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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: June 30, 1997
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 0-23678
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BIOSEPRA INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-3216867
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Organization or Incorporation)
111 LOCKE DRIVE, MARLBOROUGH, MASSACHUSETTS 01752
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(Address of Principal Executive Offices) (Zip Code)
(508) 481-6802
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(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 $.01 per share 8,426,127
-------------------------------------- -----------------------------
Class Outstanding at August 8, 1997
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BioSepra Inc.
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Condensed Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Consolidated Condensed Statements of Operations for the
Three and Six Month Periods Ended June 30, 1997
and 1996 4
Consolidated Condensed Statements of Cash Flows for the
Periods Ended June 30, 1997 and 1996 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION 13
SIGNATURES 15
2
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BioSepra Inc.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
June 30, December 31,
ASSETS 1997 1996
-------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,687 $ 4,142
Marketable securities -- 360
Restricted cash 148 167
Accounts receivable 1,954 3,030
Inventories (Note 2) 3,271 3,481
Prepaid and other current assets 115 54
-------- --------
Total current assets 9,175 11,234
Property and equipment, net (Note 3) 1,985 2,168
Goodwill, net 8,935 9,254
Other assets 520 513
-------- --------
Total assets $ 20,615 $ 23,169
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion of long-term debt
and capital lease obligations $ 563 $ 497
Accounts payable 972 1,365
Related party payable (Note 4) 242 157
Accrued expenses 1,785 1,921
Deferred contract revenue (Note 8) 3,023 3,646
-------- --------
Total current liabilities 6,585 7,586
Long-term debt and capital lease obligations, net of
current portion 950 1,141
-------- --------
Total liabilities 7,535 8,727
Stockholders' equity:
Common stock 84 84
Additional paid-in capital 40,507 40,485
Unearned compensation (242) (322)
Accumulated deficit (27,016) (25,918)
Cumulative translation adjustment (253) 113
-------- --------
Total stockholders' equity 13,080 14,442
-------- --------
Total liabilities and stockholders' equity $ 20,615 $ 23,169
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE> 4
BioSepra Inc.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands, except per share data)
Three-month periods Six-month periods
ended June 30, ended June 30,
-------------------- ----------------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
Revenue:
Product sales $1,606 $3,676 $ 4,994 $ 6,482
License fees 600 600 600 600
Research and development 128 -- 128 --
------ ------ ------- -------
Total revenue 2,334 4,276 5,722 7,082
Costs and expenses:
Cost of products sold 994 1,785 2,926 2,968
Selling, general and administrative 1,295 1,389 2,551 3,231
Research and development 474 646 1,032 1,243
Amortization expense 232 319 464 638
------ ------ ------- -------
Total costs and expenses 2,995 4,139 6,973 8,080
------ ------ ------- -------
Income (loss) from operations (661) 137 (1,251) (998)
Other income (expenses), net 32 (84) 153 (142)
------ ------ ------- -------
Net income (loss) $ (629) $ 53 $(1,098) $(1,140)
====== ====== ======= =======
Net income (loss) per share $(0.07) $ 0.01 $ (0.13) $ (0.16)
Weighted average number of common
and common equivalent shares outstanding 8,419 7,479 8,418 7,251
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
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BioSepra Inc.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In thousands)
Six- month periods
ended June 30,
----------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,098) $(1,140)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 817 975
Provision for doubtful accounts 93 142
Loss on disposition of long-term assets 5 10
Changes in operating assets and liabilities:
Accounts receivable 834 (55)
Inventories (70) (26)
Prepaid and other current assets (61) (424)
Accounts payable (266) 390
Related party payable 84 (444)
Accrued expenses (41) 116
Accrued expenses relating to acquisition -- (3)
Accrued restructuring (13) (204)
Deferred revenue (618) 463
------- -------
Net cash used in operating activities (334) (200)
------- -------
Cash flows from investing activities:
Additions to property and equipment (164) (583)
Proceeds from sales of equipment -- 90
Decrease in marketable securities 360 --
Increase in other assets (71) (45)
------- -------
Net cash provided by (used in) investing activities 125 (538)
------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock to parent -- 5,548
Proceeds from issuance of common stock to minority stockholders 22 35
Borrowings(repayments) under line of credit agreements 64 (2,255)
Long-term borrowings 47 350
Repayment of long-term borrowings (238) (230)
------- -------
Net cash (used in) provided by financing activities (105) 3,448
------- -------
Effect of exchange rate changes on cash and cash equivalents (141) 35
------- -------
Net (decrease) increase in cash and cash equivalents (455) 2,745
Cash and cash equivalents at beginning of period 4,142 2,079
------- -------
Cash and cash equivalents at end of period $ 3,687 $ 4,824
======= =======
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE> 6
BioSepra Inc.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements of BioSepra Inc. (the
"Company") are unaudited and have been prepared on a basis substantially
consistent with the annual audited financial statements. The consolidated
financial statements include the accounts of the Company and its wholly
owned subsidiaries. All material intercompany balances and transactions
have been eliminated in consolidation.
Certain information and footnote disclosures normally included in the
Company's annual statements have been condensed or omitted. The
consolidated financial statements, in the opinion of management, reflect
all adjustments (including normal recurring accruals) necessary for a fair
statement of the results for the periods ended June 30, 1997 and 1996.
The results of operations for the periods are not necessarily indicative
of the results of operations to be expected for the fiscal year. These
consolidated financial statements should be read in conjunction with the
audited financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------- -----------
<S> <C> <C>
Raw materials $1,016 $1,155
Work in progress 299 310
Finished goods 1,956 2,016
------ ------
$3,271 $3,481
====== ======
</TABLE>
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------- -----------
<S> <C> <C>
Property and equipment $4,713 $4,874
Less accumulated depreciation
and amortization (2,728) (2,752)
------ ------
1,985 2,122
Construction in progress -- 46
------ ------
$1,985 $2,168
====== ======
</TABLE>
6
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4. Related party transactions
The payable to related party represents amounts due for certain services
and facilities provided by Sepracor Inc. ("Sepracor"), the Company's
majority stockholder.
In March 1996, the Company entered into a $5,500,000 Convertible
Subordinated Note (the Note) with Sepracor. Principal and interest were
due and payable on March 29, 2000. The Note bore interest per annum at
Sepracor's borrowing rate less 1/2%. On June 10, 1996, Sepracor exercised
its option to convert the outstanding principal and interest on the Note
into shares of common stock. The Note was converted into one share of
common stock for every $4.05 of principal and interest outstanding
resulting in 1,369,788 shares of common stock issued to Sepracor. Sepracor
currently owns approximately 64% of the outstanding common stock of the
Company, including the shares issued in connection with this transaction.
In January 1996, the Company entered into a promissory note for $350,000
with Sepracor. This amount is payable to Sepracor over sixty monthly
installments and does not bear interest. The Company utilized the funds
for leasehold improvements to the Company's facilities. As of June 30,
1997, $286,000 was outstanding under the promissory note.
5. Net Income (Loss) Per Share
The net income (loss) per share is computed based upon the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be antidilutive.
6. Statements of Cash Flows
Cash payments for interest for the six months ended June 30,1997 and 1996
were $33,000 and $141,000, respectively.
7. Litigation
The Company and Sepracor are defendants in three lawsuits brought by
PerSeptive Biosystems, Inc. ("PerSeptive"), a competitor of the Company,
in the United States District Court for the District of Massachusetts. In
actions commenced in October 1993 and January 1995, PerSeptive alleged
that the Company's and Sepracor's manufacture and sale of HyperD(R)
chromatography media infringe four of PerSeptive's United States patents.
PerSeptive sought unspecified monetary damages as well as injunctive
relief. In a separate action, PerSeptive alleged that certain statements
made by the Company and Sepracor with respect to the performance of
HyperD media, performance of PerSeptive's POROS(R) media, and the
internal structures of POROS and HyperD media, including statements made
in the Company's Prospectus dated March 24, 1994, constitute false
advertising. Two additional perfusion chromatography patents have been
issued to PerSeptive. These new perfusion chromatography patents, which
have not yet been asserted against the Company or Sepracor in the
litigation, contain claims similar to the other patents the Company and
Sepracor are alleged to have infringed.
The Company has received an opinion of its patent counsel, Pennie &
Edmonds, to the effect that a properly informed court should conclude the
manufacture, use and/or sale by the Company or its customers of the
present HyperD products do not infringe any valid claims of the three
United States patents relating to "perfusion chromatography" which
PerSeptive has asserted against the Company and Sepracor. PerSeptive also
alleges that another United States patent which relates to the chemistry
of certain coatings applied during the manufacture of HyperD (the
"coatings patent"), is infringed by the manufacture, sale or use of
HyperD. The Company and Sepracor have asserted a counterclaim charging
PerSeptive with unfair competition.
7
<PAGE> 8
In January 1996, the United States District Court for the District of
Massachusetts in part granted Sepracor and the Company's request for
summary judgment with respect to three of PerSeptive's patents concerning
"Perfusion Chromatography". The Court ruled that the named inventors in
the three "perfusion" patents were not all of the inventors of the alleged
inventions claimed in those patents. PerSeptive moved to correct the
inventorship of the patents to include the unnamed inventors. The Court
ruled in April 1997 that PerSeptive's patents could not be corrected
because of deceptive conduct by the named inventors, and ordered entry of
judgment in favor of the defendants. In response, the Company and Sepracor
requested that, in addition to dismissing PerSeptive's infringement claims
because the named inventor's deceptive conduct prevented the patents from
being corrected, the Court should also dismiss those claims on the grounds
that the patents were obtained as a result of inequitable conduct. In that
event, two theories would have been presented to the Appeals Court upon
appeal by PerSeptive.
Before the Court ruled on the Company's and Sepracor's request for entry
of judgment against PerSeptive on both theories, the United States Court
of Appeal for the Federal Circuit (to which all appeals of patent cases
are directed) ruled in an unrelated case that the deceptive intentions of
named inventors are not relevant to the question whether a patent should
be corrected, but are relevant to the question of inequitable conduct. In
response to the new Appeals Court decision, the Court is likely to modify
its earlier ruling that PerSeptive's patents could not be corrected
because of the named inventors' deceptive intent. The Company and Sepracor
will request that any modification occur simultaneously with any decision
by the District Court concerning inequitable conduct. If the perfusion
patents were obtained by inequitable conduct, they would be invalid and
unenforceable.
There can be no assurance that the Company and Sepracor will prevail in
the pending litigation, and an adverse outcome in any of the patent
infringement actions on any of the chromatography patents would have a
materially adverse effect on the Company's future business and operations.
The Company would be required to repay to Beckman part of certain payments
if the Company terminates Beckman's right to use and sell HyperD media
because a court finds HyperD media infringes any third party patents.
Substantial funds have been and continue to be expended in connection with
the defense of the litigation. Sepracor has agreed to control the defense
of the litigation, and Sepracor and the Company share equally in expenses,
net of insurance payments. In addition, in the event of any settlement or
judgment adverse to the Company, Sepracor has agreed to indemnify the
Company from and against any damages that the Company is required to pay
with respect to its manufacture, use or sale of HyperD media products
occurring prior to March 24, 1994.
8. Distribution Agreement
On March 14, 1995, the Company and Beckman Instruments, Inc. ("Beckman")
entered into a joint distribution and development agreement. The agreement
was extended in July 1996, allowing Beckman to market on a worldwide
exclusive basis certain HyperD media and the ProSys workstation for 18
months.
Under the agreement, Beckman has made payments totaling $4,900,000. The
Company may be required to return to Beckman part of such payments made by
Beckman under the agreement if the Company fails to meet such milestones
or if the Company terminates Beckman's right to use and sell licensed
products, including HyperD media, if a court finds that any such licensed
products infringe any third party patents. The Company recognized license
revenue of $600,000 for both six month periods ended June 30, 1997 and
1996 and has recorded deferred revenue of $3,000,000 and $3,600,000 as of
June 30, 1997 and 1996, respectively.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
BioSepra Inc. and subsidiaries ( the "Company") develops, manufactures and sells
chromatographic media and systems for use by biopharmaceutical companies in the
purification and production of biopharmaceuticals. The Company's products enable
pharmaceutical companies to reduce the time and cost required to develop and
manufacture biopharmaceuticals. The Company supplies its process chromatography
media and other proprietary product to drug manufactures for use in the
commercial production of a wide range of biopharmaceuticals. Among these are
interferons, insulin, human growth hormone, special enzymes and vaccines.
Three and six months ended June 30, 1997 and 1996
Revenue decreased to $2,334,000 for the three months ended June 30, 1997 from
$4,276,000 for the same period in 1996. Revenue for the six months ended June
30, 1997 decreased to $5,722,000 compared to $7,082,000 for the same period in
1996. The decrease in revenue is attributed to fluctuations in the timing of
large production-scale media orders and to the absence of stocking orders from a
major distributor of the Company's research instruments.
Cost of products sold as a percentage of product sales increased to 62% for the
three months ended June 30, 1997 compared to 49% for the same period in 1996.
For the six months ended June 30, 1997 and 1996 the cost of products sold as a
percentage of product sales was 59% and 46%, respectively. The increase in cost
as a percentage of product sales is primarily due to product mix changes and
fluctuations in production-scale customer order patterns. The increase in cost
as a percentage of product sales is also attributed to the transition of
resources from the product development phase to production support associated
with the commercialization of new media and instrument products.
Selling, general and administrative expenses decreased to $1,295,000 for the
three months ended June 30, 1997 from $1,389,000 for the three months ended June
30, 1996. For the first six months of 1997, selling, general and administrative
expenses decreased to $2,551,000 from $3,231,000 for the comparable period in
1996. The decrease in expenditures is related to the reduction in bad debt
expense due to collection of past due receivables, the reduction in overall
personnel costs and the transition of resources to direct product support of new
media and instrument products.
Research and development expenses decreased to $474,000 for the second quarter
of 1997 from $646,000 in the second quarter of 1996. For the first six months of
1997, research and development expenses decreased to $1,032,000 from $1,243,000
for the comparable period in 1996. This decrease is attributed to the transition
of resources from development to production and commercialization support of new
media and instrument products. The decrease is offset by additional media
product development expenses incurred in the first six months of 1997.
Amortization expenses decreased to $232,000 for the second quarter of 1997 from
$319,000 in the second quarter of 1996. For the first six months of 1997,
amortization expense decreased to $464,000 from $638,000 for the comparable
period in 1996. The decrease in amortization expense is primarily attributed to
the write-off, in the fourth quarter of 1996, of the remaining unamortized
portion of certain technology retained from the sale of Biopass S.A. The
decrease in amortization expense is also attributed to a reduction, due to
employee termination, in the amount of amortization associated with deferred
compensation.
9
<PAGE> 10
Other income, net, increased to $32,000 for the three months ended June 30, 1997
as compared to other expense, net of $84,000 for the comparable period in 1996.
Other income, net increased to $153,000 for the six months ended June 30, 1997
as compared to other expense, net of $142,000 for the comparable period in 1996
This increase is attributed to the net effect of foreign currency gains and
losses due to changes in the value of the U.S. dollar and, to a lesser extent,
decreased levels of borrowings and changes in the interest rates charged on such
borrowings.
The Company's net loss increased to $629,000 for the three months ended June 30,
1997 compared to net income of $53,000 for the three months ended June 30, 1996.
For the first six months of 1997, the Company's net loss decreased to $1,098,000
from $1,140,000 for the comparable period in 1996. The decrease is attributed to
reduced operating expenses offset by reduced revenue as described above.
Litigation
The Company and Sepracor are defendants in three lawsuits brought by PerSeptive
Biosystems, Inc. ("PerSeptive"), a competitor of the Company, in the United
States District Court for the District of Massachusetts. In actions commenced
in October 1993 and January 1995, PerSeptive alleged that the Company's and
Sepracor's manufacture and sale of HyperD(R) chromatography media infringe four
of PerSeptive's United States patents. PerSeptive sought unspecified monetary
damages as well as injunctive relief. In a separate action, PerSeptive alleged
that certain statements made by the Company and Sepracor with respect to the
performance of HyperD media, performance of PerSeptive's POROS(R) media, and
the internal structures of POROS and HyperD media, including statements made in
the Company's Prospectus dated March 24, 1994, constitute false advertising.
Two additional perfusion chromatography patents have been issued to PerSeptive.
These new perfusion chromatography patents, which have not yet been asserted
against the Company or Sepracor in the litigation, contain claims similar to
the other patents the Company and Sepracor are alleged to have infringed.
The Company has received an opinion of its patent counsel, Pennie & Edmonds, to
the effect that a properly informed court should conclude the manufacture, use
and/or sale by the Company or its customers of the present HyperD products do
not infringe any valid claims of the three United States patents relating to
"perfusion chromatography" which PerSeptive has asserted against the Company and
Sepracor. PerSeptive also alleges that another United States patent which
relates to the chemistry of certain coatings applied during the manufacture of
HyperD (the "coatings patent"), is infringed by the manufacture, sale or use of
HyperD. The Company and Sepracor have asserted a counterclaim charging
PerSeptive with unfair competition.
In January 1996, the United States District Court for the District of
Massachusetts in part granted Sepracor and the Company's request for summary
judgment with respect to three of PerSeptive's patents concerning "Perfusion
Chromatography". The Court ruled that the named inventors in the three
"perfusion" patents were not all of the inventors of the alleged inventions
claimed in those patents. PerSeptive moved to correct the inventorship of the
patents to include the unnamed inventors. The Court ruled in April 1997 that
PerSeptive's patents could not be corrected because of deceptive conduct by the
named inventors, and ordered entry of judgment in favor of the defendants. In
response, the Company and Sepracor requested that, in addition to dismissing
PerSeptive's infringement claims because the named inventor's deceptive conduct
prevented the patents from being corrected, the Court should also dismiss those
claims on the grounds that the patents were obtained as a result of inequitable
conduct. In that event, two theories would have been presented to the Appeals
Court upon appeal by PerSeptive.
10
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Before the Court ruled on the Company's and Sepracor's request for entry of
judgment against PerSeptive on both theories, the United States Court of Appeal
for the Federal Circuit (to which all appeals of patent cases are directed)
ruled in an unrelated case that the deceptive intentions of named inventors are
not relevant to the question whether a patent should be corrected, but are
relevant to the question of inequitable conduct. In response to the new Appeals
Court decision, the Court is likely to modify its earlier ruling that
PerSeptive's patents could not be corrected because of the named inventors'
deceptive intent. The Company and Sepracor will request that any modification
occur simultaneously with any decision by the District Court concerning
inequitable conduct. If the perfusion patents were obtained by inequitable
conduct, they would be invalid and unenforceable.
There can be no assurance that the Company and Sepracor will prevail in the
pending litigation, and an adverse outcome in any of the patent infringement
actions on any of the chromatography patents would have a materially adverse
effect on the Company's future business and operations. The Company would be
required to repay to Beckman part of certain payments if the Company terminates
Beckman's right to use and sell HyperD media because a court finds HyperD media
infringes any third party patents.
Substantial funds have been and continue to be expended in connection with the
defense of the litigation. Sepracor has agreed to control the defense of the
litigation, and Sepracor and the Company share equally in expenses, net of
insurance payments. In addition, in the event of any settlement or judgment
adverse to the Company, Sepracor has agreed to indemnify the Company from and
against any damages that the Company is required to pay with respect to its
manufacture, use or sale of HyperD media products occurring prior to March 24,
1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily from net proceeds
provided from the Company's initial public offering, funds provided by Sepracor
and equipment financing leases. The Company has available a revolving credit
agreement under which the Company may borrow up to $3,000,000, subject to
limitation defined in the agreement. There were no borrowings outstanding under
this agreement as of June 30, 1997. Sepracor is guarantor of any amounts
outstanding under the agreement.
As of June 30, 1997, the Company had $3,687,000 of cash and cash equivalents and
$2,590,000 of working capital. Cash and cash equivalents for the six months
ended June 30, 1997 decreased by $455,000. The Company utilized cash for
operations of $334,000 primarily to fund its operating loss. The Company
generated cash from investing activities of $125,000 primarily due to the
maturity of a bond, partially offset by the purchase of property and equipment
of $164,000. The Company utilized cash from financing activities of $105,000
primarily due to repayment of borrowings.
In March 1996, the Company entered into a $5,500,000 Convertible Subordinated
Note (the Note) with Sepracor. Principal and interest were due and payable on
March 29, 2000. The Note bore interest per annum at Sepracor's borrowing rate
less 1/2%. On June 10, 1996, Sepracor exercised its option to convert the
outstanding principal and interest on the Note into shares of common stock. The
Note was converted into one share of common stock for every $4.05 of principal
and interest outstanding resulting in 1,369,788 shares of common stock issued to
Sepracor. Sepracor currently owns approximately 64% of the outstanding common
stock of the Company, including the effects of this transaction.
As of June 30, 1997, there was $838,000 outstanding under two available credit
facilities with a French commercial bank which are currently guaranteed by
Sepracor. In addition, Sepracor guarantees certain capital lease obligations of
the Company. The outstanding balance of the capital lease obligation guaranteed
by Sepracor was $194,000 as of June 30, 1997.
11
<PAGE> 12
Based upon the Company's current operating plan, the Company believes that its
current cash balance and available credit line are sufficient to fund the
Company's operations into mid 1998. The Company's cash requirements may vary
materially from those now planned because of factors such as the timing of
significant product orders, commercial acceptance of new products, patent
developments, the introduction of competitive products and acquisitions.
FUTURE OPERATING RESULTS
Certain of the information contained in this Quarterly Report on Form 10-Q,
including information with respect to the ability of the Company to obtain
additional financing within the next twelve months, the success of the Company's
HyperD media and the ProSys workstation, and information with respect to the
Company's other plans and strategy for its business, including its plans to
introduce products for use in producing monoclonal antibody-based drugs, consist
of forward-looking statements. Important factors that could cause actual results
to differ materially from the forward-looking statements are described in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
In addition, based upon the Company's current operating plan, the Company
believes that its current cash balance and available credit line are sufficient
to fund the Company's operations into mid 1998. The Company's cash requirements
may vary materially from those now planned because of factors such as the timing
of significant product orders, commercial acceptance of new products, patent
developments, the introduction of competitive products and acquisitions.
Accordingly, the Company may be required to raise additional financing within
the next twelve months, and there can be no assurance that such financing will
be available on favorable terms, if at all.
Because of the foregoing factors, the Company believes that period-to-period
comparisons of its financial results are not necessarily meaningful and it
expects that its results of operations may continue to fluctuate from period to
period in the future.
12
<PAGE> 13
PART II.
OTHER INFORMATION
Item 1. Legal proceedings
The Company and Sepracor are defendants in three lawsuits brought by
PerSeptive Biosystems, Inc. ("PerSeptive"), a competitor of the Company,
in the United States District Court for the District of Massachusetts. In
actions commenced in October 1993 and January 1995, PerSeptive alleged
that the Company's and Sepracor's manufacture and sale of HyperD(R)
chromatography media infringe four of PerSeptive's United States patents.
PerSeptive sought unspecified monetary damages as well as injunctive
relief. In a separate action, PerSeptive alleged that certain statements
made by the Company and Sepracor with respect to the performance of
HyperD media, performance of PerSeptive's POROS(R) media, and the
internal structures of POROS and HyperD media, including statements made
in the Company's Prospectus dated March 24, 1994, constitute false
advertising. Two additional perfusion chromatography patents have been
issued to PerSeptive. These new perfusion chromatography patents, which
have not yet been asserted against the Company or Sepracor in the
litigation, contain claims similar to the other patents the Company and
Sepracor are alleged to have infringed.
The Company has received an opinion of its patent counsel, Pennie &
Edmonds, to the effect that a properly informed court should conclude the
manufacture, use and/or sale by the Company or its customers of the
present HyperD products do not infringe any valid claims of the three
United States patents relating to "perfusion chromatography" which
PerSeptive has asserted against the Company and Sepracor. PerSeptive also
alleges that another United States patent which relates to the chemistry
of certain coatings applied during the manufacture of HyperD (the
"coatings patent"), is infringed by the manufacture, sale or use of
HyperD. The Company and Sepracor have asserted a counterclaim charging
PerSeptive with unfair competition.
In January 1996, the United States District Court for the District of
Massachusetts in part granted Sepracor and the Company's request for
summary judgment with respect to three of PerSeptive's patents concerning
"Perfusion Chromatography". The Court ruled that the named inventors in
the three "perfusion" patents were not all of the inventors of the alleged
inventions claimed in those patents. PerSeptive moved to correct the
inventorship of the patents to include the unnamed inventors. The Court
ruled in April 1997 that PerSeptive's patents could not be corrected
because of deceptive conduct by the named inventors, and ordered entry of
judgment in favor of the defendants. In response, the Company and Sepracor
requested that, in addition to dismissing PerSeptive's infringement claims
because the named inventor's deceptive conduct prevented the patents from
being corrected, the Court should also dismiss those claims on the grounds
that the patents were obtained as a result of inequitable conduct. In that
event, two theories would have been presented to the Appeals Court upon
appeal by PerSeptive.
Before the Court ruled on the Company's and Sepracor's request for entry
of judgment against PerSeptive on both theories, the United States Court
of Appeal for the Federal Circuit (to which all appeals of patent cases
are directed) ruled in an unrelated case that the deceptive intentions of
named inventors are not relevant to the question whether a patent should
be corrected, but are relevant to the question of inequitable conduct. In
response to the new Appeals Court decision, the Court is likely to modify
its earlier ruling that PerSeptive's patents could not be corrected
because of the named inventors' deceptive intent. The Company and Sepracor
will request that any modification occur simultaneously with any decision
by the District Court concerning inequitable conduct. If the perfusion
patents were obtained by inequitable conduct, they would be invalid and
unenforceable.
13
<PAGE> 14
There can be no assurance that the Company and Sepracor will prevail in
the pending litigation, and an adverse outcome in any of the patent
infringement actions on any of the chromatography patents would have a
materially adverse effect on the Company's future business and operations.
The Company would be required to repay to Beckman part of certain payments
if the Company terminates Beckman's right to use and sell HyperD media
because a court finds HyperD media infringes any third party patents.
Substantial funds have been and continue to be expended in connection with
the defense of the litigation. Sepracor has agreed to control the defense
of the litigation, and Sepracor and the Company share equally in expenses,
net of insurance payments. In addition, in the event of any settlement or
judgment adverse to the Company, Sepracor has agreed to indemnify the
Company from and against any damages that the Company is required to pay
with respect to its manufacture, use or sale of HyperD media products
occurring prior to March 24, 1994.
Items 2 - 3. None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 14, 1997, the
following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
Broker
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Election of Directors
Timothy J. Barberich 8,196,887 24,900 0
William M. Cousins, Jr 8,206,887 14,900 0
Alexander M. Klibanov, Ph.D. 8,206,887 14,900 0
Paul A. Looney 8,206,887 14,900 0
Riccardo Pigliucci 8,206,887 14,900 0
William E. Rich, Ph.D. 8,206,887 14,900 0
David P. Southwell 8,206,887 14,900 0
Jean-Marie Vogel 8,196,887 24,900 0
2. Approve the Company's 1997
Employee Stock Purchase Plan 6,865,930 41,800 6,100 1,307,957
3. Approve the Company's 1997
Stock Incentive Plan 6,846,945 61,285 5,600 1,307,957
</TABLE>
Item 5. None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) Exhibits
10.1 1997 Employee Stock Purchase Plan, of BioSepra Inc.
10.2 1997 Stock Incentive Plan, of BioSepra Inc.
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
14
<PAGE> 15
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.
BIOSEPRA INC.
August 8, 1997 /s/ Jean-Marie Vogel
------------------------------------
Jean-Marie Vogel
President, Chief Executive
Officer and Director
(Principal Executive and Financial
Officer)
August 8, 1997 /s/ Peter M. Castellanos
------------------------------------
Peter M. Castellanos
Director, Finance and Administration
(Chief Accounting Officer)
15
<PAGE> 1
BIOSEPRA INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
The purpose of this Plan is to provide eligible employees of BioSepra
Inc. (the "Company") and certain of its subsidiaries with opportunities to
purchase shares of the Company's common stock, $.01 par value (the "Common
Stock"). Fifty Thousand (50,000) shares of Common Stock in the aggregate have
been approved for this purpose.
1. ADMINISTRATION. The Plan will be administered by the Company's
Board of Directors (the "Board") or by a Committee appointed by the Board (the
"Committee"). The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.
2. ELIGIBILITY. Participation in the Plan will neither be permitted
nor denied contrary to the requirements of Section 423 of the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations promulgated thereunder.
All employees of the Company, including Directors who are employees, and all
employees of any subsidiary of the Company (as defined in Section 424(f) of the
Code) designated by the Board or the Committee from time to time (a "Designated
Subsidiary"), are eligible to participate in any one or more of the offerings of
Options (as defined in Section 9) to purchase Common Stock under the Plan
provided that:
(a) they are regularly employed by the Company or a
Designated Subsidiary for more than 20 hours a week and for more than
five months in a calendar year; and
(b) they are employees of the Company or a Designated
Subsidiary on the first day of the applicable Plan Period (as defined
below).
No employee may be granted an option hereunder if such employee,
immediately after the option is granted, owns 5% or more of the total combined
voting power or value of the stock of the Company or any subsidiary. For
purposes of the preceding sentence, the attribution rules of Section 424(d) of
the Code shall apply in determining the stock ownership of an employee, and all
stock which the employee has a contractual right to purchase shall be treated as
stock owned by the employee.
3. OFFERINGS. The Company will make one or more offerings
("Offerings") to employees to purchase stock under this Plan. Offerings will
begin each June 1 and
<PAGE> 2
December 1, or the first business day thereafter (the "Offering Commencement
Dates"). Each Offering Commencement Date will begin a six month period (a "Plan
Period") during which payroll deductions will be made and held for the purchase
of Common Stock at the end of the Plan Period. The Board or the Committee may,
at its discretion, choose a different Plan Period of twelve (12) months or less
for subsequent Offerings. Offerings under this Plan shall be as follows:
June 1, 1997 to November 30, 1997
December 1, 1997 to May 31, 1998
June 1, 1998 to November 30, 1998
December 1, 1998 to May 31, 1999.
4. PARTICIPATION. An employee eligible on the Offering Commencement
Date of any Offering may participate in such Offering by completing and
forwarding a payroll deduction authorization form to the employee's appropriate
payroll office at least 30 days prior to the applicable Offering Commencement
Date. The form will authorize a regular payroll deduction from the Compensation
received by the employee during the Plan Period. Unless an employee files a new
form or withdraws from the Plan, his deductions and purchases will continue at
the same rate for future Offerings under the Plan as long as the Plan remains in
effect. The term "Compensation" means the amount of money reportable on the
employee's Federal Income Tax Withholding Statement, excluding overtime,
incentive or bonus awards, allowances and reimbursements for expenses such as
relocation allowances for travel expenses, income or gains on the exercise of
Company stock options and similar items, whether or not shown on the employee's
Federal Income Tax Withholding Statement.
5. DEDUCTIONS. The Company will maintain payroll deduction accounts
for all participating employees. Payroll deductions may be at the rate of 1%,
2%, 3%, 4%, 5%, 6%, 7%, 8%, 9% or 10% of Compensation with any change in
compensation during the Plan Period to result in an automatic corresponding
change in the dollar amount withheld.
No employee may be granted an Option (as defined in Section 9) which
permits his rights to purchase Common Stock under this Plan and any other stock
purchase plan of the Company and its subsidiaries, to accrue at a rate which
exceeds $25,000 of the fair market value of such Common Stock (determined at the
Offering Commencement Date of the Plan Period) for each calendar year in which
the Option is outstanding at any time.
6. DEDUCTION CHANGES. An employee may decrease or discontinue his
payroll deduction once during any Plan Period, by filing a new payroll deduction
authorization form. However, an employee may not increase his payroll deduction
during a Plan Period. If an employee elects to discontinue his payroll
deductions
-2-
<PAGE> 3
during a Plan Period, but does not elect to withdraw his funds pursuant to
Section 8 hereof, funds deducted prior to his election to discontinue will be
applied to the purchase of Common Stock on the Exercise Date (as defined below).
7. INTEREST. Interest will not be paid on any employee accounts,
except to the extent that the Board or the Committee, in its sole discretion,
elects to credit employee accounts with interest at such per annum rate as it
may from time to time determine.
8. WITHDRAWAL OF FUNDS. An employee may at any time prior to the
close of business on the last business day in a Plan Period and for any reason
permanently draw out the balance accumulated in the employee's account and
thereby withdraw from participation in an Offering. Partial withdrawals are not
permitted. The employee may not begin participation again during the remainder
of the Plan Period. The employee may participate in any subsequent Offering in
accordance with terms and conditions established by the Board or the Committee.
9. PURCHASE OF SHARES. On the Offering Commencement Date of each
Plan Period, the Company will grant to each eligible employee who is then a
participant in the Plan an option ("Option") to purchase on the last business
day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter
provided for, such number of whole shares of Common Stock of the Company
reserved for the purposes of the Plan as does not exceed the number of shares
determined by dividing 6% of such employee's annualized Compensation for the
immediately prior six-month period by the price determined in accordance with
the formula set forth in the following paragraph but using the closing price on
the Offering Commencement Date of such Plan Period.
The purchase price for each share purchased will be 85% of the closing
price of the Common Stock on (i) the first business day of such Plan Period or
(ii) the Exercise Date, whichever closing price shall be less. Such closing
price shall be (a) the closing price on any national securities exchange on
which the Common Stock is listed, (b) the closing price of the Common Stock on
the Nasdaq National Market or (c) the average of the closing bid and asked
prices in the over-the-counter-market, whichever is applicable, as published in
THE WALL STREET JOURNAL. If no sales of Common Stock were made on such a day,
the price of the Common Stock for purposes of clauses (a) and (b) above shall be
the reported price for the next preceding day on which sales were made.
Each employee who continues to be a participant in the Plan on the
Exercise Date shall be deemed to have exercised his Option at the Option Price
on such date and shall be deemed to have purchased from the Company the number
of full shares of Common Stock reserved for the purpose of the Plan that his
accumulated payroll
-3-
<PAGE> 4
deductions on such date will pay for pursuant to the formula set forth above
(but not in excess of the maximum number determined in the manner set forth
above).
Any balance remaining in an employee's payroll deduction account at the
end of a Plan Period will be automatically refunded to the employee, except that
any balance which is less than the purchase price of one share of Common Stock
will be carried forward into the employee's payroll deduction account for the
following Offering, unless the employee elects not to participate in the
following Offering under the Plan, in which case the balance in the employee's
account shall be refunded.
10. ISSUANCE OF CERTIFICATES. Certificates representing shares of
Common Stock purchased under the Plan may be issued only in the name of the
employee, in the name of the employee and another person of legal age as joint
tenants with rights of survivorship, or (in the Company's sole discretion) in
the street name of a brokerage firm, bank or other nominee holder designated by
the employee.
11. RIGHTS ON RETIREMENT DEATH OR TERMINATION OF EMPLOYMENT. In the
event of a participating employee's termination of employment prior to the last
business day of a Plan Period, no payroll deduction shall be taken from any pay
due and owing to an employee and the balance in the employee's account shall be
paid to the employee or, in the event of the employee's death, (a) to a
beneficiary previously designated in a revocable notice signed by the employee
(with any spousal consent required under state law) or (b) in the absence of
such a designated beneficiary, to the executor or administrator of the
employee's estate or (c) if no such executor or administrator has been appointed
to the knowledge of the Company, to such other person(s) as the Company may, in
its discretion, designate. If, prior to the last business day of the Plan
Period, the Designated Subsidiary by which an employee is employed shall cease
to be a subsidiary of the Company, or if the employee is transferred to a
subsidiary of the Company that is not a Designated Subsidiary, the employee
shall be deemed to have terminated employment for the purposes of this Plan.
12. OPTIONEES NOT STOCKHOLDERS. Neither the granting of an Option to
an employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him.
13. RIGHTS NOT TRANSFERABLE. Except as the Board of Directors may
otherwise determine or provide, rights under this Plan shall not be sold,
assigned, transferred, pledged or otherwise encumbered by an employee, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
-4-
<PAGE> 5
14. APPLICATION OF FUNDS. All funds received or held by the Company
under this Plan may be combined with other corporate funds and may be used for
any corporate purpose.
15. ADJUSTMENT IN CASE OF CHANGES AFFECTING COMMON STOCK. In the
event of a subdivision of outstanding shares of Common Stock, or the payment of
a dividend in Common Stock, the number of shares approved for this Plan, and the
share limitation set forth in Section 9, shall be increased proportionately, and
such other adjustment shall be made as may be deemed equitable by the Board or
the Committee. In the event of any other change affecting the Common Stock such
adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.
16. MERGER. If the Company shall at any time merge or consolidate
with another corporation and the holders of the capital stock of the Company
immediately prior to such merger or consolidation continue to hold at least 80%
by voting power of the capital stock of the surviving corporation ("Continuity
of Control"), the holder of each Option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such Option
for each share as to which such Option shall be exercised the securities or
property which a holder of one share of the Common Stock was entitled to upon
and at the time of such merger, and the Committee shall take such steps in
connection with such merger as the Committee shall deem necessary to assure that
the provisions of Paragraph 15 shall thereafter be applicable, as nearly as
reasonably may be, in relation to the said securities or property as to which
such holder of such Option might thereafter be entitled to receive thereunder.
In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clauses (b) and (c), after the effective date of such transaction, each holder
of an outstanding Option shall be entitled, upon exercise of such Option, to
receive in lieu of shares of Common Stock, shares of such stock or other
securities as the holders of shares of Common Stock received pursuant to the
terms of such transaction; or (b) all outstanding Options may be cancelled by
the Board or the Committee as of a date prior to the effective date of any such
transaction and all payroll deductions shall be paid out to the participating
employees; or (c) all outstanding Options may be cancelled by the Board or the
Committee as of the effective date of any such transaction, provided that notice
of such cancellation shall be given to each holder of an Option, and each holder
of an Option shall have the right to exercise such Option in full based on
payroll deductions then credited to his account as of a date determined by the
Board or the Committee, which date shall not be less than ten (10) days
preceding the effective date of such transaction.
-5-
<PAGE> 6
17. AMENDMENT OF THE PLAN. The Board may at any time, and from time
to time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the shareholders of the Company is required by Section 423 of
the Code or by Rule 16b-3 under the Exchange Act, such amendment shall not be
effected without such approval, and (b) in no event may any amendment be made
which would cause the Plan to fail to comply with Section 16 of the Exchange Act
and the rules promulgated thereunder, as in effect from time to time, or Section
423 of the Code.
18. INSUFFICIENT SHARES. In the event that the total number of
shares of Common Stock specified in elections to be purchased under any Offering
plus the number of shares purchased under previous Offerings under this Plan
exceeds the maximum number of shares issuable under this Plan, the Board or the
Committee will allot the shares then available on a pro rata basis.
19. TERMINATION OF THE PLAN. This Plan may be terminated at any time
by the Board. Upon termination of this Plan all amounts in the accounts of
participating employees shall be promptly refunded.
20. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and
deliver Common Stock under this Plan is subject to listing on a national stock
exchange or quotation on the Nasdaq National Market and the approval of all
governmental authorities required in connection with the authorization, issuance
or sale of such stock.
The Plan shall be governed by Delaware law except to the extent that
such law is preempted by federal law.
The Plan is intended to comply with the provisions of Rule 16b-3
promulgated under the Securities Exchange Act of 1934. Any provision
inconsistent with such Rule shall to that extent be inoperative and shall not
affect the validity of the Plan.
21. ISSUANCE OF SHARES. Shares may be issued upon exercise of an
Option from authorized but unissued Common Stock, from shares held in the
treasury of the Company, or from any other proper source.
22. NOTIFICATION UPON SALE OF SHARES. Each employee agrees, by
entering the Plan, to promptly give the Company notice of any disposition of
shares purchased under the Plan where such disposition occurs within two years
after the date of grant of the Option pursuant to which such shares were
purchased.
23. EFFECTIVE DATE AND APPROVAL OF SHAREHOLDERS. The Plan shall take
effect upon the closing of the Company's initial public offering of Common Stock
pursuant to an effective registration statement under the Securities Act of
1933, as amended,
-6-
<PAGE> 7
subject to approval by the shareholders of the Company as required by Rule 16b-3
under the Exchange Act or by Section 423 of the Code, which approval must occur
within twelve months of the adoption of the Plan by the Board.
Adopted by the Board of Directors on
March 28, 1997
Approved by the Stockholders on
May 14, 1997
-7-
<PAGE> 1
BIOSEPRA INC.
1997 STOCK INCENTIVE PLAN
1. Purpose
-------
The purpose of this 1997 Stock Incentive Plan (the "Plan") of BioSepra
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 persons who make (or are expected to make) important contributions to
the Company by providing such persons with equity ownership opportunities and
performance-based incentives and thereby better aligning the interests of such
persons with those of the Company's stockholders. Except where the context
otherwise requires, the term "Company" shall include any present or future
subsidiary corporations of BioSepra Inc. as defined in Section 424(f) of the
Internal Revenue Code of 1986, as amended, and any regulations promulgated
thereunder (the "Code").
2. Eligibility
-----------
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other
stock-based awards (each, an "Award") under the Plan. Any person who has been
granted an Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
--------------------------
(a) ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be
administered by the Board of Directors of the Company (the "Board"). The Board
shall have authority to grant Awards and 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 Award 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 Award. 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.
(b) DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted by
applicable
<PAGE> 2
law, the Board may delegate to one or more executive officers of the Company the
power to make Awards and exercise such other powers under the Plan as the Board
may determine, provided that the Board shall fix the maximum number of shares
subject to Awards and the maximum number of shares for any one Participant to be
made by such executive officers.
(c) APPOINTMENT OF COMMITTEES. To the extent permitted by applicable
law, the Board may delegate any or all of its powers under the Plan to one or
more committees or subcommittees of the Board (a "Committee"). During such
periods when the common stock, $.01 par value per share, of the Company (the
"Common Stock") is registered under the Securities Exchange Act of 1934 (the
"Exchange Act"), the Board shall appoint one such Committee of not less than two
members, each member of which shall be an "outside director" within the meaning
of Section 162(m) of the Code and a "non-employee director" as defined in Rule
16b-3 promulgated under the Exchange Act." All references in the Plan to the
"Board" shall mean the Board or a Committee of the Board or the executive
officer referred to in Section 3(b) to the extent that the Board's powers or
authority under the Plan have been delegated to such Committee or executive
officer.
4. Stock Available for Awards
--------------------------
(a) NUMBER OF SHARES. Subject to adjustment under Section 4(c),
Awards may be made under the Plan for up to 600,000 shares of Common Stock. If
any Award 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 by such Award shall
again be available for the grant of Awards under the Plan, subject, however, in
the case of Incentive Stock Options (as hereinafter defined), to any limitation
required under the Code. Shares issued under the Plan may consist in whole or in
part of authorized but unissued shares or treasury shares.
(b) PER-PARTICIPANT LIMIT. Subject to adjustment under Section 4(c),
for Awards granted after the Common Stock is registered under the Exchange Act,
the maximum aggregate number of shares with respect to which an Award may be
granted to any Participant under the Plan shall be 300,000 during the term of
the Plan. The per-participant limit described in this Section 4(b) shall be
construed and applied consistently with Section 162(m) of the Code.
2
<PAGE> 3
(c) 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 security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per
security subject to each outstanding Restricted Stock Award, and (iv) the terms
of each other outstanding stock-based Award shall be appropriately adjusted by
the Company (or substituted Awards 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(c) applies and Section 8(e)(1)
also applies to any event, Section 8(e)(1) shall be applicable to such event,
and this Section 4(c) shall not be applicable.
5. Stock Options
-------------
(a) GENERAL. The Board may grant options to purchase Common Stock
(each, an "Option") and determine the number of shares of Common Stock to be
covered by each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) INCENTIVE STOCK OPTIONS. An Option that the Board intends to be
an "incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) EXERCISE PRICE. The Board shall establish the exercise price at
the time each Option is granted and specify it in the applicable option
agreement.
(d) DURATION OF OPTIONS. Each Option shall be exercisable at such
times and subject to such terms and conditions as the Board may specify in the
applicable option agreement. No Option will be granted for a term in excess of
10 years.
(e) EXERCISE OF OPTION. Options may be exercised only by delivery to
the Company of a written notice of exercise signed by the proper person together
with
3
<PAGE> 4
payment in full as specified in Section 5(f) for the number of shares for which
the Option is exercised.
(f) PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise
of an Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the
Company;
(2) except as the Board may otherwise provide in an Option
Agreement, (i) by delivery of an irrevocable and unconditional undertaking by a
credit worthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price, or delivery by the Participant to the Company of a copy of
irrevocable and unconditional instructions to a credit worthy broker to deliver
promptly to the Company cash or a check sufficient to pay the exercise price or
(ii) 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.
(3) to the extent permitted by the Board and explicitly
provided in an Option Agreement (i) by delivery of a promissory note of the
Participant to the Company on terms determined by the Board or (ii) by payment
of such other lawful consideration as the Board may determine; or
(4) any combination of the above permitted forms of payment.
6. Restricted Stock
----------------
(a) GRANTS. The Board may grant Awards entitling recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares at their issue price or other stated or
formula price (or to require forfeiture of such shares if issued at no cost)
from the recipient in the event that conditions specified by the Board in the
applicable Award are not satisfied prior to the end of the applicable
restriction period or periods established by the Board for such Award (each,
"Restricted Stock Award").
(b) TERMS AND CONDITIONS. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the
4
<PAGE> 5
expiration of the applicable restriction periods, the Company (or such designee)
shall deliver the certificates no longer subject to such restrictions to the
Participant or if the Participant has died, to the beneficiary designated, in a
manner determined by the Board, by a Participant to receive amounts due or
exercise rights of the Participant in the event of the Participant's death (the
"Designated Beneficiary"). In the absence of an effective designation by a
Participant, Designated Beneficiary shall mean the Participant's estate.
7. Other Stock-based Awards
------------------------
The Board shall have the right to grant other Awards based upon the
Common Stock having such terms and conditions as the Board may determine,
including the grant of shares based upon certain conditions, the grant of
securities convertible into Common Stock and the grant of stock appreciation
rights.
8. General Provisions Applicable To Awards
---------------------------------------
(a) TRANSFERABILITY OF AWARDS. Except as the Board may otherwise
determine or provide in an Award, Awards 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 Award under the Plan shall be evidenced by a
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) BOARD DISCRETION. Except as otherwise provided by the Plan, each
type of Award may be made alone or in addition or in relation to any other type
of Award. The terms of each type of Award need not be identical, and the Board
need not treat Participants uniformly.
(d) TERMINATION OF STATUS. The Board shall determine the effect on
an Award of the disability, death, retirement, authorized leave of absence or
other change in the employment or other status of a Participant and the extent
to which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
5
<PAGE> 6
(e) Acquisition Events
------------------
(1) CONSEQUENCES OF ACQUISITION EVENTS. Subject to Section
8(e)(2) below, upon the occurrence of an Acquisition Event (as defined below),
or the execution by the Company of any agreement with respect to an Acquisition
Event, the Board shall take any one or more of the following actions with
respect to then outstanding Awards: (i) provide that outstanding 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 satisfy, in the determination of
the Board, the requirements of Section 424(a) of the Code; (ii) upon written
notice to the Participants, provide that all then unexercised Options will
become exercisable in full as of a specified date (the "Acceleration Date")
prior to the Acquisition Event and will terminate immediately prior to the
consummation of such Acquisition Event, except to the extent exercised by the
Participants between the Acceleration Date and the consummation of such
Acquisition Event; (iii) in the event of an Acquisition Event under the terms of
which holders of Common Stock will receive upon consummation thereof a cash
payment for each share of Common Stock surrendered pursuant to such Acquisition
Event (the "Acquisition Price"), provide that all outstanding Options shall
terminate upon consummation of such Acquisition Event and each Participant shall
receive, in exchange therefor, a cash payment equal to the amount (if any) by
which (A) the Acquisition Price multiplied by the number of shares of Common
Stock subject to such outstanding Options (whether or not then exercisable),
exceeds (B) the aggregate exercise price of such Options; (iv) provide that all
Restricted Stock Awards then outstanding shall become free of all restrictions
prior to the consummation of the Acquisition Event; and (v) provide that any
other stock-based Awards outstanding (A) shall become exercisable, realizable or
vested in full, or shall be free of all conditions or restrictions, as
applicable to each such Award, prior to the consummation of the Acquisition
Event, or (B), if applicable, shall be assumed, or equivalent Awards shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof).
An "Acquisition Event" shall be deemed to have occurred only if any of
the following events occur: (a) the stockholders of the Company approve a merger
or consolidation which results in the voting securities of the Company
outstanding immediately prior thereto representing 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 entity
outstanding immediately after such merger or consolidation; (b) any sale of all
or substantially all of the assets of the Company; (c) the complete liquidation
of the Company; or (d) the acquisition of "beneficial
6
<PAGE> 7
ownership" (as defined in Rule 13d-3 under the Exchange Act) of securities of
the Company representing 50% or more of the combined voting power of the
Company's then outstanding securities (other than through a merger or
consolidation or an acquisition of securities directly from the Company) by any
"person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act
other than the Company, Sepracor Inc. (or its successor), any trustee or other
fiduciary holding securities under an employee benefit plan of the Company or
any corporation owned directly or indirectly by the stockholders of the Company
in substantially the same proportion as their ownership of stock of the Company;
or (e) individuals who, on the date on which the Plan was adopted by the Board
of Directors, constituted the Board of Directors of the Company, together with
any new director whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a vote of at least a
majority of the directors then still in office who were directors on the date on
which the Plan was adopted by the Board of Directors or whose election or
nomination was previously so approved, cease for any reason to constitute at
least a majority of the Board of Directors.
(2) ACCELERATION UPON AN ACQUISITION EVENT. Except to the
extent otherwise provided in the instrument evidencing the Award or in any other
agreement between the Participant and the Company, upon the occurrence of an
Acquisition Event or with respect to Options or any other similar Awards only,
upon the execution by the Company of any agreement with respect to an
Acquisition Event, (i) the Board shall provide a written notice to the
Participants that are employees of the Company that all Options then outstanding
shall become immediately exercisable in full as of a specified date (the
"Acceleration Date") prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Participants between the Acceleration Date and the
consummation of such Acquisition Event; (ii) all Restricted Stock Awards then
outstanding and held by employees of the Company shall become immediately free
of all restrictions; (iii) all other stock-based Awards that are held by
employees of the Company shall become immediately exercisable, realizable or
vested in full, or shall be immediately free of all restrictions or conditions,
as the case may be.
(3) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. The Board may
grant Awards under the Plan in substitution for stock and stock-based awards
held by employees of another corporation who become employees of the Company as
a result of a merger or consolidation of the employing corporation with the
Company or the acquisition by the Company of property or stock of the employing
corporation. The substitute Awards shall be granted on such terms and conditions
as the Board considers appropriate in the circumstances.
7
<PAGE> 8
(f) WITHHOLDING. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to a
Participant.
(g) AMENDMENT OF AWARD. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(h) 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 Award 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.
(i) ACCELERATION. The Board may at any time provide that any Options
shall become immediately exercisable in full or in part, that any Restricted
Stock Awards shall be free of all restrictions or that any other stock-based
Awards may become exercisable in full or in part or free of some or all
restrictions or conditions, or otherwise realizable in full or in part, as the
case may be.
9. Miscellaneous
-------------
(a) NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
8
<PAGE> 9
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
with respect to an Award 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, but no Award granted to a
Participant designated as subject to Section 162(m) by the Board shall become
exercisable, vested or realizable, as applicable to such Award, unless and until
the Plan has been approved by the Company's stockholders. No Awards shall be
granted under the Plan after the completion of ten years from the earlier of (i)
the date on which the Plan was adopted by the Board or (ii) the date the Plan
was approved by the Company's stockholders, but Awards 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, provided that no Award granted to a
Participant designated as subject to Section 162(m) by the Board after the date
of such amendment shall become exercisable, realizable or vested, as applicable
to such Award (to the extent that such amendment to the Plan was required to
grant such Award to a particular Participant), unless and until such amendment
shall have been approved by the Company's stockholders.
(e) STOCKHOLDER APPROVAL. For purposes of this Plan, stockholder
approval shall mean approval by a vote of the stockholders in accordance with
the requirements of Section 162(m) of the Code.
(f) GOVERNING LAW. The provisions of the Plan and all Awards 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.
9
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