<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<S> <C>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
For the quarterly period ended: SEPTEMBER 30, 1999
OR
<TABLE>
<S> <C>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
For the transition period from ______________ to ______________
COMMISSION FILE NUMBER 0-19410
------------------------
SEPRACOR INC.
-----------------------------
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 22-2536587
-------------------------- --------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Organization or Incorporation) number)
</TABLE>
111 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS 01752
-----------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(508) 481-6700
------------
(Registrant's Telephone Number, Including Area Code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE $.10 PER SHARE, 33,135,047 SHARES OUTSTANDING AT
NOVEMBER 5, 1999.
- --------------------------------------------------------------------------------
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<PAGE>
SEPRACOR INC.
INDEX
<TABLE>
<S> <C>
Part I--Financial Information
Item 1. Consolidated Condensed Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 1999 and December 31, 1998
(Unaudited)........................................................................... 3
Consolidated Statements of Operations for the Three and Nine Month Periods Ended
September 30, 1999 and 1998 (Unaudited)............................................... 4
Consolidated Statements of Cash Flows for the Nine Month Periods Ended
September 30, 1999 and 1998 (Unaudited)............................................... 5
Notes to Consolidated Interim Financial Statements...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk......................... 23
Part II--Other Information
Item 1. Legal Proceedings................................................................. 24
Item 6. Exhibits and Reports on Form 8-K.................................................. 25
Signatures................................................................................ 26
</TABLE>
2
<PAGE>
SEPRACOR INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 30,560 $295,323
Marketable securities..................................... 347,238 204,274
Accounts receivable, net.................................. 2,827 --
Inventories, net.......................................... 6,208 --
Other current assets...................................... 5,074 3,386
-------- --------
Total Current Assets...................................... 391,907 502,983
Property, plant and equipment, net.......................... 18,963 16,508
Deferred financing costs, net............................... 13,286 15,119
Patents and intangible assets, net.......................... 21,156 2,677
Investment in affiliates.................................... 2,058 1,490
Net assets from discontinued operations..................... -- 10,325
Other assets................................................ 1,228 158
-------- --------
Total Assets.............................................. $448,598 $549,260
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ 7,564 $ 9,290
Accrued expenses.......................................... 44,113 31,275
Notes payable and current portion of capital lease
obligation and long-term debt........................... 446 2,410
Deferred revenue and other current liabilities............ 2,658 2,502
-------- --------
Total Current Liabilities................................. 54,781 45,477
Loan guarantee of affiliate................................. 5,000 5,000
Long-term debt and capital lease obligation................. 2,176 2,435
Convertible subordinated debentures......................... 489,475 489,475
-------- --------
Total Liabilities......................................... 551,432 542,387
Minority interest........................................... 1,462 2,445
Stockholders' Equity (Deficit)
Preferred stock........................................... -- --
Common stock.............................................. 3,311 3,266
Additional paid-in capital................................ 321,954 307,668
Unearned compensation, net................................ (119) (144)
Accumulated deficit....................................... (428,986) (306,311)
Accumulated other comprehensive income (loss)............. (456) (51)
-------- --------
Total Stockholders' Equity (Deficit)........................ (104,296) 4,428
-------- --------
Total Liabilities and Stockholders' Equity (Deficit)...... $448,598 $549,260
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
3
<PAGE>
SEPRACOR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Product................................. $ 2,392 $ 34 $ 7,619 $ 124
Collaborative research and
development........................... -- 1,368 2,390 3,618
License fees............................ -- 8 11 5,038
Royalties............................... 91 61 201 175
-------- -------- --------- --------
Total Revenues........................ 2,483 1,471 10,221 8,955
Cost of revenues:
Product................................. 877 20 2,157 75
License fees............................ -- -- -- 400
Royalties............................... 29 21 70 57
-------- -------- --------- --------
Total Cost of Revenues................ 906 41 2,227 532
Gross Margin.......................... 1,577 1,430 7,994 8,423
Operating Expenses:
Research and development................ 34,690 20,151 77,252 43,490
Sales and marketing..................... 15,560 6,460 30,935 11,820
General and administrative.............. 3,512 2,115 10,257 5,918
Patent costs............................ 1,024 476 2,554 1,412
-------- -------- --------- --------
Total Operating Expenses.............. 54,786 29,202 120,998 62,640
-------- -------- --------- --------
Loss from operations...................... (53,209) (27,772) (113,004) (54,217)
Other income (expense):
Interest income......................... 5,304 3,483 16,975 9,459
Interest expense........................ (8,276) (4,502) (24,834) (12,132)
Other income (expense).................. 70 87 132 (43)
Equity in loss of investees............. -- (600) (2,509) (1,846)
-------- -------- --------- --------
Total Other Income (Expense).......... (2,902) (1,532) (10,236) (4,562)
-------- -------- --------- --------
Net loss before minority interests........ (56,111) (29,304) (123,240) (58,779)
Minority interest in subsidiary........... 362 134 910 291
-------- -------- --------- --------
Net loss from continuing operations....... $(55,749) $(29,170) $(122,330) $(58,488)
-------- -------- --------- --------
Discontinued Operations:
Loss from discontinued operations (net
of minority interests)................ -- (458) (345) (442)
-------- -------- --------- --------
Net loss.................................. $(55,749) $(29,628) $(122,675) $(58,930)
-------- -------- --------- --------
Basic and diluted net loss per common
share from continuing operations........ $ (1.68) $ (1.03) $ (3.72) $ (2.08)
-------- -------- --------- --------
Basic and diluted net loss per common
share from discontinued operations...... $ -- $ (0.02) $ (0.01) $ (0.02)
-------- -------- --------- --------
Basic and diluted net loss per common
share................................... $ (1.68) $ (1.05) $ (3.73) $ (2.10)
-------- -------- --------- --------
Shares used in computing basic and diluted
net loss per common share:
Basic and diluted....................... 33,098 28,315 32,873 28,092
-------- -------- --------- --------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
4
<PAGE>
SEPRACOR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $(122,675) $ (58,930)
Less: Net loss from discontinued operations
(net of minority interests)............................... (345) (442)
--------- ---------
Net loss from continuing operations..................... (122,330) (58,488)
Adjustments to reconcile net loss to net cash used in
operating activities:
Minority interests in subsidiaries........................ (910) (291)
Depreciation and amortization............................. 5,134 2,827
Provision for discounts and allowances.................... 82 --
Equity in investee losses................................. 2,509 1,846
Loss on disposal of property and equipment................ 6 14
Changes in operating assets and liabilities:
Accounts receivable....................................... (2,143) (2,224)
Inventories............................................... (5,814) --
Other current assets and liabilities...................... (2,553) 717
Accounts payable.......................................... (2,097) 819
Accrued expenses.......................................... 12,499 12,768
--------- ---------
Net cash used in operating activities:.................. (115,617) (42,012)
Cash flows used in investing activities:
Purchases of marketable securities........................ (832,481) (210,916)
Sales of marketable securities............................ 689,517 111,510
Additions to property and equipment....................... (5,567) (4,533)
Purchase of intangible assets............................. (10,000) --
Investment in affiliate................................... (2,000) 75
Promissory note to affiliate.............................. (500) --
Decrease in other assets.................................. 148 567
--------- ---------
Net cash used in investing activities:.................. (160,883) (103,297)
Cash flows from financing activities:
Net proceeds from issuance of common stock................ 5,304 4,760
Issuance of warrants...................................... -- 31
Repurchase of redeemable preferred stock.................. -- (6,850)
Proceeds from sale of 6 1/4% debentures due 2005.......... -- 189,475
Costs associated with 6 1/4% debentures due 2005.......... -- (6,105)
Costs associated with 7% debentures due 2005.............. (276) --
Net repayments of long-term debt and capital leases....... (794) (1,006)
Net borrowings (repayments) under line of credit
agreements.............................................. (2,032) 1,917
--------- ---------
Net cash provided by financing activities............... 2,202 182,222
Effect of exchange rates on cash and cash equivalents....... (405) (308)
--------- ---------
Net increase (decrease) in cash and cash equivalents........ (274,703) 36,605
Net cash provided by discontinued operations................ 9,940 182
Cash and cash equivalents at beginning of period............ 295,323 82,579
--------- ---------
Cash and cash equivalents at end of period.................. $ 30,560 $ 119,366
Non cash activities:
Common stock issued for intangible asset.................... $ (7,950) $ --
Acquisition of BioSphere Medical:
Liabilities assumed....................................... $ (1,493) $ --
Fair value of assets acquired............................. 1,493 $ --
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
5
<PAGE>
ITEM 1.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. Basis of presentation:
The accompanying consolidated interim financial statements are unaudited and
have been prepared on a basis substantially consistent with the audited
financial statements. Certain information and footnote disclosures normally
included in Sepracor's annual financial statements have been condensed or
omitted. The year-end consolidated condensed balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. The consolidated interim financial
statements, in the opinion of management, reflect all adjustments (including
normal recurring accruals) necessary for a fair presentation of the results for
the interim periods ended September 30, 1999 and 1998.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
These consolidated interim financial statements should be read in conjunction
with the audited financial statements for the year ended December 31, 1998,
which are contained in Sepracor's Annual Report on Form 10-K for the year ended
December 31, 1998, filed with the Securities and Exchange Commission.
The consolidated interim financial statements include the accounts of
Sepracor Inc. ("Sepracor") and its majority and wholly owned subsidiaries,
including BioSphere Medical Inc. ("BioSphere") formerly BioSepra Inc., and
Sepracor Canada Limited.
2. Discontinued operations:
On May 17, 1999, BioSphere completed the sale of substantially all its
assets related to its biopharmaceutical drug purification and research
consumable business to Life Technologies for net cash proceeds of approximately
$11,158,000.
Sepracor's results of operations and the related footnote information for
the three and nine months ended September 30, 1999 and 1998 exclude the results
of the BioSphere biopharmaceutical drug purification and research consumable
business from continuing operations, revenues and other components of income and
expense. The discontinued operations results are presented separately in a
single caption entitled "Loss from discontinued operations, net of minority
interests." The loss for the nine-month period ended September 30, 1999 includes
a $69,000 loss on the sale of the discontinued assets. Revenues from the
discontinued operations were $0 and $2,521,000 for the three and nine months
ended September 30, 1999, respectively, and $1,220,000 and $4,853,000 for the
three and nine months ended September 30, 1998, respectively. The loss from
discontinued operations, net of minority interests, was $0 and $345,000 for the
three and nine months ended September 30, 1999, respectively, and was $458,000
and $442,000 for the three and nine months ended September 30, 1998,
respectively.
The consolidated statements of cash flows for the nine months ended
September 30, 1999 includes discontinued operations and 1998 has been restated
to reflect the discontinued operation. The cash flows from discontinued
operations have been summarized into a single line entitled "net cash provided
from discontinued operations."
6
<PAGE>
ITEM 1.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
3. Inventories, patents and intangible assets, net:
Inventories consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, 1999 DECEMBER 31, 1998
- -------------- ------------------ -----------------
<S> <C> <C>
Raw materials............................................... $2,312 $ --
Work in progress............................................ 923 --
Finished goods.............................................. 2,973 --
------ ---------
$6,208 $ --
</TABLE>
At September 30, 1999, the inventory balances related primarily to Xopenex
inventory. At December 31, 1998, the net assets of BioSphere's discontinued
operations included inventory of $3,572,000.
Patents and intangible assets, net of amortization, were $21,156,000 and
$2,677,000 at September 30, 1999 and December 31, 1998, respectively.
In August 1999, Sepracor paid Georgetown University $10,000,000 in cash and
issued 100,000 shares of Sepracor common stock to obtain all rights, title and
interest held by Georgetown relating to terfenadine carboxylate, norastemizole,
intraconazole enantiomers, and ketoconazole enantiomers. The intellectual
property rights purchased from Georgetown are being amortized over a ten year
period.
4. Basic and diluted net loss per common share:
Basic net loss per common share ("EPS") excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS is based upon the
weighted average number of common shares outstanding during the period plus the
additional weighted average common equivalent shares during the period. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be anti-dilutive. Common equivalent shares
result from the assumed conversion of preferred stock and convertible debt and
the assumed exercises of outstanding stock options, the proceeds of which are
then assumed to have been used to repurchase outstanding common stock using the
treasury stock method. For the three and nine months ended September 30, 1999
and 1998, basic and diluted net loss per common share is computed based on the
weighted-average number of common shares outstanding during the period, because
the effect of common stock equivalents would be anti-dilutive.
Included in the three and nine months ended September 30, 1999 and 1998 net
loss applicable to common shares is $0, and $0, and $0 and $150, respectively,
of dividends relating to series B redeemable exchangeable preferred stock (see
table below). Certain securities were not included in the computation of diluted
earnings per share for the three and nine months ended September 30, 1999 and
1998, because they would have an anti-dilutive effect due to net losses for such
periods. These securities include: (i) options to purchase 5,325,605 shares of
common stock with purchase prices of $2.00 to $118.25 per share for the three
and nine months ended September 30, 1999 and options to purchase 4,535,312
shares of common stock with purchase prices of $1.00 to $48.63 per share for the
three and nine months ended September 30, 1998; and (ii) 6,402,381 shares of
common stock for issuance upon conversion of the 7% convertible subordinated
debentures due 2005 and the 6 1/4% convertible subordinated debentures due 2005
for the three and nine months ended September 30, 1999 and 8,101,302 shares of
common stock for
7
<PAGE>
ITEM 1.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
issuance upon conversion of the 7% convertible subordinated debentures due 2002
and the 6 1/4% convertible subordinated debentures due 2005 for the three and
nine months ended September 30, 1998.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1999 1998 1999 1998
- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss applicable to common shares:
Net loss.................................. $(55,749) $(29,628) $(122,675) $(58,930)
Dividends on preferred stock.............. -- -- -- (150)
-------- -------- --------- --------
Net loss applicable to common shares:..... $(55,749) $(29,628) $(122,675) $(59,080)
</TABLE>
5. Comprehensive income (loss):
Total comprehensive income (loss) is comprised of net income (loss) and net
currency translation adjustments.
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1999 1998 1999 1998
- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net loss.................................. $(55,749) $(29,628) $(122,675) $(58,930)
Cumulative translation adjustment......... (218) (98) (405) (238)
-------- -------- --------- --------
Total comprehensive income (loss)......... $(55,967) $(29,726) $(123,080) $(59,168)
</TABLE>
6. Business segments:
Sepracor is a research based pharmaceutical company engaged in the
discovery, development and marketing of pharmaceutical products. Previously, the
Company presented information with BioSphere as a separate segment and included
an "other" column for equity in investee losses and minority interests. Based on
BioSphere discontinuing a material portion of its operations, Sepracor
management has reviewed information as one business segment since June 1999.
7. Summarized financial information regarding affiliates:
HemaSure
On February 25, 1999, Sepracor entered into an agreement with HemaSure
pursuant to which Sepracor invested $2,000,000 in HemaSure in exchange for
1,333,334 shares of HemaSure common stock and for warrants to purchase 667,000
additional shares of HemaSure common stock.
On May 4, 1999, HemaSure completed a private placement financing with COBE
Laboratories, Inc. ("COBE LABS"), which is wholly-owned by Gambro AB. COBE LABS
purchased 4.5 million shares of HemaSure common stock for an aggregate purchase
price of $9.0 million. As a result of this investment, COBE LABS acquired
approximately 30% of HemaSure's outstanding common stock and Sepracor's
ownership of HemaSure was reduced to approximately 29%. The agreement also
provides COBE LABS with an option to purchase an additional $3 million of
HemaSure common stock at any time between August 3, 1999 and May 3, 2000. Should
COBE LABS exercise its option, the number of shares to be issued will be based
upon the average closing price of HemaSure's common stock for the 30-day period
prior to the exercise.
For the nine month period ended September 30, 1999, Sepracor recognized
$2,000,000 as its ownership share of HemaSure losses. Sepracor's investment in
HemaSure is zero at September 30, 1999.
8
<PAGE>
ITEM 1.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
Versicor
On March 31, 1999, Versicor sold 500,000 shares of preferred stock to
Novartis Pharma AG, as part of a joint collaboration to discover certain new
antibacterials.
On April 2, 1999, Versicor sold 500,000 shares of preferred stock to
Pharmacia & Upjohn, as part of a joint collaboration to discover certain new
antibacterials.
As a result of the Novartis and Pharmacia & Upjohn equity investments in
Versicor, Sepracor recorded a gain of $1,077,000 which was recorded through
additional paid-in-capital and Sepracor's ownership percentage of Versicor was
reduced to approximately 18%. Effective April 1999, Sepracor has changed its
accounting for its investment in Versicor to the cost method of accounting from
the equity method. Sepracor recorded $508,741 as its share of Versicor losses
through April, 1999. At September 30, 1999, Sepracor's investment in Versicor
was approximately $2,058,000.
On June 29, 1999, Sepracor loaned Versicor $500,000 under a promissory note
agreement.
The following is the summarized income statement information for the
Company's subsidiaries HemaSure and Versicor for the three and nine month
periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
THREE MONTH PERIODS ENDED NINE MONTH PERIODS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1999 1998 1999 1998
- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
HemaSure:
Net sales................................. $ 119 $ -- $ 132 $ 25
Gross profit (loss)....................... (530) -- (1,300) (632)
Loss from operations...................... (2,236) (2,667) (6,953) (9,029)
Net loss.................................. $(2,543) $(2,682) $ (7,934) $(8,974)
Versicor:
Net sales................................. $ 1,550 $ -- $ 3,200 $ --
Gross profit (loss)....................... 1,550 -- 3,200 --
Loss from operations...................... (1,286) (2,429) (15,138) (8,614)
Net loss.................................. $(1,467) $(2,386) $(15,340) $(8,392)
</TABLE>
8. Litigation:
On February 12, 1999, the Federal Trade Commission ("FTC") issued a request
for additional information or documentary materials relating to the Company's
exclusive license agreement with Eli Lilly and Company (the "Lilly Agreement").
The purpose of the request was to investigate whether or not the Lilly Agreement
constitutes a violation of Section 5 of the Federal Trade Commission Act and
Section 7 of the Clayton Act. The Company is in the process of responding to the
request. At the conclusion of its investigation, the FTC could institute
proceedings seeking to modify the Lilly Agreement or to prevent it from becoming
effective. While the Company believes that the Lilly Agreement does not
constitute a violation of the above-mentioned laws, the Company is unable to
predict the outcome of the proceeding.
The interference declared on June 30, 1999 between Sepracor and
Rhone-Poulenc Rorer S.A. ("RPR") relating to (+)-zopiclone will be dissolved by
Sepracor's agreement with RPR of October 7, 1999, under which RPR's involved
patent application will be assigned to Sepracor. (See Note 9, Subsequent events)
All legal proceedings between Sepracor and Hoechst Marion Roussel ("HMR")
relating to fexofenadine, including foreign litigation and the interference
between Sepracor and HMR, have been settled
9
<PAGE>
ITEM 1.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
by Sepracor's agreement with HMR of September 1, 1999. (See Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations)
HemaSure is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged
that HemaSure's manufacture, use and/or sale of the LeukoNet product infringes
upon three patents held by Pall. On October 14, 1996, in connection with the
first action concerning U.S. Patent No. 5,451,321 (the "321 Patent"), HemaSure
filed a motion for summary judgment of noninfringement. Pall filed a cross
motion for summary judgment of infringement at the same time. In October 1997,
the U.S. District Court of the Eastern District of New York ("EDNY") granted in
part Pall's summary judgment motion and held that the LeukoNet product infringes
a single claim from the "321 Patent. HemaSure has terminated the manufacture,
use, sale and offer for sale of the filter subject to the court's order.
HemaSure appealed the October 1997 decision to the Court of Appeals for the
Federal Circuit. In June 1999, the Court of Appeals for the Federal Circuit
determined that the LeukoNet product did not infringe the claim of the "321
patent.
With respect to the second action concerning U.S. Patent No's. 4,952,572
(the "572 Patent") and 4,340,479 (the "479 patent"), HemaSure has answered the
complaint stating that it does not infringe any claim of the asserted patents.
Further, HemaSure has counterclaimed for declaratory judgment of invalidity,
noninfringement and unenforceability of the "572 Patent. Pall has amended its
complaint to add Lydall, Inc. ("Lydall"), whose subsidiary supplied filter media
for the LeukoNet product, as a co-defendant and has dropped its claim that the
LeukoNet product infringes the "479 patent. HemaSure has filed for summary
judgment of noninfringement, and Pall has cross-filed for summary judgment of
infringement at the same time. Lydall supported HemaSure's motion for summary
judgment of noninfringement, and has served a motion for summary judgment that
the asserted claims of the "572 Patent are invalid as a matter of law. Discovery
has been completed in the action.
On April 5, 1999, HemaSure and COBE BCT, Inc. ("COBE BCT") filed a complaint
for declaratory relief against Pall in the U.S. District Court of Colorado.
HemaSure and COBE BCT seek declaratory relief that Pall's U.S. Patent No's.
4,925,572, 5,229,012, 5,344,561, 5,451,321, 5,501,795 and 5,863,436 are invalid
and not infringed by HemaSure's r\LS filter and methods of using the r\LS
filter. Pall moved to dismiss, to transfer, or, in the alternative, to stay this
action and HemaSure and COBE BCT opposed Pall's motion. On July 16, 1999, the
U.S. District Court of Colorado denied Pall's motion to transfer and on
September 30, 1999 the court denied Pall's motion to dismiss. Discovery is now
proceeding.
On April 23, 1999, Pall filed a complaint against HemaSure and COBE BCT in
the EDNY alleging that HemaSure's r\LS filter infringes Pall's "572 patent,
tortuously interfered and unfairly competed with Pall's business. HemaSure was
served with the complaint on April 30, 1999. On May 19, 1999, Pall filed an
amended complaint in the EDNY adding Sepracor, COBE Laboratories, Inc. ("COBE
LABS"), Gambro, A.B. as defendants and alleging that Sepracor induced and
contributed to HemaSure's alleged infringement of Pall's "572 patent, and
allegedly tortuously interfered and unfairly competed with Pall's business.
Sepracor was served with the amended complaint on June 1, 1999. Sepracor,
HemaSure and COBE LABS have moved to dismiss, transfer, or stay the action, and
Pall has opposed the motion.
HemaSure believes, based on advice of its legal counsel, that a properly
informed court should conclude that the manufacture, use and/or sale by HemaSure
or its customers of the LeukoNet product and the r\LS product did not infringe
any valid enforceable claim of the Pall patents. However, there can be no
assurance that HemaSure will prevail in the pending litigation, and an adverse
outcome in a patent infringement action would have a material adverse effect on
HemaSure's financial condition and future business and operations.
10
<PAGE>
ITEM 1.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
Sepracor believes, based on advice of its legal counsel, that a properly
informed court should conclude that Pall's suit against Sepracor should be
dismissed. However, there can be no assurance that this suit will be dismissed
or that Sepracor will prevail in the pending litigation.
9. Subsequent events:
On October 7, 1999, Sepracor announced that it had entered into an agreement
with Rhone-Poulenc Rorer SA, whereby Sepracor has exclusively licensed RPR's
pre-clinical, clinical and post-marketing surveillance data package relating to
zopiclone, its isomers and metabolites, to develop, make, use and sell
(+)-zopiclone in the United States. RPR will assign all U.S. patent applications
relating to (+)-zopiclone to Sepracor. Pursuant to the agreement, RPR retains
the right under the licensed data package to manufacture (+)-zopiclone in the
U.S. for non-U.S. markets. In addition, Sepracor has paid a license fee to RPR
and will pay a royalty to RPR on (+)-zopiclone product sales, if any, in the
United States. Sepracor may also be required to pay RPR milestone payments.
On October 5, 1999, COBE Laboratories, Inc. exercised its option to purchase
$3 million of HemaSure common stock as part of its May 1999 private placement
agreement with HemaSure. As a result of the transaction, Sepracor's ownership of
HemaSure was reduced to approximately 27%.
On October 29, 1999, Versicor completed a private placement financing
arrangement of approximately $40 million. As a result of the transaction,
Sepracor paid an additional $500,000 to Versicor under a promissory note
agreement and Sepracor's $1,000,000 note receivable was then converted into
Versicor preferred stock. Sepracor's ownership of Versicor was reduced to
approximately 11%.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains, in addition to historical
information, forward-looking statements, which involve risk and uncertainties.
Sepracor's actual results could differ significantly from the results discussed
in such forward-looking statements. See "Factors Affecting Future Operating
Results" below.
OVERVIEW
The consolidated interim financial statements include the accounts of
Sepracor Inc. ("Sepracor") and its majority and wholly owned subsidiaries,
including BioSphere Medical Inc. ("BioSphere"), which was formerly known as
BioSepra Inc.("BioSepra") and Sepracor Canada Limited.
On February 25, 1999, Sepracor entered into an agreement with HemaSure
pursuant to which Sepracor invested $2,000,000 in HemaSure in exchange for
1,333,334 shares of HemaSure common stock and for warrants to purchase 667,000
of additional shares of HemaSure common stock.
On February 25, 1999, BioSphere acquired 51% of the outstanding common stock
of BioSphere Medical, S.A. ("BioSphere SA"). BioSphere acquired the 51%
ownership by granting an exclusive license pertaining to certain patents and
technology and the transfer of certain other technology to BioSphere SA.
BioSphere has the option to acquire the remaining 49% of the outstanding common
stock of BioSphere SA, through December 31, 2004. The results of operations for
BioSphere SA are included in BioSphere's operations from the date of
acquisition. The historical results of operations of BioSphere SA are not
material to BioSphere's financial statements.
On March 26, 1999, Sepracor announced it had received final approval from
the U.S. Food and Drug Administration to market Xopenex(TM) (levalbuterol HCI)
inhalation solution in two dosage strengths for use with a nebulizer for the
treatment and prevention of bronchospasm. In April 1999, commercial sales of
Xopenex commenced.
On May 14, 1999, Sepracor announced that Johnson & Johnson elected not to
exercise its option to co-promote norastemizole under the agreement, effective
January 1998, between Sepracor and Johnson & Johnson (the "Norastemizole
Agreement"). Sepracor will continue to fund clinical development and marketing
of the drug, which is currently in Phase III clinical trials. Under the terms of
the Norastemizole Agreement, Sepracor has worldwide rights to all Johnson &
Johnson intellectual property covering norastemizole, including the right to
reference data from the astemizole New Drug Application ("NDA"), for
manufacture, development, and marketing of prescription norastemizole products.
In exchange, Johnson & Johnson will receive a royalty on Sepracor's product
sales, if any.
On May 17, 1999, BioSepra sold substantially all its assets related to its
biopharmaceutical drug purification and research consumable business to Life
Technologies for net cash proceeds of approximately $11,158,000. As a result of
the sale, BioSepra has restated prior year and prior quarter consolidated
financial statement amounts to reflect this business as a discontinued operation
and changed its name to BioSphere Medical Inc.
On June 1, 1999, Sepracor announced a licensing agreement with UCB Farchim
SA, an affiliate of UCB ("UCB"), relating to levocetirizine, an isomer of ZYRTEC
(racemic cetirizine). Under terms of the agreement, Sepracor has exclusively
licensed to UCB all of Sepracor's issued patents and pending patent applications
regarding levocetirizine in Europe and all other countries, except the United
States and Japan. UCB will begin to pay Sepracor royalties upon first product
sales, if any, and royalties will escalate upon achievement of sales volume
milestones.
On September 1, 1999, Hoechst Marion Roussel ("HMR") and Sepracor announced
the amendment of an existing business arrangement related to fexofenadine. The
amended arrangement settles all patent
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issues between the two companies involving the nonsedating antihistamine
developed and marketed by HMR. Under the terms of a US agreement, Sepracor and
HMR have settled an ongoing arbitrated patent interference involving their US
patent properties, and HMR now owns the Sepracor patent properties. HMR also
obtained an exclusive license to various other Sepracor US patent applications
related to fexofenadine. Sepracor will receive royalties on fexofenadine sales,
if any, in the US upon expiration of HMR's composition of matter patent in
mid-February 2001. Under the terms of a separate ex-US agreement, HMR obtained
an exclusive license to Sepracor's patents that had been subject of litigation
in Europe, as well as various other patent oppositions between the two companies
outside the US. All legal actions outside the US have been settled and Sepracor
is entitled to royalties on fexofenadine product sales effective March 1, 1999
in countries where it has patents in place.
On October 7, 1999, Sepracor announced that it had entered into an agreement
with Rhone-Poulenc Rorer SA ("RPR"), whereby Sepracor has exclusively licensed
RPR's pre-clinical, clinical and post-marketing surveillance data package
relating to zopiclone, its isomers and metabolites, to develop, make, use and
sell (+)-zopiclone in the United States. RPR will assign all U.S. patent
applications relating to (+)-zopiclone to Sepracor. Pursuant to the agreement,
RPR retains the right under the licensed data package to manufacture
(+)-zopiclone in the U.S. for non-U.S. markets. In addition, Sepracor has paid a
license fee to RPR and will pay a royalty to RPR on (+)-zopiclone product sales,
if any, in the United States. Sepracor may also be required to pay RPR milestone
payments.
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Product revenues were $2,392,000 and $7,619,000 for the three and nine
months ended September 30, 1999, respectively, compared to $34,000 and $124,000,
respectively, for the same periods in 1998. The increase for the three and nine
month periods ended September 30, 1999 is primarily due to sales of Xopenex.
Collaborative research and development revenues were $0 and $2,390,000 for
the three and nine months ended September 30, 1999, respectively, compared to
$1,368,000 and $3,618,000, respectively, for the same periods in 1998. The
decrease for the three and nine month periods ended September 30, 1999 is
primarily due to the completion of research and development studies relating to
the Norastemizole Agreement in the second quarter of 1999.
License fees were $0 and $11,000 for the three and nine months ended
September 30, 1999, respectively, compared to $8,000 and $5,038,000,
respectively, for the same periods in 1998. The decrease for the nine-month
period ended September 30, 1999 is primarily due to the $5,000,000 one-time
license payment, which Sepracor received under an agreement with Schering Plough
Corporation entered into in 1998.
Cost of product revenues, as a percentage of product revenues, were 37% and
28% for the three and nine months ended September 30, 1999, respectively,
compared to 59% and 60%, respectively, for the same periods in 1998. The
decrease for the three and nine month periods ended September 30, 1999 is
primarily due to the introduction of Xopenex product sales in April 1999 which
have significantly less product cost as a percentage of product revenues than
the BioSphere product cost as a percentage of product revenues.
Research and development expenses were $34,690,000 and $77,252,000 for the
three and nine months ended September 30, 1999, respectively, compared to
$20,151,000 and $43,490,000, respectively, for the same periods in 1998. The
increase for the three and nine month periods ended September 30, 1999 is
primarily due to costs related to several new and anticipated clinical studies
being initiated and increased personnel costs related to the quality assurance,
quality control, clinical and regulatory infrastructure development.
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Sales and marketing expenses were $15,560,000 and $30,935,000 for the three
and nine months ended September 30, 1999, respectively, compared to $6,460,000
and $11,820,000, respectively, for the same periods in 1998. The increase for
the three month period ended September 30, 1999 is primarily due to the addition
of a third-party contracted sales force and the introduction of various
marketing programs for the commercial launch of Xopenex. The increase for the
nine month period ended September 30, 1999 is primarily due to the hiring,
training and salary expense of Sepracor's specialty sales force and the third-
party contracted sales force and the introduction of various marketing programs
for the commercial launch of Xopenex, which commenced in April 1999.
General and administrative expenses were $3,512,000 and $10,257,000 for the
three and nine months ended September 30, 1999, respectively, compared to
$2,115,000 and $5,918,000, respectively, for the same periods in 1998. The
increase for the three and nine month periods ended September 30, 1999 is
primarily due to higher costs associated with amortization of deferred financing
costs, increased legal costs principally related to the Federal Trade
Commission's review of the Company's agreement, dated December 1998 (the "Lilly
(R)- Fluoxetine Agreement"), with Eli Lilly and Company for R-fluoxetine,
increased personnel costs and increased depreciation expense related to fixed
assets.
Patent costs were $1,024,000 and $2,554,000 for the three and nine months
ended September 30, 1999, respectively, compared to $476,000 and $1,412,000,
respectively, for the same periods in 1998. The increase for the three and nine
month periods ended September 30, 1999 is primarily due to increased costs
related to new patent applications and to legal costs related to the patent
interference and litigation associated with HMR and RPR.
The net of interest income, interest (expense) and other income (expense)
was ($2,902,000) and ($7,727,000) for the three and nine months ended
September 30, 1999, respectively, compared to ($932,000) and ($2,716,000),
respectively, for the same periods in 1998. The increase in expense for the
three and nine month periods ended September 30, 1999 is primarily the result of
increased interest expense related to Sepracor's 6 1/4% Convertible Subordinated
Debentures due 2005 issued in February 1998 and the 7% Convertible Subordinated
Debentures due 2005, issued in December 1998, offset in part by an increase in
interest income due to a higher average daily cash balance available for
investment in 1999.
Equity in loss of investees was $0 and $2,509,000 for the three and nine
months ended September 30, 1999, respectively, compared to $600,000 and
$1,846,000, respectively, for the same periods in 1998. The decrease for the
three month period ended September 30, 1999 is due to Sepracor no longer
recognizing Versicor losses as a result of Sepracor's change from the equity
method of accounting to the cost method of accounting as of May 1999. The
increase for the nine month period ended September 30, 1999 is due to Sepracor's
recognition of HemaSure losses in 1999 partially offset by the recognition of
less Versicor losses in 1999.
Minority interest in subsidiary from continuing operations resulted in a
decrease to consolidated net loss of $362,000 and $910,000 for the three and
nine months ended September 30, 1999, respectively, compared to $134,000 and
$291,000, respectively, for the same periods in 1998. The fluctuation in
minority interest is the result of BioSphere's fluctuation in net loss and
discontinued operations (net of minority interests) through the second quarter
of 1999.
Net loss from discontinued operations was $0 and $345,000 for the three and
nine months ended September 30, 1999, respectively, compared to $458,000 and
$442,000, respectively, for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents plus marketable securities totaled $377,798,000 at
September 30,1999, compared to $499,598,000 at December 31, 1998.
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The net cash used in operating activities for the nine months ended
September 30, 1999 was $115,617,000. The net cash used in operating activities
includes a net loss of $122,675,000 adjusted by non-cash charges of $6,815,000.
Accounts receivable increased by $2,143,000 due primarily to sales of Xopenex.
Inventory increased by $5,814,000 primarily due to Sepracor's recording of
Xopenex inventories in 1999. Accounts payable decreased by $2,097,000 due to the
timing of cash disbursements made. Accrued expenses increased by $12,499,000 due
primarily to increased research and development activities.
The net cash used in investing activities for the nine months ended
September 30, 1999 was $160,883,000. Cash was invested primarily in net
purchases of marketable securities of $142,964,000, purchases of property and
equipment of $5,567,000 and an investment of $2,000,000 in HemaSure.
Additionally, an investment of $10,000,000 in cash and 100,000 shares of issued
Sepracor common stock was made for the purchase of intangible assets.
The net cash provided by financing activities for the nine months ended
September 30, 1999 was $2,202,000. Sepracor received $5,304,000 in net proceeds
from the issuance of common stock. Sepracor paid Versicor $500,000 under a
promissory note agreement and BioSphere used $2,458,000 primarily to repay its
bank loans.
We believe that existing cash and investment securities, and anticipated
cash from our current product sales, and collaboration and licensing agreements
will be sufficient to support our existing operations for the near term.
Sepracor's actual future cash requirements, however, will depend on many
factors, including future product sales, the progress, number and breadth of
clinical trials and discovery programs, and the achievement of milestones under
collaboration agreements. The Company's forecast of the period of time through
which its financial resources will be adequate to support its operations is
forward-looking information, and, as such, actual results may vary.
In December 1998, Sepracor signed a license agreement (the "Lilly
(R)-Fluoxetine Agreement") with Eli Lilly and Company ("Lilly") giving Lilly
exclusive worldwide rights to Sepracor's patents covering (R)-fluoxetine, which
is a modified form of an active ingredient found in Prozac(R). Under the terms
of the Lilly (R)-Fluoxetine Agreement, and subject to approval under the Hart
Scott Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
Sepracor will receive an initial milestone payment and license fee of
$20,000,000, which will be recorded as revenue in accordance with the terms of
the agreement. Additional milestone payments of up to $70,000,000 will be made
based on the progression of (R)-fluoxetine through development. In addition,
Sepracor will receive royalties on (R)-fluoxetine worldwide sales, if any,
beginning at product launch. Under the HSR Act, Sepracor has received a request
from the Federal Trade Commission for additional information in connection with
the Lilly (R)-Fluoxetine Agreement. Sepracor plans to fully respond to the
request.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 was not required to
be implemented by the Company until fiscal year 2000. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--An
Amendment of FASB Statement No. 133." SFAS No. 137 delayed the original
implementation date of SFAS No. 133 by one year. The Company will continue to
evaluate any potential impact this standard may have on its consolidated
financial statements.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain of the information contained in this Quarterly Report on Form 10-Q,
including information with respect to the safety, efficacy and potential
benefits of Sepracor's improved chemical entities, or ICEs, under development,
the scope of patent protection with respect to these products and Sepracor's
ability to market and sell its products successfully and information with
respect to the other plans and strategy for
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Sepracor's business and the business of the subsidiaries and certain affiliates
of Sepracor, consists of forward-looking statements. Important factors that
could cause actual results to differ materially from the forward-looking
statements include the following:
SEPRACOR HAS NEVER BEEN PROFITABLE AND MAY NOT BE ABLE TO GENERATE REVENUES
SUFFICIENT TO ACHIEVE PROFITABILITY.
Sepracor has not been profitable since inception, and it is possible that it
will not achieve profitability. Sepracor incurred net losses applicable to
common shares on a consolidated basis of approximately $122,675,000 for the nine
month period ended September 30, 1999 and $93,433,000 for the year ended
December 31, 1998. Sepracor expects to continue to incur operating and capital
expenditures. As a result, it will need to generate significant revenues to
achieve and maintain profitability. Sepracor cannot assure you that it will
achieve significant revenues or that it will ever achieve profitability. Even if
Sepracor does achieve profitability, it cannot assure you that it can sustain or
increase profitability on a quarterly or annual basis in the future. If revenues
grow more slowly than Sepracor anticipates or if operating expenses exceed
Sepracor's expectations or cannot be adjusted accordingly, Sepracor's business,
results of operations and financial conditions will be materially and adversely
affected.
SEPRACOR WILL BE REQUIRED TO EXPEND SIGNIFICANT RESOURCES FOR RESEARCH,
DEVELOPMENT, TESTING AND REGULATORY APPROVAL OF ITS DRUGS UNDER DEVELOPMENT AND
THESE DRUGS MAY NOT BE DEVELOPED SUCCESSFULLY.
Sepracor is focused on the development of ICEs. Most of Sepracor's ICEs are
still undergoing clinical trials or are at the early stages of development.
Sepracor's drugs may not provide greater benefits or fewer side effects than the
original versions of these drugs and its research efforts may not lead to the
discovery of new drugs with improved characteristics. All of Sepracor's drugs
under development will require significant additional research, development,
preclinical and clinical testing, regulatory approval and a commitment of
significant additional resources prior to their commercialization. Sepracor's
potential products may not:
- be developed successfully;
- be proven safe and efficacious in clinical trials;
- offer therapeutic or other improvements over comparable drugs;
- meet applicable regulatory standards;
- be capable of being produced in commercial quantities at acceptable costs;
or
- be successfully marketed or sold.
IF SEPRACOR FAILS TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS OR
FACES A CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, THEN IT
COULD LOSE VALUABLE INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT
DAMAGES.
Sepracor's success depends in part on its ability to obtain and maintain
patents, protect trade secrets and operate without infringing upon the
proprietary rights of others. In the absence of patent and trade secret
protection, competitors may adversely affect Sepracor's business by
independently developing and marketing substantially equivalent products and
technology and preventing Sepracor from marketing its products. It is also
possible that Sepracor could incur substantial costs in litigation if it is
required to defend itself in patent suits brought by third parties, or if
Sepracor is required to initiate litigation against others to protect its
intellectual property rights.
Sepracor has filed various patent applications covering the composition of,
and the methods of using, single-isomer or active-metabolite forms of various
compounds for specific applications. However,
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Sepracor may not be issued patents in respect of the patent applications already
filed or that it may file in the future. Moreover, the patent position of
companies in the pharmaceutical industry generally involves complex legal and
factual questions, and recently has been the subject of much litigation.
Therefore, any patents Sepracor has obtained, or obtains in the future, might be
challenged, invalidated or circumvented.
Sepracor's ability to commercialize successfully any ICE will largely depend
upon its ability to obtain and maintain use patents of sufficient scope to
prevent third parties from developing similar or competitive products. Third
parties, typically drug companies, hold patents or patent applications covering
the composition of matter for most of the ICEs for which Sepracor has use
patents or patent applications. In each such case, unless Sepracor has or
obtains a license agreement, Sepracor may not be permitted to commercialize the
ICE until the expiration of these third-party patents. Licenses may not be
available to Sepracor on acceptable terms, if at all. In addition, it would be
costly to contest the validity of a third-party patent or defend any claim that
Sepracor infringes a third-party patent. Moreover, litigation involving
third-party patents may not be resolved in Sepracor's favor.
SEPRACOR HAS LIMITED SALES AND MARKETING EXPERIENCE AND EXPECTS TO INCUR
SIGNIFICANT EXPENSES IN DEVELOPING A SALES FORCE. IN ADDITION, SEPRACOR'S
LIMITED SALES AND MARKETING EXPERIENCE MAY RESTRICT ITS SUCCESS IN
COMMERCIALIZING ITS PRODUCTS.
Sepracor currently has very limited sales and marketing experience. If
Sepracor successfully develops and obtains regulatory approval for the products
it is currently developing, Sepracor expects to license some of them to large
pharmaceutical companies and market and sell others through its direct specialty
sales forces or through other arrangements, including co-promotion arrangements.
Sepracor has established a direct sales force to market its single isomer form
of albuterol, Xopenex. As Sepracor begins to enter into co-promotion
arrangements or market and sell additional products directly, Sepracor will need
to significantly expand its sales force. Sepracor expects to incur significant
expense in expanding its direct sales force and Sepracor's limited experience
may restrict its success in commercializing its products.
Sepracor's ability to realize significant revenues from direct marketing and
sales activities depends on its ability to attract and retain qualified sales
personnel in the pharmaceutical industry and competition for these people is
intense. If Sepracor is unable to attract and retain qualified sales personnel,
Sepracor will not be able to successfully expand its marketing and direct sales
force on a timely or cost effective basis. Further, Sepracor's sales and
marketing efforts may not be successful, and the need to comply with FDA limits
on drug product marketing, including limits on claims of comparative safety or
efficacy, may inhibit the effectiveness of its marketing efforts. In addition,
Sepracor will need to enter into co-promotion arrangements with third parties
where its own direct sales force is neither well situated nor large enough to
achieve maximum penetration in the market. Sepracor may not be successful in
entering into any co-promotion arrangements, and the terms of any co-promotion
arrangements may not be favorable to Sepracor.
SALES THROUGH THIRD PARTIES COULD BE LESS PROFITABLE THAN DIRECT SALES AND
THIRD PARTIES MAY SELL COMPETING PRODUCTS.
Our current sales and marketing operation is not sufficient to achieve our
desired level of sales for Xopenex. We have entered into an agreement with a
third party to assist our selling efforts for Xopenex and we may seek additional
contract sales assistance. Sales through a third party sales force could be less
profitable than direct sales.
IF SEPRACOR'S PRODUCTS DO NOT RECEIVE GOVERNMENT APPROVAL, THEN SEPRACOR
WILL NOT BE ABLE TO COMMERCIALIZE THEM.
The U.S. Food and Drug Administration, or FDA, and similar foreign agencies
must approve the marketing and sale of pharmaceutical products developed by
Sepracor or its development partners. These agencies impose substantial
requirements on the manufacture and marketing of drugs. Sepracor's failure
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to obtain regulatory approval on a timely basis and any unanticipated
significant expenditures on preclinical and clinical studies could adversely
affect the funds Sepracor will require to advance its products to
commercialization and the timing of the commercial introduction of, or its
ability to market and sell, its products. The regulatory process to obtain
marketing approval requires clinical trials of a product to establish its safety
and efficacy. Problems that may arise during clinical trials include:
- results of clinical trials may not be consistent with pre-clinical study
results;
- results from later phases of clinical trials may not be consistent with
the results from earlier phases; and
- products may not be shown to be safe and efficacious.
The clinical trial and regulatory approval process can take many years and
require substantial expenditures. Sepracor may not obtain regulatory approval
for products on a timely basis, if at all. With respect to certain of Sepracor's
ICEs, Sepracor has been able to shorten the regulatory approval process by
relying on the parent drug's preclinical and clinical toxicology data already on
file with the FDA. However, it is possible that the FDA will not permit Sepracor
to use this strategy in the future. Accordingly, Sepracor may be required to
expend significant resources to complete preclinical and clinical studies for
its other ICEs, which would significantly delay the regulatory approval process.
Even if the FDA or a similar foreign agency grants Sepracor regulatory approval
of a product, the approval may be subject to limitations on the indicated uses
for which the product may be marketed or contain requirements for costly
post-marketing follow-up studies. Moreover, if Sepracor fails to comply with
applicable regulatory requirements, it may be subject to fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions and criminal prosecution.
IF SEPRACOR DOES NOT MAINTAIN CURRENT GOOD MANUFACTURING PRACTICES, THEN THE
FDA COULD REFUSE TO APPROVE MARKETING APPLICATIONS. SEPRACOR DOES NOT HAVE THE
CAPABILITY TO MANUFACTURE, IN SUFFICIENT QUANTITIES, ALL OF THE PRODUCTS WHICH
MAY BE APPROVED FOR SALE, AND DEVELOPING AND OBTAINING THIS CAPABILITY WILL BE
TIME CONSUMING AND EXPENSIVE.
The FDA and other regulatory authorities require that Sepracor's products be
manufactured according to their Good Manufacturing Practices standards.
Sepracor's failure to maintain current Good Manufacturing Practices compliance
and/or scale up its manufacturing processes could lead to refusal by the FDA to
approve marketing applications. Failure in either respect could also be the
basis for action by the FDA to withdraw approvals previously granted and for
other regulatory action.
Sepracor's failure to increase its manufacturing capabilities may mean that
even if it develops new products, it may not be able to produce them. Sepracor
currently operates a manufacturing plant that is compliant with current Good
Manufacturing Practices that Sepracor believes can produce commercial quantities
of Xoponex and support the production of Sepracor's other possible products in
amounts needed for its clinical trials. However, Sepracor will not have the
capability to manufacture in sufficient quantities all of the products which may
be approved for sale. Accordingly, Sepracor may be required to spend money to
expand its current manufacturing facility, build an additional manufacturing
facility or contract the production of these drugs to third-party manufacturers.
Sepracor currently has a supply contract with ChiRex that commits Sepracor
to purchase through December 31, 2001 all of its annual requirements of those
drugs that it will market directly through its specialty sales force, provided
ChiRex meets certain pricing, supply and quality control conditions. If ChiRex
experiences delays or difficulties in producing, packaging or delivering the
drugs, market introduction and subsequent sales of the drugs that Sepracor
markets through its specialty sales force could be adversely affected. Under
this supply agreement, however, Sepracor retains the right to manufacture
commercial quantities of its drugs in its Nova Scotia manufacturing plant.
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SEPRACOR COULD BE EXPOSED TO SIGNIFICANT LIABILITY CLAIMS IF IT IS UNABLE TO
OBTAIN INSURANCE AT ACCEPTABLE RATES OR OTHERWISE PROTECT AGAINST POTENTIAL
LIABILITY CLAIMS.
Sepracor may be subjected to product liability claims that are inherent in
the testing, manufacturing, marketing and sale of human health care products.
These claims could expose Sepracor to significant liabilities that could prevent
or interfere with its product commercialization efforts. Product liability
claims could require Sepracor to spend significant time and money in litigation
or to pay significant damages. Although Sepracor maintains limited product
liability insurance coverage for both the clinical trials and commercialization
of Sepracor's products, it is possible that Sepracor will not be able to obtain
further product liability insurance on acceptable terms, if at all, and that
insurance subsequently obtained will not provide adequate coverage against all
potential claims.
THE DEVELOPMENT AND COMMERCIALIZATION OF SEPRACOR'S PRODUCTS COULD BE
DELAYED OR TERMINATED IF SEPRACOR'S COLLABORATIVE PARTNERS TERMINATE, OR FAIL TO
PERFORM THEIR OBLIGATIONS UNDER THEIR AGREEMENTS WITH SEPRACOR.
Sepracor's ability to commercialize certain drugs that Sepracor develops is
likely to depend significantly on its continued ability to enter into
collaborative agreements with pharmaceutical companies to fund all or part of
the costs to complete the development of these drugs and to manufacture and/or
market these drugs. In each of Sepracor's collaborative arrangements and, to the
extent that it enters into additional collaborative arrangements, Sepracor
depends upon the efforts of its collaboration partners, and these efforts may
not be successful. If any of Sepracor's collaboration partners were to breach or
terminate their agreements with Sepracor, or fail to perform their obligations
to Sepracor in a timely manner, the development and commercialization of the
products could be delayed or terminated. Any delay or termination of this type
could have a material, adverse effect on Sepracor's financial condition and
results of operations because Sepracor may be required to expend additional
funds to bring its products to commercialization, and milestone or royalty
payments from collaborative partners or revenue from product sales, if any,
could be delayed or terminated. Any failure or inability by Sepracor to perform
some of its obligations under a collaborative agreement could reduce or
extinguish the benefits to which Sepracor is otherwise entitled under the
agreement.
Currently, Sepracor has a number of collaboration agreements. Sepracor has
licensed to Hoechst Marion Roussel its U.S. patent rights to fexofenadine, which
is marketed by Hoechst Marion Roussell as Allegra(R), and is entitled to receive
royalties on all U.S. sales of Allegra when the patent on the parent drug
expires. Sepracor has also licensed its worldwide patent rights in desloratadine
to Schering-Plough, Ltd., pursuant to which it is entitled to receive royalties
from Schering-Plough, Ltd. upon the initial sale of the product. Sepracor has
entered into an agreement with Janssen Pharmaceutica N.V., a wholly owned
subsidiary of Johnson & Johnson, with respect to norastemizole. On May 14, 1999,
Sepracor announced that Janssen had elected not to exercise its option to
co-promote norastemizole. Sepracor has exclusively licensed its rights in a
compound known as norcisapride to Janssen, and may be entitled to receive
royalties on product sales, if any, beginning upon the first commercial sale.
These royalties will escalate upon achievement of sales volume milestones.
Sepracor has exclusively licensed its (R)-fluoxetine rights to Eli Lilly and
Company, and, in addition to up front license and development milestone
payments, is entitled to receive royalties on product sales beginning upon the
first commercial sale. This agreement will be effective on the next business day
following the expiration or earlier termination of the notice and waiting period
under the Hart Scott Rodino Act of 1976. Under the Hart Scott Rodino Act of
1976, Sepracor has received a request from the Federal Trade Commission for
additional information in connection with the (R)-Fluoxetine Agreement.
Sepracor cannot assure you that it will be able to enter into collaborative
agreements for ICEs in the future or that the terms of the collaborative
agreements, if any, will be favorable to Sepracor. The inability
19
<PAGE>
to enter into collaborative agreements in the future could delay or preclude the
development, manufacture and/or marketing of some of Sepracor's drugs and could
have a material adverse effect on Sepracor's financial condition and results of
operations because:
- Sepracor may be required to expend additional funds to advance the drugs
to commercialization;
- revenue from product sales could be delayed; or
- Sepracor may elect not to commercialize the drugs.
SEPRACOR HAS SIGNIFICANT LONG-TERM DEBT AND IT MAY NOT BE ABLE TO MAKE
INTEREST OR PRINCIPAL PAYMENTS WHEN DUE.
As of September 30, 1999, Sepracor's total long-term debt was approximately
$491,651,000 and its stockholders' deficit was approximately $104,296,000.
Neither the debentures issued in February 1998 nor the debentures issued in
December 1998 restrict Sepracor's ability, or its subsidiaries' ability, to
incur additional indebtedness, including debt that ranks senior to these
debentures. Additional indebtedness of Sepracor may rank senior to or on parity
with these debentures in certain circumstances. Sepracor's ability to satisfy
its obligations will depend upon Sepracor's future performance, which is subject
to many factors, including factors beyond its control. It is possible that
Sepracor will be unable to meet its debt service requirements on any of its
outstanding debentures. Moreover, Sepracor may be unable to repay the 6 1/4%
debentures or 7% debentures at maturity or otherwise in accordance with the debt
instruments.
IF SUFFICIENT FUNDS TO FINANCE SEPRACOR'S BUSINESS ARE NOT AVAILABLE TO
SEPRACOR WHEN NEEDED OR ON ACCEPTABLE TERMS, THEN SEPRACOR MAY BE REQUIRED TO
DELAY, SCALE BACK, ELIMINATE OR ALTER ITS STRATEGY FOR ITS PROGRAMS.
Sepracor may require additional funds for its research and product
development programs, operating expenses, the pursuit of regulatory approvals,
and the expansion of Sepracor's production, sales and marketing capabilities.
Historically, Sepracor has satisfied its funding needs through collaborative
arrangements with corporate partners, equity or debt financing. Sepracor cannot
assure you that these funding sources will be available to it when needed in the
future, or, if available, will be on terms acceptable to Sepracor. Insufficient
funds could require Sepracor to delay, scale back or eliminate certain of its
research and product development programs or to license third parties to
commercialize products or technologies that Sepracor would otherwise develop or
commercialize itself. Sepracor's cash requirements may vary materially from
those now planned because of factors including:
- increased research and development expenses;
- patent developments;
- relationships with collaborative partners;
- the FDA regulatory process; and
- Sepracor's capital requirements.
SEPRACOR EXPECTS TO FACE INTENSE COMPETITION AND ITS COMPETITORS HAVE
GREATER RESOURCES AND CAPABILITIES THAN SEPRACOR HAS. DEVELOPMENTS BY OTHERS MAY
RENDER SEPRACOR'S PRODUCTS OR TECHNOLOGIES OBSOLETE OR NONCOMPETITIVE.
Sepracor expects to encounter intense competition in the sale of its future
products. If Sepracor is unable to compete effectively, its financial condition
and results of operations could be materially adversely affected because
Sepracor may use its financial resources to seek to differentiate itself from
its competition and because Sepracor may not achieve its product revenue
objectives. Many of Sepracor's competitors and potential competitors, which
include pharmaceutical companies, biotechnology firms,
20
<PAGE>
universities and other research institutions, have substantially greater
resources, manufacturing and marketing capabilities, research and development
staff and production facilities than Sepracor has. The fields in which Sepracor
competes are subject to rapid and substantial technological change. Sepracor's
competitors may be able to respond more quickly to new or emerging technologies
or to devote greater resources to the development, manufacture and marketing of
new products and/or technologies than Sepracor can. As a result, any products
and/or technologies that Sepracor may develop may become obsolete or
non-competitive before Sepracor can recover expenses incurred in connection with
their development.
FLUCTUATIONS IN THE DEMAND FOR PRODUCTS, THE TIMING OF COLLABORATIVE
ARRANGEMENTS, EXPENSES AND THE RESULTS OF OPERATIONS OF SEPRACOR'S SUBSIDIARIES
WILL CAUSE FLUCTUATIONS IN SEPRACOR'S QUARTERLY OPERATING RESULTS, WHICH COULD
CAUSE VOLATILITY IN ITS STOCK PRICE.
Sepracor's quarterly operating results are likely to fluctuate
significantly, which could cause our stock price to be volatile. These
fluctuations will depend on factors which include:
- the timing of collaborative agreements for Sepracor's pharmaceutical
development candidates and development costs for those pharmaceuticals;
- the timing of product sales and market penetration;
- the timing of operating expenses, including marketing expenses and the
costs of expanding and maintaining a direct sales force;
- the timing of significant orders for the products of BioSphere; and the
losses of HemaSure and Versicor, to the extent Sepracor is required to
recognize these losses.
21
<PAGE>
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of Sepracor's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculation or
system failures. In 1996, Sepracor began a comprehensive project, fully
supported by senior management, to determine the risks and impacts of the Year
2000, or Y2K, computer problem on Sepracor's ability to operate into the next
century. This plan took into account Sepracor's status as a pharmaceutical
research and development company, and its transition to a fully-developed
pharmaceutical company, with research and development, manufacturing,
distribution and sales functions. The project relates to the following areas:
(i) Sepracor's internal systems (including information technology systems, such
as financial systems, and non-information technology systems, such as telephones
and facilities); and (ii) the readiness of Sepracor's vendors.
Department managers in every business area participated in the project,
under the leadership of a Y2K Project Manager. Sepracor began this project in
1996 so as to incorporate Y2K readiness into its business strategy, and to
identify and replace non-compliant systems and procedures as part of its normal
operating plan and budget.
Y2K State of Readiness: The term "Y2K compliant" as used herein means that
all Sepracor systems, procedures, and products will correctly identify and
process without error all dates, including those calculations which reference
leap years, and one or more centuries.
Sepracor has completed its assessment of the impact of Y2K on its present
and future operations, and has identified computer and microprocessor based
systems, both hardware and software driven, which could potentially be affected
by the turnover to the next century. These components and systems have been
tested for Y2K compliance. Those systems which required replacement or
modification have been addressed and re-tested. At this point all systems are
fully compliant.
Sepracor's goal of achieving full compliance on its internal systems was
achieved in July 1999. This compliance was fully tested when a complete
integrated systems test of all our business systems, including those which
access outside services, was performed. This test involved our voice as well as
data systems, and all test criteria were met successfully.
We have completed the process of reviewing Y2K Compliance certifications
that were requested from our key suppliers earlier this year. At this time, we
are confident that our key suppliers are either fully compliant, or plan to be
prior to December 31, 1999. We have also completed a review of the outsourcing
companies who package, test and distribute our products and found them to be Y2K
compliant.
Y2K Costs: Costs related to Year 2000 issues are funded through the
information technology operating budget and represent an immaterial portion of
this IT budget. Spending associated with Y2K issues has not caused us to defer
any other IT projects.
To date, Sepracor has spent approximately $425,000 to retrofit or replace
computer-based systems, which were identified as lacking compliance. This
included the migration of all of Sepracor's desktop computers to an operating
status Sepracor considers to be Y2K certified, through software upgrades or full
system replacements. Sepracor's key telecommunications systems were also
upgraded and/or replaced. These costs have been minimal due to the fact that Y2K
compliance has been a prerequisite to all new systems acquisitions and
maintenance upgrades. Sepracor expects that it will not incur any significant
additional costs associated with its Y2K readiness efforts.
Y2K Contingency Plans: The Company has completed a contingency plan which
will enable all of the essential aspects of our business to continue to function
in the event of a significant Y2K systems problem.
Y2K Risks: Sepracor relies on third-party suppliers and service providers.
If these or other parties experience Y2K failures or malfunctions there could be
an adverse impact on the Company's ability to conduct operations, including
conducting continued pharmaceutical development efforts and manufacturing
pharmaceutical products. At this time, the Company does not anticipate this
worst case scenario to occur, nor does Sepracor anticipate any major
interruptions in its ability to provide products and services to our customers.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK
The Company's exposure to market risk from changes in interest rates and
equity prices has not changed materially from its exposure at year-end 1998.
23
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 12, 1999, the Federal Trade Commission ("FTC") issued a request
for additional information or documentary materials relating to the Company's
exclusive license agreement with Eli Lilly and Company (the "Lilly Agreement").
The purpose of the request was to investigate whether or not the Lilly Agreement
constitutes a violation of Section 5 of the Federal Trade Commission Act and
Section 7 of the Clayton Act. The Company is in the process of responding to the
request. At the conclusion of its investigation, the FTC could institute
proceedings seeking to modify the Lilly Agreement or to prevent it from becoming
effective. While the Company believes that the Lilly Agreement does not
constitute a violation of the above-mentioned laws, the Company is unable to
predict the outcome of the proceeding.
The interference declared on June 30, 1999 between Sepracor and
Rhone-Poulenc Rorer S.A. ("RPR") relating to (+)-zopiclone will be dissolved by
Sepracor's agreement with RPR of October 7, 1999, under which RPR's involved
patent application will be assigned to Sepracor. (See Note 9, Subsequent events)
All legal proceedings between Sepracor and Hoechst Marion Roussel ("HMR")
relating to fexofenadine, including foreign litigation and the interference
between Sepracor and HMR, have been settled by Sepracor's agreement with HMR of
September 1, 1999. (See Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations)
HemaSure is a defendant in two lawsuits brought by Pall Corporation
("Pall"). In complaints filed in February 1996 and November 1996, Pall alleged
that HemaSure's manufacture, use and/or sale of the LeukoNet product infringes
upon three patents held by Pall. On October 14, 1996, in connection with the
first action concerning U.S. Patent No. 5,451,321 (the "321 Patent"), HemaSure
filed a motion for summary judgment of noninfringement. Pall filed a cross
motion for summary judgment of infringement at the same time. In October 1997,
the U.S. District Court of the Eastern District of New York ("EDNY") granted in
part Pall's summary judgment motion and held that the LeukoNet product infringes
a single claim from the "321 Patent. HemaSure has terminated the manufacture,
use, sale and offer for sale of the filter subject to the court's order.
HemaSure appealed the October 1997 decision to the Court of Appeals for the
Federal Circuit. In June 1999, the Court of Appeals for the Federal Circuit
determined that the LeukoNet product did not infringe the claim of the "321
patent.
With respect to the second action concerning U.S. Patent No's. 4,952,572
(the "572 Patent") and 4,340,479 (the "479 patent"), HemaSure has answered the
complaint stating that it does not infringe any claim of the asserted patents.
Further, HemaSure has counterclaimed for declaratory judgment of invalidity,
noninfringement and unenforceability of the "572 Patent. Pall has amended its
complaint to add Lydall, Inc. ("Lydall"), whose subsidiary supplied filter media
for the LeukoNet product, as a co-defendant and has dropped its claim that the
LeukoNet product infringes the "479 patent. HemaSure has filed for summary
judgment of noninfringement, and Pall has cross-filed for summary judgment of
infringement at the same time. Lydall supported HemaSure's motion for summary
judgment of noninfringement, and has served a motion for summary judgment that
the asserted claims of the "572 Patent are invalid as a matter of law. Discovery
has been completed in the action.
On April 5, 1999, HemaSure and COBE BCT, Inc. ("COBE BCT") filed a complaint
for declaratory relief against Pall in the U.S. District Court of Colorado.
HemaSure and COBE BCT seek declaratory relief that Pall's U.S. Patent No's.
4,925,572, 5,229,012, 5,344,561, 5,451,321, 5,501,795 and 5,863,436 are invalid
and not infringed by HemaSure's r\LS filter and methods of using the r\LS
filter. Pall moved to dismiss, to transfer, or, in the alternative, to stay this
action and HemaSure and COBE BCT opposed Pall's
24
<PAGE>
motion. On July 16, 1999, the U.S. District Court of Colorado denied Pall's
motion to transfer and on September 30, 1999 the court denied Pall's motion to
dismiss. Discovery is now proceeding.
On April 23, 1999, Pall filed a complaint against HemaSure and COBE BCT in
the EDNY alleging that HemaSure's r\LS filter infringes Pall's "572 patent,
tortuously interfered and unfairly competed with Pall's business. HemaSure was
served with the complaint on April 30, 1999. On May 19, 1999, Pall filed an
amended complaint in the EDNY adding Sepracor, COBE Laboratories, Inc. ("COBE
LABS"), Gambro, A.B. as defendants and alleging that Sepracor induced and
contributed to HemaSure's alleged infringement of Pall's "572 patent, and
allegedly tortuously interfered and unfairly competed with Pall's business.
Sepracor was served with the amended complaint on June 1, 1999. Sepracor,
HemaSure and COBE LABS have moved to dismiss, transfer, or stay the action, and
Pall has opposed the motion.
HemaSure believes, based on advice of its legal counsel, that a properly
informed court should conclude that the manufacture, use and/or sale by HemaSure
or its customers of the LeukoNet product and the r\LS product did not infringe
any valid enforceable claim of the Pall patents. However, there can be no
assurance that HemaSure will prevail in the pending litigation, and an adverse
outcome in a patent infringement action would have a material adverse effect on
HemaSure's financial condition and future business and operations.
Sepracor believes, based on advice of its legal counsel, that a properly
informed court should conclude that Pall's suit against Sepracor should be
dismissed. However, there can be no assurance that this suit will be dismissed
or that Sepracor will prevail in the pending litigation.
ITEMS 2 - 5 NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Exhibit Index immediately preceding the exhibits is incorporated by
reference.
a) Exhibits:
10.1 Amended and Restated 1991 Stock Option Plan
10.2 1999 Director Stock Option Plan
10.3 Assignment Agreement By and Between The Registrant and
Georgetown University, Dated August 25, 19999
10.4 Registration Rights Agreement, Dated as of August 25, 1999, By
and Between The Registrant and Georgetown University
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
SEPRACOR INC.
Date: November 12, 1999 /s/ TIMOTHY J. BARBERICH
----------------------------
Timothy J. Barberich
Chairman and
Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1999 /s/ ROBERT F. SCUMACI
----------------------------
Robert F. Scumaci
Senior Vice President
of Finance and Administration
(Principal Accounting Officer)
</TABLE>
26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS:
NUMBER DESCRIPTION
- --------------------- -----------
<S> <C>
10.1 Amended and Restated 1991 Stock Option Plan
10.2 1999 Director Stock Option Plan
10.3 Assignment Agreement By and Between The Registrant and
Georgetown University, Dated August 25, 1999
10.4 Registration Rights Agreement, Dated as of August 25, 1999,
By and Between The Registrant and Georgetown University
27.1 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 10.1
SEPRACOR INC.
1991 AMENDED AND RESTATED STOCK OPTION PLAN
ADOPTED BY THE BOARD OF DIRECTORS ON JUNE 24, 1991
1. PURPOSE.
The purpose of this plan (the "Plan") is to secure for Sepracor Inc.
(the "Company") and its shareholders the benefits arising from capital stock
ownership by employees and officers of, and consultants or advisors to, the
Company and its parent and subsidiary corporations who are expected to
contribute to the Company's future growth and success. Except where the context
otherwise requires, the term "Company" shall include the parent and all present
and future subsidiaries of the Company as defined in Sections 424(e) and 424(f)
of the Internal Revenue Code of 1986, as amended or replaced from time to time
(the "Code"). Those provisions of the Plan which make express reference to
Section 422 of the Code shall apply only to Incentive Stock Options (as that
term is defined in the Plan).
The Plan shall be treated as an amendment to and restatement of the
Company's 1985 Stock Option Plan, a copy of which is attached hereto as EXHIBIT
A. As amended and restated, the Plan shall apply to all options granted by the
Company on or after June 24, 1991, but shall apply, as so amended and restated,
to any option granted prior to such date if and only to the extent that the
agreement pursuant to which such option was granted is expressly amended in
writing to adopt the terms of the Plan. Any options granted prior to June 24,
1991 not so expressly amended shall continue to be governed by the terms set
forth in EXHIBIT A.
2. TYPE OF OPTIONS AND ADMINISTRATION.
(a) TYPES OF OPTIONS. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (or a Committee
designated by the Board of Directors) and may be either incentive stock options
("Incentive Stock Options") meeting the requirements of Section 422 of the Code
or non-qualified options which are not intended to meet the requirements of
Section 422 of the Code.
(b) ADMINISTRATION. The Plan will be administered by the Board of
Directors of the Company, whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. The Board of Directors may
in its sole discretion grant options to purchase shares of the Company's Common
Stock, par value $.10 per share ("Common Stock"), and issue shares upon exercise
of such options as provided
<PAGE>
in the Plan. The Board shall have authority, subject to the express provisions
of the Plan, to construe the respective option agreements and the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of the respective option agreements, which
need not be identical, and to make all other determinations in the judgment of
the Board of Directors necessary or desirable for the administration of the
Plan. The Board of Directors may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any option agreement in the manner
and to the extent it shall deem expedient to carry the Plan into effect and it
shall be the sole and final judge of such expediency. No director or person
acting pursuant to authority delegated by the Board of Directors shall be liable
for any action or determination made in good faith. The Board of Directors may,
to the full extent permitted by or consistent with applicable laws or
regulations (including, without limitation, applicable state law and Rule 16b-3
promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or
any successor rule ("Rule 16b-3")), delegate any or all of its powers under the
Plan to a committee (the "Committee") appointed by the Board of Directors, and
if the Committee is so appointed all references to the Board of Directors in the
Plan shall mean and relate to such Committee.
(c) APPLICABILITY OF RULE 16B-3. Those provisions of the Plan which
make express reference to Rule 16b-3 shall apply to the Company only at such
time as the Company's Common Stock or another class of equity security is
registered under the Exchange Act, and then only to such persons as are required
to file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. ELIGIBILITY.
(a) GENERAL. Options may be granted to persons who are, at the time of
grant, employees or officers of, or consultants or advisors to, the Company;
PROVIDED, that Incentive Stock Options may be granted only to persons who are
eligible to receive such options under Section 422 of the Code. In addition, no
person shall be granted any Incentive Stock Option under the Plan who, at the
time such option is granted, owns, directly or indirectly, stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, unless the requirements of Section 11(b) are satisfied. The attribution
of stock ownership provisions of Section 424(d) of the Code, and any successor
provisions thereto, shall be applied in determining the shares of stock owned by
a person for purposes of applying the foregoing percentage limitation. A person
who has been granted an option may, if he or she is otherwise eligible, be
granted an additional option or options if the Board of Directors shall so
determine. Subject to adjustment as provided in Section 15 below, the maximum
number of shares with respect to which options may be granted to any employee
under
-2-
<PAGE>
the Plan Shall not exceed 500,000 shares of Common Stock during any calendar
year. For the purpose of calculating such maximum number, (a) an option shall
continue to be treated as outstanding notwithstanding its repricing,
cancellation or expiration and (b) the repricing of an outstanding option or the
issuance of a new option in substitution for a cancelled option shall be deemed
to constitute the grant of a new additional option separate from the original
grant of the option that is repriced or cancelled.
(b) GRANT OF OPTIONS TO DIRECTORS AND OFFICERS. From and after the
registration of the Common Stock of the Company under the Exchange Act, the
selection of an officer (as the term "officer" is defined for the purposes of
Rule 16b-3) as a recipient of an option, the timing of the option grant, the
exercise price of the option and the number of shares subject to the option
shall be determined either (i) by the full Board of Directors or (ii) by a
committee composed solely of two or more "Non-Employee Directors" having full
authority to act in the matter. For the purposes of the Plan, a director shall
be deemed to be a "Non-Employee Director" only if such person qualifies as a
"Non-Employee Director" within the meaning of Rule 16b-3, as such term is
interpreted from time to time.
4. STOCK SUBJECT TO PLAN.
Subject to adjustment as provided in Section 15 below, the maximum
number of shares of Common Stock of the Company which may be issued and sold
under the Plan (including the Plan as in effect prior to this amendment and
restatement) is 9,000,000 shares. If an option granted under the Plan shall
expire or terminate for any reason without having been exercised in full, the
unpurchased shares subject to such option shall again be available for
subsequent option grants under the Plan. If shares issued upon exercise of an
option under the Plan are tendered to the Company in payment of the exercise
price of an option granted under the Plan, such tendered shares shall again be
available for subsequent option grants under the Plan; provided, that in no
event shall (i) the total number of shares issued pursuant to the exercise of
Incentive Stock Options under the Plan, on a cumulative basis, exceed the
maximum number of shares authorized for issuance under the Plan exclusive of
shares made available for issuance pursuant to this sentence or (ii) the total
number of shares issued pursuant to the exercise of options by persons who are
required to file reports under Section 16(a) of the Exchange Act, on a
cumulative basis, exceed the maximum number of shares authorized for issuance
under the Plan exclusive of shares made available for issuance pursuant to this
sentence.
-3-
<PAGE>
5. FORMS OF OPTION AGREEMENTS.
As a condition to the grant of an option under the Plan, each recipient
of an option shall execute an option agreement in such form not inconsistent
with the Plan as may be approved by the Board of Directors. Each option
agreement shall specifically state whether the options granted thereby are
intended to be Incentive Stock Options or non-qualified options. Such option
agreements may differ among recipients.
6. PURCHASE PRICE.
(a) GENERAL. The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Board of Directors, PROVIDED,
HOWEVER, that (i) in the case of an Incentive Stock Option, the exercise price
shall not be less than 100% of the fair market value of such stock, as
determined by the Board of Directors, at the time of grant of such option, or
less than 110% of such fair market value in the case of options described in
Section 11(b), and (ii) in the case of a non-qualified option, the exercise
price shall not be less than 50% of the fair market value of such stock, as
determined by the Board of Directors, at the time of grant of such option.
(b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may
provide for the payment of the exercise price by delivery of cash or a check to
the order of the Company in an amount equal to the exercise price of such
options, or, to the extent provided in the applicable option agreement, (i) by
delivery to the Company of shares of Common Stock of the Company already owned
by the optionee having a fair market value equal in amount to the exercise price
of the options being exercised, (ii) by any other means which the Board of
Directors determines are consistent with the purpose of the Plan and with
applicable laws and regulations (including, without limitation, the provisions
of Rule 16b-3 and Regulation T promulgated by the Federal Reserve Board) or
(iii) by any combination of such methods of payment. The fair market value of
any shares of the Company's Common Stock or other non-cash consideration which
may be delivered upon exercise of an option shall be determined by the Board of
Directors.
7. OPTION PERIOD.
Each option and all rights thereunder shall expire on such date as the
Board of Directors shall determine, except that (i) in the case of an Incentive
Stock Option, such date shall not be later than ten years after the date on
which the option is granted, (ii) in the case of an Incentive Stock Option
described in Section 11(b), such date shall not be later than five years after
the date on which the option is granted and (iii) in all cases, options shall be
subject to earlier termination as provided in the Plan.
-4-
<PAGE>
8. EXERCISE OF OPTIONS.
Each option granted under the Plan shall be exercisable either in full
or in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.
9. TRANSFERABILITY OF OPTIONS.
Except as the Board of Directors may otherwise determine or provide in
the applicable option agreement, options shall not be sold, assigned,
transferred, pledged, or otherwise encumbered by the optionee to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the optionee, shall be
exercisable only by the optionee.
10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Except as provided in Section 11(d) with respect to Incentive Stock
Options, the Board of Directors shall determine the period of time during which
an optionee may exercise an option following (i) the termination of the
optionee's employment or other relationship with the Company or (ii) the death
or disability of the optionee. Such periods shall be set forth in the agreement
evidencing such option.
11. INCENTIVE STOCK OPTIONS.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
(b) 10% SHAREHOLDER. If any employee to whom an Incentive Stock Option
is to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(i) The purchase price per share of the Common Stock subject
to such Incentive Stock Option shall not be less than 110% of the fair
market value of one share of Common Stock at the time of grant; and
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(ii) The option exercise period shall not exceed five years
from the date of grant.
(c) DOLLAR LIMITATION. For so long as the Code shall so provide,
options granted to any employee under the Plan (and any other incentive stock
option plans of the Company) which are intended to constitute Incentive Stock
Options shall not constitute Incentive Stock Options to the extent that such
options, in the aggregate, become exercisable for the first time in any one
calendar year for shares of Common Stock with an aggregate fair market value
(determined as of the respective date or dates of grant) of more than $100,000.
(d) TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
(i) an Incentive Stock Option may be exercised within the
period of three months after the date the optionee ceases to be an
employee of the Company (or within such lesser period as may be
specified in the applicable option agreement), provided, that the
agreement with respect to such option may designate a longer exercise
period and that the exercise after such three-month period shall be
treated as the exercise of a non-qualified option under the Plan;
(ii) if the optionee dies while in the employ of the Company,
or within three months after the optionee ceases to be such an
employee, the Incentive Stock Option may be exercised by the person to
whom it is transferred by will or the laws of descent and distribution
within the period of one year after the date of death (or within such
lesser period as may be specified in the applicable option agreement);
and
(iii) if the optionee becomes disabled (within the meaning of
Section 22(e)(3) of the Code or any successor provision thereto) while
in the employ of the Company, the Incentive Stock Option may be
exercised within the period of one year after the date the optionee
ceases to be such an employee because of such disability (or within
such lesser period as may be specified in the applicable option
agreement).
For all purposes of the Plan and any option granted hereunder,
"employment" shall be defined in accordance with the provisions of Section
1.421-7(h) of the Income
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<PAGE>
Tax Regulations (or any successor regulations). Notwithstanding the foregoing
provisions, no Incentive Stock Option may be exercised after its expiration
date.
12. ADDITIONAL PROVISIONS.
(a) ADDITIONAL OPTION PROVISIONS. The Board of Directors may, in its
sole discretion, include additional provisions in any option agreement covering
options granted under the Plan, including without limitation restrictions on
transfer, repurchase rights, commitments to pay cash bonuses, to make, arrange
for or guaranty loans or to transfer other property to optionees upon exercise
of options, or such other provisions as shall be determined by the Board of
Directors; PROVIDED THAT such additional provisions shall not be inconsistent
with any other term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan to fail to
qualify as an Incentive Stock Option within the meaning of Section 422 of the
Code.
(b) ACCELERATION, EXTENSION, ETC. The Board of Directors may, in its
sole discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular option or options granted under the
Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3.
13. GENERAL RESTRICTIONS.
(a) INVESTMENT REPRESENTATIONS. The Company may require any person to
whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws, or with covenants or representations made by
the Company in connection with any public offering of its Common Stock.
(b) COMPLIANCE WITH SECURITIES LAWS. Each option shall be subject to
the requirement that if, at any time, counsel to the Company shall determine
that the listing, registration or qualification of the shares subject to such
option upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or that the
disclosure of non-public information or the satisfaction of any other condition
is necessary as a condition of, or in connection
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<PAGE>
with, the issuance or purchase of shares thereunder, such option may not be
exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval, or satisfaction of such condition shall have
been effected or obtained on conditions acceptable to the Board of Directors.
Nothing herein shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification, or to satisfy such condition.
14. RIGHTS AS A SHAREHOLDER.
The holder of an option shall have no rights as a shareholder with
respect to any shares covered by the option (including, without limitation, any
rights to receive dividends or non-cash distributions with respect to such
shares) until the date of issue of a stock certificate to him or her for such
shares. No adjustment shall be made for dividends or other rights for which the
record date is prior to the date such stock certificate is issued.
15. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS AND RELATED TRANSACTIONS.
(a) GENERAL. If, through or as a result of any merger, consolidation,
sale of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other similar transaction, (i) the outstanding shares of Common Stock
are increased or decreased or are exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment may be made in (x) the maximum number
and kind of shares reserved for issuance under the Plan, (y) the number and kind
of shares or other securities subject to then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable, provided that no adjustment shall be made pursuant
to this Section 15 if such adjustment would cause the Plan to fail to comply
with Section 422 of the Code or with Rule 16b-3.
(b) BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this
Section 15 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
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16. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.
(a) GENERAL. In the event of a consolidation or merger or sale of all
or substantially all of the assets of the Company in which outstanding shares of
Common Stock are exchanged for securities, cash or other property of any other
corporation or business entity or in the event of a liquidation of the Company,
the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i)
provide that such options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), PROVIDED that any such options substituted for Incentive Stock Options
shall meet the requirements of Section 425(a) of the Code, (ii) upon written
notice to the optionees, provide that all unexercised options will terminate
immediately prior to the consummation of such transaction unless exercised by
the optionee within a specified period following the date of such notice, (iii)
in the event of a merger under the terms of which holders of the Common Stock of
the Company will receive upon consummation thereof a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such outstanding options
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding options in exchange for
the termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full immediately prior to such event.
(b) SUBSTITUTE OPTIONS. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. NO SPECIAL EMPLOYMENT RIGHTS.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
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18. OTHER EMPLOYEE BENEFITS.
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. AMENDMENT OF THE PLAN.
(a) The Plan was initially adopted by the Board of Directors on July
15, 1985, was amended on April 9, 1986, January 1, 1987, January 30, 1990 and
August 27, 1990, was readopted by the Board of Directors as a new Plan on June
24, 1991, was amended on March 24, 1992, February 14, 1995 and March 27, 1996,
was reapproved by the stockholders of the Company on May 14, 1997 and was
amended on February 26, 1998 and February 25, 1999, each time subject to its
becoming effective upon approval by the holders of a majority of the outstanding
shares of Common Stock of the Company.
(b) The Board of Directors may at any time, and from time to time,
modify or amend the Plan in any respect, except that if at any time the approval
of the shareholders of the Company is required under Section 422 of the Code or
any successor provision with respect to Incentive Stock Options or under Rule
16b-3 or with respect to options held by persons who are required to file
reports pursuant to Section 16(a) of the Exchange Act, the Board of Directors
may not effect such modification or amendment without such approval.
(c) The termination or any modification or amendment of the Plan shall
not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Board of Directors may amend outstanding option agreements in a
manner not inconsistent with the Plan. The Board of Directors shall have the
right to amend or modify (i) the terms and provisions of the Plan and of any
outstanding Incentive Stock Options granted under the Plan to the extent
necessary to qualify any or all such options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code and (ii) the terms and
provisions of the Plan and of any outstanding option to the extent necessary to
ensure the qualification of the Plan under Rule 16b-3.
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<PAGE>
20. WITHHOLDING.
(a) The Company shall have the right to deduct from payments of any
kind otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a fair
market value equal to such withholding obligation. The fair market value of the
shares used to satisfy such withholding obligation shall be determined by the
Company as of the date that the amount of tax to be withheld is to be
determined. An optionee who has made an election pursuant to this Section 20(a)
may only satisfy his or her withholding obligation with shares of Common Stock
which are not subject to any repurchase, forfeiture, unfulfilled vesting or
other similar requirements.
(b) Notwithstanding the foregoing, in the case of a director or
officer, no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements of Rule
16b-3.
21. CANCELLATION AND NEW GRANT OF OPTIONS, ETC.
The Board of Directors shall have the authority to effect, at any time
and from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. EFFECTIVE DATE AND DURATION OF THE PLAN.
(a) EFFECTIVE DATE. The Plan shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve months after
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<PAGE>
the date of the Board's adoption of the Plan, no options previously granted
under the Plan shall be deemed to be Incentive Stock Options and no further
Incentive Stock Options shall be granted. Amendments to the Plan not requiring
shareholder approval shall become effective when adopted by the Board of
Directors; amendments requiring shareholder approval (as provided in Section 19)
shall become effective when adopted by the Board of Directors, but no Incentive
Stock Option granted after the date of such amendment shall become exercisable
(to the extent that such amendment to the Plan was required to enable the
Company to grant such Incentive Stock Option to a particular optionee) unless
and until such amendment shall have been approved by the Company's shareholders.
If such shareholder approval is not obtained within twelve months of the Board's
adoption of such amendment, any Incentive Stock Options granted on or after the
date of such amendment shall terminate to the extent that such amendment to the
Plan was required to enable the Company to grant such option to a particular
optionee. Subject to this limitation, options may be granted under the Plan at
any time after the effective date and before the date fixed for termination of
the Plan.
(b) TERMINATION. Unless sooner terminated in accordance with Section
16, the Plan shall terminate, with respect to Incentive Stock Options, upon the
earlier of (i) the close of business on the day next preceding the tenth
anniversary of the date of its adoption by the Board of Directors, or (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to the exercise or cancellation of options granted under the
Plan. Unless sooner terminated in accordance with Section 16, the Plan shall
terminate with respect to options which are not Incentive Stock Options on the
date specified in (ii) above. If the date of termination is determined under (i)
above, then options outstanding on such date shall continue to have force and
effect in accordance with the provisions of the instruments evidencing such
options.
23. PROVISION FOR FOREIGN PARTICIPANTS.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
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Exhibit 10.2
SEPRACOR INC.
1999 DIRECTOR STOCK OPTION PLAN
1. PURPOSE
The purpose of this 1999 Director Stock Option Plan (the "Plan") of
Sepracor Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate outside directors ("Directors") of the Company by
providing such Directors with equity ownership opportunities and
performance-based incentives and thereby better aligning the interests of such
persons with those of the Company's stockholders.
2. ELIGIBILITY
Each Director of the Company who is not an employee of the Company (an
"Eligible Director") is eligible to be granted options (an "Option") under the
Plan. Any person who has been granted an Option under the Plan shall be deemed a
"Participant."
3. ADMINISTRATION, DELEGATION
The Plan will be administered by the Board of Directors of the Company
(the "Board"). The Board shall have authority to adopt, amend and repeal such
administrative rules, guidelines and practices relating to the Plan as it shall
deem advisable. The Board may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Option in the manner and to the
extent it shall deem expedient to carry the Plan into effect, and it shall be
the sole and final judge of such expediency. All decisions by the Board shall be
made in the Board's sole discretion and shall be final and binding on all
persons having or claiming any interest in the Plan or in any Option. No
Director or person acting pursuant to the authority delegated by the Board shall
be liable for any action or determination relating to or under the Plan made in
good faith.
4. STOCK AVAILABLE FOR OPTIONS
a. NUMBER OF SHARES. Subject to adjustment under Section 4(b), Options
may be made under the Plan for up to 900,000 shares of common stock, $.10 par
value per share, of the Company (the "Common Stock"). If any Option expires or
is terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not being issued,
the unused Common Stock covered
<PAGE>
by such Option shall again be available for the grant of Options under
the Plan. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
b. ADJUSTMENT TO COMMON STOCK. In the event of any stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan, (ii) the number and class of securities and exercise price per
share subject to each outstanding Option, and (iii) the number and class of
securities available for automatic grants shall be appropriately adjusted by the
Company (or substituted Options may be made, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 4(b) applies and Section 6(c) also
applies to any event, Section 6(c) shall be applicable to such event, and this
Section 4(b) shall not be applicable.
5. STOCK OPTIONS
a. AUTOMATIC GRANTS.
i. Each Eligible Director shall be granted an Option to
purchase 10,000 shares of Common Stock at the close of business on the date such
Eligible Director is first elected to serve on the Board.
ii. Each Eligible Director who is serving on the Board at the
adjournment of any annual meeting which begins at least six months after the
date of his or her election shall be granted an Option to purchase 10,000 shares
of Common Stock at the close of business on the date of each such adjournment.
b. OPTION EXERCISE PRICE. The option exercise price per share for each
Option granted under the Plan shall equal (i) the last reported sales price per
share of the Company's Common Stock as listed on a nationally recognized
securities exchange or the Nasdaq National Market, as the case may be, on the
date of grant (or, if no such price is reported on such date, such price as
reported on the nearest preceding day); or (ii) the fair market value of the
stock on the date of grant, as determined by the Board of Directors, if the
Common Stock is not publicly traded.
c. EXERCISE PERIOD.
i. Each Option granted pursuant to clause (i) of Section 5(a)
shall vest
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and be exercisable in equal annual installments of 2,000 shares beginning on the
first anniversary of the date of grant; and
ii. each Option granted pursuant to clause (ii) of Section
5(a) shall vest and be exercisable on the day prior to the first annual meeting
of stockholders following the date of grant of such Option, provided that, in
each instance described herein the Participant continue to serve as a director
on such dates. In addition, subject to the provisions of Section 5(d) and
Section 6(1), no Option may be exercised more than 90 days after the Participant
ceases to serve as a director of the Company and such Option may only be
exercised for the purchase of such number of shares as were vested and
exercisable at the time of such termination. No Option shall be exercisable
after the expiration of ten (10) years from the date of grant or prior to
approval of the Plan by the stockholders of the Company.
d. EXERCISE PERIOD UPON DEATH OR DISABILITY. Notwithstanding the
provisions of Section 5(c), any Option granted under the Plan:
i. may be exercised in full by a Participant who becomes disabled
(within the meaning of Section 22(e)(3) of the Code or any successor provision
thereto) while serving as a Director of the Company; or
ii. may be exercised
(x) in full upon the death of the Participant while serving
as a Director of the Company, or
(y) to the extent then exercisable upon the death of the
Participant within 90 days of ceasing to serve as a
Director of the Company,
by the person to whom it is transferred by will, by the laws
of descent and distribution, or by written designation of
beneficiary filed with the Company;
in each such case within the period of one year after the date the Participant
ceases to be such a director by reason of such death or disability; provided,
that no Option shall be exercisable after the expiration of ten (10) years from
the date of grant.
e. PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise of
an Option granted under the Plan shall be paid for as follows:
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i. in cash or by check, payable to the order of the Company;
ii. except as the Board may otherwise provide in an Option
Agreement, by delivery of an irrevocable and unconditional undertaking by a
creditworthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price, or by delivery by the Participant to the Company of a copy
of irrevocable and unconditional instructions to a creditworthy broker to
deliver promptly to the Company cash or a check sufficient to pay the exercise
price;
iii. to the extent permitted by the Board and explicitly provided in
an Option Agreement (i) by delivery of shares of Common Stock owned by the
Participant valued at their fair market value as determined by the Board in good
faith ("Fair Market Value"), which Common Stock was owned by the Participant at
least six months prior to such delivery, (ii) by delivery of a promissory note
of the Participant to the Company on terms determined by the Board, or (iii) by
payment of such other lawful consideration as the Board may determine; or
iv. by any combination of the above permitted forms of payment.
6. GENERAL PROVISIONS APPLICABLE TO OPTIONS
a. TRANSFERABILITY OF OPTIONS. Except as the Board may otherwise
determine or provide in an Option, Options shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to a Participant, to the extent
relevant in the context, shall include references to authorized transferees.
b. DOCUMENTATION. Each Option under the Plan shall be evidenced by a
written instrument in such form as the Board shall determine. Each Option may
contain terms and conditions in addition to those set forth in the Plan.
c. ACQUISITION EVENTS. Upon the occurrence of an Acquisition Event (as
defined below), the Participant shall have the right to exercise the Option in
full, including with respect to shares of Common Stock as to which it would not
otherwise be exercisable. In the event of an Acquisition Event, the Board shall
notify the Participant in writing or electronically that the Option shall be
fully exercisable for a period of not less than one hundred eighty (180) days
from the date of such notice, and the Option shall terminate upon the expiration
of such period. An "Acquisition Event" shall mean: (a) any merger or
consolidation which results in the voting securities of the Company outstanding
immediately prior thereto representing immediately thereafter (either by
remaining outstanding or by being converted into voting securities of the
surviving or acquiring entity) less than 50% of the combined voting power of the
voting securities of the Company or such surviving or acquiring
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<PAGE>
entity outstanding immediately after such merger or consolidation; (b) any sale
of all or substantially all of the assets of the Company; or (c) the complete
liquidation of the Company.
d. CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated
to deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Option have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
e. ACCELERATION. The Board may at any time provide that any Options
shall become immediately exercisable in full or in part.
7. MISCELLANEOUS
a. NO RIGHT TO BOARD MEMBERSHIP OR OTHER STATUS. Neither the Plan nor
the granting of an Option shall be construed as giving a Participant the right
to continue as a Director of the Company.
b. NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Options, no Participant or beneficiary designated by the Participant
shall have any rights as a stockholder with respect to any shares of Common
Stock to be distributed with respect to an Option until becoming the record
holder of such shares.
c. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on
the date on which it is adopted by the Board. No Options shall be granted under
the Plan after the completion of ten years from the date on which the Plan was
adopted by the Board, but Options previously granted may extend beyond that
date.
d. AMENDMENT OF PLAN. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time.
e. GOVERNING LAW. The provisions of the Plan and all Options made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
Adopted by the Board of Directors on August 31, 1999
Adopted by the Stockholders on October 13, 1999
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Exhibit 10.3
ASSIGNMENT AGREEMENT
This Assignment Agreement (hereinafter referred to as "Agreement") is made
and effective as of the 25th day of August, 1999, by and between
SEPRACOR INC. (hereinafter referred to as "SEPRACOR") with a principal place
of business located at 111 Locke Drive, Marlborough, Massachusetts 01752, and
GEORGETOWN UNIVERSITY (hereinafter referred to as "UNIVERSITY") having a
principal place of business at 37th and O Streets NW, Washington, DC 20057
WITNESSETH:
WHEREAS, SEPRACOR and UNIVERSITY have executed two Statements of Agreement,
one effective as of 1 October 1990 (Exhibit A), and one effective as of 1
January 1993 (Exhibit B), as amended by the Amendment to Agreement effective
as of 16 January 1998 (Exhibit C)(collectively, the "Statements of
Agreement");
WHEREAS, under the Statements of Agreement UNIVERSITY has granted to SEPRACOR
certain exclusive rights under University Intellectual Property and Joint
Intellectual Property, as such terms are defined in the Statements of
Agreement, but has retained its share of ownership of such intellectual
property; and
WHEREAS, SEPRACOR wishes to own the entire right, title, and interest in
University Intellectual Property and Joint Intellectual Property, and,
pursuant to the terms hereof, UNIVERSITY is willing to assign such to
SEPRACOR.
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained herein, the parties agree to as follows:
ARTICLE I - Definitions
1.1 All terms appearing herein and not otherwise defined herein and defined
in the Statements of Agreement shall have the meaning set forth in the
Statement of Agreement effective 1 January 1993, as amended by the
Amendment to Agreement effective 16 January 1998, except that such
terms when used herein are understood to refer to the cumulative
subject matter of the Statements of Agreement.
<PAGE>
ARTICLE II- Grant
2.1 Effective as of the Closing Date (as hereinafter defined), UNIVERISITY
hereby assigns to SEPRACOR all of UNIVERSITY's right, title, and
interest in Joint Intellectual Property and University Intellectual
Property, including but not limited to Invention(s), Licensed
Patent(s), and Joint Licensed Patent(s). UNIVERSITY shall cooperate
fully at SEPRACOR's expense in executing any and all documents
necessary to effectuate such assignment to SEPRACOR and in prosecution
of Licensed Patents and Joint Licensed Patents. The Licensed Patent(s)
and Joint Licensed Patent(s) presently existing and assigned to
SEPRACOR pursuant to this Agreement are listed in Exhibit D.
2.2 From and after the Closing Date, UNIVERSITY, its directors, officers,
employees, consultants, and agents, shall cooperate fully with and
provide assistance to SEPRACOR and its nominees with regard to
prosecution, maintenance, enforcement, or defense relating to Joint
Intellectual Property and University Intellectual Property, including
but not limited to Invention(s), Licensed Patent(s), or Joint Licensed
Patent(s), and shall execute any and all documents SEPRACOR or its
nominees deem necessary to the prosecution, maintenance, enforcement,
or defense of such Joint Intellectual Property and University
Intellectual Property, all at SEPRACOR's expense.
ARTICLE III - Consideration
3.1 Common Stock. In partial consideration for the assignment and other
obligations set forth in Article II, SEPRACOR shall issue to
UNIVERSITY on the Closing Date, one hundred thousand (100,000)
shares of SEPRACOR common stock ($0.10 par value per
share)(hereinafter the "Shares"). Effective upon issuance of the
Shares to UNIVERSITY, SEPRACOR grants to UNIVERSITY the registration
rights with respect to the Shares set forth in Exhibit E, which is
incorporated herein by reference and made a part hereof. In
connection with issuance of the Shares on the Closing Date,
UNIVERSITY shall execute and deliver to SEPRACOR an Investment
Letter in a form substantially as shown in Exhibit F.
3.2 Cash. In partial consideration for the assignment and other obligations
set forth in Article II, on the Closing Date SEPRACOR shall pay to
UNIVERSITY by wire transfer of immediately available funds (or such
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<PAGE>
other method of funds transfer as may be mutually agreed upon by
SEPRACOR and UNIVERSITY) Ten Million Dollars ($10,000,000).
3.3 The closing of the transactions contemplated hereby (the "Closing")
shall occur no later than ten (10) days after the effective date as
first above written (the "Closing Date"). The Closing shall take place
at the offices of Covington & Burling, 1201 Pennsylvania Avenue, NW,
Washington, DC, at 10:00 AM on the Closing Date, or at such other
location or such other time as may be mutually agreed upon by SEPRACOR
and the UNIVERSITY. At the Closing, SEPRACOR shall (a) pay to the
UNIVERSITY the cash portion of the consideration as provided in Section
3.2 and (b) deliver to the UNIVERSITY a duly executed stock
certificate(s) evidencing the Shares issued in the name of the
UNIVERSITY.
3.4 REGISTRATION RIGHTS. From and after the Closing Date, UNIVERSITY shall
have, and SEPRACOR shall be bound by, the Registration Rights attached
hereto as Exhibit E and incorporated herein by reference (the
"Registration Rights"). The Registration Rights shall survive the
Closing Date and the expiration or termination of this Agreement.
ARTICLE IV - Termination of Statements of Agreement, Retained Rights or
Obligations
Effective as of the Closing Date, the Statements of Agreement are hereby
terminated, except that Article 7 Publicity, Article 8 - Publications, and
Article 16 - Indemnification of each statement of Agreement shall survive
termination and remain in full force and effect. Except as stated in the
preceding sentence, from and after the Closing Date, UNIVERSITY shall retain
no rights under Joint Intellectual Property or University Intellectual
Property, and SEPRACOR shall have no remaining obligations to UNIVERSITY. By
way of non-limiting example, the Payments made by Sepracor hereunder shall be
in full satisfaction of any and all of SEPRACOR's payment obligations to
UNIVERSITY arising out of this Agreement or the Statements of Agreement;
SEPRACOR shall have no obligation to UNIVERSITY in respect of use, non-use,
licensing, enforcement, prosecution, abandonment, maintenance, or any other
matter relating to Joint Intellectual Property or University Intellectual
Property; SEPRACOR shall have no reporting obligations and no obligation to
make any further payments to UNIVERSITY relating to University Intellectual
Property, Joint Intellectual Property, or Licensed Product, including but not
limited to any portion of Net Sales or royalty payments, lump sum payments,
or Equity received by SEPRACOR.
3
<PAGE>
ARTICLE V - Sepracor Representations and Warranties
5.1 ORGANIZATION. SEPRACOR is (a) a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware
and (b) duly qualified and in good standing as a foreign corporation in
each jurisdiction where the properties owned, leased or operated, or
the business conducted, by it requires such qualification, except where
a failure so to qualify either singly or in the aggregate would not
have a material adverse effect on the financial condition, assets,
business, prospects or results of operations of SEPRACOR.
5.2 POWER. SEPRACOR has all requisite power and authority to (a) execute,
deliver and perform this Agreement and (b) own, lease and operate its
properties and assets and to carry on its business as presently
conducted.
5.3 DUE EXECUTION. This Agreement has been duly authorized, executed and
delivered by SEPRACOR and is the legal, valid and binding obligation of
SEPRACOR, enforceable against SEPRACOR in accordance with its terms.
5.4 NON-CONTRAVENTION. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby
will not (a) violate in any material respect any federal, state or
local law, statute, ordinance, rule or regulation which is or may be
applicable to SEPRACOR; (b) violate in any material respect any
agreement, indenture, instrument, note, mortgage, lease, license,
franchise, permit or other authorization, right, restriction or
obligation to which SEPRACOR is a party or may be bound; (c) violate in
any material respect any order, injunction, judgment or decree of any
court or other governmental authority or arbitrator by which SEPRACOR
is or may be bound; (d) constitute an act of bankruptcy, preferences,
insolvency or fraudulent conveyance under any bankruptcy act or other
law for the protection of debtors or creditors; or (e) conflict with or
result in any material breach or violation of the terms, conditions or
provisions of the Certificate of Incorporation or Bylaws of SEPRACOR.
5.5 SHARES. All of the Shares to be issued in connection with the
transactions contemplated hereby, on the Closing Date, will be (a) duly
authorized, validly issued, fully paid and nonassessable and (b)
offered and sold pursuant to a valid exemption from the registration
requirements under the Securities Act of 1933, as amended (the
"Securities Act").
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<PAGE>
5.6 CAPITAL STOCK OF SEPRACOR. The authorized capital stock of SEPRACOR
consists of 80,000,000 shares of common stock, par value $0.10 per
share, of which 32,793,644 are issued and outstanding as of April 7,
1999, and 1,000,000 shares of preferred stock, par value $0.10 per
share, none of which are outstanding as of the date hereof. All of the
issued and outstanding shares of capital stock of SEPRACOR are validly
issued and outstanding, fully paid and nonassessable, and none of such
shares has been issued in violation of any preemptive or other rights
of any person, the Securities Act or, to the best knowledge of
SEPRACOR, any state securities or blue sky law.
5.7 SEC FILINGS. SEPRACOR has heretofore delivered or made available to
UNIVERSITY true and complete copies of its Annual Report on Form 10-K
for the year ended December 31, 1998, as filed with the SEC (the "SEC
Filing"). SEPRACOR has made all filings required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As of its date,
of the SEC Filing did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
5.8 MATERIAL ADVERSE CHANGE. All material adverse changes in the financial
condition, assets, liabilities (contingent or otherwise), business or
results of operations of SEPRACOR since December 31, 1998, have been
publicly announced by SEPRACOR.
ARTICLE VI - University Representations and Warranties
6.1 POWER. UNIVERSITY has all requisite power and authority to
execute, deliver and perform this Agreement.
6.2 DUE EXECUTION. This Agreement has been duly authorized, executed and
delivered by UNIVERSITY and is the legal, valid and binding obligation
of UNIVERSITY, enforceable against UNIVERSITY in accordance with its
terms.
6.3 NON-CONTRAVENTION. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby
will not (a) violate in any material respect any federal, state or
local law, statute, ordinance, rule or regulation which is or may be
applicable to
5
<PAGE>
UNIVERSITY; (b) violate in any material respect any agreement,
indenture, instrument, note, mortgage, lease, license, franchise,
permit or other authorization, right, restriction or obligation to
which UNIVERSITY is a party or may be bound; (c) violate in any
material respect any order, injunction, judgment or decree of any
court or other governmental authority or arbitrator by which
UNIVERSITY is or may be bound; (d) constitute an act of bankruptcy,
preferences, insolvency or fraudulent conveyance under any
bankruptcy act or other law for the protection of debtors or
creditors; or (e) conflict with or result in any material breach or
violation of the terms, conditions or provisions of the Bylaws of
UNIVERSITY.
ARTICLE VII - Entire Agreement
7.1 This Agreement, together with the attached Exhibits, is the entire
agreement between the parties and constitutes all the terms,
conditions, and covenants of this agreement.
IN WITNESS WHEREOF, the parties have caused this Assignment Agreement to be
executed in their names by their properly and duly authorized officers or
representatives in duplicate and under seal as of the day and year first
written above.
SEPRACOR INC. GEORGETOWN UNIVERSITY
By: /s/ Douglas E. Reedich By: /s/Nicole F. Mandeville
--------------------------- ----------------------------
Date: August 25, 1999 Date: August 24, 1999
------------------------- -------------------------
6
<PAGE>
Exhibit 10.4
REGISTRATION RIGHTS AGREEMENT
1. CERTAIN DEFINITIONS.
As used in this Exhibit E, the following terms shall have the following
respective meanings:
"COMMISSION" means the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any successor federal statue, and the rules and regulations of
the Commission issued under such act, as they may, from time to time, be in
effect.
"REGISTRATION STATEMENT" means a registration statement filed by
SEPRACOR with the Commission for a public offering and sale of securities of
SEPRACOR (other than a registration statement on Form S-8 or Form S-4, or
their successors, or any other form for a similar limited purpose, or any
registration statement covering only securities proposed to be issued in
exchange for securities or assets of another corporation).
"SECURITIES ACT" means the Securities Act of 1933, as amended, or
any successor federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
2. INCIDENTAL REGISTRATION.
(a) Whenever SEPRACOR proposes to file a Registration
Statement covering shares to be sold for the account of SEPRACOR, it will,
prior to such filing, give written notice to UNIVERSITY of its intention to
do so; PROVIDED, that no such notice need be given if no Shares are to be
included therein as a result of a determination of the managing underwriter
pursuant to paragraph 2(b) below. Upon the written request of UNIVERSITY
given within 10 days after SEPRACOR provides such notice, SEPRACOR shall use
its best efforts to cause all Shares which SEPRACOR has been requested by
UNIVERSITY to register to be registered under the Securities Act to the
extent necessary to permit their sale, provided that SPONSOR shall have the
right to postpone or withdraw any registration without obligation to
UNIVERSITY.
(b) The right of UNIVERSITY to include its Shares in such
registration pursuant to this Section shall be conditioned upon UNIVERSITY's
participation in the underwriting on the terms set forth herein. UNIVERSITY
shall (together with SEPRACOR, and any officers or directors of SEPRACOR
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form
1
<PAGE>
with the underwriter or underwriters selected for the underwriting by
SEPRACOR. Notwithstanding any other provision of this Section if the managing
underwriter determines that the inclusion of all shares requested to be
registered would adversely affect the offering, the managing underwriter may
limit the number of Shares to be included in the registration and
underwriting, the securities so included to be apportioned among the holders
of SEPRACOR securities seeking to register their shares, pro rata according
to the number of such securities held by each such holder.
(c) Notwithstanding the foregoing, SEPRACOR shall not be
required to include any Shares in a Registration Statement if such Shares can
then be sold pursuant to Rule 144 under the Securities Act.
3. EXPENSES. SEPRACOR will pay all expenses for all registrations
under this Agreement, except that SEPRACOR shall not be responsible for
underwriting discounts and selling commissions incurred in connection with
the sale of Shares and the fees and expenses of UNIVERSITY's own counsel.
4. INDEMNIFICATION. In the event any Shares are included in a
registration statement under this Agreement:
(a) To the extent permitted by law, SEPRACOR will indemnify
and hold harmless the UNIVERSITY, and each of the UNIVERSITY's officers,
directors, employees and affiliates, any underwriter (as defined in the
Securities Act) for the UNIVERSITY and each Person, if any, who controls the
UNIVERSITY or underwriter within the meaning of the Securities Act or the
Exchange Act against any losses, claims, damages, liabilities, or expenses
(joint or several) to which they may become subject under the Securities Act,
the Exchange Act or other federal or state law, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon a Violation (as hereinafter defined), PROVIDED, HOWEVER,
that SEPRACOR will not be required to indemnify any of the foregoing Persons
on account of any losses, claims, damages or liabilities arising from a
Violation if and to the extent that such Violation was made in a preliminary
prospectus and was corrected in a subsequent prospectus that was required by
law to be delivered to the Person making the claim with respect to which
indemnification is sought hereunder (and such subsequent prospectus was made
available by SEPRACOR to permit delivery of such prospectus in a timely
manner), and such subsequent prospectus was not so delivered to such Person;
and SEPRACOR will pay to each such indemnified party, as incurred, any legal
or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or
action; PROVIDED, HOWEVER, that the indemnity agreement contained in this
Section 4(a) shall not apply to any such loss, claim, damage, liability or
action if settlement thereof is effected without the consent of SEPRACOR
(which consent shall not be unreasonably withheld), nor shall SEPRACOR be
liable in any such case to a particular indemnified party for any such loss,
claim, damage, liability or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by or on behalf of such indemnified party.
2
<PAGE>
(b) To the extent permitted by law, the UNIVERSITY will
indemnify and hold harmless SEPRACOR, each of its directors, officers, each
of its employees, each Person, if any, who controls SEPRACOR within the
meaning of the Securities Act, any underwriter, against any losses, claims,
damages, liabilities, or expenses (joint or several) to which any of the
foregoing Persons may become subject, under the Securities Act, the Exchange
Act or other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by or on behalf of the UNIVERSITY expressly for use in connection
with such registration; and the UNIVERSITY will pay, as incurred, any legal
or other expenses reasonably incurred by any Person intended to be
indemnified pursuant to this Section 4(b), in connection with investigating
or defending any such loss, claim, damage, liability, or action; PROVIDED,
HOWEVER, that the indemnity agreement contained in this Section 4(b) shall
not apply to any such loss, claim, damage, liability or action if settlement
thereof is effected without the consent of the UNIVERSITY, which consent
shall not be unreasonably withheld; and PROVIDED FURTHER, that, in no event
shall the liability of the UNIVERSITY under this Section 4(b) exceed the net
proceeds from the offering received by the UNIVERSITY.
(c) Promptly after receipt by an indemnified party under
this Section 4 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 4,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an
indemnified party shall have the right to retain its own counsel, with the
fees and expenses to be paid by the indemnifying party, if representation of
such indemnified party by the counsel retained by the indemnifying party
would be inappropriate due to actual or potential differing interests between
such indemnified party and any other party represented by such counsel in
such proceeding. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall
not relieve such indemnifying party of any liability to the indemnified party
under this Section 4 except if, and only to the extent that, the indemnifying
party is actually prejudiced thereby; and such failure to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 4.
(d) The obligations of SEPRACOR and the UNIVERSITY under
this Section 4 shall survive the completion of any offering of the Shares in
a registration statement under this Agreement and otherwise.
(e) The indemnity agreements contained herein shall be in
addition to
3
<PAGE>
any other rights to indemnification or contribution which any indemnified
party may have pursuant to law or contract and shall remain operative and in
full force and effect regardless of any investigation made or omitted by or
on behalf of any indemnified party.
(f) In the event that the indemnity provided in Section
4(a) or 4(b) is by the terms of such Section applicable to a loss, claim,
damage, liability, or expense, but such indemnity is for any reason
unenforceable by the indemnified party, then the party that , under such
Section would have been the indemnifying party (for the purposes of this
subsection, the "indenmifying party") shall contribute to the amount paid or
payable by the indemnified party as a result of such losses, claims, damages,
liabilities or expenses (i) in such proportion as is appropriate to reflect
the relative benefits received by the indemnifying party on the one hand and
the indemnified party on the other or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law or provides a lesser sum
to the indemnified party than the amount hereinafter calculated, in such
proportion as is appropriate to reflect not only the relative benefits
received by the indemnifying party on the one hand and the indemnified party
on the other but also the relative fault of the indemnifying party and the
indemnified party as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by or on behalf of the indemnifying party or the indemnified party
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. No
Person guilty of fraudulent misrepresentation (within the meaning of section
11(f) of the Securities Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation.
(g) "Violation" means any of the following statements,
omissions or violations: (i) any untrue statement or alleged untrue statement
of a material fact contained in a registration statement under this
Agreement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto or any documents filed under
state securities or "blue sky" laws in connection therewith, or (ii) the
omission or alleged omission to state therein a material fact required to be
stated therein, or necessary to make the statements therein not misleading,
or (iii) any violation or alleged violation by SEPRACOR of the Securities
Act, the Exchange Act, any state securities law or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any state
securities law.
5. REPORTS UNDER THE EXCHANGE ACT. With a view to making available
to the University the benefits of Rule 144 under the Securities Act and any
other rule or regulation of the Commission that may at any time permit the
University to sell securities of SEPRACOR to the public without registration
or pursuant to a registration
4
<PAGE>
on Form S-3, SEPRACOR agrees to:
(a) make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date of the first registration statement filed by
SEPRACOR for the offering of its securities to the general public;
(b) file with the Commission in a timely manner all reports
and other documents required of SEPRACOR under the Securities Act and the
Exchange Act; and
(d) furnish to the UNIVERSITY, so long as the UNIVERSITY
owns any Shares, forthwith upon request (i) a written statement by SEPRACOR
that it has complied with the reporting requirements of Rule 144 under the
Securities Act, the Securities Act and the Exchange Act, and (ii) a copy of
the most recent annual or quarterly report of SEPRACOR and such other reports
and documents so filed by SEPRACOR which are made public.
6. MISCELLANEOUS.
(a) UNIVERSITY shall treat as confidential any notice from
SEPRACOR regarding plans to file a Registration Statement and shall not
disclose such information to any person other than as necessary to exercise
its rights hereunder.
(b) SEPRACOR shall not be required to include any Shares in
a Registration Statement unless UNIVERSITY furnishes to SEPRACOR in writing
such information regarding UNIVERSITY as SEPRACOR may reasonably request in
writing in connection with the Registration Statement or as shall be required
in connection therewith by the Commission or any state securities law
authorities.
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,560,000
<SECURITIES> 347,238,000
<RECEIVABLES> 2,909,000
<ALLOWANCES> 82,000
<INVENTORY> 6,208,000
<CURRENT-ASSETS> 391,907,000
<PP&E> 29,666,000
<DEPRECIATION> 10,703,000
<TOTAL-ASSETS> 448,598,000
<CURRENT-LIABILITIES> 54,781,000
<BONDS> 489,475,000
0
0
<COMMON> 3,311,000
<OTHER-SE> (107,607,000)
<TOTAL-LIABILITY-AND-EQUITY> 448,598,000
<SALES> 7,619,000
<TOTAL-REVENUES> 10,221,000
<CGS> 2,157,000
<TOTAL-COSTS> 2,227,000
<OTHER-EXPENSES> 120,998,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,834,000
<INCOME-PRETAX> (122,675,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (122,330,000)
<DISCONTINUED> (345,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (122,675,000)
<EPS-BASIC> (3.73)
<EPS-DILUTED> (3.73)
</TABLE>
