................... 79 54
Accrued compensation............................... (173) (116)
Other accrued expenses............................. 210 207
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Net cash used in operating activities.................. (2,252) (2,432)
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Cash flows from investing activities:
Purchase of property and equipment..................... (18) (144)
Purchase of marketable securities...................... (7,819) --
Proceeds from the maturity of marketable securities.... 7,317 12,550
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Net cash (used in) provided by investing activities.... (520) 12,406
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Cash flows from financing activities:
Proceeds from issuance of common stock under
employee benefit and incentive plans.................. -- 6
Principal payments under long-term debt and
capital lease obligations............................. (28) (31)
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Net cash used in financing activities (28) (25)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS.................................... (21) 10
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..... (2,821) 9,959
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 4,112 10,569
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CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 1,291 $ 20,528
========= =========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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BIOSPHERE MEDICAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Nature of Business
BioSphere Medical, Inc. (the "Company") was incorporated in Delaware in
December 1993. During 1999, the Company strategically refocused its business on
the development and commercialization of its proprietary Embosphere(R)
Microspheres and other accessory embolotherapy products for use in treating
uterine fibroids, hypervascularized tumors and arteriovenous malformations.
Between February 1999 and October 2001, the Company acquired all ownership
interests in Biosphere Medical S.A. ("BMSA"), a French societe anonyme. BMSA
holds the license to the embolotherapy platform device that is the main focus of
the Company's business. In May 1999, the Company sold substantially all of the
assets relating to its former core business, chromatography, and changed its
name from BioSepra, Inc. to BioSphere Medical, Inc.
The Company believes that existing working capital, together with
anticipated sales proceeds from its microspheres and other medical device
products, will provide liquidity sufficient to allow the Company to meet its
expected spending obligations for at least the next twelve-month period, while
also allowing the further development and testing of other product candidates
and technologies. However, no assurances can be given that such revenues will,
in fact, be realized, or that the Company will have sufficient capital to meet
its obligations beyond the next twelve-month period. If the Company does not
realize some or all of its revenue expectations, or otherwise fails to have
sufficient capital for its planned operations, it may be required to secure
alternative financing arrangements or pursue additional strategic partners,
neither of which may be available to the Company on favorable terms or at all,
and/or defer or limit some or all of its sales, marketing, research, development
and/or clinical projects.
B) Basis of Presentation
The accompanying consolidated condensed financial statements are unaudited
and have been prepared on a basis substantially consistent with the Company's
annual audited financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002. The consolidated
condensed financial statements include the accounts of the Company, and its
three wholly owned subsidiaries, BMSA, Biosphere Medical Japan, Inc. and BSMD
Ventures, Inc. All material inter-company balances and transactions have been
eliminated in consolidation. Certain information and footnote disclosures
normally included in the Company's annual audited financial statements have been
condensed or omitted. The consolidated condensed financial statements, in the
opinion of management, reflect all adjustments (including normal recurring
adjustments) necessary for a fair statement of the results for the three months
ended March 31, 2003 and 2002. The results of operations for the presented
periods are not necessarily indicative of the results of operations to be
expected for the entire fiscal year. These consolidated condensed financial
statements should be read in conjunction with the audited financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002.
C) Cash, cash equivalents and marketable securities
In accordance with the Company's investment policy, surplus cash is
invested in investment grade corporate and U.S. government debt as well as
certain asset backed securities. The Company considers all highly liquid
investments with an original maturity of ninety days or less, as of the date of
purchase, to be cash equivalents. The Company determines the appropriate
classification of marketable securities at each balance sheet date.
Available-for-sale marketable securities are carried at their fair value with
unrealized gains and losses included in accumulated other comprehensive income
(loss) in the accompanying balance sheet.
D) Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive income.
Other comprehensive income includes certain changes in equity that are excluded
from net loss. Specifically, the effects of foreign currency translation
adjustments and any unrealized gains or losses on available-for-sale marketable
securities are separately included in accumulated other comprehensive income
within stockholders' equity. For the three months ended March 31, 2003 and 2002,
the Company's comprehensive losses are as follows:
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BIOSPHERE MEDICAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
D) Comprehensive Loss (continued)
THREE MONTHS ENDED
MARCH 31,
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2003 2002
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(In thousands)
Net loss.................................... $ (2,176) $ (2,319)
Cumulative translation adjustment........... (19) (9)
Unrealized gains on available
for sale securities........................ (25) --
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Total comprehensive loss $ (2,220) $ (2,328)
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E) Net Loss Per Share
Basic net loss per share is calculated based on the weighted average number
of common shares outstanding during the period. Diluted net loss per share
incorporates the dilutive effect of common stock equivalent options, warrants
and other convertible securities. Common stock equivalents, as determined in
accordance with the treasury-stock accounting method, equaled 1,720,924 and
2,645,121 as of March 31, 2003 and 2002, respectively. The three-month average
price of BioSphere Medical common stock used in determining common stock
equivalents equaled $4.60 and $9.07 as of March 31, 2003 and 2002, respectively.
Total common stock options and warrants outstanding as of March 31, 2003 and
2002 equaled 3,940,805 and 3,940,131 respectively. Common stock equivalents have
been excluded from the calculation of weighted average number of diluted common
shares, as their effect would be antidilutive for all periods presented.
F) Impairment of Long-Lived Assets
As of March 31, 2003, the Company has evaluated the potential impairment of
its long-lived assets with respect to events or changes in circumstances that
may indicate that the carrying amount of a recorded asset may not be
recoverable. Based on management's assessment as of March 31, 2003, the Company
has determined that no impairment of long-lived assets exists.
2. INVENTORIES
Inventories are stated at the lower of cost or market and consist of
the following:
MARCH 31, DECEMBER 31,
2003 2002
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(In thousands)
Raw material................................ $ 248 $ 213
Work in progress............................ 1,110 1,031
Finished goods.............................. 2,058 1,935
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Total inventory............................. $ 3,416 $ 3,179
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3. SEGMENT AND GEOGRAPHIC DATA
The Company develops its Microspheres and other accessory products for use
in the treatment of uterine fibroids, hypervascularized tumors and arteriovenous
malformations. The Company operates exclusively in the medical device
business, which the Company considers as one business segment. Operations are
primarily conducted in two geographic regions: North America and Europe.
Operations by geographic region for the three months ended March 31, 2003 and
2002 are as follows:
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BIOSPHERE MEDICAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
3. SEGMENT AND GEOGRAPHIC DATA (continued)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
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(In thousands)
PRODUCT REVENUES
North America
Unaffiliated customers.................. $ 2,110 $ 1,734
Related parties......................... 260 --
Transfer to other geographic areas...... 13 --
Europe
Unaffiliated customers -
(primarily in France)................. 788 739
Related parties......................... 555 921
Transfer to other geographic areas...... 139 131
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Total revenues............................. 3,865 3,525
Intercompany eliminations and adjustments.. (815) (921)
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Total product revenues..................... $ 3,050 $ 2,604
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LOSS FROM OPERATIONS, NET OF ELIMINATIONS
North America.............................. $ (1,955) $ (2,287)
Europe..................................... (221) (32)
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Total operating loss....................... $ (2,176) $ (2,319)
============= ============
North America product revenues include shipments within the United States
and Canada as well as minimal shipments to other geographic territories in the
Far East and Pacific Rim. European product revenues include product shipments to
European countries as well as shipments to other geographic territories in the
Middle East and Africa.
4. STOCK COMPENSATION
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure ("SFAS No. 148"). SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition to the fair
value method of accounting for stock-based employee compensation. SFAS No. 148
also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28,
Interim Financial Reporting ("APB No. 28"), to include increased pro-forma
disclosure of the effects of stock-based employee compensation on the results of
operations. SFAS No. 148 became effective for fiscal years ending after December
15, 2002. The Company has elected to continue to account for employee
stock-based compensation using the intrinsic value method as described in APB
No. 25 and therefore, the adoption of SFAS No. 148 did not have a material
impact on the Company's consolidated results of operations for the three-month
period ended March 31, 2003.
Under APB No. 25, compensation expense is measured as the difference, if
any, between the option exercise price and the fair value of the Company's
common stock at the date of grant. The Company has historically granted options
to employees and directors at exercise prices equal to the fair value of the
Company's common stock. Accordingly, no compensation expense has been recognized
for its employee stock-based compensation plans.
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes a fair
value based approach for valuing stock options. The Company follows the
disclosure-only alternative afforded by SFAS No. 123. Had compensation costs for
stock options issued to employees and directors been determined based on the
estimated fair value at the grant dates as calculated in accordance with SFAS
No. 123, the Company's reported net loss and basic and diluted net loss per
common share for the three months ended March 31, 2003 and 2002 would have been
adjusted to the pro forma amounts indicated below:
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BIOSPHERE MEDICAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
4. STOCK OPTIONS (continued)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2003 2002
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(In thousands, except
per share amounts)
Net loss
As reported $ (2,176) $ (2,319)
Pro forma compensation expense (333) (281)
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Pro forma net loss $ (2,509) $ (2,600)
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Basic and diluted loss per share
As reported (0.16) (0.18)
Pro forma (0.19) (0.20)
============= ============
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing models require the use of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock-based compensation.
5. RECENT ACCOUNTING PRONOUNCEMENTS
At the November 21, 2002 meeting, the Emerging Issues Task Force reached a
consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables," which addresses how to account for arrangements that may involve
the delivery or performance of multiple products, services, and/or rights to use
assets. The final consensus will be applicable to agreements entered into in
fiscal periods beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to all
existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes.
The Company does not believe the adoption of EITF 00-21 will have a
material impact on its results of operations or financial position.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion of our financial condition and results of
operations should be read in conjunction with the Condensed Consolidated
Financial Statements and the related Notes contained elsewhere in this report.
OVERVIEW
BioSphere Medical, Inc. ("we," "our", or "BioSphere") develops,
manufactures and markets agents for medical applications using embolotherapy
techniques. Our core technologies, consisting of patented bio-engineered
polymers and manufacturing methods, are used to produce miniature spherical
beads with unique properties for a variety of applications. Embolotherapy works
by reducing blood flow to target areas of the body. The procedure is performed
by injecting agents, usually particles, through a catheter, into the blood
vessels that feed these target areas. By selectively blocking the target
tissue's blood supply, the deprived tissue will either become destroyed or
devitalized, resulting in therapeutic benefit.
Our principal focus is on growing our Embosphere Microsphere business
worldwide, which we believe will be a key driver to our success. We are also
focused on maintaining our leadership position through the introduction of new
embolic products, new accessory embolic products, and product improvements. Our
revenue is primarily generated from product sales of our Embosphere Microspheres
and EmboGold Microspheres in North America, Europe and other geographic
territories including the Middle East, Africa, Far East and Pacific Rim Basin.
Product revenues also include the sale of accessory embolotherapy devices such
as our EmboCath catheters and our Segway guidewires, as well as our other
non-embolotherapy products, including barium and other ancillary medical
devices. These other products are manufactured by us or by third parties under
various supply and licensing arrangements. We believe that a majority of our
revenue in the United States for the three-month period ended March 31, 2003 and
2002 was derived from the sale of Embosphere Microspheres and EmboGold
Microspheres for use in uterine fibroid embolization.
In April 2000, we received clearance from the FDA for embolization of
hypervascularized tumors and arteriovenous malformations. In November 2002, we
received additional clearance from the FDA to market our Embosphere Microspheres
for use in treating symptomatic uterine fibroids. Currently our Embosphere
Microspheres are the only embolic product specifically approved for use in UFE.
After receiving UFE marketing clearance, we began an aggressive marketing
strategy to promote UFE through our ASK4UFE (TM) awareness and education
campaign and also to specifically promote our EmboSphere microspheres as the
choice of treatment for uterine fibroid embolization.
We received CE mark approval of our Embosphere Microspheres product in the
European Union in 1997. CE mark approval is a certification granted by European
regulatory bodies, or by some manufacturers with satisfactory quality systems,
that substantiates the compliance of products with specific standards of quality
and/or safety. This approval is generally required prior to the
commercialization of a medical device in the European Union. In January 2000, we
received marketing approval of our Embosphere Microspheres product in Australia
and Canada.
We have experienced operating losses in each fiscal period since our
inception. As of March 31, 2003, we had approximately $12.41 million in cash,
cash equivalents and marketable securities and an accumulated deficit of
approximately $63.42 million. In connection with the execution of our business
plan, we expect to experience an operating loss for the full year ended December
31, 2003. However, we expect to attain profitability by the end of 2003.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
- 10 -
to make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosure at the date of our
financial statements. The significant accounting policies which we believe are
most critical in gaining an understanding of our financial statements include
policies and judgments relating to revenue recognition, accounts receivable,
inventories and deferred taxes. Actual results could differ materially from
these estimates. There were no material changes in our judgments or estimates
during the first three months of 2003. For a more detailed explanation of the
judgments made in these areas, refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations within our Annual Report on Form
10-K for the year ended December 31, 2002.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Product revenues increased to $3.05 million for the three-month period
ended March 31, 2003 from $2.60 million for the same period in 2002. The 17%
increase in product revenues in the year-to-year quarters was due primarily to a
22% increase in the sales of our Microspheres in the United States. Also
contributing to the growth in revenue was a 7% increase in European sales
resulting from favorable Euro-to-dollar conversion rate changes.
Cost of product revenues for the three-month period ended March 31, 2003
was $1.03 million compared with $713,000 for the same period in 2002. The 44%
increase in the cost of product revenues was primarily attributable to the
following factors; the increase in unabsorbed manufacturing overhead due to a
decrease in embosphere production in order to diminish inventory levels and
preserve liquidity; the establishment of a small manufacturing team in the U.S.
to improve the quality and efficiency in our production process; and the 17%
growth in revenues. Gross margin from all our device product sales for the
three-month period ended March 31, 2003 was $2.02 million, or approximately 66%
of product revenues, compared with $1.89 million, or 73% of product revenues,
for the same period in 2002. Gross margin percentage is highly correlated to
embosphere revenue growth.
Research and development expenses primarily relate to (i) development
related to improving manufacturing processes, (ii) research to identify and
evaluate new and innovative embolotherapy products based on our platform
microsphere technology, and (iii) pre-clinical testing and clinical trials of
product candidates. Our research efforts are primarily focused in the following
areas:
o Continuing to advance our microsphere technology for use in embolotherapy
applications;
o Developing next generation embolotherapy technologies, including active
microsphere platforms that advance the scope of embolotherapy into new
therapeutic applications; and
o Building a broad, accessory product portfolio to complement embolotherapy
applications.
Our research and development functions typically work on a number of
projects concurrently. In addition, except for clinical expenses, a substantial
amount of fixed research and development costs such as salary and salary related
benefits, facility depreciation, utilities and maintenance are shared among
various programs. Accordingly, we do not separately track all specific costs for
each of our research and development projects. We estimate that during the three
months ended March 31, 2003 and 2002, the majority of our research and
development expenses were related to the development and validation of our
Embocath(TM) Catheter and Segway(TM) Guidewire, as well as salary and related
benefit expenses and laboratory supplies related to our Radiosphere(TM),
TempRx(TM) and Hepasphere SAP(TM) programs.
Total research and development expenses in the three-month period ended
March 31, 2003 decreased to $706,000 from $1.05 million in the same period in
2002. The 33% decrease in the three months ended March 31, 2003 was primarily
due to the completion in the first quarter of 2002 of our pivotal Phase II
clinical trials to support FDA-specific labeling clearance or approval to use
our Microsphere products in the treatment of uterine fibroids. Total clinical
costs were $93,000 and $313,000 for the three-month periods ended March 31, 2003
and 2002, respectively. Also contributing to the decrease in total research and
development expenses from 2002 to 2003 was a reduction in new product validation
costs. We anticipate that our research and development expenses through the next
several quarters will not increase above current levels.
Selling expense for the three-month period ended March 31, 2003 was $1.42
million and remained consistent with first quarter 2002 expense levels as our
sales force continued to aggressively promote, penetrate and develop the uterine
fibroid embolization market. Marketing expenses for the three-month period ended
March 31, 2003 increased to $1.29 million from $1.04 million for the comparable
period in 2002. The 24% increase was primarily due to UFE specific awareness and
education expenses associated with promoting the UFE procedure through our
ASK4UFE campaign as well as promoting Embosphere Microspheres as the choice of
treatment of uterine fibroids. We expect that both sales and marketing expense
- 11 -
will either continue at current levels, or increase moderately, over the
foreseeable future as we maintain our aggressive effort to promote (i) UFE
awareness as an alternative to hysterectomy and (ii) Embosphere Microspheres as
a uniquely beneficial product in UFE procedures. Selling and marketing expenses
are also expected to grow consistent with realized growth in worldwide product
sales.
General and administrative expenses for the three-month period ended March
31, 2003 increased to $906,000 from $837,000 for the comparable period in 2002.
The 8% increase was primarily due to additional reserves for bad debt
established to accommodate increased products revenues, as well as, to a lesser
extent, a change in the Board of Directors compensation program.
Interest and other income, net, in the three-month period ended March 31,
2003 was $126,000, compared to $130,000 in the comparable period in 2002. The 3%
decrease in interest and other income, net, was primarily due to decreases in
invested balances and the significant reductions in available on interest rates
investment-grade securities. Partially offsetting the total decrease in interest
and other income was approximately $57,000 in realized foreign currency exchange
gains. Currently, it is not our policy to actively manage or engage in foreign
currency transactions designed to enhance or mitigate exchange rate gains or
losses.
LIQUIDITY AND CAPITAL RESOURCES
We have historically funded our operations from product sales, net proceeds
provided from public and private equity offerings, funds provided by the sale of
our former chromatography business, funds provided by Sepracor Inc., bank
financings, equipment lease financing and, to a lesser extent, exercises of
stock options. As of March 31, 2003, we had $12.41 million in cash, cash
equivalents and marketable securities, as well as $14.92 million in net working
capital.
For the three months ended March 31, 2003, we used $2.25 million in
operating activities primarily to fund our sales, marketing and product research
and development activities, as well as to finance working capital requirements,
particularly in the U.S. We expect cash used in operations to decrease, as we
expect product revenue growth to begin offsetting our working capital needs,
product development efforts and operational expenses.
Net cash used in investing activities was $520,000 for the three months
ended March 31, 2003, due to increased investments in available for sale
marketable securities.
Net cash used in financing activities was $28,000 for the three months
ended March 31, 2003, all of which was associated with payments on capital lease
and long-term debt financing instruments.
In May 2002, we entered into a two-year credit facility with a bank under
which we may borrow, subject to limitations defined in the agreement, up to $5.0
million for general working capital and corporate purposes. There were no
borrowings outstanding under this agreement as of March 31, 2003. Each available
30, 60, 90 or 180-day advance shall bear interest at a per annum rate that we
may select equal to either (i) a variable rate as determined by the bank or (ii)
a rate equal to the corresponding 30, 60, 90 or 180-day LIBOR rate
(approximately 1.40% as of March 31, 2003) plus a LIBOR advance rate spread as
determined by certain current working capital balances at the time of the
advance. Our ability to borrow under this credit line is dependent upon
maintenance of certain financial ratios and levels of cash and cash equivalents
and tangible capital bases. In connection with the credit facility, the Company
has entered into a security agreement pursuant to which we have pledged to the
bank all of our U.S. assets, excluding the equity ownership of BMSA, as
collateral. As of March 31, 2003, we were in compliance with all credit facility
covenants.
Except as referred to above, we have not had any material changes in our
borrowings, our borrowing arrangements, contractual cash commitments and related
party transactions since December 31, 2002. For a discussion of our contractual
cash commitments and related party transactions, refer to our Annual Report on
Form 10-K for the year ended December 31, 2002.
We believe that our existing cash and other working capital, including the
approximate $12.41 million in cash, cash equivalents and marketable securities
that we have as of March 31, 2003, will be sufficient to fund our operating and
capital requirements, as currently planned, at least through the next
twelve-month period. However, our cash requirements may vary materially from
those now planned due to a number of factors, including, without limitation, the
amount of proceeds from sales of our products, changes in post-UFE-clearance
marketing programs, anticipated research and development efforts, the scope and
results of pre-clinical and clinical testing, changes in the focus and direction
of our research and development programs, competitive and technological
advances, the timing and results of FDA regulatory review and the market's
acceptance of any approved products.
- 12 -
We expect to incur additional costs, including costs related to ongoing
research and development activities, pre-clinical studies, clinical trials, the
expansion of our manufacturing, laboratory and administrative functions, as well
as costs relating to further market development and commercialization efforts.
We may also need additional funds for possible strategic acquisitions of
synergistic businesses, products and/or technologies. These additional funds may
be substantial and raised from time to time through additional public or private
sales of equity, through borrowings, or through other financings. There are no
assurances that we will be able to obtain any additional funding that may be
required on acceptable terms.
RECENT ACCOUNTING PRONOUNCEMENTS
At the November 21, 2002 meeting, the Emerging Issues Task Force reached a
consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables," which addresses how to account for arrangements that may involve
the delivery or performance of multiple products, services, and/or rights to use
assets. The final consensus will be applicable to agreements entered into in
fiscal periods beginning after June 15, 2003 with early adoption permitted.
Additionally, companies will be permitted to apply the consensus guidance to all
existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes.
We do not believe the adoption of EITF 00-21 will have a material impact on
our results of operations or financial position. Application of SFAS No. 144 did
not have any effect on our consolidated financial position or consolidated
results of operations, as we believe no impairment exists at this time.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains, in addition to historical
information, forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, including information with respect
to timing and likelihood or regulatory approval of products under development,
market acceptance of our products and expected results of operations. These
forward-looking statements involve risks and uncertainties and are not
guarantees of future performance. Our actual results could differ significantly
from the results discussed in such forward-looking statements due to a number of
important factors, including those set forth below. You should carefully
consider each of these risks and uncertainties in evaluating our business,
financial condition and results of operations. The forward-looking information
provided herein represents our estimates as of the date of this report.
Subsequent events and developments may cause these estimates to change. We
caution you that while we may elect to update this forward-looking information
at some point in the future, we specifically disclaim any obligation to do so.
RISK RELATING TO OUR FUTURE PROFITABILITY
- -----------------------------------------
BECAUSE WE HAVE A HISTORY OF LOSSES AND OUR FUTURE PROFITABILITY IS UNCERTAIN,
OUR COMMON STOCK IS A SPECULATIVE INVESTMENT
We have incurred operating losses since our inception and, as of March 31,
2003, had an accumulated deficit of approximately $63.4 million. We expect to
spend substantial funds to continue research and product testing, to establish
sales, marketing, quality control, regulatory, manufacturing and administrative
capabilities and for other general corporate purposes. We expect to continue to
incur operating losses until at least the fourth quarter of 2003, as we expand
our commercialization efforts.
We may never become profitable. If we do become profitable, we may not
remain profitable on a continuing basis. Our failure to become and remain
profitable would depress the market price of our common stock and impair our
ability to raise capital and expand, diversify or continue our operations.
RISKS RELATING TO OUR INDUSTRY, BUSINESS AND STRATEGY
- -----------------------------------------------------
IF WE DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE OF OUR MICROSPHERES PRODUCTS,
OUR BUSINESS PROSPECTS WILL BE SERIOUSLY HARMED
Our Microspheres are based on new technologies and therapeutic approaches.
In the United States, we began selling our Microspheres product in the first
- 13 -
half of 2000. In November 2002, we received FDA clearance to market our
Microspheres in the United States for specific use in the embolization of
uterine fibroids. Our success will depend upon the medical community's,
patients' and third-party payors' increasing acceptance of our Microspheres
product as medically therapeutic and cost-effective. Our future success will
also depend upon obstetrics and gynecology physicians referring patients to
interventional radiologists to receive treatment using our products in lieu of,
or in addition to, receiving other forms of treatment that the obstetrics and
gynecology physicians can otherwise provide directly.
Negative publicity associated with any adverse medical effects attributed
to embolization treatments generally, or our product specifically, may create
the market perception that our products are unsafe. For example, patients
commonly experience a day or two of post-procedure abdominal pain or cramping.
Other infrequently occurring complications may include allergic reactions,
rashes, early onset of menopause, infertility and infection that may, in some
cases, require a hysterectomy. In addition, our Microspheres are designed to
remain in the body permanently. As a result, there is some risk that some or all
of the Microspheres used in a medical procedure may travel in the blood system
beyond the intended surgical site and occlude, or block, other blood vessels,
resulting in the potential for significant adverse health effects on the patient
or, in a worst case, even death. Moreover, to use our Microspheres correctly for
a particular medical procedure, trained physicians must select and use the
proper size and quantity. A physician's selection and use of the wrong size or
quantity of our Microspheres could potentially have significant adverse health
effects on the patient, including death. It will be necessary for us to spend
significant amounts of money and allocate management resources to educate
physicians about the selection and use of the proper size and quantity of
Microspheres in patient therapy. In addition, there is only limited data
concerning the long-term health effects on persons receiving embolotherapy using
our Microspheres. For example, the effect of uterine fibroid embolization on
continued fertility has not yet been specifically studied and our FDA clearance
currently does not include women who intend future pregnancy.
If we are not able to successfully educate physicians to properly use our
product, or if the market determines or concludes that our product is not safe
or effective for any reason, we may be exposed to product liability claims,
product recalls, fines or other penalties or enforcement actions by regulatory
agencies and associated adverse publicity. In addition, we have provided to our
customers a satisfaction guarantee that requires us to accept the return of any
inventory and credit the entire amount of the original order if a properly
trained customer is not satisfied with the performance of either our
Microspheres or our EmboCath catheter products. If we experience adverse
publicity or are subject to product liability claims, excessive guarantee
claims, recalls, fines and the like, we will be unable to achieve widespread
market acceptance of our Embosphere Microsphere products and achieve
profitability.
IF WE DO NOT SUCCESSFULLY MARKET AND PROMOTE OUR EMBOSPHERE MICROSPHERES FOR USE
IN UTERINE FIBROIDS EMBOLIZATION, OUR PRODUCT REVENUES WILL NOT INCREASE.
In the first quarter of 2003, we launched our ASK4UFE campaign to increase
awareness among patients, referring physicians, interventional radiologists and
third party payors of UFE as an alternative treatment for fibroids. To date, we
believe that only a very small segment of the population is familiar with the
treatment option. We believe that our future product revenues are substantially
dependent on our ability to achieve awareness of the use of Embosphere
Microspheres for the treatment of UFE, and if we do not achieve increased
awareness, our product revenues will be adversely affected.
IF WE EXPERIENCE DELAYS, DIFFICULTIES OR UNANTICIPATED COSTS IN ESTABLISHING THE
SALES, DISTRIBUTION AND MARKETING CAPABILITIES NECESSARY TO SUCCESSFULLY
COMMERCIALIZE OUR PRODUCTS, WE WILL HAVE DIFFICULTY MAINTAINING AND INCREASING
OUR SALES
We are continuing to develop sales, distribution and marketing capabilities
in the United States, the European Union, the Far East and in South America. We
recently began an aggressive marketing strategy to promote UFE awareness and the
benefits of our products for the treatment of uterine fibroids. We have limited
sales and marketing experience and it will be expensive and time-consuming for
us to develop a global marketing and sales force. Moreover, we may choose, or
find it necessary, to enter into strategic collaborations to sell, market and
distribute our products. We may not be able to provide adequate incentive to our
sales force or to establish and maintain favorable distribution and marketing
collaborations with other companies to promote our products. In addition, any
third party with whom we have established a marketing and distribution
relationship may not devote sufficient time to the marketing and sales of our
products thereby exposing us to potential expenses in exiting such distribution
agreements. We and any of our third-party collaborators must also market our
products in compliance with federal, state and local laws relating to the
providing of incentives and inducements. Violation of these laws can result in
substantial penalties. If we are unable to successfully motivate and expand our
marketing and sales force and further develop our sales and marketing
capabilities, or if our distributors fail to promote our products, we will have
difficulty maintaining and increasing our sales.
- 14 -
WE WILL BE REQUIRED TO EXPEND SIGNIFICANT RESOURCES FOR RESEARCH, DEVELOPMENT,
TESTING AND REGULATORY APPROVAL OF OUR PRODUCTS UNDER DEVELOPMENT, AND THESE
PRODUCTS MAY NOT BE DEVELOPED SUCCESSFULLY
We are developing and commercializing products for medical applications
using embolotherapy techniques. Most of our next-generation embolotherapy
product candidates are still in the early stages of research and development.
Our products may not provide greater benefits than current treatments or
products, or alternative treatments or products under development. All of our
products under development will require significant additional research,
development, pre-clinical and/or clinical testing, regulatory approval and a
commitment of significant additional resources prior to their commercialization.
Our potential products may not:
o be developed successfully;
o be proven safe and effective in clinical trials;
o offer therapeutic or other improvements over current treatments and
products;
o meet applicable regulatory standards or receive regulatory approvals;
o be capable of production in commercial quantities at acceptable costs; or
o be successfully marketed.
IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS, WE MAY NOT ACHIEVE REVENUE
OPPORTUNITIES
We derived more than a majority of our revenues for the three-month period
ended March 31, 2003 and 2002 from the sale of Embosphere Microspheres and
EmboGold Microspheres. In addition, although we did not receive FDA clearance or
approval to market our Microspheres for the specific use in the treatment of
uterine fibroids until November 2002, we believe that a majority of our revenues
in the United States for the three-month period ended March 31, 2003 and 2002
were derived from the sale of our Microspheres for use in uterine fibroid
embolization. We derived approximately 16% of our revenues for the three-month
period ended March 31, 2003, and 17% of our revenues for three-month period
ended March 31, 2002, from the sale of non-strategic medical device products
that we do not expect to constitute a significant portion of our revenues on an
ongoing basis. Accordingly, we need to develop and introduce new applications
for our embolotherapy technology and pursue opportunities for microsphere
technology in other medical applications. If we are not successful in developing
new applications and products, we may not achieve revenue opportunities.
IF WE ARE UNABLE TO OBTAIN ADEQUATE PRODUCT LIABILITY INSURANCE, THEN WE MAY
HAVE TO PAY SIGNIFICANT MONETARY DAMAGES IN A SUCCESSFUL PRODUCT LIABILITY CLAIM
AGAINST US
The development and sale of medical devices entails an inherent risk of
product liability. For example, if we are not able to successfully educate
physicians to properly use our products, or if the market determines or
concludes that our product is not safe or effective for any reason, we may be
exposed to product liability claims. Product liability insurance is generally
expensive for medical device companies such as ours. Although we maintain
limited product liability insurance coverage for our products, it is possible
that we will not be able to obtain further product liability insurance on
acceptable terms, if at all. Insurance we subsequently obtain may not provide us
with adequate coverage against all potential claims. If we are exposed to
product liability claims for which we have insufficient insurance, we may be
required to pay significant damages, which would prevent or delay our ability to
commercialize our products.
IF WE ARE NOT ABLE TO COMPETE EFFECTIVELY, WE MAY EXPERIENCE DECREASED DEMAND
FOR OUR PRODUCTS, WHICH MAY RESULT IN PRICE REDUCTIONS
We have many competitors in the United States and abroad, including medical
device, biotechnology and other alternative therapeutic companies, universities
and other private and public research institutions. Our success depends upon our
ability to develop and maintain a competitive position in the embolotherapy
market. Our key medical device competitors are Cordis Corporation, a Johnson &
Johnson company, Boston Scientific Corporation and Cook Incorporated. These and
many of our other competitors have greater capabilities, experience and
financial resources than we do. As a result, they may develop products more
- 15 -
rapidly or at less cost that compete with our Microspheres products. In
addition, we may experience decreased demand for our products if these or other
competitors announce that they have begun to develop products that compete with
our products. For example, in the fourth quarter of 2002, Boston Scientific
Corporation provided samples of a competitive product to embolotherapy
providers. The availability of these free or reduced priced samples adversely
affected our products revenue in the fourth quarter of 2002 and the first
quarter of 2003. Currently, the primary products with which our Microspheres
compete for some of our applications are polyvinyl alcohol, polymerizing gels
and coils. In addition, our competitors may develop technologies that render our
products obsolete or otherwise noncompetitive.
We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our market and
continue to commercially develop our business. Moreover, we may not be able to
compete effectively, and competitive pressures may result in less demand for our
products and impair our ability to become profitable.
IF WE FAIL TO MAINTAIN, OR IN SOME INSTANCES OBTAIN, AN ADEQUATE LEVEL OF
REIMBURSEMENT FOR OUR PRODUCTS BY THIRD-PARTY PAYORS, THERE MAY BE NO
COMMERCIALLY VIABLE MARKETS FOR OUR PRODUCTS
The availability and levels of reimbursement by governmental and other
third-party payors affects the market for any medical device. We may not be able
to sell our products profitably if reimbursement is unavailable or limited in
scope or amount. Some insurance companies do not fully reimburse for
embolization procedures. These third-party payors continually attempt to contain
or reduce the costs of healthcare by challenging the prices that companies such
as ours charge for medical products. In some foreign countries, particularly the
countries of the European Union where our Microspheres product is currently
marketed and sold, the pricing of medical devices is subject to governmental
control, and the prices charged for our products have in some instances been
reduced as a result of these controls. Additionally, in both the United States
and some foreign jurisdictions, there have been a number of legislative and
regulatory proposals to change the healthcare system. Further proposals are
likely. These proposals, if adopted, could result in less revenue per procedure
for us, and could affect our ability to market our products profitably.
IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT, OTHER KEY EMPLOYEES, SCIENTIFIC
COLLABORATORS AND ADVISORS, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR
BUSINESS STRATEGY
The loss of key members of our management team could harm us. We also
depend on our scientific collaborators and advisors, all of whom have other
commitments that may limit their availability to us. Our success is
substantially dependent on the ability, experience and performance of these
members of our senior management and other key employees, scientific
collaborators and advisors. Because of their ability and experience, if we lose
one or more of these individuals, we may not be able to successfully implement
our business strategy.
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO EXPAND
OUR BUSINESS
Our future success will depend in large part upon our ability to attract
and retain highly skilled scientific, operational, managerial and marketing
personnel, particularly as we expand our activities in product development, the
regulatory approval process and sales and manufacturing. We face significant
competition for these types of persons from other companies, research and
academic institutions, government entities and other organizations.
Consequently, if we are unable to attract and retain skilled personnel, we will
not be able to expand our business.
IF WE MAKE ANY ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS AND MAY NEVER
SUCCESSFULLY INTEGRATE THE ACQUIRED BUSINESS INTO OURS
We may attempt to acquire businesses, technologies, services or products
that we believe are a strategic complement to our business model. We may
encounter operating difficulties and expenditures relating to integrating an
acquired business, technology, service or product. These acquisitions may also
absorb significant management attention that would otherwise be available for
ongoing development of our business. Moreover, we may never realize the
anticipated benefits of any acquisition. We may also make dilutive issuances of
equity securities, incur debt or experience a decrease in the cash available for
our operations, or incur contingent liabilities in connection with any future
acquisitions.
BECAUSE SEPRACOR INC. AND OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A SIGNIFICANT
AMOUNT OF OUR COMMON STOCK, THEY MAY BE ABLE TO EXERT CONTROL OVER US
As of March 31, 2003, Sepracor Inc. owned approximately 24% of our
outstanding common stock. Moreover, two of our directors are executive officers
- 16 -
of Sepracor. Sepracor and our executive officers and directors will have
significant control over all corporate actions requiring stockholder approval,
irrespective of how our other stockholders may vote, including:
o the election of directors;
o the amendment of charter documents;
o the approval of mergers and other significant corporate transactions,
including a sale of substantially all of our assets; and
o the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.
This ownership concentration could cause the market price of our common stock to
decline. In addition, conflicts of interest between Sepracor and us may arise,
including with respect to competitive business activities and control of our
management and our affairs.
OUR SUBSIDIARY'S LITIGATION WITH TERUMO COULD BE EXPENSIVE AND TIME CONSUMING
AND ANY ADVERSE DECISION BY A COURT COULD REQUIRE THE PAYMENT OF MONEY TO TERUMO
On January 27, 2003, our French subsidiary, BioSphere Medical, S.A.,
received notice from Terumo Europe, N.V. that Terumo has initiated legal
proceedings in the Commercial Court of Pontoise, France alleging that it
suffered damages from a purported termination of the distribution contract by
BioSphere Medical, S.A. BioSphere Medical, S.A. and Terumo Europe entered into a
distribution agreement in January 2002 pursuant to which Terumo Europe became
the exclusive distributor of EmboSphere Microsphere and EmboGold Microsphere
products in certain countries of Europe.
We can provide no assurance as to the outcome of Terumo's complaint. Our
subsidiary may incur substantial expenses in defending against Terumo's claims
and, even if our subsidiary prevails, this claim could divert our attention.
Moreover, an adverse court decision could require us and our subsidiary to incur
significant costs.
IF THE ESTIMATES WE MAKE, AND THE ASSUMPTIONS ON WHICH WE RELY, IN PREPARING OUR
FINANCIAL STATEMENTS PROVE INACCURATE, OUR ACTUAL RESULTS MAY VARY FROM THOSE
REFLECTED IN OUR PROJECTIONS AND ACCRUALS
Our financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of our assets, liabilities, revenues and expenses,
the amounts of charges accrued by us and related disclosure of contingent assets
and liabilities. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances.
There can be no assurance, however, that our estimates, or the assumptions
underlying them, will be correct. This, in turn, could adversely affect our
stock price.
RISKS RELATING TO REGULATORY MATTERS
- ------------------------------------
IF WE DO NOT OBTAIN AND MAINTAIN THE REGULATORY APPROVALS REQUIRED TO MARKET AND
SELL OUR PRODUCTS, THEN OUR BUSINESS MAY BE UNSUCCESSFUL AND THE MARKET PRICE OF
OUR STOCK MAY DECLINE
We are subject to regulation by government agencies in the United States
and abroad with respect to the manufacture, packaging, labeling, advertising,
promotion, distribution and sale of our products. For example, our products are
subject to approval or clearance by the FDA prior to marketing in the United
States for commercial use. Similar regulations exist in most major foreign
markets, including the European Union and Asia. The process of obtaining
necessary regulatory approvals and clearances will be time-consuming and
expensive for us. If we do not receive required regulatory approval or clearance
to market our products, or if any approvals we have received are revoked or
terminated, we may not be able to develop and commercialize our products and
become profitable, and the value of our common stock may decline.
We plan to seek 510(k) clearance for our EmboGold Microspheres for UFE.
There is no assurance that we will be able to gain such clearance.
IF THE FDA OR OTHER REGULATORY AGENCIES PLACE RESTRICTIONS ON, OR IMPOSE
ADDITIONAL APPROVAL REQUIREMENTS WITH RESPECT TO, PRODUCTS WE ARE THEN
MARKETING, WE MAY INCUR SUBSTANTIAL ADDITIONAL COSTS AND EXPERIENCE DELAYS OR
DIFFICULTIES IN CONTINUING TO MARKET AND SELL THESE PRODUCTS
- 17 -
Even though the FDA granted us clearance with respect to marketing our
Embosphere Microspheres, in the treatment of uterine fibroids, hypervascularized
tumors and arteriovascular malformations, it may have placed certain
restrictions on the indications for which we may market the product, which could
result in lower revenues. The marketing claims we are permitted to make in
labeling or advertising regarding our Microspheres are limited to those
specified in any FDA clearance or approval.
We may in the future make modifications to our Microspheres or their
labeling which we determine do not necessitate the filing of a new 510(k)
notification. However, if the FDA does not agree with our determination, it will
require us to make additional 510(k) filings for the modification, and we may be
prohibited from marketing the modified product until we obtain FDA clearance.
Similarly, if we obtain premarket approval, we may not be able to make product
or labeling changes until we get FDA clearance.
Further, the FDA has classified our embolotherapy device into Class III,
which means that even though we have obtained clearance under Section 510(k) to
market the device for certain indications, the FDA could in the future
promulgate a regulation requiring premarket approval of the device under Section
515 of the Federal Food, Drug, and Cosmetic Act to allow it to remain on the
market. We may experience difficulty in providing the FDA with sufficient data
for premarket approval in a timely fashion, if at all. In addition, the FDA may
require us to conduct a postmarket surveillance study that would require us to
track specific elements of patient experience with our Microspheres product
after we have begun marketing it. If such a study revealed previously unknown
adverse events or an unexpectedly high rate of adverse events, the FDA could
place further restrictions on our marketing of the device, or rescind our
clearance or approval.
Our products will be subject to continuing FDA requirements relating to
quality control, quality assurance, and maintenance of records, documentation,
manufacturing, labeling and promotion of medical devices. We are also required
to submit medical device reports to the FDA to report device-related deaths or
serious injuries, as well as malfunctions, the recurrence of which would be
likely to cause or contribute to a death or serious injury. These reports are
publicly available.
IF WE FAIL TO COMPLY WITH REGULATORY LAWS AND REGULATIONS, WE WILL BE SUBJECT TO
ENFORCEMENT ACTIONS, WHICH WILL AFFECT OUR ABILITY TO MARKET AND SELL OUR
PRODUCTS AND MAY HARM OUR REPUTATION
If we fail to comply with applicable federal, state or foreign laws or
regulations, we could be subject to enforcement actions, which could affect our
ability to develop, market and sell our products successfully and could harm our
reputation and lead to less acceptance of our products by the market. These
enforcement actions include:
o product seizures;
o voluntary or mandatory recalls;
o voluntary or mandatory patient or physician notification;
o withdrawal of product clearances or approvals;
o withdrawal of investigational device exemption approval;
o restrictions on, or prohibitions against, marketing our products;
o fines;
o restrictions on importation of our products;
o injunctions;
o civil and criminal penalties; and
o withdrawal of premarket approval or rescission of premarket notification
clearance.
- 18 -
RISKS RELATING TO INTELLECTUAL PROPERTY
- ---------------------------------------
IF WE ARE UNABLE TO OBTAIN PATENT PROTECTION FOR OUR PRODUCTS, THEIR COMPETITIVE
VALUE COULD DECLINE
We may not obtain meaningful protection for our technology and products
with the patents and patent applications that we own or license relating to our
microsphere technology or other ancillary products. In particular, the patent
rights we possess or are pursuing generally cover our technologies to varying
degrees, and these rights may not prevent others from designing products similar
to or otherwise competitive with our Microspheres and other products
commercialized by us. To the extent that our competitors are able to design
products competitive with ours without infringing our intellectual property
rights, we may experience less market penetration with our products and,
consequently, we may have decreased revenues.
We do not know whether competitors have similar United States patent
applications on file, since United States patent applications filed before
November 28, 2000 or for which no foreign patents will be sought are secret
until issued, and applications filed after November 28, 2000 are published
approximately 18 months after their earliest priority date. Consequently, the
United States Patent and Trademark Office could initiate interference
proceedings involving our owned or licensed United States patent applications or
issued patents. Further, there is a substantial backlog of patent applications
at the United States Patent and Trademark Office, and the approval or rejection
of patent applications may take several years.
We require our employees, consultants and advisors to execute
confidentiality agreements. However, we cannot guarantee that these agreements
will provide us with adequate protection against improper use or disclosure of
confidential information. In addition, in some situations, these agreements may
conflict with, or be subject to, the rights of third parties with whom our
employees, consultants or advisors have prior employment or consulting
relationships. Further, others may independently develop substantially
equivalent proprietary information and techniques, or otherwise gain access to
our trade secrets. Our failure to protect our proprietary information and
techniques may inhibit or limit our ability to exclude certain competitors from
the market.
IF WE BECOME INVOLVED IN EXPENSIVE PATENT LITIGATION OR OTHER PROCEEDINGS TO
ENFORCE OUR PATENT RIGHTS, WE COULD INCUR SUBSTANTIAL COSTS AND EXPENSES OR
SUBSTANTIAL LIABILITY FOR DAMAGES OR BE REQUIRED TO STOP OUR PRODUCT DEVELOPMENT
AND COMMERCIALIZATION EFFORTS
In order to protect or enforce our patent rights, we may have to initiate
legal proceedings against third parties, such as infringement suits or
interference proceedings. By initiating legal proceedings to enforce our
intellectual property rights, we may also provoke these third parties to assert
claims against us and, as a result, our patents could be narrowed, invalidated
or rendered unenforceable by a court. Furthermore, we may be sued for infringing
on the intellectual property rights of others. We may find it necessary, if
threatened, to initiate a lawsuit seeking a declaration from a court regarding
the proprietary rights of others. Intellectual property litigation is costly,
and, even if we prevail, could divert management attention and resources away
from our business.
The patent position of companies like ours generally is highly uncertain,
involves complex legal and factual questions, and has recently been the subject
of much litigation. We may not prevail in any patent-related proceeding. If we
do not prevail in any litigation, we could be required to pay damages, stop the
infringing activity, or obtain a license. Any required license might not be
available to us on acceptable terms, or at all. In addition, some licenses may
be nonexclusive, and therefore, our competitors may have access to the same
technology licensed to us. If we fail to obtain a required license or are unable
to design around a patent, we may be prevented from selling some of our
products, which could decrease our revenues.
IF ANY OF OUR LICENSES TO USE THIRD-PARTY TECHNOLOGIES IN OUR PRODUCTS ARE
TERMINATED, WE MAY BE UNABLE TO DEVELOP, MARKET OR SELL OUR PRODUCTS
We are dependent on various license agreements relating to each of our
current and proposed products that give us rights under intellectual property
rights of third parties. These licenses impose commercialization, sublicensing,
royalty, insurance and other obligations on us. Our failure, or any third
party's failure, to comply with the terms of any of these licenses could result
in our losing our rights to the license, which could result in our being unable
to develop, manufacture or sell products which contain the licensed technology.
RISKS RELATING TO OUR FINANCIAL RESULTS AND NEED FOR FINANCING
- --------------------------------------------------------------
WE WILL CONTINUE TO NEED ADDITIONAL FUNDS, AND IF ADDITIONAL CAPITAL IS NOT
AVAILABLE, WE MAY HAVE TO LIMIT, SCALE BACK OR CEASE OUR OPERATIONS
We may need to raise additional funds to develop and commercialize our
products successfully. If we cannot raise more funds, we could be required to
reduce our capital expenditures, scale back our product development, reduce our
- 19 -
workforce and license to others products or technologies that we otherwise would
seek to commercialize ourselves. Although we may seek additional funding through
collaborative arrangements, borrowing money or the sale of additional equity
securities, we may not receive additional funding on reasonable terms, or at
all. Any sales of additional shares of our capital stock are likely to dilute
our existing stockholders.
Further, if we issue additional equity securities, the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of our common stock. Alternatively, we may borrow money from
commercial lenders, possibly at high interest rates, which will increase the
risk of your investment in us.
IF OPERATING RESULTS FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER, THEN OUR
STOCK PRICE MAY DECLINE
Our operating results could fluctuate significantly from quarter to
quarter. These fluctuations may be due to several factors, including the timing
and volume of customer orders for our commercial products, procedure
cancellations, introduction or announcement of competitive products and general
economic conditions. We also expect that our operating results will be affected
by seasonality. We expect our revenue growth to subside in the third quarter of
each year from the first two quarters of each year because we do a significant
percentage of our business in the European Union, which typically experiences a
slowdown of business during the summer months. Due to these fluctuations, our
operating results in some quarters may not meet the expectations of our
investors. In that case, our stock price may decline.
In addition, a large portion of our expenses, including expenses for
facilities, equipment and personnel, are relatively fixed. Accordingly, if our
revenue declines or does not grow as much as we anticipate, we might not be able
to improve our operating margins. Failure to achieve anticipated levels of
revenues could therefore significantly harm our operating results for a
particular fiscal period.
RISKS RELATING TO THE PRODUCTION AND SUPPLY OF OUR PRODUCTS
- -----------------------------------------------------------
IF WE EXPERIENCE MANUFACTURING DELAYS OR INTERRUPTIONS IN PRODUCTION, THEN WE
MAY EXPERIENCE CUSTOMER DISSATISFACTION AND OUR REPUTATION COULD SUFFER
If we fail to produce enough products at our own manufacturing facility or
at a third-party manufacturing facility, we may be unable to deliver products to
our customers on a timely basis, which could lead to customer dissatisfaction
and could harm our reputation and ability to compete. We currently produce all
of our Microsphere products in one manufacturing facility in France and
subcontract a majority of the final packaging process and also our entire U.S.
catheter and U.S. guidewire processes to an independent contract manufacturer in
the United States. We would likely experience significant delays or cessation in
producing our products at either of these facilities if a labor strike, natural
disaster, local or regional conflict or other supply disruption were to occur.
If we are unable to manufacture our products at our facility in France, or
package certain of our products with our contract manufacturer, we may be
required to enter into arrangements with one or more alternative contract
manufacturing companies. In addition, if we are required to depend on
third-party manufacturers, our profit margins may be lower, which will make it
more difficult for us to achieve profitability.
Medical device manufacturers must adhere to the FDA's current Good
Manufacturing Practices regulations, which are enforced by the FDA through its
facilities inspection program. The manufacturers may not be able to comply or
maintain compliance with Good Manufacturing Practices regulations. If our
manufacturers fail to comply, their noncompliance could significantly delay our
receipt of new product premarket approvals or result in FDA enforcement action,
including an embargo on imported devices. For a premarket approval device, if we
change our manufacturing facility or switch to a third-party manufacturer, we
will be required to submit a premarket approval application supplement before
the change is implemented.
BECAUSE WE RELY ON A LIMITED NUMBER OF SUPPLIERS, WE MAY EXPERIENCE DIFFICULTY
IN MEETING OUR CUSTOMERS' DEMANDS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN
BUDGET
We currently purchase key components of our Microspheres from a variety of
outside sources. Some of these components may only be available to us through a
few sources. We generally do not have long-term agreements with any of our
suppliers.
Our reliance on our suppliers exposes us to risks, including:
o the possibility that one or more of our suppliers could terminate their
services at any time without penalty;
o the potential inability of our suppliers to obtain required components;
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o the potential delays and expenses of seeking alternative sources of supply;
o reduced control over pricing, quality and timely delivery due to the
difficulties in switching to alternative suppliers; and
o the possibility that one or more of our suppliers could fail to satisfy any
of the FDA's required current Good Manufacturing Practices regulations.
Consequently, in the event that our suppliers delay or interrupt the supply of
components for any reason, our ability to produce and supply our products could
be impaired, which could lead to customer dissatisfaction.
RISKS RELATING TO OUR FOREIGN OPERATIONS
- ----------------------------------------
IF WE ARE UNABLE TO MEET THE OPERATIONAL, LEGAL AND FINANCIAL CHALLENGES THAT WE
WILL ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, WE MAY NOT BE ABLE TO GROW OUR
BUSINESS
Our worldwide manufacturing and European sales operations are currently
conducted primarily through our French subsidiary. Furthermore, we currently
derive a portion of our revenues from the sale of our Microspheres and other
products in the European Union. We are increasingly subject to a number of
challenges which specifically relate to our international business activities.
Our international operations may not be successful if we are unable to meet and
overcome these challenges, which would limit the growth of our business. These
challenges include:
o failure of local laws to provide the same degree of protection against
infringement of our intellectual property;
o protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets;
o potentially longer sales cycles to sell products, which could slow our
revenue growth from international sales; and
o potentially longer accounts receivable payment cycles and difficulties in
collecting accounts receivable.
BECAUSE WE EXCHANGE FOREIGN CURRENCY RECEIVED FROM INTERNATIONAL SALES INTO U.S.
DOLLARS AND ARE REQUIRED TO MAKE FOREIGN CURRENCY PAYMENTS, WE MAY INCUR LOSSES
DUE TO FLUCTUATIONS IN FOREIGN CURRENCY TRANSLATIONS
A significant portion of our business is conducted in the European Union
Euro. We recognize foreign currency gains or losses arising from our operations
in the period incurred. As a result, currency fluctuations between the U.S.
dollar and the currencies in which we do business will cause foreign currency
translation gains and losses, which may cause fluctuations in our future
operating results. We do not currently engage in foreign exchange hedging
transactions to manage our foreign currency exposure.
RISK RELATING TO OUR STOCK PRICE
- --------------------------------
BECAUSE THE MARKET PRICE OF OUR STOCK IS HIGHLY VOLATILE, INVESTMENTS IN OUR
STOCK COULD RAPIDLY LOSE THEIR VALUE AND WE MAY INCUR SIGNIFICANT COSTS FROM
CLASS ACTION LITIGATION
The market price of our stock is highly volatile. As a result, investments
in our stock could rapidly lose their value. In addition, the stock market often
experiences extreme price and volume fluctuations, which affect the market price
of many medical device companies and which are often unrelated to the operating
performance of these companies.
Recently, when the market price of a stock has been as volatile as our
stock price has been, holders of that stock have occasionally instituted
securities class action litigation against the company that issued the stock. If
any of our stockholders were to bring a lawsuit of this type against us, even if
the lawsuit is without merit, we could incur substantial costs in defending the
lawsuit. The lawsuit could also divert the time and attention of our management.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS
As of March 31, 2003, we did not participate in any derivative financial
instruments or other financial and commodity instruments for which fair value
disclosure would be required under Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 107 "Disclosures About Fair Value
of Financial Instruments."
PRIMARY MARKET RISK EXPOSURES
Our primary market risk exposure is in the area of foreign currency
exchange rate risk. We are exposed to currency exchange rate fluctuations
related to our operations in France. Operations in France are denominated in the
Euro and as of March 31, 2003 approximately (euro)2.07 million or $2.23 million
remained outstanding within the inter-company trade accounts. Accordingly, a
hypothetical 10-percent increase in Euro to U.S. Dollar conversion rates would
result in an approximate $192,000 foreign currency market-to-market change in
the fair value of our inter-company trade account balance as of March 31, 2003.
We have not engaged in formal currency hedging activities to date, but do have a
limited natural hedge in that our revenues and expenses in France are primarily
denominated in the Euro. We also attempt to minimize exchange rate risk by
converting non-U.S. currency to U.S. dollars as often as practicable. We
generally view our investment in foreign subsidiaries operating under a
functional currency (the Euro) other than our reporting currency (the U.S.
Dollar) as long-term. Our investment in foreign subsidiaries is sensitive to
fluctuations in foreign currency exchange rates. The effect of a change in
foreign exchange rates on our net investment in foreign subsidiaries is
reflected in the "Other accumulated comprehensive loss" component of
stockholders' equity. Because our foreign currency exchange rate risk is not
material, no quantitative tabular disclosure has been provided.
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we invest in
may have market risk. This means that an increase in prevailing interest rates
may cause the principal amount of the investment to decrease. To minimize this
risk in the future, we maintain our portfolio of cash equivalents and short-term
investments in a variety of securities, including commercial paper, investment
grade asset-backed corporate securities, money market funds and government and
non-government debt securities. A hypothetical 100-basis-point increase in
interest rates would result in an approximate $75,000 decrease in the fair value
of our investments as of March 31, 2003. However, due to the conservative nature
of our investments, the relatively short duration of their maturities, our
ability to convert some or all of our long-term investments to less interest
rate-sensitive holdings and our general intent to hold most securities until
maturity, we believe interest rate risk is mitigated. As of March 31, 2002,
approximately 69% of the $11.12 million classified as available-for-sale
marketable securities will mature within one year.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their
evaluation of the Company's disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934) as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, the Company's chief executive officer
and chief financial officer have concluded that the Company's
disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.
b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
most recent evaluation.
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PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
On January 27, 2003, our French subsidiary, BioSphere Medical, S.A.,
received notice from Terumo Europe, N.V. that Terumo has initiated legal
proceedings in the Commercial Court of Pontoise, France alleging that it
suffered damages from a purported termination of the distribution contract by
BioSphere Medical, S.A. BioSphere Medical, S.A. and Terumo Europe entered into a
distribution agreement in January 2002 pursuant to which Terumo Europe became
the exclusive distributor of EmboSphere Microsphere and EmboGold Microsphere
products in certain countries of Europe. It is not possible at this time to make
a reasonable assessment as to the final outcome of this proceeding. We strongly
believe that Terumo's allegations are without merit and we will vigorously
defend the claims it has made against us.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
99.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K
ITEM 5. Other Events.
On March 31, 2003, the Company filed a current report on
Form 8-K, pursuant to Item 5 (other events), to announce
clinical developments relating to UFE.
On January 27, 2003, the Company filed a current report on
Form 8-K, pursuant to Item 5 (other events), to report that
its French subsidiary, BioSphere Medical, S.A., has received
notice from Terumo Europe, N.V. that Terumo has initiated
legal proceedings in the Commercial Court of Pontoise,
France alleging that it suffered damages from a purported
termination of the distribution contract by BioSphere
Medical, S.A.
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SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorize
BioSphere Medical, Inc.
Date: May 14, 2003 /s/ Robert M. Palladino
------------------------
Robert M. Palladino
Chief Financial Officer
(principal financial officer)
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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
- --------------------------------------------------------------------------------
I, Paul A Looney, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BioSphere Medical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ Paul A. Looney
------------------
Paul A. Looney
Chief Executive Officer
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CERTIFICATION OF CHIEF FINANCIAL OFFICER
- --------------------------------------------------------------------------------
I, Robert M. Palladino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BioSphere Medical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ Robert M. Palladino
-----------------------
Robert M. Palladino
Chief Financial Officer
- 26 -